Earnings Call: H2 2012

Mar 19, 2013

Good day, everyone, and thank you for joining us today to discuss the First Pacific 2012 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 with us Mr. Manny Pangilinan, our Managing Director and CEO, Mr. Robert Nicholson, our Executive Director, Mr. Richard Pitcher, Corporate Financial Controller, Mr. Joseph Ng of Corporate Finance, and Mr. John Ryan from Public Communications. At this point, I would like to turn to Mr. Ryan for his presentation. Welcome, everyone. Please turn to page 2 of the presentation. We'll run through it and then do a Q&A. As you can see on page 2, there were many developments in 2012. A number of investments, such as in infrastructure, the acquisition of the hospital by MPIC, and the acquisition of a toll road by MPIC. The Indofood Group, part of the First Pacific Group, began a series of new joint ventures and investments, headlined here under the Food Consumer and Natural Resources headings on the left side of the page. Under our capital allocation program, we have declared a full-year regular dividend of $0.21 a share. That's unchanged from a year earlier, and that amounts to a payout ratio of 29% of recurring profit, the highest that we have ever made. In another arm of our capital allocation program, we have repurchased and canceled over 50 million shares, paying an average price of HKD 8.37 in the Hong Kong currency, spending a bit more than $50 million U.S. Looking over on the right-hand side of page 2, you see that our value of assets has continued to grow to just under $8.7 billion at the end of 2012. As referenced a moment ago, our dividend yield is up to a record high, but with the share price performance being strong in the first part of this year, that's pushed down the dividend yield to 2.0% as of today. Now let's turn to page 3, where there's a summary of our results. Recurring profit was down just under 15% to $360 million U.S. This is driven chiefly by suspension of operations at the Padcal Mine by Philex, and lower contribution also from PLDT. The results go on further. Profit contribution from operations down just under 10% to $463 million. Profit attributable to owners of the parent, just under $350 million, down 40% because there is a non-repetition of a non-recurring gain that we had in 2011. That was due to a gain on dilution of First Pacific's interest in PLDT following its acquisition of Digitel in 2011. Equity attributable to owners of the parent is up 7% to just over $3.2 billion. Turning to page 4, we've got some highlights of the operating performance. I draw your attention to the table at the middle of the left-hand side. There you see the contribution from the various operating companies. MPIC's contribution was up 26%. They recorded their highest ever earnings in pesos. Indofood did the same in their own local currency, rupiah, but because of foreign exchange losses, change in the exchange rate, their contribution was down just under 5%. Philex, as you see, with the greatest decline in contribution, down 73% because of the mining suspension. Dividend income, which is First Pacific's sole source of cash for investment in paying our own dividends and share repurchases, was basically flat at $320 million. There is a table on the right-hand side of that page which illustrates the change over time of our dividend income. Our gearing is little changed on a consolidated level at 0.3 times. At the head office level, it is a bit higher at 0.67 times. Again, a little change from a year earlier. Gross debt is up by $400 million to $1.7 billion. Net debt is down a bit to $1.1 billion from $1.2 billion at the end of 2011. As you can see on the right-hand side, there is a graphic of the contribution and recurring profit, down a bit from last year's record high. Let us turn to page 5 for a brief look at the performance of PLDT in 2012. As you can see, service revenues were up quite a bit. Core income was down 4%, however, owing mostly to intense competition and higher selling and promotional expenses. As you can see from the bullet point, there was a challenging operating environment. The revenue mix, however, is evolving, with declines from legacy businesses such as texting and international voice are being offset by double-digit growth in newer sources of revenue. 2012 saw the culmination of a two-year CapEx program amounting to 67 or so billion pesos over that period. It was around $1.6 billion. That has laid the foundation for a return to profit growth of PLDT this year in 2013. As you can see, they see their core income reaching 38.3 billion pesos, up from 37 billion in 2012. Let us turn now to page 6 and look at Metro Pacific Investments, which saw record high revenues and record high core income in both U.S. dollars and pesos. All four of its businesses, as you can see from the two pie charts at the bottom right, showed impressive gains. The high increase their holdings of hospitals. We now have six hospitals in the hospitals group of MPIC. 2013 earnings are seen continuing to build from 2012's record high, and all businesses there expect to see continuing growth in their earnings. Looking further ahead, MPIC is quite hopeful of taking part in public-private partnerships organized by the government. We have particular interest in airport redevelopment, specifically the airport in the tourist city of Cebu, the Philippines' second biggest city, as well as light rail, electricity generation, toll roads, and water distribution. Let us turn to page 7, where Indofood outlines its eighth year in a row of record-high earnings in local currency terms. As you can see, they are a bit flat in U.S. dollar terms, owing to a 6% or 7% decline in the rupiah exchange rate over the course of 2012. As you can see on the EBIT margin column chart in the middle of the right-hand side, margin performance was quite good across the group, except for a fall in prices for palm oil, bringing down a steep drop in the margin in the agribusiness, which was the main driver in a slight decline in the EBIT margin of the group for 2012 as a whole. We have some hope of holding the EBIT margin steadily in 2013 and perhaps beginning to grow. Indofood is fairly confident that its sales and core income will continue to grow in 2013, owing in part to steadily increasing GDP per head in Indonesia, a very flat Gini coefficient in that country, and positive consequences of a strong increase in advertising and promotional spending, which began in 2012 and will continue on into 2013. Now let's have a look over at Philex on page 8, where as you can see, we've had record-high revenues and core income in 2011 owing to a 25-year high in production, in processing of ore, and very strong prices for the metals it produces, particularly for gold. Conditions were fairly good throughout 2012. Grades were a bit down. An act of God, the near-simultaneous hit of two typhoons on its tailings pond, forced Philex to close operations at the Padcal mine on August 1. So for the final five months of the year, there were essentially no revenues over at Philex. Philex has returned to operation at the Padcal mine as of March 8, under a four-month temporary license to help rebuild the tailings pond. It is hoped that at the end of those four months, we will find our way to a permanent return of the license. Now, on more positive news, the Silangan project is still going forward quite well. We still expect an opening of the mine there at Silangan, down in the south of the country, in 2017. Following a very large CapEx spend of over $1 billion, the heavy lifting there will take place beginning really in 2015 going forward. As you can see in the last bullet point on this page, Philex is looking towards a rights offering to raise about $300 million to help finance loan repayment and CapEx as it moves forward. Now let's turn to page 9, where we can look ahead for our goals in the coming year. For First Pacific, first and foremost among that is to bring our acquisition of GMR Energy into operation before year-end, delivering 800 megawatts of electricity to Singapore. It will begin to deliver its own contribution to First Pacific, beginning in 2013. For PLDT, its goals are led by return to profit. As you know, they had record-high earnings in 2010, declining in 2011 and 2012. Last year's earnings were, by the way, still the third highest they've ever had. MPIC is very strongly focused on new investments in infrastructure in the Philippines. We're hopeful of getting one or two projects moving forward in 2013. At Indofood, the drive to continue introducing new products will continue. They have formed a couple of joint ventures in the past several months, and they will be making progress in bringing those into operation, beginning in 2014. At Philex, of course, the key goal is to resume permanent production at the Padcal mine as it continues to work on bringing the Silangan project forward to development. Now, pages 10 and forward are a kind of appendix with some financial details. But I think for now, after this very brief summary, we might turn to Q&A. Thanks. Operator, we are ready for the questions. Thank you. Our first question comes from the line of Karl Choi with Merrill Lynch. Go ahead, please. Hi, good evening. I have a couple of questions regarding Philex. First, can you talk a bit about what specifically you need to do in order to satisfy the regulators to resume full operations after the four months of temporary operations? Second, can you comment on whether you intend to exercise your rights in the Philex rights issue? Thanks. Robin Nicholson here. I think the question first, if I may. We have advanced a certain amount of cash to Philex by way of intercompany loan, and we intend to capitalize that in the rights issue. To the extent that is not enough to take up our full rights, we would put fresh cash in to Philex. So we intend to maintain our current shareholding in Philex post rights issue. In relation to the operations of Philex, the first thing we have to do is we have to backfill the hole that was created when tailings spilled out of the tailings dam, and that will take several months. At that point, we will have satisfied the criteria laid down by our foreign consultants to assure us and the government that the tailings dam is absolutely secure. Let me emphasize, the tailings dam has never been breached, and the spill took place through a water clearing system that was put in place to allow runoff from the hills to come out of the dam into the adjacent waterways. It was that particular system that failed and allowed tailings to escape. The dam wall has always been entirely secure. However, by backfilling the hole that was created, we will have met the consultants' requirements and the requirements of the Mines and Geosciences Bureau. In addition, we are constructing a new mechanism whereby water running off the local hillsides can escape the tailings pond, and that is a spillway. That is under construction at the moment. It's a very significant piece of civil engineering, and we hope to get that finished over the next 3 months. That will be an important element in our final presentation to the Bureau of Mines, that it is appropriate and entirely safe to allow Philex to continue operations permanently. So it's really a question of completing the civil engineering works that we've had now in train for the last few months, and getting a further confirmation of having finished the works in relation to the backfilling of the tailings pond, that the dam meets all the requisite safety requirements with appropriate margins of safety built in. Okay. Great. If I may follow up. I think management was quoted in the press about looking at utility investment opportunities in ASEAN countries like Vietnam, for example, outside the Philippines. How serious do you think these opportunities are going to turn out to be, that you can actually make an investment this year or more likely exploration at this stage still? Thanks. Well, we are actively pursuing infrastructure investments in both Vietnam and Burma. In fact, I was in Vietnam last week. We've identified one or two relatively small projects. There is every prospect that one or more of these small projects will come to fruition over the course of the year. They're not going to change the nature of the overall group. As I say, they're relatively small. But it's important that we begin to make investments in these countries to become familiar with the environment there and the regulations there, and very importantly, to develop relationships. I think we all feel that in order to invest securely in these countries, we need to have proper partnerships, and we're anxious to begin building those with relatively small-scale investments as soon as possible. I hope we will see something during the balance of this year, but it is not going to be big relative to the group or our other investments. That is helpful. Thank you very much. Our next question comes from the line of Nick Vann with Value Square. Go ahead. Yeah. Hello. I was just wondering on Philex, is there likely to be any earnings contribution from Philex this year or should we pencil it in only as of next year? Well, provided everything goes well on the rehabilitation of the tailings pond, and we complete our spillway on time, and we meet the requirements of the Mines and Geosciences Bureau, then I think we're expecting a modest contribution from Philex for the year as a whole. All right. Okay. Thank you. We have a question from Justin Tang with Churchill Capital. Go ahead, please. I'd like to ask, how did we arrive at the 11% IRR for the GMRE acquisition? Basically, a function of looking at the discounted cash flows that emanate from the power plant over a period of its operation. This is on the assumption that although we are operating a merchant plant, we are operating what I believe is, if not the most efficient, one of the most efficient plants in Singapore. Therefore, we will be online pretty much as if we were a baseload plant, notwithstanding the fact that we are a gas-fired facility. Okay. Now my next question is, will you continue to use such an acquisition structure for future acquisitions? If so, what kind of markets and what kind of industries are we looking at? For power plants in general, we will use the special purpose vehicle that has been Between First Pacific and Meralco, which is 60/40 in favor of First Pacific. Most likely for distribution investments in the region, it will be a Meralco investment straight into that destination. And I think for power plants within the Philippines. Yeah. It is also a Meralco investment. Okay. And where else are we looking at? What other geographies, and what other regions and industries? Well, water is an attractive area to take a look at regionally. I think there are a few opportunities available in the region that we were able to do a scan on. Quite likely we will take a similar approach to the power investment, where it is likely to be a joint venture between First Pacific and Metro Pacific Investments for water projects. In terms of other destinations for investments in power, the area that we are looking at most closely would be Thailand. Okay. That's all the questions I have for you, sir. Thank you very much for your time. It appears there are no questions at this time, so please continue. Thank you. As there are no more questions, may I invite Mr. Pangilinan to give us the closing remarks? I'll just wind up, please, by reminding folks that as some of us go on the road to visit investors, we'll be in the U.S. next week hosted by Bank of America Merrill Lynch. On Friday, we're in Toronto hosted by CIBC. Following the Easter holiday, we'll be in Europe beginning the middle of the month of April, beginning with Edinburgh and London in the first part of the week of April 15, hosted by Credit Suisse. The last two days of that week will be in Zurich, Geneva and Paris, hosted by UBS. We will, of course, be taking part in the usual investor conferences that the banks hold in Hong Kong and Singapore. If you do not have our contact details, should you need to talk to us, please have a look on our website www.firstpacific.com. Thanks for joining the call.