Earnings Call: H2 2014

Mar 24, 2015

This is PGI. Please stand by. We are about to begin. At this time for opening remarks, I would like to turn the conference over to your moderator for today, Miss Sara Cheung. Please go ahead. Thank you. Good day, everyone, and thank you for joining us today to discuss First Pacific's 2014 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's website, www.firstpacific.com. For today's conference call, we have requested Mr. Manny Pangilinan, our managing director and CEO, Mr. Paul Wallace, our CFO, and other senior executives. At this point, I would like to turn to Mr. John White from Group Corporate Communications for his presentation. Thank you, Sarah. I will run through this in fairly rapid order to leave some room for you folks to ask questions of Manny and the other folks at the table. If we are turning to page 2 on the presentation, the major M&A development of 2014, of course, was the investment in Goodman Fielder. That closed last week. The total consideration we paid is around about $540 million. Our corporate development executive, Stanley Yang, can talk about that later, and Josephine, who is head of our treasury, can discuss any aspect of financing that you may want to raise. The value of our assets rose by a little over $1 billion last year. By the end of December, we were a touch over $9 billion asset value at First Pacific. Now, with the final dividend agreed by the board to put to shareholders at the AGM, the dividend yield and payout ratio is described on the bottom right of the page. Payout ratio is about 36%, and the dividend yield is around about 2.7%. Now, if we turn to page 3, there is a brief summary of our 2014 results. Recurring profit was essentially flat at around $324 million. Contribution from operations had a similar minus 1% movement, a hair under $463 million for the year. Profit attributable to owners of the parent was down by quite a bit, and that was due mostly to a $188 million write-down of the value of Philex. Paul Wallace, our CFO, can speak to that insofar as he has worked at Philex for two years before coming to First Pacific again. Now, our recurring EPS is at $7.55 versus $7.87, and the proposed final dividend is $1.67 US cents. As said, the payout ratio is 36%. Our gearing is not much different at 0.45 times consolidated. Of course, the important number is the head office figure at 0.56 times. Now, turning to page 4, there is a breakdown of the contribution that is worth drawing your attention to. Most of the overall change can be due to currency movements and a small decline in the contribution from PLDT. Indofood had yet another year of record-high earnings, but the currency translation meant that contribution fell by about 1%. MPIC again had record-high earnings, and their contribution increased by about 13%, and so on down the list. FPM Power, representing PacificLight in Singapore, saw a slight increase in its negative contribution to head office. Our dividend income, as you can see in the chart on the bottom right-hand side, was little change from a year earlier. It is a bit over $300 million at $304. Our gross debt is unchanged at year-end, $1.75 billion, similarly for the net debt at $1.2 billion. Now, if we turn to page 5, there is a brief outline of PLDT's year in 2014. Essentially, it was a year of transformation, which we will see continue in 2015. We have got, as many telcos have seen, a decline in traditional sources of revenue, particularly international voice and text messaging, which is gradually being replaced by data-intensive services like data network broadband and mobile internet. Going forward, let us look at Goodman Fielder on page 15. Now, we have only just begun to own half of this company jointly with Wilmar a week ago. So this is very much a historical description here on page 15. Sorry, that is the wrong page number there. I have just spotted that. Page 6. This is essentially the shape of the company as it has come into our hands. You are all probably aware that our key goal here is to expand the APAC businesses while stabilizing domestic operations and regaining market power versus that duopsony in the supermarket business there. Now on the next page, there is an outline of what has been happening at Indofood. Nearly all of its businesses had strong growth, particularly in the consumer-branded products. As you can see, the eye-catching illustration on this page is the very strong increase in sales over the past five years at Indofood. We expect another strong year in 2015 there. The next page portrays something similar from Metro Pacific. The historical contribution of its four, soon to be five, main businesses has shown staggering growth in the seven years since 2008, and we expect continuing earnings growth in 2015. Demand for the basic services that it offers remains strong. The gains that we expect to see next year are notwithstanding continuing difficulties in the regulatory space. I am sure Manny can speak to that if you would like to hear more detail going forward. Now, let us turn to Philex, the last of the major operating companies. Essentially, 2014 saw greater production of ore, but at lower grades and lower prices, so its earnings for the year were essentially flat. This picture is illustrated in the production cost and price illustrations on the right-hand side of that page. The focus for Philex going forward, of course, is the major new development in the south of the country, the Silangan project in Mindanao. We expect some significant milestones to be achieved this year as we move towards production in a few years' time. On page 10, there's an outline of goals for 2015. I won't tire you by reading all of them. Overall, for the First Pacific group, we've got strong organic growth in MPIC and Indofood, and we've got some very important transformations going on at PLDT as it moves from traditional telco businesses to a digital world. Philex, developing its new project down in the south, and of course, Goodman Fielder, our newest major investment project. What follows are a few pages on contribution summary and statement of financial position and so on. But this really brings to an end the narrative portion of this conference call. If you're ready for questions, we're ready to take them. Operator, we are now ready for questions. Thank you, Ms. Cheung. The question and answer session will be conducted electronically. If you'd like to ask a question, please do so by pressing the star key followed by the digit 1 on your touchtone telephone. We will proceed in the order in which you signal us and will take as many questions as time permits. If you are using a speakerphone, please be sure your mute function is turned off to allow your signal to reach our equipment. Once again, please press star 1 on your touchtone telephone to ask a question. We will pause for a moment to assemble a queue. The first question comes from the line of Karl Choi from Merrill Lynch. Your line is open, please go ahead. Sure. A couple questions. First, for Goodman Fielder, just want to get a feel. You mentioned that your goal is to get back to, for the business, to get back to earnings growth this year. Any more color on some of the major particulars, especially for investors that some of the maybe yardsticks that we can look upon as you execute on your turnaround plan? More color on what exactly you plan to implement, that would be very helpful. Second, can you just talk a little bit about the Singapore power plant business? How has it been doing year to date? Any improvement in profitability? Thanks. Sure. First on Goodman Fielder. The transaction, as many of you are aware, just closed last week. In terms of how the business, as we see it, would perform, I think one aspect was how we see it year to date. Bear in mind that Goodman Fielder's fiscal year is a June 30th one. Basically, as of year to date they were tracking quite close to the management's estimate on an EBIT, earnings before interest and tax, basis. That turnaround, whilst the bread segment was still quite challenging, they were able to get some positive and in a way over-delivered on the budget relative on dairy and some of the APAC businesses. We feel that the fiscal year 2015 remains on track. I think now that the transaction has closed there is a new change at the leadership. Scott Weidmaier of Wilmar Sugar is now the chief executive officer. One of the aspects of the transaction was a long lead period. It was since July. We had quite a number of regulatory approvals. Having said that, though, we did meet with management quite regularly, and as part of that, we were identifying areas where we felt could be improved. With the support of the new shareholders, those changes and improvements, we're on the execution path to implementing them. I think that going forward, we identify quite a number of synergies on procurement, on logistics, and being able to open markets both within the core markets of ANZ and the Pacific Islands, but also up into Asia, where longer term we see a lot of opportunity given the food safety issues and the demand for quality products that Goodman could play in the long-term aspects under our ownership. This is something we're quite positive about. We do expect this year to perform as expected. I think that would follow close to where brokers were seeing it. That going forward, we would see a significant improvement once our inputs both on growth drivers as well as improving the efficiencies and margins would come into play. Just to add a point about the Singapore power plant. Others that I've spoken to over the last 12 months, I think we said that we were sort of a year or 2 years behind where we thought we were going to be, and I think that's still the case. It's extremely challenging environment. The regulator has made some changes to the rules in the last 12 months, which has made it even more competitive, and there seems to be an impact from the current low gas prices. We're forecasting to show losses again for 2015, but smaller losses. But it's going to take a couple of years before we get to a break-even or profitability point of view. Okay, thanks. The next question comes from the line of Mark Webb from HSBC. Your line is open, please go ahead. Hello, good evening. Just two questions. First on Metro Pacific. Just in terms of the regulatory environment, particularly in connection with Maynilad, and its winning the arbitration but not being able to implement some of the rate rises. How do you think that is going to pan out this year? When do you think the environment will start to improve? That is the first question. Secondly, just in case of the head office costs. Those have trended up a bit, but I know there has been a lot of transactions and some other items going through there, perhaps which has inflated them. What are the normalized costs we should expect going forward at the head office level? Do you want to take on that one? Yeah. Well, from the regulatory side, particularly in respect of Maynilad, yes, we have had some difficulty in getting the arbitral award implemented by MWSS, by Metropolitan Waterworks and Sewerage System, and on account of the fact that they have now said that the implementation of the Maynilad decision is contingent on the Maynilad because Maynilad lost, they find it difficult to implement a tariff increase on our side on the west zone and a tariff reduction on the east zone. We have had to take steps to call on the advocate of the Republic in respect of any losses that Maynilad may incur as a result of the delay in implementing the tariff. That obviously has caught the attention of the Department of Finance through Secretary Purisima. The latest news we have gathered, and this is unconfirmed, but I would say fairly reliable, is that the economic cluster of the cabinet has met and are inclined to enforce the arbitral awards for both concessions. In the case of Maynilad, to allow a tariff increase, and in the case of Maynilad, to enforce or implement the tariff decrease. However, the Department of Finance apparently has not been fully informed about two things, about the fact that Maynilad has voluntarily submitted to government a proposal to implement the tariff adjustment over a period of three years rather than implement it in one go. At the same time, we are hearing that there might be an unbundling or a separate implementation of the tariffs as they pertain to the corporate income tax and to the tariff as they pertain to other items in the arbitration proceedings. We've sent word that it's an all or nothing for us, not only that the tariff, which is really quite modest, ₱3.06 per cubic meter to implement it up to the extent of ₱1.02 per cubic meter per month. We cannot afford to unbundle the ₱3.06 as to one component and the other component. I think that's with the Department of Finance at the moment, but I think in a way, it's a big step forward in a positive direction. As of today, we were told that the Subic Bay Metropolitan Authority, the board met, and has approved the terms of the lease agreement relating to the power plant of Meralco that has long been on the burner since 2011. That is probably one of the last steps that we need to obtain to proceed with the construction of the power plant, the 600-megawatt power plant, in joint venture with the Aboitiz. I guess to some degree, there's been some relaxation of the very challenging environmental regulatory environment, and I don't know what it is. Maybe it's the occasion, but the fact that the President will step down very soon, and therefore they might be accelerating the approvals of projects that have been on the board since 2010 or 2011. At least on those two fronts, I would say there's been some progress. Was there other question? About head office overhead. I think, Mark, you were asking about the sort of normalized head office overhead, is that right? Yes, that's right. I was aware there some issues in there in terms of Things been pushed up a little bit with the share option expenses and maybe some other items that wouldn't really care. I am just looking at your contribution figure. You have got your corporate overheads Yeah and you have got your other expenses line and just how those two would trend into 2015. Well, I think the corporate overhead currently, we are looking at about $30 million. The other expenses is mostly related to the share option plans. It is the accounting amortization of the awards. The rest is interest expense. The other item that you can see on the face of the contribution summary is interest expense. I see. So the corporate overhead sits around $30 million, about. I think if you stick with that figure, Mark, that would be fine. The one that is more difficult for you to predict is the amortization of the share award scheme. Yes. Okay. So that depends on some accounting definition of the- Yeah the value assigned to it, and therefore that it's apportioned over the period of time, I guess. Yeah. Okay. All right. Thanks. Your next question comes from the line of Pauline Lee from ValueSquare. Your line is open. Please go ahead. Hello. Hi. I have a few questions, firstly, on PacificLight. Could you share with us why do you make this investment in the first place and what really went wrong? Because if you look at your results from the EBITDA margin, is rather thin at just about 1.8%. My second question is, with regards to the usage of the rights issue proceeds, is it mainly for the acquisition of PacificLight? And thirdly, do you think you can further deliver value creation in future by reducing head office costs and interest expenses? Also, could you provide an updated NAV calculation as of today? Lastly, what is the policy on share buyback for 2015? Thank you. PacificLight. Mr. Tan, go ahead. Well, we had assumed that the initial purchase price of PacificLight would be reasonably priced, right? Because it was a distressed seller. GMR was a distressed seller of the property. I guess we underestimated the extent of the surplus capacity that was in the Singapore market. We, I think, correctly assumed that the plant would be a super efficient plant as it is now because it's a new plant, and it's one of the latest plants employing the latest technology in the gas area. I think what we underestimated the extent to which gas prices have dropped and the extent to which overcapacity would impact the pricing in the Singapore market. We've done recently, we commissioned a study, the market study of the Singapore market, and I think the assumption is that we should see the start of an inflection point in the recovery of the demand-supply situation starting 2017. That's the way it is. We just have to hold onto it until the situation stabilizes. Just to add, even though pool pricing remains quite challenging, the management has been building up its base of retail contracts. They are working on improving the efficiencies. The plant is operating very well. In the context of a new plant, bear in mind, this is a plant that still has a life of 30 to 35 years. Whilst the market condition today in Singapore, because of the supply situation is challenging, we believe that in due course, that will change, and that being an efficient and new plant will be advantage in the long term. Regarding your question, Pauline, about the use of the rights proceeds, that followed the acquisition of PLP, and the rights proceeds essentially financed most of the purchase of Goodman Fielder. Okay. Now that the Goodman Fielder transaction is closed, it is mainly funded by the rights issue proceeds. Going forward, you see that by end of 2014, we still have quite a bit of cash in the balance sheet, and those cash now have been used to fund the closing of the Goodman transaction just last week. What we see there going forward in 2015, clearly, the cash on hand would be substantially reduced. That will clearly have some impact to the interest expense line, the net interest expense lines, in the sense that interest income from cash would be reduced. Then you actually see maybe a little bit of trending up a little bit on the interest expenses in the course of 2015, because at headquarters level, we now have roughly $1.6 billion gross debt. At a blend of roughly 5% borrowing cost, that is about $90 million, $95 million. The $90 million you see in 2014, in 2015, that actually would go up a little bit to the $95 million level. I think that address your point on the interest expenses. Overall, I think the PMI team is what Paul has mentioned earlier. I think the assumption is that we keep at pretty much the same $30 million level going forward. As to the adjusted net asset value, right? Yes. I think we can send you by a separate email the calculation on the ANAV. Our gross ANAV, the gross adjusted net asset value as of March 18. Okay, yeah. As of March 18. Okay. That would be very helpful. It is $8.8 billion. Net of debts and other things and cash. The adjusted net asset value as of March 18 this year was about $7.3 billion U.S. Okay. In share price, the adjusted NAV is HKD 13.21 per share. 13 Hong Kong dollars, 21 cents. That is a discount about 42%. Okay. Share buyback. Share buyback, yeah. I think we have announced that we will maintain a share buyback policy of 10% of core for the year. We will just have to be somewhat opportunistic as to when we go to the market to implement this share buyback program. So far, we spent about $200 million on share buybacks in the past couple of years and bought back roughly about 5% at a blended cost of roughly about HK$7.70. We keep a close eye on share price performance, and at the right level, then we will come out to the market and do some buyback. But we spent $200 million already in the past couple of years, so we will monitor the impact to the share price and NAV discount before we jump in and buy back shares in a big way. Okay. Thank you. Just one clarification. With regards to PacificLight, could you remind us how did you fund this acquisition and the amount of this acquisition? The acquisition price we paid for PacificLight on first of several anchors we did in Gandang Adrawna onshore with Morocco, I think the investment cost for us is roughly $330 million. I think before that, actually, I remember, I think we issued a bond a few years back in the tune of $400 million earlier in that year. We raised the bond proceeds, and then we identified this opportunity in Singapore. It's largely funded, I think, by that bond. The bond proceeds we raised from that bond issuance a few years ago. Okay, sure. Thank you very much. At this time, we have one question remaining in queue. Once again, if you'd like to ask a question, please press the star key followed by the digit one on your telephone. We will now move on to the next question from the line of Angus Chan from UBS. Your line is open. Please go ahead. Hi, guys. Good evening. I've got two questions, actually. One is, do we need to think about or potentially some asset write-down for the Singapore power plant? That's the first question. My second one is, if you considering your payment of something like $400 million for Goodman Fielder this year, it looks like your head office liquidity looks like pretty tight, in light of PLDT's dividend cut as well. Can we assume your dividend on an absolute level stays flat for 2015 and 2016? How are you planning to de-gear at the corporate level? Thanks. First question, write-down. Actually, every year as part of the audit, there's an assessment of the assets that we have. They're done on a value in use basis. Obviously, there was an exercise that was done this year with Philex, which resulted in a significant write-down to the quoted market price. With PacificLight, because there's no quoted price for it's slightly different. But effectively, they go through a cash flow analysis, and the valuation that was done and reviewed by the has indicated that the value use was higher than our carrying value. On that basis, there was no impairment required. But with all assets of this type, there will always be an ongoing review of whether an impairment provision is required or not. On the question on the cash flow. You're right that while we spend quite a bit of cash on funding the Goodman Fielder closing, as we've seen earlier, it's mainly funded by the rights offering closes that we raised in July in 2013. We raised 500 million fresh equity from there. Then very patiently, we look for good opportunities like Goodman Fielder. So it's actually fully funded on a capital basis by the equity we raised back in mid-2013. On the recurring cash flow, you are right that while PLDT has revised its profit guidance and also trimmed down a little bit on its dividend payout. But at the headquarters level, clearly the impact to us is that the dividend at the headquarters level will also be affected slightly. But MPIC is performing well. Indofood is performing well. Just understand that compensate a little bit on the kind of decrease in the dividend reduction from PLDT. But overall, yes, there will be some downward adjustment on the overall dividend income and the kind of service operating cash at headquarters level will be affected slightly. But the dividend kind of payout that we are planning going forward, clearly, we still tie to the recurring profit that we could achieve in 2015 and 2016. For 2014, we still stick to the same dividend payout in absolute amount and per share basis. On a kind of a payout basis is still 36% of the recurring earning. So we still keep that to show the confidence that we think that, well, in 2016, 2017, that will stabilize and maybe turning up starting from 2016. I think for 2015, we have budgeted a similar dividend per share. Yeah. 2015, so we can maintain the 2014 dividend payout in absolute terms. If profits are higher than expected, then we are open to a look-back approach. So that we could pay more. But at the least, we pay $0.21 per share. Thanks. Just a quick follow-up then. Any plans to deleverage at the holding company? If I add in your completion for Goodman Fielder, I think your net debt to equity at the holding company level goes to close to 90%. Any plans to delever or are you going to be happy with that gearing level? Thanks. Well, I think that actually I have noted that perhaps we should start thinking about a deleveraging program starting this year in the next few years. That is in front of us, I would say. But of course, the debt, even gross debt to gross NAV is still about what, 30%? Yeah, the gross asset value, as mentioned by Manny earlier, in earlier kind of answer, is about $8.8 billion or close to $9 billion asset value. If you do the calculation on that basis rather than using the book equity, I think, which is around $1.7 billion-$1.8 billion, which is low. But if you focus on using the market value of the asset, which is $8.8 billion, almost $9 billion, and the gross debt at headquarters level is $1.8 billion, so it is actually less than 20% of the gross asset value. So is that high? Is that low? We believe that from the asset to value point of view, that is actually not very high. Right. But I think from a liquidity perspective. Correct. From liquidity point of view, well, we do not disagree with you because of the impact from the, say, the deal to PLDT giving its contribution. At the same time, as I mentioned, well, we need to do the full impact of the, let us say, 5% borrowing cost on the $1.8 billion debt, which is around $90 million-$95 million interest payment every year. But I think we do have internal policy of having the dividends received each year being a multiple of interest expense. We have to maintain the discipline. At the moment, we are above that internal guideline. But it is something that we have to address. It has been raised in the board meeting this morning. Thank you. That is helpful. Thanks. Okay. It appears there are no further questions at this time. I will now hand the call over to Ms. Sara Cheung for any additional or closing remarks. I see no more questions. May I remind Mr. Pang Linina to please give his closing remarks, please. Thank you for this conference call. We look forward to talking to you again when we announce the first in August this year, when we announce our first half year results. Thank you. Thanks again for joining us tonight for the call. Operator, can you please provide the replay information? Sure. Thank you, Miss Cheung. Ladies and gentlemen, to access the replay of today's call, you may dial the Hong Kong toll-free number of 800-966-697. Callers from Singapore may dial 800-616-2127. Callers from U.K. may dial 0800-169-7301, and callers from U.S. may dial 1-866-846-0868 with the access code 1093832#. Once again, ladies and gentlemen, we thank you for your participation. You may now disconnect your lines.