PLDT Inc (PHI) 2006 Q4 法說會逐字稿

Welcome to the PLDT Conference Call to discuss the Company's full year 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. You may begin. Thank you.

Hello there. Good morning. Thank you for joining us for this call. We have here with us today, Mr. Chris Young, Chief Financial Advisor, PLDT, and Annabelle Chua, CFO of Smart and we have [inaudible] of Smart Communications as well. At this time, let me turn over handover the presentation to Chris.

Good evening. Well, good evening and, yes, good morning to all of you there. I -- just to make you aware that we did such a good job at the presentation this afternoon and answered so many of the questions that there are actually only three of you on the line. So, it's out intention, given the very personal nature of this conference call, to go through it relatively quickly and give you time for questions at the end.

I'll start and cover the consolidated position. Annabelle will pitch in and cover Smart and I'll tie up on the Fixed and ePLDT.

So, to make a start, I assume you have access to the presentation. On the summary, 2006 was a strong performance from the Group as a whole. Revenues are ahead. EBITDA was ahead. Our definition of core net income was ahead by 9%. Earnings per share was ahead by 5%, mainly as a result of the conversion of various instruments during the year. And the reported net income was ahead 3%.

If we turn to the next page, we analyze that the core net income and the reported. And both the core and reported were effected by several factors. The ForEx was important in both cases. The peso appreciated by 6.8% last year from an average of PHP55 to the dollar in 2005 to PHP51.3 in 2006. And still a fair percentage of our revenues, about 25%, and the Group as a whole, about 52% of the fixed remain directly or indirectly linked to the U.S. dollar. If the peso had been flat year-on-year, the increase in our revenues would have been closer to 5.5% than the 3% that we have recorded.

And that will obviously be a factor as we move into 2007, because the peso has continued to appreciate. I think to date we're averaging about PHP48.5 so far, compared with the average of PHP51.3 last year. And our current estimate is that in terms of the P&L effect that is about PHP550m for every PHP1 movement in the exchange rate versus the U.S. dollar. That doesn't take into account the balance sheet effect. But as we'll discuss somewhat later, that is becoming less significant in terms of its P&L impact.

Now, the other times which effected the -- were the difference between the core net income and the reported were on a positive side, the reversal of the pervious provision which we made against ACeS, as a result of the ACeS restructuring which was a positive PHP3.5b. We continued to recognize exchange gains from the retranslation of the balance sheet, particularly the dollar-denominator liability of PHP1.6b, though that was significantly lower than the PHP4.3b that we recorded in the previous year. We still got the -- a positive deferred tax impact of PHP5.5b. But again, that was somewhat lower than the PHP7.3b recorded in 2005.

On the negative side, there was an additional depreciation charge, similar to 2005 of about PHP7.9b for certain parts of the Legacy Network on the Fixed, which needed to -- which will no longer be utilized as a result of the NGN upgrade. And there were certain impairment charges that we took. The largest of which was in respect of our satellite operation, Mabuhay, where there was a shorter estimate of the life of the satellite than we'd originally anticipated. That explains the bulk of the movement between the PHP31.5b core net income and the higher PHP35.1b reported net income. Now, before going -- sorry, that's from a P&L perspective.

Cash flow remained strong at PHP34b for the year. That was after incurring capital expenditures of PHP21.1b. The cash was used to pay-down debt, $362m during the year including, as I think you know, the prepayment of Piltel's restructured debt.

We also used funds to invest in new businesses to diversify from the traditional Fixed Line -- particular -- particularly the Fixed Line and Wireless business, in particular, for SPI, the BPO business.

We've also increased the dividend payout ratio for 2006 to 60% of our core earnings, which means that an additional PHP50 per share will be paid in April this year. And that means a total dividend of PHP100 per share in respect of the 2006 earnings.

For 2007, we're targeting to increase the dividend payout ratio to 70%, while adopting a look-back approach at the end of the year to determine our capacity to supplement our regular dividend payment with additional shareholder return, balancing that versus investment opportunities that we may identify during the year.

As of the year end 2006, the consolidated debt is down to $1.7b and our net debt to EBITDA has improved to 0.7 times.

In February 2007, Smart successfully issued PHP5b worth of five-year and 10-year notes at fixed rates of 5.625% and 6.5% respectively. This issue is one of the lowest price peso deals in the market. We're taking advantage of the strong peso and the low interest rate environment to improve our debt mix and lower our cost of borrowings going forward.

Before going into the balance of the financial presentation, we have a chart here really to highlight where we -- the Group is in terms of what we would perceive as a transformation to its next generation communications. We are at a critical stage at the moment where we need to strike a careful balance as we transition from existing businesses to what we are describing as our next generation communications.

The transformation goes beyond upgrading our network [work] and all IP next generation network. As that network upgrade is underway, we are simultaneously having to re-engineer processes, integrate our various fixed line and wireless platforms, re-orient our people and transform our products and services to make them more relevant to our customers who are growing in sophistication and looking for better value.

In 2006, we saw the beginning of this transformation as we rolled out NGN, 3G and wireless broadband. In 2007, we'll work on the integration of our billing and other information technology platforms. We are also maximizing out existing platforms in order to roll out the services costs effectively to various markets. This whole move towards next generation communication will allow us to expand our coverage, capacity and capability to serve our customers better in the years to come.

Moving to slide six, our drive to move PLDT Group forward the next generation communication is already starting to bare fruit. In 2006, we were encouraged by an 18% growth in our Data, Broadband and ICT revenues, which more than offset the decline in our traditional fixed line voice services.

Consolidated service revenues are up 3% to PHP125b and our EBITDA margins were sustained at 64%. We expect Data, Broadband, ICT and the so-called Next Generation Services to have an even stronger contribution in 2007 and in the coming years.

Moving onto the seven, enabling the growth of Data Services and the investments we're making in our networks, consolidated CapEx increased to PHP21.1b, principally due to the initial roll out of NGN, wireless broadband and 3G, as well as the expansion of our digital fiber optic network, which will provide for our significant transmission capability to support the growth of Data Services in the years to come.

In 2007 we estimate that our total CapEx will range from PHP20 to PHP22b. In the bottom right of this slide, you will note that the nature of our CapEx is shifting more towards NGN and broadband, and an increase in the areas of IT and product development.

Investments in the cellular network remain important, as we continue to increase our cellular subscriber base and as wireless technology is developed.

At this stage, I'll pass it over to Annabelle, who will update us on progress at Smart.

Moving onto Smart, Smart's Wireless revenues rose by 5% in 2006 to PHP78.4b and we remain market leader in the cellular market. For the fourth quarter service revenues were up 5% compared with third quarter. Fourth quarter revenues were up PHP20.4b, driven by the fourth quarter Christmas seasonality and despite the negative impact of certain natural calamities which took place during this period.

With respect to the mix of the revenues, this -- the growth's been driven principally by higher Cellular Data and Wireless Broadband revenues, while we were able to maintain Voice revenues at a steady contribution.

With respect to the management of the subscriber acquisition cost, which remained quite low at PHP113 per -- [went up] per user, compared to the -- our prepaid ARPU of PHP263. So, that remains less than 50% of one month ARPU.

With respect to the EBITDA margins of the Smart Cellular business, we saw EBITDA grew by 5% to PHP50.2b with margins staying at 64%.

Looking at slide number nine, you will see from this slide that Smart was able to maintain market leadership position in both subscriber take-ups as well as in revenues. We were able to reach a 25m subscriber [market] in 2007, after seeing acquisitions of PHP1.2m in the fourth quarter 2006 and 900,000 new net adds in the first two months of this year alone.

We continue to remain focused on segmenting the market by offering our separate, specific, value-driven packages that aim to minimize small [inaudible] usage while providing better network efficiencies and higher yields to our subscribers.

In addition to our mainstream Text and Voice business, Smart is developing new services with the objective of enhancing usage amongst our subscriber base. And we have our Smart Money platform, which has become the base for other acquisitions such as Smart Remit and the relaunch of Smart Money and Smart Money PayPass.

During the 3G Congress in Barcelona, Smart announced that we would launch pilot projects in the Middle East and Europe with respect to low-cost [inaudible] services using the mobile phone as the platform for this type of financial services. [For] the Smart services have a platform that will enable Mobile operators and banks to serve the [relevant] needs of migrant workers in various countries to [receive the] type of application.

The project is supported by 19 of the world's leading mobile operators with the objective of creating a money transfer solution that will take advantage of [the basic] mobile phone networks and lower the cost of [significantly].

Smart's first pilot project will be in Bahrain in March and a brand new Smart Remit in tandem with MTC Vodafone Bahrain and the leading [inaudible] Bank, focusing on the over [inaudible] in Bahrain.

In addition, Smart Money is being launched as a payment medium for toll-ways, retail outlets and other value -- low-value, high volume transactions in the Philippines. We have signed up RCBC and DBP as two additional issuing banks for Smart Money in the Philippines. And we are currently also deploying PayPass terminals in the leading retail chains in the country.

Also, today Smart is getting together with Mediaquest and NBC which are media companies owned by the PLDC [inaudible]. We have [inaudible] broadcasting a new mobile TV service. This service is being broadcast using a DVBH or digital video broadcasting-handheld of the mobile TV platform. Initially it will be made available in metro Manila, with [the first] broadcast offering nine channels, which will include CNN, CNBC, [VC] World, fashion TV, chat TV, [inaudible] amongst others. [Inaudible] service, Smart [inaudible] handset subscriber [inaudible] DVBH enabled handset.

I turn it back over to Chris to discuss the highlights in the performance of Fixed Line business for 2006.

Slide -- moving to slide 11, which shows you the highlights of the performance of the Fixed Line business. Fixed Line's revenues declined by 1% to PHP49, as a result of the combined impact of a strong growth in DSL and Corporate Data services which were, however, more than offset and -- by the 11% decline in Voice services.

With about 52% of Fixed Line revenues denominated or linked to the U.S. dollar, depreciation in the peso is a major factor for the Fixed Line business. Had the peso remained stable, Fixed Line revenues would have increased by 2% year-on-year.

EBITDA declined slightly to PHP28.4b in line with the small decline in the revenues. EBITDA margins, however, remained stable at 58%.

Fixed Line business is rapidly evolving. As broadband services become widely available, we anticipate our traditional Voice services to come under even greater pressure. Nevertheless, we believe that our ability to stay ahead in the Broadband revolution is the key, not only to mitigate the impact of declining Voice revenues, but also deliver growth in the years ahead.

Moving onto slide 12, clearly the Broadband revolution is just starting. The number of PCs in residential homes grew by 58% year-on-year to about 1.4m, or about 8% of total households according to third-party surveys. Our young population lends itself to the propagation of the Internet. And we currently estimate there are now 9m Internet users in the country. Half of them access the Internet through Internet cafes.

Total Broadband subscriptions in the market have more than doubled to about 340,000, and narrow band subscriptions are likewise increasing, particularly in the middle to lower income households.

PLDT Group through PLDT DSL and Smart Bro more than doubled its broadband subscriber base to 265,000 as of year end 2006. Our Broadband and Internet revenues surged 49% to PHP5.2b in 2006, from PHP3.5b in 2005. With the continued expansion of the broadband market in the Philippines, we're optimistic about the growth potential of our broadband services in the years ahead.

As you can see on slide 13, the PLDT Group is in a unique position to provide the widest array of broadband services in the country. Our combined fixed line and wireless capability, and our significant transgression and international cable capacity allow us to support a number of Internet services from the low-speed, low mobility narrow band Internet access to high speed broadband services. We also provide these services at varying price points to suit the requirements of individuals, low to high income households and small to medium sized enterprises.

Our two main service offerings for Broadband are PLDT DSL and Smart Bro. Our DSL capacity has been expanded mainly through the NGN roll out. Smart Bro, on the other hand, has been gaining momentum as a result of Smart's rapid deployment of wireless broadband capable base stations, utilizing existing Smart towers all over the country. Smart Bro utilizes wireless broadband technology developed by Motorola called Canopy using a 5.7 megahertz spectrum of [Smart].

Let us now move on to ePLDT, ePLDT's service revenues grew by 122% to PHP6.5b, mainly driven by the consolidation of SPI and a 35% organic growth in call center revenues. On a pro forma basis with the full year impact of SPI, ePLDT's revenues would have grown by 29% to PHP9.5b.

EBITDA increased to PHP876m while margins declined 13%. ePLDT expects margins to improve over the next 12 to 18 months as certain operations of SPI are integrated and capacity utilization increased. Through ePLDT, the PLDT Group is able to diversify our revenue base and participate in new growth sectors, which tap into markets outside of the domestic economy.

If we turn to slide 15, we can see that ePLDT through Ventus and SPI are well positioned to increase their share in the growing global outsourcing market. On a combined basis, Ventus and SPI have close to 9,306 and 12,000 employees. The Philippines is gaining recognition as an attractive site for Voice and non Voice services. We are optimistic about the growth prospects of Ventus and SPI in the years ahead.

Both Ventus and SPI are moving into higher value services, which will allow them to increase their business from existing clients while continuing to broaden their customer base. SPI is also looking to expand its service offerings through selective acquisitions, which will allow them to gain new contracts and obtain new or related capabilities to their existing service verticals.

To conclude, we will take a short look at the outlook for 2007. And the first thing that needs to be noted is that the Group's financial results will be impacted by a number of factors, but may be most importantly be the impact of movements in the exchange rate.

Restating the PLDT Group's 2006 financial results foreign exchange rate of PHP48 on the PHP51.3 to U.S. dollar average in 2006 will give us a profit base of PHP30b. On that basis we are forecasting that the core net income for the year will come in at something in the region of PHP32 to PHP33b.

We expect capital expenditures to be similar to those in 2006, in the range PHP20 to PHP22b. And as I said earlier, we would expect to make 70% dividend payout, with a look-back towards the end of the year or early next year to determine whether we would make a bigger distribution to shareholders, either by way of special dividend, or share buy back, or some other form of capital reduction.

One last point I would make is that it's likely that we will see the core and the reported earnings converging over the next few years, in particular as the impact of the exchange rates when we can retranslate the balance sheet, is getting -- is having less of an effect as time goes on as the balance sheet is deleveraged and the amount of unhedged debt is now relatively small.

That is the end of the formal presentation. We will now open it up to see if you have any questions. Thank you.

Thank you. The floor is open for your questions. [OPERATOR INSTRUCTIONS]. We have a question from [Chad Mentiller] in Washington. Go ahead please.

Hello, thank you very much for having the call at an hour at which we could participate, even if only three of us did show up. Just a few questions, I wonder if you could talk a little bit about the competitive environment in the mobile space in the fourth quarter. It seems that the margins were a little weak.

Second question, I understand the positive case for the shift in CapEx. I wonder if there is also a sense of -- a view on 3G and whether or not it's not yet ready for prime time in the Philippines, if there's any of that in that CapEx budget?

Third question, is there a target range of net debt to EBITDA that we could think about as you do your look back toward the end of next year?

And then just two technical questions, can you give us a guide as to how much depreciation is going to be in '07 and what tax rate we should expect?

Okay, you understand the question?

In terms of the fourth quarter performance if you look at this from a revenue market share, it's a little up, 58.9% compared to 58.7% in the previous quarter.

On a more overall basis the market to some extent we recognize that there is quite an element now of people who hold [inaudible], although certainly this is [inaudible]. But there's an element of about 10 to 20% of the market in that mould. And so, there is probably a thrust to try to develop more attractive packages that would essentially result in people having [inaudible] of subscribers [inaudible].

So, there has been various programs that we have launched including the LAHATxt, which is probably the last big launch that we had, that would enable people to still buy these bucket type of pricing for text. But moving on, you are in a pure on net type [testing] to an on and off net component to it. So, there are various attempts to try to segment the market further and do more creative things.

Now having said that, with respect to the margins in the fourth quarter, it's not so much the competitive pressure, but really some of the expenses that we booked through in the fourth quarter with respect to accruals of the marketing spend the fourth quarter as well as spend went up principally [deployment] of the PLDT. A lot of those accruals were put in the fourth quarter. That had the effect of depressing the margins a bit. But overall, the margin for Cellular business remains quite healthy at 64% for the year. And that's the same expectation that we have for the Cellular business this year.

3G CapEx, if you look at the chart on CapEx, last year we spent about $60m for 3G CapEx, albeit at the end of the day that was a way of expanding our 3G capacity, which we wanted to do for things like heavier texting, but we did it on the 3G network anyway.

So, in terms of traction and 3G not really that much yet. But -- so, and we won't have significant 3G spending included in these '07 numbers. Having said that, we obviously will continue to keep a watch on [these] -- on 3G and how the handset prices develop, how the services develop. And so, we would not hesitate to spend if there was a case for that. But at the moment there's a more [needs expanding] for the Cellular in this CapEx assumption for '07.

Would that imply that you're comfortable with the level of Voice capacity that you have with the caveat that, of course, you have to grow that over time?

That's correct.

Okay.

Net debt to EBITDA?

Well, we've said that the target is in the 1 to 1.5 times range depending on the opportunities. Now, obviously we are trending below that at the moment. We're at 0.7, which is in a way, as we've indicated before, keeping up the all the drivers for taking opportunities that will come up. And so, that's the general -- it's still that the medium term target would be 1 to 1.5 times.

If you look at the debt -- the rate that SMART's getting for debt, congratulations, that is incredibly attractive. Wouldn't that make you more comfortable that you could go at a higher leverage rate?

I think that that level has been some form of interactive discussion with the various rating agencies over time. I think where the Philippines stands at the moment I think people are getting more confident. But obviously there are some -- still some significant issues out there.

I think they still also, on the rating agencies side, do have a concern in terms of the mix of the debt where I know it's 1.7b, but it's still predominantly -- I think it's 95% is in U.S. dollars. But that's certainly not fixed in stone. I think we will continue to discuss with them and I think it will be a developing situation over the next 12 months or so.

Okay. Depreciation and tax rate?

I think that's the easier one, so I'll deal with that. It's about PHP24b for the depreciation.

And the tax rate is -- yes, again it has to be a range. I think we're thinking probably in the range about 32 to 33%.

Great. Thanks a lot.

Thank you for your question. [OPERATOR INSTRUCTIONS]. That concludes the question and answer session.

Before I turn the conference back to Ms. Anna Bengzon, I would like to give you the instant replay information for today's call. This conference will be available on a 24 hour instant replay starting today and daily until March 20, year 2007. To listen to it you may call Hong Kong 852 2802 5151. Or, if you're in the United States, you may call toll free 1 800 454 0219. The pass code is 792 840.

I will turn the conference back to Ms. Bengzon for any additional or closing remarks. Go ahead please.

I think just to let [inaudible] Chris and myself will be in the U.S. next week on the [CLS] day [inaudible]. So -- and if you happen to be there maybe meeting some of you during the course of the trip, Annabelle and [Debbie] will be there, so if you're going to be in Singapore and in Hong Kong, [loans] office.

I think we're in New York Monday, Tuesday next week, Wednesday Boston and then Thursday in San Francisco. So, if you would -- can join us for -- on any of these meetings that would be great to see you, I think there a series of one on one. So, if you can make it that would be good. Otherwise I think we're done.

Thank you.

Thank you.

Thank you. That concludes the conference. Thank you for your participation. You may disconnect at this time.