Earnings Call: H2 2017

Mar 20, 2018

Good day, everyone, and thank you for joining us today to discuss First Pacific's 2017 full year financial and operating results. The results presentation is available on First Pacific's website, www.firstpacific.com. For media on this call, please note the Q&A session is open for investors and analysts only. If you would like to raise questions, please contact us when the call finishes. For today's conference call, we have with us Mr. Warren Nicholson, our Executive Director; Mr. Chris Young, Executive Director, CFO; Mr. Edward Tortorici, our Executive Advisor; and other senior executives. At this point, I would like to turn to Mr. John Ryan from Public Communications for his presentation. Hi, everyone. Thank you for joining the call. I trust you've got a copy of our brief presentation. The format should be familiar to you. Page 3 has many of the people who are sitting around the table with me on this call. Page 4 reminds us all of what First Pacific's main investments are and how much we own of each of these companies. As we turn to page 5, we've got end 2017 valuation for the assets that we are directly invested in and their proportion within the entire portfolio. As you can see, our food investments now are over 40% of the total, followed by infrastructure at 29%. Here we've got our investment objectives and criteria, which have generally remained unchanged for many years. Turning to page 6, the value of our portfolio as of the end of 2017 was about $35 billion. That, of course, values these assets on a 100% basis. There are some bullet points on the right-hand side of this page, which show you some gross overall numbers for the assets that we are invested in. If you like, you can turn way to the back of this presentation, page 20, for a fuller table of the 2017 performance of the companies in the First Pacific group. When we turn to page 7, we see the performance at head office during 2017. As you can see, apart from currency movements, we've got increased contribution from all of our investments, lifting our recurring profit to a hair over $300 million from about $265 million in 2016. The pie chart on the right-hand side shows you the balance of contribution. As you can see, the biggest part of it is from food consumer, followed by telecom and infrastructure. It's quite similar to the proportions within our directly held portfolio. Turning to page 8, there is a graphic portraying our cash flow and the source of dividend income to First Pacific, the crucial single source of cash that we get. We only get cash from the dividend flow up to head office. In years past, PLDT, the biggest telecommunications firm in the Philippines, provided far and away the bulk of the dividend flow to First Pacific. As you can see, it has more recently become a more balanced disposition between telecommunications and food consumer in terms of the source of our dividend income, more balanced than in the past. Now, looking at the cash flow chart on the left-hand side of the page, our dividend payments have remained fairly steady in recent years. We paid out about $75 million for our dividends in 2017. Our dividend was unchanged for the year, by the way. Dividend and fee income, about $186 million. With the expiration of a long-term incentive plan, there were share option proceeds of about $33 million. Thanks to the efforts of our treasury department, led by Joseph Ng, we've had some net loan repayments and a little further on. In fact, let's go to the next page where I'll describe it. Joseph has managed to refashion our debt balance and our maturity profile, as well as the interest bill. It's down by about $15 million in cash terms last year as he's increased the floating share of our debt a little bit, replacing some of the bonds that matured last year with some bank debt and retiring the remainder of that bond. This snapshot here shows you that our blended interest cost has gone down by, I think, 70 basis points in the past year. It's now about 4.5%, and the average maturity is 3.6 years. Net debt's about $1.5 billion. Further details on how this looks, you guys can bring up in the question-and-answer session if you would like. Now a quick look at the main investments of First Pacific. Let's begin with PLDT, which really has been going through the biggest transformation of all of our main holdings in the past years. The way we like to portray this over at First Pacific is showing how the service revenues are evolving. As you can see on page 10, the pink shaded fixed line revenues are showing very strong growth. It's in double digit for the second year in a row. Honestly, we would expect a similar performance in 2018. The wireless business, as you can see, is a little bit behind the fixed line in terms of the evolution from analog to digital. There's still a lot of cellular voice and text messaging that needs to work its way out as we shift from analog to digital services. Nevertheless, we look to see in 2018, a second year in a row of higher EBITDA than the year before. We see our recurring core income at PLDT rising by 1 or 2 billion pesos to 23 or 24 billion pesos, and that's even as the expenditure on new assets for the network and so on, CapEx, rises to about 58 billion pesos we expect this year from 40 billion in 2017. Over the past five years, the spending on CapEx at PLDT has been around 260 billion pesos, and if you look on page 11, you can see where that has got PLDT and why we're feeling some really positive optimism. All that spending has delivered now, particularly in the wireless network, a world-class competition beating set of assets, which now require just the effort in sales and marketing to go on there and win. As you can see, Opensignal, which is an independent arbiter of who's good and who's bad in telecommunications globally, has looked recently at the market in the Philippines. They've delivered their verdict in six very important areas in the wireless business, in the 4G and 3G areas. Of the six, Smart brand is winner in four areas, loser in only one, and there's a draw on the 3G download speed. I would expect when this competition is rerun later this year or in 2019, we will see a more overwhelming performance by Smart as a result of that surge in CapEx, which is described in a few bullet points there at the bottom of page 11. Now, let's have a quick look at MPIC beginning on page 12. They're the premier infrastructure investment firm in the Philippines. In the six or seven months since we reported our first half numbers, there hasn't been a whole lot of change to their portfolio except for the addition of one or two hospitals and an investment in Nusantara Infrastructure, which you can ask further about in the Q&A. Now, as they have done for each of the past 10 years, MPIC has delivered yet another increase in its core profit, this time up 17% to more than PHP 14 billion. Looking at page 13, you can see far and away the largest increase there is from power, and that, to a great extent, is due to greater economic interest in the main power investments, think Beacon Electric and Meralco. As you can see, all of the other businesses have also increased their contribution to MPIC head office. That's largely owing to continuing strong control over costs. Very strong volume growth, particularly in the road business, which overall has seen close to double-digit growth. I think it's about 9% overall on some roads, well into the double digits. Looking ahead at MPIC, we expect the volume growth to continue very strongly. The only question mark, of course, is resolution of the unresolved tariff matters between regulators and the operating businesses in the water and in the toll roads in particular. Our Chief Executive, Manny Pangilinan, is sitting to my right, and he will be able to address these questions in the Q&A. But until we get there, it's worth noting that we understand the government in the Philippines is telling us they believe in the sanctity of a contract. They don't, however, want to subsidize the taxpayer. So there's going to be a threading of a camel through that. That's probably a poor analogy. It's going to be a bit of a difficult job, but they're working on getting that done, and MPIC is confident of resolution in its favor in both water and toll roads. Now, let's turn to Indofood, which similar to MPIC seems to be delivering year-on-year growth in sales and earnings. In 2017, looking on page 14, you can see that each and every business improved their sales and in fact within the various units within each business, nearly everywhere saw an increase in sales. The noodle business, which is about a third of overall sales at Indofood, managed to deliver extraordinarily strong margins in 2017, underlining that the consumer branded products business is continuing to be a strong driver at Indofood. Now, looking at the outlook for 2018. Indofood is cautious on sales and earnings growth because not least there are question marks over what will happen with commodity prices, thinking specifically of wheat and palm oil, which really affect the agribusiness and Bogasari business and their own performance going ahead. A quick look on page 15 at the margins at Indofood. As you can see, those two businesses, which are really affected by commodity prices, have seen their margins pushed down in 2017. But a strong growth of more than a percentage point in the consumer branded products business, and less so with distribution, managed to push up the overall margin for Indofood rather slightly. You can see the power of the CBP business. It consisted of half of all overall sales in 2017, and that's basically a good crude measure to remember going forward. Half of all sales tend to be the consumer branded products, with maybe 20% in the agri business and a quarter in the flour business, Bogasari. Turning to Goodman Fielder. In our third full year of ownership, you can see that we've got a good, strong increase in net sales and in core profit. We've had excellent performance in the Australia business, offsetting some slight disappointment in Papua New Guinea and some other markets. We remain positive about the outlook for Goodman Fielder going forward, and our executives most closely involved in that business are here with me, and they can discuss that more in the Q&A. Over at Philex, really the earnings increase there has been driven by a surge in copper prices. They're up by over a quarter in 2017, and that compensated for lower ore volumes, which was due largely to bouldery ore being in very large pieces, making it expensive and difficult to smash them down into the fine powder you use in the concentrate sent off for refining. Nevertheless, because of the higher copper prices, the lower ore volumes and lower grades were overcome to deliver earnings growth in 2017. Philex expects that earnings will probably be flattish in 2018, prices being equal. Looking further ahead, they are examining possibilities for increasing their ability to dispose of mine waste to push beyond 2022, the mine life at Padcal, while they begin down in the south in Mindanao, the Silangan project, to have a new look at the possibility of making that development an underground mining development owing to difficulties seen in securing the possibility of open pit mining down there at Silangan. I'm sure all of you have tracked the performance of First Pacific's share price year to date. Actually, it's tracked rather a lot with MPIC. We used to track PLDT quite a bit, but we've seen since the bad news over the water tariff came a few weeks ago to be tracking at MPIC. Now, we think we've got some really terrific investments in a part of the world where we're very optimistic about the growth of the economy and consumer spending power in the years ahead. We really don't want to be anywhere else apart from these industries and these geographies. We feel we're really well positioned for growth over the medium term. We're frankly dismayed by the surge in our NAV discount to around the 50% level. We are hopeful that we'll be able to communicate our optimism over our assets and our ambitions for refocusing our portfolio and using any proceeds that we might raise for debt reduction and share repurchases. Although I must say this is taking a little longer than we had hoped it would take. Let me reiterate, we feel we've got some really terrific assets that are poised for excellent performance over the medium term. Now, this really is the end of the opening monologue. There's some further slides in the appendix, which you may examine to help you better understand the group. Otherwise, I think we're ready for questions. Thanks, John. Operator, we are ready for questions. Thank you. If you would like to ask a question, please signal by pressing star one on your telephone keypad. Please ensure that your mute function on the telephone is switched off to allow your signal to reach our equipment. Again, please press star one to ask a question. We will pause for a moment to allow anyone to signal. We will take our first question from Jonathan Galligan from CLSA. Please go ahead. Yeah, good afternoon, guys. Maybe just picking up right there where you guys left off in terms of thinking about share buybacks. You have a balance sheet that's a little bit stretched. How far would you need to see gearing come down before you would feel comfortable potentially buying back shares? Thank you. John, that's a fair question. Generally, we look through the lens of our interest cover. We're currently at about 2.2 times. Our comfort level is around about three times. That's just as a general broad background. Yeah, that's where we are on that. Our primary objective is to ensure the balance sheet is stable. We've taken significant initiatives this year to push out the tenor of our debt and to bring down the cost of our debt. Accordingly, we've seen a slight improvement in our covenant ratios. We certainly wouldn't want to see the ratios deteriorate if we were able to sell assets and had cash available to either apply for further debt reduction or repurchase. I think the truth is, we try to do a little bit of both. I don't think we would necessarily apply any money that we achieved initially to repay debt before we did a repurchase. I think we'd try and initiate a share repurchase program concurrently with some further debt reduction. That was Robin Nicholson, Executive Director, by the way. Then maybe one follow-up along those lines. Go ahead. The reason- Maybe the- At the moment. If I could just say, the reason I think we would like to initiate a share repurchase is the shares at the moment represent a fantastic opportunity for the company to enhance the value overall. A discount of 50%, given the turnaround we've seen at PLDT and the quality of the performance in some of our other significant investments. It's simply such a good time to buy shares back. So that is, I think, why we would try and split any funding we had available to cover both the share repurchase and a debt reduction. Sorry. I think that is fair. The follow-up question would be, we have kind of talked about asset disposals now for a year. Any timeframe we can be thinking around that or anything you can update us on with regards to the progress of where that might be? Well, we have had a number of initiatives over the last 12 months, and one or two of those have fallen flat. We have not been able to achieve the prices that we felt the assets deserved. So rather than to sell ourselves short, we have either stopped the process or we have looked at a different way of addressing the issue. As those of you who follow the group know, the natural resources sector is an area where we would like to reduce our exposure. We also got an issue in relation to our power plants in Singapore where we have to do something. In relation to both of those areas, there are currently initiatives underway which I hope will improve our overall portfolio. Now, whether they can be achieved in three months or six months, I am not certain. But certainly within this year, we hope to be able to announce something that will address our objective. Okay. Thank you very much. As a reminder, please press star one to ask a question. Our next question is from Patrick Moogman from Value Square. Please go ahead. Hello. I have a question on share buybacks. If you think it would be a fantastic opportunity to buy shares, why then no single manager buys any shares today? Why also your Chairman, the main shareholder, Mr. Salim, he doesn't buy any shares? Well, in fairness, we can't speak for the Chairman who's not here. In terms of the company and a share repurchase, on the one hand, we have to balance up the strong desire on the part of the management to take advantage of what we see as extremely cheap stock and very strong assets that over the next 12 months we genuinely believe will continue to prosper against the need to have cash reserves so that we can reassure anyone looking into our company that the balance sheet is secure. I think if we're going to initiate a share repurchase program, we have to be confident that we've got enough cash on hand for the present and the foreseeable future for it to be a worthwhile exercise. Simply stepping into the market and buying a few shares today wouldn't, in our view, be productive. We need to be able to roll out a longer-term plan that we can demonstrate indicates strong support for our company. Okay. I have a couple of other questions. Why Mr. Santoso stepped out of the Audit Committee? Patrick, this is Don. I am afraid I am responsible for that because we have tried, or we are beginning to try quite hard to have a look at what the likes of ISS, Glass Lewis, Sustainalytics, and so on, how they are scoring us, because this is becoming increasingly important for a lot of fund managers. ISS gave us a contract whereby they would allow us to examine how they score First Pacific and how our score might change in terms of corporate governance. Depending on what factors we can be changed. One of the questions they ask is: What is the proportion of independent directors on the Audit Committee? Our number was, I think 75%, three out of four. If Benny were to resign, it would go up to 100%. Now, Benny joined that committee a couple of years ago, while we were working through the disposal by Indofood of a company called China Minzhong, and having Benny on that committee helped us work through all the accounting aspects that were implied in this transaction for First Pacific head office. The purpose of him being on the committee expired about 18 months ago, but he had just remained on. Then I asked Benny, "Look, do you mind? We will get a slight improvement in our score if you resign." Benny was quite happy to do so. Now 100%. Now it's 100% independent. Independent. As are like all of the other three of them. Okay, then a question on slide 13, where you indeed mention the losses amounting to PHP 9.2 billion for the culmination of claimed revenue losses, and that this is a priority for 2018. Can you elaborate a bit how, going forward, how will you resolve or try to resolve this issue? What was the question? Resolution. Well, we're in a continuous dialogue with the government in respect of the tariff issues relating principally to the water business, to the toll roads business. As you know, despite our effectively winning the two arbitration cases, just speaking to the water business first, we brought the government to arbitration twice on different matters and have prevailed in each of those two cases. We have brought our case to the government to say, "Can we then now implement the relevant tariff increase?" What they've done is that they brought a new case to the courts in Singapore, saying effectively that there's no jurisdiction on the part of the arbitration panel in Singapore over the two issues that have been raised with the government. Effectively, what they're saying, what we've been told, principally by the Department of Finance, is that if they were to pay up on the underrecoveries effectively for the past few years in cash, that would be equivalent to taxing the entire 100 million Filipinos. They would rather see, by inference, that the tariff adjustments relating to both the underrecoveries and the catch-up tariffs would be based on future tariffs, increased adjustments to the tariff schedule starting this year onwards. What we've done over the weekend is to prepare a revised tariff schedule, which we hope to bring to the attention of the government after Easter. I think in a similar way, the tollways have looked at their revised tariff schedule to cover the same ground, underrecoveries arising from delayed tariff adjustments and a catch-up tariff. In both cases, we have to dialogue with the government to get their approval, principally because, well, in many respects, we've done away with their objection about the taxing subsidy that John referred to earlier. We're quite confident that the government now accept this effectively user pay resolution of the tariff issues. That was mainly from our chief executive. Yes, okay. On the same slide, the last sentence, you are mentioning an eventual IPO of the hospital business. Can you elaborate a bit on that one? Well, that of the assets belonging to the Metro Pacific portfolio appears to be the most attractive and probably the highest-valued asset in terms of public markets. So it is easily translatable into an IPO situation for the hospitals group. On the other hand, there are arguments that would say that why are you giving away value of that most priceless asset within the portfolio? As of now, the schedule of the IPO for the hospitals is the early part of 2019, partly because it takes a while to prepare for it, partly because there are several hospitals that are likely to be acquired in the next few months, and therefore, could increase the value of the IPO. Now, I think what we need to do is to re-examine the entire portfolio of MPIC and determine which ones of the available assets we should IPO, because all of the companies within the Metro Pacific portfolio, except for Meralco, are private. So an IPO of one other asset company is likely to be needed by Metro Pacific in order to raise funds for its own CapEx requirements. Okay. My last question. I think, honestly, that the most important reasons for the high discounts of First Pacific are the quite high head office costs. Of course, now you have targets to lower the debt and the interest costs. Do you also have a target to decrease the other costs of the holding? Do you have targets for that one, too? I think that what we are trying to do is maintain the corporate overhead costs. I think if you have a look at 2017 versus 2016, you will see that they were basically flat at about $39.6 million. As indicated earlier, there has been quite a strong focus on the net interest expense line. There is a decrease of almost 15%, in fact, a little over 15%, in 2017 over 2016, down to about $81 million from $95.7 million. Yes, I think it is a fair point. There is a strong focus on the costs at the head office level, and we would like to see these to continue to come down. There will be a focus both on the expense line and the interest line, and that will continue into 2018 and beyond. On governance, because ESG has become more and more important. Do you think that the remuneration of the executive committee and board members is in line with other comparable companies? Yeah. Hello? Hello? Sorry, pardon the interruption. Patrick's line has disconnected. Oh, Christ. What can we do? Gee. Let's call back in. The other line. Okay, operator. Let's go to another question, and when he dials back in, please let him ask his question so we can hear the answer. Okay. We've no questions at the moment. Again, it's star one to ask a question. Ugh. We have another question from Mark Dwyer from Citi. Please go ahead. Your line is open. Yeah. Hi, thank you. Can you just talk a little bit about your plans in the absence of making any disposals of what you refer to as peripheral assets in the next 12 months? What is plan B after that in order to raise some capital to pay down debt and start the buyback? Well, I think the pressure is on us to realize some of the non-core assets to ensure that we have cash for these initiatives. We're certainly not planning to raise any equity capital in the foreseeable future. If we don't sell things, then we are reliant on our recurrent income from the operating companies. Certainly, looking at the performance of those companies in the last 12 months, we continue to be quite optimistic that they will provide strong cash flows going forward. If we want to look for lump sums, then we are certainly going to have to achieve a disposal. No, thanks. I was wondering, are you still only looking at those non-core assets? If you didn't make progress, as I said, over the next, say, six months, would you start looking- No, we- -towards reducing some of the positions in the core assets? I definitely wasn't talking about equity issuance or- I see. Well, I think we've started by looking at disposals of those assets, which by our internal measures, don't meet our requirements. I mentioned the sectors earlier on where we've focused our attention. There are other investments that we hold that we could consider selling if we decided that raising capital was a priority over securing long-term growth in the portfolio. I think it's unlikely that we would start shaving our core investments. Although, I suppose one should never say never if the right deal comes along. It's not, for example, our plan to sell down a couple of percent of PLDT or to reduce our exposure further to MPIC or to lose control of Indofood. I think these assets are ones where we have great confidence in their long-term prospects and their performance. So we want to ensure that we maintain adequate exposure to them and that we have control of them. So I don't think shaving our portfolio in the sense of selling a few shares here and there is the way to go. But there certainly are other investments that we might consider if the right opportunity came along beyond the small group that we have currently working on. Okay, thanks. One thing we also talked about last year, I don't think in this forum, was a more regular publication of a NAV of the company, which is obviously something that can be done very cleanly and quickly. If that was publicized, it could be beneficial to attract a wider audience and potentially more shareholders. That's something we will take a look at again. Absolutely right. We certainly calculate that number every day internally, so it's not a difficult exercise. Whether we do it daily or perhaps on some more regular basis, I think we ought to consider it, and we will. I can tell you this, that we are looking into technically how it would be done on our website on a regular basis, whether it would be a manual or if we could somehow automate the process like a share price. Okay. Thank you. There are no further questions at this time. Thank you. As there are no more questions, may I invite Mr. Feng Minnan to give us the closing remarks. I'm sorry to interrupt, folks. Operator, has Value Square dialed back in? Not yet, I'm afraid. Well, in any case, let us answer his question so that all questions are answered. Sorry, pardon the interruption. Please, Robin. He has actually dialed back in. Okay. I will open his line. Hello, John. Yes, I am back here. But I missed the answer to my last question on the remuneration of management compared to if it is more or less in line with other comparable companies. Yeah. We didn't answer it because we thought we'd wait till you came back on the line. So if we could take this opportunity to answer it now. Remuneration of the senior executives is the exclusive jurisdiction of the Remuneration Committee, which comprises predominantly independent Directors. They are careful at every opportunity when salaries or bonuses or other arrangements are being considered to benchmark payments or awards against other appropriate companies in Hong Kong. There are a number of companies which they look to as suitable benchmarks. Indeed, from time to time, and indeed, I believe this year, they have actually brought in outside consultants to assist them in that process. So there's a strong effort made by the Remuneration Committee to ensure that people are paid in line with the market. Okay, thank you. Operator, are there any questions online? We do have one more question from Mark Dwyer from Citi. Please go ahead. Your line is open. No, we don't have a question. We were just going to ask for the answer to Patrick's question, even if he eventually wasn't there. But thank you. Okay. Thank you. There are no further questions. Thank you. Thank you. Thank you for joining us this afternoon. Let me just summarize perhaps our answer to the thread of questions relating to the balance sheet of the company and, of course, the related issue of share buyback. I would just like to echo what Robin said earlier, that the best way to approach that is by way of asset disposals and not by incremental disposal of the key assets of First Pacific, principally Indofood, which in any event, Anthoni Salim would not allow us to do so anyway, PLDT and Metro Pacific itself. Now, that signifies that the rest of the portfolio are actually available for sale if we could do so. And despite it being somewhat reticent in telling you what actually had been done and are trying to do, there had been quite a lot of activity last year in relation to disposing of certain assets. I'd just like to focus, particularly to use as an example, the case of the sugar business. That has been on the burner for a number of months last year, and we did get a price, but not at the price that we would want to dispose of it. Eventually, we have had to withdraw the company from the market, but we're now into plan B. What we have agreed with management of the sugar business is to dispose of a significant sugar asset in order to reduce significantly the debt at the sugar level and therefore improve the cash flows of the sugar business. We would hope that by doing so, the sugar business becomes more attractive either for a combination with an existing sugar operator and eventual disposal of the sugar business. In a similar fashion, Philex Mining, which we've indicated earlier, the natural resource company, there's not an open for sale sign, but it is fully the intention to dispose of Philex. What we're just waiting for is a value on the new Silangan mine, because we don't want to dispose of Philex at a fire sale. We do have to wait for a few more months for a clear signal from the government as to whether they're totally opposed to open-pit mining, in which case we may have to go to underground mining, which would then change the economics and the valuation of Philex Mining as a whole. But it is clearly within our intention to dispose of Philex Mining in some shape or form. The intention of all this is really to improve the balance sheet, raise money, raise cash, to, on the one hand, reduce our debt, and on the other hand, to do some share buyback. We know that perhaps in the application of the cash proceeds, that share buyback is a priority to our shareholders. Because I think, as John indicated earlier, I think Joseph has done a good job in terms of bringing down the cost, reducing the debt somewhat at head office. And I think the balance sheet is in a fairly stable condition. Now we must put the balance sheet in a position to do share buyback. We're aware of that. I think I just don't want to leave this conversation with you with the impression that management has taken a sort of rather lackadaisical, I didn't want to say that, but kind of relaxed position that if a buyer comes along, we'll sell the asset. No, that's not true at all. Advisers, we ourselves are trying to sell any relevant assets that we could sell, including the power in Singapore, power plant in Singapore, and possibly even Goodman Fielder. With that. Thanks, Manny. Thank you again for joining today's call. Operator, can you provide the replay information? Ladies and gentlemen, this concludes the First Pacific's 2017 full year results conference call. If you would like to listen to a replay of today's call, for Hong Kong, please dial 85230080334. For Singapore, 8001012009. For U.K., 08081001153. And for U.S., 8882031112. The passcode for the replay is 1645957. Thank you for your participation. You may now disconnect.