Earnings Call: H1 2021

Aug 25, 2021

Good afternoon, everyone. Thank you for joining this online briefing to discuss First Pacific 2021 First Half Financial and Operating Results. The latest presentation for the results is available on First Pacific website, www.firstpacific.com, under the Investor Relations session presentation page. This results meeting is being recorded and the replay will be available on First Pacific's website in the Investor Relations session as well. For participants from the media, please log the Q and A session is open for investors and analysts only. If you would like to raise questions, please contact us when the meeting is finished. Today, we have with us Mr. Manuel Hunglinen, our Managing Director and Chief Executive Officer, joining us from Manila Mr. Chris Young, our Executive Director and Chief Financial Officer Mr. Joseph Ng and Mr. John Ryan, our Associate Directors and other senior executives from the head office of First Pacific. At this point, I would like to turn to John for his presentation. Thank you, Sarah. And thank you, everyone, for joining. We see some familiar names there on the list, and we're very glad to have you with us today. A strange little housekeeping note, please. We were able to unload a presentation version with the Indo Food first half data only with the close of their market in Jakarta. And you will look on our website now to see that we have the EndoFood and ICPP pages updated with 1H material. Now let's jump in. Turning to Page 2, we have the familiar list of group companies. There has been substantially no change since we last spoke to you in March. But it's worth reminding you that under Metro Pacific, global business power now is owned wholly by Marelco. So all the electricity production business is now housed under 1 parent, Muralco. Now turning to Page 3, you might hear me say highest ever or 10 year high a few times. And I beg your indulgence because it is very cheering to say these words. Now looking at the top right column chart on Page 3, we see that nearly all of our operating companies increased their contribution as our recurring profit rose 38% to just under $210,000,000 This was led, as you can see, by a sharp increase of the contributions of Indo Food and PLDT. We had good improvement at head office owing to the efforts of our Treasury Department under Joseph Ng to reduce our interest bill and so on following through. We've got also MPIC and Felix improving their contribution to us as well. As mentioned, interest expense was sharply lower. Net profit amounted to $181,000,000 versus just over $100,000,000 a year earlier, owing to a very sharp fall in non recurring losses. Now in line with our I believe it's our 12th year now that we're doing it, our 25% recurring profit distribution to shareholders continues with a $0.02 increase in our interim distribution to HK0.09 from HK0.07 last year. You may recall in March, we launched our 3 year $100,000,000 share repurchase program. That's been in abeyance during our blackout period and will be set to continue moving forward with the opening of share trading tomorrow. So we've got the highest ever turnover in the first half. On present trends, it would be the same for the full year. The contribution in recurring profit were at 10 year highs and that's what allowed the 7 year high in the interim distribution. Now a little bit more about cash flow and balance sheet is on Page 4. As you can see, our interest coverage ratio has improved to 3.5 times at the end of last year. Joseph, it was about 3.1, was it? Yes. Thank you. Not a lot of change in our gross and net debt. The coverage there for each is around about $4,000,000 Cash balance is $132,000,000 and 6 months since we spoke to you, we've lost 3 months in the average debt maturity. It's down to 3.4 years. The blended interest costs, thanks to our Treasury Department's keen bargaining with banks and bondholders is now just 3.5%. It's I think perhaps as low as it's ever been. You can see in the blue box, the prices of our 3 outstanding bonds are well over face value. And the column chart at the bottom of the page shows you we've got a well spread out maturity profile. We've got $300,000,000 of bank borrowings coming due next spring, followed by bond in 2023. And we've got our treasury team here led by Joseph to answer questions on those matters. Now a quick look at Page 6 at our gross asset value as of the end of June. It was $4,901,000,000 at that time. You can see it's fairly well balanced between the core holdings that we've gotten in, including MPIC, PLDT and the Fillex Group worth just under $500,000,000 at that date, not least because of the excellent performance of FiliX and high metal prices. A brief word on Slide 7 with respect to ESG matters. The proxy advisor ratings are updated just a little bit. We've seen an improvement in our score from Sustainalytics from April to June from 19.2 to 15.2, moving us deeper into the low risk category. We published our 6th, I believe, ESG reports in April. That's along with all the others available on our website. You can click a link as shown here on this page. ESG is very much led by the operating companies where almost the entire bulk of GHG emissions, a clear key indicator for us all, are produced and they are moving actively to become leaders in the ESG space. In time terms, they were led by the Plantations business and lately MPIC and PLDT are catching up quite quickly. Here at head office, we've only got a headcount of perhaps 40 people. Our emissions are quite negligible as you can see in column charts. We are currently reassessing what our targeting will be for greenhouse gas emissions at head office. They may well go up if a post COVID world allows us to come visit you in your offices by the time spring rolls around, but we will be keeping a sharp eye on that. Now, let's turn over towards the operating companies, which are really the key important items that we're talking about today. Now looking at Page 9, we've got some results from Indo Food. Forgive me please if these first half numbers are particularly fresh for you. I'll try to explain them briefly. The net sales growth of 20% to a record high is on double digit external sales growth at all divisions in that business. That went down to a core profit increase of 37%, again to a record high of just under RUB4 1,000,000,000,000. The reason behind this is the 6 months of contribution from Pine Hill, the noodle maker bought last August based in North Africa, the Middle East and Southeastern Europe. And we had stronger gross profit margins. That's hinted at in the EBIT margin chart you can see on the bottom right hand part of this page. Noodles remains strictly after the Pinehill purchase, the major food items sold by the Indo Food Group. And as you can see, following that acquisition, they've got a very strong improvement in their EBIT margins. The outlook is described in some bullet points here, but broadly speaking, it's very positive. Now a little more detail on ICBP, the 80% subsidiary of Indo Food is on Page 10. As you can see, net sales rose by a similar amount, just a bit more at 22%. EBITDA rose by a very strong 33% and its EBIT margin is at a level of 22.6 percent and that's the highest that I have seen looking back over the years since its listing. Core profit itself rose by a full quarter to around Rp4 1,000,000,000,000. And if we look at the change in net sales chart in the bottom right of this page, we can see that the contribution from Pine Hill here cannot be disguised at all. The vast bulk of the increase in net sales is by the Noodles division. Most of that delivered internationally and that of course is mostly Pine Hill. As you can see in the table on the bottom left, the Noodles business saw an increase in sales of almost a third, followed there by dairy snack foods, food seasonings, etcetera. The intermittent lockdowns imposed during the Indonesian government's response to the COVID crisis did not hinder the performance at Indo Food, particularly in the consumer branded products segment of that company. We are very happy with the first half numbers. And I don't think you would be misleading yourself if they stated something about the potential performance for the full year. Now let's move on to PLDC, where again we see record high revenues. There was 10% in the first half of the year, it's almost ARS92 billion. EBITDA was up 8%. Again, we're looking at a record high. Telco core income up 10% to a bit more than ARS15 billion. The service revenues are seen continuing rising strongly. They are forecasting a full year telco core profit of Ps. 30,000,000,000 and the heavy hinting about an extra dividend payment to shareholders continues with the promise of an additional 5 percentage points on to the regular 60% payout ratio that they provide to shareholders. The CapEx budget that they announced to us when they reported their full year 2020 numbers remains unchanged at Ps88 1,000,000,000 to Ps92 1,000,000,000. All of that spending well over a $1,000,000,000 a year for the past 5 or 6 years has resulted in those pretty shades of green that we see in the change in service revenues chart on the bottom right. It's a bit simplified from earlier versions because it delivers a clearer message this way. Essentially, it's wireless and fixed blind data that are driving the growth. Now if we look at Page 12, we'll see where that growth came from. And at the bottom of the page, honestly, it was led by the home business. We've seen surging data increases in the wireless space over the past several quarters. And with people locked up in homes for many months during 2020 2021, there have been a lot of new connections of people getting new home Wi Fi. As you can see, the service revenues are up by almost a quarter and they make up again a quarter of all service revenues. The individual business where you think that would be consumer mobile, their revenues grow at a slower 7% pace. Mobile data traffic is continuing to surge, but a bit more slowly. Moving over to the enterprise business, they're managing to register revenue growth as you can see there of 2%, notwithstanding that many, many businesses have got work from home policies during the community quarantine that they are having off and on there in the Philippines. A brief word on Page 13 about the quality of the network. As you can see in both fixed line and wireless, where I think it's fair to describe PLDT and SMART as market leaders. They are very, very strong, though we've got converged in the fixed line space, as you can see, offering a very competitive offering. It is worth noting in this context that PLDT has got far, far more fixed line customers than anyone else and in fact are building out very, very quickly as we can see the number of homes passed in the first half of the year was 13% in the end in 2020 level. Now very interestingly, while the mobile broadband, the individual sorry, the mobile business in the individual is slowing its growth a little bit, Feel VT Smart is maintaining a market share in the wireless space of about 48%. But interestingly, they have now moved ahead of their main competitor on average revenue per user, leading in both postpaid and prepaid categories for the first time in perhaps a very long time at the end of the second quarter. Now, let's have a glance at Metro Pacific here. Page 14 reminds us of the assets we hold underneath Metro Pacific. And as you can see, GBP Global Business Power is held entirely now by Meralco, which is owned 46% by MPIC. Now let's look at what has happened in the first half on Page 15. With the easing of quarantine restrictions, people have returned to the roads and that's quite evident in the change in contribution chart that we see in the bottom left here. With the increase in contribution, it was up 11% being driven very hard by toll roads followed by power and then other smaller businesses such as the hospitals business. Water was held back by lots of people staying at home during the period. Looking ahead, we see the water business and all others having a pretty good 2021 and there are forecasts of core profit at MPIC, I believe heading firmly into double digits, MXN12.0 billion for the full year. They are having a strong recovery from what was for MPIC and in contrast with PLDT and Indofu, a difficult 2020. In a little bit more detail, let's have a look at Meralco on Page 16. Distribution revenues up strongly. Earnings growing a bit faster than GDP growth there in the Philippines. They are turning their focus now to renewables, where they forecast that renewables will make up fully half of new capacity that they plan to install over the next 5 to 7 years. There are 2 solar power plants either in operation or being built at the moment and some details of them are here on this page. A quick look at toll roads on the next page. Revenues up by well over a third, core income rising much better doubling to just under ARS2 1,000,000,000, helped by a change in the tax regime. And that was all driven by a big surge in traffic, 38%. Mainal ad saw its revenues down 2% as industry remains to a great extent close during quarantine periods. This led to a decline in core income double digits I'm afraid of 15%, offset a little bit by the new tax legislation. Non revenue water increased fairly significantly to well over 30%, largely because they were much less able than they wanted to get crews out into the fields to fix leaks. As quarantine eases, that number will improve very much. Perhaps the most important news with respect to Mainland is resolution of a long enduring difference of opinion with their regulator, MWSS, which has resulted in new concession terms, offering them a 12% rate of return and confirmation that the concession will extend until the end of July in 2,037. I'll finish the look at the operating companies with a glance at FilEx, which saw a very strong increase in its earnings core income nearly tripling, thanks to a very, very big increase in copper prices, smaller increase in gold prices. Volumes mined were not much changed. Cash production costs were up a little bit, but really it was the surge in copper prices that went to the that led to the huge improvement in their earnings. At the same time, they have confirmed the increase in mine life at Pad Cal by another 2 years to the end of 2024 and management at Fillex is now looking to the future organizing themselves to get financing in hand for the Selangen project down south in Mindanao, so that they could begin building it out in 2022 with commercial operation planned 3 years later in 2025. So that's the snapshot of the performance of the operating companies. In the appendix, you'll see there are some tables and other details describing net and profit and cash flow and so on. But all in all, I think this is the best 6 months that we've had in quite some time. We are very enthusiastic about the future as demonstrated in the increase in the interim dividend and the continuation beginning tomorrow morning of our share repurchase program and the glowing numbers from the operating companies. That ends the narrative. I think, Sarah, now will turn us over to Q and A. That's fine. And we are now ready for questions. So I can scroll to read this entire question. Okay. We've got a question about the bank loans that are coming to you next year and have to be repaid to the banks. And the questioner continues to ask how much will gross debt decline by year end 2021 and next year, taking account of our current views of cash flow? And what's the target for our debt level, which the questioner cites as a major reason for the high discount to net asset value of course specific? Joseph, please help. Yes, let me address that. It's Joseph here. First part of that is 300,000,000 bank loans due in the Q1 2022. We're actively discussing the bank and putting in place kind of funding facilities just to refinance it. We are making quite good progress that more than 40% of the 300,000,000 already committed and signed. So working on the other 60%. And remember, we just probably show a very strong set of numbers. And we have been in active discussions. All the positive signals we received from the banks are that we'll get that done in the next 1 or 2 months signed, and then we'll get that ready and refinance the band loans for the latest Q1 2022, if not end of 2021. That's purely a refinancing exercise, so that would not change the so called gross debt level at all. So it's just terming out the bank loan to 300,000,000 bank loans to the out years. And that will clearly improve the average maturity of the debt profile. And then that's actually the main purpose of that, taking out the so called refinancing risk and liquidity risk in the course of 2022. And once that's done, then we basically have a clean trough for 2022 and the next one coming up would be the 358,000,000 born due in April 2023. So that's the first part of the question. The second part of that is what's the so called target debt level. Currently, we have a gross debt of RMB1.4 billion and taking out the cash is probably RMB1.3 1,000,000,000 and that's been the case in the past 18 months since December 2019. We are actually keeping at that level of RMB 1.3 billion. When you track the interest coverage ratio that we have been publishing, it actually keep on improving. From in December 2019, it was just over 2. And then December 2020, it was 3.1. And today, June, we're talking about 3.5. And then with further initiatives that we have in our plan that will actually improve further. I think that's the main measurement of our interest coverage ratio and the Sjogarib step servicing or interest servicing capability. And when we launched the bond last September 2020, I think we indicated to the bond investors that we are in the medium term. We target to reach 3.5, and we did actually deliver the 3.5 by June 2021 this year. Now measurement of the debt level, there are a number of ways to measure that. If you track the value of the portfolio, I think today it's roughly RMB4.8 billion. And with a net debt of RMB1.3 billion, you're talking about 27%, 28% now. Is that high or low? I mean, anyone could have their own kind of estimate and to what extent that actually ties to the NAV discount. Again, this is everybody's own assessment, but less than 30% of the total value of the portfolio or the total value of the asset, we don't really consider that as a high level. And then we keep on improving the interest coverage ratio by all sorts of liability management initiatives that we 18 months or 24 months. So I hope I have addressed the second part of that question as well. Thanks, Joseph. Any other questions? The share buyback program. We're compelled by listing rules to suspend it for, I think it's 30 days prior to our results announcement. We've got the budget commitment of $100,000,000 over the 3 years. We anticipate that will all be spent at a fairly even pace over that 36 months. Joseph, more to add? And just one more point on the regulatory side. When the share price is going up, I mean, like today, it actually went up quite a bit. There's also regulatory kind of concern that we're under the listing rules in Hong Kong. We can't buy back shares more than the 5% of the 5 days average. So when like today, I mean, it actually goes up to 2.6x something like that, actually past the 5% higher than the 5 days average. So that's all of our listing rules that we need to observe and comply with. It's not that we are not going to buy back shares, but we need to offset those rules. And also the other one mentioned by John that has already spread out before announcing our interim and final results. Okay. Can you update us on the sale of non strategic assets? Are all participations except the 3 big ones still categorized as non strategic? I believe we would leave this question to our Executive Directors, both of whom I believe we have online, Manny and Chris. Well, I'm not sure we have any more that is nonstrategic perhaps because, well, the Singapore power plant is doing very well starting this year and showing respectable profits. I think we continue to have issues with the sugar business, but I think there are plans to turn it around. So we may have to give that a bit more time. In any event, I'm not sure we can sell it at this stage because the industry itself is struggling here in the Philippines. So I think the rest of the companies or the bulk of the companies are doing very well this year. And as you know, you saw why they shouldn't do well in the coming years. Thank you, Meny. Have we got some more questions from our audience? Can we expect to rise in the final dividend in June next year? Manny, do you want to speak about our 11, 12 year old commitment to the minimum payout ratio? Well, addressing the second half, I see no reason why it should not perform as well as it did for the second for the first half. Now it's a bit early days to forecast what 2022 would look like. But again, I think the major companies are well positioned to perform creditably next year when hopefully the COVID situation will improve. For the past 2 years, the major companies, namely Indo Food, Meralco, PLDT and even the Tollways have performed well in the face of the pandemic. So I see no reason why 2022 should not be a better year compared to 2021. So I think the payout could improve next year if profits do rise. I see now this time, why not? Thank you, Manny. There's a question here about ESG and the plantation businesses no longer being members of the round chain, the RSPO roundtable for sustainable production of palm oil. Our plantation businesses left RSPO several years ago. It's a long and involved story, which I think would be quite tedious for all of us to go through right now, particularly as among all the notes that I've brought with me, I haven't brought notes on the plantation business. Indo Food will be reporting its own results to analysts on Monday. That question can be brought up there. Now with respect to ESG more broadly than the narrow question of RSPO membership, Indo Agri has for many years been a leader in this space since publishing their first sustainability report back in 2013. They don't do any planting in peat regardless of depth. They do 0 deforesting. They are members or rather have signed up to the core tenants of the International Labor Organization. The vast bulk of all their staff in the plantations have got about 300,000 hectares are members of unions with remuneration and other benefits fixed for the entire workforce. And they are generally well regarded in the ESG space. But there are those who have very strong feelings about palm oil. So this RSPO question does come up from time to time. But it is worth noting in the context that palm oil is the least costly of all edible oils. It is widely used in foods, in chemicals, in paints, in coatings. The modern world global economy really isn't prepared to run without palm oil. And the Indo Agri and the plantation companies under it have a vocal, open and transparent commitment to sustainable production of this edible oil. And to shut it all down would mean unemployment for the vast bulk of those living in the countryside in Indonesia, which is a country of 260,000,000 people, not to mention Malaysia and other places. So there's a lot of nuance to the RSPO and ESG question. I invite you to join the Indo Food earnings call on Monday, where their Head of Investor Relations, Mark Wakeford, is also Chief Executive of the Plantation business and can answer this sort of question much more fully than I can. Just one quick follow-up. What's stopping IndoAgri becoming a member of RSPO again? IndoAgri is a member of ISPO, which is a palm oil association set up domestically in Indonesia. It is very, very similar in terms of the rules and requirements that it imposes on palm oil producers. And we frankly regard it as a better standard to adhere to. Patrick, let's take that offline. I could go on for hours and hours, but we've got some more questions coming up. On noodles sales, I've just lost it. Here it is. Doing very well in the first half. Well, honestly, I think the vast bulk of the increase in noodles sales is the addition of Pine Hill to the Indo Food Group, well under ICBP. That acquisition closed only on the 27th August last year. So when you were comparing first half to first half, there was no Pine Hill whatsoever. So most of the increase in noodle sales will be from Pinehill. And we've got a question now about a very popular company with us now, PLP based in Singapore, LNG power producer. Stanley Yang is on the Board of that company will talk us through what's going on there. Sure. The turnaround really started at the end of last year and this was reported after the year end results in terms of a bank refinancing that was completed in October along with some savings generated from the procurement of gas and other operating expenses. But this year, the improvement has also been supported largely by a turnaround in the market. We have seen generation demand levels rise to all time highs this year for the Singapore market. At the end of last year, in terms of the system wide generation, it was approximately 5,900 megawatts and it's since by the end of first half risen to around over 6,300. And so that generation increase is partly the rebound from the COVID situation, but also general economic growth. You may have seen some of the recent forecasts by the Ministry of Trade and Industry, the government that expects the GDP growth for this year to be in the 6% to 7% range. And so that is helping the power generation. And in addition, in the Singapore power market, demand is being driven by increase in data center usage and demand and with some of that build out. And so that has supported higher pool prices, which in turn also benefit PLP in terms of the retail contracts they signed as well. And so that has really been the factors behind the improvement in PLP this year. Any other questions? As there's no more questions, may I invite Manny to give his closing remarks, please? Well, first of all, thank you for joining us this afternoon for the review of the first half results. And we look forward to a really much better year taken as a whole for 2021 compared to 2020, even better than 2019 pre COVID. And we look forward to speaking to you again early next year after we announce our full year results. So again, thank you. Thank you, Manny. Thanks again for all the participants joining today's online meeting. Have a good day. Thank you. Thank you. Thank you.