FPAFF - First Pacific Company Limited (FPAFY) Q2 2022 Earnings Call Transcript

First Pacific Company Limited (FPAFY)

Q2 2022 Earnings Conference Call

August 31, 2022 05:00 ET

Company Participants

Sara Cheung - Vice President of Corporate Communications

John Ryan - Associate Director

Joseph Ng - Chief Financial Officer & Associate Director

Stanley Yang - In-Charge, Corporate Development

Chris Young - Executive Director

Richard Chan - Vice President of Finance

Manuel Pangilinan - Managing Director & Chief Executive Officer

Conference Call Participants

Presentation

Sara Cheung

Okay, everyone, thank you for joining this online briefing to discuss First Pacific’s 2022 First Half of Financial and Operating Results. The result presentation is available on First Pacific’s website www.firstpacific.com under the Investor Relations section, presentation page. This result briefing is being recorded, and the replay will be available on First Pacific’s website in the Investor Relations section. For participants from the media, please note that the Q&A session is open for investors and analysts only. If you would like to raise questions, please contact us when the briefing finished. Today, we have our Executive Director, Mr. Chris Young; our Financial -- our Chief Financial Officer and Associate Director, Mr. Joseph Ng; and Mr. John Ryan, our Associate Director; and other Senior Executive from the Office of Hong Kong.

Over to you, John, for the presentation please.

John Ryan

Thank you very much, Sara. We recorded our half year numbers at lunchtime today. I hope you've all had a chance to do some digesting of them in the intervening hours between then and now. Each of the past few reporting periods, we've reported ever better numbers. So again, we've hit some record highs. Our contribution from operations up more than a fifth to a record high. Our recurring profit is up to a record high of $263 million up by about 25%. We've increased our interim distribution by 17% to $10.5 share. Our three-year share repurchase program with a budget of $100 million is well underway, with about $32 million spent by the end of July, when we reached a blackout period during which we had to suspend such share repurchases, we can expect those will be will be returning to the market in the days ahead.

If we look at the graphic on the top right of page 3, we can see that all of our operating investment companies there’s contributed to the increase in recurring profit. Looking ahead for the rest of the year and further into the future. Broadly speaking, all of our portfolio companies are expecting stronger earnings moving forward. Now, a brief look at our cash in the bottom right-hand graphic on this chart. We have more cash at the end of June than we had at the beginning of the year. Thanks to the dividend and fee income coming in a relatively low net interest expense. Our newly appointed Chief Financial Officer, Joseph Ng, can speak to how that might change in the second half of the year in the higher interest rate environment when we turned to the Q&A.

We've had very slight new borrowings and net investments. That is mostly our participation in REITs offering by Philex, the mining company about finance a mining project in Mindanao called Silangan. And our investment of $27 million into that REITs offering kept our stake unchanged at a little more than 30% in Philex. And of course, we've spent some money on share repurchases. Now a little deeper look into our cash flow and balance sheet on page 4. A few months ago, we obtained investment grade credit ratings from Standard and Poor’s, and by Moody's. You can see the details here. They both have stable outlooks.

At the end of June, our gross debt was about $1.5 billion. Our cash on hand is about $139 million at the end of June. And when you look at the debt maturity column chart at the bottom of this slide, you see we have nothing to repay this year and the $360 million or so that's coming to you in 2023 as in principle all be all been taken care of with long term banking facilities, we agreed earlier this month. Our net interest -- our blended interest cost has risen a little bit since year end given the increase in interest rates across the Board and the average maturity has shortened a bit to about 3.3 years.

The ever-important interest coverage ratio is unchanged at 3.8 times. And again, that is our dividend income minus our costs. And you divide that by the interest bill. So we've got four times more money leftover than we have in the interest bill. And now let's have a look over two pages -- to page 6, a snapshot of our gross asset value. One more page, please, Amy. As you can see our three biggest assets there Indofood MPIC and PLDT, our gap of just under $5 billion at the half year mark. When markets are all closed later today, we will very likely be updating this presentation with end August figures. So that you've got a more up to date number there. But for our half year report, we want the half year gap chart there for you.

On the next page, page 7. There are a few details here about sustainability matters, which are increasingly important. Not printed on this page is discussions we had yesterday in a two-hour meeting of our Corporate Governance Committee, where we've approved a couple of initiatives and changes to some of our policies. Nothing quite major there but worth having a look at on our website. And later, we may announce some details of our tree planting initiative in cooperation with some of our companies down in the Philippines.

I'd like to draw your attention to the blue box at top right. Our ISS governance quality score covered following our Annual General Meeting and publication of our annual report in April remains at one the best possible score. There hasn't been any change recently in any of those other scores. Now let's move to our biggest single asset in no food, which at the half year reported, again, record high net sales that was to be expected. Core profit rose less than it did for the full year of 2021, up by only 2%. And as you can see, they've had some difficulties with costs. The EBIT margin box in the bottom right shows you that the noodles margins, which a year ago were pretty much at a record high have come down quite a bit.

But other businesses which are more reflective of commodity prices, saw the converse and increase in their margins. So focus on the Flower and Pasture division, so a healthy increase in their margins. And so did the Agribusiness. Broadly speaking, we had sales up across the Board, except in the Agribusiness, where volumes were down rather a lot in both the Edible Oils and Fats, and Plantations business each down by a third or more. Now looking to the full year Indofood expects continuing strong earnings with EBIT margin, perhaps towards the bottom of that range of 18% to 20% that they expect. Sales growth is continuing very strong at consumer branded products driven in particular, by the Pinehill business in Africa, in the Middle East. We can discuss this more in the Q&A. If you like. All in all, the full year should continue strong.

A very brief look at ICBP that Consumer Branded Products business on the next page here. Their sales again, were at a record high just like the parent company, their margins were down and their core profit fell quite a bit by 23%. Now let's move to PLDT, which is the largest and highest quality telecommunications and data services provider in the Philippines. Again, we have record high revenues. This is a consistent theme and the companies that we are invested in here at First Pacific record high PHP97 billion in the first half. The EBITA was up 8% to over PHP50 billion. And they're suggesting that the bid to for the full year is probably going to be over PHP100 billion. And that seems to me looking at numbers over the past decade to be a very likely record high. Telco core profit is expected to be up 10% or so to PHP33 billion. At the interim we saw a special dividend paid to shareholders, which is very welcomed here at First Pacific. And CapEx at PHP85 billion is down a bit from the previous year’s PHP89 billion. And we expect over the next few years to see the ratio of capital expenditures to service revenues to glide down to less than 40% of service revenue.

Now we have a very quick look at the line charts on page 12. We can see pardon me, page 12. One more page, Amy, we can see that PLDT maintains its continuing lead in network quality over its competitors, whether it's in the mobile space, or in the fixed line. The earnings growth at PLDT is driven very hard. Yet again, by the Home business, where sales are up by about a quarter, we expect a similar performance for the full year. The Individual business which has been mobile phones, in the hands of consumers has had a bit of a struggle. But we've we're beginning to see signs of turnaround in the second quarter number second quarter numbers from PLDT there. And the Enterprise business itself continues to grow strong, with service revenues up almost 10% in the first half.

For fuller details on the performance of PLDT and the other companies. We invite you to look at their own investor presentations, or speak to us in the Q&A, you can even ask me to email it to you. Now let's briefly look at Metro Pacific Investments Corporation. Page 14 reminds us of the assets underneath MPIC. Meralco, the biggest electricity distributor in the country and increasingly a major generator of electricity to particularly with its fast-growing ambitions in the renewable space. And then we've got the Toll Roads business, which is growing very, very fast. We had a major bridge project open in April in Cebu connecting the airport to the mainland. And later this year, we will see in Manila the opening of the connector road connecting the Northern and Southern Luzon highway systems. So we're seeing very strong contribution growth from the Toll Roads business. And that will continue searching on in the years ahead. And there we have the biggest water distributor in the Philippines and the Biggest Hospitals business.

Now turning to the next page, we can look at the change in the contribution chart on the bottom left. And as you can see Toll Roads was the biggest contributor to the increase in contribution followed by the Electricity business at Meralco and some others. We expect the earnings growth that we saw in the first half, with core profit up almost a quarter to continue for the full year. And I say again looking at we expect the Toll Roads business to deliver an increasing proportion of the earnings growth over at MPIC. While not to be outdone, the Electricity business has got ambitions to build out 1500 megawatts of renewable capacity over the next five to seven years. So those are the two biggest sources of earnings growth in MPIC in the years ahead.

Now let's move several pages ahead to page 19. Where we've got our Singapore asset PacificLight Power, a very modern gas fired power plant is generating far stronger earnings than it did a year ago when it began a turnaround after several years of difficulty. As we can see core profit will in excess of SGD130 million, whereas a year earlier, it was a little over SGD1 million. What's going on here, it's a very efficient plant. Demand is growing much faster than supply of electricity. And the outlook over the next few months is fairly positive. And dialed into this call, we've got Stanley Yang, who's on the Board of Directors. He's In-Charge of Corporate Development with us. He can speak to any questions you might have about PacificLight. He might want to bring up this potential solar project based in Indonesia, where we would like to import solar generated electricity into Singapore from there, but there are some regulatory and trade matters that need to be addressed there before that could go ahead. Now we'll wind up with the operating companies on page 20 with a brief look at Philex mining, which saw a decent increase in operating revenues because we're mostly of higher metal prices, offset a little bit by lower metal production, gold price up 3% to almost $1,900. Copper price up again still quite high to $4.38.

The full year numbers might not be quite as strong if metal prices do not sustain at the level that we saw in the first half. And the outlook for this company very much hangs on the Selenium project, which was mentioned very briefly at the beginning of this presentation. They've got some additional financing in place after the stock rights offering. And in the meantime, study continues how they can keep the Padcal mining operations to extend beyond 2024 by looking at potential core bodies in the environments of that mind, which should be used at the mill there at Padcal.

Now, all in all, to recap, we've got record high recurring profit. The contribution from operations is at a record high. We've got a fairly high base from the second half of 2021. So I don't know if we can promise again, 25% or so increase in our earnings. But the outlook is very, very positive. And you can see that in the 17% increase in our distribution to shareholders. At the interim, we're very positive about the outlook for us for our operating companies.

And that winds up the initial introduction to this discussion. And Sara will now moderate the question.

Question-and-Answer Session

Q - Sara Cheung

Yes, so we are now ready for questions. If you have any questions, you can raise your hands. So unmute your -- we will let you know when you can unmute your device or you can put your questions in the chat box. Thank you, [indiscernible]. Go ahead.

John Ryan

And while we're waiting for them for the first question. Our -- my colleague Peter Lin from the Treasury Department reminds me that the new internet investment in the first half was not the likes that was in the second half of last year. But as an investment in Voyager FinTech company underneath PLDT, which has got the Biggest Online Banking business in the Philippines called Maya. Right. And now we have Sara read the question.

Sara Cheung

The first question is coming from Jaffe of CLSA. And here's the first question. Here's the first one this is different than payout ratio, I understand you're still nice to have 25% dividend payout for the full year. But for the interim, we have 22% payout. And the last time we have 22% payout in the first half was in 2013. My question is, does the POE in the first half have any indication that the management may possibly be cautious for the second half 2022 earnings outlook? And the second question from Jaffe is for the investments at the head office level, in our previous briefings, the launch the investment will be make a loan with underlying entities like PLDT. Can you give us any updates about those investments of where we are at? For the payout?

Joseph Ng

This is Joseph Ng. I tried to tackle the first one. You're quite right that the to invite present bail is set on a four-year basis. And the kind of 22% payout is for the first half, essentially representing a 17% growth in the dividend per share basis as compared to rely on consent last year first half. And even in the first half of 2021 we paid $0.09. I think that's not 25%, let's think a little bit lower than that. I think 23%, 24%. So as far as we're concerned 25%. It's more for the for you. The second part of the question is that does that indicate kind of that are, we have a little bit caution on the second half. I think generally, it's not incorrect to say that the macro situation out there is not very friendly.

I mean, so many volatilities in the market interest rate will be going up. And that will be clearly affecting all the operating units as well as the headquarter companies. And invasion is out there in the G7 countries recording 6% to 10% inflation. And I think Philippine itself is recording 6.4% inflation as well. So at the end, all this will affect all the operating units, in terms of increase in fuel cost, the electricity cost, and on consumer side the kind of disposable income. So all this will affect all the operation that we are in and is actually the trend to try to be a bit cautious. But we're still quite optimistic about a second half because of the nature of the business that we are in, under stable for under in the food and all the infrastructure operations to telcos to power distributions, water distribution, and total operations in the Philippines. So strong put it I mean, the first half, we are excellent first half numbers 25% growth in gross profit. And we are quite confident that on a full year basis. We will still deliver a very impressive set of numbers.

That said, I mean, all these volatilities are affecting us, and we need to be cautious in addressing all these all these factors. Before we cannot make a final decision when you see the final numbers for the full year and set the final dividend payout ratio.

John Ryan

Okay. Stan, please, can you reference the second question about HO investments?

Stanley Yang

I think the question was how we're going to be investing alongside our group companies. And so on the first example, there was a $20 million investment into Voyager. Voyager being the parent company of the PayMaya platform, it's a business, FinTech that was started by PLDT. And over the years had brought in additional investors, including KKR -- and KKR, and Tencent. And so we invested into the Series C round, which coincided not too shortly thereafter of the launch of the digital bank, Maya Bank. And so with this, because this was a license that, that the business got late last year and worked hard and quickly to get it up and launching and running. That will say a good entry for us and an opportunity to build into this very high growth area.

Other investment areas that we're focused on, included at the head office renewables through a Singapore project, which has been mentioned before, but it's a subsea cable from Indonesia into Singapore, where we're looking to develop a solar project. This is part of the EMA phase request for an opportunity seeking proposals to invest into this area. But one of the key hurdles would be securing the licenses and including the export license from Indonesia, that could then allow the power to be sold into Singapore. And so it's a project that's ongoing. It's one that will take time to get the regulatory approval, but one that we believe that in terms of an opportunity and an area that we want to get into looks very promising. And so we're working at that.

John Ryan

Thank you, Stan. The following question is about the performance of Pinehill to remind Indofood subsidiary ICBP have bought a collection of noodle companies in the Middle East and Africa, for just under $3 billion in the summer of 2020. It was a very, very big transaction. And it has had significant consequences for Indofood, it's propelled them onto the global stage, it's cemented into me as a global brand. And in the food is now by all accounts one of the very largest instant noodle manufacturers in the world, again at a global scale. And if you're looking at the presentation on page 8, where you've got the revenues and earnings and profit of Indofood portrayed over time, you can see that the acquisition in 2020 significantly boosted both revenues and profit.

Now in the first half of this year Indofood reports that the revenue at Middle East and Africa rose about 30% in the first half of the year. And about 90% of that is Pinehill production and they saw both growth in volume and in prices. Looking ahead to the rest of the year and going forward, the expectation is for continued strong performance by the Pinehill companies underneath ICBP. And while I'm speaking about Indofood, there's a question about the interest costs at Indofood. Remember, they recently did a 10-year and 30-year US dollar bond. And that is the vast bulk of their borrowings. So that's, of course at a fixed rate. It's just under 4%. All in blended for those two bonds.

So if they're going to see their interest cost rise, it will be more an effect of a foreign exchange movements. But let us recall that Indofood raise that money on the understanding that the interest payments will be made from its very significant US dollar income, that it gets following the acquisition of Pinehill. And now, back one step two pandemic related work from home at PLDT. That effects on PLDT’s performance for its various businesses, like the individual and own businesses has faded away now with the lifting of restrictions in the Philippines.

Chris, would you add anything more to that?

Chris Young

Yes, I think it's a positive impact. But I think the question, is it driving PLDT’s performance? I don't think it is. But yes, so it turned up a positive. And I think in particular, regarding its home business where during the lockdown period, there was a strong demand for broadband. And particular, the fiber PLDT has the most expensive and highest quality fiber network in the country. So yes, so positive impact, but I think it's not driving performance at the moment.

John Ryan

Thank you, Chris. Joseph, could you please address the tax rate?

Joseph Ng

Well, just the interest impact on specific and the holding company, I think the first part of the one risk questions. And mean for the first half of 2022 actually our interview, I calmed down a little bit, because we did some liability management exercise. In the fourth quarter of 2021, we bought back some bonds, expensive, expensive bonds, paying a bit more than 5% interest coupon and using some cheaper bands on so that helped us to save a little bit interest in the first half. But then we start to feel the heat actually, in the second half after June 30. And it's not a secret about what's happening in the market about what US Freight is trying to do right, so we start to feel the hit in the second half.

But we will need to bear in mind, well, debt portfolio, as of now will we have roughly 64% of our debt, essentially in fixed rate. There's been roughly 1/3, that remaining 36% or 1% protein. So we can quite well positioned. But that certainly we still have something like 56% or 500 meals a day about kind of bland boring that we're subject to folding with. And depending on the extent of the increase in the second half and more importantly, going forward in 2023. And then we'll kind of have a close watch and close monitoring on this. And that ties to one of the points that I made earlier about all these macro factors, macro volatility factors that will affect us in the next couple of months in 2022 and moving into 2023.

So we have more visibility when we get to the fourth quarter, we get a taste of it and also see how that would affect all the operations come 2023 budget and as far as the budget at the headquarters level.

John Ryan

Thank you, Joseph. Stan, could you please address some the question about PLP and the growth prospects there?

Stanley Yang

So can you read the question, is it just asking about general growth.

John Ryan

The contribution from PLP was very strong. Can you tell us a bit more about this investment and its growth prospects?

Stanley Yang

Sure. So, the growth in the first half and the profit performance was a result of a few factors, one being the demand in Singapore. The power demand continues to steadily rise and so with that rise in the generation demand. There is a fixed capacity in terms of the existing gas players in the market. And so over time, what used to be an oversupply situation has narrowed. The other factor that has benefited PLP is that in terms of its gas profiling, they were able to restructure the gas supply arrangements and put it on a much better foot. And so as the LNG situation in terms of supply has impacted prices elsewhere in Singapore, there has been an element of pass through to the consumer, coupled with the demand. And so when you take the two together, that has significantly improved the nonfuel margins or gross margins of the business, and so that has driven the profitability of PLP.

Going forward, the factors that will continue to push demand is the steady economic growth and, as a proxy, Singapore's power generation has generally followed GDP growth over the years. Adding to that are a couple of things. One is the government's push to really build out into the data center space, it's an area that there was a moratorium which only opened earlier this year, which was uplifted. And with that, because of the type of hyperscale there and customers they're going to need a lot more generation capacity and hence the focus on the government and EMA regulator to look for imported solar and renewable energy into the market. And so, we see that as a factor in terms of pushing the demand further and the growth prospects for PLP and the overall gas demand.

John Ryan

Thank you, Stan. The tax bond, I think Richard will handle that.

RichardChan

Okay. I tried to adjust the question on effective tax rate in the first half, which seems to be lower than it was always. I assume this is talking about the effective tax rate from the consolidated P&L perspective. Again, First Pacific operate in the Philippines, Indonesia and Singapore and desaturate in the Philippines is about 25% and Indonesia is about 22%. Singapore is about 17%. So, given our major operating company, again is located in the Philippines in Asia is typical to see that our so called the effective tax rate. So be somewhere around 20% to 25% to tax rate in Asia and the Philippines.

I will have to address your question. If you looked at the first half of 2021. The effective tax rate is actually about 25.7%. However, in the first half of 2022, though the effective tax rate actually reduced to about 22.5%. I guess the main reason is as John, and Stan point out before, our PLP has a very good performance in first half 2022. Actually, in US dollar terms here we first will patient ‘19 of the PLP constitute a profit of about US$95.6 million. However, this US$95.6 million won't attract any contestant Singapore because our PLP historically has been operating loss as Stan there are and PLP are to make quite a huge amount of test Moses. If you adjust this US$95 million from the poverty forecast and then we calculate the effective test will be able to arrive at effective tax rate after a school during the PLP law untaxable Pacific will be able to apply it again to the effective test rate at around 25%. So it's which is roughly similar to the first off in 2021.

Stanley Yang

It created it's also worth noticing, noting that the tax losses will continue to have effect for another one or two years.

RichardChan

Harassed phased.

Sara Cheung

Thanks, Richard. Are there any questions? These only questions. We have answer other questions. Thank you have several more questions. May I invite our Managing Director and Chief Executive Officer, Mr. Manuel Pangilinan to give his closing remarks.

Manuel Pangilinan

Well, first of all, thank you to all of you for joining us this afternoon. To hear the first half results, let’s say, for First Pacific. I think was addressing one of your questions about the full year we do are we are cautious about second half prospects, earnings prospects, because of a number of reasons supply chain, difficulties, inflation pressures, interest rates going up. And of course, the impact on consumer spending and raw material prices which will affect I think, in the food, although the earnings will continue to grow this year, albeit maybe not at the same pace as last year. We're seeing headwinds also for PLDT quite regularly the wireless side, not so much in enterprise or the home broadband, which continue to grow in double digits for the second quarter and the first half.

Meralco electricity sales continue to be strong at mid to high single digit growth underlined by revival in commercial and industrial demand increasing for the first half of this year and continuing through July and August. Residential sales are flattish because, it gets probably hit the limits because of the pandemic and the lockdown. Well, we're cautious about the next week because metal prices have so softened a bit so that will impact feed continues and impact on second half earnings picture of Philex. So, but overall looking at the full year, First Pacific's profits will be better than last year for the second half. And we expect full year profitability to be set at record highs, record historic highs for the full year 2022. So thank you, thank you so much.

John Ryan

That's a great note to end on, Manuel

Sara Cheung

Yes, Manuel. Thanks again for joining us today on our briefing. Thank you.

Richard Chan

Okay.

Stanley Yang

Okay.

John Ryan

Okay. Thank you.

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