Earnings Call: H1 2018

Aug 29, 2018

Ladies and gentlemen, for your information, today's conference is being recorded. Please go ahead. Good day, everyone, and thank you for joining us today to discuss First Pacific's 2018 first half financial and operating results. The results presentation is available on First Pacific website, www.firstpacific.com. For media on this call, please note the Q&A session is open for the 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. Manithan Kunnanan, our Managing Director and CEO, Mr. Robert Nicholson, our Executive Director, Mr. Chris Young, Executive Director and CFO, Mr. Edward Tortorici, our advisor, and other senior executives. At this point, I would like to turn to Mr. John Ryan from Group Corporate Communications for his presentation. Thank you, Sarah. Sorry we're late, folks. We had line trouble. The presentation I hope you've downloaded from our website. I'll go ahead and begin moving on to page 3 with the overview of the main assets that we hold. There has not been any kind of significant change in our ownership stake in the companies which form our GAV. On page 4, there are photographs of most of the people on this page are sitting around the table for this presentation and the following Q&A. Page 5 shows us some end June figures for gearing and cash and gross and net debt, as well as turnover EBITDA and profit numbers for that six-month period as well for the companies of the First Pacific group. Please note that the very bottom line for Pacific head office, those are solely head office numbers. You'll see in the numbers we report, we reported a far higher turnover, in fact, the highest yet that we've ever had for the first half of the year. On page 6, this pie chart represents the gross asset value of what we own. Cash and borrowings are not included here. We've got our three core assets of MPIC, Indofood, and PLDT and the other assets which you are also familiar with. The investment objectives and criteria have remained unchanged since the last time we spoke. Turning to page 7, we see at the end of the period, the value of assets controlled by First Pacific was just over $30 billion. It does not count some unlisted assets, key among them, Maynilad, which we control through MPIC, the biggest water company in the Philippines, and the hospitals group also under MPIC. Both of those are privately held. Off to the right of this very large pie chart, we've got some numbers for the group totals in the first half of the year. Now, finally, on page 8, we're turning to First Pacific results. As you can see, our recurring profit is down a bit from last year. There was, as I'm sure you expected, a foreign currency effect there with weaker rupiah and peso in particular, affecting the USD dollar value of contributions from our Philippine and Indonesian companies. Now, if you look at the red squares going down from last year's results, moving to the green and up to the $161 million of recurring profit this year. You can see that PLDT is still seeing a drop-off in some of its mobile revenues, particularly SMS and voice, as well as the international and long distance for both the wireless and wireline networks offsetting to a great extent the surge in growth in broadband and data usage in both of those sectors, the cellular and the fixed line. We'll turn to that in just a moment. As you can see in the pie chart on the right-hand side of this page, those three core holdings deliver the core. Pardon me, I have misread my own chart. We've broken it up into the sectors that we cover, and as you can see, the three main sectors that we focus on are delivering the great core of the contribution. Natural resources only is 2% of the total. Now, cash flow is an important metric for our investors to look at, and we've got that on page 9, where you can see that our dividend income for the period was $67.5 million. Next to that, we've already paid one distribution this year. Our interest expense, you'll see both in accounting and cash terms, is down from a year earlier. We had some slight net new borrowings, frankly, as our rolling liability management program had a very strong milestone in May when we bought back some bonds and issued a new one, reducing our overall borrowing cost and pushing out our maturities. Now, I'm afraid the source of dividends pie chart on the side is the 2017 shape, but I would imagine that the 2018 end-year figure won't be terribly different from that. Now on page 10, we've got the shape of our debt profile following the liability management exercise conducted by our Head of Treasury, Joseph Ng, right at the end of May. Essentially, he's pushed out the maturity. You can see on the bottom left-hand side of this page, there's a $175 million bond timed frankly quite well ahead of the turnaround in the direction of interest rates. Above this box, you've got a table of the four bonds we've got currently outstanding. Now, I imagine later in this call, Joseph will address for you what we're doing about the 2019 bond. As you can see, it's $215 million maturing next June. Currently, we've got most of our borrowings unsecured, and a bit more than half, three-fifths, are at fixed interest rate, frankly, bonds. The bullet points above here, they give you a few key numbers for you to consider what our balance sheet is looking like at the moment. Page 11 is a new introduction to our handout and our presentation because, as I'm sure you've all seen, ESG is growing ever more important, particularly among our European shareholders. We've now issued two ESG reports in 2016 and then covering 2017. The 2017 report would have more depth and breadth than the previous year's report, and that's a trend we are hopeful of continuing as we move into the 2018 report and beyond. ESG for the First Pacific Group really drills down and focuses on the plantations business, where the Chief Executive of IndoAgri, Mark Wakeford, has been doing a very solid job of moving IndoAgri to the forefront of CPO plantation companies who are palatable for investors who are increasingly using ESG factors in their investment decisions. I'm hopeful as we move forward, he will help educate us and improve the overall ESG reporting and standards of the wider group. Now, let's finally move on to the operating companies. On page 12, we have a snapshot of PLDT showing a change in service revenues chart, which doesn't look a lot different from what we've seen, particularly accelerating in 2017. Service revenues are up, and that, frankly, is driven by data services, which I think are about overall half of all the service revenues that we're getting at PLDT. Now, they're thinking that the full-year core income will be up by one or two billion pesos, not including Voyager. Our Managing Director, Manny Pangilinan, who's Chairman of PLDT, can address the PLDT matters in the Q&A. If you look over to page 13, you can see what the high spending on CapEx in recent years, we expect it will be PHP 58 billion for the full year of 2018, has brought to PLDT. It's known to all of you, particularly those who focus hard on telco, that Globe has been gaining market share in recent years, and Smart has been having to catch up. To my personal great delight, I think if you're looking at network quality overall, Smart has now got a clear lead. OpenSignal, an independent agency that compares telephone networks globally, just a day or two ago issued a new report covering the Philippines. There's a link at the bottom of this page. Following that, I spoke with PLDT's CTO about what the future might hold, and his goal is for all of the red symbols there to be on the top line within the next year or so with Smart having a quality network well ahead of Globe and help that boosting the transformation of its fortunes there. Page 14, we've got some updated data here on the shape of Metro Pacific. In the Philippines, the hospitals business in red is growing like Topsy. They're looking to do 5,000 beds total in the next few years, and we've got the other assets which are well known to you. As usual, their earnings in the first half of the year were quite strong. Contribution had double-digit growth, core income up. An extremely positive story, as all these numbers show you. But there has been, for the longest time, the overhang of regulatory question marks over tariffs on the various road and water industries and even electricity. There have been some recent developments in this area, and Manny, who is the chairman also of Metro Pacific, can address those to you, and we are feeling fairly positive about the outlook for these long-enduring, painful difficulties there. Now, let's move over to Indofood. I must request your forgiveness. If you downloaded this presentation before half an hour ago, you will see the headline was wrong on that slide. The first half earnings were held back by the plantation business. Palm oil prices were lower in this period than they were earlier, and a timing question of when palm oil sales were made also held back the agri business, which, as you can see in the sales pie chart, is about 20% of the total. Bogasari had to cope with higher wheat prices. The growth in consumer spending is not as fast as all of these fast-moving consumer goods food producers would like to see. Still, for the full year, we are looking to see the top line grow very strongly. However, the bottom line, the core profit over at Indofood, will still suffer some pressures like the ones I have just described. Also, now they own 100% of their beverages business. That is still not profitable. It has got negative margins. So they are taking that entire loss into their P&L, and that is going to hit the bottom line for the full year. Nevertheless, the food business there, the consumer-branded products, is performing very strongly, and the medium-term outlook remains unchanged. Turning to Goodman Fielder, we have got strong growth in the first half numbers, strongly led by the international business. Our Executive Director, Robert Nicholson, can speak about this company in the Q&A to follow this presentation. Last of the major companies that I will cover for you today is Philex. Philex had slightly worse grades of ore and they had slightly worse recoveries. That means that the stronger metal prices that we saw in the first half of the year, particularly for copper, were not enough to offset the lower volumes that they were able to produce in the first half of the year, with the consequence that their earnings were down. The Silangan project down in the south, which represents the future of this company, has had to turn to the possibility of mining underground following a ban on open-pit mining made with the arrival of the new administration of Duterte. Now, the following slides are some appendices for you to review to help you in the Q&A. Thanks, John. May I invite our Managing Director and CEO, Mr. Pangilinan, to say a few words on the results? Yeah. Good afternoon to all of you. I just have four points to make by way of summation. The first is what John noted earlier, the company's ongoing liability management program is being successfully managed by Joseph here, lengthening the maturities of our debts all the way out to 2025 and bringing down the cost of borrowing of First Pacific Company. The second point relates to our NAV discount, which we regard to be unjustified and of course, merits all of our attention. Knowing about the company's prospects and by the performance, particularly of the core operating units, PLDT, Indofood, and Metro Pacific, we feel that when the performance results are out by year-end, some degree of optimism is justified in terms of the discount. I think we can talk about some of the developments in each of these units later on in the Q&A. In terms of our ESG initiatives, just to amplify what John indicated, we continue to intensify our initiatives in this regard to ensure that First Pacific and the constituent companies of the group follow best practices. Finally, management have identified assets not meeting our return targets, with the prospect of divestments or disposal, the proceeds to be applied towards debt reduction and share repurchase, signal confidence in our prospects for the future. That ends the summation side. Thank you, Mr. Pangilinan. Operator, we are now ready for questions. Thank you. If you would like to ask a question, please signal by pressing *1 on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, please press *1 if you would like to ask a question at this time. We will pause for just a moment to give everyone the opportunity to signal. We will now take our first question from Kedar Wagle of Maybank. Please go ahead. Thank you. Thank you so much for the call. I had a question on PacificLight. If you could just talk about what the outlook for PacificLight is in the next couple of years. Also, you had talked about divesting that asset. If you can update us what the status of that is. And third, on PacificLight, I see that you've invested more in the first half in PacificLight. If you can talk about what the debt situation for PacificLight is and would you need to invest more in the coming years? Thank you. It's Robin here. Let me try and address those questions. As you'd know, the Singapore power market remains challenging. There are structural issues. There's too much capacity, and there's an oversupply of gas, and that has driven prices in both the retail and the wholesale markets down. I think currently at the moment, no one actually makes a profit, at least in general terms. That said, demand for electricity has been a bit higher than expected, and a certain rationality has entered how the participants are operating. So performance has improved a little bit over the last 6 months and is expected to improve again over the balance of the year. The company is cash flow positive, and it's generating reduced losses. In terms of its debt, we put a little bit of money in earlier on to ensure that we were in full compliance with certain covenants, and we're currently in advanced discussions with the banks to term out our existing debt. As part of those arrangements, we'll put a little bit of capital into the company, but the hope is that the final arrangements would see the debt termed out for 8 years. There seems to be no particular issue with that debt refinancing, and we expect that that will be in place before the end of the year. An important component, of course, is that there will be no principal repayments for the next 3 years. So the company's position is improving slightly And is stable, and the debt restructuring or refinancing will ensure that over and above the small amount of capital we put in as part of the refinancing exercise, we don't expect to have any further cash calls. That said, in order to improve the position long-term, it's our view that a consolidation in the industry is necessary, and that's certainly something that we would be keen to participate in if the opportunity arises, and we're in discussions with a number of parties along those lines. The sale process is ongoing. It may find its final outcome in participation in a consolidation, or it may find its outcome in an actual sale. It's got to be said that these are challenging times to sell a power company in Singapore, and we're very reluctant to release it for a very low price. Although we're realistic about what we might achieve on a sale process, we're certainly not going to just give the company away. It may be that a consolidation and our participation in that is the best solution. But we certainly expect to have some outcome within the next 3 months, and we're pressed today actually by our board to give them some assurances that we'll have that thing sorted out one way or the other by the end of the year. That's our objective. Okay, thanks for that. Just one follow-up question. The additional capital you would need to put in as part of the debt restructuring, I know you probably can't share the exact numbers, but in ballpark terms, is the magnitude similar to what you put in in the first half? Very similar. Okay. Thank you so much. Once again, if you would like to ask a question, please press star 1 on your telephone keypad. We will now take our next question from John Galligan of CLSA. Please go ahead. Yeah. Good afternoon, guys. Two questions from me. First of all, can you give some update on the regulatory challenges you are having at the Metro Pacific group? I know, John, you alluded that in your prepared remarks, but it would be good to understand a little bit more about the timing of the process, and what you guys think the resolution might be, and whether or not you are going to change your strategy in light of what has happened with the government. Secondly, we have heard a lot about the potential for asset divestments now for a while. I can fully appreciate it is important to get a good price, but is that the only thing that is holding this up, or are there other issues when it comes to the disposal of non-core assets that we should be aware of? Well, John. Yes, John. Yeah. John, Manny Pangilinan here. In respect of the regulatory developments affecting Metro Pacific, let me deal with the tollways first. I think we have a bit of good news. We've been in regular touch with the Toll Regulatory Board, which is the regulator that sets and approves the tariffs for all tollways. Yesterday, there was a board meeting of the TRB, the Toll Regulatory Board, and we are told that the board has approved tariff increases relating to both our tollways in the north, namely the NLEX system and the Subic-Clark tollway system. The approved tariffs account for about 80% of what we have petitioned to be approved. Effectively, what they have approved are for the 3 years, 2012, 2013, and 2014. What's pending are 2 items for the tariff adjustment. One relates to the south tollways, which is the Cavitex system. Number 2 is the extension of the concession by 3 years. We understand that these 2 matters will be taken up in the next TRB board, which is the 3rd of September, and we expect the board to approve the Cavitex, the south toll roads tariffs in that board meeting for implementation sometime in October, November timeframe. The impact on the Tollways group will be felt mainly next year, albeit that the tariff adjustments for the north system will take effect, we expect if we get a copy of the TRB resolution, say, within the week or next week, subject to public publication of such resolution within the next week or 2, we should be able to implement the tariff adjustments on the north system effective October. The southern system, if we're fortunate, could be implemented towards the end of the year. Now, the impact of both, if they were approved within the month of September, would be a significant increase in the revenues of the toll roads, probably north of PHP 1 billion a year, which will impact the tollways, both the top line and the bottom line, mainly in 2019. I understand that I was told that we had a board meeting, that I was told that Secretary Tugade, who's the Secretary for Transportation, has alluded to the approval by the TRB board of the tariff adjustments for the northern tollways. We think that for the water side, we are obviously, as well, in touch with the regulator. The last element of the discussion revolves on the amount or the quantum of tariff adjustments that the administrator of MWSS, the Metropolitan Waterworks, are prepared to give to us. Where they are is PHP 4 per cubic meter, and our petition relates to about PHP 5.20 per cubic meter as well. Now, I think just to move things forward for the water side, we're prepared, we're inclined to agree to the proposal of MWSS to PHP 4 per cubic meter. The impact on Maynilad, should we finally come to terms with the regulator, aiming towards the end of the year, would be something north of around PHP 2 billion a year on the revenue. In a way, the tollways agreement creates a precedent for the water agreement, and we're all striving to achieve closure before year-end on both the tollways and the water concession and the tariff petition. Of course, the petition, the requirement of government is that once these things are agreed with them, that we will withdraw. The arbitration case is relevant to both the tollways and the water. Right. Turning now to Chief Executive Robin Nicholson. Okay. I'll start by saying that we have not changed our plans, and that we propose to dispose of non-core assets, and to utilize the proceeds at head office to reduce debt, and perhaps implement a share repurchase program underlying the fact that we believe our share price is currently very significantly undervalued given the prospects for our business. There's no change whatsoever in our plan or our policy. I think I talked a little bit earlier about PacificLight. We are in discussions at the moment with a number of parties. We're maintaining parallel tracks because we want to achieve the best possible outcome. So we're pursuing a debt restructuring, which will stabilize the company, limit any exposure we have at head office to further capital commitments. But we're looking to bring about a consolidation of the industry. We're also pursuing the possibility of a disposal for cash. Which of those outcomes is the best will partly depend on where we end up with the discussions, but we certainly hope that we'll have final visibility on how best to proceed by the end of the year. Now, in relation to other initiatives, we set out, as you know, to sell out or sell down out of our sugar investment. That's RHI. That transaction has resulted in an agreement to dispose of one of the sugar refineries at RHI to a Philippine party. That will result in a significant injection of cash into RHI to stabilize that company and give it working capital. We're currently waiting for some Philippine regulatory consents to fall in. The documentation's been signed, but we don't envisage any particular problem. That leaves initiatives relating to Goodman Fielder. Again, it's a complex series of transactions, but we're pursuing parallel tracks, in respect both of our interests in Goodman Fielder and also in relation to asset disposals at Goodman Fielder. Again, designed both to ensure that that company has adequate capital for its requirements and also to try and ensure that we have cash back at head office. I really can't say much more than that. These discussions are continuing. And again, we're under a lot of pressure from our own board, let alone the shareholders, to ensure that we have an outcome or a final path to closure by the end of the year, and that's what we intend to do. Once again, to ask a telephone question, please press star one. We will now take our next question from Oliver Marshinda of City of London Investment Management. Please go ahead. Actually, it's Mark Klein. Thanks for the presentation and the update. Obviously, we've been hearing for some time now about these disposals of non-core assets, and it's disappointing to see that there hasn't really been much success, and indeed, it seems that there's been net new money going into a couple of these investments over the most recent period. Is it time now for the board to consider more radical action to fund the debt repayment, which is going to be significant over the next couple of years, and also the buyback and time to consider taking some of the core investments down, which is something that hasn't previously been addressed? No, I think at the moment we're committed to our core investments. I think what is becoming apparent, and where we've had very firm direction from the board today, is that we're going to have to be realistic about pricing on some of these disposals. It's not that there isn't interest. There's interest at PLP level, and there's very significant interest across a range of options at Goodman Fielder. It's the desire on the part of management to maximize the return to First Pacific that is slowing these transactions down, or at least has ensured that we explore every opportunity before finally deciding on the best way to go. It's easy enough to sell the assets if you give them away. We're not going to do that. We have to make sure that we've explored every opportunity and all the various options to maximize value to First Pacific. But we've had firm instructions today that we need to bring the various opportunities to a head and close out or at least finalize a disposal in respect of those PLP and the Goodman Fielder options during the course of this year. That is the way we're going to go, and at the moment we don't see any need to step beyond the list of investments that we have currently said we are selling. Joseph, liability management, please. Well, it's Joseph here. On the liability management side, we launched the first part of the liability management exercise in May, and we tendered and bought back $220 million bonds in May. That's part of the overall $690 million 2019 and 2020 bonds that would come due in the next 12 months or so. As part of the exercise, we tendered that 220, and we put in place the new bond 175 and drew down some committed facilities, banking facilities, medium term, to pare down 220 in May. In the past couple of weeks, we also signed up a banking facility as well as we could reuse some of the forward committed facilities in May. We, as of today, have committed funding facility, fully funded facility from banks sufficient to retire the remaining $215 million bonds due in next June. As far as 2019 is concerned, we are fully funded for the upcoming bonds due in June 2019, and we are all good for 2019. The next piece of debt coming up due will be the remaining $250 million bonds due in September 2020, which is just over two years away from today. I think we are fine. As explained by Robin and other members, we are actively pursuing all the asset disposal opportunities and make sure that we could raise sufficient money to pay down debt, in particular debt coming up until September 2020, the $251 million bonds. Mark, it's John here. You'll be seeing Chris Young and me next week, I believe. Yep, no, we look forward to that. Thanks. Cheers. We have no further telephone questions at this time. Thank you. As there are no more questions, I would like to invite Mr. Pangilinan to give his closing remarks. Thank you for joining us this afternoon. Do we have a conference call for the third quarter results? No, because it is just our operating company. Well, just to repeat what Robin said, we have firm instructions from the board today to close out this disposal program, and the target is to do so by year-end. We would hope we could report the result of that effort on or before the year-end and give you continuing news, positive news on the current developments out there in the Philippines, which could help the Metro Pacific performance and the Metro Pacific share price. On PLP, we continue to be optimistic that the results will improve in the second half compared to the first half and for the full year 2018 and continuing positive prospects for and beyond. Thank you, Mr. Pangilinan. For First Pacific results also, John and Mr. Chris Young, our Executive Director and CFO, will be in London next week. In early October, John and Mr. Robert Nicholson, our Executive Director, will be in the U.S. So if you would like to meet with the First Pacific team, please get in touch with John or Sarah. Thank you. Thanks again for joining today's call. Operator, can you please provide the replay information? Ladies and gentlemen, this concludes First Pacific's 2018 first-half results conference call. If you would like to listen to a replay of today's call, for Hong Kong, please dial +852 3008-0334, for Singapore, 800-101-2009, for the U.K., 0808-101-1153, and for the U.S., 888-203-1112. Passcode for the replay is 9650089. Thank you for your participation. You may now disconnect.