Earnings Call: H1 2014

Aug 27, 2014

Good day everyone, and thank you for joining us today to discuss First Pacific 2014 first half 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. On today's conference call, we have with us Mr. Paul Wallace, our CFO, and other senior executives. At this point, I would like to turn to Mr. John Ryan from Corporate Communications for his presentation. John, please. Hi all. Thanks for dialing in. Our executive directors are in three different cities on two different continents. We're hoping that they'll be able to dial in as I run through this quick presentation. Turning over to page 2, the developments in the first half of the year clearly centered around the joint bid with Wilmar for Goodman Fielder in Australia. I'm sure more on that will come up in the Q&A. We acquired a small stake in a Philippine sugar company called Victorias Milling. During the course of the year, if you see the chart on the top right-hand side, the value of our assets rose to just over $10 billion. That latest figure is as at the end of July. The dividend yield and payout ratio numbers are for the full year of 2013. Now turning to the next page, number 3, there's a summary of our results. Our recurring profit was up by half a percentage point, by half a percent. The contribution from operations was a stronger 3% rise, and net profit grew quite strongly by 31% to $186 million. As you can see, there were a big swing in foreign exchange gains to push that percentage growth higher. Turning over to page 4, there's a little bit of a breakdown on how the contribution increases totaled up in the first half of the year. As you can see, PLDT, really because of a weaker peso, saw its contribution decline despite earnings growth. MPIC again looks to be headed for yet another record high earnings. All of its businesses contributed more in the first half. Indofood's contribution growth was limited by what we all know to be a very weak Indonesian rupiah. Philex's contribution grew after a difficult 2013. FPM Infrastructure is making its first contribution, the same with Natural Resources, and FPM Power is getting off to a slower start than we had anticipated with its negative contribution increasing a fair amount there. The chart on the bottom right-hand side of the page shows you what contributed to the contribution growth for the first half of the year and what took back. As you can see, PacificLight and PLDT, those are negative numbers, and the others are quite strongly positive. Our gearing gross and net debt figures, they didn't change much in the six months. Now turning to page 5, a few more details about PLDT. Essentially, the story of PLDT is the fast-growing service revenue streams like data and mobile broadband grew faster than the legacy service revenues like long distance, international cellular voice declined. As you can see, we've got a slightly lower EBITDA margin because those newer businesses have lower margins than those declining ones. The main thing is those newer businesses are showing very strong double-digit growth. PLDT, as you can see in the outlook section, sees its core income growing this year for the second year in a row. CapEx is a bit up on last year, but we should see by year-end a 3G network encompassing about 95% of the population, and the LTE coverage of well over 50%. Now turning to Indofood. We can see there's very strong growth there. They've got the beverages business making its first-ever contribution in the half. That started in November last year, and it's already about 8% of sales. The change in sales by business chart there shows you the breakdown of where the growth is coming from. China Minzhong is making its first six-month contribution, and that's the biggest increase in sales, followed by an extremely strong noodles and flour business in Bogasari. They're likely to have yet another year of record high earnings in 2014. Turning to page seven, Metro Pacific, as said earlier, saw contribution growth from all of its four main businesses. There are two main themes in their first half earnings. One is the sale of part of the hospitals business to GIC of Singapore, which delivers cash to MPIC as well as cash to the hospitals business itself for investment for growth going forward. The second main strand to focus on for Metro Pacific is they do have some difficulties with regulators, particularly in the toll roads and the water business. The water business is up for arbitration in the next several days, so we're hoping for developments on that question over the next couple of weeks. Now turning to page eight, we'll finish the narrative of the operating companies with Philex. Philex saw its revenues rise because they produced a lot more copper and gold, albeit at lower grades in the first half of the year. The outlook, of course, is all focused on the Silangan project, which looks like it's got a very bright future in front of it. Paul Wallace, who's been CFO officially, I think since February, but really in Hong Kong since the end of June, was at Philex prior to this, and he will be able to give you more details on the future prospects for that mining company. On page nine, we've got some focuses for the year for First Pacific and the operating companies. I won't read through the list because you can do that yourselves. The main thing is we are aiming to grow all of the businesses that we have in hand, complete the Goodman Fielder transaction, and return that company to growth going forward. What follows are some contribution summaries. You can read those at your leisure. As regard seeing us in person, we are in Singapore for Thursday and Friday this week. Then we are at the Deutsche Gems Conference in New York City for a couple of days next week. On Monday, Tuesday of the following week, the 9th and 10th of September, if I am getting my dates right. 8th and 9th. 8th and 9th, Paul corrects me. We will be at the JP Morgan conference in London, and we have got a couple of empty slots there, I think, largely because folks are not very keen journeying all the way down to Canary Wharf, whereas our meetings in Singapore and New York are all pretty full. That is it for the narrative. I think we will be going to questions now. Sarah? Yes. Thanks, John. Operator, we are now ready for questions. Thank you. If you have a question on today's conference, please press star one on your telephone keypad. If you are on a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Once again, that will be star one on your telephone keypad, and we will pause for just a moment to give everyone a chance to signal. We will take our first question from Mark Webb, from HSBC. Hello, good evening. Just a question on Goodman Fielder, and then a follow-up question on FPM Power. On Goodman Fielder, could you quickly run through the challenges which were thrown up by the due diligence process? I did notice you lowered your offer price after completion of that process. Maybe if you could add to it from scratch what you plan to do now, you plan to turn around that business. Any sort of primary comments you could provide would be great. Also, on FPM Power, the results were, as you said, slightly disappointing for the first half year. What are the problems there, and what sort of outlook is there for the second half of the year? It is Paul Wallace. Let me start with the easy bits first. Let me talk about the Power company in Singapore. I think we are about 18 months behind where we thought we might be. We suspected that the tariff that our competitors would have, we thought that they would be able to renegotiate their take-or-pay contracts for fuel, and therefore, they would not be so aggressive on pricing. We renegotiated our take-or-pay contracts with British Gas for fuel, and I think we were somewhat surprised that the main competitors have been very aggressive on pricing. We assumed, I think, that they would have been able to renegotiate take-or-pay just as we have been able to renegotiate. I think that we are looking forward to 2015. There is going to be a leveling of the playing field 2015. The three main competitors have got significant amounts of vesting capacity, which basically guarantees them a price in the market. The Singapore government has indicated that that is going to be halved, effective 1st of January next year. I think these guys are starting to realize they have got to go back and try and renegotiate their take-or-pay. As always is the case with these sorts of things, there were delays and issues with commissioning at the beginning. We expected some of that, and we would not have been surprised by some of that. But I think the biggest concern has been that the competitors have had to react on pricing because of their take-or-pay obligations. The expectation is at the moment that we get the right model and systems and people in place to pick up the retail business, and we should start to improve in 2015. I think the market here is still very tight. Every time somebody trips out, we are quite fortunate in being a low-cost producer that people come to us to replace that capacity. It is just that on the retail and the SME contracts, the three competitors have been pretty aggressive. That was a surprise to us. I think we thought we would make better progress, but I think with the government resetting everything next year, I think that is going to help everybody. On Goodman Fielder, the way forward is really that both ourselves and Wilmar are actively involved as much as we are allowed to be with the management of the company and looking at the opportunities. We have monthly meetings in Australia with the management, and I think the next meeting in October is scheduled to be in New Zealand. We are going through all the businesses. I think with our experience and certainly Wilmar's experience, where they have experience already in Australia and in China, we are looking at the costings of various items, and we have been highlighting areas of cost savings. I think that plan is moving ahead. The disappointment is that the timetable seems to be dragging on to the extent that there is a lot of regulatory approvals that are being required. There is the Australian regulatory approval, which seems to be slowing down for a couple of weeks here or there. There is a New Zealand one where we have had to resubmit another document. People are telling us that these approvals in Australia and New Zealand should be just a matter of process, but it is actually taking quite a bit of time to satisfy individual questions. Now, the other one that has been cited in the press, obviously, is the approval of the Chinese government, because Wilmar and ourselves already have businesses in China. Although it has been publicly said in the press that everyone is trying to get this thing finished by the end of this year, to have it closed off by the end of this year, but I think my expectation is that it is going to be closed off in the first quarter of next year. There are issues about you have got to have a shareholders meeting, then you have got to go to a court. I think that if the shareholders meeting is delayed and it gets close to the year-end or the six-month period for them, I think the court would probably prefer that all the shareholders have the six-month numbers in order for them to make an informed decision. I think that is the issue. The opportunities, I think we see that the price of their inputs is very high. They are under a lot of competitive pressure in Australia and New Zealand, and particularly in Australia. I think that was the main drivers for asking the price to be adjusted. However, I think now that that has been done, I think we are all quite happy with the way forward. There is a couple of major projects that they have got to address the bread business in Australia and New Zealand, and they are looking at building out the milk business. Obviously we are monitoring that quite carefully, but at the same time, developing our own plan so that when this thing closes, hopefully we will be going from a running start. This is Stanley Yang. Just to add to that, we did a comprehensive due diligence during the offer period. As part of our review of Goodman Fielder, we did take a very close look at the operations, each of the plants and so forth. I think that whilst the process is still underway, we are expecting the scheme and the shareholder meeting either in Q4 or, as Paul mentioned, perhaps slightly delayed. The expectation, though, is that we would, as a consortium, bring a fair bit to the table perhaps in areas where Wilmar and First Pacific and our subsidiaries would have the sector expertise. Whether that's in the sourcing of raw material supply, whether that's in procurement, logistics, and potentially access to new markets and growth opportunities. I think we are working on the plan. We are in regular dialogue with Goodman as well as our joint venture partner. We're excited about the opportunity. We think that whilst the Goodman business has gone through quite a bit of challenges, that under our ownership we would see a pos- Thanks. We have no further questions in queue at this time. I would now like to turn it I'm sorry. We'll take our next question from Angus Chan from UBS. Hi. Thanks for taking my questions. I've got a couple of questions. One is regarding Metro Pacific. I guess politics is holding things up a bit here, and with the election in 2016, what was the likelihood of some of these new projects not moving on until after the election in 2016? That's the first question. The other one is just housekeeping. On the other expenses, there's been some increases, I think just over $5 million. Can we just have some color on that? Thanks. On Metro Pacific, I think it really depends on what project you are talking about. I have just spent two years down there, and everybody has been very frustrated with how long it has taken to get government approvals for what are relatively straightforward things. Having said that, the government seems to be trying to resolve things, and I think the water thing is expected to be resolved, and the power thing we are hoping is going to get resolved. There are issues that the government feels that they have been hampered by awarding the contracts because third parties have put up claims. I do not think it is This is a personal view, but I cannot see it getting any slower in the Philippines. I think that if you look at the government's track record, there were a number of PPPs that were put out in the last couple of years, where really they had not put out very much at all. I think things are not going to slow down, and I cannot think of some particular project where it is going to get worse. There is still the issue with the power and getting permits. We have still got the issue with mining about getting a permanent lifting. But as the numbers show, the Metro's volume has gone up, notwithstanding the fact that it has not been able to get, in some cases, the tariff increases that it was expected. I think that totally. I think the issue really is, I agree with Paul, I do not think it is going to get any slower than it is because it is pretty slow as it is now. But Metro has been able to continue to develop and grow a little bit, notwithstanding the slowness of this government in awarding contracts. Or as Paul was talking about, the lifting of the government ban on Philex is still not there, but we are producing, and we are producing very well, although the grade is a little lower, but I think we will get some higher grade ore in the near future. So things continue to work notwithstanding this government. The other expenses, I think it has gone from 4.5 to about 10.1 million on the table on page 10. Maybe I can take it. It's Joseph here from First Pacific Treasury. It's mainly because of certain long-term incentive payments. It's mainly the share options granted in the course of 2013. There are three to four installments for options granted in 2013, and a couple of them are actually granted in June, July, and August of 2013. The first half of 2014 essentially started to take the hit, basically the hit of all these three or four tranches of share options granted to executives and directors. But it's just this kind of option accounting, this kind of accounting impact is not really the kind of cash impact to the company. Right. Thank you. We have no further questions in queue at this time. I would now like to turn it back over to our moderator for any additional or closing remarks. Hi, Ed. Would you like to give the closing remarks, please? I'm sorry. Would you like to give a closing remark before we finish the call? Why doesn't John do that? Thank you very much, Ed. As mentioned, we'll be seeing investors in Singapore this week, followed by New York next week and London the week after that. We would like to hear from you if you would like to meet with us during our itinerary there. Looking ahead, management's focus very much is, as Stanley says, completing the Goodman Fielder transaction and integrating it. We're very pleased that PLDT is continuing its growth, MPIC and Indofood likewise. At Philex, the focus is on the Silangan project, which over the medium term is going to be transformational for Philex Mining Company. We're very optimistic about the future at First Pacific head office, and we're hopeful that you'll meet with us or talk to us on the phone so we can go into more detail about this, and we appreciate you folks dialing in. Thanks, John. Thanks again for joining the call today. Operator, please can you provide the replay information? Yes, and thank you. Ladies and gentlemen, to access the replay of today's call, you may dial the HK toll-free number of 800-901108. Replay password is 5893123. Callers from the U.K. may dial 08081011153. Again, access code is 5893123. Callers from the U.S. may dial 888-203-1112 with access code 5893123. Again, ladies and gentlemen, we thank you for your participation. You may now disconnect your lines.