PLDT Inc (PHI) 2006 Q2 法說會逐字稿

Good afternoon, everyone. And welcome to the PLDT conference call to discuss the company's first half 2006 financial and operating results. This conference call is being recorded. Replay information will be provided at the end of the call. At this point, I would like to turn you over to Miss Anna Bengzon, for the opening remarks and a bit of introduction. Please go ahead. Thank you.

Good afternoon, everyone. Thank you for joining us today for the PLDT investor conference call to discuss our first half 2006 financial and operating results. We hope you got the presentation, which we made available at our website. For those that have not received the information, please go to the PLDT website at www.pldt.com.ph under the Investor Relations page. And there is a sub-section called presentations. There you'll also see financial statement and the MD&A for the first half of 2006.

For today's presentation, we have with us the management team of PLDT Group. We have Mr. Manuel Pangilinan, Chairman, Mr. Poly Nazareno, President and Chief Executive Officer, Mr. Christopher Young, our Chief Financial Advisor for PLDT. And from Smart we have Anabelle Chua, the CFO, [inaudible] who is seated in the front, Head of Investor Relations. And for ePLDT we have Mr. Ray Espinosa. We also have members of the senior management team of PLDT and Smart here with us today.

We'd like you to turn over now to Mr. Nazareno for the presentation.

Ladies and gentlemen, good afternoon. Thank you very much for joining us today as we announce the PLDT's -- PLDT Group's financial and operating results for the first half of '06.

PLDT Group's service revenues grew by 2% to 60.6b on the back of a 6% year-on-year growth for our wireless service revenues. More importantly, EBITDA increased by 7% to 40.4b with EBIBTDA margin improving to 67% as of the first half of '06. In addition, the 23% reduction in our consolidated interest cost helped boost our core earnings by 11% to 15.2b compared with 13.7b last year.

Reported net income was down 7% to 15.3b principally due to additional depreciation charges that we are booking this year and FX or foreign exchange losses arising from this depreciation of the peso in the second quarter of '06.

Our core earnings per share was up 9% to PHP83. On this basis, we are pleased to announce that our Board of Directors declared earlier today, an interim dividend of PHP0.50 per share. This is the first installment of our '06 dividend payment representing 60% of our core earnings per share.

As mentioned, our core earnings grew by 11% to 15.2b as a result of the continuing resiliency of our business, despite the rapidly evolving environment we operate in. Notwithstanding the 6% increase in the total outstanding common shares to about 183m, as of the end of June, our core earnings per share was up 9%.

In the first six months of '06, reported net income was down to 15.3b from 16.5b last year. The decline was due to additional depreciation charges, higher statutory tax rate and foreign exchange losses of about 200m in the first half of '06, compared to a ForEx gain of 2.2b in the same period last year. Given the appreciation of the peso in July, back to 51.44 from 53.22 at the end of June, the ForEx losses booked in the second quarter of 1.8b is now being partly offset by ForEx gains recorded in July.

Our debt reduction program coupled with our hedges, however have significantly reduced our ForEx risk exposure. We estimate that based on our net debt levels as of end June '06, every one peso in ForEx rate will translate to a pre-tax ForEx gain or loss of about PHP700m, compared to PHP1.35b difference last year.

Consolidated service revenues, reached 60.6b in the first half of '06. Wireless revenues accounted for 63% of the total, while the fixed line and ICT contributed 34% and 3% respectively. EBITDA grew more dramatically by 7% to 40.4b as a result of continued focus on managing costs and also due to lower provisions for doubtful accounts. Margins remained strong at 67% better than the 64% recorded in the first half of last year.

Moving on to slide five, to discuss specifically our data and broadband business. On a consolidated basis we are now generating about 43% of service revenues from data services compared with 39% last year. Total data and ICT revenues increased by 12% to 26b while traditional voice revenues decreased by 5%. Our total broadband subscribers grew by almost 60,000 in the first six months to almost 174,000 as of the end of June '06. PLDT Vibe subscribers -- those are our narrow band subscribers also grew to 425,000 from 364,000 last year. Overall our broadband services contributed 2b in revenues in the first half of '06, up 58% year-on-year. Smart Bro our wireless broadband service is fast becoming an acceptable alternative to narrowband internet access. DSL on the other hand, is expected to grow more significantly as NGN is rolled out. Our target is to hit 1m broadband subscribers in three year's time. We believe that our future growth will come from data services. Our challenge today is to manage the transition from voice to data, as we step up the upgrading of our networks to support the growth in broadband and data services.

Consistent with this strategy, CapEx spending increased to 12.4b in the first six months of the year. Currently about 200,000 lines in various exchanges are being upgraded to NGN. Smart has rolled out about 2,200 wireless broadband capable sites. And is already geared up to further promote Smart Bro in those areas. In addition, Smart has expanded its cellular capacity to support its ongoing initiatives. We anticipate full year CapEx to reach 20b this year or about 16% of service revenues.

Meanwhile, free cash flows remained strong at 17.4b for the first half of the year. Our cash flows adequately support the investments we are making this year to ePLDT while allowing us to continue reducing debt and increasing dividends to shareholders as committed. Investments being undertaken this year to ePLDT is expected to reach $200m. In addition, we are targeting to reduce debt by $350m as well as pay common dividends aggregating to about $350m. The interim dividend we declared today of PHP0.50 per share will require total cash payment of PHP9.1b or about $175m.

Slide number eight tracks for you the improvements we have achieved to strengthen our balance sheet and improve our overall financial flexibility. In the first six months of the year, we paid down close to $270m of debt, including the prepayment of $56m of Piltel debt owed to third parties. Consolidated debt levels are down to 1.8b with fixed line debt balances declining to less than $1.2b. Net debt to EBITDA is below one times. While net debt to free cash flow is down to 1.7 times. As mentioned earlier, our ForEx risk exposure has been substantially reduced with our up-hedge position decreasing from $1.2b last year to $645m as of the end of June '06. The improvement in our share price has also led to significant voluntary conversions of our Series V and Series VI preferred shares. The conversions will allow us to reduce accretion costs of about PHP150m in the second half of '06 and by 370m in '07.

Slide nine shows the performance of our wireless business. Smart and Talk 'N Text had a strong second quarter, adding almost 1.6m subscribers during the quarter. As of end June, Smart had 16.4m subscribers while Talk 'N Text had about 6m. A total of 22.5m combined cellular subscribers for the group.

During the second quarter, our marketing promotions gained traction and our welcome back promo successfully reduced churn. Wireless revenues grew 6% to 38.6b mainly driven by the 8% growth in our data services, particularly due to 258 Unlimited. EBITDA grew 8% year-on-year to 25.8b while margins moved up to 68% principally as a result of lower saving and promotional expenses.

On a quarter-on-quarter basis, revenues grew by 4% to 19.6b allowing Smart to improve its revenue share to 59%. EBITDA increased by 8% quarter-on-quarter to 13.4b in the second quarter. With margins improving to 68%.

Bucket priced schemes -- bucket pricing schemes are now the key driver for usage and subscriber acquisition. If you look carefully, you will see that we have been segmenting our market into smaller slices through our various SMS and voice call packages. This ability to offer attractive value driven, unlimited packages to our subscribers has enabled us to effectively defend our leadership position. Our unlimited texting packages have helped us keep our subscribers by offering them service packages that are of real value. At the same time, we have been able to protect our revenue base and even gaining incremental revenues. The success of our 258 packages have been due not only to effective marketing. We have also relied heavily on the massive sales and distribution network of 800,000 retailers. Finally, all this has been made possible because the capacity of our network to handle SMS traffic has been considerably upgraded. We now have the most powerful SMS enabled network in the world, capable of handling over 1b text messages a day.

Reflecting the impact of these marketing initiatives, prepaid ARPUs in the second quarter remained steady, at 294 as a result of higher on-net traffic and higher SMS revenues, offset in part by lower outbound voice usage. The main source of cash savings for Smart is subscriber acquisition cost. Our SACs have been reduced to approximately PHP112, representing just one third of net ARPU.

Fixed line revenues declined slightly by 1% to 24.1b mainly due to the negative impact of the 5% year-on-year peso appreciation, on our local exchange and ILD revenues. If the peso remained stable year-on-year, we would have been able to realize a total fixed line revenue growth of about 3%.

Data revenues surged 36% to 6.2b driven by the healthy take up of our DSL service and corporate data products, including the DFON rental from Smart. Data revenues now account for 26% of total fixed line revenues, while our dependence on our traditional call business is down to 36% compared with 40% last year. Reflecting the significant improvement in our receivable collection, fixed line EBITDA grew 4% to 14.2b, with margins improving to 59%.

As you know already, the upgrade to NGN is a significant initiative we have for the fixed line business. While the project is expected to take two to three years to implement, we would like to share with you a couple of cases which illustrate the benefits of NGN.

Pasay is a relatively large exchange. It has two buildings inside a one hectare property. It services 21,000 voice lines and only about 2,000 DSL subscribers. It is housed in two buildings and it occupies -- the PSTN equipment occupies -- including the DSL, 150 square meters. If we took -- if you take a look at the right-hand of the slide -- the previous slide, the NGN will allow all existing work lines to become DSL capable. That means the 21,000 lines will become all DSL capable and the existing PSTN equipment will be shut down. We will be able to shut down the air conditioning, save on power, save on maintenance cost. The access gateway will only occupy 13% of the original space, which is 20 square meters.

The current network features also of the Calauan Exchange is as follows. The services -- it has -- it services about 850 lines and 35 DSL subscribers. And the PSTN equipment houses -- is housed in three vans and a building located on a 1,226 square meter property. With the NGN network this will dramatically reduce the space. The existing PSTN equipment -- we'll have two vans that we will be able to shut down in March '06. And the three NGN access gateways will be installed in one equipment van. And the excess property that we will generate out of these conversions will be 836 square meters, which will be earmarked for disposal.

Going forward we will be undertaking a substantial space rationalization program, which will involve potentially integrating business offices such as the one in Pasay. At the moment, the excess space in this exchange is being utilized by PLDT and administrative support services, which were moved out from our Reposo office in Makati. Another example is -- well, I have mentioned this already -- our Calauan office in Laguna. Since then we have seen at least a 40% drop in our power consumption for the NGN in Calauan. And we have also been able to split up the property, which will then allow us to dispose as I have said earlier 836 square meters.

The benefits of the NGN upgrade are just starting to bear fruit. The more substantial cost savings and improved capabilities are likely to become more obvious in the next 12 to 18 months after we complete the upgrades of more lines and exchanges.

Moving on to ePLDT on slide 16. Service revenues increased by 36% year-on-year to 1.8b driven by the strong performance of ePLDT Ventus. ePLDT Ventus call center is the largest revenue contributor in the ePLDT at around 68%. Internet and gaming accounts for 19% while Vitro contributed about 10%. The acquisition of ePLDT of SPi will catapult ePLDT to become probably one of the largest full service BPO companies in the industry. Through the combined operations of SPi and Ventus, ePLDT is well positioned to increase its participation in the growing global outsourcing market.

On slide 17 we look more closely at the results of ePLDT Ventus. Ventus revenues surged 48% year-on-year to 1.2b. EBITDA also grew at the same rate to 332m, translating to an EBITDA margin of 27%. The growth has been driven by an increase in billable hours both from existing and new clients. Ventus generates over 85% of its revenues from international clients, mostly from the U.S. Ventus has been gaining contracts as a result of an increasing preference to outsource voice services to the Philippines instead of India. As such the additional capacity of Ventus in its two new sites has already been pre-sold and the new contracts are expected to go on stream by the fourth quarter of '06.

With ePLDT's acquisition of SPi in July, we expect to be able to capitalize on SPi's sales presence in the U.S. and increase our share in both the voice and the non-voice outsourcing market.

Now to discuss more about SPi. SPi generated about $16m in revenues in '05, predominantly from U.S. based clients. Half of its revenues have been considerably -- consistently derived from its publishing unit where they copy, edit and typeset over 1m pages a year for about 600 journals. The legal unit has been a source of growth but tends to be more project driven. The challenge for this business unit is to win longer-term contracts and generate a more recurring revenue base.

Much growth however, is expected from the healthcare unit, which delivers medical transcription services to hospitals, doctors and other healthcare organizations in North America. The medical transcription business in the U.S. has grown to 2.3b in 2004 and a bulk of this business is still being outsourced within the United States. However, the shortage of MTs in the U.S. or medical transcriptionists is driving the off shoring of this type of work to specialized vendors such as SPi. We are currently working on completing a bolt-on acquisition of a medical transcription company in the U.S. with a revenue base of about $20m. The acquisition will allow us to gradually move its operations to the Philippines using SPi's existing capacity and generate cost savings.

That ends my presentation. Let me now turn you over to our chairman, Mr. Manny Pangilinan for the outlook of '06.

Thank you, Poly. And good afternoon to everybody. I think we're -- actually approaching this presentation this afternoon, slightly unaccustomed to reporting numbers that are neither spectacular in percentage terms nor exceeding expectations, as we have done in the past three years. So I guess the consensus numbers at least in terms of core earnings, it will meet the expectations, as I understand them so.

And in many respects, that is indicative of how the numbers will behave for the balance of the year. As Poly has presented to you, core earnings are up by 11% for the period and we're maintaining our guidance number for the entire year at PHP32b compared with core earnings last year of PHP29b.

On the face of it, the increase in income of 1.5b for the period appeared to be rather unchallenging for PLDT and for its management. Actually, it was. It has been a rather challenging period. And will continue to be particularly in light of the very difficult revenue environment moving forward. Because the ability of PLDT to achieve spectacular growth in a number of its revenue streams, which are increasingly to become mature is itself becoming increasingly challenging as well.

So our revenues actually grew by 2% or 1.1b. But net income on core terms grew by 1.5b. So that's indicative of the fact that -- again as Poly indicated, costs have been well managed during the period. And I think for the balance of the year for the foreseeable future, both on a cash and non-cash basis. Cash expenses are under control and cash under control as well and financing expenses are down compared to last year.

Of course the picture on reported is quite different, mainly on account of the ForEx movements. The last year first half numbers on a reported basis did not reflect the accelerated depreciation charge, which this year was reflected to the extent of PHP3.9b. Last year there was none. And last year, we did report PHP2.2b exchange gain. This year we did report a foreign exchange loss on a net basis, cumulative of about PHP200m. So that's a swing in the reported numbers of PHP2.4b for year-on-year.

It's difficult for us to project what the likely reported numbers are going to be for the entire year. Let me just say that for the first quarter we did report ForEx gain of 1.6b this year and for the second quarter, it shifted to a ForEx loss of 1.8b. Hence resulting in a cumulative ForEx loss of 200m for the period.

And yet as of end of July, the booking rate was about PHP51.40 against the booking rate of June 30 of PHP53.20. So if the booking rate in June 30 -- for July 31 were to be as for June 30, we would actually show a ForEx gain net of about 1b. So on that basis the reported earnings for the first half would have been fairly close to what we reported last year. But that just goes to show that our reported earnings number could be [inaudible] by the ForEx movement.

Now having said that, with our debts rapidly coming down and with the net foreign exchange position being hedged by financial hedges and by the cash balances in dollar terms, to the extent of 64%, I think there will be compression in terms of how -- moving forward how our reported numbers are going to behave with respect to the core earnings number in the future. So the amplitude between the two is going to compress in the coming years. So in many respects, maybe we won't have an issue with respect to reported earnings and net core earnings.

So the reported earnings will be determined obviously by the exchange rate movements for the balance of the year. And so far the peso has appreciated so that's been helpful. It won't be too helpful in terms of certain revenue streams that are denominated in dollars particularly in the local exchange revenues and international long distance revenues as well.

Now some of you have made comments on -- or suggestions about our revisiting our satellite assets. Those assets are under review and if we're successful in reorganizing those assets, maybe it will translate into some exceptional gains, either this year or next year.

As I indicated the revenue environment moving forward is going to be challenging. The [inaudible] revenues -- service revenues has grown by 6% for the period and the fixed line is down by 1%. Again the picture there is mixed. Data's grown significantly by 26% but the voice related, data related revenues are down because -- partly because of volume or decline in sub base on the fixed line side and by the peso appreciation for the period.

ePLDT has shown a significant revenue growth of 36%. But we need to bulk up the assets and businesses under ePLDT to make a significant impact on consolidated revenues. But I guess what I'm saying is that our revenue profile moving forward will be similar to what you've seen in the first half. Namely, continued mild growth in several revenues moving forward. We grew by 6%. Significant growth on the data side of our business and in the broadband wireless WiMAX. Poly's shown you the numbers in terms of -- at least of some numbers in the ARPU on the broadband side is quite significant. ePLDT will continue through its call centers and BPO. SPi will continue to show significant growth revenues. But you have to bulk up those assets to make a significant impact on consolidated revenues moving forward.

And to deliver the bottom line, cash costs and non-cash cost have to be managed as well, including the application of access cash that continue to be generated in a very robust basis. Poly's explained to you cash flows are doing very well. We will continue to reduce debts this year and next year. 350m of which $276m have been paid down, including Piltel third party debts in the first half. So we're still forecasting about the %350m paid down. Dividends have been increased and new investments are being made, both in terms of infrastructure and new businesses like SPi and PhilWeb without need to leverage the company.

The balance sheet is looking very strong. Gross debts as of the end of June is 1.8b, net debt about $1.4b. By the end of the year, we should be at 1.7b gross and about $1.3b net. Our scheduled maturities next year is about $300 so we hope that we would -- our net debt level would be around $1b which is of course an historic high for PLDT. And, in fact, I think maybe we are moving to the zone where PLDT could be regarded as somewhat under-leveraged instead of being over-leveraged only three or four years ago.

So the financial matrix look good for the Company. In fact, what’s looming ahead of us is on the one side the challenges relating to how we could grow our revenues. I think cost should be well contained moving forward. And indeed how to manage the cash moving forward the most optimum way. Recognizing that we should continue to be fiscally prudent in terms of our debt profile, delivering cash dividends to our shareholders. But at the same time ensuring that we devote some of this cash to get investments that will precisely see us through this period of transition from really a voice-driven business in the past to a data-driven business of the future. So I thank you very much and I guess we’re ready for the Q&A.

The floor is now open for your questions. [OPERATOR INSTRUCTIONS]. Our first question will be coming from Ms. Karen Ann from Bangkok. Please go ahead.

Hi. Good afternoon. Thank you for the call. I have three questions. First is on capital management. Well, you sort of met your policy of 60% payout on the first half earnings. I suppose you won t disagree with me if I say that the market was kind of hoping for a dividend upside surprise. So to that end, do you see any scope of increasing your payout in the second half, or into 2007?

The second question is, if you can help us understand the profitability picture of SPi in terms of EBITDA net profit in ‘05 as well as the revenue EBITDA net profits in the first half of this year.

And the last question is referring to what you expect to spend in 2007? Both on CapEx as well as on new business acquisition, i.e. have you -- are you in a position to put forward those numbers? Thank you.

Hi. I think I’ll now try and answer your first questionon cost. And then maybe I can turn it across to Ray on SPi.

I think in terms of the last question the CapEx number that we re looking at for 2007 is around about the same number that we re looking at for 2006, which is at the PHP20b level. And at this time we don t have any figures for expected investments in 2007. In terms of the capital management, I think when you look at the second half of this year, you ve got to take into account the investment in SPi. And as indicated by Mr. Nazareno there maybe some additional amounts to be invested in the second half. So that’s -- SPi is about $135m. We expect a little more in the ePLDT area in the second half. So I think if you take that into account in addition the continuing debt reduction, we think that the 60% payout ratio is reasonable. Now having said that, I think if the trends continue into 2007, then certainly it would be an opportunity to increase the payout ratio then.

Well on SPi for the full year we re expecting an EBITDA margin of around 13 to [15%] absolute. That would include the broadband acquisition which we plan to complete within two weeks.

On the net income side it should register a net income by the end of the year. Together with the broadband acquisition, that would be a slight -- an income of around $500,000. But for the following year that’s where we expect basically [SPi’s platform three] take off. And we re looking at a very robust growth for the 07 numbers. And especially once we get the savings across the Group, once we start integrating some of the shared services, together with our voice Group, we can bring down some of the costs from the U.S. dramatically. So that will all filter to the bottom line.

Thank you. Does that conclude your question ma am?

Yes, it does. Thanks.

Thank you very much. Our next question will be coming from Mr. Luis Hilado from Singapore. Please go ahead sir.

Hi. Good afternoon. Thanks for the call. I also had three questions. The first one is in terms of NGN. Now that you ve sort of outlined the potential cost savings, I’m just wondering if you can give some kind of milestone in terms of when the network will be 20% NGN already, or 50%.

And in relation to the CapEx level that you mentioned, I think it was PHP20b, you think to get to your target NGN level, you’ll have a similar number for ‘08?

And my second question is regarding the 258 promotion. Now that you re getting so much structure in terms of volumes on 258, do you intend to tweak the packages? Or do some structuring which will be able to transfer some of those volume on to the regular SMS.

And last question in terms of the accelerated depreciation, should we be anticipating further depreciation in the second half? And around how much would we be looking at?

Thank you for your questions, Luis. With regards to the NGN, the -- well we are rolling out currently about 200,000 lines which would replace on a substantial basis the existing lines of about 2.1m. So that’s roughly about 10% of our current network base.

And in terms of savings, as I pointed out, this will be realized in a more substantial basis in the coming years. Now to complete, the NGN will take us about three years from now. And that should require a CapEx -- additional CapEx in the succeeding years of about PHP20b.

With regards to 258 promo at the heart level, as you know we have expanded our network to accommodate over 1b messages a day. Right now we are averaging about 800 plus million messages a day. And a great proportion of that is in the 258 environment. Such that our average revenue overall for SMS has gone down now to [$15].

So you rightly put there we are looking at packages where we will even slice the market even more thinly compared to what we are doing now. To offer real value-added services to our consumers. And hopefully maximize our yield for these 800m messages that we are doing.

And the third question was --

I guess on accelerated depreciation. Whether the second half we should look at another PHP3.9b?

The short answer is yes. That should be basically as a mix, 2005 and 2006. So by the end of this year that accelerated depreciation will have finished.

Thanks a lot.

Thank you sir. Does that conclude your question?

Luis Hilado. Yes. Yes, it does.

Thank you very much. Our next question will be coming from [Ken Dole] from Singapore. Please go ahead.

Hi. Good afternoon. Just a few questions. The first question is just on the take up of 3G Services since you began charging for it at the end of the second quarter. What are -- can you give us an indication of the volumes for 3G services you’ve been experiencing since then?

The second question is just on the new, fixed line pre-paid service. I think it’s called Telepwede. Sorry for my pronunciation. Again just some more details on that target market. How does it enhance the current pre-paid fixed line offering?

Third question, on page eight of your MD&A, you draw attention to the decline in the domestic voice revenue for Smart. Just wondering -- I guess it’s following on from Luis’ question, whether you feel the need to tweak some of the plans now to reduce the emphasis on SMS and increase the emphasis on voice, or whether you’re happy with the plans as they stand at the moment? Thank you.

The first question on 3G. Right now the market as far as Smart is concerned, we have about 350,000 3G handsets within our subscriber base. And roughly about 70,000 are using this service. So we are looking at different programs to try to enhance usage and traffic. At this moment we – it’s still quite low. But it’s going to move up once we are able to introduce the new packages that we are about to introduce.

The reason why the CapEx of the 3G was accelerated to a certain extent was because we needed to expand also the core network to accommodate this tremendous volume of SMS that we re having. And rather than invest on the old technology, we decided to accelerate the CapEx on the core for 3G. So that in place already is an IP-centric core.

Well, the pre-paid, fixed plan of Telepwede, it’s a revival of introducing pre-paid fixed. It is at a very early stage at this point and we’re still observing as to how the -- this product would be accepted in the market at this point.

And I’ll just answer the point in respect to page eight. You’ll see that overall, Ken, that the voice revenues are up. But that the domestic minutes are down. However, if you also just look at the item below that, international inbound, you’ll see a large increase by about PHP328m. What that is, is effectively initiative that we’ve taken to reduce the amount of international bypass on the network. So calls which were effectively being coursed through the domestic network and being charged the domestic tariff, have now reverted back to being international inbound calls. So overall, you’ll see that the number of minutes increases. But it’s really just the mix between the domestic and the international, and really is a result of our successful efforts to reduce the amount of bypass on the network.

Okay. Thank you.

Thank you sir. Does that complete your question?

Sorry. Can I just ask one final question? I suppose you’ve now given some -- a great amount of detail on the advantages of the NGN. If you were to put up a ball-park figure on the amount of surplus property you would have after three years, once the NGN is complete, what would that be?

As we said we don’t have a firm take on that as yet. I think if you see the presentation, what actually happens is that you reduce the amount of space which is occupied. But in a number of cases you are not able to give off the building or the premises all together. So in some cases it’s possible that we’ll be able to sell a fairly large part of a property or a building. And maintain a small part for the ongoing NGN. In other cases it may be difficult to do that. So we have a property management group going through that exercise at the moment together with the engineering group. And I think we’ll be able to have a better take on that in a few months time.

Okay.

But what it does, it gives us some options. For example some of the space that can be freed up, even though it may not be practical to sell that to a third party, we can use those sites for call center business and the like, which continue to expand.

And as we reduce the space anyway then that actually does reduce things like the cost of air-conditioning, general, electrical, admin costs in terms of insurance and the like. We are in the process of quantifying that and I think we’ll be able to give a firmer number on that when we come out with the year-end results. It is quite a tricky exercise.

Okay. Thank you.

Thank you sir. Does that conclude your question?

Yes, it does.

Thank you very much. Our next question will be coming from Ms. Kathy Chen. Please go ahead.

Hi. I have four questions. The first one is on your wireless margins. They were quite high this quarter. Looks like a lot of that was from the lower selling and promotion expenses. Can you give us an outlook on whether these lower S&P costs are going to be sustainable for the second half, and whether the 68% margin can be sustainable in the second half?

The second question is can you again remind us on the tax returns for the full year? As it looks like the tax rate in the second quarter was also quite low.

The third question is -- it s a follow up on capital management. I understand that PLDT is very focused on increasing the dividends they payout right now. But can you remind us what the Board’s policy and outlook is on share buybacks and special dividends? Which do you prefer?

And the last question is a small question on slide 16. You indicated that the call center revenues could go up to about $100m per year. Can you specify around what year you expect that to actually come in?

The first question on the wireless margins your observation is correct that the strong margins in the wireless are driven primarily by lower selling and promotion expenses as well as lower product subsidies, or that’s the difference between the total sales and the non-service income. So our expectation in terms of the wireless is that we should be able to continue to sustain 67% [inaudible] for the EBITDA margin for the second half.

I think your second question related to the tax rate. There are two items at play here. In terms of the statutory tax rate, that has increased this year to 35% compared to 32% last year. But on the other hand we do -- we have recognized in the numbers, deferred tax assets of roughly about PHP2.8b that has brought down the effective tax rate closer to 17%. So that s kind of the two off-setting elements in terms of the inter-play in the tax rate.

Third, on the capital management, I think the share buyback or share –- it’s an option. In the course of our meetings with various investors, it is something that we continue to canvass people’s opinions about whether they prefer one over the other. I think in terms of the management side, we’re, I guess, quite indifferent between the two. But for the moment, I think the priority has been to decrease the absolute regulatory redemptions. And then to establish a track record of something that we want to be able to sustain over time.

Well we expect to hit well over a $100m in revenues for our call center BPO business by next year.

Okay. Thank you.

Thank you ma’am. Does that conclude your question?

Yes, it does. Thank you.

Thank you very much ma’am. Our next question will be coming from Naveen [Kelia]. Please go ahead.

Hi. Thank you for the conference call. Actually three questions from my side. First, the deferred tax issue. Should we assume that the adjustment that has been made in the second quarter was a one off? Or should we expect some more benefits to accrue in the second half of the year?

Secondly, I notice that your fixed line EBITDA margins were down quite substantially in the second quarter. I was just wondering how you viewed that in the remainder of the year.

And the third question on the ForEx sensitivity that you’ve provided, PHP1 for PHP700m of earnings impact, was that only based on the balance sheet side, or did that also incorporate the fixed line revenue impact from ForEx movement? That’s it. Thank you.

We will work backwards, Naveen. The ForEx impact of PHP700m for every PHP1 movement, that is purely on the balance sheet side. So that doesn’t take into account the volatility impact of the revenue side, especially on the fixed line side. I think a rough estimate is about PHP500m in terms of the operating numbers. But that’s a one-year effect as against the balance sheet translation, which could come in one time.

And the deferred tax asset, if you look at the notes you’ll see there’s still about PHP2.8b of unrecognized deferred tax assets as of June 30. I think pretty much we -- our expectation is that will be booked in the second half of the year.

I think on the fixed line, the margins are certainly down compared to the first quarter and the fourth quarter. I guess to some extent that is a lead on to what Manuel says, it depends on what happens on the ForEx side. Because that impacts both our fixed line basic tariff through the [SERA] adjustment. And also influences the value of our inbound international business which is settled in dollars. So I think that’s why you’ve seen the volatility during the period say from the middle of last year, where we were about 55%, then it goes up as high as 66, and then back down to 56. So I guess we need to take a view in terms of what the likely impact is on the exchange rate. If the exchange rate improves, then obviously that will flow through to the margins.

Thank you.

Thank you. Does that conclude your question?

Yes.

Thank you very much.

I think there are no more questions on the call. We’re opening the floor here for some questions. If you could kindly approach the microphone for questions. No questions on the floor? There’s one more question. There’s one more question on the line.

Our next question will be coming from Kathy Chen. Please go ahead.

Hi. Just a quick follow up. Can you also talk about why the staff costs were up year on year?

What was that, Kathy?

Okay. Can you explain -- talk about why the staff costs were up quarter on quarter?

I think one -- on a consolidated basis obviously we do have more headcount as a result of the expansion of the ePLDT’s business, in particular the call centers. As you saw in the presentation, the businesses continue to do very well. But a major part of the cost there is headcount. So that’s one factor.

The second factor relates to effectively the accounting for the senior executives’ long-term incentive plan. That is an earnings, effectively a share-based plan. Under the new accounting you effectively accrue that on an on-going basis. And the accrual will, to a degree, depend on how the share price has performed. So during a period where the share price performs strongly, we need to increase the amount that we’ve accrued. So I think, as you re aware, the share price has performed quite strongly this year to date. Therefore there has been a need to increase the accrual. And that s flowed through the compensation item in the P&L.

I understand. Thank you.

Thank you. Does that conclude your question ma’am?

Yes. I suppose it does.

Thank you very much. Our next question will be coming from a follow-up question from Mr. Ken Dole. Please go ahead.

Sorry I don t have another question. It s just been asked by Kathy. That’s fine.

Thank you very much sir.

I think there are no more questions. Can we turn over to the operator please?

That concludes the question and answer session. Before I turn the conference back to Mr. Manuel Pangilinan, I would like to give everybody the instant replay information of today’s call.

This conference will be available on a 24-hour instant replay starting today. Daily on through August 23, 2006. Replay informations. 3:30 pm call. International caller number 852 2802 5151. U.S. toll free 1800 839 3016. Pass code is 788320. Conference leader is Anna Bengzon. This time I will turn the conference back to Mr. Manuel Pangilinan for any additional or closing remarks.

Let me just close this afternoon’s presentation by thanking all of you again. And we look forward to seeing all of you in the third quarter results presentation sometime first week November, November 8 I think. Anyway, it’s after All Saints Day. Thank you.

And that concludes today s conference. Thank you for your participation.