PHINMA Corporation (PHN) Earnings Call Transcript & Summary

Good afternoon to everyone. We'll be starting the briefing in a bit. For now please sit back and enjoy this view. [Presentation]

So good afternoon again to all, both to those who have been regularly attending our briefings as well as to any new folks joining us this afternoon. I am Kara Albert, the Investor Relations Officer of PHINMA Corp, and I'll be moderating this session. So thank you again for taking the time to join us on a late Friday afternoon. We'll keep the briefing within the allotted time, especially for those of you who might have Christmas parties or get together to attend to after this. But first, we have the usual housekeeping matters. We would like to kindly remind everyone to keep your microphones on mute for the duration of the presentation proper. [Operator Instructions] So together with me this afternoon is our ever reliable CFO, Mr. EJ Qua Hiansen who will give the highlights on the group's performance as of the third quarter of 2024, as well as some insights on what we can expect moving forward. So EJ, the virtual floor is yours.

Okay. Thank you very much, Kara, and good afternoon to everyone. Thank you again for taking the time to meet with us and hear about our company and the plans that we have moving forward. So we see a lot of new faces here. So we'll try to, I guess, go over the company a little bit in more detail so that you understand it better. But really, our mission and our vision as best articulated by Mr. Del Rosario in the video is to make lives better. And by doing that, PHINMA wants to play a key role in building the nation and uplifting the lives of Filipinos, especially the underserved. And increasingly, we've positioned our portfolio towards those -- towards that endeavor, which we can see on the next slide. So if you look at PHINMA Corp, we're really divided into 3 segments: Education, where we now have the largest tertiary network in Southeast Asia through PHINMA Education. And I think there's been a lot of exciting news that I'll be sharing there. But another fast-growing business unit of PHINMA Corp is our Construction Materials Group, which really is where our history was. As recently as the 1990s, PHINMA was 90% -- 50% of Philippine cement. But when we strategically left that industry in 2004 and got into education, we retained Union Galvasteel, which is our galvanizations business. And using that as a vehicle for its distribution network, we were able to reenter cement a few years ago. And from that also utilizing the synergy within our construction materials group, enter into value-added products such as PHINMA Solar and Union Insulated Panels. Another segment that we're bullish on to the fact -- to the point that PHINMA Corp actually consolidated the group's holdings in last year is shelter, where we have PHINMA Properties, which is our property development company as well as PHINMA Hospitality and PHINMA Microtel Hotels, where we now have ownership stakes in about 7 hotels nationwide as well as managing and franchising 15 under the Microtel by Wyndham and TRYP by Wyndham brands. But in addition to these and underlying our commitment towards risk management and enhancing synergy within the group, we're also acquiring the group's interest in PHINMA Insurance Brokers next year, which will really be value accretive from the very beginning as this company services the group's insurance requirements. And again, it plays a key role in identifying the risks and subsequently mitigating those risks for our companies. Next slide, please. So this was a milestone year, and I think that's really why we have so many people attending today. What we've really been doing is laying the foundation for future growth and success. And we see many pictures here across all of our strategic business units, there is an energy that we've been seeing as all of our strategic business units are gearing up for growth. And that's something that we really believe in because we think that the country really needs the goods and services that PHINMA provides. And we think that there's a large market opportunity to take advantage of the competitive advantages that we do have. So first and foremost, on the upper left-hand side, you see that PHINMA Education signed a PHP 4.5 billion investment agreement with the investment vehicles of KKR through their Impact Investment fund and Kaizenvest, who are part of our original private equity investors and decided to come back in on a second round. I think this really underlines the competitive advantages that PHINMA Education has. They really pointed towards the growth and the unique business model of our education business as we look to continue to scale up our education model. Moving on to our Construction Materials Group. There's actually 3 key things that have happened so far. In terms of Philcement, which is our vehicle for cement, as the name would suggest, first, they signed a share purchase agreement with Petra Cement. This is in Northwest Mindanao, which will allow us to service a market where we think there's an undersupply of cement. In the cement industry, it's really about logistics and the closer we are to customers that gives us a natural market with which to sell. So this enhances our presence in an area where we think that there's growth opportunities. But also in the Mindanao market, we entered into a joint venture agreement with the ANFLOCOR Group to build a modern cement facility in Davao, more specifically Panabo. This is a mirror facility to our Mariveles, Bataan, which will give us about 2 million tonnes of capacity as early as 2026. So those -- Petra Cement is already adding to our bottom line this year. The cement facility in Davao will still take a few years to construct and become operational. But what we've been doing in the meantime is continuing to expand our market presence so that once we are capable of being there, we will immediately realize margin improvements. The other area, which we're very excited about in construction materials is what we call Union Insulated Panels Corporation, where we broke ground on a state-of-the-art insulated panel factory in Pampanga. Insulated panels are a key component of items such as cold storage facilities and data centers as it really -- as the name sounds, keeps it insulated, enhancing energy efficiency. But more than that, it's really our first foray into improving the food security of the nation. We've seen too many numbers that we already have a shortage of food and yet we lose more than 25% along the supply chain. And so PHINMA decided using our expertise in the construction materials space to do something about it. So in our Porac facility, we'll actually be putting into place machines from Europe, where we'll be able to produce 1 million square meters of insulated panels per year also in 2026. So this is something where, again, we're working on building and developing the market today. And then once the facility comes online, we expect significant margin improvements of more than 10% on our gross margins. Another very exciting area, as I mentioned, was our properties business, where we launched a flagship township in Bacolod. This is a 21-hectare township located near the airport. It's an area where we think there's going to be a lot of growth. And we did this in partnership with JEPP real estate company. What excites us about the township is that it can really represent the best of PHINMA. And by that I mean, in addition to our property business, we'll be able to put in first schools, the first branch of Southwestern University, which is our mid-market school based in Cebu. And we'll also be investing in and developing a TRYP by Wyndham brand, where we hope to have what I think will be the best hotel in the Bacolod market. But in addition to that, PHINMA Microtel hotels also enhanced its existing partnership with the Damosa Land group to operate a TRYP by Wyndham in Samal Island. This will be our first foray into the condotel market, but our presence there will be as management and franchise holders. Next slide, please. So that was a not-so-brief overview of where we think we're going. Let me take a step back and show you where we've been. So the first half of this year was very challenging. I think that's something that we admitted as macroeconomic volatility was there as all these different pressures impacted our businesses, particularly the stronger dollar, which impacted our Construction Materials group. We did see a good recovery in the third quarter of the year. So you look here, we saw a 34% increase in revenue, and this is attributable to 2 things: one, the improvement or recovery of revenue in construction materials; and two, cyclically, the third quarter is our strongest quarter for the education business as we welcome enrollment for the new school year. This translated to the bottom line where our PHP 320 million loss as of the second quarter reversed to a PHP 438 million gain in the third quarter alone. So looking at the right -- upper right-hand side, we've continued our long-term revenue trend growth. And as I mentioned, we did consolidate our stakes in education, property and hospitality last year. In terms of education, due to the entrance of KKR, we've already received additional benefit from that increase in stake. But in terms of property development and hospitality, as the Bacolod township continues to sell well, we expect to see more value addition to PHINMA in succeeding periods. Next slide, please. So in terms of our 9-month income statement, revenues, as I mentioned, did hit a record of almost PHP 17 billion, but in terms of consolidated net income after tax, that was PHP 609 million with a parent NIAT of PHP 123 million. So this was about half of last year's income, and it's something that we're looking to continue to reverse, especially if we can continue the momentum of the third quarter. But in terms of our balance sheet, it remains healthy, especially as 2 things happened: One, and these actually happened in the fourth quarter, first of all, of course, the KKR investment closed in October. So that did strengthen the balance sheet of PHINMA Education and, subsequently, the consolidated balance sheet. But second, we were able to successfully list PHINMA Corp stock rights offering of PHP 1 billion just a week ago, and that further increased or improved our parent balance sheet. So our current ratio is above 1 and our debt-equity ratio is at about 1.7. Longer term, we are taking steps towards reducing debt and improving our equity, which we think will also happen as performance kicks in and we have increased retained earnings. Next slide, please. So if we look at the specific segments, you see in that same period of the 9 months, a strong improvement in Fin Education as we have record enrollment, which increased by 12% year-on-year to about 164,000 students. In terms of construction materials, it was slightly down. But again, what I'd like to point out is Construction Materials group focused on volume. And this is because those expansion projects that I mentioned will be margin improvement operations. And so when these come on stream in 2026 or 2027, we expect an immediate benefit from those projects. So in the meantime, volume is the key driver for construction materials, but we are continuing to be net income positive. In terms of property development and hospitality, I think this is where we saw the bigger change year-on-year, and this is largely due to property development, which saw a combination of 2 factors really impacting its performance. One, there were slower sales in the first 9 months due to percentage of completion. We expect that to catch up in the fourth quarter, thereby booking more revenue, and we look towards breakeven performance from our property development company in the -- for the year. And second, also, just looking at some of the projects that we had on the construction side of our property development business, we purposely looked at them and focused on projects that we believe had a better cash collection process. In terms of hospitality, there were improvements in occupancy and ADR and subsequently, the RevPAR. So this is a business that is returning to its pre-pandemic performance, and we continue to be bullish. And I think that's why we're building the hotel in Bacolod, and we're also finding more franchisees that want to use our brands. Next slide, please. So I'll just do a deeper dive now into our strategic business units, starting with PHINMA Education. So on the slide here, as I mentioned, total enrollment is actually up 12% year-on-year. If you heard our Chairman, Mr. Del Rosario during the stock rights offering, that enrollment is closer to 167,000 students now as we are in the process of closing an investment in our 11th school in Cavite, and that should add another 3,000 students. Cavite is an area that we think has a large population that can use the type of education that we're offering. For those that are unaware of PHINMA Education, it's really focused on providing education to the underserved with our tuition rates being about PHP 15,000 per semester. Although if you look at it with scholarships that we offer, the actual effective tuition rate is probably closer to PHP 11,000 or PHP 12,000 per semester. And we're able to attract good students because of our ability to make them employable and help them pass the Board exams. Next slide, please. So as mentioned, the KKR investment did close in October, and this is the impact in terms of the ownership. So pre-equity raise PHINMA Corp owned about 75%. Once all of the funds comes in, PHINMA will still remain to be a majority at 61%, but KKR will be a significant minority of almost 31%. As mentioned, Kaizenvest did reinvest, but KKR did buy out part of Kaizenvest stake as well as the full stakes of ADB and FMO. So the funds will be used to continue to expand our business. As mentioned, we are looking to acquire more schools here in the Philippines, and we're also now managing 2 schools in Indonesia. So including Cavite, that would be 9 now in the Philippines and 2 in Indonesia. Next slide, please. And you can see that with our enrollment growth, we've also seen strong revenue and bottom line growth over the past few years. Revenue going up at a CAGR of 21% for 3 years and net income attributable to PHINMA Corp going up at a CAGR of 18%. Most of this growth in enrollment has been organic growth. The impact of our acquisitions usually takes about 6 to 7 years until we really see double -- more than 10,000 students in terms of enrollment. This Cavite school is probably one of the bigger ones in terms of our acquisitions recently with 3,000 students. Next slide, please. Moving on to construction materials, where we've had a lot of activity. While the third quarter was a weaker -- is traditionally a weaker quarter for the construction industry, I think as government projects really started being implemented, we saw growth in the gross value added in construction, which flowed into our financial statements. But again, the focus was on 2 things. One is maintaining the increasing volume. And secondly, we've been shifting towards higher-margin products. So across our construction materials group, rather than focusing on where we think there's red ocean markets, we've looked at where we can find higher-margin products that can improve our bottom line while still providing consistent, reliable supply and strong quality to our customers. At the same time, we focused on managing our costs and improving our inventory so that our cash conversion cycle can strengthen. And in terms of PHINMA Solar, we're excited because we should have our Green Energy Auction Program awards installed within the year. If you recall, we were the only company awarded in the government's Green Energy Auction Program for rooftop solar. And I think this really emphasizes the synergy between PHINMA Solar and Union Galvasteel because we were able to identify roofs that we could subsequently lease and turn into effectively smaller power providers that we could sell to the grid or to the government. Next slide, please. So in terms of CMG, there's been a slight improvement in our revenue over the past few years. But again, the expansion projects that we're taking in and the stronger dollar, the increased competition really has been a drag on our bottom line. So the net income attributable to PHINMA Corp has only been PHP 108 million over the 9-month period this year. Next slide, please. Okay. So moving on to Property Development and Hospitality. Our property business, while the financial results aren't there, I think looking at the future, we do have a good product, and this has been recognized by groups such as Lamudi, which named us the Best Boutique Developer of the Year for 2024, including all of the different projects that we're expanding in our property business. Next slide, please. And that's really given us the confidence to go ahead and put up our township in Bacolod, which we call Saludad. And you can see a picture here. This is near the old airport road. You'll see in the middle with the Maroon roof. That's the TRYP by Wyndham that we plan to put up in Saludad. And then on the left-hand side would be the Southwestern University. And I think that's really what distinguishes us from our competitors is that we're really willing to do and start a lot of commercial activity in the space. In the middle area, you see more commercial where we will put up some restaurants and some eateries for our residents to enjoy. But in addition to doing all of this, of course, it does allow us to utilize the synergy with the construction materials group to decrease our construction costs. Next slide, please. So here's some pictures from the grand launch that we recently had. Just as you can see, it was very well attended. This is a master planned by [ Royal Pineda. ] Next slide, please. And in terms of the financial results, again, it's lagging, but we're confident that there's going to be a recovery in the longer term. Another area that we're looking to get into in a big way, and I think Mr. Del Rosario has really called it his next dream after education is reentering into socialized housing, where we hope and plan to launch our first socialized housing project in the coming months in either Davao or Bacolod. In socialized housing, we think that there's such a large backlog, President Marcos has said that it's 6.5 million homes, but projections that we've seen have it increasing to as high as 10.5 million homes simply because more and more homes are not being developed. And part of the reason I think for this is there's also the incongruity where we see that there's an oversupply of condominium units here in Metro Manila. I think part of it is twofold. One, the cost of land acquisition is quite high. And second, construction costs also remain high. So utilizing our synergy again with construction materials, we're doing what we can to bring those costs down so that we can put together a business model that will be value accretive to PHINMA Corp, but more importantly, provide homes to those most in need. Next slide, please. So as I mentioned, and I think part of the reason why we have such strong attendance is, we were successful in listing our PHP 1 billion stock right offering. This was a big sign. This is our first equity raise in 28 years since PHINMA Corp did its IPO on the stock exchange. And the funds from here, as you'll see in the next slides, will really go towards funding those expansion projects that I mentioned earlier. So in the Construction Materials Group, as mentioned, we're looking at about 9.4 megawatt peak in the Green Energy Auction Program as well as the construction of that modern cement facility in Davao. So the one in the picture is our existing facility in Mariveles. In Davao, we expect a near mirror image of this facility. So we have a pretty good idea of how long it takes to construct and the cost. And as mentioned, we're already developing the market in preparation. Next slide, please. In terms of our property business, again, we're going to continue to focus on developing our township, looking more outside of Metro Manila because we think that there's already an oversupply here, and there's more of a need for our kind of projects outside of Metro Manila as we also go further deeper into the socialized housing market. Next slide, please. In terms of hospitality, as I mentioned, we will be establishing the TRYP by Wyndham in Bacolod. And then we're also looking at in the next slide, different kinds of ventures that we can get into. So one would be our new IPC facility in Porac. But really, when we took a deeper dive into the needs of the Filipinos and we took a deeper dive into their average spend or the share of wallet, it really went into 4 segments for those that are most in need, housing, food security, health care and education. And so these are areas where in education, obviously, we're already there. Housing, we want to go in, in a bigger way. Food security, this was -- this is our first effort along those lines. And health care, we're indirectly in by producing a lot of health care graduates from our schools. But moving forward, if you ask where I think the portfolio is going to go, it will continue to be in these segments that we think that will service the underserved sectors. Next slide, please. So in conclusion, again, thank you so much to everyone for attending today. In terms of the group, we do have a lot of plans. Our focus will be on driving the execution of these projects in the coming years so that we'll begin to see the financial returns to PHINMA Corporation. We do want to continue to enhance the synergies that we have between or within our business group. But also looking at our balance sheet, we want to continue to strengthen it and as time comes by, focus really on consolidating our businesses and, at the same time, providing vehicles or funds for investment growth. So I think I'll stop there. If there's any questions, we're happy to answer them at this point.

Thank you, EJ. So like said, we're now opening the floor for any questions. [Operator Instructions] And the -- so to, I guess, kick us off, as part of one of the questions that were sent in advance. And I think this is one of the ones that we do get frequently asked in the area of PHINMA Education. So is PHINMA Education open to more investors?

That's a tough question to start with, Kara. I think if you look at the underlying of PHINMA education, it's really to make sure that all of those in need of education are provided with a quality education, which is defined as education that will help them get to employment. So while the size of our network, 167,000 is quite large, that's still only a drop in the bucket compared to the total enrollment of tertiary students in the Philippines, not to mention the low participation rate where a lot of the eligible population isn't even in school. And so that's a long roundabout way of saying that, at some point, as we want to hit these ambitions of providing education to everyone, I think we'll always be open to new investors, specifically those that provide a strategic element. So one of the things that we're gaining from the KKR investment, for example, KKR has also invested in different educational institutions that focus on completion. And what completion means is, if you look at a student who enters as a freshman, will they make it all the way to graduation or will they just stay for a semester or a year or 2 years? We want to make sure that not only do they enroll, but they're able to graduate and that they're able to get good jobs.

Thanks, EJ. We have another question here, this time for the Construction Materials Group, CMG. So how does CMG plan to sustain its performance given that the competitive and economic environment has become more challenging?

The quick answer is actually they want to improve their performance, not sustain it. And I think where we have a competitive advantage is our long history in the construction materials space. So we have a very experienced management team that has been through multiple cycles of a cyclical industry. As I mentioned, we are looking at developing higher-margin products that we can sell, that will improve our bottom line despite the competitive markets. So in terms of Union Galvasteel, for example, these higher-value products will be such as the insulated panels that I mentioned, where our margins again will improve by 10% once the factory is up and running, but it's already higher than our traditional galvanized sheets, but also our light steel frames business, where we look at margins upwards of 30% moving forward. Similarly, in the cement space, we've been negotiating with our suppliers to keep our costs low. But in addition, as I did say, it's a logistics team. So we're trying to be closer to the market to reduce the logistics cost to our customers and thereby keeping us more competitive.

Thanks, EJ. So now let's move on to a question on the properties. So would you be able to give a little more color on how PPH plans to tackle or how do they envision serving the affordable housing segment?

Sure. In terms of serving the socialized space, actually, they're taking a novel approach. First, I think it's important that we brought in a team that understands that market. So to that end, the one leading our foray into socialized housing is a guy named Luis Oquiñena. He's also the Chairman of Gawad Kalinga. And he has such a passion for it and he really understands the needs of the market, and he's able to drive us in a direction that will address those needs. We're looking to do partnerships with local government units in terms of using their land without cost or at lower cost. As I mentioned, land acquisition costs are a significant hindrance to providing lower-cost housing, especially the Filipinos that need it. And I think if you look nationwide, there is a large land bank with local government units. Second, rather than focusing only on housing or socialized, we're actually calling it community housing because we want to develop communities. And by communities, it includes putting in activities that will keep the pride of the community, things such as day care so that people can work knowing that their children are safe and looked after. Sorry, Kara, I have one more thing to add. Okay, go ahead. In our construction materials group, we recently held a hackathon, where we invited 5 universities to compete. They were all given a brief and the budget of, I think, PHP 800,000, and they were supposed to come up with innovative housing solutions. And these students spent some time with our construction materials group and even visited low-cost housing developments such as in Baseco and Bataan in order to come up with these houses. And it's really exciting to see that after a 1-month period, these students already came up with some very interesting ideas, some of which we might be applying on a pilot basis in different locations. They were given or awarded extra points if they use our construction materials. Also, again, just to leverage that kind of synergy. So that's one of the ways in which we're trying to reduce the cost and really keep our community housing group competitive.

Thanks for adding that, EJ. We have a question this time on the PHINMA Corp level. So with the SRO recently done, how does PHINMA Corp plan to continue to manage or strengthen further its balance sheet?

I think the first part of strengthening our balance sheet will happen as our businesses improve their operations, and we start to see more and more income and subsequently retained earnings to PHINMA Corp, so that will naturally boost our equity account. Two, we're taking a close look at our debt levels and ensuring that we don't borrow more than necessary, and we don't incur negative carries in terms of our debt, especially as the interest rate environment has become more volatile in recent months. So in terms of how we're managing our debt, we've really intentionally kept our debt more on the short term rather than long term as we've avoided locking in elevated rates for long-term basis. We intend to refinance some of the short-term debt longer term next year and while still maintaining the flexibility to make strategic investments if they make sense.

Thanks, EJ. Just checking if there's any questions in the chat box. [Operator Instructions] I think more questions from the floor. Any last notes, EJ, or information you want to share?

Sure. Yes, again, we'd like to thank everyone for their continued support, especially the support of our shareholders during our recent stock rights offering. Listening to the speeches of PSE President, Mon Monzon and SEC Commissioner, Mcjill Bryant Fernandez, they really emphasized the role of PHINMA in being a force for good and using our business that way. And I think you're seeing that more and more in how our portfolio is taking shape. And moving forward, I think that's a direction that we're going to continue to go in.

So with that, thank you again to everyone for joining us this afternoon. If you want to learn more about PHINMA, you can reach out to the e-mail that you see flashing in front of you or go to our website. So thank you again.