First Pacific Company Limited (142) Earnings Call Transcript & Summary

Good day, and welcome to the First Pacific Company Limited Full Year 2019 Results Teleconference with investors. Today's conference is being recorded. At this time, I'd like to turn the conference over to Sara Cheung. Please go ahead.

Thank you. Good day, everyone, and thank you for joining us today to discuss First Pacific 2019 full year financial and operating results. The results presentation is available on First Pacific website, www.firstpacific.com. For media on this call, please look, 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 is finished. For today's call, we have with us Mr. Chris Young, our Executive Director and CFO; Mr. Joseph Ng and Mr. John Ryan, both are our associate directors and other senior executives. At this point, I would like to turn to Mr. John Ryan for his presentation.

Thank you, Sara. Everyone, thank you very much for dialing in. I hope this will be a useful time spent for you. We have posted to the stock exchange earlier today our audited results, 39-page document full of numbers. We've posted our press release to our website as well as a presentation of our FY 2019 results and some discussion therein in all of these documents about how we're dealing with the current crisis with the COVID-19 pandemic. Now normally, twice a year, we narrate the P&L of First Pacific and the contribution of the operating companies to our earnings, walking right through that document down to the bottom. And this time around, as you can see, it's quite different. We're beginning our press release and our narrative today with COVID-19, how our companies are responding to it and how we expect it might affect their results and ours during the course of 2020. Now for the 2019 full year, you'll see that we posted our first net loss in almost 2 decades. And it's a fair good size, it's over $0.25 billion. But I would imagine there's very little in that number that is surprising to you. It consists mostly of a loss on disposal for our stake in Goodman Fielder, which you all heard about when we posted our half year 2019 numbers last August. It also contains, and I'm sure there's no surprise here, some loss attributing to PLP, a decline in value of that asset, the power plant in Singapore. Now once you put that number aside and you look at what's going on, on a recurring basis, you can see that the core assets, Indofood, PLDT and MPIC, towards which we have been turning our focus for the past few years now, delivered pretty good results for the full year of 2019. Their contribution jointly is up about 9%. Now in a world without this dreadful pandemic, we would have a very rosy outlook for 2020. All 3 of those companies were reporting -- were giving us expectations of continuing strong demand growth for their products and services. And in fact, as you might infer from some of the -- Manny's comments in our press release, we're hopeful he'll be able to join this call in a few minutes, by the way, our CFO -- our CEO talks about the potential for a share repurchase program. Of course, under current circumstances, that's put back on the shelf for at least a little while. Now looking through the numbers, those 3 core holdings, contribution up about 9%. The -- what turned the recurring profit towards a flat number was less of a contribution from the less core assets. And if you're looking at our presentation on Page 8, all of that is pretty much spelled out for you. Also important to, I think, all of you on this call is our cash flow and our liquidity. We take pains in our press release to detail that for any borrowings coming due this year, and frankly, there's just one described on Page 10 of our investor handout, a secured bond, our last remaining secured bond in our single most expensive borrowing falling due this September, it's a 6 3/8 coupon bond. And you can see there are some details of it on that page. We have end year cash of USD 325 million, plenty of money in hand to care of that borrowing. Joseph Ng, my colleague, who's Head of Treasury, will be happy to speak during the Q&A to his plans for taking care of debt obligations coming to you in the following years, such as next year, we've got $170 million following -- falling due. Those are bank borrowings, and he will speak to you more about that. They're falling due in March and May of next year, if you're keeping it on your calendar. So as things stand, we have stress-tested our likely cash flows during the course of 2020, considering potential strong declines in the exchange rates of our key currencies, the rupiah and the peso and the potential for reduced dividend inflow from those 3 core companies that are really the bulk of First Pacific group. And looking at those stress tests, we feel that we were confident enough to keep our full year dividend for 2019 unchanged. And in fact, with the rebalancing of the half year and full year payments that Joseph initiated 6 months ago, there was actually a lift in the final dividend payment to $0.07. So while we don't know what the immediate future holds for us as this pandemic expands into the wealthier economies of the world, as far as we can tell at the current snapshot of the situation among our group companies, we feel that it looks pretty much okay. Now if you drill down into them, you can see that Indofood and MPIC and PLDT are all offering core services or products that are very resilient in a downturn. People still need to eat, they still need water, they still need electricity. Now when you turn to the toll roads, there has been quite a drop in traffic in the toll roads controlled by MPIC in Luzon. But we expect those numbers will begin to turn back up as the Philippines began easing the total shutdown in Greater Manila that was imposed a few days ago. PLDT is seeing a big uptick in use of home WiFi, no surprise there. And they have begun responding to the changing shape of demand by helping people pay for greater use of data by offering bulk discounts to prepaid cellular users for their use of data and some free data to those who are using fixed-line data services for their WiFi at home. Indofood, throughout its long history, has a long great record of helping the government deal with natural disasters. And during the course of this pandemic, they will be turning to their tried and tested response system as well. Remember that the core products that Indofood sells to consumers in Indonesia are very widely used both in cities and countryside all over the country. So that's essentially where we stand at the minute. Like the operating companies, PLDT is unable to give you a shape of what their full year numbers will look like. The same is true of MPIC and Indofood as well. Again, we've stress-tested what we're likely to see during the course of 2020. And I'm hopeful that the Hong Kong stock market's sanguine response to our earnings report at lunchtime, I think we closed flat on heavy volume, indicates that our shareholders in the wider investor community sees that we're adequately handling what's going on in the world around us. And as much as anyone can be optimistic in these difficult times, we feel that 2020 is the year for which we're as well prepared as pretty much anyone else. That I think is a summation of what you need to hear at the moment. You'll probably want some further details. And so I think we can move towards some Q&A now.

[Operator Instructions]

John, I'm here. John, I've just joined the conference.

Thank you very much, Manny. Following the Q&A, I'll do a very brief summary, and then you can end it all with your own summary of how you -- things appear to you sitting in Manila, if that's all right. But now we're going to Q&A.

We have a question now from Kedar Wagle from Maybank Asset Management.

I had 2 questions. First, can you update us on the status of FPM Power and where -- what the status of the restructuring is? And is there any possibility of the company needing to inject more money into that business? Second, in the presentation and press release, you allude to a share buyback. But my takeaway was that you would look at that option only once this COVID situation improves. Is that what you're thinking right now? Or would you look at doing a share buyback even at this point?

Kedar, given the uncertainty over the next several weeks, our feeling now is to hold on to the resources we've got at the minute regarding potential repurchases. We don't anticipate circumstances compelling us to draw down that money. But as you know, circumstances are changing drastically. So we can't commit to something that we consider we might have to give up on. Remember, our aim with share repurchases is a multiyear program. And under current circumstances, we regard it as irresponsible at the moment to commit to it, notwithstanding the fact that we feel we've got the potential cash flow in hand to take care of it. Now your first answer requires a longer answer. Your first -- and that's going to come from Stanley Yang, who's been our point man dealing with PLP.

With respect to PacificLight, the objective for us in PLP is still to seek a consolidation of the industry. And to that effect, and your question that you have raised on a debt refinancing, we are in discussions with -- this is PacificLight with the banks and creditors to explore a refinancing and debt restructuring. The fact is that the power market continues to suffer. It had suffered for a long time, but in light of what has happened this year and the impact of COVID-19, it is fair to say that the outlook continues to look very challenging and conditions could continue to be tougher. And so it is imperative to get a debt refinancing done. I will stress that the debt at PLP is on a nonrecourse basis to update. The intention of the shareholders is to -- is not to put further equity into the business. I think the difficulty of any business with respect to PacificLight, we believe that the only solution that's going to happen in terms of improving the prospects through a market consolidation. And so our plans would be to first agree with creditors on a broader refinancing and restructuring of the debt. We have also approached the gas supplier of the company, given the difficulties in the market and what can be improved from that. And as part of that, with a view that once the refinancing is completed, that the business would then be able to continue exploring its options on a sale or a consolidation, a merger of sorts. You may have noted that in the market, recently, there was an announcement by YTL PowerSeraya in terms of the acquisition of Tuaspring, the asset that was in receivership stemming from Hyflux. Whilst the -- some consolidation will help, our view is that it is not nearly enough to improve the prospects of the Singapore power generation business and further consolidation must happen because at this moment where the pool prices are and what this means in terms of the nonfuel margins and profitability, we do not see the uptick in the near term or even medium term unless further consolidation happens. And the key for that is moved by the industry players to pursue this. And it is also contingent on the support from the regulators, in this case being EMA, to support that further consolidation, which we hope will unfold once a refinancing of PLP can be achieved. And so that is the plan with respect to our investment in FPM Power and the broader PLP investment.

We'll go to our next question now from Jon Galligan from CLSA.

I wanted to ask some questions around the balance sheet. And John, take you up on your offer to dig into some of those refinancing questions beyond 2020. Just a couple of options -- a couple of questions here. Number one, do you guys have any debt covenants that we need to be aware of? Anything, liquidity ratios or interest rate covers that must be maintained? Also, could you speak a little bit more about how you are thinking about refinancing or paying back debt that's due beyond this year? And then third, I have a bit of a housekeeping question, but can you give us the final price received for the Goodman Fielder transaction?

Joseph Ng, Head of Treasury, will answer your first 2 questions. Then our CFO, Chris Young, will deal with your third one, Jonathan.

It's Joseph here. Thanks, Jon. In respect to the covenants, yes, we do have some covenants that we need to comply with, and not a lot. There are basically 2 tranches of debt at the headquarter's level. One is the one applicable for the bonds. We have a few actually, at least 2 unsecured bonds out there. And there's only 1 covenant applicable to the bonds. It's not a compliance, mainly so-called debt incurrence covenant. That is actually the interest-coverage ratio. So if our interest-coverage ratio is not more than 2.5x, then we are not allowed to incur any debt. Now as at the end of December 2019, I think we are a little bit above of 2, let's say, 2x. So yes, we are not about the 2.5x, and there's no plan for us to take on any new borrowings. So we are fine on that. Now as far as the bank debt, we also have interest coverage ratio above a certain level. We are well over that at 2x. I think the minimum requirement for interest coverage ratio for the bank loan is much lower than the 2x cover that we require. So we are very comfortable about that ratio. So I think this is the main covenant we need to observe and then we satisfy all these covenant requirements comfortably as at the end of December 2019. Now as far as the refinancing plan is concerned, we -- you hear loud and clear from John Ryan that we are sitting on quite a bit of cash, mainly as a result of the Goodman Fielder transaction, the sale process we are sitting on. So we have over $300-something million and that's well covered the $252 million coming due in September. Now the next tranche of so-called bank loans coming due in the first half of 2021 is roughly around $170 million. And then we are in discussion with some international banks to handle that. It's still over 12 months away, but we have initiated the discussions with some international banks on that, and then they have provided us with some indicative terms, and then they are quite attractive set of terms that we are looking into. And of course, I'm not saying that they are fully committed as of today yet because like yourself, we are seeing into all these numbers that we just put up in the public space in respect of the fiscal year 2019. But we're in line with the discussions. We see some indicative terms. I think we are in good shape about getting into the next step of talking to them and then carrying with the credit application process. And then we are well comfortable to put that in place before the end of 2020. So still 12 months ahead of that. So -- but we see very, very favorable signals from our very supportive bankers here. So as far as the third question you raised, I think that's the Goodman Fielder transaction, right?

Jon, the transaction completed on the 16th of December, and the proceeds we got was the USD 275 million.

[Operator Instructions] It appears we have no further questions at this time. Pardon me, we do have a follow-up question now from John Galligan.

Guys, I mean, just maybe one more for me. As we kind of look at the 3 core underlying businesses, this is obviously a difficult time as you guys point out. But can you talk a little bit, I mean, it looks like you've largely kept dividends flat across the board for the underlying company signaling some confidence. MPIC has bought back some stock, signaling some confidence. Are you guys scaling back any investment on CapEx or things like that? Or broadly, do you think you guys are in a decent enough position to attack this where you guys can still continue to maybe tread water and then go back to growing these businesses? Or are there broader plans to scale back some of the investment and CapEx in some of the underlying businesses? I know that's kind of a broad question, but it'd be helpful to kind of understand the approach to capital allocation on some of these underlying businesses in light of what's going on.

John, at PLDT, which historically in recent years has had very high CapEx, their budget for this year, I think, is PHP 83 billion, which even today is quite a lot of money. They will be refocusing that CapEx for the changing shape of demand for their services. So you'll see they've already spent some money in the past week or so on international connectivity. I think they increased their capacity to Hong Kong, Singapore to get to the rest of the world, for example. So they have not announced any reduction in capital spending, but you will definitely see a shifting in their spending. And over the MPIC group of companies, I think you will see that with the company -- the country rather, shutting down to a great extent, there will, in fact, be less spending on tollway expansion or improvement. The Hospitals business, as you can imagine, is getting absolutely slimmed. So I think CapEx there has probably entirely stopped and we'll be directing cash flows towards securing supplies that they need for this pandemic. And over at Indofood, I quite honestly don't know their CapEx at the end of the year. Spending can look sometimes a little different from what their budget was 12 months earlier. Historically, there's been a lot on the Plantation business. In recent years it's -- that's been devoted towards not plantation expansions, but replanting of existing hectares with more productive types of trees, mostly palm, of course. I don't think Indofood will do anything unexpected to you there.

I think, John, if I may add. To being with as a practical matter, given the lockdown, particularly in the island of Luzon that the government has imposed on the -- our companies here in the Philippines and individuals, it is very difficult to deploy manpower to be able to prosecute your CapEx program. So there's a dearth of technical and skilled personnel that will be able to go out and do your CapEx programs. So that, plus the fact that we -- our sense is that this quarantine will likely be extended by 1 more month. It's supposed to expire at April 12, but I think it will be expanded by at least 1 more month, maybe all the way up to June. So we are highly concerned about our cash flows. So we have asked all the operating companies to postpone their CapEx expenditures and to postpone as well any new investments in the period of this quarantine, even if it were extended, no? There may be some exceptions. For example, the project of the tollways that links the NLEX, the northern tollways to the harbor, the government talked to us, it is 93% complete, and we should be able to finish it in the next 2 to 3 weeks. Now the reason why they talked to us is because it connects the northern roadway to the harbor. It's very important that we complete it, because then the trucks and the cargo vehicles can traverse, no? Because if that's not completed, it will just simply add to the congestion in the harbor, and they want to unlock the cargo traffic between the north and the south -- the north and the harbor area. The other bit is the Cebu bridge, which we have committed to the government to be finished by next year being the 500 years of discovery of the Philippines. That's an important national event. So we don't know whether the government will ask us to complete it as scheduled or we would -- we'd wish that it be postponed as well. So cash is paramount to us in this stage of the quarantine. And as I said, all relevant CapEx and reinvestments will be curtailed as much as possible, no?

Thank you, Manny. Jon, back to Indonesia for a moment, I spoke really only about one smaller division of Indofood. There is an enormous amount of CapEx, which has been focused on expanding food production. And that's in the consumer-branded products space and Bogasari, the flour space.

We will now go to our next question from Vivek Dhawan from Value Square.

Just a couple from me. Well, I see that the head office expenses have reduced quite a bit, I would say. Could you maybe tell us how much subsidy did you take or what led to that? And then I have a follow-up on the covenants. It was mostly clear. I was just wondering if you could also tell me, is there any covenant which sort of -- do you think that can be a bit difficult to meet? Or it's more on the sidelines? And finally, just linked to that would be on the dividend for the current yield is quite high. And maybe you already addressed this in the call earlier, but it would also help to understand looking forward where the dividend yield is right now, how you look at the dividend payouts. So that's basically my questions.

I'll try on the first one, which is the overhead, which is actually going through -- principally relates to headcount reductions here at the head office.

And now regarding your third question, you're asking about scenarios going forward for reducing our dividend payments. Is that right, Vivek?

Yes. That's more or less what I wanted to understand.

Well, we've stress-tested many different scenarios. And I don't want to lead you anywhere, but our base case is that we will have no change to a dividend policy, which has given our shareholders a quarter of recurring profit for 10 years now. But of course, this pandemic is going to wreak absolute havoc in much wealthier economies. I'm hopeful that one of the takeaways you all will have after this call is that after our last full year report 12 months ago, we've sold off Goodman Fielder. We've all but resolved the PacificLight investment in Singapore. It's on our books, I think, with an equity value of 0. If you look at a data page that we've got on Page 9 of that handout, we've established a finance committee to oversee capital allocation at head office and across the group. We've strengthened the dividend flow from our core holdings and, until the pandemic came along, they looked fantastic. And we have ourselves in a position -- pole position placed for ready to press the button on multiyear share repurchase program. The pandemic has changed everything. We are fortunate at First Pacific to have been able -- to have this come at a time when we're better positioned than we've been in many years to deal with whatever the consequences of this that might come along. There are no forecast on our dividend because we simply don't know what's going to happen. I think we probably have more certainty over in Hong Kong than in other places. Now I think Joseph Ng is going to talk about your question regarding the covenants.

Well, on the covenant, there's only, well, one covenant applicable to us at the head office level, principally, that's the interest coverage ratio at the head office level covering mainly the -- so-called the operating cash flow at headquarters, meaning the dividend income less the overhead that we need to sustain and then that metric against the net interest servicing that we need to pay to service order borrowings at the headquarters level again. So we don't guarantee the debts of the units. So there's no cross-default or any recourse to us as far as the units debt is concerned. So that interest-coverage ratio is the main covenant applicable to us at the headquarters level. And then, as I said earlier, is the 2.5x for debt incurrence for the bonds and a much lower level for the bank loans. And at the end of December 2019, we were at 2x and then we well cover the 1 that required under the bank debt, but we have not met the 2.5x, but that's okay. There's no plan to incur more debt, so we are fine with that. I think that's the current position that we have.

Okay, great. That's helpful. Maybe just one last, if I'm allowed for that. On Indofood, is there any update on the planned acquisition of Pinehill? Maybe there is which I missed? So I was wondering if you could update me on that.

No. At the moment, we don't have anything further to say on that, but I imagine Indofood will be speaking to this sometime in the next several weeks.

We have a follow-up question now from Kedar Wagle from Maybank Asset Management.

I was wondering if Manny could share his thoughts on the regulatory risk in the Philippines after what has happened with the water companies. Does he -- do you see that spreading to the other businesses, which Metro Pacific runs? And what does it mean for future capital allocation for the group in the Philippines?

Well, addressing the Manila regulatory situation, first, the government has set up a task force composed of 6 cabinet ministers to handle the situation with respect of the discussion with both water concessionaires, with us and with the Ayala group. So we're dealing with -- each of us is dealing with separately with this task force. And on our part, we have identified 6 key provisions that seem to be of concern to the President, no? And most -- frankly, most of these provisions are noncommercial, nonmonetary, nonfinancial in nature. But for example, noninterference with the government, which the President didn't like at all, because it suggested to him that the government cannot do anything when it comes to target setting, events like that, no? So we will have to modify the language of that particular provision or otherwise delete it from the concession agreement, no? So most of the -- in fact all of the 6 points deal with nonmonetary points. So we have committed, however, to government that we will not -- we've agreed to maintain the existing tariffs all the way up to 2022, which is at the time that the President steps down, no? The only question is whether we will be allowed, and that's subject to discussion with the task force, to increase our tariffs in relation to inflation and to any ForEx adjustment if we have any foreign loans, no? So that remains to be discussed. Will it infect the other company? So far, no. And given the current environment here where everybody is -- especially the government is preoccupied with the virus, I don't think there's any regulatory threat in the horizon in the next few months, no. And so far, the President has limited his attention to the water concessionaires.

Okay. And what does all of this mean for future capital allocation? Would the group focus less on these kind of projects where you're dependent on the government for returns?

Well, the -- I think the flavor is that we have reached the limit of our investment in regulated industries, right? So I don't think there's any -- at least locally, there's any appetite for investing in new regulated businesses. That's why we have opted out of the airport -- the international airport project here with the -- with 6 other business groups. We have withdrawn voluntarily from the Line 3 of the light rail system and 1 or 2 other government projects, because we don't want to load up on further regulatory -- or regulated industries. In terms of the CapEx within each of the companies, they're basically self-sustained. They're -- we're spending in accordance with their own cash means no? So even for the water, we're spending within the EBITDA limits of Maynilad Water, no? Of course, we have to socialize this particular approach with the regulator because it will mean a calibration, for example, of the prosecution of the water treatment plants, no? We will probably cannot spend more than what we originally programmed for, no? So that's part of the discussion with the task force.

Thank you. We have no further questions at this time.

Thank you very much, everyone, for dialing in. Again, this crisis has come to a First Pacific, which is rather a new look from the company that you saw the last time we reported our full year earnings. From tomorrow, we've expanded our Board of Directors by over 20%. We have a new Independent Director. We've got a total of 5 now, and we've got a new nonexecutive Director as well. And let's see how we move ahead going forward. I've summed up some changes that we've had in the past 12 months. Our Chief Executive, Manny Pangilinan, is in Manila. We cannot travel between our 2 cities or to Jakarta. We can't travel really at all. But Manny's at the pointy end of things, and I turn it over now to him for closing remarks.

So thank you, John, and thank you to all of you who have joined this call. In many respects, we are glad that 2019 is over. We can look forward to a brand-new year and hopefully, a brand-new performance level for the group. Let me just say this. For the first quarter, I think the performance of the operating companies in the Philippines have been quite good, no? I think without exception, they have been ahead of the first quarter performance last year 2019. So the effect of the quarantine is only in respect of the last 2 weeks of March. So -- but on the whole, the quarter performance should be better than it was last year, no? I think the issue is really the second quarter this year, and we could already feel the growing deceleration of economic activity or business activities in the country. And I think it's going to get worse, particularly in April, no? What the [ DSL ] would say, April is the cruelest month. And so my sense is that April is -- I mean, second quarter is going to be tough for the group. And it could mean that performance could slow down, no? So hopefully, by the second half, we'd be free of this virus and the quarantine that we should -- our -- we should be able to recover. The thing is that we are -- we continuously focused on running the business, keeping it as a going concern with particular focus on our cash flows and looking forward to the lifting of this quarantine and being able to recover what might be lost in the second quarter. Because as I told the Board of First Pacific this morning, it is important from the First Pacific perspective that we are able to deliver the dividends that First Pacific expects from the Philippines. And indeed, on April 3, PLDT will pay what the scheduled dividends to First Pacific and to all other shareholders, of course, are scheduled, and we are sticking to the policy of 60%, for example. And so it's important First Pacific that it does receive the cash dividends from the Philippines, and at the same time, perform in accordance with the budgeted P&L, no? That I think will be a challenging pass this year because of this second quarter situation, no? So -- but -- so we're all locked down here and doing our best. We are actually in the middle of a digital dialogue with more than 700 locked-down employees of PLDT. And so thank you. Thank you to all of you.

Thanks, Manny. Thanks again for joining today's call. Operator, can you please provide the replay information?

Thank you. This concludes today's conference call. A replay for this conference will be available shortly. To listen to the replay, for Hong Kong, please dial the number +(852) 5808-3200 and enter the code 3219917#. Or if you're dialing from Singapore, dial +(65) 3158-1054 and enter the confirmation code 3219917#. Thank you for your participation, ladies and gentlemen. You may now disconnect.