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

Good day, everyone. Thank you for joining this online briefing to discuss First Pacific 2021 Full Year Financial and Operating Results. The results presentation is available on First Pacific's website, www.firstpacific.com under the Investor Relations section Presentation page. This results meeting is being recorded, and the replay will be available on First Pacific's website in the Investor Relations section as well. Our participants from the media, please note this Q&A session is open for investors and analysts only. If you would like to raise questions, please contact us when the briefing is finished. Today, we have Mr. Manny Pangilinan, our Managing Director and Chief Executive Officer; Mr. Chris Young, our Executive Director and CFO; Mr. Joseph Ng and Mr. John Ryan, our associate directors and other senior executives from the Head Office of First Pacific. Over to you, John, for the presentation.

Thank you very much, Sara. Now those of you who know me know that I'll run through this fairly rapidly and then we can go through questions. For refamiliarization, Page 2 has our major holdings. These percentages are as of the year-end. So please note that the 44.0% in MPIC is as of today's date, I think, 44.1%. There are no big changes, however. Now on Page 3, we've got the major highlights of our earnings report that we published at lunchtime today. We've got, in many ways, the strongest numbers we have ever had. Contribution is not one of them. It's the strongest since 2011. Turnover, recurring profit are the highest that we've ever had. And that's, as you can see on the column chart on the right-hand side of this page at the top, that's because of a strong increase from Indofood, which had its first full year contribution from Pinehill. That's a noodle maker based in the other side of the world. And then PLP, PacificLight Power, which we own through a joint venture with Meralco, had a strong turnaround in its performance. Our Head of Corporate Development, Stanley Yang, can speak to that later in this meeting. MPIC bounced back from its COVID woes of 2021. Philex benefited from extremely strong copper prices, and then Head Office improvements were strong, too. We've got sharply lower interest expense, thanks to our Head of Treasury, Joseph Ng, right here. He can speak to these details a little bit later. So all in all, this wound up to a 1/3 improvement in our recurring profit, as you can see there, to a record high $426.5 million. Most of you will recall that we've got a consistent policy towards capital management, which for 11 or 12 years now has included a 25% payout of our recurring profit to shareholders in Distribution. So the full year number is $0.19 per share. That's 31% increase from 2020's figure. And another second leg of our capital management policy is a share repurchase program, which we introduced 12 months ago. I think to this date, we've spent about $28 million, $24 million of which was in calendar 2021. And now that we've reported our earnings, our blackout period is done, and we can move forward. Now I'll speak very briefly on Page 4 about our borrowings and treatment of them because Joseph, who manages it with extraordinary grace, will speak to it in more detail in our Q&A. Gross debt has really not changed from a year earlier. Our gross debt cover has improved. It's at 3.8x. Net debt also not very well -- not much changed. We've got a little over $100 million in cash. Average maturity, as you can see, is just over 3 years. Our blended interest cost is quite low at the moment, 3.2%. But of course, we're moving into an environment of steadily increasing interest rates. So that figure might be going up over the next couple of years. Now an important figure for us is the interest coverage ratio. That's the ratio of how much money we've got after we pay all our bills to the interest bill. And that has improved to 3.8x as of the end of 2021. And we're very confident that the outlook for that going forward is quite strong. As you can see from the column chart at the bottom of the page here, we've got no borrowings falling due until a bond in April next year. And that's a 4.5% 10-year borrowing, which we were quite proud of when we launched it way back in 2013. And as you can see, we've tried to keep our maturity profile fairly even as the years go by. And again, Joseph can speak to that going forward. Page 5 has got several points which are an important way we look at our investments and our strategies for that. And the buyback program is something I'm fairly proud of at a personal level. We promised it back in 2017, and we've begun delivering now for the past 12 months. We expect to spend that $100 million fairly evenly over the course of the 3-year period. Page 6 shows us a snapshot of our gross asset value. Not a lot of change there from month to month. This, as you can see is as of the end of February and probably on Monday or Tuesday, we'll be updating that to end-March figures as well. It's a little over $5 billion. Now looking at Page 7, a brief word about sustainability matters. We'll be publishing our 2021 ESG report in late April to mid-May following publication of Indofood's very first sustainability report. We're looking forward to that very, very much. That has enabled us to issue our first consolidated ESG report. And for those of you who are putting increasing importance on ESG matters in your investment decisions, please be aware that from calendar 2022, annual staff bonuses will have a sustainability component in them. So with this, I will have personally either earned a great love or great disdain from my colleagues. Let's see how it works out in a year's time or so. Now before we move into the operating companies, let's recall the superlativeness of some of these numbers that we've got published at lunchtime today. The last time we had a similar level of performance was 10 years earlier in 2011. And as you can see, it took another 10 years for recurring profit to exceed that figure. Now looking at the performance of our main operating companies and by this, I mean, Indofood, PLDT, MPIC. Over the past 3, 4 or 5 quarters, there seems to me to be consistent grounds to expect continuing improvement of their results going forward. And that's just looking at their quarterly performances in the recent past. So that instills in us a high degree of confidence, particularly given the strength of our cash flows and our balance sheet and our expectations for the future. Now let's look at Indofood very briefly on Page 8. They had record high net sales, as you can see, up by more than 1/5. And that's driven quite a lot by Consumer Branded Products division, which had reported its first full year of results, including Pinehill. That's a noodle maker based in Africa, the Middle East and Southern Southeastern Europe. And as you can see, very, very strong. Core profit is at a record high IDR 8 trillion in 2021. And as you can see, I think it's very important to consider the margins in the blue box at the bottom right. As you can see, there is broad improvement across the board. The noodles margin is at an astonishing 24.3% for 2021. This is a very core product for Indofood. It's north of 50% of all of their sales. And it's an extraordinarily profitable business, which we expect will be growing fast in the years ahead, thanks to Pinehill. Now let's move on to PLDT, which is on Page 10. Essentially, we've got 3 main businesses for PLDT. It's the Home business. You can consider that's your wired WiFi. There's a little bit of fixed wireless in there. And then there's the Individual business, which is mostly consumer mobile. And then, of course, there's the Enterprise business, which is services to businesses and data centers and so on. Now over the past couple of years of dealing with COVID and its ramifications for mobility in the Philippines, the Individual and Home businesses switched off on the leadership for earnings growth. PLDT has, I think, for 5 or 6 straight years shown steadily increasing earnings year-to-year, and they did it again. Service revenues at a record high, EBITDA at a record high. Telco core, up 8% to over PHP 30 billion hitting their targets, and that was driven largely by the Home business, which saw their service revenues rise by almost 25%. By contrast, the Individual business, which led earnings growth in 2020, was mostly flat. And then the Enterprise business saw their revenues go up 4%. We're expecting probably similar sort of performance in 2022. As you can see that PLDT does have some guidance. Telco core profit up another PHP 2 billion or PHP 3 billion. Very important to people who've been watching it closely for the first time in many years, their CapEx guidance is for a lower number than in the previous year. So 2022 CapEx seen at PHP 76 billion to PHP 80 billion. And let's have a quick look at Page 12, and you can see why they're bringing down the CapEx. As you can see, their performance, whether it's fixed line for home WiFi or wireless for everybody's mobile phones, PLDT and its wireless brand, Smart, are delivering much better customer experience than their competitors. And that's enabling them to take their foot off the gas pedal a little bit on the CapEx. It's just enough to keep them maintaining that excellent customer experience. Now on Page 13, we've got a snapshot of the shape of MPIC today. The 3 main businesses, of course, are electricity distribution and increasingly, generation, now that Meralco has bought all of Global Business Power and is merging it into its MGEN subsidiary. Then we've got the Toll Roads, which have been busily, busily extending their network over recent years and expect in the second half of this year to see new roads come into operation, not least a very beautiful bridge linking the mainland to the airport in Cebu. And then, of course, the Water business, which had a very difficult couple of years trying to sort out with its regulator how the shape of relations are going to go over the next 15 years or so left in the concession now a franchise. A quick look on Page 14 for the financial highlights. The electricity, roads and water businesses all saw higher volumes. But as you see implied by the red mark above the word water and the change in contribution, the build volumes in the Water business were a little bit lower, largely because of COVID restrictions, making nonrevenue water a little bit higher. They couldn't get out there to fix the pipes as best they might. Now as you can see, as people hopped back in their cars with the easing of travel limitations, the Toll Roads business sharply increased its contribution to Head Office MPIC. And then that's followed by the Power business. As I say, looking ahead, you'll expect Meralco to begin delivering in a big way on its commitment to build out 1,500 megawatts of renewable energy -- electricity generation over the next 5 to 7 years. This will gradually increasingly deliver to the bottom line that comes to its shareholders, the largest of which is MPIC. Likewise, the Toll Roads business will begin seeing much heavier traffic as it builds out its new roads and so on and so forth. The Water business will -- now that it's got a stable environment, it will return to steady contribution to MPIC going forward. Now if we look at Page 17, we've got the rather pleasant view of PacificLight Power, which we bought, I think, in 2014 or in late 2013, which had years of difficulties going forward because of an imbalance between supply and demand for electricity in Singapore, its market. And as you can see, that began to change rather drastically in 2021. It swung to a decent core profit, as you can see in the chart there and on the bullet points. Its EBITDA rose 10x to over SGD 100 million. And early electricity demand data for the first 2, 3 months of 2022 suggests that it's going to continue that strong performance going forward. So it's no longer a red-headed stepchild perhaps even it's a favored offspring because they're talking now about investing in the import of solar-generated electricity to Singapore from Bulan Island in Indonesia to the south of Singapore. Stanley Yang has been closely involved in that. It's personally very exciting, and it's a key part of First Pacific's thinking about where it will put its money in the future. And we're looking at renewables and fintech, which, of course, today fits right underneath PLDT. A brief word about Philex Mining. They saw their core profit double to a 10-year high in 2021, and that's because of a huge increase in the price they're able to get for copper, a little bit of an increase for gold. Looking ahead, they are looking around the [ environments ] of the Padcal mine for new ore deposits to develop. But the big part of their future remains the Silangan Project down in the south in Mindanao, which we are keen to begin developing so that they can get it online in 2025. Now the Padcal Mine, as you can see, is scheduled to close operations at the end of 2024. But with what they're finding around in the environments, I wouldn't be entirely surprised to see it continue operations a little bit longer than that. But it is not an enormous part of First Pacific's future. We've got our core holdings of PLDT, MPIC and Indofood, which are going to be our earnings drivers for the next few years. We can talk about that in the Q&A. But as we saw in this morning's Board meeting to discuss our full year 2021 results, the atmosphere was really something to behold. The optimism is great, and it's a delight to be working here. That's it for the opening monologue. Sara?

Thanks, John. We are now ready for questions. [Operator Instructions] I am switching it to [indiscernible]

What do we got? Should I read it?

That's right.

Okay. Jeff Kiang, CLSA analyst who covers First Pacific, is asking a question that everyone can read. And it seems to be directed at Joseph Ng, our Head of Treasury. Eliza, can you scroll so Joseph can see it?

Yes. I'll just make it bigger, too.

Okay. That should do it. Right.

I mean, just for the benefit of others, it is -- the question is with continued improvement of Head Office interest coverage ratio, will it change our current capital deployment strategy at Head Office level, which is the priority among acquisition, debt reduction, dividends and share buyback. Yes. Maybe I could address that. I think it's a function of the net cash flow in the headquarter, talking about the -- basically the capital allocation strategy. Main thing is the level of the dividend that we could collect from the units. We are recording quite a decent, not spectacular, but decent growth in dividend in the course of 2021. We grew by roughly 7% from $190 million in 2020 to $204 million in 2021 as shown in the cash flow. And then, of course, I mean, the interest expenses reduction acted a bit mainly because of the previous liability management initiatives. We bought back about 300 million bonds, I think, in the last quarter of 2020. And that helped us to basically have the full year benefit in 2021. Now that the interest is trending up, so that impact would be kind of mitigated a little bit in the course of 2022. Now even after that, I think basically it wasn't that [indiscernible] will be allocated mainly to shareholders, shareholders return to say, right, distribution. And then the accounting program is increasing quite a bit, and then we are paying 25% dividend payout. So the payment to shareholders also increased by roughly 30% as demonstrated in the dividend to share increase over 30%. At the same time, we are also allocating some budget for the share buyback also mentioned by John. So after that, that is basically the residual cash we could deploy about debt reduction and acquisition. So going forward, I think it's a function as to the growth of the dividend streams from the respective major operating units, in particular, PLDT and Indofood. And there's some prospect that the news about our PLDT selling some of the towers, and that could raise quite a bit of money, and that may be an opportunity for distributing a little bit more dividend up to the [indiscernible]. So if that's the case, then we have more possibility to explore the acquisition and debt reduction. But for now, I think quite a bit of our free cash or cash flow at headquarters, we'll be allocating for shareholders return, distributions and share buyback.

[indiscernible] PacificLight , Stanley, please.

Yes. So PacificLight, as you may recall, in 2020 at the end of -- in the fourth quarter, completed a debt restructuring as well as a restructuring of their gas supply agreement. And at that time, PLP was marked down to 0, and that is still reflected in our NAV calculation. Having said that, though, with the strong EBITDA last year and the continuation of the performance as expected this year, the business is starting to generate cash flows and positive income. And so the proceeds are being applied to reduce the debt. It is our plan that even with 23 million of debt that was repaid in 2021 that, that amount will increase in terms of the debt repayment this year. And so we believe that the fundamental value, the value of PLP will grow. But at the moment, it's still carried in the books at 0.

The second question from Patrick is about the raw material cost impact on Indofood. John, can you help?

Yes, sure. Now Indofood doesn't hedge on the futures markets for soft commodities. For fleet, they purchased ahead for up to 6 months. They have not been enormous buyers from Ukraine. And while the Black Sea may deliver something like a 1/4 of all global fleet exports, that doesn't amount to much. That's a low single-digit percentage of all we consumed. Now Bogasari, that's the flower and pasta business at Indofood. Their business model is consistently cost plus, EBIT margins range generally between 5%, 7%. And they've raised wheat flour prices so far this year already by about 8%. Now generally speaking, in an environment of higher prices for soft commodities, that tends to boost the profitability of Indofood as a whole. I hope that helps there.

There's another question from Jeff about PacificLight.

Sure, if I could just scroll up to it. The question is around the solar, and this is related to a solar import project, of which PacificLight is partnering in a consortium. There's a consortium of 3 parties that are looking at importing the solar from Indonesian island to Singapore. Now there has been a pilot, a conditional license granted by EMA for a 100-megawatt project. This is on a continuous basis. So the peak is higher, but on a continuous basis, 100 megawatts. Having said that though, there is an RFP that the EMA is now tendering and the initial bids, nonbinding bids will be due next month. And so as part of that, there's an opportunity to scale it beyond the 100 megawatts. And this is something that the consortium is reviewing our opportunities. If it's the pilot project, the business would start operations in the beginning of 2025. If it is through the RFP, then there is up to 2 more years until 2027 when the expectation of the project would be commenced, the COD date. And so thereafter, and it also depends because this is a solar project, but the -- there's interest from hyperscalers and retail contracts that looking at a long arrangement for buying the power from this project. It is something that we would know later on. It's still premature to have a view on the P&L impact.

[indiscernible] question.

Okay. Chris, could you please take the question from Vincent Lam regarding buybacks at Metro or even Indofood?

This is -- sorry, John, I can't see the question. This is buyback at their own level, at the Metro Pacific level?

Yes. The question is, may I know if management has anything in mind besides share buyback at FBC, e.g. will Metro Pacific, Indofood adopt or accelerate their share buyback schemes on their own?

Well, I think that if you follow Metro Pacific, I think you will have seen a few weeks back that they actually announced a new share buyback. I think it's another PHP 5 billion. So yes, we will consider and support share buybacks at the operating companies. At the moment, there's no proposal that, that could extend beyond Metro Pacific to the Indofood Group in time. But yes, it's something we have a watching brief on.

Okay, Stan. LNG pricing for PLP?

Sure. The...

This will take half an hour to answer, guys.

The LNG contract was a long-term contract signed with Shell when PLP commenced operations in 2014. The contract as it approaches the end, there's been discussions on renewal. And what's happened in Singapore is that in the beginning, Shell was the only provider. And now there are other aggregators, which include Exxon. It includes Pavilion. And so there are other opportunities, and PLP has been speaking with the other groups. The formula, there is a formula that is indexed to Brent in terms of the movement on LNG. It does move up. Having said that, though, the ability for the plan to pass through, and if you look at where the nonfuel margins are in the business, they're reflecting that improvement. And so whilst the prices of the LNG are higher, the margins are significantly improved as well.

There's 2 questions about Indofood and Pinehill. John, can you?

Yes, I'll take a stab at that, Chris, and if an expansion is needed, please carry on after me. Indofood's revenue and earnings growth not counting Pinehill are not numbers that Indofood shares, but I am very confident that those numbers are positive. There was revenue and earnings growth in the domestic Indonesian markets. Key synergies between Indofood and -- ICBP rather and Pinehill, well, as you know, before ICBP bought Pinehill, there was a business relationship of many years between those companies. So the Pinehill noodle factories were exactly like the noodle factories in Indonesia using the same spice packets and ingredients and so on, sourced from ICBP. So that's all internal now. That's -- can't really get much closer. But one thing they have started to do already, and that is import non-noodle products from ICBP into the Pinehill markets. And that will help growth going forward. All in all, it's been a quite positive acquisition for Indofood. I'm very, very pleased with it. I'm proud of the effort we made in persuading shareholders to take it on. And I think they'll -- eventually, all of them agree that it was a great acquisition. And I would imagine that the margin improvement overall at Indofood that we saw a few pages away from here were helped by the Pinehill acquisition. Chris, do you want to add on that?

No, I think that's quite comprehensive.

Okay. Now we have free cash flow. Chris, I believe this question here, can you rule out any risk of making large acquisitions? Again, e.g. Goodman Fielder. I think this is right up your alley, Chris.

Yes. I think we can roll that out. I think John in the presentation and Joseph in his earlier description, but I think the presentation, Page 23, you can effectively see that the approach, at least for the next couple of years, is to take the net operating cash and return the bulk of that to shareholders. The biggest chunk is the 25% distribution and dividend. And then we have committed to the USD 100 million share buyback. So you can see on Page 23, till the end of 2021, we spent USD 24 million on purchasing shares. So if you factor that into 2023, 2024, together with a modest increase in dividends from the underlying businesses, you will see that the bulk of our operating cash flow is going to be used to return to shareholders. And that's, I think, what we have indicated we would do. We may make 1 or 2 smaller investments. These investments, we will probably invest alongside the operating companies. I think Stan mentioned fintech layer as an area and possibly something on the renewable side, but smaller scale and together with the operating companies. But in summary, the bulk of operating cash flow will be returned to shareholders in 2022 and 2023 through dividends and share buyback.

Thank you very much, Chris. We have a question now about the updated adjusted NAV for First Pacific per share based on yesterday's closing prices of all the quoted subsidiaries. What I'll do there is since today is the last of the month, tonight or tomorrow, I'll put together that spreadsheet, which we do on a regular basis. So you'll have the end-month data there rather than the 29 March. If that's not okay, then just drop me an e-mail, and I'll see what else we might be able to do. And while it's on my mind, in late April, early May, Stanley Yang and I will be visiting equity investors in U.K., Europe and to North America. If you want us to see you, please drop me a note, and we'll see how we can assemble the entire trip. We haven't seen investors on a formal earnings roadshow in, what, a good couple of years, 2.5, I think. And we're currently looking forward to it, and we're feeling really good about the story we can tell.

Any more questions? Not yet, all right. As there is no more questions, please may I invite Manny to give his closing remark.

There's one more question. What is the pace of share buybacks going forward?

Joseph, can you help with that?

Yes. I mean, as mentioned by John, the program is $100 million over 3 years. And so far, we spent about $28 million before we got into the buyback period. So we still have somewhere around $72 million to be spent. So for a 3-year program, clearly, it's market-driven and writing on up and down on the share price. But on average, you are talking about 3 years over -- for $100 million. On average, you talk about $30 million a year. I think that's probably a good estimate. But at the end, [indiscernible] to a number of things as to say, [ the Brent ] and other things. So in verbatim, I think we say 30 million a year is kind of fair estimate.

Thank you, Joseph. I think there's no more questions. Manny, can you please give us your closing remarks?

Simply want to thank everyone for joining us this afternoon in this investor briefing in respect to the full year results for 2021. Actually, in the Board meeting today, we briefed the Board about this and [ most of ] Philippine companies, the first 2 months appear to have been a good start for the year 2022. And I think our own budgets at First Pacific assume a better year for First Pacific this year than compared to 2021. And I'm glad John and Stanley are going out to see most of you, all of you, to explain not only our 2021 numbers, but update you on the latest developments amongst our operating companies. So again, thank you, and we look forward to talking to you again when we announce our midyear results sometime in August, I guess, John?

Yes, towards the end of August, I believe, Manny.

Okay. Thank you. Thank you so much.

Thanks again for tuning for this online briefing.

Thank you.

Thank you.

Thank you.

Goodbye, everybody. Drop me a note, please.