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

Good day, everyone. Thank you for joining this online briefing to discuss First Pacific 2020 First Half Financial and Operating Results. The results presentation and the results announcement press release are all available on First Pacific's website, www.firstpacific.com. [Operator Instructions] Today, we have, Mr. Manuel Pangilinan, our Managing Director and Chief Executive, join us from Manila; Mr. Chris Young, our Executive Director and Chief Financial Officer; and other senior executive from office of Hong Kong from Indofood, PLDT and Metro Pacific. At this point, I would like to turn to Mr. John Ryan, our Associate Director, for his presentation.

Hi, everyone, thanks for joining us. It's great to see you. We've never done this via a video conference before, and thank you for your patience waiting for us to get going here. Now I hope we're all looking at the investor presentation that we uploaded earlier today. Broadly speaking, let's turn to Page 8, which has a snapshot of how First Pacific performed in the first half of the year. Essentially, our contribution was up a tiny little bit on very strong performances by Indofood and PLDT. I'll speak a little bit later about Indofood. I'm sure Manny has got lots to say about PLDT. They were held back, to a certain extent, by MPIC, which saw a collapse in volumes, particularly on its toll roads and on the rail business, although that's quite small, and a change in the shape of demand in the Power and Water businesses, which saw its earnings in the first half of the year suffer, of course, due to the COVID-19 pandemic. So if you're looking at the column chart on the top right of Page 8, you've got the general shape of how the recurring profit increase of 7% managed to take place in the first half of the year. Now apart from the steadiness in contribution owing to the strong performance of those 2 companies, the key, really, to the increase in recurring profit lies in our treasury department where they managed to deliver a sharp decline in the interest bill in the first half of the year. The details are here in the bullet points on the left-hand side. But essentially, we had 1/5 fall in our net interest expense. Now sticking with the theme of our balance sheet and cash flows. If you look on Page 9, you've got a snapshot here of our debt maturity profile with an idea of the pricing of our bonds in the secondary market. The maturities are a bit under 2.7 years currently. The interest cost, well under 4% at 3.5%. And as you can see, we've got a cash balance just short of $350 million, which gives us plenty of money in hand to take care of that $252 million maturing in late September. And as you can see, that's a 6 3/8 borrowing, and when that falls out of our interest bill, our average interest cost is going to fall quite a bit, and the overall spend on the interest bill will go down quite a bit as well. Now let's spend a moment on Page 10 where we talk about governance and the environment and social matters. We recently managed to get a score, a QualityScore of 1 from ISS, Institutional Shareholder Services. We're really quite proud of that, considering the journey that we've been on over the past several years. There are only about 20 companies listed in Hong Kong that have this score. Now when you're looking at the E&S parts of this, there are, of course, things that we have to deal with that other companies in Hong Kong do not, such as the fact that we have a Plantations business for all of its, I think, really superb performance in terms of how it treats its workers and the environment and so on, all to be seen in its extremely solid sustainability report on the IndoAgri website, please have a look. Nevertheless, there is a strong feeling about Plantation business in the investor community, which we are struggling to deal with. But the fact is, palm oil is an enormously important food. It's the cheapest edible oil, and it's a huge part of the society for millions of people in Indonesia. Let me not dwell here, but move on now to some results of our operating companies. Indofood is the biggest single asset that we own. Just over half of Indofood is in First Pacific's portfolio. In the first half, they had an increase in sales of about 2%, and that trickles down to a very strong increase in core income of 18%. Now when you look at their P&L, there's a drop in the cost of goods sold, even as the sales rose, and that really is the main kicker for that big growth in the core income at Indofood. If you look at the column chart at the bottom of Page 11, you can see that the food businesses under ICBP were the big drivers of the strong earnings at Indofood, particularly led by the noodles. And noodles, as we all know, have been in the news for Indofood in recent months, owing to the purchase of the Pinehill group of noodle makers based in the Middle East, North Africa and Southeastern Europe. You can talk about this in the Q&A. I believe that transaction is going to close before the end of this month. And I personally am looking forward to see how Indofood evolves as a global food company and one of the biggest noodle makers in the world. Now there are some brief descriptions of the Indofood companies and -- sorry, Pinehill on the following pages. But in the interest of time, let's move on to PLDT on Page 16 where we've got our traditional column chart describing the change in service revenues. And you can see at a glance that the surge in data revenues on the fixed line and in the mobile business was the big driver in the earnings growth there, 18% growth in data and broadband revenues in the first half of the year. The ECQ that the government imposed in response to the coronavirus pandemic triggered quite a surge in demand for data revenues, both people at home over their WiFi services and particularly on mobile phones where we saw an enormous growth in use of data. I believe it doubled year-on-year, if I'm recalling correctly. Yes, it did to over -- almost 1,400 petabytes in the period. Now the outlook for PLDT, Manny will speak to this, but I think it's not unreasonable to look at last year's core telco profit as a benchmark for the full year 2020 earnings. As a reminder, that was PHP 27 billion. The performance of this company is entirely due to the large and focused CapEx spending they've been doing over the past several years. It's going to come down a little bit this year from last year from about PHP 73 billion to, I think, the expectation is PHP 70 billion in 2020. But please bear with me, a quick glance at Page 18, which compares the 2 main telco companies in the Philippines and their performances. Those bar charts at the bottom of the page tell the story of why most analysts covering PLDT have got a strong buy on that company. It really is an asset to be proud of, and I'm looking forward to the second half performance. And I'm hopeful Manny can open up a little bit about that in the Q&A. Okay. Over to Metro Pacific, which is on Page 20, and you can see there that the contribution decline basically hit almost every business. The only green bar there we see is from logistics where their negative contribution was smaller in the first half of this year compared with the first half of 2019. We will recall last year, the sale of most of the hospitals business to investors led by KKR by MPIC, it left them in an enviable cash position. They're currently on about PHP 27.5 billion of cash, and it is this financial strength, the strong balance sheet, which has enabled MPIC to keep its interim dividend unchanged. And I believe they are committing themselves, at least provisionally, to keeping their full year dividend payout to shareholders unchanged as well. How big a commitment is that? Let's turn to Page 23, and you can see how the volume declines in the first half of the year affected the MPIC businesses. As you can see, the decline was greatest in the toll roads. And you can say the water was perhaps the least, but let's remember that the changing shape of demand for water and power had an overall negative effect on the earnings. Water is cheaper for residential customers. And I believe it's a similar story for Meralco's distribution business as well. Now the outlook for Metro Pacific for the full year, I don't think they can match the 2019 performance. The COVID pandemic is still going on. There are still varying degrees of shutdown throughout the regions where their businesses operate. But I think the key takeaway here is the businesses are quite sound, their balance sheets are strong, and MPIC is maintaining its dividend to its shareholders. Now Philex, a much smaller company than the others, had a terrific first half of the year largely because of the surge in gold prices. We've all seen it go up. You can see in the one of the bullets here on Page 24, the middle of the left-hand side, their average gold price was almost $1,700. And I would expect that the second half of the year is going to be rather stronger because we've seen times when gold was over $2,000 an ounce. Now those are the operating companies. The further pages in this book give you some details of our balance sheet and cash flows and P&L and so on, and there are some further details of our shareholding structure and so on. But that's the brief overview of how the operating companies have performed. It's been reflected in a strong performance at First Pacific. And now it's time for me to close my mouth and hand it to Sara for Q&A.

Thanks, John. [Operator Instructions]

[ John Galvan ] there. Don't -- just single click should...

Can you hear me?

Hi, [ John ].

Yes, we can.

A quick one for me. I mean I know early on in the slides, you kind of continue to talk about some of the capital allocation initiatives around potentially looking at noncore asset divestments as well as share buybacks. I mean these had been kind of a common theme now for a little while. Can you give any update on whether anything is close on the divestment side? And then on the share buyback side, what would you actually need to see either on the balance sheet or otherwise that would potentially lead you to actually pull the trigger on buying back stock?

Chris, can you help out there? Or Manny?

You asked about divestments, right?

That is correct.

Divestment, not investments, okay. Well, the only remaining problem asset is the Singapore power plant, and efforts are being made to improve the -- or mitigate the losses, if you may, or improve the financial position of PacificLight out there. So there are discussions with Chen in respect of improving the terms of its -- supply contract to PLP, and I think we're there in terms of an agreement in improving the terms of their supply. There are -- there's agreement in principle as well with the Siemens, which is the technical service provider for the plant because they're charging a technical service fee of about SGD 15 million. So we're trying to bring it down to help improve not only the cash flow, but the P&L position of PLP. And finally, it's a restructuring of the debt of PLP with a view to helping out the cash flow position of PLP. Now -- so I think we just have to put the -- this nonperforming asset into a stronger position, so that we're able to come to a view as to whether we could eventually sell it to, what you call it, an aggregator of the power generation assets out there in Singapore because there's an oversupply situation, either we contribute it or sell it to a consolidator effectively. So that will happen after all of these steps have been taken, so that the asset value could improve over time. And as far as our other assets are concerned, candidates for divestment would be the sugar operations in the Philippines and -- which is quite small in the context of the total portfolio of First Pacific and Philex Mining. But Philex' position has obviously improved since last year because of improving gold and copper prices. So -- but the mine life will last only until the end of 2022, so it's really a question -- well, we've put it in such shape as that it's -- we're able to develop the -- or defray the closing of the closure costs of the mine and pay off all the debts. But we're looking at possible new projects, which was could renew the life of Philex Mining, but nothing is certain at this stage. So in the horizon, no new investments that are in place. I think what -- in terms of our ability to undertake a share buyback program, I think we have to wait for 2 things. One is the -- I think we should need to refinance the existing debt structure of First Pacific because we have maturities due quite -- apart from what John said in terms of the maturities this year, maturities due in the first half of 2021 of $170 million and another $400 million in 2022. So we need to be able to refinance that or raise a long-term issue -- debt issue that puts us in a position to refinance that. Number two is the results for 2020. The first half was quite strong, and I think there's no reason to believe why the second half should not be at least as good as the first half for First Pacific. I think once we're quite confident that the profits are good enough and the operating companies are in a position to at least maintain their dividends to First Pacific, then we will certainly revisit the aspect of not only a slightly higher dividend payout, but also the share buyback next year. I hope that...

Does it answer your question, [ John ]?

Yes, it does. I think it's fair to say then as maybe just a bit of a follow-up, but the kind of the 25% guidance on payout remains intact. Is that fair?

That's correct. Yes, yes.

Are there any questions online?

This is Kedar from Maybank Asset Management. I just had a question on the Singapore power plant. I see that the losses from FPM Power have come down quite sharply in the first half. Can you share some color on that? I mean what has resulted in that improvement in performance?

Sure. This is Stan. I'll answer that one. So the conditions this year have continued to remain quite challenging in Singapore. And in terms of the coal prices, they've fallen significantly because of the drop in Brent prices, which LNG, the fuel source for PacificLight, is linked to. And there has also been a COVID impact. Having said that, though, there has been some improvement in the margins, and PLP has benefited from some lower gas that it has been able to secure. But also in terms of the retail margins, these are contracts that PLP takes on with -- as a retail contracts longer term, 1-year or 2-year contracts, these margins have also started to show some signs of improving. But it's largely because of the lower gas that PLP has been able to procure that has helped in its margin improvement.

Okay. Just a follow-up. The refinancing of debt for FPM Power, would you envisage First Pacific pumping in any additional money into FPM Power as part of the refinancing?

I think, to be clear, the -- upon the refinancing, there will be no equity that -- the shareholders have already put in a significant amount of equity into PLP over the last 1.5 years. Amongst all the shareholders, there's been an equity injection of -- already of $105 million, and that equity injection would be underpinning any refinancing that would be taking place. So I think we are looking to conclude the refinancing in the near term. I think there are some details that are still being worked out with the banks, but we are looking to complete this within the next month.

[Operator Instructions] There's no more questions. May I invite Mr. Pangilinan to give his closing remarks?

Okay. Thank you. Well, thank you all to -- for joining us this afternoon. And I guess, we won't see you until after we announce our full year results sometime early next year. We just wish to convey to you that we're quite optimistic, although, of course, cautious about the second half prospects. But this month, in August, the Philippine operating companies are actually reporting higher volumes across the board in -- certainly at PLDT in terms of data usage at home, the wireless side. And even the enterprise is showing growth, despite the very savaged environment at the corporate sector. Similar with the Power, I think there has just been a spike this month in the Power business, and I hope it's a precursor to return to recovery of the economy. Water, in a similar way, slight increase. Toll ways, slightly affected in August, but still above Water, above breakeven in cash and profitable from a P&L standpoint. So the -- certainly, the second half performance should be better than the second quarter for this year overall. So I think that should determine the numbers for the second half as well. So from a cash standpoint, I think most, if not all, of our companies, except perhaps for the light rail, would -- are independently managed from a cash standpoint. They can stand on their own without any cash infusion from First Pacific or from Metro Pacific into their operating companies. So I think the group has weathered this crisis reasonably well, and we really look forward to a recovery setting in, hopefully, by year-end. So again, thank you. And we hope to see you early next year.

Thank you. Okay. Thanks again for joining today's online briefing, and this is the end of the briefing. Thank you.