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Philippine Long Distance Telephone Company (NYSE:PHI)

Q3 2012 Earnings Call

November 6, 2012 2:00 AM ET

Executives

Melissa Vergel de Dios – Head, IR

Poly Nazareno – President and CEO

Chris Young – Chief Financial Advisor

Ray Espinosa – Head, Regulatory Affairs and Policies

Anabelle Lim-Chua – SVP and Treasurer; CFO, Smart

Analysts

Sachin Salgaonkar

Luis Hilado

Rajesh Raman

Arthur Pineda

Chi Fan

Surabhi Chandna

Rama Maruvada

Operator

Good afternoon, everyone, and welcome to the PLDT Conference Call to discuss the Company’s Financial and Operating Results for the First Nine Months of 2012. 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 Melissa Vergel de Dios, Head of Investor Relations for PLDT, for the introduction. Please go ahead. Thank you.

Melissa Vergel de Dios

Good afternoon, and thank you for joining us today to discuss the company’s financial and operating results for the first nine months of 2012. As mentioned in the conference call invitation, today’s presentation is posted on our website. For those who have not been able to do so, you may download the presentation from www.pldt.com.ph, under the Investor Relations section.

For today’s presentation, we have with us members of the PLDT Group management team; namely, Mr. Poly Nazareno, President and Chief Executive Officer of both PLDT and Smart; Mr. Chris Young, Chief Financial Advisor of PLDT; Ms. Anabelle Lim-Chua, SVP, Treasurer of PLDT and Chief Financial Officer of Smart; and Atty Ray C Espinosa.

At this point, let me turn the floor over to Mr. Poly Nazareno for the presentation.

Poly Nazareno

Good afternoon and thank you for joining us today. For 2012 we anticipated that the challenging operating conditions that arose in the second half of 2011 would carry into the first half of 2012 and would begin to improve in the second semester. Our results for the first nine months of the year are largely in line with this.

Consolidated service revenues as of end September 2012 grew by 12% to PHP126.2 billion compared with PHP112.3 billion in the same period last year. EBIT dipped by PHP2.5 billion or 4% year on year to PHP58.6 billion largely due to the PHP1.8 billion of manpower reduction costs booked in the second quarter. Margin was lower at 46%.

Reported net income for the first semester declined by 6% year on year to PHP28.7 billion, while core net income, excluding exceptional items, was lower by 8% year on year at PHP28 billion. Worth mentioning is that the results of the third quarter of 2012 are generally better quarter on quarter even without the contribution from digital. In addition, although third quarter metrics were lower than the same period last year, they showed improvement compared with the second quarter year-on-year results.

Analysts

Our core income of PHP28 billion on the next page – our core income of PHP28 billion at the end of September 2012 was lower year on year by PHP2.6 billion. The bulk of the decline or PHP2.4 billion pertains to the first six months of 2012 compared with the same period in 2011. This reflects the impact in the first semester of competitive pressure, which led to higher selling and promotion expenses and subsidies, as well as the one-time manpower reduction costs in the fixed line.

In contrast, the core income decline of PHP200 million in the third quarter was significantly lower year-on-year and is in line with our outlook for a stronger second half of the year. Reported net income for the first nine months of PHP28.7 billion was 6% lower year-on-year due to lower core income and higher net ForEx and derivative gains.

On the next page, the PLDT Group’s combined cellular subscriber base grew to 68.6 million at the end of September 2012 with 4.9 million new subscribers from the end of 2011. Strong growth was registered by Talk ‘N Text having added 2.5 million in the third quarter alone.

Smart subscriber base stood at 25.6 million while the number of Sun subscribers cross the 16 million mark. The group’s combined postpaid cellular subscriber base, inclusive of Sun Cellular’s 1.5 million postpaid customer count stood at 2.2 million in the end of the first nine months of 2012. Smart’s postpaid additions of 108,000 for the nine month period are almost double the net additions recorded in the same period in 2011.

We expect to have 70 million subscribers at the end of 2012. The group’s total broadband subscriber base rose to 3.2 million at the end of the first nine months of 2012 reflecting net adds for the year of over 240,000; 100,000 of which were added in the third quarter alone.

The combined wireless and fixed broadband subscriber base grew to 2.3 million and 902,000 respectively. Finally, our fixed line subscriber base stood at 2.1 million at the end of September.

On the next slide, the consolidated service revenues at the end of September 2012 rose by PHP14 billion or 12% year-on-year to PHP126.2 billion. Digitel accounted for 13% or PHP16.6 billion in total group service revenues. As in other markets, our revenue mix is changing with declines in contribution from legacy businesses such as SMS, NLD and inbound international voice, partly replaced by increases in broadband and BPO revenues.

At the end of September, for example, our BPO and broadband revenues grew by PHP2.7 billion, however, the combined decline in revenues from our NLD and ILD businesses amounted to PHP3.8 billion of which PHP2.2 billion were from international revenues. Improvement in overall top-line revenues will be muted by this trend until the contribution of broadband and BPO increases significantly.

Note that the structural change in revenue mix is also exerting pressure on EBITDA margins as the higher margin SMS and the international voice revenues are being replaced by relatively lower-margin revenue streams of broadband and BPO.

Consolidated EBITDA at the end of September dipped by 4% to PHP58.6 billion although PHP2.2 billion of the PHP2.5 billion year-on-year decrease was from the first half of the year. Higher revenues were offset by increases in cash operating expenses, more specifically higher selling and promo expenses, subsidies and PHP1.8 billion paid in connection with the manpower reduction program.

Excluding the said MRP cost, EBITDA would have only been PHP700 million or 1% lower year on year. EBITDA margin for the period, which would have declined to 48% without the MRP cost, was lower at 46%, partly reflecting the impact of Digitel’s lower margin, the change in revenue mix and the higher cash operating expenses as mentioned.

On the next slide, our highlights for the various segments starting with broadband and BPO, which showed the most promise. Broadband service revenues, accounting for 14% of total service revenues, remained robust with a 30% year-on-year growth to PHP17.6 billion for the first nine months of 2012. Despite low penetration levels of access devices, broadband usage and the popularity of social networks continue to expand.

This is supported by the large number of overseas Filipinos’ high literacy rate, a relatively young population and increasing purchasing power from remittances and BPO employments. With PLDT’s network advantage and the availability of a wide variety of service offers catering to various customer budgets and preferences, we expect to capture an even greater share of the broadband market.

Moving to our BPO business, service revenues at the end of September grew by 16% year-on-year to PHP7.3 billion, tracking overall industry growth. The outlook for SPi like that of the BPO industry is bullish. SPi continues to focus on growing its top line by expanding its sales pipeline with existing and new clients in current and new geographies and exploring new verticals.

On the next slide, service revenues from our wireless business rose 18% to PHP13.1 billion year-on-year to PHP87.3 billion. As comparative challenges remain in this space, our strategy focuses on pushing offers that aim to improve ARPUs and yield, among these are bucket plans and variants that keep subscribers on the network longer. Where necessary, we have responded with competitive offers in order to defend market share. In the execution of this strategy, we are leveraging on the PLDT group’s network advantage and ability to provide better quality of service.

Moving to our fixed line business, services revenues are highly – service revenues were higher by 5% or PHP2 billion, at PHP45.5 billion at the end of September 2012. Data and other network revenues were up by 12% or PHP2.1 billion, at PHP19 billion including billion from Digitel.

However, NLD and ILD revenues were lower by PHP700 million as Digitel’s NLD and ILD revenues of PHP800 million partly offset the PHP1.5 billion decline at PLDT. Our DSL and corporate businesses, which account – which together account for 40% of fixed line service revenues, are expected to benefit from the continued improvements in the economy, particularly in the BPO industry, as well as the sustained growth in domestic consumption.

Hereto the group’s network advantage boosts PLDT’s ability to offer higher value of services to both retail and enterprise customers. PLDT’s network advantage was reinforced, that’s on the next slide, by the recent completion of a two-year accelerated CapEx investment program which entailed PHP31.2 billion in 2011 and about PHP38 billion this year. The CapEx investments were directed at all the network’s elements, ensuring that our access, transport, core and international networks, individually and as a whole, are unrivalled in its capacity, reach, robustness and efficiency. This will further improve our ability to deliver quality of service to our customers, especially for broadband and content.

To further support the anticipated growth in Internet traffic following the launch of our fiber and LTE offerings, we have now investments to increase our Internet gateway capacity, additional backhaul coverage, and a fiber rollout that would pass by two million homes by the end of 2013.

We believe that having a strong integrated fixed line and cellular network is key to maintaining the industry leadership and ensuring growth, especially as the industry moves more and more into data.

On the next slide, many of you are aware that we earlier obtained board and shareholder approvals to create a class of preferred shares entitled to vote in the election of directors, following the Supreme Court decision in June 2011 on the petition filed by Wilson Gamboa.

In the said decision, the Supreme Court ruled that the term “capital,” as used in Section 11, Article XII of the 1987 Constitution, refers only to shares of stock entitled to vote in the election of directors and directed the SEC to determine whether PLDT was in violation of the 40% constitutional foreign ownership limit based on the said definition.

On October 9, the Supreme Court denied with finality – that is on the next slide – the motions for reconsideration filed by respondents in the Gamboa petition following the Supreme Court decision of June 2011.

On October 12, pursuant to the definition of capital as contained in the Supreme Court decision, the PLDT Board approved the issuance of 150 million voting preferred shares to be BTF Holdings, Inc., a wholly owned company of the PLDT Beneficial Trust Fund. BTFH paid PHP150 million for the said shares. With the issuance of these shares, PLDT’s foreign ownership based on outstanding voting shares stands at 34.5% well within the 40% foreign ownership cap and compliant with the Supreme Court decision.

On the last slide, last quarter we said that our first half results support our position that we are gradually seeing our way out of the tough wind second quarter financial metrics showing no deterioration compared with the first quarter and that the second quarter figures were ahead of the average quarterly numbers in the second half of 2011.

The return to the profit growth track seems to be under way as can be seen in our third quarter numbers and consequently in the nine-month results. Our focus remains on improving profitability. Profitability levels for our existing portfolio of businesses even as we look for new growth areas and opportunities for synergy within the group.

Given the results to date and the outlook for the rest of the year, we maintain our core net income guidance for the full year 2012 at PHP37 billion.

Thank you for joining us today, and we are now ready to take your questions.

Melissa Vergel de Dios

Operator, can you read the questions for – mechanics for taking the questions?

Question-and-Answer Session

Operator

Thank you. The floor is now open for your question. (Operator Instructions) Our first question is from Mr. Sachin Salgaonkar. Your line is now open. You may go ahead.

Sachin Salgaonkar

Hi. Thank you for the call. I have three questions. The first question is, do you see this tough competitive intensity picking up in 4Q and beyond as Globe has also its capacity concern issue and potentially gets more aggressive?

My second question is, if you look at your data and mobile Internet revenue, it’s showing a decent growth. But when we look at your overall ARPU, the sharp decline continues. I mean, I was wondering if this is an indication of any cannibalization. And at what point should we see this trend changing as in the ARPU stabilizes or increases.

And lastly, PLDT had an intention of selling your BPO businesses. I was wondering if there are any updates on that or whether that has taken a back seat. Thank you.

Poly Nazareno

With regards to the first question which is the competitive intensity, it – over the last two or three quarters, the competitive intensity has remained – actually, quite tight. And we’re seeing that we’ll continue but what is happening is that the market shares are stabilizing. Our market share, for example, has – in terms of revenue, on outbound cellular revenues, have more or less remained the same. So, we’re seeing that that has stabilized to a certain extent.

Our objective, therefore, is to protect our strongholds and to respond to whatever threats would be occurring in the different regions within the country and make sure that we will not lose a single percentage point of market share.

Chris Young

The number two question was...

Ray Espinosa

ARPU. (Inaudible) When do you see ARPU stabilize?

Poly Nazareno

Right now, there is a still a slight of – downgrading from higher bucket price services to the lower bucket price and as long as the competitive intensity remains, I think there will still be a decline in the ARPU, albeit it may not be as high as it has been in the last three to four quarters. We’re optimistically looking at reduction in ARPUs a little bit on a lower range compared to what is happening today.

Chris Young

I think the last question was on SPi. I think the reason that SPi was discussed earlier was within the context of the overall funding for a possible GMA 7 transaction. I think, as you know, that transaction is not now proceeding. So, while we are looking at the overall funding for the media investments that we have at the moment, we have no definitive plan in respect of SPi company.

Sachin Salgaonkar

Okay. Got it. That’s very clear, Chris. And just one follow-up question on competitive intensity. I mean, the one argument out there is maybe the market shares stabilized the last couple of quarters because of the capacity issues at Globe. Now if capacity issues are resolved, if Globe continues to maybe target the increased market share, PLDT is focusing on not trying to lose any market share, there is a risk that competitive intensity might further pick up. So, any thoughts on that?

Poly Nazareno

Well, if that is your assumption, that will continue to be – the competitive situation will continue to intensify. But I think the overall – if market shares are stabilizing to a certain extent quarter on quarter, which has been happening in the last two, three quarters. Then maybe things would be more rational moving forward regardless of whether one has capacity or not because we do have capacity, too, because we have just finished our super-charging of our network.

Sachin Salgaonkar

Good. That’s very clear. Thank you.

Operator

Our next question is from Mr. Luis Hilado. Your line is now open. You may go ahead and ask your question.

Luis Hilado

Hi. Good afternoon. Thanks for the call. I have three questions, one on revenues, one on OpEx and one on other income. On the revenue side, we noticed that the average revenue per minute for voice has improved quite substantially quarter-on-quarter, just wondering if there’s any particular reason for that. But as Mr. Nazareno mentioned, the yield on bucket pricing and even standard SMS was under pressure, just wondering if there’s, again, a seasonal or structural reasons for that.

The second question was on OpEx for a few items like professional and contracted services, rent and insurance, Q-on-Q they seem to be up double digit, any one-off factors for that or should we use those numbers going forward?

And last question, if you could tell us what the other income number was for in this quarter. It seems to be about over a PHP1 billion based on what we estimate for the quarter – PHP1.6 billion?

Chris Young

Yield on voice.

Anabelle Lim-Chua

Well, we’ll compare notes, Luis, but the yield per minute Q-on-Q did not increased significantly as per your observation. But maybe you should just take it offline in terms of how we’re kind of looking at it.

Luis Hilado

Yes. I’m getting about PH1.04 versus PHP0.92 the previous quarter, but, yes, I’ll take it offline.

Anabelle Lim-Chua

Okay. And the last question on the other income in the third quarter, that includes the gain and sale of the Philweb shares with respect to the first tranche that was closed in July of this year.

Luis Hilado

Okay. There’s another tranche coming in fourth quarter, I believe, or...

Anabelle Lim-Chua

Yes. Yes. We’ve closed the second tranche this October.

Luis Hilado

Okay.

Poly Nazareno

I think on the expense side, the reason for most of the increases is this year we’re consolidating the Sun and Digitel P&L whereas last year it’s not in there yet. We didn’t consolidate the results.

Luis Hilado

I’ll take it, the Q-on-Q – it’s quarter-on-quarter actually.

Poly Nazareno

2Q to 3Q, it’s 2Q.

Luis Hilado

Okay. All right.

Operator

Our next question is from Rajesh Raman. Your line is now open. You may go ahead.

Rajesh Raman

Yes. Hi. This is Rajesh from HSBC. Thanks for the call. I have two questions. Firstly, on media, could you guide us if there are any revisions for the media budgets for ABC 5 with the GMA acquisition now called off? Second, could you please remind us on the timing for auction and what is the minimum bid price? And lastly, your effective tax rate during the quarter was 19%. So, could you please guide us on your full-year tax rate please? Thank you.

Chris Young

What was the question again?

Anabelle Lim-Chua

All the investments will be given (inaudible).

Chris Young

What is the question? What is the question on the media?

Rajesh Raman

Sorry. Media, I was just wondering if there are any revisions for your media budget given that the GMA transaction has been called off. So, I was just wondering if there was anything that you have to revise in terms of the media budget, anything that you can guide on.

Chris Young

On the – well, the broad approach, I guess, is it was – the GMA’s sudden transaction that, was either a buy or build through TV5 and Cignal, I think we are currently reviewing with the management that TV5 and Cignal how the businesses are developing this year as yet we don’t have any updates at numbers for 2013, 2014 yet. It think on balance, it would appear that Cignal which is the direct-to-home satellite TV businesses doing quite well and should make it not exceed its numbers, initial output for next year.

I think for TV5 it’s probably a little bit behind of where we expected it to be but again, the numbers have been looked at for this year – for next year and 2014. At this stage, as yet, there’s no impact on the PLDT’s financial statements. I’m sure this will come up later, we’re still reviewing how that investment should best be made into MediaQuest given the current discussions that are going on following the Supreme Court ruling, on the definition of capital. So, as yet, there’s no direct impact, but it will certainly begin to affect us going into 2013 and 2014.

Rajesh Raman

Okay.

Anabelle Lim-Chua

On your second question with regards to cure auction, the prescribed time table based on the original ruling was to have the auction process happen I guess no later than sometime in January next year. Now, we have submitted what we call our cost recovery amount but it is up to the NTC to determine what the minimum bid price will be, whether it will be a cost recovery amount or something higher than the cost recovery amount.

Chris Young

(Inaudible).

Anabelle Lim-Chua

Well, the tax rate for PLDT group, we need to take into account the items that are I guess not taxable from our perspective or – so, for example, the gain on the Philweb sales, the equity share in our Meralco become earnings, previously, that gain on the disposal of (inaudible). So, all of those things have to sort of be netted out to arrive at a more what will be the operating sort of tax rate for the business. So, those things sometimes distorted if you just do a straightforward mathematical calculation.

Rajesh Raman

Okay. Thank you.

Operator

Our question is from Mr. Arthur Pineda. Your line is now open. Please go ahead.

Arthur Pineda

Hi. Thanks. Three questions for me. Firstly, on your OpEx, could you please quantify how much of your OpEx this year was actually linked to the network restructuring? I just wanted to clarify what a clean number for OpEx would be if you were to strip out restructuring activities for the year.

Secondly, you mentioned that there were another 850 towers to be consolidated. Just to clarify, the PHP1 billion cost savings from 2013 onwards, is that just on 850 or is that on 1,700 towers. Also, is there a room for more consolidation in the future? Lastly, I wanted to clarify your tower rental expenses seems have risen significantly up by more than 20%. Is there any reason for this? And should we see that reverting in the next quarter?

Anabelle Lim-Chua

Arthur, we’re not sure what you mean by network restructuring expenses, so we have not undertaken any item that we have to touch.

Arthur Pineda

Presumably, you were taking expenses on consolidating the Digitel and PLDT network beyond just the labor expenses. Is there any clarity on how much that has actually cost you this year?

Poly Nazareno

What we are seeing from the sites, for example, the consolidation of sites, is that it will cost us about PHP1 million for every two sites that we consolidate. And so far, we have been able to consolidate about 200 sites out of the 1,800 that we are planning to do over the next two to three years. That’s the only type of restructuring cost that you might be referring to. But that’s about it.

Arthur Pineda

Understood. Sorry. On towers, the PHP1 billion, is that referring to just 850 towers, or is that a total of 1,700 towers?

Anabelle Lim-Chua

The savings that we refer to is after we complete the process. Then there is a recurring savings of over PHP1 billion. So, the last take two to three years to complete. So, I guess it’s progressive, but that’s after the completion of the program, then we see over PHP1 billion in savings.

Arthur Pineda

And the 1,800 is the maximum that we can expect?

Anabelle Lim-Chua

Yes.

Poly Nazareno

Right now that is what we’re seeing based on our evaluation of all the sites physically.

Arthur Pineda

Understood.

Anabelle Lim-Chua

And the savings will come from not just tower-rental savings but I guess...

Poly Nazareno

Power...

Anabelle Lim-Chua

Electricity, et cetera, et cetera.

Arthur Pineda

Understood. Sorry, just last one on the rentals. It seems to be up a bit quarter on quarter. Is there any reason for this?

Chris Young

I don’t think that tower rentals – that rental expense also includes – if we see a short-term requirement to boost the lease of international capacity, we usually – as you’re aware, we usually build that and we are opening the cable landing station in Daet towards the end of the year. But I think with the pickup in broadband, we have rented a bit of additional capacity to bridge us through to the goal life of the Daet cable landing station. So, that – these are generally 6 or 12-month rentals. But it doesn’t relate to the power business. Yes, it doesn’t relate to the rental of powers.

Arthur Pineda

Understood. Okay. Thank you very much.

Operator

Our next question is from Chi Fan. Your line is now open. You may go ahead.

Chi Fan

Hi. Good afternoon and thank you for the opportunity to ask questions. I have in total four questions. The first question is regarding your subscriber growth. I see it’s mainly coming from the Talk ‘N Text brand which has lower ARPU compared to the Smart prepaid main brand which seems to continue to report a subscriber decline. Just trying to get a sense from you if there are some kind of internal cannibalization with subscribers migrating from your Smart main brand onto Talk ‘N Text?

The second question is regarding the CapEx. You said that it’s going to normalize to pre-2011 level. Is it refer to CapEx to sales or is it the absolute CapEx of PHP28 billion, PHP29 billion? The third is regarding your core net income guidance. In the previous quarter, you seem to also guide that you’ve returned to PHP42 billion by 2014 as well, but this quarter guidance you seem to only talk about 2012. Does that – I just want to ask whether there are anything we should read into that or it’s just you didn’t mention it?

The last question is on the foreign ownership. I understand that the SEC has come up with a draft guidance yesterday which comply with basically the Supreme Court’s recent judgment that the share should be considered separately by class and therefore this might impact both you and also some other company as well. What’s your view on that on these SEC new draft regulations? Thank you.

Poly Nazareno

Thank you for your questions, Chif. Let me answer the first one. I think – well, for a certain extent, you are right. There is a certain migration from the Smart subsidies towards, of course, the cheaper bucket offerings on the Talk ‘N Text brand.

And to a certain extent, that has resulted to our ARPUs – overall ARPUs or the combined ARPUs going down slightly, so – but what we are doing is we are looking at trying to differentiate the Smart brand versus the Talk ‘N Text No-frills brand, and therefore, adding more value to the Smart brand so that the premium that it commands will justify to a certain extent. But, yes, we’re trying to manage that shift and we are aware of this shift. The number two question...

Chris Young

I think that CapEx, it will more be focused on a number at the moment for 2013-2014 we indicated we think it would come down to about the PHP30 billion to PHP31 billion range which, I guess, is a little bit above the number that you were mentioning. But I think we are reasonably optimistic about the growth and data going into 2013-2014, both in text and mobile, as well as continued profit growth. So, I think we’re targeting that number.

On the guidance, I think the reason we’ve not put that in is, one, that we are in the middle of the budgeting updates at the moment. And we need to reassess what the outlook for 2013-2014 will be. I think that we – it would be probably be fair to say at the moment, if we looked out to that 2014 number of PHP42 billion, that that’s maybe quite challenging as we sit here now. Two principle reasons for that, one is that in terms of the competitive situation, so-called market repair, given where we find ourselves today, I think it’s going to take – it looks like it’s going to be – take longer than we initially anticipated. So, I think that will affect the numbers as we go into 2013, 2014.

So, we still think that, as Poly said in his presentation, that we’re seeing the situation stabilize in the current year. But certainly, the outlook is it’s going to take a little bit longer to get back to that PHP42 billion number. We also indicated we’ll get some firmer guidance numbers when we come out with the full-year results.

Ray Espinosa

On the last question regarding the SEC exposure draft pertaining to the Gamboa decision, just as a first point, insofar as PLDT is concerned, we have taken the view that by issuing the voting preferred shares, PLDT has effectively complied with the Gamboa decision, in particular the vast portion of the June 28, 2011, Gamboa decision.

This actually limits itself to the definition of capital as referring only to shares entitled to vote in the election of directors for the purposes of determining the allowable for investment, for foreign ownership limit in PLDT or in public utility companies. Insofar as the draft NTC rule is concerned, yes, we have noticed that the SEC in its rule making, policy making function has actually adopted the two statements of the Court found in the Gamboa opinions, and the one that you dealt with refers to into the application of the 60/40 rule to each class of share.

Now, we have sounded off the SEC and local business communities that we find this particular rule to be very concerning. It does bring in to question and doubt, the validity of a significant amount of foreign investment particularly in listed companies like PLDT, Globe, ICTSI, Manila Water, CEDC, where if you were just to apply the 60/40 rule on the common stock only, the level of court ownership in each of these companies exceed in varying degrees to 40% allowable limit.

The voting preferred shares were created by all of these companies and belatedly by us actually to address up the foreign ownership limit and to create in fact more headroom for additional foreign investment which these companies would need for their expansion.

So, all of these bountiful effects of a structure that improves the voting preferred shares seems to be put a lot by this draft rule, and in general it’s really a question on how much of this excess foreign ownership can really be sold out in market where there is very limited foreign capital – local capital to acquire these shares at current market prices.

By our calculation, the foreign ownership if common shares exceeding 40% of PLDT, Globe, Manila Water, ICSI, Ayala Land would account to about PHP150 billion quite obviously given the training volumes of the PSE and the amount of genuine Filipino capital that is available to acquire first – these shares cannot be sold out in any short period of time. So, we have cautioned the SEC and the business community that this will have to depress the prices of the shares and not just the shares, but have this affected ownership, but the prices as well of the other listed shares in the PSE and which could eventually lead to up to actually melt down of the stock market.

It has really created a client, I mean, hospitable climate for foreign investment because until all of this have clarified – to be clarified by the SEC, and perhaps, again, ultimately, by the Supreme Court, foreign investments in the Philippines or foreign investors in the Philippines will not be sure whether or not their current investments are legitimate and will not be required to give the investment.

So, we’ve encouraged the media to encourage the PSE and the other business groups to attend the first SEC public consultation hearing on November 9 and to voice their opinions. We will certainly be there with our lawyers to explain to the SEC our position and what we believe would be the negative profound effects of the rule if it were adopted on the stock market, foreign investment and the economy in general.

We also have sounded off the SEC and the PSE that this kind of rule, if it is somehow promulgated in its statutory form, would actually affect and erode the unprecedented credit rating, so far, achieved by the present government. And it’s something that all of us should be concerned about.

This is not a matter for just the SEC to consider of the economic managers of the country, we have made appeals to the executive branch that the economic managers of the country, particularly the Department of Trade and Industry and the Department of Finance, should get involve and put their inputs to bear on the SEC rule and what to adopt is a rule of framework that would be foreign investment-friendly and not one that would drive away foreign investment. It’s something easy for foreign money to look for parties where they are welcome and the atmosphere for foreign investors are hospitable.

Chi Fan

Okay. Thank you very much. Just a bit of a follow-up, is there any definite timeframe on when the SEC needs to rule on this?

Ray Espinosa

Well, we have no indication yet when the SEC intends to finally promulgate the rule. What we know, so far, is they will hold the first public consultation of that on November 9, after which they actually will allow participating parties to submit their position papers. I think our interest is to attend November 9, voice out our views, submit our position paper shortly thereafter and encourage the SEC to hold a second consultative meeting so that the issues can be more intelligent to discuss in an open forum between the regulator and all of the affected parties.

Operator

Our next question is from...

Chi Fan

Thank you very much. Yes.

Operator

Our next question is from (inaudible). Your line is now open. You may go ahead.

Unidentified Analyst

Yes. Thanks. Yes, just a question on nonrecurring items which is included in the core earnings, computation one is under manpower reduction. I do understand you have booked already manpower reduction expenses for the first nine months. Just want to know how much is your – the balance to be booked for the fourth quarter. Same goes for the gain on sale of the Philweb. I do understand the first tranche has already been booked in the first nine months and again, what amount it will be for the balance of the full year? That’s all. Thanks.

Anabelle Lim-Chua

On the Philweb, first tranche indicated closed in the third quarter, and then the second tranche will close in the first quarter. So, there will be a similar amount of gain booked in the fourth quarter of approximately about PHP800 billion.

Chris Young

I think on the MRP, the number is not definite. Yes, I think there are still discussions going on. It could be a higher number. I think what we think it may be something in the region of about PHP500 million, maybe a little bit higher than that. It’s difficult to know these things in advance because we’re not entirely sure what the take-up might be. But PHP500 million, maybe a little bit higher.

Unidentified Analyst

Thanks. For the first nine months, how much was the manpower reduction? Is that available?

Anabelle Lim-Chua

PHP1.8 billion.

Unidentified Analyst

Okay. First nine months. Thank you.

Operator

Our next question is from Surabhi Chandna. Your line is now open. You may go ahead.

Surabhi Chandna

Hi. Thanks for the opportunity. I just wanted to clarify one thing on the competition cost. Is there anything in the third quarter which was part of the MRP as well?

Chris Young

Did you say MRP, manpower reduction?

Surabhi Chandna

Yes. Because the reason I asked this is, last time, it was PHP7.8 billion, and you had suggested PHP1.8 billion of excess are one-time. And currently, compensation costs are again up. So, I’m just wondering if there are some one-off elements there for the third quarter alone.

Anabelle Lim-Chua

The manpower reduction program was booked in the second quarter.

Chris Young

Second quarter.

Anabelle Lim-Chua

So, not in the third quarter.

Surabhi Chandna

PHP6.5 billion for the current quarter would be, like, the recurring going rate in the future as well?

Anabelle Lim-Chua

Say that again? The compensation cost for the third quarter is about PHP6.6 billion.

Surabhi Chandna

And should we look at this as the recurring rate?

Anabelle Lim-Chua

Well, as Chris indicated earlier, there could be another expense related to manpower expense in the fourth quarter.

Chris Young

Manpower-reduction expense.

Anabelle Lim-Chua

Yes, yes. And then the other thing, we probably would need to revisit at some point is really pension costs as a function of the change in manpower and also, I guess, some accounting changes next year.

Surabhi Chandna

Okay. My second question is on the tax rate. I understand it’s just there are a lot of one-offs for the current year. Do you have any guidance for next year, ex of this Philweb transaction?

Anabelle Lim-Chua

Typically, ex the capital gains and Meralco, we are a little under 30%. 30% is the statutory tax rate. So, taking away the effects of all the other things, we come in 2%, 3% sort of below 30%, typically.

Surabhi Chandna

And this is not impacted by any changes in the fixed line versus wireless contribution in terms of income because I saw some note in your MDA which suggested something that you have low provisions because of fixed line revenues declining?

Chris Young

It shouldn’t. I think that our – as a result of the Digitel Sun transaction, there were certain tax we call net operating losses...

Ray Espinosa

NOLCOs.

Chris Young

.NOLCOs, which depending on the outlook for the wireless and the fixed end business maybe not be recognized. If it is a NOLCO per se, normally that relates – you create a deferred tax asset. So, when you reverse it, the roundabout sales, you come out with roughly a tax rate 2% to 3% below the 30%.

If there is a situation where there is a NOLCO which hasn’t been recognized but because of improving profitability you can begin to recognize it, that can have a positive effect on your tax rate. Otherwise, you’re running at about 27% to 28% level.

Surabhi Chandna

Sure. My final question is on the cash inflows that you have so far because of the Beacon and the PLDT transactions. Could you summarize the total amount and plan use of this funds considering now that the GMA talks are terminated? So, any plans on use of this cash?

Anabelle Lim-Chua

On the Beacon-related cash flow, we received about PHP3.6 billion from the disposal of the certain – perhaps to MPIC. earlier in the year, we had also infused PHP2.7 billion into Beacon to – at our 50% with respect to certain additional share purchases that were made – Meralco share purchases that were made from the Lopez Group. So, that’s the – then on the Philweb, I guess, we received approximately PHP2 billion this year and then potentially another – a little over PHP2 billion next year. So, I guess, in a way you can look at that PHP2 billion also versus the MRT cost that we have basically also sort of shouldered.

Surabhi Chandna

(Inaudible). Thank you so much.

Operator

Our next question is from Rama Maruvada. Your line is now open. You may go ahead.

Rama Maruvada

Hi. Good afternoon. Just two questions from me, please. The first one, again, following up on the OpEx trajectory, can I just check with you in terms of where do you see the longer term EBITDA margins for the fixed line division? They are about 10 percentage points below where they were last year because of the consolidation. So, if any clarity there would be helpful.

The second one is with regards to digital DSL subscriber base. I noticed that it’s been trending down the past three quarters, just wondering what’s going on here.

Poly Nazareno

May just add to that the second question over here, I think really – this is around the fixed line. That’s really a clean-up exercise, I think on our behalf. We have in place a credit control policy on the PLDT QIK side, the receivables being a perennial problem there over the years. So, as the year has progressed, we have Digitel adapt these more stringent credit management policies. I think as a result, we’ve seen the fallout in the subscriber numbers there. But that should be fully in place by the end of the year and should continue as we go into 2013.

In fact, I think in terms of the sales residual base of Digitel performance, given they will have access to improve quality of service on their network because of the full integration – it’s a full integration with PLDT. That improved quality of service, I think, should encourage more people to take up – more of the voice subscribers to take up DSL going forward.

On the text line, I think, our guidance on the margins remains the same, as we’ve been giving for the last four or five years, is that broadly the revenues are staying steadily. Plus we’re getting a little bit of growth but we still are seeing the dynamic where the international inbound and the NLD declines offset by the growth in the data business, both the consumer DSL and corporate.

And again, as mentioned by Poly in his presentation, the margins on that part of the business, it’s growing and somewhat lower than that which is declining. So, we have been forecasting the EBITDA margin to come up by about 1% per annum until NLD and ILD gets back to a much lower number than it is now. And I think that’s how we see the trend continuing. Obviously, we will consider the PHP1.7 billion to be something – to be added back in terms of how we look at the margins.

Rama Maruvada

Okay. Understood. Thank you very much.

Melissa Vergel de Dios

Operator, are there any more questions?

Operator

At this time, we don’t have any other questions on queue.

Melissa V. Vergel de Dios, Head-Investor Relations

If there are no more questions, I’d like to turn the floor over to you for the replay details.

Operator

I would like to give everyone the instant replay information for today’s call. This conference will be available on a 24-hour instant replay starting today daily on through November 20, 2012. Replay information for the CPM call, international caller number, country code 852-3018-4300. U.S. toll-free is 1-800-945-6576. Passcode is 4168. Conference leader is Melissa Vergel de Dios. I will now turn the conference back to PLDT for any additional and closing remarks.

Poly Nazareno

On behalf of my colleagues, I want to thank you all for joining us today, and we look forward to the next call, which would be sometime early March about the year-end results for the group. Thank you.

Operator

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

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Source: Philippine Long Distance Telephone Company's CEO Discusses Q3 2012 Results - Earnings Call Transcript
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