PLDT Inc (PHI) 2005 Q4 法說會逐字稿

Good afternoon, everyone and welcome to the PLDT conference call to discuss the company's full year 2005 financial and operating results.

[Operator Instructions]

At this point, I would like to turn you over to Ms. Anna Bengzon for the opening remarks and a bit of introduction. Please go ahead. Thank you.

Good morning for everyone. Thank you for joining us today for our 2005 full year results conference call. We have with us today Mr. Christopher Young, Chief Financial Advisor PLDT, Annabelle Chua, CFO of Smart and [Serfa DeNarisk], head of our accounting group. And [Da Bitan], Head of Investor Relations of Smart, and this is Anna Bengzon.

At this time, let me turn over the call to Mr. Young for the presentation.

Thank you, Anna and thank you all for joining us on the call. I'll go straight into the presentation. The first part of the presentation covers the financial and operating results for 2005, while the second part discusses the framework for our future growth and our outlook for 2006.

Starting first with 2005. The PLDT 3 group had another good year in 2005, despite the market environment being more challenging. Service revenues grew by 5% to 121 billion pesos and our EBITDA increased by 12% to 79 billion pesos.

Our net income surged 22% to 34 billion pesos, helped by foreign gains, which you recorded and our core net income was up by 9% to 31 billion.

At the same time, our pre-cash group-- flow also grew significantly to 51 billion pesos from 37 billion pesos the previous year. This enabled us to pay down debt laying 713 million US dollars on a consolidated basis and at the same time allowed us to increase the common dividend to just over 40% at 70 pesos per share.

We move on to slide number 3 and look at the results in a little bit more detail. The growth in our service revenues is driven mainly by the continued strong performance of our wireless business and the increased resilience of our fixed line business. Our wireless business remains the largest contributor to our consolidated revenues, representing 61% of the total.

Our fixed line and ICT businesses contributed 37% and 2% respectively of our revenues.

On a consolidated basis, approximately 35% of service revenue is derived from data services, both fixed and cellular, compared with about 31% in 2004. As we continue to grow our broadband business and further enhance our SMS and content service offerings, we anticipate that our revenue mix will shift even more dramatically from traditional voice to data.

PLDT group now has 22.5 million combined wireless and fixed line subscribers. Despite the negative impact of [terminate] and some swapping activities, Smart and [full bell] registered net additions at 1.2 million subscribers for the year.

On the fixed line side, we experienced for the first time in 4 years, net additions of 700 [force paid] lines. However, prepaid lines declined by a little over 45,000 resulting in an overall net disconnection of 38,000 fixed lines in 2005.

Moving on to page 4 of the presentation. 5% growth in our service revenue out paced the 3% increase in our cash operating expenses. The termination of Sim swapping led to significant savings and subscriber related expenses, such as selling and promotion expense and handset subsidies. The increase in our other cash costs related mostly to higher salaries and benefits and network related costs.

Depreciation expense increased by 9 billion to 31 billion in 2005. Additional depreciation charges were recorded due to changes in the estimated [useful lives] of certain assets in our fixed line business, which were effected by our NGN upgrade. We expect our overall depreciation expense to remain at approximately 30 billion in 2006 and anticipate a return to more normalized levels beginning 2007.

The reasons for [bellforth] lines declined to 40% to about - by 40% to about 3 billion as a result of improved collections systems and processes, mainly on the fixed line side of business.

The growth in our revenues, combined with our continued focus on managing costs, resulted in consolidated EBITDA increasing by 12% to 79 billion pesos. EBITDA margins include 65% in 2005 compared with 61% in the previous year.

Reported net income was up 22% to 34 billion boosted by net foreign exchange and derivative gains of 2.9 billion pesos brought about by the strengthening of the peso versus the US dollar and the Japanese yen.

Last year, I reported profit benefit from the Piltel debt exchange gain of 3 billion pesos, offset by not - net foreign exchange and derivative losses of 2.4 billion pesos.

Core profits grew 9% percent to a record high of 31.3 billion pesos. The increase in core profits reflect the combined impact of stronger EBITDA versus higher depreciation expenses and the recognition of the fair pact assets, more so related to the improved profit performance of Piltel.

Approximately 35% of our revenues is linked to the US dollar. As such, a strengthening peso tends to reduce our service revenues. This however is partly offset by product gains resulting from the translation of our phone country to the nominated exposures. We estimate that for every 1 peso change in the foreign rate, a net impact to our bottom line will be about 600 billion pesos.

The strengthening of our performance in 2005 is also reflected by the significant level of pre cash flow generated during the year. Pre cash flow increased by 14 billion pesos to 51 billion pesos, driven by improved cash flows from operations, lower cap ex and reduced interest costs.

From a cash flow perspective, PLDT group paid income taxes of almost 9.7 billion pesos in 2005, up by 4.2 billion pesos from last year. As a result of the higher cash flows, the group surpassed the original debt deduction target of 500 billion US dollars per year by over 200 million US dollars.

We also increased our common dividend there to 40% of 2005 earnings with payments reaching 12 billion pesos or close to 230 million US dollars.

The amount of debt and dividends paid in 2005 is probably the highest recorded by any Philippine company.

Moving forward, we expect a higher proportion of pre cash flow being utilized for common dividend payments.

Moving on to looking at the balance sheet. On this side, you'll see the fruits of our commitment to strengthen our balance sheet. Since 2002, we have paid down a total of 1.7 billion US dollars of debt. As of year-end 2005, our consolidated debt levels have been reduced to 2.1 billion US dollars.

Taking into account our cash balances of about 29 billion pesos, our net debt level is even better at 1.6 billion US dollars.

In addition, our financial liabilities have also been reduced by voluntary conversions to common shares of about 2.3 million series 5 and 6 convertible preferred shares in 2005 due to the improvements in the company's share price. These voluntary conversions will move liabilities amounting to 2.6 billion pesos from our balance sheet.

As of year-end 2005, approximately 8.5 million series 5, 6 and 7 CPS remain outstanding, which are convertible to common shares on a 1 per 1 basis.

Our leverage ratios have improved substantially across the board. Net debt to EBITDA is at 1 times. Our net debt between cash flow is at 1.6 times. In 2006, our program debt reduction is 300 million US dollars.

Moving on to our wireless business. Not withstanding the changing market dynamics in cellular, Smart remains the leading cellular operator in the country, both in terms of subscribers and revenue market share. As of year-end 2005, we maintained our 59% market share in subscriber terms with 20.4 million subscribers. Further, our share of industry revenue has gone up to 59% versus 58% in 2004.

At about this time last year, you remember, we were facing - we were faced with a market of - sorry. We were faced with a number of questions about the introduction of bucket price plans in the market. We introduced Smart 25/8 unlimited sects in February, and over the course of the year, we refined the offering in order to give debited value for money to our subscribers for preserving network quality. As such, we saw service revenues grow about 8% year on year to 75 billion, driven by a 13% jump in our data or SMS revenues. Our flat rate also brings-- also contributed to the 3% increase in our voice revenues.

While we do recognize that growth in the cellular market may indeed be slowing, we are again moving ahead in developing products and services that will broaden our presence in less penetrated market segments while encouraging more usage from our existing base.

In the fourth quarter of 2005 we saw some improvement in ARPOO as a result of the sim swap termination and higher usage usually brought about by Christmas seasonality spending. An environment where net adds were mostly come from the lower end of the market, the ability to maintain a balance between ARPOOs and subscriber acquisition costs is of great importance.

As you can see on the chart on the right, we have been able to adjust our subscriber acquisition costs down even as ARPOOs decline. As of year-end 2005 we were able to recover subscriber acquisition costs in just a little over one months worth of ARPOO.

Wireless EBITDA increased 13% to 49 billion pesos and as a result of the growth in revenues and control over selling promotion costs EBITDA margins improved to 66% from 64% in 2004.

Reported net income grew 21% to over 33 billion pesos of core net income excluding foreign exchange produced by 23% to 31 billion pesos. Smart score income takes into account the recognition of certain deferred tax assets arising mostly from unrealized foreign exchange losses at Piltel. Given Piltel's return to profitability these unrealized product loses represent potential tax deductible items or future tax credits in the coming years when Piltel pays down its debts.

Slide 11 shows Smart's cap ex and pre cash flow. Smart's cap ex in 2005 declined by 6 billion pesos to 9 billion pesos. The reduction in cap ex in 2005 is largely due to the significant coverage already achieved by Smart in previous years. Today Smart's coverage, covers 99% of the population and only 13 municipalities in the country are not covered by Smart.

2006 Smart's cap ex is estimated to be 9 billion pesos, mainly to roll out our 3G network and expand wireless broadband capable base stations to support Smart wifi.

[Quandt's] pre cash flow grew by 15 billion pesos to 38 billion pesos as a result of higher cash flow from operations, lower cap ex partly offset by higher income taxes paid. Smart's pre cash flow was used to pay down debts of 122 million US dollars and make cash distributions to PLDT of 25 billion pesos.

In 2006 Smart intends to pay at least 20 billion of dividends to PLDT.

Let me now go through highlights of our fixed line business. Fixed line revenues grew to almost 50 billion pesos on the backs of increases on data services revenues, which more than offset the decline in local exchange NLD and ILD revenues. As of year-end 2005, data services already accounted for 21% of fixed line revenues. The strengthening of the peso negatively impacted our dollar-linked revenues arising from 1-fixed average fees of our local exchange business and from ILD.

In order to manage the potential impact of technology on our traditional voice based revenues, we are expanding broadband coverage aggressively. In this manner we are looking to further drive up revenue contributions from our data business as long distance revenues continue to come under pressure.

Fixed line EBITDA grew 9% to 29 billion pesos and EBITDA margins improved to 58%. This is mainly due to the combined impact of higher revenues, lower provisions for doubtful accounts and higher cash operating costs. With the improved receivable collections received by PLDT's fixed volume we anticipate our provisioning level to go down to approximately 3% of service revenues in future years.

As mentioned earlier, the organization is keeping considerable amount of [enlessment] and emphasis on our broadband business given the growth potential we see for this service. In 2005 our DSL and wireless broadband subscribers more than doubled to almost 115,000. We are aggressively rolling out broadband for fixed and wireless and are targeting to at least double our broadband subscribers this year.

According to industry reports, Internet penetration in the country is now at 5.3%. Surveys also indicated that are now almost - now over 8 million Internet users in the Philippines. The market potential is big. Clearly there is much talk to increase the 200,000 broadband subscribers in market today provided that price points for PC and for broadband service continue to come down. We assure you that the PLDT group will be at the forefront in ensuring that Internet access becomes more widely available in this countries. We share facilities or Internet cafes, dial up service, wireless broadband, DSL, or even through 3G.

And all this expected increase in Internet usage our capital expenditures over the next 3 years will take into account the continued expansion of international bandwidth capacity. In 2006 alone we will be expanding our international bandwidth capacity to over 20 gigabits per second or 5 gigabits per second as of the end of 2005.

Fixed line cap ex is anticipated to increase to 9 billion pesos in 2006 from a low of 5.6 billion in 2005. This is in line with the next generation upgrade which accelerates beginning 2006. Fixed line pre cash flow remains strong at about 12 billion pesos and was boosted by distributions from Smart totaling 25 billion pesos. The cash was used to neutralize, to reduce fixed line debt by 574 million US dollars and to pay dividends to common shareholders. As of year-end 2005, total fixed line debt is down to less than 1.4 billion US dollars. Half the level of debts we had just 4 years ago.

And of course, ePLDT, our fastest growing business segment. PLDT's service revenues surged 42% to 3 billion pesos driven mainly by the continued growth [inaudible] end of business. Emphasis revenues increased by 52% to 1.9 billion as a result of expansion of its 2 well established call center operations, [Biolage and Bropiter] and also due to improved capacity neutralization of its other sites. Vitro Internet data center also shows considerable gains in 2005. Revenues grew by 117% to about 375 million pesos as capacity utilization increased by 75%.

Netopia, the largest Internet café chain in the country, also expanded aggressively in 2005. It added over 60 stores during the year and is now serving about 2.7 billion Internet users per month. ePLDT is likewise beefing up its content business which we fill will provide differentiation for our product offerings across the group. Just recently completed the acquisition of LevelUp! Philippines. ePLDT will be managing net gains on LevelUp!. This will enable the group to offer Internet gains such as [Rignorrock] and can to a growing base of Internet gamers.

Slide 16 recaps our financial results for the year. Again, revenues are up 5%. EBITDA increased 12% with margins improving to 65%. We anticipate that we will be able to sustain our EBITDA margin despite the challenging year ahead of us as we remain conscious about containing costs and costs of goods.

Quarter net income surged to P34 billion while core profits increased 9% to 31.3 billion. Final dividend of P28 per share brings up our total dividend per share to P70 representing a little over 40% of our core average per share of P174. Proactive date for this dividend is on March 20th and payment date is April 20, 2006.

The second part of the presentation focuses on outlook and the free market for growth.

On page 18, we show - we track the investments that the group has made in terms of CapEx since 1999, indicates that US$2.7 billion has been invested and as a result we through our wireless network able to cover 99% of the population. We expect that CapEx over the next three years will accelerate from what we've seen over the past couple of years and we'll spend about 18 billion per year or about US$1 billion over the period '06, '07, '08.

Page 19, we are slashing the importance of PLDT in servicing the corporate center to provide international and domestic connectivity to now more than 300 call centers PBO on our ITP related activities. We continue to develop innovative products and services relevant to the enterprise level to give our selection region the chart in the middle and we continue to generate employment opportunities both within our core business and within ePLDT itself particularly in the call centers.

Page 20, we anticipate continuing to innovate across the group. We've introduced a number of world class products particularly within the wireless sector with Smart Money and eLoad. We anticipate that continuing as we expand into the broadband sector.

At the same time as we look at page 21, the group continues to contribute to the economic growth of the country. We are one of the leading taxpayers in the Philippines. We're very actively involved in corporate social responsibility programs and at the same time through the eLoad of Smart we have been able to sustain a number of micro businesses estimated at about 700,000 throughout the country. We've also received international recognition for excellent management and corporate governance practices within the group.

In summary, assessing what's been achieved over the past seven years the group I think has a reputation for being a serious partner in not only growing its own profitability but in contributing to the country's economic growth and welfare. We take the view I think supported by the innovation that we've grown not just because of size but we have introduced many new products and the execution of these new products has been very good. In fact, we also take the view that the financial results are crucial to under pin the next level of investment that the group needs to make. As I indicated earlier, we expect to spend close to US$1 billion during the period '06,'07, '08 principally to build out our broadband infrastructure.

We continue to try to make PLDT a world class company in management practices, corporate governance, and operating results and that commitment will continue. We do feel, however, that after seven years of significant expansion, we are reaching a stage where there is effectively a tipping point where we will be embracing new technologies both on the fixed and wireless side that will provide opportunities for growth for us going forward.

Moving to page 23, where do we see these opportunities coming from? In 2G, we still see there are some opportunities there at the lower end of the market, the DE and lower CN. We have a number of products that we're working on that we think we'll be able to access that part of the market.

3G launched on February 14th this year. We're investing US$150 million in this area and we feel this should contribute an increase RPU for our higher end subscribers.

On the fixed line side, we see that the NGN gives us good opportunity to expand subscriber numbers and to be able to offer a range of broadband products, which we can't do at the moment. Broadband is a key factor for us as you'll see on page 24. Qe're expanding on the Quicks line through our NGN and we're also specifically focusing on DSL capability.

On the wireless side, we're building out WiFi and WiMax to cover major parts of the country we can't access through the fixed line. We're trying to price our products at a very affordable level to allow brisk growth in terms of subscriber numbers. We are-- while not subsidizing PCs and laptops, we are introducing a number of promotional offers which allow people to pay for the equipment over a period of time, which makes it more affordable. We are also expanding our Internet capability through Netopia or from the fixed and mobile side to widen the broadband reach.

So in summary, if we look at 2006, we see it as a year of transition for future growth. We won't see growth in-we are anticipating some growth, but we expect that it will benign. And we see growth in the revenue line. However, we expect that costs will continue to be well managed but we are anticipating depreciation to be higher. Interest expense, however, will continue to decline. But at the same time, we do expect to be paying significantly higher income taxes in 2006 compared to 2005.

On the cash flow side, we will see that they will continue to be robust despite the higher CapEx levels that we are anticipating and we would expect as a result to increase the dividend to shareholders to a minimum 50% of 2006 earnings. At the same time, we'll continue to reduce debt and we will see that US$300 million of debt maturing in 2006. And we will anticipate them to be paid off fully. And at the same time, we'll also be improving the risk profile of our balance sheet. Net debt we anticipate to drop to US$1.3 billion by the end of 2006 and net debt to EBITDA to be less than one times by year end.

In conclusion, we expect 2006 to be a year where we lay the foundation of earnings growth going into 2007 and beyond. That's the end of the formal presentation. I think we'll now open it up to see if there are any questions.

[Operator Instructions]

First question will be coming from [Mr. Hilado]. Please go ahead, sir.

Hi. I have just two questions, follow-up questions. In terms of the outlook for mobile going into '06, is it safe to say that the subscriber base is now clean of the sin swappers so we're going to see the real subscriber growth going forward. And second question is in terms of DoCoMo if you could elaborate on what plans you would have in terms of tie ups with the competitors technology and service launches.

Yes. I think it's fair to say that the clean up is effectively carved in terms of the sin swapping so I think you should see - this year you should see the increasing subscriber numbers reflecting the underlying business plans rather than the impact of the sin swapping. I think in terms of DoCoMo the initial input that we're getting really will be on the 3G side. They are the largest 3G operator in the world and obviously they had certain landings when they were launching the product themselves as to what subscribers and what [inaudible-highly accented].

So I think we'll be getting the benefit of that from them over the next few months. At the same time we have a successful product called i-Mode which allows people to access the Internet very effectively in a user friendly way. They will be working with us to introduce that product over the next few months. It won't actually launch until probably towards the end of the year.

The battle's been very successful for them and one of the reasons that they've been able to add as many subscribers as they have in Japan so we would hope to be able to introduce that product successfully here in the Philippines. So really the input will be two-fold. One, product specific through i-Mode. At the same time they will send some people here advisors who really will assist us with the 3G build out and we're looking at the business models which have worked for them in Japan. Obviously, we don't expect everything supplied directly here in the Philippines but obviously we would expect to get the benefit of say what is what for them in Japan and we can obviously fine tune it or tailor it or the local market here.

Thanks guys.

Thank you sir. Does that complete your question?

Yes it does.

Thank you very much. [Operator Instructions]

Next question will be coming from Jason [Karium] from US. Please go ahead, sir.

I've read the response to the NTC paper but I was just wondering if you could comment and give us an update on relations with the MTC and how they're viewing the competitive state and what changes if any do you think will be coming in the next year?

Well I think the relation with NTC is good. I think one thing that our paper does - the point that our paper does stress is that we do think that the MTC has done a very good job in recent years. In terms of where the market is now here in the Philippines I think it's way ahead of all projections that were made four or five years ago in terms of coverage, covering 99% of the population.

Wireless penetration rates are up to about 40% and the tariff structure that we have in place is one of the lowest in the world so I think a lot of what's happened in recent years has been very good and as a result - partly as a result of the regulatory environment which the NTC has created so I think the position that we're coming from is that the industry itself is in pretty good shape and that we're approaching a period now where significant investment is going to be required from the industry if we are to offer broadband in a widespread way here.

So the discussion that we're entering into is timely but I think also there is a good appreciation from the regulators side that in looking at the competitive environment there are broader issues that need to be looked at in terms of how the broader government policies in terms of economic development and the like interrelate with the broader competitive environment. So we think our paper reflects fairly well the composition and certainly in terms of our initial discussions with NTC we think they - at least understanding and appreciate our views.

I think the process itself will take some time. Obviously weeks in making their response. Others have submitted their response. I think the NTC envisions a series of roundtable discussions where they would like to present their views - get the views of industry, get the views of the other operators and then refine and develop their views over the next few months. But I think we're initially encouraged by the response that we've received and we hope that they'll take onboard the points we made in our response.

Okay, thank you.

Thank you sir. Does that conclude your question?

Yes.

Thank you very much. [Operator Instructions]

There are no more questions for this point and that concludes the question and answer session. Before I turn the conference back to Mr. Christopher Young, I would like to give everybody the instant play information of today's call. Today's conference will be available on a 24-hour instant replay starting today daily on through March 29, 2006. Replay information 9:00 p.m. call, international caller 852-28025151. U.S. toll-free 1-800-839-3014. Access code is 724840 contact is Anna Benson. At this time, I will turn the conference back over to Mr. Christopher Young for any additional or closing remarks.

Thank you for joining us for the year end call. The next time we will be getting back to you past quarter's results which I think that out around May 9th. So thank you again for joining us and good morning to you.

And that concludes today's conference. Thank you for your participation. You may disconnect your line in your own time. Thank you.