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Edited Transcript of MWC.PS earnings conference call or presentation 8-May-20 6:00am GMT

Q1 2020 Manila Water Company Inc Earnings Call

Quezon City Jun 3, 2020 (Thomson StreetEvents) -- Edited Transcript of Manila Water Company Inc earnings conference call or presentation Friday, May 8, 2020 at 6:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Mark S. Orbos

Manila Water Company, Inc. - Department Head of Corporate Strategy & IR

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Presentation

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Mark S. Orbos, Manila Water Company, Inc. - Department Head of Corporate Strategy & IR [1]

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Good afternoon, ladies and gentlemen. Welcome to Manila Water Company's briefing on financial and operating results for the first quarter of 2020. For the first time, because of the current health crisis, we are holding this briefing in a fully virtual format.

Before I begin, I would like to introduce our senior management joining us live in this virtual briefing led by Mr. Rene Almendras, President and CEO; Ms. Maria Cecilia Cruzabra, Chief Finance Officer; Mr. Virgilio Rivera Jr., Chief Operating Officer for New Business Operations; Mr. Abelardo Basilio, Chief Operating Officer for Manila Water Operations; and Attorney Solomon Hermosura, Corporate Secretary.

We are also joined by other members of the management committee, namely Mr. Robert Baffrey, Group Director for Corporate Project Management; Ms. Janine Carreon, Group Director for Corporate Human Resources; Ms. Evangeline Clemente, Group Director for Strategic Asset Management; Mr. Arnold Mortera, Group Director for Corporate Operations; Ms. Linda Quines, Group Director for the East Zone Business Operations; Ms. May Quinto, Group Director for Subsidiary Operations; Attorney Kaye Revil, Group Head for Enterprise Stakeholder Engagement and Regulatory Affairs; Ms. Liway Sevalla, Group Director for Corporate Information Technology; and Mr. Jeric Sevilla, Group Head for Corporate Strategic Affairs.

As we are holding this briefing in a virtual format, we are unfortunately able (sic) [unable] to answer live questions at this time. However, you may e-mail your questions and comments at our Investor Relations e-mail, invrel@manilawater.com, and management will remain on hand to provide the responses, after the briefing, through e-mail.

This afternoon's presentation will cover our consolidated financial and operating results for the first quarter of 2020. We will further discuss the key operating and financial results of the parent company, which houses the East Zone concession; our operating subsidiaries in the Philippines under Manila Water Philippine Ventures; our subsidiaries in the region under Manila Water Asia Pacific; and Manila Water Total Solutions.

I shall begin with the key messages summarizing our results for the first quarter of 2020. Consolidated net income in the first quarter of 2020 stood at PHP 1.3 billion, 4% higher than last year due to the significant extraordinary expenses in the East Zone last year. Excluding one-offs, core income was 12% lower.

Parent company net income rose 74% to PHP 1.6 billion due to significant extraordinary expenses related to the water supply shortage last year. Excluding one-offs, core income declined 7% versus last year.

Manila Water Philippine Ventures posted net loss of PHP 151 million due to lower supervision fees in Estate Water and recognition of additional expenses for probable losses. Manila Water Asia Pacific posted net loss of PHP 193 million due to the recognition of additional expenses for probable losses but was partially offset by the higher equity share in net income of associates.

Manila Water Total Solutions continued to post a net loss of PHP 13 million, weighed down by the weak sales in Healthy Family and slowdown of projects in the pipelaying and environmental services segments.

Looking at the group's consolidated financial performance for the first quarter of the year. Consolidated revenues grew 9% to over PHP 5.5 billion from PHP 5.1 billion the previous year on account of higher billed volume and the effect of the bill waiver program last year.

Consolidated operating costs and expenses decreased by 18% to PHP 2 billion in the first quarter of the year, mainly due to the recognized MWSS penalty and additional costs due to the water shortage in 2019. Meanwhile, net other expenses posted was at PHP 392 million driven by the recognition of additional estimates for probable losses, but was partially offset by the higher equity share in net income of associates, which increased 6% to PHP 219 million.

These developments resulted in a consolidated earnings before interest, taxes, depreciation and amortization of PHP 3.1 billion in the first quarter of 2020, 10% higher than last year, with an EBITDA margin of 57%. Depreciation and amortization rose by 26% to PHP 827 million, mainly attributed to the CapEx undertaken by the East Zone concession and its subsidiaries on top of the higher billed volume and wastewater flows.

Meanwhile, net interest expense increased 24% to PHP 461 million, driven by additional loan drawdowns from the East Zone and other subsidiaries. Provision for income tax increased by 10% to PHP 595 million on account of higher taxable income of the group. These developments resulted in a consolidated net income of PHP 1.3 billion for the first quarter of the year, an increase of 4% from 2019. Net income margin stood at 23%. Excluding one-offs, Manila Water Company's consolidated core net income for the first quarter stands at PHP 1.8 billion, lower by 12% from the same period last year.

Here is a breakdown of group earnings for the period. The net income increase of the parent company or East Zone in the first quarter is largely due to the impact of the water supply shortage in 2019, particularly by way of the voluntary onetime bill waiver as well as additional costs led by the MWSS penalty.

For Manila Water Philippine Ventures, net loss for the period was driven by the lower contribution from East Water attributable to lower supervision fees and additional expenses for estimated probable losses. Manila Water Asia Pacific's performance was due to additional expenses for estimated probable losses but was partially offset by the higher equity share in net income of associates.

Manila Water Total Solutions net loss for the period was due by lower bottle sales and slowdown of projects in the pipelaying and environmental services segments. These will be discussed in detail in the subsequent slides.

For consolidated costs and expenses, these decreased by 18% to PHP 2 billion in the first quarter of 2020, mainly due to the effect of the water supply shortage in 2019. Excluding one-offs, core expenses stood at PHP 1.9 billion, higher by 4% in the same period last year.

Personnel costs were tempered in the first quarter of the year, decreasing by PHP 544 million, mainly attributable to the localization of manpower to subsidiaries. On the other hand, direct costs rose 12% to PHP 1 billion as a result of increased usage of water treatment chemicals with the start of operations of the Cardona water treatment plant in May 2019 as well as higher consumption of power with the increased number and utilization of deep wells.

Overhead costs declined significantly to PHP 253 billion (sic) [PHP 253 million], primarily due to the PHP 534 million penalty imposed by MWSS in relation to the water supply shortage, which was recognized in 2019. For premises costs, a decline of 14% to PHP 92 million was realized for the period, mainly driven by the adoption of a new accounting standard, PFRS 16, in which rental fees for long-term leases are not recognized in the income statement for long-term lease contracts.

Going on to group operating results. For CapEx, total capital expenditures reached PHP 2.3 billion in the first quarter of 2019. The East Zone concession accounts for 84% of total CapEx for the period. Performance was weighed down by the onset of the enhanced community quarantine.

For balance sheet highlights, total assets as of March 2020 stood at PHP 139 billion, an increase of PHP 4.4 billion against December, driven by the increase in service concession assets and cash and short-term investments. Group balance sheet remains compliant with loan covenants with key ratios maintained well within set tolerances.

Total bank debt end-of-period increased over PHP 60 billion from PHP 56 billion as of end 2019. Net bank debt to equity was 0.95x on account of the new loans of the company in 2019. Meanwhile, debt service coverage stood at 3.07x. Average cost of debt for the group was held steady at 4.61% while ROE stood at 9%.

In view of the current prevailing circumstances, Manila Water has deemed it best not to declare cash dividends at this time with the ongoing discussions with the government under the concession agreement as well as the need to focus on operational preparations for the prevailing summer months, specifically on service continuity and operations recovery amid the COVID-19 pandemic. Resources are being prioritized towards ensuring reliable service to customers. Manila Water will continue to assess the situation in the coming periods and determine the feasibility to declare cash dividends at the appropriate time.

In view of the COVID-19 pandemic impact on the communities which Manila Water serves, numerous contingency measures have been undertaken to ensure business continuity and safeguard the health and safety of employees, customers and our partners. For our customers, with the onset of the enhanced community quarantine, Manila Water implemented business contingency measures to ensure that critical facilities and business centers remain operational to provide reliable service to customers. Furthermore, in view of health and safety concerns, Manila Water suspended meter reading activities in its service areas for the duration of the enhanced community quarantine. Equally important, to assist customers amidst the quarantine period, Manila Water deferred the due date of customer bills for 30 days.

For employees, in order to ensure safety and welfare amid the COVID-19 pandemic and ECQ (technical difficulty) only enhanced (inaudible) for employees, in order to ensure safety amid the COVID-19 pandemic. Deployed employees are provided the necessary protection and support to ensure their safety. Equally important, significant preparations are being made for the safe and effective reintegration of employees upon the lifting of the ECQ.

For service providers, Manila Water worked with its partners to facilitate full salary payment of service providers affected by the ECQ. Furthermore, gratuity pay was given for service providers who provided physical support to the company's operations as well as additional assistance by way of supplements and food for those who reported for work.

Going beyond business continuity, Manila Water joins the fight against COVID-19 and is committed to support our frontliners and the various initiatives of government.

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our frontliners in the fight against COVID-19, Manila Water joins the fight against COVID-19 and it has supplied drinking water and hygiene kits to the public hospitals, local government units, police personnel and quarantined university students.

For our LGUs and law enforcement units managing the enhanced community quarantine, Manila Water installed static tanks in various locations for disinfection of vehicles traveling along major roads.

Last but not least, Manila Water directly participated in the building of shower facilities, provision of static tanks and deployment of dispensers for the World Trade Center: We Heal as One Center COVID-19 facility.

We now move on to the parent company, which houses the East Zone concession, for a more detailed discussion of its financial and operating results. For parent company operating highlights, billed volume increased by 2% to 124.6 million cubic meters with water availability restored and maintained at 24/7 at minimum 7 PSI pressure to near 100% of customers in the East Zone.

Average effective tariff increased 9%, driven mainly by the bill waiver program during the first quarter of the year. Without the effect of the bill waiver, effective average tariff was relatively flat. Collection efficiency declined 15 percentage points to 84.7% with the onset of the enhanced community quarantine and the impact of the 30-day due date extension granted to customers.

For water supply updates, it can be recalled that the East Zone managed through a raw water supply shortage last year, causing a significant drop in water service availability. Working through the challenges, the situation pushed Manila Water to further improve its network management capability. And this resulted in a more dynamic and efficient distribution network.

Entering 2020, the good coordination between the National Water Resources Board, the MWSS and the National Irrigation Administration resulted in better water levels in the raw water dams. Raw water allocation as of April 2020 has been restored to 46 cubic meters per second in support of water domestic use requirements under the enhanced community quarantine.

We hope that the good coordination with key water agencies and government is sustained to ensure continued equitable raw water allocation. In further support of government's initiatives towards water security, Manila Water continues to implement various initiatives to ensure water availability to customers.

Moving on to the Manila Concession's financial highlights. Revenues increased to PHP 4.4 billion, 10% higher than the same period last year, largely due to the effect of the bill waiver in 2019. Meanwhile, costs and expenses decreased to PHP 1.3 billion, primarily by way of the PHP 534 million penalty imposed by MWSS in relation to the raw water supply shortage in 2019.

This decline was partially offset by the increase in direct costs driven by higher chemical costs to address the raw water quality and the operation of the Cardona water treatment plant as well as by additional power to energize the newly commissioned deep wells. These movements resulted in a 42% increase in EBITDA to PHP 3.1 billion with an EBITDA margin of 71%.

Consequently, net income reached PHP 1.6 billion, an increase of 74% from the same period last year. Net income margin stood at 37%. Excluding one-offs, parent company's first quarter 2020 core net income stood at PHP 1.7 billion, 7% lower than the same period last year.

As earlier discussed, the East Zone spent a total of PHP 1.9 billion in CapEx in the first quarter 2020. Said CapEx was outlaid for wastewater expansion, network reliability and water supply projects as well as concession fees paid to MWSS.

We now move on to Manila Water Philippine Ventures, which is composed of our domestic operating subsidiaries in Clark, Laguna and Boracay, to name a few; and Estate Water, which is a division within Manila Water Philippine Ventures. Over the years, Manila Water Philippine Ventures has expanded its footprint across the country, leveraging technical and business experience and core competencies. MWPV now has over 20 operating businesses and continues its expansion on a more focused approach.

Going on to the consolidated results for Manila Water Philippine Ventures. Revenues grew 11% to PHP 1.2 billion in the first quarter 2020 due to higher billed volume across the group, which increased by 19% to 26 million cubic meters as well as the higher tariff in Laguna Water attributable to the tariff increase in Laguna Technopark. These gains were dampened by the lower supervision fees in Estate Water.

Costs and expenses rose 26% to PHP 716 million, mainly due to the increase in direct costs attributable to the combined effects of the following: increase in bulk water, and water tankering expenses of Estate Water due to higher demand in its Cebu and National Capital Region operations, increase in contractual services related to projects, and higher personnel costs due to headcount increases in line with the business expansion.

With costs and expenses outpacing revenue growth, coupled with the recognition of additional expenses for probable losses, EBITDA stood at PHP 270 million, 45% lower than the same period last year. Consequently, MWPV posted a net loss of PHP 151 million. Excluding one-offs, core net income of Philippine Ventures should have been at PHP 38 million, lower by 79% versus the same period last year.

Moving on, we have a snapshot of the operating and financial highlights of our subsidiaries under Manila Water Philippine Ventures. All core domestic subsidiaries registered growth in billed volume for the first quarter of the year.

Looking at financial performance. Net income was higher in Laguna Water and Clark Water but lower in Boracay Water. Estate Water posted a net loss for the period. These will be discussed in more detail in the subsequent slides.

For Laguna Water, billed volume increased by 5% to 11 million cubic meters in the first quarter of the year, driven by a longer reading cycle for the period, increased consumption of domestic accounts, full cycle effect of taking over subdivisions, and increase in several top key accounts. Meanwhile, billed connections increased by 8% to over 110,000, mainly due to new accounts from Pagsanjan, which were connected in the second quarter of 2019.

Laguna Water -- non-revenue water increased by 3.8 percentage points as it reached 22.4% in the first quarter of 2020 from 18.5% the previous year. Laguna Water spent PHP 99 million in CapEx during the period, mostly for the expansion of water services.

For financial highlights, Laguna Water revenues grew 19% for the period to PHP 450 million on the back of higher build volume and 15% improvement in average effective tariff to PHP 39.6 per cubic meter.

Meanwhile, costs and expenses slightly decreased by 1% from 2019 to PHP 184 million due to lower direct costs and management fees, but partially offset by higher personnel costs. These movements resulted in a 38% growth in EBITDA to PHP 266 million and consequently, 48% increase in net income to PHP 126 million for the first quarter of the year.

Moving to Estate Water. Estate Water posted billed volume growth of 19% to reach 3 million cubic meters for the first quarter of the year, mainly driven by the 12% increase in billed volume. Total revenues of Estate Water decreased by 23% to PHP 246 million, mainly due to the decline in supervision fees, attributable mainly from the change in accounting treatment for said fees but also driven in part by the stoppage of projects due to the ECQ.

Beginning January 2020, Estate Water adopted a change in accounting treatment wherein supervision fees are allocated based upon connection fees and tariff subsidy. Specifically, revenue on connection fees shall be recognized based on progress completion of facilities, while revenue and tariff subsidy shall be recognized over 5 years based on the demand projection starting the first quarter of the project.

Furthermore, costs and expenses rose 26% to PHP 196 million, driven by increase in direct costs such as water tankering, bulk water costs as well as bad debts expense. With the decline in revenues and increase in costs and expenses, EBITDA declined to PHP 50 million, further resulting to a net loss of PHP 4 million for Estate Water in the first quarter of 2020.

Moving on to Boracay. Boracay Water's billed volume increased 21% to 1.3 million cubic meters in the first quarter of 2020 despite the lower tourist arrivals brought about by the imposed travel restrictions due to the COVID-19 pandemic. On the other hand, non-revenue water increased by 7.7 percentage points to 15.9% due to major leaks along the transmission and distribution lines with road widening projects.

Boracay Water spent CapEx of PHP 68 million for the period, mostly outlaid for its wastewater projects. Revenues for Boracay Water increased by 7% to PHP 160 million on the back of higher billed volume, mainly attributable to improvements in consumption in the commercial segment and bulk water supply.

Meanwhile, costs and expenses increased 17% versus the same period last year due to higher direct costs, particularly for chemicals, maintenance materials and sludge disposal costs. With costs and expenses outpacing revenue growth, EBITDA declined by 2%. Consequently, net income for the period stood at PHP 15 million, 36% decrease from the same period last year.

Moving on to Clark Water. Clark Water registered higher billed volume of 3.55 million cubic meters in the first quarter of 2020, slightly better at a 2% from last year, mainly driven by higher consumption of new commercial accounts. Billed connections likewise increased slightly due to the connections of new commercial accounts.

Clark Water's non-revenue water increased by 0.5 percentage points to 8.1%. Clark Water spent PHP 22 million in CapEx, mostly for service continuity and water security projects. Clark Water's revenues increased 5% to PHP 118 million for the quarter, driven by the growth in billed volume and average tariff from commercial accounts and other income from after the meter services.

Meanwhile, costs and expenses decreased by 2% to PHP 65 million due to lower power costs through the reduction of power tariff within the Clark Freeport Zone. These developments led to Clark Water posting a 16% increase in EBITDA to PHP 53 million. And consequently, Clark's net income increased by 40% to PHP 16 million for the first quarter of the year.

Now we move on to Manila Water Asia Pacific, which houses our affiliates in Vietnam, Thailand and Indonesia. Similar to our domestic operations outside the East Zone, Manila Water Asia Pacific has likewise expanded over the past decade from its first performance-based leakage reduction project in Zone 1 of Ho Chi Minh City to now having market presence in Vietnam, Thailand and Indonesia.

Now looking at the consolidated performance of Manila Water Asia Pacific for the period. Equity share in net income of associates increased by 6% to PHP 219 million, primarily due to the improvement in contribution from the Vietnam businesses. This increase was partially offset by the lower recognition in equity share in net income from East water.

Costs and expenses decreased by 22% to PHP 20 million due to lower overhead and travel expenses due to travel restrictions imposed amid the COVID-19 pandemic. These developments, including the recognition of additional expenses for probable losses in relation to the Cu Chi Water Company, led to a negative EBITDA and net loss of PHP 137 million and PHP 193 million, respectively. Including one-offs, core income of Manila Water Asia Pacific stood at PHP 144 million, 8% higher than the same period last year.

Now looking at the breakdown of equity share in net income of associates, Vietnam associates drove the increase for the period, with all subsidiaries growing versus last year. This increase was partially offset by the decline in East Water and PT STU.

Now looking at the snapshot of our associates under MWAP. Let's start with East Water. East Water sold a total of 89 million cubic meters in the first quarter of 2020, a decrease of 5% from its billed volume level of 94 million cubic meters from the same period due to lower demand from the Provincial Waterworks Authority.

Net income decline of THB 312 million is due to the lower billed volume and higher cost and expenses related to measures of the company to address the drought in Eastern Thailand. In peso terms, the income reflected in Manila Water's consolidated financial statements as equity share in net income of associates amounted to PHP 92 million in the first quarter of 2020, equivalent to Manila Water's 18.72% stake in East Water.

For Thu Duc Water, Thu Duc Water sold a total of 27 million cubic meters in the first quarter of 2020, 3% higher than the same period last year. Meanwhile, net income of Thu Duc improved 40% last year on the back of higher billed volume and the implementation of its contractual tariff increase. In peso terms, the PFRS translated income reflected in Manila Water's consolidated financial statements as equity share in net income of associates amounted to PHP 69 million in the first quarter of the year, equivalent to MWAP's 49% stake in Thu Duc Water.

For Kenh Dong Water, billed volume increased 14% in the first quarter 2020 to 16 million cubic meters. Similar to Thu Duc, Kenh Dong's net income growth of 146% to VND 25 billion was attributed to the higher billed volume and implementation of tariff increase.

Income from Kenh Dong Water is translated to PFRS and is reported as equity share in net income of associates in the consolidated financial statements of Manila Water. In peso terms, the PFRS translated income, 47.35% stake in Kenh Dong, amounted to PHP 40 million in the first quarter of 2020.

For Saigon Water, MWAP's investment of Saigon Water, a listed holding company in Vietnam with 7 subsidiaries and 1 equity investment, billed a consolidated total volume of 30 million cubic meters in the first quarter of the year, a 15% increase from the previous year, driven mainly by the performance of Cu Chi, Dankia and Tan Hiep 2. Saigon Water's decrease in net income to VND 22 billion was driven by lower revenues and higher interest expense as a result of loan refinancing by Saigon Water's investments. In peso terms, the PFRS translated income of Manila Water's 37.99% stake in Saigon Water amounted to PHP 18 million for the first quarter of the year.

Lastly, we have Manila Water Total Solutions, a wholly owned subsidiary, which handles after-the-meter products and services, including pipelaying, integrated used water services and the incubation of new sector business and the sale of Healthy Family purified water in 5-gallon, 500-mL and 300-mL bottles in selected areas in Metro Manila.

For Healthy Family, bottle sales of its 5-gallon variant saw an 18% decline during the period. Despite the increase in Healthy Family mini bottle sales and its initiative to push for cost efficiency, Healthy Family ended the period with a net loss of PHP 6 million.

For the environmental services segment, the slowdown in projects caused a significant drag on profitability, resulting to a net loss of over PHP 350,000 for the period. This is likewise the case for the pipelaying segment wherein delays in the implementation of its remaining projects have driven down performance to a net loss of PHP 4 million.

On the other hand, continued streamlining efforts led to lower costs and expenses, amounting to PHP 58 million in the first quarter of 2020 from 11 -- PHP 111 million in the same period last year. The improvement in cost and expenses was, however, unable to offset the decline in revenues and the continued operating losses of the company. As a result, Manila Water Total Solutions ended the first quarter 2020 with a continued net loss amounting to PHP 13 million.

In summary, allow me to reiterate our key messages for this briefing. Consolidated net income in the first quarter of 2020 stood at PHP 1.3 billion, 4% higher than last year, due to the significant extraordinary expenses in the East Zone. Excluding one-offs, core net income was 12% lower than last year.

Parent company net income rose 74% to PHP 1.6 billion due to the significant extraordinary expenses related to the water supply shortage last year. Excluding one-offs, core income declined 7% versus last year.

Manila Water Philippine Ventures posted a net loss of PHP 151 million due to lower supervision fees in Estate Water and recognition of additional expenses for probable losses. Manila Water Asia Pacific posted net loss of 130 -- PHP 193 million due to the recognition of additional expenses for probable losses but was partially offset by the higher equity share in net income of associates.

Lastly, Manila Water Total Solutions continued to post net loss amounting to PHP 13 million, weighed down by the weak sales in Healthy Family and slowdown of projects in the pipelaying and environmental services segments.

Thank you for your questions and comments. We will be entertaining your questions and comments in the e-mail that we have provided. Please send them, and we will direct our responses to you directly subsequent to this presentation. A recording of this analyst briefing will be made available at the website of Manila Water subsequently.

Thank you very much for your time, and good afternoon to everyone.