Earnings Call: H2 2018

Mar 26, 2019

Good day, everyone, and thank you for joining us today to discuss First Pacific's 2018 full year financial and operating results. The results presentation is now available on First Pacific's website, www.firstpacific.com. For media on this call, please note the Q&A session is open only for our investors and analysts. If you would like to raise questions, please contact us when the call finishes. For today's call, we have with us Mr. Manny Pangilinan, our Managing Director and CEO, Mr. Chris Young, our Executive Director and CFO, and other senior executives. At this point, I would like to turn to Mr. John Ryan from the corporate communication for his presentation. John, please. Thank you, Sara. For reference, I am reading from the information summary for investors posted to our website this afternoon. If we open it up to page 2, we've got the familiar list of our major investments. On the facing page 3, most of the people you see on this page are here in this room to help you during the Q&A after my brief opening remarks. We turn to page 4, where there's an illustration of our gross asset value as at the end of February with one fine print item. As you can see, we've changed the value of Goodman Fielder to the value we expect to get from it in our transaction with Wilmar as we sell our half of that company to its other owner in a transaction expected to close before the year ends. Questions on that can be addressed by Stanley Yang, who's our corporate development executive, or Manny Pangilinan as the time comes. Page 5 is the familiar snapshot of the total value of many of the assets we're invested in. Some of the large unlisted assets such as Maynilad, the water company, and MPTC, the toll road company, both in the Philippines, are not in this pie chart. The renewed focus on core assets on page 6 will form the core of Manny's summary when we finish the Q&A. Let's jump now to page 7 for a brief rundown of the financial and operational performance of First Pacific and our companies in 2018. Let's begin with the chart on the top right of the page. The free cash flow is rather similar to what we saw in 2017, although the net interest expense is a little bit down. The distribution-paid dividends is exactly the same. As you can see, there's been almost no change in borrowings one way or another, and there has been a reduction in our corporate overheads with the result that our closing cash is very close to what the opening free cash was. The recurring profit chart underneath that really gives you a snapshot of what has happened with our operating companies and their contribution to First Pacific in 2018. As you can see, we would have seen an increase in recurring profit except for the sharp declines we observed in the Indonesian rupiah and the Philippine peso. They contributed almost $21 million of negative contribution to our recurring profit. Philex suffered from poor metal grades and lower volumes at its Padcal mine. Goodman Fielder had difficulties in some of its major markets owing to adverse movements in commodity prices. Indofood itself, the last decline in contribution, that is almost entirely due to the currency effect I mentioned, as well as low prices for the CPO, which formed the bulk of the sales of its plantations division, which is itself about 17% of Indofood's overall sales. Head office, as I alluded in the cash flow remarks, saw a sharp increase in what we cost $16 million there. MPIC saw volume growth in most of its major investments and made great progress towards resolving many of those tariff issues it had been facing with regulators, e.g., water and toll roads. The negative contribution from PLP declined with a sharp increase in its revenues. A similar change from First Pacific Natural Resources, which is focused on our small sugar investment in the Philippines. As you can see, notwithstanding the currency effect, the positive increase in contribution from PLDT, which I will address in a moment. Now up here at head office, turnover rose 6%, notwithstanding a decline at Indofood, sharp increases in sales at MPIC and PLP, the power company in Singapore. The contribution, again, down 6% largely because of the currency difference, and the recurring profit decline was smaller owing to lower head office costs. Net profit was up 9% on lower non-recurring losses, and we have folks from our finance department, led by Chris Young, the CFO, who can speak to that in the Q&A if you require. Now let us look forward past page 8, which will be a useful page for you to bookmark. It is a snapshot of all those group companies. On page 9 now, we have got our interest bill being cut following the tender and new bond issue that we have done in 2018. Let us focus for a moment on the head office debt column chart at the bottom left of this page. On these first two columns on the left-hand side. The 2019 borrowings, which come due in June, that is a 6% seven-year bond will be fully taken care of with bank financing we have already lined up in hand. We plan for the 2020 bond. That is our last secured borrowing and our most expensive borrowing at six and three-eighth. When that matures at the end of September 2020, we expect to take care of that with proceeds from the sale of Goodman Fielder, which we expect will close well ahead of year end 2019. As you can see, the bullet points up above here, our blended interest cost is well under 5%, albeit, the floating share of all our borrowings is now at about 39%. Let us see how interest rates move going forward, but there does seem to be a suggestion that central bankers are turning a bit dovish now. There are some ratios here. We have got our gearing, our debt cover, and so on. The most important figure there is the cash interest cover, which is two and a half times. Our dividend income is two and a half times the interest bill. Now, let us turn to page 11, and I will speak briefly about Indofood. The story of Indofood is, in a nutshell, described in that change in sales column chart at the bottom of the page, where you can see low CPO prices at the plantation division are the biggest decline in contribution there. But the rest of the businesses, albeit a small decline at distribution, showed very good increases indeed. The noodles business, they have got an enormous market share of over 70% domestically, saw greater prices, greater volumes, leading to greater sales there. The flour business, because of higher wheat prices, was able to pass on much of that increase to its customers, and thereby saw its own sales increase as well. Now, the dairy business increase there, it is only IDR 479 billion, but it is worth noting that in just the past few years, the share of high-margin dairy products has greatly increased in the total volume of what they sell. A few years ago, sweetened condensed milk, the lowest margin dairy product, was about half of all sales. In 2018, it was down to about 40%. Now, let us flip a couple of pages forward to a company going through some very exciting developments. Let us look at page 15, which portrays some of the results of enormous CapEx spending at PLDT, the biggest phone company in the Philippines, over the past few years. Since, I believe, about 2015, annual CapEx bill has been over $1 billion, and the results now are portrayed on this page. They have got far and away the strongest network in the Philippines. CapEx in 2019 is budgeted at about ₱78 billion, which is give or take $1.5 billion. That will solidify the leadership position of PLDT in crucial areas. The wireless network, where it has, as you can see, the best latency, the best video experience, the best upload speed, and the best download speed. All of these metrics are going to improve, and I expect the next time we speak to you at the end of August with our half-year numbers, we will show that 4G availability is no longer a draw, but a clear win for the wireless network. What does this mean for the bottom line? There has been extremely strong growth in two of the main businesses over the past couple of years. I speak of Enterprise, which provides data services to business, and the Home business, which provides fixed line products like Wi-Fi and television over the phone line to residences. Those have been growing at a double-digit rate in the past couple of years. We see that continuing in 2019. This year they are being joined by the wireless business, which PLDT calls the Individual segment. That is growing very strongly as subscriber numbers are increasing quite sharply after several years of decline. We are beginning to see signs of solidifying increases in average revenue per user after all of that CapEx spend of over $5 billion over the past few years, is delivering a network capable of delivering vast volumes of data going from mobile phones out to the world of PLDT. Now let us turn to page 17 and have a quick look at MPIC, which is the premier holding company for infrastructure investments in the Philippines. Let us look to the contribution page. As you can see, nearly all of their businesses showed strong increases in contribution at MPIC, with the exception of logistics, which is still in startup phase. As you can see, the electricity business, partly because of greater ownership stakes obtained in the second half of 2017, saw a sharp increase in contribution, as did the toll roads and the water and the rail and so on. Essentially, with the strong economic growth in the Philippines, consumers are spending more from their larger wallets. They are driving more on the roads. They are consuming more water, even as investment makes that system more efficient. They are using more electricity, keeping their homes perhaps a degree cooler, although it must be pointed out that the growth in electricity consumption has been from factories and businesses. I will wind up with a brief word about Philex Mining on page 20, which is now entering a period of transformation as the Padcal mine, after over half a century of production, delivered in 2018 lower volumes at poorer grades. As that company gears up to begin development of its giant Silangan project down in the south of the company, which is the future of Philex Mining Corporation going forward. We can move to the Q&A now. You folks can ask your questions to all of our executives here, and at the end of it, our CEO, Manny Pangilinan, whom I must admit is a little bit delayed coming back from an investor conference, hopefully will be in time for the winding up. Thank you, Sara. Operator, we are now ready for questions. Thank you, Sara. If you would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Once again, please press star 1 to ask a question. We will pause for just a moment to allow everyone an opportunity to signal for questions. Ladies and gentlemen, once again, if you would like to ask a question, please press star 1 on your telephone keypad at this time. We have one question from Aras Poon. Your line is open. Please go ahead. Hi, this is Arras Poon from CI Group. Thanks for taking the question. I guess my question is more about the long-term strategies of the head office. With now that you are disposing within a few days, most of your investments at the head office are now listed companies. I just want to get a sense, in long term, when you see new investment opportunities, would you use the head office to invest directly, or you would just let your list of subsidiaries to invest in the opportunities and making First Pacific as a pure investment holdings of your listed investment? This is Chris Young. I think you are correct. The plan is to focus on the three core investments, big investments of the group, plus Philex and PXP going forward. There will be disposal activity over the next 12 to 18 months or so. Going forward, I think, yes, it would be true that we will have most of our focus on supporting the operational companies, but there is a lot to do there. Mr. Pangilinan remains the CEO of PLDT and closely involved in the turnaround there. At the Metro Pacific side, I think as you know, there are initiatives to not only continue to build their toll road business and both in the Philippines and outside, but also to sell down certain assets, and I think we will be closely involved with that. On the Philex side, we are moving from Padcal to Silangan, which is a major project, and that is one that we will work very closely with the management there to develop over the next 12 to 18 months or so to move it from effectively the definitive feasibility stage to a fully functioning mine within 2 to 3 years. Indofood, again, that is mainly run from the Indonesian side, but obviously, there is quite a bit of expansion going on there as well. Lastly, PXP, which we have an investment in directly and also through Philex, has some potentially significant opportunities to develop in terms of its service contracts, both in the Philippines and also overseas. Yes, I think it is true to say that most of initiatives will be through operating companies, but I think the head office will be very closely involved in the various initiatives which are underway there, as well as the continued slimming down of the head office and focus on the major operating entities. Okay. Thank you very much. Once again, if you would like to ask a question, please press star one on your telephone keypad. We will take our next question from the line of Vivek Dhawan from Value Square. Your line is open. Please go ahead. Hi. Good afternoon. So just maybe the first question on the sale of Goodman Fielder, because until last year, I think Goodman Fielder was not precisely one of the assets that was one of the first in the list to be sold. Then when we compare it with the price at which it is sold, could you explain us a bit what was the rationale behind? And how do you look at the price at which it is sold? Sure. This is Stan. On the sale of Goodman, when we looked at the portfolio of assets, because we determined that Goodman was not a long-term A holding for the group, and because there was a window to sell it, we explored our options. That included sounding out the market. However, recognizing that in terms of our holding, we were a 50% shareholder in a non-controlling position. That had some impact in terms of the breadth of buyers that we were able to reach out to. In terms of the value to your question, the performance started to struggle in 2018. You may have seen the results where core net income fell to 62.7 million Australian dollars from 80.1 million in 2017. A large part was due to the impact of raw material, particularly on the wheat prices, as that impacts the baking and flour businesses of the group. That has continued in terms of the challenging environment in 2019. Coupled with that, we also saw some challenges in terms of the operations of the business by way of various efficiency initiatives, automation projects, and network transformation that has just taken a longer time to get through. For us, when we looked at the sale price, and also coupled with the increased level of debt that the business has taken on, then we concluded that the price offered by Wilmar, when we look at the sale multiple relative to EBITDA, was in line with comparable transactions within the Australian market for a business of this nature. That's how we got to the conclusion in terms of the selling price. Mm-hmm. Okay. Maybe if there is an update on the sale of other non-core assets, is there some tangible progress in that, or are you still not seeing very good interest in the sale of those other non-core assets? The follow-up would be then on share repurchases. I think in terms of the other businesses we've identified, I think was principally the small sugar business in the Philippines, Roxas. We did get very far with a transaction there, which would have been attractive. Unfortunately, in the middle of February, that transaction was blocked by the Philippine Competition Commission. We are having to restart the initiatives there. There are a number underway, but I think it'll take a few months before you see any significant developments there. PLP is the other major business, which is the power generation company in Singapore. Again, we are working on multiple fronts there, and we would expect that there would be some developments there probably before the end of the year. It's unlikely that we will be able to get a complete sale out of PLP immediately, but we think we could play an active role in the consolidation process in Singapore, which could then lead to an eventual exit. But on both of these companies, there are, as indicated, initiatives underway, which we would expect to see some developments on by the end of this financial year. Mm-hmm. All right. Thank you. Once again, if you would like to ask a question, please press *1 on your telephone keypad at this time. It appears there are no further questions. I beg your pardon. We have our next question from Jonathan Galligan from CLSA. Your line is open. Please go ahead. Yeah, good afternoon, guys. Just a quick one. Can you give an update on the tariff situation at Metro Pacific as well, and just take us through kind of where we're at in that process and what are the next steps there? Hello, John, this is Manny Pangilinan. I just walked in having come from that Credit Suisse investors conference. On the tollway side, we have gotten final approval from the Toll Regulatory Board, and the new tariff schedule has been published. I think as of midnight, one particular day last week, as of midnight of that day, we implemented the toll rate increase. The impact on the toll roads group would be in the order of half a billion, PHP 500 million this year, and increasing to something like PHP 700 million to PHP 800 million incremental revenue from the toll roads increase next year when we see the full impact of the toll raise tariff increase. Of course, we will be opening three road segments within the year. We inaugurated the largest one, which is the first part of the connector road about two weeks ago with the president. On the water side, in addition to being allowed to increase our tariffs from time to time as a consequence of any foreign currency adjustments, not that we have any, and the inflation. We have been allowed to raise tariffs on the water side after the election. Starting June, we should be able to implement the relevant tariff increases for the water, Maynilad Water. I do not have the numbers readily with me, but it is not what we had applied for, but it is close enough to it for both the tollways and the water tariffs. On the tollways, we were granted relief for the 2014 to from the 2012, I am sorry, 2012 to 2014, and the Toll Regulatory Board has said they will approve in the coming months the increase applicable to 2015 and 2016. On Meralco, the fifth regulatory period will end June 30th. We are in discussion already with the Energy Regulatory Commission in respect of the fifth regulatory period, which will start in July of this year. Our own view is that the relevant formal steps, which starts with a memo to be issued by the ERC to us, to Meralco, has not been done. These are the informal discussions, informal channels, we are using to convey our view of what the tariff should be for the fifth RP. It is unlikely that any tariff will be determined by the ERC within this year, and probably at the earliest, the first half of 2020. It is likely that the temporary tariff applicable during the entire fourth RP of PHP 1.38, which is the headline tariff, would apply for the July to December period 2019. In many respects, there will be no impact on Meralco's tariff structure for the entire year 2019. That is great. Thank you, Manny. Appreciate that. Thank you. It appears we have no further questions. I will hand over the call back to Sara. Please go ahead. Thank you. Now a few words from Manny Pangilinan to close out our meeting with you. Sorry, just walked in. I think in terms of the disposal of assets, that was asked when I came in, right? Quite apart from Goodman Fielder, we are actively seeking a solution to the Singapore power plant. We got held back because, as you know, Anthoni Salim was trying to get into Hyflux, and that is looking less and less likely. Anthoni was here, and we have agreed on a way forward, most likely without Hyflux and most likely with somebody else, the consolidator of the power market or the power companies, generation companies in Singapore. We would hope to accomplish that within this year, as Chris indicated. Same is true for the sugar business in the Philippines. There are at least two groups talking to us about buying the sugar mill in Batangas in the southern part of Manila, as well as other pieces of the RHI group that may be available for sale to other groups, mainly the sugar mills or the ethanol plants located in the island of Negros. What else? For Philex, we have not yet announced. No. Quite likely end of life for Padcal will be sometime middle of 2022. In terms of any cash requirement from First Pacific moving forward, we think that they will be self-sustaining in terms of supporting their own OpEx, the remaining maintenance CapEx required for the mine in Padcal, and building enough cash to pay down the debts of $41 million. The fund required by government to close down the mine and maintain the mine post-closing. Philex is focusing its operations precisely to achieve those objectives and to ensure that First Pacific will not be called upon to further any cash prior to its close down in the middle of 2022. I think quite soon, perhaps in April or May, the board of Philex Mining will have to determine whether the Silangan mine in northern Mindanao will indeed be pursued, will be prosecuted. I think my sense is it is likely to be. In that case, our approach would be to look for a strategic partner, and the idea is for First Pacific not to be called upon to contribute any cash for the development of the mine. Because effectively, Philex has, in any event, funded the development costs of Silangan mine to the tune of a little over $300 million already. So there is built-in equity that has been contributed by Philex Mining in respect of the Silangan mine. We think the project cost for the Silangan will be in the area of $700 million, of which majority of that funding cost will be by way of project financing. It is the last one, I forget the wording. Okay. Oh, I see. In respect of subsidiaries, particularly Metro Pacific, I think we can assume that PLDT will be self-sustaining despite the high CapEx of ₱70 billion or $1.4 billion this year. Meralco will as well be able to fund its CapEx and dividend requirements moving forward, given its significant cash balances and its continued EBITDA growth. The issue has always been Metro Pacific, and this afternoon, the board has decided, and with the concurrence of the CEO and the CFO of Metro Pacific, to dispose of certain assets at their level to fund what may be needed for the immediate future of MPIC. In due course, within the year, definitely MPIC should make announcements in relation to the divestment or sell-down of certain assets within its overall investment portfolio. Within the year, there will be no capital call on First Pacific and no equity raising for Metro Pacific for 2019. That should complete the picture, right? In terms of fundraising. Thanks, Manny. For the results roadshow, John and Chris will be in Europe from the 9th to 18th of April and in Latin America in May. If you would like to have a meeting with them, please get in touch with John or Sara. Thanks again for joining today's call. Operator, please can you provide the replay information? Thank you, Sara. Ladies and gentlemen, this concludes First Pacific's 2018 full year results conference call. If you would like to listen to a replay of today's call, for Hong Kong, please dial +852 3008 0334, for Singapore 800 101 2009, for U.K. 0808 101 1153, and for U.S. 888 203 1112. The passcode for replay is 5780119. Thank you for your participation. You may now disconnect.