PLDT Inc. (TEL) Earnings Call Transcript & Summary

Good afternoon, and thank you for joining us today to discuss the press release on elevated CapEx spend. For today's presentation, we have with us our Chairman, Mr. Manny Pangilinan; Mr. Al Panlilio, President and CEO; and Attorney Marilyn Victorio-Aquino, Chief Legal Counsel and Corporate Secretary. At this point, let me turn the floor over to Mr. Pangilinan to begin the briefing.

Thank you, Melissa, and good afternoon to everybody, physically present and those online. I think we have a fairly good attendance this afternoon. So we start with an open statement that I will make, particularly in respect of this CapEx overrun and outlook for 2022 this year. And following me will be house comments in respect of prospects for 2023. As we indicated in the press statement we issued a few days ago, the CapEx overrun is likely to be up to PHP 48 billion, as we indicated, which represents about 12.7% of the total CapEx spend for the period 2019 to 2022. Now there's been some comment. I think that we have gotten from -- maybe from media, maybe some from you, as to 3 years that we did not report this thing. Actually, the bulk of the CapEx overrun occurred in 2020. There's a portion in the last quarter 2019, but the bulk of being overrun really occurred in 2020 and 2021. For 2022, CapEx has been well controlled, partly as a consequence of the discovery of this -- of the quantum of this CapEx overrun. So as soon as we reported to the Board sometime early November, we informed about the potential issues around this CapEx overrun. Of course, we -- there was an immediate mandate by the Board and the Audit Committee and, of course, internally even before that management has undertaken quickly and immediately review of what happened and to determine -- get a fair idea of the quantum of the overrun. And it's fair to say that as of now, the investigation -- substantial work has been completed in respect to the investigation, and there are discussions with the principal vendors. There are about 4 of them with a view to doing 3 things: number one was to reconcile their accounts with our accounts. Of course, the reduction of these budget overruns from PHP 48 billion to X. We cannot say with final determination as to where we will eventually run -- land with the vendors because part of it is the dynamics of negotiations. We don't want to indicate a figure that could actually determine the floor with them. So we're very hopeful that there will be some reduction in this total number of PHP 48 billion. And of course, whatever the agreed number with them amongst the 4 major vendors, we will ask for deferred payment terms. So that should ease the impact of the cash flow of the company moving forward and ask for a no-interest element to the final number of this budget overruns. But the review has, and I say this, we caution so far because it is still ongoing. So I don't want to be 100% definitive about this point. But as so far established, again, contrary to certain reports that there's been -- we have determined there is no fraud. There are no anomalies. There's no evidence of over pricing and there are no unauthorized CapEx projects. What has happened is actually we have over ordered quite a bit of equipment and work to be done in these past 2 years, 2020 and 2021, principally. So the CapEx will be subject -- the CapEx subject to the overruns will be used in the business in the next 3 or so years. And again, it will not be written off as I think some reports have said in full or in part. We may accelerate depreciation of existing assets, as we've indicated, I think in the press statement. Principally, the 2G network, which is already obsolete, 3G as well, VVDSL and the legacy elements of our transport system, which is now also the subject of a transformation project with Cisco and Huawei. So we intend to finalize discussions with the vendors and documentation with the vendors by early 2023. Certainly, by the time -- or before the time we release our full year results, which is typically early March, right, Melissa, and certainly before the financial accounts for the year -- full year 2022 release. Of course, we're looking as well, part of the investigation process is to look at the improvements in the operational aspects of procurement and network projects in order, obviously, to avoid a repeat of this incident. And finally, operating with the regular interest in respect to the various investigations that they have written to us principally locally. It is the capital -- CMIC, Capital Markets Investigation -- Integrity Corporation with the PSC and the marketing securities something of the [indiscernible] the SEC. And then, of course, we have received reports that there's a law firm based in Pennsylvania that is threatening to launch a class action suit against the company because of our U.S. listing. So Marilyn perhaps can give some color to any questions you may add in that regard. But we are now in conversation with U.S. lawyers in respect of this potential threat to the company. Now in respect of the 2022 outlook, the EBITDA continues to be healthy. So the business has not been significantly -- that been moderately affected by this CapEx incident. We are on track to achieve EBITDA numbers of at least PHP 100 billion for the year as we have originally indicated. CapEx will be between PHP 95 billion to PHP 97 billion from our guidance of PHP 85 billion, partly because of the ForEx element, although that has mitigated in the past few weeks. And acceleration in selected CapEx to ensure no delay in completion of certain critical projects. We have like the hyperscaler data center in Santa Rosa and of course, the continued push on fiber home. Telco Core is likely to land anywhere between PHP 32.6 billion to PHP 33 billion, so substantially within the range of the PHP 33 billion core guidance we gave to you earlier in the year. Dividends, an important point for all of you. We are maintaining our dividend payout of 60% of core income for 2022. And since we have committed a special dividend, the balance of the special dividends of PHP 3 billion. Remember, we -- when we announced our sales and when we reported our interim results this year, we said we will -- the total amount of PHP 9 billion represent this special dividends, PHP 6 billion will be paid in the interim as part of the interim dividends and PHP 3 billion as part of the final dividend. So the final dividend will be calculated with drives to the -- for the regular dividend, 60% Telco core of anywhere between 60% or PHP 32.6 billion to PHP 33 billion, plus PHP 3 billion payable sometime in April, but declarable when we announce our full year results. So in numbers, for the interim, we gave PHP 47 regular and PHP 28 per share, a total of PHP 75 for the interim. For the final, the regular dividend would be PHP 45 per share and PHP 14, representing the PHP 3 billion special dividend, which we promised. So that's PHP 59 per share total for the final dividend. So when you sum it up, regular dividends for -- out of 2022 income will be PHP 92 per share, representing 60% of Telco Core per share and PHP 42 per share of the special dividends. So total dividends will be PHP 134, representing 88% of the EPS for the year. Year-end 2022 net debt to EBITDA will be within the range of 2.3x to 2.4x. So I'd like to turn to Al for the outlook for next year.

Thank you, Mr. Chairman, and good afternoon to all, and again, thank you for being here, physically and people online. Just wanted to repeat what MVP said. I think the core business remains to be a very strong. Home, individual and enterprise are still very strong. And I think if you take a look at the first 9 months results compared to competition, we've gotten the bigger share of the growth for this year. We've started, as you know, this year, also a transformation of the company with objective of really doing things better. And I think management initiatives on what happened started because of the transformation. But core business is healthy and I guess for outlook on 2023, it's a year that we will consolidate. Obviously, that's what MVP was referring into on the overruns. So we'll have to carry the additional CapEx in 2023, but we're looking at getting back on track in 2024. Telco Core EBITDA continues to remain healthy. We're seeing a growth on EBITDA next year and also the next few years. Telco Core will modestly improve. Obviously, our depreciation and amortization and interest income will be slightly elevated because of the overruns. But we will have a modest improvement on Telco Core moving forward to 2023 and '24 and start picking up again, hopefully, in '25. CapEx, I think we've overspent, we've over-ordered, I guess, on CapEx. So -- significantly from the PHP 97 billion that MVP said CapEx will -- mostly PHP 95 billion to PHP 97 billion most probably will end up this year. It'll be a significant decline in 2023. We are finalizing that as we have not presented the budget also to the Board. And beyond '23, even lower, '24, '25 that will be the push to bring down fresh CapEx moving forward. Worst-case scenario on the impact of PHP 48 billion CapEx overrun, if all accepted next year, then this will impact our balance sheet. But like in any project, they don't complete normally in the year, so it might flow over the following year, but we will follow a normal 10-year depreciation schedule on whatever has been accepted as PPE for the company. We might need to increase our debts, possible increase in the financing costs to cover for the CapEx. But to the point of MVP, again, on negotiations with vendors, if there's some vendor financing without interest and that will provide relief for us moving forward also. How could you mitigate the impact? Again, as I said, CapEx will be much lower moving forward because of the overrun on the CapEx, the discussion with the vendors to reduce the budget overrun and the target payment that was mentioned. But prior to this issue, as you know, we've been undertaking asset sales, to monetize our assets and to move to an asset-light balance sheet. The tower sale is a perfect example of that. So we have P&L gains in the tower sale. And this cash flow will obviously help us avoid debt as we continue to do that. We just announced a small tranche with [indiscernible] group of Aboitiz. We closed PHP 9.6 billion tower sale last Monday or Friday. There's another close -- over 1,000 that we are planning to sell. Hopefully, that gets completed also in the first quarter of next year. Moving forward on dividend payout of Telco Core. We believe that we can sustain the 60% dividend payout. As I said, EBITDA expected to remain strong. CapEx will be managed downwards, resulting the average will trend towards 2x net debt EBITDA in the course of time. We did discuss as a management team, a shareholder buyback is considered, but we felt that better judgment for us was to use the money instead to actually fund dividends. That's all that I have, Melissa.

All right. So we're now ready to take your questions. [Operator Instructions] So first, allow me to pass questions -- to have questions from the floor. There's a -- raise your hand and we'll give you a microphone so you can ask your questions. Anyone? [ Kervin ]

Good afternoon. So this is [ Kervin ] from Manulife and thanks for the briefing for this one. Just a couple of questions for me for now. First is that maybe can you get a bit of nature on the assets that were over-purchased. In the near term, where are these Telco equipment, 5G equipment, for example, or towers. So at least we can have a bit of understanding on how this will be used in the next 2 to 3 years? And second is that while we are under investigation on the remaining PHP 49 billion overruns, how is it on the ground? Have we stopped maybe the network improvements or installations of equipment as we investigate the current equipment that we have right now. And lastly, may be connected to the other ones that the over-purchased assets, are these assets with us? Or are they still remaining with the 4 principal vendors that you mentioned earlier?

The bulk of the assets that are subject matter of this overrun relate to network elements. So principally, the wireless side of the business. So we still have -- we have equipment relating to the final build-out of the 4G network and 5G equipment as well because that has been -- that has taken a bit of a slowdown in its progress of buildup. So we do have -- we ordered quite a bit of 5G network elements. So that is the storage as we speak. There are equipment related to towers.

54 towers from Ericsson and 61 from Huawei, which we canceled the installation -- we canceled because after we launch the Stratosphere 1 because the Stratosphere 1 included build-to-suit obligations to the buyers. So those were canceled. But we're considering including them in the Stratosphere 2 because we launched Stratosphere 2. So then they are in the warehouse, they're fully paid.

I guess, Kervin, just to add a bit of context on the massive CapEx build up, I guess, '16, '17, '18 time frame, there was really under-investment on network. And there was a decision to become a superior network against the major investments. You also know that the previous president sort of strengthened the telcos, so we did improve service. Third, of course, competition is very aggressive. Dito, Converge, very aggressive, so we want to make sure that not only in the wireless side, but also on the -- and also we didn't know whether Dito with [indiscernible], how much impact they will have in the market. We know now, not much, but at the initial stage, we didn't know the impact of Dito coming in. Converge has been very aggressive and we had to sort of fix ourselves and make sure that we're able to serve the customers. And lastly COVID. I mean during the COVID, connectivity, as you know, became very important and network expansion continued to happen during that time. Just to give some context on why there was a major buildup.

And I think to the extent that almost all of the equipment ordered and most of them are actually here in the Philippines already, they can be used for future build out. That's why we're now indicated that we can substantially reduce the quantum of fresh CapEx this year for the next 3 years. This is because [Foreign Language] we use your credit card to buy this equipment ahead of time. So there's -- so that's why we're saying to the vendors, you should give us a deferred payment terms interest fee [Foreign Language] so, yes.

[ Kervin ], is that okay? Any follow-up questions?

The question earlier, also have we stopped maybe anything on the ground in terms of CapEx build out in the network as we are investigating the remaining PHP 49 billion?

Well, honestly, initially, we had to hold off on all POs. We have to take control of this management action immediately as to hold on all POs especially in this area, but we've started to open up and continue already very -- sites that they are [indiscernible] we're starting to roll out again. And also, of course, that rollout of fiber still continues, so -- but initially with a pause just to get a grasp of where everything was.

Actually, the bulk of it is really more on the wireless CapEx. I can see this year and next year, we will continue to invest on the fiber-to-the-home demand. So that will continue, albeit at a lower level because we already -- we will probably build less ports in the course of the year. And -- but we'll keep pushing the fiber home take-up of subscribers.

Any other questions from the floor before we open it up to the online participants? Arthur Pineda, you have your hand raised.

Several questions, please. Firstly, can you just clarify what control process has -- broke down and what has been done to address this? And why was this not captured in the annual audits? Second question I had is just regard to the PHP 48 billion, which is identified. Is there a risk on any further upside? Or do you think this is already fully captured of maximum PHP 48 billion? And can you also clarify on the PHP 48 billion overrun, is the equipment related to this already operational? Or is still sitting in a warehouse somewhere? I'm just wondering if the existing network quality already reflects the additional PHP 48 billion.

I think taking the third question first. Yes, the substantial amount of equipment, wireless equipment, are sitting in warehouses, our warehouses and the warehouses of the vendors. So that is, as and when we're ready to install, we will install them and therefore, it will be an asset that needs to be depreciated as and when that is installed. What's the first question?

[indiscernible] outside?

The [indiscernible] process is actually not bad. The originating unit for CapEx, generally speaking, but the bulk of it is done by network, right? Of course, the business units have their own CapEx spend relating to like modems and the like. So -- but that's where the epicenter is and that it moves towards procurement where it's subject to requests for proposals. So either a bidding process, at least a contested process and before a purchase order is actually issued, it is checked with finance. And also the system, the SAP records the transactions, right? So the data there is within the system. But the question is, to what extent are the accumulated and unspent CapEx reported at our level? I think unfortunately done. And frankly, we were remiss as well because there's a procuring council, right, at the management level that reviews all CapEx requests. And then it gets elevated to the Technology Strategy Committee of the Board that also reviews and recommends approval to the Board of that CapEx. And finally, the Board endorses it or approves it, ratifies it pursuant to the recommendation of Tech-Strat so that the controls are in place. But typically, the question we ask whether you are at the Tech-Strat Committee level or at the Board level is this within your CapEx for the year. And I think we were remiss in asking -- I did not think of asking what is your -- are there carryover CapEx? And that we did -- have asked. And that the reporting units, not 1 of network, procurement or finance managed to report it to us. So [Foreign Language], this is significant. It was higher than PHP 48 billion when we first learned about this issue. So it's -- and nobody is shirking from the responsibility. I take command responsibility and Al is also taking responsibility for that oversight. But to when people allege that there are no control processes in place, that's not right? It is simply not right. So it's the -- I think there were since late 2021 when [indiscernible] on those involved in this supply chain internally [indiscernible] this is becoming a little large, they try to correct the process, right, to be fair to them. And it just came to light recently. So that's -- that's the control process. So it's really a people issue at the end of the day. But I don't think there was any attempt. There really -- the 4 vendors principally, there might be smaller vendors, allegation that there was related by the transaction. I don't want to say it is Cisco, Huawei, FiberHome and Ericsson, often anybody [indiscernible] I own any shares of Ericsson or [indiscernible] whoever, within the organization, right, simply that on. And we do have a governance committee and part of their portfolio is to look at related by the transactions. There's a policy in place, and that is reviewed every time there is a governance committee meeting, that's a Board committee. So the controls are in place. But if -- whether you're at the Board level, you rely on the information supplied to you unless you ask more questions. And that question about accumulated CapEx was not raised unfortunately. So obviously, the network monitoring system or the procurement monitors has got to be tightened -- really tightened. So we know how every peso is spent. And I think we probably were remiss in that respect that we probably shouldn't spend much less than we should have in the past 2 or 3 years.

The other question is on the risk to the upside of the PHP 48 billion?

That's actually -- we cannot say now, but we're trying to do that in the negotiations. The good thing is all of the vendors are very supportive, and they want to maintain their partnership with us, and they want to help us. So it's not impossible. It's not -- it's out there depending on the negotiations. And if I can just add to what Mr. Pangilinan said, it's really the multiyear nature of the CapEx that happened and the size of the CapEx. In the past, I don't believe we had an instance where so many huge projects like this happened in the span of like 4 years and in multiyear level. So the -- I think the 5G LTE rollout alone is around PHP 30 billion plus. So when you see the size of project and then there are more of them, including TNT, when the multiyear effect is -- could be very severe, and that's what we monitor in the future.

Yes. Just a final point, I think, adding to Manuel. I mean you're talking about rollouts of sites for wireless and also for ports in fiber and transport that in multiyear. And I guess project management needs improvement internally also making sure that those projects finish on time, on budget, and that's something also we're looking into.

Just 1 point, if I may add, this CapEx rollout came under 2 pressures, basically. The pressure of the President, Duterte, at that time to fast track infrastructure and also the pressure of COVID. We rolled out so many projects during the COVID pandemic in order to improve the connectivity. And you felt it, right? People stayed at home and you were not cut off, the connectivity was there, and it is because of the CapEx that we rolled out during the pandemic.

The next question is from Veronica of UBS. Veronica Carlos.

Just on the CapEx booking, do you have any plans on booking some of the overruns this year? Or are you planning to do it entirely next year? And what are the balance sheet implications of these?

Whether we're planning to book any of the overruns this year and what are the balance sheet implications?

Well, we have whatever -- of the PHP 48 billion, whatever assets flowing from that number will enter the -- within what they call GR, goods received, in relation to, say, to equipment and install and/or works rendered or construction in progress, work in progress that enters operational use, then we have to book those assets, and therefore, the depreciation line will get affected, right? So as I indicated, we look at this structure, right? The EBITDA is going to be healthy, to continue to grow in the next 5 years. So our problem is our depreciation because there's cascade of assets that we know will be coming online effectively and affecting the P&L side. Let's talk about the cash indicator. So I think in certain of the statements we've issued, the impact of the PHP 48 billion is pretax, say, just use a 10-year metric, is about PHP 4.8 billion increase in our depreciation expense each year. So what we intend to do is to ameliorate that pressure on the bottom line is that we, as I indicated to you, we probably have to accelerate a write-off certain existing assets relating to 2G, 3G, the legacy elements of the transport system, VVDSL, which has been overtaken at the junket because we're now on an all-fiber network. So yes, I think this year, we'll likely to write off up to PHP 50 billion to PHP 55 billion of assets this year. So what will get affected will be our reported income will drop significantly for 2022 compared to 2021. So it's more of an accounting situation. And certain of the assets of the PHP 48 billion will flow over to 2023. So the write off of assets, legacy assets, existing assets will continue but to a lesser degree in 2023. And hopefully, by that time, we would be basically out towards starting 2024. So that is the picture on the accounting side of the P&L. Now on the cash side, as Al indicated, we looked at the cash flows. We're likely to borrow in the next 2 years, anywhere between PHP 35 billion to PHP 40 billion to maintain the dividends to the shareholders, ensure that we have to pay off this PHP 48 billion, even if it's deferred. If you could get it interest fee, that would be great because it doesn't affect the interest expense line. And, of course, ameliorates the borrowing levels in the next 2 years. But after that, I think we can safely say it is possible that we can generate free cash flows starting 2025. That's why Al indicated we can shoot for 2x net debt to equity by 2026 or 2027, so that's the picture. The reported income this year in 2023, it will be low this year and a bit higher or higher next year, but not the same levels as previous years, and partly driven by the losses from Voyager, which were [indiscernible] below the Telco Core income line. And of course, dividends [indiscernible] at the core income, not at the reported income.

Next question is from Ranjan Sharma of JPMorgan. Ranjan?

I have a bunch of questions, but maybe I can just start with a very simple question because I'm sorry, I don't understand completely what's happened. Is it like the network teams were overestimating network needs for 4 years, and that's why you have this PHP 48 billion budget overrun? Is that the reason why we are in this situation?

There are 2 incidents basically -- 2 points here. It's -- the first is the rollout of the 5G. The initial -- we ordered the hardware. The initial rollout did not attract a lot of users. So we decided to stop the rollout and -- but this 5G hardware that are here, we intend to re-purpose them for 4G, the roll -- the LTE rollout next year because the same hardware will be used. We just need to buy a different license. The other incident that happened was we decided -- well, in the -- remember, there was a common tower buildup. We -- well, there was common tower and we were planning to build 61 towers for -- to be built by Huawei and 54 towers to be built by Ericsson. But in the process, along the way, we decided to sell our towers and include a commitment for BTS sites, build-to-suit, by the buyers. So what we did was, since we have commitments in around 750 towers for each, 1,500 of total roughly, we decided -- we had to cancel our order for tower build from Huawei and Ericsson. That's the reason. In a sense, the plan's changed which required us to cancel because we have to shift the buildup to the BTS commitment in the Stratosphere 1. And in the case of 5G, the commercial response was not attractive. So we decided to temper and stop the rollout and now we are re-purposing -- we're going to re-purpose the hardware that we purchased for the LTE rollout next year and succeeding years.

Yes, just to sort of slightly correct that. I think it's happened globally, right? 5G adoption has been very, very slow. So there was a major push in those 5G. We're not something stopping it, but we're choosing the areas, but the focus now really will be on 4G LTE, where the majority of our customers, 80% to 90%, and there are areas where capacity is an issue. Congestion is happening. So very targeted expansions on 4G LTE, for sure. 5G slowed down, but very targeted only.

Ranjan, do you have any follow-up questions?

Yes, I do have a few questions. But I'm sorry, I'm since struggling to understand this. So there was CapEx overruns for 5G rollout, but this has happened over 4 years. So PLDT was buying equipment and putting it in warehouse and kept ordering more equipment. Is that what is happening?

Whether PLDT was rolling out 5G and keeping the equipment in warehouses over the last 4 years?

5G rollout started maybe sometime late 2020. So it's under 4 years. So a lot of that is also on transport. 5G initially was heavy, 2020. And then we decided in 2021, we should not be as aggressive in 5G, but they were -- there were plans initially, as you know, when you order from vendors, there's a lead time for this equipment. So [Foreign Language] by saying, change in the business plan, change in the direction because of market. The market wasn't adopting to 5G.

So I think, Ranjan, if I might add to that. So 5G was given as an example. It's not the only reason of the PHP 48 billion. So that was just an example to kind of make it easier to understand what happened. But there are many other instances. And as ASP said, it's not only 5G alone, it's transport, it's site rollout and a couple of other things, the fiber-to-the-home build out. So yes, the 5G was just an example.

Okay. Got it. The next question is, so these assets have been acquired and they're sitting in warehouses, why not reduce asset purchases going forward, why don't you reduce the overall CapEx bill rather than look to write-off assets to reduce the depreciation?

Why are we planning to write down assets rather than reduce CapEx going forward?

We should do both, that's the intention, because most of those assets in the warehouses are usable for the wireless network, principally, right? So if you use that for the business.

I think, Ranjan, you might not have been in earlier, when MVP started the conversation and said that the PHP 48 billion has been established to be useful in operations. So they're not going to get written down. The assets that he was referring to that will be written down is based on a review of the older assets within the network, which I guess is a regular exercise, right? You assessed -- estimated useful remaining life of the assets and you write down accordingly. So the reference to the write-down is that in relation to the PHP 48 billion that is in relation to the older assets.

Okay. Yes, I mean, I was just saying that the total CapEx bill should come down by PHP 48 billion, if that's the overrun. Okay. The last question I have is the response given that they were changes to the network build because of the Common Tower Policy being rolled out in the Philippines. I mean that should not affect your network investment plans, right? I mean you just -- the radio equipment would just be deployed on common towers rather than on captive towers. So if you can just explain why the Common Tower Policy has affected the budget overruns. Thank you.

I just mentioned the Common Tower Policy as a progression of events that led to Stratosphere 1 and which eventually resulted in our cancellation of the buildup of 61 towers by Huawei and 54 towers by Ericsson. So it's just a succession of events.

Yes. I mean, to add to that, some of these towers before the Common Tower, we already sold it, we're in the process of being upgraded. So there was work being done in these towers, and we got caught in the sale. So some of them had to be completed as part of the sale. Towers that were not started were sold as is, but it came in the middle of towers, we normally refurbish, upgrade and things like that year-on-year. So because of natural maintenance and upgrading, then the Stratosphere deal came in, in the middle. And also some of the committed -- that work that was being done repeated, if it's right at end of the work. Some of them are going to be started. We've actually not done so obviously, so we're balancing it, there is a balance of that.

For those who are not familiar with what Stratosphere is, that's the first batch of tower sales that we undertook earlier this -- we call it Stratosphere internally. But externally, it's tower sale in these transactions.

There's a question from [ Weixian of Wellington ].

I have a question on your credit rating. I was wondering what kind of discussions is the company having with rating agencies. Are you seeing any pressure on your ratings?

Question on the rating.

Right now, no. Well, I don't recall any conversation with the ratings agencies. I know for specific I said the discussion 1 or 2 days ago with S&P. S&P, there's some -- will be, but there was no -- I think they just wanted a clarification on the numbers during the -- final numbers to be determined. We'll always be very cautious about the PHP 48 billion, right, because we're subject to investigation and now this class action suit. But what we can say is that it's less likely that it will exceed PHP 48 billion and more likely to be reduced. By what quantum? I don't know. Until it's done, it's not done, right? So when it's done, we will tell you right away, you know. So I don't recall because I know that, that should be the -- I didn't get aligned by the comments of S&P to that specific. I am sorry. I don't recall.

The next set of questions comes from [indiscernible] of Barings.

We were obviously -- well, that's one of the fears we had when we learned about these overruns, right, that the impact obviously of the share price on the equity side and on the debt side of PLDT. Whether -- are we violating our covenants in respect of loans, including the bonds outside PLDT. And of course, the derating of the debt paper of PLDT, which we're trying to avoid. So it allows [indiscernible] on the cash flows that we can produce to all of you, particularly creditors and the ratings agencies. And as we indicated, the EBITDA levels continue to be rather strong to support the underlying requirements. So we have this PHP 48 billion thing that we have to deal with. And eventually, it would translate into payment of this PHP 48 billion. As we indicated, we are ameliorated by 2 things. One is, if you can get deferred payment terms, and I think we will, from the vendors that already offered 3 years to 5 years. And number 2, is the sale of towers. There will be the balance of Strato 1 about 1,600 -- 1,200, and I think Strato 2, there have been offers received for 1,650 towers for Strato 2. So there'll be a bit more cash that will flow through in 2022. And that will be used to defer any potential cash flow requirements flowing from this PHP 48 billion situation. So I think we have proved that we are able to sustain this kind of level of unexpected event.

[indiscernible] of Barings.

The question is just to understand what happened with the system. So you were buying the equipment. It was going into your warehouse. Was it recorded in the system? Is it about the system did not pick up the recording and then you later found out in October this year? Just trying to understand what happened exactly.

The data are there in respect of the POs issued, in respect of POs fulfilled, in respect of the POs outstanding. So we believe there are no unrecorded transactions or unauthorized transactions in the system. What was not reported to us is the accumulation of this CapEx, because let me tell you the budget for CapEx this year, for example, or in that particular, it's PHP 80 billion. We don't spend exactly PHP 80 billion, right? It will be there above that, below that. But very equal to the PHP 80 billion, otherwise, you will be suspicious, why are we spending exactly what we told you. That's not the way this business operates. So we should head on about the accumulated CapEx and unfortunately, that was not reported to us. Maybe we should have asked that certain statement, because every year, I think when we report to you, we tell you what the CapEx for the year was actually spent, right?

Thanks for that. And just on the -- from the accounting part as well. So this PHP 48 billion, none of cash has been recorded in your cash flow statements. No payments have been made out for this PHP 48 billion of CapEx. And this is why you're saying that there's going to be a cash impact in 2023. Is that correct?

Well, the irony is that quite a number of these supplies of these, of course have actually -- there were certain advances made against these orders already to them. So again, we're trying to find out which of these advanced payments have been made in relation to the Pos issued as part of the overall work process that's happening, right? Because as you appreciate the people involved in this particular incident are not there, they don't believe. So we practically have to reconstruct the books. I mean the internal audit group, finance led by [ Danny ] here and of course, legal are involved in that reconstruction process. But we do know that a significant amount of advances have been made to these vendors already. So to what extent will that ameliorate the cash flows moving forward. I think it will do, but we cannot tell you exactly to what extent the ameliorates will be in terms of the cash flows. All we can do today is what we see today, right? We know and these sort of books, that these advances have been made to these vendors and they have received the money. That's why they delivered the equipment.

[indiscernible], is that okay?

Yes, it's okay. But I'm still just trying to understand, like if you have a CapEx budget for the year, I'm using PHP 50 billion, a rough number. Your CapEx budget for the year is PHP 50 billion. And then what you report in the actual statement is around that level. How was there a cost overrun? I'm still trying to understand -- do we expect your cash flow statements to be restated?

No, because there's a line in the balance sheet that says advances to vendors -- to projects.

The way -- well, all the payments to the vendors are reflected in the advances. And once the project is completed, hardware installed and services fulfilled, it is accepted by PLDT and recorded as a part of PPE. And then the top portion, which is in the advances is transferred to the PPE, so there is nothing that's not recorded. So all of the projects that have not been completed and have not yet been delivered, all payments to those projects are in the advances. They will be transferred to the PPE once the projects are completed.

Yes. Just final point on that. I think when you talk about these POs, it's a difficult year [indiscernible] validation because it's really just a lot of POs and some of the POs have so much line items into it. So the validation, the completion -- it's a process. So that's why it's a difficult process to validate payments versus POs.

We'll take a question from Matthew De Leon of COL. Matthew? Matthew, are you on the line? If not, we'll skip over to Jonathan Feng of JPMorgan. Jonathan? If not Jonathan, Hussaini of UBS.

I just want to connect with the previous one. I want to get more understanding about the implications on the balance sheet and also the cash flow, right? Since you have mentioned that most of the advances has been made to the vendors regarding this PHP 48 billion of overruns of budget, right? Then why you also mentioned they are looking to borrow like PHP 35 billion to PHP 40 billion of the more debt, more debt for the next like several years kind of to mitigate the impact on the -- I don't know, on the balance sheet. So what are the connections here? And so are we looking to borrow like new money? Are we going to get more financing to mitigate this kind of overrun? Or it's they're kind of separate. So this is my first question. The second one would be, you mentioned most of the payment have been made to the vendors, right? So do you have roughly what the number of the PHP 48 billion has been made to the vendors so far.

I think what needs to be done, Hussaini, is it...

This is Jonathan.

Jonathan, is to really reconcile the advances, the advance payments made to the relevant vendors and to what work or equipment that they supply. It is possible that these advances relate to work or equipment they have contract -- they have been contracted for and is not part of the PHP 48 billion, right? Because the advances are ahead of the PHP 48 billion. So you're right, your question is to what extent will this PHP 48 billion bypass in terms of new cash flows, right? So -- but we have to reconcile how much of the total advances we've made so far relate -- precisely to the PHP 48 billion or to POs issued versus orders issued, not part of this PHP 48 billion, and that's what we need to reconcile with us, for a statement of account from each of these 4 vendors, and they've submitted their statement accounts. So we need to reconcile where the advances went to, right? Is it part of the PHP 48 billion, are some -- probably some are not part of the PHP 48 billion, so we need to determine that. And that's part of the overall work process. It's a [indiscernible], it's a very tedious process.

Yes, how about my first question. So the additional borrowing. So what's that about, right? Trying to understand this.

We simply assume maybe for the sake of conservatism that the entire PHP 48 billion is due, because it will be due, right, as to whether we certain of the PHP 48 billion have already been paid for in relation to the advances on the books of the company. Then we also need to know that. So -- but that has got to be reconciled with the vendors. So on the assumption that the full PHP 48 billion will need to be paid for. That's right. I think we're coming around to a number, which is around PHP 35 billion in the next 2 years that we have to borrow in order to fulfill all of these payment obligations, including the fresh CapEx for the year and the dividends commitment being made to you at 60% of core.

Okay. And then what are the available options for us to borrow this PHP 35 billion? Are we looking to borrow from banks or from the public markets?

No, I think the banks. It will be a bilateral transaction. Obviously, it's better to -- we can use these advances to pay for all or part of the PHP 48 billion. That is the ideal situation and we're striving for that as well, right?

I think part of the debt management plan is by 2025, we start bringing down debt after those 2 years possibly of borrowings.

Next question from [ Kathy ] of Sun Life. [indiscernible] [ Kathy ] are you on the line? If not, we skip over to Hussaini of UBS. Hussaini, going once. We'll skip over Hussaini. [ Daniel Jamil of APR ]. There you are.

I also joined a bit late, so my questions may have been answered. But in the previous question, it was noted that certain POs are being made or booked -- ordered, but it is not part of PHP 48 billion. That does mean that the PHP 48 billion number could rise. That's question #1. And the second question is on the CapEx side. So -- means the future CapEx should come down means outside of this PHP 48 billion, as you overbuild or overspent the real going forward CapEx should come down? And finally, just to better understand the process of what happened in the last 4 years, is that network teams were building or putting the orders, but it was not being reported to the BoD. And has this then led to the CapEx overrun, just to better understand what happened exactly.

Okay. The first question is are POs being booked, but not part of the PHP 48 billion such that the PHP 48 billion has a risk to the upside so that it will be greater than PHP 48 billion.

I think it is less likely that you'll see a number bigger than PHP 48 billion and more likely to be a lower number than PHP 48 billion. As I said, we've been cautious as well about being very determined as to this number because we are under investigation and this, this and that. So we just have to be cautious about statements we're making here to you. So I think once that number is determined, agreed with the vendors, we will say these are the numbers. And these are our advances relating to that PHP 48 billion that have already been paid to these guys, right? So this is not -- this session does not give us undiluted pleasure, right? But we're being transparent -- totally transparent to you guys. There's nothing we're hiding here, we're not playing with the truth.

So Hussaini, I think the answer earlier given was the PHP 48 billion is likely to be the upside to that. And then I think, Hussaini second question is, will the CapEx come down, therefore, in the future because we've already sort of pulled forward some of the CapEx which were part of the PHP 48 billion.

Yes. I think, as I said earlier, moving forward, I think beyond '23, '24 it starts -- it will come down next year significantly compared to '22, but it should be at normal levels by 2024, discounting already the overruns that we had. So '24 will be your normal CapEx range, and maybe we're targeting somewhere PHP 50 billion, PHP 55 billion at that time. But this year -- I mean, next year will be much lower than what we're projecting for 2022.

And then his last question is what was happening, whether the network teams continued to build, but were not reporting to the Board of Directors.

They go to 2 committees before they go to the Board. They go to the Board for approval of the projects and the size, the amount of the project. Thereafter, once they have the approval, then they issue the PO and they build. They normally do not have a daily or monthly report on the status of the project. The project is reported as completed when it's completed. And so basically, they go to the Board for approval to enter into contracts for the size of the project. That's it. And then they build and then they report the network build, the percentage of completion internally as part of the operational procedure.

Matthew De Leon, second round call. [indiscernible] of ATR Asset Management. Ken? Skip over. Ken, there you go.

Yes. Just 1 question for me. When the news was released last Friday, it was mentioned that you were looking at some reorganization. Could you share with us what kind of management reorganization you're considering?

But I think we also mentioned is, now there is 3 groups that are looking into, network, procurement and finance.

Next from [ Daniel Lau of Eastspring ].

A few questions from me. I'll ask the questions one by one. So the first question is on, clarifications on cash flow. So can you give us a sense of how much of that PHP 48 billion has already been paid for. So it's either paid for in full or in advances? And how much of that has actually been recognized in the 2020 and 2021 cash flow reporting.

Well, the total advances is PHP 95 billion to these vendors. They actually are making a big advantage because practically, a big percentage of the invoices are paid for effectively in advance, I think, within 7 months. But there's a big down payment and there's progress payments as such, even if it's work in progress for Axiata. I mean, they get, a part of it is there's a factor in line that these vendors have agreed with the local banks. So they have the ability to discount the receivables from PLDT to -- or the payables of PLDT to them with these commercial banks. And then we take on [indiscernible] for the commercial banks. So they have gotten quite a bit of the cash up front. So they are more than willing to show the equipment and the works ahead of schedule to us because they've got the money, right? And that's part -- I think part of the lack of discipline as well that happened. So now we are coming back to the them and saying, wait a minute, this cannot happen, right?

Got it. So just to clarify, so of the PHP 95 billion, a big part of that has been factored and has been paid for by commercial banks, but the liability is still on you to pay off to the commercial banks, right, which hasn't actually happened at this point in time.

Correct, correct. That's correct.

Got it. So of that PHP 48 billion, is it safe to say that it hasn't been recognized in the cash flow in 2020 and 2021?

No. It hasn't because these are still works to be completed and goods to be delivered, right? So it's still incoming. So part of it will be recognized in 2022, but most of it, I believe, will be 2023. To the extent that we can reduce it, therefore, the impact on both the accounting and for depreciation and the cash flows will get mitigated, right? So that's what we're trying to do. Now are certain of these advances today refer to the PHP 48 billion, and that's what we still have to determine. We're reconciling accounts, right, between ourselves and the vendors.

Okay. Got it. Okay. So next question, right? So I think you mentioned earlier that some of these equipment of this PHP 48 billion is already sitting in your warehouse? Some of that is sitting in your vendor's warehouse. So can you -- how much of that is sitting in your warehouse in terms of value? Do you have that sense?

PHP 70 billion.

Okay. And you've not paid for the PHP 70 billion. You have not paid...

Have said mostly in vendor warehouses.

Vendor warehouses.

PHP 70 billion is mostly in vendor warehouses?

Vendor warehouses, yes.

So the remaining PHP 25 billion is sitting in your warehouse?

All of them paid.

Paid by banks or paid by you?

By PLDT.

Paid by us at this point in time. So even the refinancing has been fully paid by us.

I see. The payment occurred in 2022. Okay, got it. Got it. All right. And how would you lower that PHP 48 billion, does that mean that for some of the orders that you have not received from the vendors you will actually cancel these orders? And will there be any penalties that comes along with?

Well, most of these equipment sitting in warehouses are equipment that we will need as we progress from 4G to 5G. So they can be used, right? So we intend to do that in the next 2 to 3 years.

So the question is, how are you going to -- why you mentioned that you intend to...

Because effectively, we have -- it's like you've ordered a lot ahead of time. That's what we did, right? So that's why we should be able to and the plans to lower the fresh or new CapEx for the next 3 years because if we tell you that our CapEx level, the fresh CapEx will stay at that PHP 80 billion or PHP 90 billion, then we -- what have we done? We've ordered equipment that are not usable, and that's not true, right? So we should have the ability to lower the fresh CapEx for the next 3 years and that's the plan. The total CapEx might stay at PHP 70 billion to PHP 80 billion, if you take into account this CapEx overruns, right? So when you see the headline number might be, say, PHP 70 billion or PHP 80 billion, but part of that will be the overall number.

If you're asking how the PHP 48 billion could be reduced or how the PHP 48 billion is pegged with respect to our discussions with the vendors, our discussion revolve around -- are providing us discounts and determining whether the status of the projects were -- whether they have been completed, work in process or not yet started. For those that have not yet been started, particularly if they are already delayed, we're going to cancel them because that means -- as to allow us to restart the what's needed by operation. So basically, those are the various levers that we're using in discussing with the vendors. And the vendors are very cooperative because they want to maintain their partnership with us, and they want to continue to provide services to us moving forward.

Got it. Got it. Next question is on -- I'm just trying to get some color on your internal SAP system. I think MVP mentioned that earlier on -- you mentioned that the information is already in your SAP system, it's already in the system, right? But it wasn't flagged out to senior management. I guess the business heads were not talking to each other and the management reporting was not flagged out. But if the data is already in the system, then why are we still investigating to determine the exact value of this budget overrun, shouldn't it be very easy to pull out the information? Or does it suggest that there's still quite a bit of manual processes in this system and therefore, it's leading to human oversight.

One of the exercises that's taking long is really the reconciliation with the vendors. First, what is the status of the project? And then we need to verify in the field, whether or not they have in fact been completed or whether they are work in process and what stage. Because in a PO for example, it's like the list is so long, it's like they're listing an entire set of equipment to build a factory. So each of them -- each of the line item you need to check and that is the exercise that's happening now. What's the status and it does not -- it requires discussion with the vendors and our people going to the field to verify the status.

And I guess to add to that, these are multiyear projects, and some of them might not have started yet, right? So we're validating whether the POs whether they've started or it's about to start or we don't need it anymore. So it's in the system, but the validation of whether those POs are still active, it's a process of validation.

Got it. Last point. I would like to make a comment is that I think so far, it's actually still quite unclear of what exactly happened, right, that led to this CapEx overrun, budget overrun. I would hope that perhaps you can publish a list of factors that resulted in this situation, exactly what processes failed and the actions that PLDT is taking to remedy these failed processes and the progress over the next 2 years. I think that will actually help investors gain a lot more confidence in the internal processes and not have this recur again. Yes, just a ask from me.

I guess we can also have more sessions in the future as we roll out the plans and developments. So we can have another briefing or a press release that we will come out with. But we -- as MVP said, we've always been transparent as best we can here, and we will continue to do so.

As you know, there are several processes that's happening. One of them is basically a forensic study, so which will allow us, in a sense, a complete view of what happened. And we will issue a disclosure once we have completed that investigation. So as we complete stages of the process, we will issue. What we're just avoiding is a premature disclosure because it could harm the public shareholders. So rest assured that there will be updates on the process that is ongoing.

Last question, last hand raised in the queue is from [ Daniel Jamil ] of ATR Asset Management. Are you still there?

Can you share with us maybe a rough time line of the resolution of the entire process? You mentioned that you're also talking to your vendors about possible resolution. And then in connection to that, I know that these vendors would want to work with you and want to preserve their relationship and would want the best outcome. But we want to look at also the adverse scenario. So for whatever you owe let's say, the PHP 48 billion. And do you want to charge interest on that, is it safe to assume that they're going to try to take a look back a retroactive interest for each of the 4 years -- over the 4 years or whatever -- whenever that is incurred.

The question is under the adverse scenario and they start to charge interest, will they charge using a look back. So I guess, a retroactive effectiveness of the interest.

I don't think that's possible. In the first place, they are ahead in terms of payment. In a project, for example, normally in a project like 70% is hardware and 30% is services. The hardware has been fully paid. And this project is supposed to be turnkey, but they get paid ahead. So normally, that shouldn't happen. So I don't think they will. I don't think that's a possibility because they are ahead -- the vendors are ahead in this situation.

I'd agree to that, right? And we also are thinking and looking at the options of replacing them if they are recalcitrant in terms of the terms that are beneficial to PLDT. As simple as that.

So that was the last question on line. One last chance for people who've joined us here at the venue to ask questions, just raise your hand. Nothing else. Right. I guess that ends this afternoon's presentation. Thank you for joining us today. I turn the floor over to Mr. Pangilinan or Mr. Panlilio for any last words.

Thank you for joining us this afternoon. I just don't know how to feel. Certainly, not feeling like Ateneo winning, more like UP losing, right? Thank you.

Merry Christmas.

Thank you also. Again, as I said earlier, the core business remains to be strong, will come out better and this issue. And I guess thank you again for being here and advanced Merry Christmas to all.

That concludes today's briefing. As always, should you have any further questions or clarifications, please reach out to PLDT Investor Relations. Thank you, Merry Christmas and join us for refreshments at the back.