Earnings Call: H1 2013

Aug 28, 2013

Good day everyone, and thank you for joining us today to discuss First Pacific's first half of 2013 financial and operating results. We hope you have been able to get a copy of the results presentation, which is available on First Pacific website at www.firstpacific.com. For today's conference call, we have with us Mr. Manny Pangilinan, our Managing Director and CEO, Mr. Edward Tortorici, our Executive Director, Mr. Ray Espinosa, our Associate Director, and our senior executives. At this point, I would like, Mr. Robert Nicholson, our Executive Director. At this point, I would like to turn to Mr. Ryan for his presentation. Good evening, and good day, and good morning. On page 2, let's begin there. On the left-hand side, we've got a series of M&A and investment transactions that we've made during the first 6 months of the year. On the right-hand side, we have got the trend of the value of assets over the past almost a decade now. Compound annual growth rate of 24% to a bit less than $10 billion. The graph below that emphasizes the return to shareholders over the past 4 years. The graph shows dividends and share buybacks that we've handed to shareholders with a comparison of the Hang Seng Index and First Pacific share price. Over the page, on page 3, there's a summary of half year results. I draw your attention to the turnover up 4%. Recurring profit is down 8%. A few words on describing that in a moment. Profit attributable to owners of the parent company, down by 35% to just under $143 million. Our interim dividend is unchanged at eight Hong Kong cents a share. In U.S. money, it's a little over eight penny. Let's turn now to page 4 for a few more details of those first half earnings. The most important illustration on this page really is the one at the bottom right, and that shows you the change in contribution from the first half of 2012 in yellow to the first half of 2013 in blue. Essentially, it was flat from one period to the next. But the good news is described by the red and green bars in between those two. Philex, as most of you are aware, is quite sharply down because it missed 2 months of production in the first 2 months of 2013. FPM Power has just joined the group a couple of months ago. Philex is now in full rate production at 26,000 tons of ore a day, and its prospects are looking good over the Padcal Mine. Indofood is showing a disappointing, essentially flat result, and the blame for that lies almost entirely with a decline in the rupiah exchange rate and a fall in CPO prices. Very good news from PLDT, with a sharp increase in its contribution of over $10 million. MPIC, which delivered the biggest growth in percentage terms and in dollars, it's a little over $5 million. Let's turn now to page 5. Over at PLDT, the earnings highlights essentially are due to the fact that new areas of revenue are growing faster than older, more traditional sources of revenue. This is described to a great extent in the middle chart, the change in service revenues, where you see things like cellular data and network growing very fast and offsetting declines in those old standbys, like international long distance and local exchange, which are being affected by over-the-top services like WhatsApp and so on. Let's turn now to page 6 and MPIC, where every single one of its four main businesses showed a double-digit increase in contribution. The two pie charts at the bottom right of the page are drawn to scale, so you can see visually the size of the increase over at MPIC. Very strong first half results, and their forecast for the full year is about a core profit of 7 billion pesos, a bit up from last year. I think it's about 10%, though I might be corrected by Manny in a minute. Let's turn now to PacificLight, which is our most recent major investment. To remind you, that is a brand-new power station in Singapore. It's a combined cycle gas turbine power plant. It's got two generation units, each of about 400 megawatts. The first of those has been generating and selling electricity for the past few weeks. The second one will turn on, we expect, in December, and we will enter full rate production and sale of electricity in next year. We're very pleased with that investment, and we're looking forward to the contribution that it will make immediately, beginning in 2014. Now, over on page 8, we've got Indofood, which as mentioned, was hurt by low CPO prices and that devilish rupiah falling almost 6% over the course of the year. As you can see from the EBIT margin chart in the middle of the page, the collapse in the green column from 19% to just under 5% explains a lot of the story. A very big fall in CPO prices. Just an aside to all of you, if you drop an email to Sara or to me, our addresses are on the website, we will send you the full investor presentation, much more detailed than this short document. We'll send it to you in PDF format by email. Now, Philex, which is battling with PLDT to be the turnaround story of 2013. Its return to production at the Padcal Mine full rate production of 26,000 tons a day, I believe I mentioned. The grades of gold and copper are a little bit better, but it's missing those two months of production, and of course, prices are quite a bit down from the previous year. Philex, if circumstances go well, plans to have a rights offering in the second half of this year to raise somewhere around $300 million, and that will keep investment on track for the Silangan project. Its major new project expected to begin production in 2017 and ramp up to full commercial volumes a year later. Now, over on page 10, we've got the goals of First Pacific and the main operating companies. First Pacific's goals are going really quite well. As mentioned, PacificLight Power is expected to come online in December. And as most of you, all of you perhaps, are aware, we've recently finished a rights offering. My colleague, Joseph H.P. Ng, will probably discuss that in a minute during the Q&A, which has delivered around about half a billion dollars so that we can explore investment opportunities in our existing core businesses. I am sure Manny and the other Executive Directors will discuss that with you as well. PLDT, of course, has hit its main goal. After two years of earnings decline, it has returned to growth in 2013. It is forecasting an increase in core profit to PHP 38.3 billion, and we are fairly confident it will meet that target. We are hopeful it might exceed it. MPIC, its prospects we have described. It is working hard to expand its portfolio of infrastructure projects. Manny, I am sure, will discuss this more in detail in a few minutes. Indofood continues to grow. It has had about six years in a row of record high sales, and in local currency, record high earnings. This has come about because it is selling more products, but also it is expanding its business categories and putting out lots of new product innovation. Philex, of course, has met its key goal, return to full-rate production at the Padcal Mine. More long-term and perhaps more important, development of the Silangan project has continued over the past several months with no interruption whatsoever. Now what follow are a few pages of our contribution summary, balance sheets, cash flow, and adjusted NAV per share. I have finished with the presentation. Thank you, Sara. Thanks, John. Operator, we are now ready for questions. Operator, we are now ready for questions. Thank you, madam. Okay. If any participant would like to ask a question, please press the star followed by the one on your telephone. If you wish to cancel this request, please press the star followed by the two. Your questions will be polled in the order they are received. There will be a short pause whilst participants register for a question. Once again, if any participant would like to ask a question, please press the star followed by the one on your telephone. To cancel this request, please press the star followed by the two. The first question- Do we have any questions? The first question comes from Nick Vand from Value Square. Please go ahead with your question. Yes. Hi, good evening. I was wondering on PacificLight, what kind of contribution should we expect from that company in 2014? Oops. We're deciding who's going to answer that, Nick. Hang on one second. Oh, okay. Go ahead. Well, I'll have a go at that. It's Robin here. One of the turbines is up and running and has just started in a trial period to deliver some electricity to the grid. We're already starting to see small amounts of turnover trickling in. The second turbine is due to be online by the end of the year. It's a few weeks behind the original schedule, but I still think it will come in at the end of the year. In terms of how we think that will perform, it's a little difficult to be certain at the moment. In order to deliver a consistent return, they need to build up a portfolio of customers because it's a merchant plant, and they will have to enter into contracts with a range of customers in Singapore. Getting that group of customers together will take a few months. We're going to see the turnover and hopefully the contribution ramping up over the year. My own hope is that we'll see a contribution in the first year of $10 million. That depends upon the ramp-up going steadily and all the arrangements that we have to put in place to support customer sales falling in line smoothly. If they had a very good start, and if Singapore continues or is buoyant next year, then we may do better than that. Certainly, a cautious approach for the first year would be somewhere in the region of $10 million. Okay. All right. What is the risk in terms of your input cost, like gas? Is there a risk that if the gas price goes up a lot or down a lot, this would impact your cost base and your profitability in the future, or is that all going to be included in your contract? I think the gas supply is assured from British Gas, but of course, the price will fluctuate, I think in line with a formula based on Brent Crude. The trick with this type of plant, as you know, is to hedge the various components, which are the fuel and the currency, so that we match the delivery promises made to customers. That's the first thing. Ideally, everything will be hedged up so that we compensate for changes in gas prices, either through the hedging arrangements or by reference to the actual terms of the contract. Some of the contracts will be fixed prices, some of the contracts will have some sort of fluctuation mechanism in them. It's a portfolio of different customers with different requirements. Some of the contracts will be short-term, in terms of the customer requirements, some may be a year or even longer. Getting the mix right, getting the hedging arrangements right, will be the key to ensuring that we don't get caught out. That really is the trick. The second trick, of course, is to ensure that the turbines operate efficiently. Just to remind you, the reason that we were keen on this project is these turbines represent the most efficient generating capacity in Singapore at the moment. They're new plants. They're built by Siemens. They're very efficient, and we're hoping that because of that efficiency, they will always be top of the list in terms of being called on for power, and that they will be able to secure a good portfolio of customers. Okay. We're very optimistic that everything will fall into place, but the plant's not fully operational until the end of next year. Fully operational doesn't just mean the turbine's running, it means we're getting all the hedging arrangements working smoothly. These are hedging decisions have to be made every day as new customers come in or new commitments are made. It's a complicated business, and that's something that we're working hard on at the moment to ensure it goes well. Okay. One other question on the money you raised in the last raise. Looking back, it was actually not a bad decision to raise it when the stock price was above 11 and you could sell the stock at 8. Now you have all this money. Markets have corrected a lot, in markets like Indonesia, Thailand, et cetera, your scope of interest, I would assume. I am not expecting you to tell me what you are going to buy, but is this raising the chance that this money might be put to use, or can you just give some more information on that? Well, no. We are determined to find proper investments as soon as practical, but we are obviously not going to be rushed into it. This is a campaign that we will run over the next 12 to 18 months. We have identified and communicated, I think, to most of our shareholders, the areas where we are looking, infrastructure and power generation. The food sector, in terms of adding on to Indofood, are areas where we are particularly keen to find things that make sense. We have also said that we are trying to diversify a little bit outside of the Philippines and Indonesia. So we are keen to look at smaller projects in places like Vietnam or Myanmar. I think we all think that the best chances are probably in power generation and infrastructure. There is a range of opportunities across the region that offer real prospects of worthwhile investments. A couple of us are off to Vietnam tomorrow to look at some water projects. They are not big, but it would be an interesting first step in terms of infrastructure in Vietnam. We have got a very busy power generation group who are looking at projects in the Philippines, and indeed, we announced a couple of things this week. We announced participation in a coal-fired power station, and we also announced the participation in wind-powered assets. There are other things that we are pursuing and are quite optimistic about in the Philippines. We are also looking further afield. Our objective is to try and build up a portfolio over the next couple of years that would comprise both greenfield investments, for example, the investment we announced through primarily Meralco in the Philippines, but also stations a bit like Singapore that are either up and running and can deliver cash flow immediately or in the short term. So we are looking to create a portfolio of power investments, and I think the prospects are quite good. It is competitive, of course. We have to be careful that we do not overpay. So although there are quite a number of things that on the face of it look attractive, they may seem to be too expensive. We have got to be confident not only that the projects work, but that we can get an acceptable return. We are definitely looking for double-digit returns in the context of any of the power investments. For things like a new build or a greenfield site, we would be looking for something higher than 10%. We are looking for something nearer 15% or 16%. We have to be careful we pick the right ones. On the food side, the problem there is there are not so many food companies around that we can acquire in the right countries or jurisdictions, and they are very expensive. That makes it tricky. We are looking at a number of things, and ideally, we would like to try and buy something that we could use to capitalize on our Indofood. Quite a number of things. The area that we have said in the past that we are looking at, and we continue to monitor, but I think it is less likely you will see any developments, are in the mining sector. We have thought about mining investments, but they are probably not top of our list at the moment. Okay. On the M&A front, from one of your subsidiaries, Indofood bought into a company listed in Singapore called China Minzhong. Stock went down 50% last week. Do these kind of things go on to the board level of First Pacific if one of your subsidiary invests a few hundred million USD into a company which might or might not be, depending on what they come up with as an answer, a fraudulent company or not. If you could share anything that you know about the process that Indofood went into this and the involvement of First Pacific on this. China Minzhong. China Minzhong. That's a situation that both Indofood and First Pacific take very seriously. In fact, I'm going down to Singapore on Friday, and will be interviewing in conjunction with my colleagues at Indofood, the senior management of that company. We are determined to get to the root of whether there is any basis to these allegations. At the moment, it's our understanding, which I think has been confirmed by the people at China Minzhong, that they are engaged with the Singapore Stock Exchange. Of course, the allegations relate primarily to the accounts of the company prior to the listing in 2010. So there's a very significant participation by the regulatory authorities in Singapore, and we're expecting some sort of formal response from China Minzhong over the next day or so. However, that runs in parallel with our own inquiries. We are determined to find out everything that's relevant, and we will take whatever steps are necessary to get to the bottom of it. It's a very serious matter, and we will act accordingly. I think to your question about what kinds of due diligence was accomplished. The due diligence, as many are done, were accompanied by the appropriate consultants, both on the accounting side and legal side, and our food people. But in the end, if there was fraud, sometimes you just don't find those things in any kind of a due diligence, even after year on year. So that's why Robin has said we will go down, and we will continue to dig along with the Singapore Stock Exchange, to find out if there's any grievance in any of these allegations made by a short seller. Mm-hmm. Okay. All right. Thank you. The next question comes from Angus Chan from UBS. Please go ahead with your question. Hi, good evening. I've just got a couple questions for me. First one is, can you comment a little bit about the tariff that you're getting for the power plant in Singapore? How are they relative to the benchmark? And the second thing is, any progress update on in terms of- Could you repeat that first question, please? Sorry. Could you repeat the first? Sure. The first question is about the power tariff that you're getting. If I heard that correctly, you are talking to customers and signing up customers in Singapore for your power plant. I just wanted to understand what kind of tariffs you're getting relative to the benchmark. Second thing is relating to Philex. Any progress there in terms of getting the permanent license to operate? That's it for me. Thanks. Well, in terms of tariffs, I don't have the exact number, but the tariffs are, of course, the market price because there's a market-setting mechanism, which determines, in general terms, what people pay for electricity, and the contracts, which are not directly fixed to that price, nevertheless closely related. As I mentioned earlier, the reason why I think we're quite optimistic about that investment is our power plant is the most efficient power plant in the territory. Therefore, if we get our arithmetic right, and we have the ability of doing that with the various hedging arrangements, we ought to be able to match or better any price that other people who are less efficient generators can offer. So that's the trick to that particular investment. It's also supported by some very competitive financing. The overall project is an efficient project, and gives us the ability to compete aggressively for new business in Singapore. Just to confirm that the contribution to First Pacific, our share of the expected profits this year is around $10 million. Angus, your second question is about the permanent license for Padcal Mine? Yeah. Any update on that front? Thanks. Well, my view is that the likelihood of getting a permanent lifting of the suspension order is most likely after the rainy season. It is likely that the government will want to test whether the remediation measures we have adopted for the past seven months will hold under this rainy season which we are experiencing. So I don't foresee getting a permanent lifting until towards the end of the year. With that said, I think they will allow us to operate for so long as the offset dikes and the main dike hold. I think the spillway has been finished, and water is flowing out of the spillway up to a certain height of the water. So we don't think that they repeat of the incident last August. I think the way the government operates is such that they probably wait until after the rainy season, and there is a good chance we could get the permanent lifting of the suspension order. Okay, thanks. Finally- limit on the operation operating. Yeah, we operate normally. They allow us to operate on a normal basis. As John said, our normal output of 26,000 tons per day of ore milled is staying where it is. The original temporary operating permit had a fixed date to it, but currently we are operating under an open-ended temporary permit. So, like Manny said, the government is keeping its options open, but there is no deadline that we are working to. Our objective is to run the mine safely and to demonstrate that we are running it safely, and to work hard on the rehabilitation side to demonstrate that we have dealt with all our obligations and requirements, and to continue to be a strong contributor to that part of the country. I think sooner or later, if we do our work properly and carry on as we have over the last few months, we will get our permanent permit back. But I quite agree with Manny, I do not think the government is going to show its hand until the rainy season is over. At the end of the year is most likely the earliest time we could expect to get any permanent lifting. But until then, we are operating normally. As you probably have seen in the newspapers and the news reports, the Philippines has just experienced a tremendous amount of rain, flooding most of Manila. The new spillways that we've put into place operated absolutely perfectly. These are very significant civil engineering constructions. Yeah. We've all been up to the site to inspect the works. We were all there to formally open these works. These are very significant pieces of work constructed in the middle of the mountains, and they have, I think, resolved the water management issue. I think we are very confident that the operations of that mine are now entirely secure and safe. I don't think any of those folks who are looking at this project will reach a different conclusion. That sounds good. Just a final one from me. In terms of M&A, I don't know if you can give some timing, or how close you are to a deal. Can we expect something before the year-end, for example? We have got advanced discussions going on two or three projects. They vary quite a lot in size. I think there's a very good chance we will be able to announce at least something relatively small, and by that I mean under $100 million, over the next few weeks. I think the bigger projects generally take longer to implement. I would have hoped that the end of the year or perhaps the first part of next year is when we might be able to say something, assuming everything goes to plan. These are tricky projects to implement. But we are not sitting on our hands. We have identified a number of things, having been through a reasonably exhaustive search, and we are hoping that one or two of these things will come to fruition over the next six months. Now, closing them may take longer. I am not suggesting that we will be closing these things necessarily within the year or within the next six months, but at least I think we will have a good idea of how the capital that we have managed to raise over the last few months will be allocated, that we will be able to show to our investors the sort of investments that we are hoping to make, which will be in line with our stated investment criteria and get some indication as to how they might look, affect our performance and return. Great. Thank you. The next question comes from Joyce Kwock from Credit Suisse. Please go ahead with your question. Hi there. Can you hear me well? Hello? Yes. Okay. Thank you. Yes. Thank you. Given the recent currency changes of rupiah, can you guide us through your sensitivity of the earnings with different level of rupiah against USD? Thank you. Sensitivity against various exchange rates of rupiah. Okay. Yeah. Exactly. Yeah. The earnings sensitivity against the rupiah currency. I guess most of the impact or sensitivity would be on Indofood. We're just gathering our thoughts here. Just give us a few moments. Clearly we don't hedge generally, so we are exposed to fluctuations in the exchange rates. We do hedge our cash flow to the extent that there's a dividend declared by PLDT or Indofood. The minute we know what that dividend is, we hedge that. Indeed, I think we have protected ourselves quite significantly over the last few months in respect of this year's cash flow to head office. But in terms of the actual contributions and how they're reported, we are We do suffer the fluctuations, and we're just having a look to see if we can give you some indication as for the sensitivity. Maybe we could come back to that one, actually. We could leave one of our mates here to- No, go on, answer. Sorry. I'm referring here directly to the financial review section of last year's annual report 2012, page 82, where we talk about the group net profit effect of a 1% swing in currencies. So our portfolio that existed at that point involved a swing. If it was a 1% change in currency, rupiah, and peso, another IDR 2.6 million impact on our group net profit. The portfolio in existence at the end of last year is basically the same as the one that you will see this year, with the exception of the addition of the Singapore power plant. But as that isn't contributing to earnings this year, clearly any change won't really earnings won't be impacted by exchange. 1% swing- 1% swing in currency has a group net effect, at First Pacific level, of $2.6 million. Right. In terms of the group at that stage, there's been a couple of small changes. Our interest in MPIC is lower this year than last year because we didn't participate in the capital-raising exercise earlier in 2013. It's very marginal. If you talk about a swing of $2 million-$3 million, I think you'd be about the right ballpark. That factors in all the various components, to the extent that PLDT gets some uplift in its peso performance by virtue of its U.S. dollar denominated income. That's factored into that calculation in general terms. No. Our operating exposure at the operating companies, PLDT or Indofood, is handled through operational hedging or the natural hedge in relation to their income generation against their cost base. This is a calculation based on the contribution that comes up to First Pacific, either in terms of pesos or rupiah. Okay, thank you. There appear to be no further questions. Please continue with any further points you wish to raise. Johnny, would like to about the road show schedule? Yeah. Thanks for reminding me, Sarah. As we do two times a year after our results, we are heading to Europe and North America to visit investors. If you would like to see us, our schedule's complicated. Rather than make you jot down all the places we're going, drop Sarah or me a note and say you'd like to see us, and we will do our best to make sure that we can meet you in New York or London or Zurich or wherever you may be. Thank you very much. Thanks, John. Thanks again for joining today's call. Operator, please can you provide the replay information, please? Ladies and gentlemen, this conference will be available for replay after today, August 28, 2013, through September 4, 2013. You may access the replay system at any time by dialing +442071542833 and entering the access code 4634904. International participants may dial +13035903030 for U.S., and +85230562777 for Hong Kong. Those numbers again are +442071542833 for U.K., +13035903030 for U.S., and +85230562777 for Hong Kong. Access code 4634904. This concludes today's conference call.