Earnings Call: H2 2015

Mar 30, 2016

Good day, everyone, and welcome to the First Pacific full year 2015 results teleconference with investors and analysts. Today's call is being recorded. At this time, for opening remarks, I would like to turn the conference over to our moderator today, Ms. Sara S.K. Cheung. Please go ahead. Thank you. Good day, everyone, and thank you for joining us today to discuss First Pacific 2015 full-year financial and operating results. We hope you have been able to get a copy of the results presentation, which is available on First Pacific 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 call, we have with us Mr. Robert C. Nicholson, our Executive Director, Mr. Chris Young, CFO, and other senior executives. At this point, I would like to turn to Mr. John Ryan from Group Corporate Communications for his presentation. John, please. Thank you, Sarah. In this presentation, whenever we're mentioning dollars, please assume it's USD unless we say specifically it's something else, such as perhaps Australian dollars. Now, if you look at page 3, this is a reminder of the main holdings that we are directly invested in at First Pacific. On page 4 are photographs of many of the people with me around the table today. Manny and Ed are not able to join us. They're in the U.S.A. for meetings, and I would guess that at this time they are asleep. Now, turning to the page labeled Developments in 2015. This is only some of the highlights. More details are available in our earnings report, which went out earlier today. You can access it on our website and on the stock exchange website. Clearly, for us, the biggest development in 2015 was the finalization of the investment in Goodman Fielder in March, a little over a year ago. PLDT, the biggest phone company in the Philippines, formed a joint venture with Rocket Internet at the beginning of 2015. Halfway through the year, ICBP and Lonsum invested in a property business for $78 million. Going further down through this list, which is only examples. These are not the most important ones. MPIC invested in a road and bridge project in Vietnam, about which they are very excited. They also acquired a 10% direct stake in Meralco from Beacon Electric, which is a 50/50 joint venture between PLDT and MPIC, which after that transaction owns about 35% of Meralco. In February last year, our joint venture with IndoAgri increased our stake in Roxas Holdings, one of the biggest sugar producers in the Philippines, to just over 50%. The two charts on the right-hand side of this page show the value of our assets. We have pushed them out to the end of February, when the value of the assets we invested in was just over $7.4 billion. The pie chart breaks down the proportion, and the column chart shows you the change over the past 12 years or so. On page 7, there is a brief summary of the main financial results for First Pacific in 2015. Our recurring profit was down 9% at $293.9 million. Contribution from operations was down a little bit less at just under $433 million. Profit attributable to owners of the parent, that is really our net profit, was up on the previous year owing to lower provisioning. Our earnings per share was down a bit less than 9% at 6.89 U.S. cents on a recurring basis. We have proposed a final dividend of 0.71 U.S. cents. That is down from 1.67 U.S. cents for 2014 earnings, and it brings the full-year dividend payout ratio to 25%, which is a target that we have achieved in every year since 2010, from 36% in 2014. There are some gearing figures at the bottom of this page as well. Joseph Ng, our Head of Treasury, can speak to balance sheet and other related topics during the Q&A portion of this conversation. On the following page, we have the highlights of our operating performance, where you see a graphic illustration of the evolution of contribution from 2012 through 2015, and a perhaps more important chart underneath it, a column chart showing the dividend income to First Pacific from the companies we are invested in. As you can see, it declines to $269 million from $304 million a year earlier, and that is largely as a result of a lower dividend payment by PLDT. Turning to the following page. We have got a snapshot of our balance sheet. As you can see, there are no major loan repayments in 2016. Our cash interest cover, which is the ratio between our dividend income to our interest bill, a very important figure to us, which gives us our best sense of our ability to borrow or not, declined to 2.6 times from 3.1 in 2014. You can see those figures are in the box on the bottom right-hand of the page. Generally, when that figure dips below 3, we are not very comfortable with any major increase in our borrowings. Turning to the following page, we have a closer look at the operating companies, beginning with PLDT, which delivers our biggest source of dividend income. As I am sure you are aware, they had a bit of a difficult year in 2015 as they engage in their digital pivot, as they are transforming their business from traditional legacy businesses like voice and texting to a greater proportion of their service revenues coming from data-intensive services such as mobile internet. So you can see that their revenues were down by a percent at 162 billion pesos. Core income was down at just over 35 billion pesos. They hit the target there. Their CapEx for 2015 was just over PHP 43 billion, and they reckon to spend a similar amount of money on CapEx this year as they build out what we frankly expect to see towards the end of 2016, the best telecommunications network in the Philippines. We're already seeing evidence of increased quality compared to that of the other major player in that market. If you look at the column chart depicting the change in service revenues in the bottom right-hand of that page, you can see quite clearly the transformation from the traditional services to the newer ones. We're beginning to see some very encouraging results there. Mobile data revenues grew in 2015, and the growth of many of our data services is accelerating quite rapidly. However, we are all aware that these newer services have lower margins than the ones they are replacing, e.g., SMS. Turning to the following page, we've got a snapshot of our investment in Goodman Fielder, one of the biggest food companies in Australia, an investment we made so that we can pivot that company towards emerging Asia, increasing its exports from its major home markets of Australia and New Zealand, and increasing the international business, which is currently focused more on the Pacific rather than in the emerging part of Southeast Asia, where we're repositioning it already beginning in 2015. Stanley Yang, who's in charge of our corporate development, can speak to this topic, or so can Robert Nicholson, our Executive Director. They were two key leaders of that transaction, and we are quite encouraged by the results. As you can see from the illustration on this page, our rationale for buying into this company is quite clear. It's got a very strong potential in the international business, which we expect to see grow strongly under our joint management with Wilmar. Turning to the next page, our other food company, Indofood, had a bit of a difficult time in 2015 owing to a great extent to a weak rupiah and weak commodity prices. Revenues managed to edge up, but core income was down, particularly in USD terms, as you can see in the column chart, largely because the rupiah weakness accelerated that decline when expressed as a contribution to First Pacific. As you can see at the historical sales chart on the bottom right-hand side of that page, it is continuing to grow quite well, led, of course, by consumer-branded products. As consumers in Indonesia see a greater purchasing power, they are laying out more money from their wallet on higher-margin food products that Indofood is gradually moving into over time, thereby increasing their earnings. We're very encouraged by the prospects for Indofood going forward. On the following page, we've got Metro Pacific, which of course, is the biggest infrastructure holding company in the Philippines with major investments in toll roads, water, electricity, and in the autumn of last year, beginning in light rail and in contactless payments. All of its businesses are doing quite well. We're encouraged by the strong earnings growth they had in 2015, a record high, just over PHP 10 billion. They are reluctant currently to forecast what the figure might be for 2016 owing to regulatory uncertainties, and we have got some of our Manila-based executives at the table here who can speak to those topics in the Q&A if you feel the need to get some more details on that. We do feel, however, that in 2016 and going forward, the continuing economic growth in the Philippines is going to mean growing volumes of electricity consumed, water consumed, and traffic on the toll roads as well as on the rail network and indeed in our hospital business, which is showing very encouraging results. Now on the following page, we address Philex Mining, our copper-gold mining company, which has seen a plateauing in its earnings in 2015. We have got much lower prices, particularly for copper and to a lesser extent for gold. We are encouraged a little bit about metal prices in the beginning part of this year. But really for Philex, it is looking to the future as they work on the feasibility study, the definitive feasibility study for their Silangan project, which is a major project down in the south of the country. And while we work towards how to deal with that over the medium term, the mine up at Padcal, which is continuing to operate about 25,000 tons a day, is delivering more resources, thereby extending its mine life. Now if we turn to the next page, we have got a snapshot of some of the goals for First Pacific head office and the operating companies. Clearly for First Pacific, guiding PLDT through its transformation is very important to First Pacific. Our newest major investment in Goodman Fielder is an item of great focus for us, and Philex has got its biggest ever project, which we will help them begin with on the definitive feasibility study. I won't go through all of these goals. These and more goals are in the results announcement which we published earlier this year. Now, the remainder of this presentation is a snapshot of our contribution, net debt and gearing and so on. I suggest we move now to Q&A, and that will be followed by closing remarks by our Executive Director, Robert Nicholson. But before we get into the Q&A, I would like to remind everyone that we will be visiting investors at the Credit Suisse conference next week. I think we have got a quite full schedule. We will be at Maybank in Singapore. I think it's the week after their conference. Following that, we will be visiting cities in Europe and North America. Please get in touch with us if you would like to see us. Thanks, John. Operator, we are now ready for questions. If you would like to ask a question at this time, please press the star or the asterisk key, followed by digit 1 on your telephone. Please ensure that the function on your telephone is switched off to allow your signals to reach our equipment. If you find that your question has already been answered, you may remove yourself from the queue by pressing star 2. Again, please press star 1 to ask a question. We will pause for just a moment to allow everyone to signal. We will now take our first question from Nicolas Van Broekhoven from Value Square. Please go ahead. Your line is open. Hello. Just a couple of questions. First one on MPIC. So difficulty forecasting for this year and since they are there. I was just wondering if they could comment on the regulatory environment, elections coming up, I think in about 2 months time. Do they expect something to be resolved after this? Because the last thing I remembered, a lot of these cases were in arbitration. So maybe if you can just share some update on that. Well, I will answer the preliminary matter and then Marilyn can add any other points. I think as far as the election goes, we are reasonably content with any outcome. We have working relationships with all the candidates and feel that our businesses will prosper under whatever administration appears. We are not particularly concerned about the outcome of the election. In relation to the various disputes, these are pretty much all the subject of arbitrations, I think all now international arbitrations. I think it is unlikely that there will be settlements before those arbitrations follow their natural course. Towards the end of this year, beginning of next year, we would expect to see these dealt with. We hope that the outcomes will be favorable to us. Certainly, we believe we have got very strong cases in relation to each of the disputes. We are cautiously optimistic, but litigation of any sort is always risky, so you can never be entirely sure of the outcome. We think we have a good case. On the Singapore arbitration, which is filed against the Republic of the Philippines, the process of arbitration has commenced, and the expected hearing schedule is on December of this year. In the meantime, the parties will be involved in discoveries and filing of memoranda from each side. The expectation is there is a one to two weeks hearing in December, thereafter, the arbitrators will issue the resolution or the award. All right. Thank you. On Goodman Fielder, Mitsubishi gives you a USD 13 million contribution today. You have now had the business for almost a year or while you are intimately involved now. Where could this contribution be in two to three years' time? I am not looking for guidance, but just maybe if you can think this could be a significant contributor to the group or where you see this? Well, Stan. Sure. Why don't I take that one? This transaction closed around March of last year. In the ensuing period, there's been quite a number of changes. One is the change in the senior leadership of Goodman Fielder. A number of the executives, the CEO, CFO ranks were replaced. Scott Whitmire, who's currently the CEO, was ex-Wilmar. He was running the sugar business for Wilmar in Australia. Paul Wallace from First Pacific, who was the CFO here, is in charge of the finance and corporate functions there. With that have come also other leadership changes. There's a lady, Julie Coates, who was an executive at Woolworths, ran Big W CEO, and she's now in charge of the Australian operations. Tim Deane, who was the managing director of Fonterra Consumer Brands, has joined as the head of the New Zealand operations. With that has come a significant review of the businesses. The strategy is really twofold. One, operating a much more efficient and profitable core markets, which would be the Australian and New Zealand one. As many of you know that it's a tough environment in terms of retailers, being able to operate efficiently, drive costs out, and find opportunities for growth are absolutely critical. Those teams have done significant reviews of that. I think the other is the pivot towards the Asian markets in driving the export strategy. Some of that is taking shape already with Wilmar being a very large player in the Chinese market. Some of the initiatives around the existing businesses, bakery fats, as well as the dairy, are being developed. Really what it comes down to is this. Look, we know that last year was a transition period with the closing and the change of management. It was also a chance to review and make sure that whatever CapEx and initiatives we put in were really the ones that we felt are the right ones to grow the business. In terms of the interim budget, there was a nine-month sub-period. The management did deliver and meet its budget. What I would say for this year is, in the first couple of months, it's slightly ahead in terms of the EBIT, in terms of what they've been able to deliver. We expect this year to be an up year, but really, where the step change will be, I think, our expectation is in the next two years thereafter in 2017 and 2018, where, after the capital, some of the plans that are being initiated by the management would then at that point be executed. We would see significant upside and expect that in those next couple of years. All right. Thank you. The company has pretty much emerged from our 12 months in the form that we expected, so we haven't had any surprises. We have had some of the opportunities confirmed. In terms of how we see the performance going, the profitability will more than double over the next three years. Of that, I'm cautiously optimistic. We expect a very significant turnaround. All right. Then on PLDT, now that the news is out that Telstra will not go in a joint venture with San Miguel, is there a chance for PLDT to cut some of the CapEx that it's doing or spread it out over more years, so the hit to the bottom line would be less? Or would you continue to go ahead with the CapEx regardless and basically then just look for, I guess, 2017, 2018 for the earnings to pick up again? No. I think the plan is to push ahead with the elevated level of CapEx that was included in the guidance at PLDT. I think that's at the 43 billion level. I think what we're seeing is just the growth in data in general, but in particular, the growth of mobile data because the price of the smartphones is coming down to the level where it's affordable to the prepaid user. We're expecting that growth just to continue to be very high over the next two to three years. I think Telstra not coming in with San Miguel obviously is a positive, but it hasn't changed the general strategy. Will San Miguel now go by itself? Is that correct when I read? Is that what they have been saying? They said that they will go by themselves if necessary. They are in the process of building out a smallish network. But in the latest interview of Ramon Ang, he did say that they are still looking for partners as well. Okay. With or without partners, he says that San Miguel will launch sometime in the third quarter of this year. Okay. But the guidance of the core income to drop from about 35 to 28 billion is still intact, right? You stick to that? Yes. There's been no change to the guidance. Okay. I think the reset is at that lower level. Then, without giving any firm guidance, use that really as a base to grow as the company moves into 2017 and 2018. Okay. All right. Then on the power plant, basically, you look for businesses that contribute to earnings and not negatively add or subtract from the contribution. So this one has been doing this for 2 years. Is there any way you could basically look for a solution, or is there an improvement in sight? I know the negative contribution has declined a bit from about 12 to 10-point something million. So basically any progress to making this at least break even or profitable? Well, the generating plant itself is up and running and operates very efficiently. The marketing team has been quite successful at gaining market share. I think we've now got something like 9% market share with somewhere in the region of 450 retail contracts. So the business has got a pretty sound base. The challenge, of course, is that our feedstock is LNG. Under the pricing arrangements in place for LNG, that is a more expensive feedstock than if we were using pipe natural gas, PNG. So what the management has been doing is they have been trying to adjust the contracts with BG, who is the feedstock supplier, to give us a little bit of headroom to buy spot, which is, of course, cheaper at the moment. I think for next year, they have reprofiled a significant portion of their gas supply. I think we're expecting the company to move at least to breakeven. That's on the assumption that oil prices don't rise. The pricing arrangements associated with these feedstocks benefit LNG users as the price of oil goes up. So if oil was to recover, then the current disadvantage that we suffer would in due course be eliminated. But on the assumption that we don't see any significant uptick in oil prices, and that we're therefore continuing to operate at a slight price disadvantage relative to those who are generating electricity with PNG, then I think the changes that the management have put in place with the cooperation of BG next year ought to allow us to, at the very minimum, go to breakeven. What oil price would make your company basically able to compete better with LNG? Would it be 50, 60, or would it be higher oil price? Once we get to about 60, then things are looking a lot easier. Okay. Indeed, I think that's the sort of budget that we would hope for. Okay. How long are you locked in with BG on this contract on LNG? Well, it is a long-term contract. It is several years, certainly. Okay. All right. Thank you. Thank you, Nick. As a reminder to ask a question, please press star one. Our next question comes from Philip Wickham from HSBC. Please go ahead. Your line is open. Hello. It's finally my turn to speak. Okay. Anyway, thanks for the time for the questions. I have two quick ones. First is, one, what was your capitalized interest expense for last year? And two, is your FX hedging strategy still only to hedge the dividends being upstream from your operations in the various countries in ASEAN? My third one is, what's your initial thoughts right now on your strategy to repay the 2017 debt maturities that are coming due at the holding company level? Thanks. It's Joseph here from the treasury department of First Pacific. Maybe I'd perform on the foreign exchange strategy first. At headquarters level, basically the focus is more on hedging the cash inflow to the headquarter, maybe the dividend income from the units from PLDT from Indofood. That has always been a practice. We normally do not hedge the underlying investment, per se. So that's the policy. For 2016, we are clearly monitoring the exchange rate, the peso exchange rate, and rupiah exchange rate actively. In particular, the peso has strengthened quite a bit in the past couple of weeks. Same for rupiah. So we are monitoring the exposure there. For the full year, I think 2016, I think we pretty much hedged roughly half of our exposure so far, even though we are only in the first quarter. We have hedged half of our cash flow exposure for 2016. The remaining half, we continue to monitor that closely, in particular in relation to peso and rupiah. So that's on the hedging strategy at headquarters level. On the 2017 bonds, that will be due in July 2017. Clearly, that's the most expensive bond, and we are paying 7.375% coupon on that. We have received quite a lot of inquiries or proposals from our banks as to how to help us to refinance that. Based on the proposals that we received in the past couple of months, the rates are fairly attractive from the banks, and clearly there will be substantial saving if we were to refinance the 2017 bonds with a syndicated banking facility in 2017. It's not yet there, and there's no repayment or prepayment option under that bond. We just need to wait them out until the early part of 2017, then put the refinancing facility in place. Yes, I think it is fair to say that it is more than a year till we have to refinance that bond or not. Certainly one of the objectives of the head office is to bring our debt level down. If the opportunity arises over the next 12 months, then I think our preference would be to try and reduce our debt. So it is certainly not the case that we would refinance the whole lot, far from it. Our objective would be to use the opportunity of repaying that bond to a greater or lesser extent to reduce our debt. Yes, thank you very much. The first question was on the capitalization of interest. I think at the First Pacific level, there is no capitalization of interest. We are basically expensing everything. In fact, across the group as a whole, there is relatively little capitalized interest except in the case of Philex, where the financing relates to the Silangan project. For the major companies in the group and including First Pacific itself, there is relatively little capitalized interest. Philip, that was Chris Young, our CFO. Okay. Thank you again. Again, please press star one to ask a question. Our next question comes from Bam Hi from CLSA. Please go ahead. Your line is open. Hi, thank you. Just a quick one. What is management's thinking at the moment in terms of the potential options in terms of reducing head office net debt? Any color on the magnitude that you are looking to reduce net debt by? Thanks. Well, we're always looking at opportunities to realize cash, and although I don't think there's any plan to sell any of our major assets over the next 12 months, it's not beyond the realm of possibility that we might sell something down if we could get an attractive price. That's certainly one possible source of cash that we could use. We do have cash flow. Some of that, I think we will probably try and reserve to reduce the overall level of our debt next year. Certainly, at the moment, it's a little bit of a year of consolidation, so we're not anticipating major M&A activity at the head office. That's not to say that our operating companies don't have their own plans. They do. But at the head office, it's definitely a year of consolidation. As cash comes in, our current thinking is that the first preference would be to hold that back so that we can reduce the debt a bit. As to the quantum, well, $100 million would be the minimum amount we'd look at, but if we could reduce the debt by a bit more, I think we probably would. Again, something very attractive came along, and we felt that the conditions were ripe, then I suppose we might look to make an acquisition, but at the moment, preference is definitely debt reduction. Right. Thank you. Our next question comes from Lu Sun from JP Morgan. Please go ahead. Your line is open. Thank you. Two quick questions. First, what is your projection for the total dividends from subsidiaries, cash dividends, for 2016? Can you give us a total number and a breakdown from the major subsidiaries? The second question is your 2020 bonds, which is backed by PLDT shares, probably were subject to some top-up because of the decline of PLDT's stock price. Just wondering if that top-up is done so far. Thanks. It is Joseph here. For the first one, the 2016 dividend, I think is a bit sensitive. You see that the 2015 dividend down by about 12% to just below $270 million level. I could not comment on 2016, but probably give you a little bit sense that of the $270 million dividend income that we received in 2015, about two-third of that is actually from PLDT. So that is about 180, that sort of level. Then you heard from the PLDT guidance that while their guidance for 2016 core earning were down by 20%, from there, I think you can do some estimate yourself. So that is the trend for dividend income for 2016. There will be some drag, but the extent of that, we are still working on it. On the top up, yes, the PLDT share price weakened a little bit a few weeks ago, and then that actually trigger a top-up requirement, and we actually deliver and top up with the necessary additional PLDT shares to ensure that it is fully covered, and then we are all okay under the secure PLDT bonds due in 2020. All right. Please press star one to ask a question. There are no further questions at this time. I would like to turn the call back to your host for any additional or closing remarks. Thank you. As there are no more questions, may I invite Mr. Nicholson to give his closing remarks? Well, first of all, thank you very much for attending. We appreciate your interest in the company. As you will have gathered from our announcement and from some of the comments that we have made during this call, 2016 is a little bit of a year of consolidation. PLDT, our biggest asset, and we need to assist it with its digital pivot. That is a very important component in restoring that company to growth. At Indofood, I think prospects look pretty good because there is some promise in both foreign exchange and commodity prices. Indeed, palm oil prices are up a bit over the last few weeks. Goodman Fielder, as Stan mentioned, is now safely in the hands of a new management group. There are not any surprises there. When we bought the company, we hoped there would be opportunities both in the export side and in terms of bringing the cost base down. I think now, having had the company under our stewardship for a year or so, we are reasonably confident that we can deliver on both of those points. Goodman Fielder is looking reasonably good. MPIC, of course, very active in the Philippines. All of its projects are doing pretty well, and we are quite pleased with progress on everything. There are a number of new projects coming up that we will bid for. I think we can expect to see MPIC being quite active over the next 12 months. Meralco has also had pretty good year, and it continues to be committed to developing its generation activity. I think we expect to see further progress in terms of building out or moving forward with its generation projects. Philex, the last of our principal subsidiaries, we are looking forward to the bankable feasibility study at the end of the year. Of course, whether we can move immediately to construct the new mine largely depends on sentiment generally to the mining sector. It is a question really of waiting and seeing how things pan out. Certainly during the first couple of months of this year, gold prices have been up, and that has given us some encouragement. Things at Philex are looking stable, with some upside prospects. We have reset the dividend at head office, to reflect the fact that our cash flow is down a little bit. I think we are very anxious that we are predictable, so we have tried to set the dividend at a level that we feel we can replicate over the next few years. That's not a dividend forecast. Who knows what's actually going to happen, but certainly when setting the dividend, at the 5.5 cent final dividend, we've had in mind a desire to ensure that we are consistent over the next few years. As I mentioned earlier on, capital management side, there's a strong desire to bring our debt down. Not that it is at the moment, particularly high, but we're mindful of the fact that interest rates eventually will go up. We probably would be more comfortable with a slightly lower level of debt. We certainly anticipate applying funds as they come in to a reserve which we will have available to reduce debt when the debt comes due. Generally, although there are challenges ahead this year, particularly with PLDT, which has a very significant reorganization to implement, we're quite optimistic for the year, and we think all our operating companies have a pretty good chance of doing well. Generally, quite optimistic. As John said, there's an extensive roadshow investor briefing program outlined for the next few weeks. We'd be very keen to see any of you, and if you contact John or Sarah, they will make arrangements to meet you pretty much wherever you are because John or the rest of us will be in North America, Europe, and of course, the Asian cities. Thank you again for your attendance, and we hope to see you soon. Thank you, Mr. Nicholson. Thanks again for joining today's call. Operator, can you please provide the replay information? Thank you. That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.