You've just released your first quarter numbers and they were incredibly strong. Net profit more than doubled to Ps5.2 billion. What drove this?
Well subscriber numbers continue to grow quarter by quarter, so most of the success is down to the wireless side. But we also started a number of initiatives a couple of years ago on the fixed line side that have stabilized revenues and reduced costs. That's now starting to come through as well.
Traditionally the four quarter brings in the highest sales because of Christmas. After that the number usually come off a bit. But this quarter has been surprisingly strong as well.
Why's that?
We've introduced a lot of product innovations over the last 12 to 18 months, which are allowing us to drive much further down into the market. We're really going after the mass market now. Last year, for example, we launched the e-load initiative, which allows people to top up electronically via their phone and does away with the need for pre-paid cards. We estimate about 85% of our subscribers use this service. It's taken hold very quickly.
The other initiative is PASA phone, which allows subscribers to pass value between one another. Transfers can be as low as Ps2. Together these two initiatives have really allowed us to expand the market for cellular services in the Philippines. And you have to remember the business model here is different to many other countries. We don't subsidize handsets, but we work hard to reduce subscriber acquisition costs by not spending much on marketing or advertising and cutting the commissions we pay to dealers. It means that at 60%, our EBITDA margins remain at the high end of the industry globally.
You added 1.4 million new users in the first quarter. Do you think you can keep additions this high going forwards?
We'll have to wait and see, but at our press conference the other day we said we believe additions will continue to remain strong from what we've seen from the April numbers.
The other element to your success is the debt reduction strategy.
Yes, this really started back in 2001 and initially was an issue about re-financing. We talked to a number of our existing lenders and in May 2002 we returned to the public bond markets to term out our maturity profile. We raised $250 million from a 10-year bond and $100 million from a five-year bond.
After the re-financing was completed, we moved onto the next stage - debt reduction. Most of the debt was on the fixed line side and resulted from a big expansion of our network in the 1990's. The wireless side was only lightly leveraged.
In 2002, we targeted paying down $130 million, then $180 million in 2003 and now in 2004 we're targeting $250 million. Over 2005 to 2006, we plan to accelerate this further to $800 million.
If we can achieve this, we'll have reduced debt to about $1.4 billion, which the cash flows of the fixed line side can easily service.
What do you think your optimal ratios should be?
On a stand-alone basis, PLDT hopes to get net debt to EBITDA down to three times and net debt to equity down below 100% by the end of 2006. On a consolidated basis taking Smart into consideration we hope to achieve a net debt to EBITDA figure of two times.
What do the ratios look like now?
Net debt to EBITDA is about four times on a stand-alone basis and net debt to equity about 135%. On a consolidated basis, it's about 2.2 times.
Being able to dividend earnings from Smart has been key I believe?
Yes it's really helped accelerate the de-leveraging process. In 2003, we dividened up 100% of net profit from Smart and this year it will be 70 %, or Ps11.3 billion. Over 2005/2006 we expect the pay-out ratio to remain the same, but as the profitability of the wireless business continues to grow, the overall figure will be higher. However, the fixed line business has also been generating strong cash flows and it's important it does so in order to service its own debt.
But because we've been concentrating on getting debt down, we haven't paid any dividends on ordinary shares. But if all goes well in 2004, we intend to start re-paying dividends in 2005, although it will be a relatively small amount to start with.
Last year there was talk of you doing an exchange offering to term out your debt profile or a new long-term deal. Is this something you still plan to do?
No there's no longer any need for it. It was something we talked about, but it was just one of a number of options. But there's no need as the wireless side of the business has outperformed and a lot of the fixed line initiatives have come through sooner than expected. We have $400 million coming due between 2005 and 2006 and we intend to fully re-pay it.
So you don't want to re-finance any higher yielding debt while interest rates remain low?
No because our overall cost of debt is below 8% on a pre-tax basis. A lot of what we need to re-pay during 2005/6 is publicly traded bonds with relatively high coupons.
What's your currency profile like?
At the moment about 89% of our debt is US dollar denominated, 7% in yen and the remaining 4% in pesos. Ideally we'd like 100% to be pesos but the domestic market is not that deep. The dollar debt was taken out to fund long-term projects and it was the right decision at the time when we were building out the network.
But we have been actively hedging our non-peso exposure. At the moment about 40% of total debt is hedged, but over the next 12 months it should rise to about 50%.
Your spread relative to government bonds has contracted very sharply. At the beginning of 2003 you were trading at 450bp over sovereign bonds, then come the summer at about 170bp over and now it's more like 35bp. Do you think this trend can continue?
Well it's a function of demand and supply. We fully paid off the bond that matured in 2003 and are doing so for the bond, which matures in June 2004. In 2005 and 2006 we will do likewise. If people want to hold our bonds, then they'll find that supply is tightening.
Finally, what's happening with Piltel's debt exchange?
We've made public that we've received offers from creditors in respect of over 50% of Piltel's debt. But we have a 75% threshold and we've extended the deadline by a month to the end of May.
What happens if you don't meet the deadline?
Basically we've said we won't change the terms, but we do want to reach that threshold. It's very important to us.
