Earnings Call: H1 2016

Aug 19, 2016

Good day everyone, and welcome to the First Pacific Company Limited Half-Year 2016 Results Teleconference with Investors. Today's call is being recorded. At this time, for opening remarks, I would like to turn the conference over to your moderator today, Ms. Sara Cheung. Please go ahead. Thank you. Good day everyone. Thank you for joining us today to discuss First Pacific 2016 first half financial and operating results. The results presentation is available on First Pacific website at 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 ask any questions, please contact us after the call. For today's conference call, we have with us Mr. Robin Nicholson, Executive Director, Mr. Chris Young, our CFO, and other senior executives. At this point, I would like to turn to Mr. John Ryan from Corporate Communications. Those of experience with our conference calls for earnings will have observed that the book is rather bigger than it has been in the past. We've been asked by some shareholders to make it more resemble the handout that we use in our physical meetings, and that is what we have done. Let's turn now to page 3 of this investor presentation, where you can see it's the usual breakdown of our main holdings. The big change since the last time we've spoken to you in this setting is that we have added Global Business Power under our infrastructure portfolio. Stanley Yang, who's in charge of business development, and Robin Nicholson, who worked closely with him on that transaction, can speak to that in the Q&A to come. Now, if you turn over to page 4, there's our familiar gross asset value pie chart, which shows at the end of June the shares in the operating companies owned by First Pacific were worth a total of $8.3 billion. Curiously, as you can see at that point, our investment in food and consumer businesses was actually the single greatest sector where we have holdings. A little bit bigger than telecommunications, which of course is represented by PLDT. On the following page, there's the value of all the assets under our control. Again, you should be familiar with it. We've got a very even breakdown between the various sectors and a pretty decent geographical split as well. Now, turning over to page seven, there is a little bit dated description here of our We will be discussing during this conference call is outlined on the next page, which is page eight. As you can see, our bullet points on the left describe the high points. Essentially, we have got turnover up a little bit because Indofood produced very strong results. All of its businesses recorded higher sales except for the plantations business held back by the palm oil business. Now, going down to contribution. We have broken it down into the various sectors represented by the companies we control. As you can see it has declined overall. That was led by the contribution from PLDT declining as the company continues through its evolution away from traditional legacy businesses, high margin ones like texting and voice, to lower margins and rather more capital-intensive, data-intensive businesses. The telecommunications contribution was down about $19 million. The infrastructure contribution was down by about $3 million owing to continuing difficult market conditions for our power plant in Singapore, which is some small pity because it distracts from a very impressive performance by MPIC, which saw all its businesses produce very strong results with the slight note that the water business Our newest investment, Goodman Fielder, and Indofood, as I mentioned, produced greater sales year on year as well. Natural Resources got a boost because Philex was able to benefit from very strong cost cutting and a decent price for gold. Now, there are many more pages in this book. I will just turn to one more, and that is the next page nine, which describes the shape of our balance sheet and what our interest and borrowings look like at the moment. As you can see here, we have got a pretty decent balance sheet, strengthened most recently at the end of May by the raising of almost $170 million in the MPIC transactions. Those funds, as Joseph Ng can detail to you in the Q&A to follow, will be devoted to paying down our single most expensive borrowing, which is described in the top line of the bond issues at a glance at the top right. That is the 7 3/8 bond that matures in July next year. I believe we are looking to pay off most of it and refinance a minority of it, probably with some bank borrowings. But Joseph can speak to that if you would like to pursue that topic further. Now, this essentially is the end of the opening remarks. I am finished here. Sarah? Yes. Thank you. We are now ready for questions. Thank you. If you wish to ask a question at this time, please press star one. As a reminder to ask a question, please press star one on your telephone keypad. We will now take our first question from Karl Choi from Merrill Lynch. Please go- Hi. A couple of questions. Hello? Go ahead, Carl, please. Hello? Hi. Yes. A couple questions. First, can you talk a little bit about the performance for Goodman Fielder? Looks like there was a bit of a setback on net income. How are you thinking in terms of the overall recovery for this? Can you also talk a little bit about the Singapore natural gas power plant, sort of what steps are you taking to turn around the business there? It's Robin here. Maybe I'll have a shot at those questions, but I would encourage my colleagues to pitch in. Goodman Fielder has now been under our control for about a year, or rather a joint control with Wilmar. I think the first thing that happened was we tried to reverse certain practices that had been in place when the company was a public company. For example, deferring expenditure to support brands and deferring expenditure on certain improvements or efficiencies. They had always tried to manage their results to meet the timetable of a public company. Expenditure to ensure that manufacturing and marketing and other elements of this business were properly funded. We also set about rehabilitating the management, and that turned out to be a rather bigger job than we had initially anticipated. We had always thought we'd put in a handful of very senior folk, and we did that pretty much straight away. But as those people became accustomed to the business, we then decided we needed to have a few more new hands. The restructuring which we envisaged at the time we bought the business, started a few months later than we had originally planned, and that reflects the relative weaker performance in the first few months that we handled the business. Now, since the new management are in place, very significant strides have been made in the restructuring. Many of the cost savings that we identified during the due diligence process and indeed cost savings that represented the core of the opportunity have been implemented. Completely new management is in place. The brands are now properly supported. We have taken steps to adjust the manufacturing footprint. We've introduced a number of initiatives to increase turnover. For example, we set up an ingredients business to try and wholesale ingredients on the back of the fact that we have quite significant demand for key baking ingredients in Australia, and we're then hoping to sell those ingredients on to other manufacturers and take a margin. We've revitalized the food service business that had originally been a. The distribution process. The new management had some success negotiating new large-scale contracts with some of the principal customers, Coles and Woolworths. What we're now seeing is a very strong turnaround in the business. We expect to see a full compliance with the targets that we set at the time of acquisition this year. We have agreed with the management group a set of targets for the next 2 or 3 years, and they are already putting in place the measures that will be required to fulfill those targets. The Goodman Fielder turnaround is well underway. We expect to see increased performance from that company over the next couple of years, and we are generally quite satisfied with the way things are going. Albeit, we got off to a bit of a slow start, and we had to spend a little bit of money reversing some of the practices that had been put in place by the former management when the company was in public hands. So that's where I would stand on Goodman Fielder. Any supplementary question you want to ask on that before we move to PacificLight Power? Sure. Just wondering, does it mean that if we try to break it down into quarter, the second quarter EBIT performance or net income performance was much better than the first quarter? Yeah. When we look at the monthly performance over the course of the period, it has ramped up. I think June was the strongest month. It delivered well above the in terms of the profits of the business. And that is our expectation as some of the initiatives instituted by management come through. We've seen cost savings of approaching AUD 50 million identified and captured over the first six months, and we'll see the benefits of that flowing through to the full year. Turning to PacificLight Power. Well, the fundamental problem there is oversupply in that market. To some extent, it's going to be a question of a slow recovery as demand picks up in the Singapore market. I think we're envisaging that might take another year or two before we see significant improvement in demand for electricity and accordingly performance of generators, generally. I think at PacificLight Power, the added disadvantage they've got is that they're an LNG fuel stock. At the moment, that's marginally more expensive than piped natural gas because of the way the pricing formulas work. In order to mitigate the disadvantage, they have two things that they've been able to do. One, because they're a Class F turbine, they are a little bit more efficient than pretty much all the other operators. Secondly, they've been able to amend or renegotiate some of the supply arrangements to buy, for example, spot cargoes. They have been able to take certain measures to mitigate the oversupply and cost disadvantage at which they operate. Looking forward, I think that what we are hoping is that we'll see a slight improvement in oil prices. Certainly, a number of people are expecting oil prices to come up a little bit over the next year or two. Every time the oil price goes up, it has a very significant effect on how these pricing formula for piped natural gas and LNG operate, and a price increase benefits LNG operators. We are hoping for some modest improvement over the next 18 months, but the management are working hard to mitigate any current disadvantage that they have actively by dealing with their gas supplier, which is BG, and by running their operations as leanly and as efficiently as possible. Great. Thanks, Carl. Just to follow up very quickly, the debt is on a non-recourse basis at First Pacific? Yeah. Absolutely. Debt non-recourse, and there are no significant repayments due for a couple of years, so we are certainly not under pressure at all on the financing. Thank you. As a reminder to ask a question, please press star one on your telephone keypad. We will pause for a moment to allow everyone to signal. We will now take our next question from Jeremy Yu from Mizuho Securities. Please go ahead. Oh, hi guys. Sorry I am late. Managed to make the call after all. Thanks very much for the presentation. I just had the second question. At the end of last fiscal year, I believe at the head office level, your primary short-term goal was to pay down a little bit of debt over the course of the year. I think that you are still probably committed towards that endeavor. How are your thoughts with regards to slowly augmenting the shape of your portfolio to maybe perhaps diversify a little bit of risks, either in terms of business lines or in terms of geographic exposure? Okay. Well, I think Chris is best placed to deal with the situation in the Philippines, so I will let him deal with that. Then I will have a shot at your second question. Well, I think in terms of risk, obviously, I think the most immediate impact could be on the infrastructure businesses. As you know, under the previous administration, there were several cases where tariff increases that we thought the businesses should have based on their underlying franchises and the like were not awarded to the company. This affected MPIC and to some degree was affecting Meralco. From our perspective, if there is a greater administration basically sticks by the rules of the various franchises that we are invested in, and that the tariff increases come through as we expect, that should have a very positive impact across all of our businesses. Another area, it is not necessarily because this is a new administration thing, but recently the Philippines set up a competition commission, which will review transactions of any size going forward. That is something that I think we need to be aware of. It is affecting PLDT to some extent at the moment because the transaction where it acquired the telco assets of San Miguel is being reviewed or the competition commission would like to review that. That is something that is not necessarily, I think your question about diversifying, in fact, I think it is happening because on the negative side, with the reduction from PLDT, that is reducing the impact from the Philippines. On the other hand, based on the contribution we are expecting to see from Goodman Fielder starting in the second half of this year. It is not only that the profitability will improve, but I think there is an agreement with them that they will Meralco, maybe modest, but they will Meralco paying dividends in the second half. That will accelerate as we go into 2017 and 2018 as profitability grows. So I think that diversification in the cash flows coming up through the head office here in Hong Kong is actually happening in practice. Thank you. I guess, let me be more direct. Ideally, as an asset allocator as you guys are, you would want to buy low and sell high. So it seems like MPIC has had a pretty good run. Would you be open to the idea of divesting some of that stake and perhaps redeploying it into some other region or some other kind of business line? Well, let me have a shot at that question. Taken the cash, just under $200 million and put it in the bank. That is sitting there until it can be deployed properly next year to reduce the debt by repaying the bonds. So we are committed to the repayment, and we have funded it. So that I think we can say is done. In terms of rebalancing the portfolio, we've got extensive prospects of growth from Goodman Fielder. At the MPIC level itself, they've made a number of investments outside the Philippines, all of which seem to be trending quite well. So we are naturally seeing a bit of a diversification geographically. In terms of the sectors we're in, we're certainly committed to supporting the food sector and Goodman Fielder, which of course is entirely outside the Philippines. In terms of are we prepared to sell things down? Well, we did sell something down within the last two or three months, quite a significant block of MPIC. In terms of bringing in new capital to the group generally, I think MPIC itself has got a number of assets where it would be interested to bring in partners if the appropriate partners emerged and the right terms could be agreed. So I think we can expect to see new capital coming into the group in the form of partnership arrangements. As for head office disposals and acquisitions, we're certainly not inclined at the moment to make any head office acquisitions. To the extent we have funds available, I think we feel they need to be applied to further debt reduction. This is not to say that we're not always looking at our portfolio. We are keen at the moment to sell PLDT down because I think that company is in the process of quite a radical transformation. In order to regain its full potential and value, we need to complete that. But we have got other assets, and then I think if the right opportunity arose, then we might be prepared to recycle the cash to invest in those. I understand. Thank you very much. Yeah. There are no further questions at this time. I would now like to hand the call back to the moderators for any closing or additional remarks. Thank you. As there are no more questions, may I invite John to give his closing remarks? Thank you folks for dialing in. The CFO, Chris Young, and I will be visiting investors in Europe and North America in the coming weeks. Our host will be CLSA. If you would like to get in touch with us, please speak to your CLSA salesperson. As Manny said in our press release for these earnings, we're optimistic about the course of 2016 for all our companies. They're either on the track we want them on, or we're doing everything we can to steer them towards that track. I think PLDT is going to be a very interesting focus for us in the months ahead as we turn it into a very data-intensive, fully modern telecommunications provider. Thank you very much for, Ladies and gentlemen, this concludes the First Pacific Company Limited Half Year 2016 Results Conference Call. If you would like to listen to a replay of today's call, please dial for Hong Kong 800-966-697, for Singapore 800-616-2127, for the U.K. 0800-169-7301, and for the U.S.A. 1-866-846-0868 and enter your access code 2333778. Thank you for your participation. You may now disconnect.