Melissa Vergel de Dios – Head, IR Manny Pangilinan – Chairman of the Board Poly Nazareno – President and CEO Anabelle Lim-Chua – SVP, Treasurer & CFO, Smart Chris Young – Chief Financial Advisor.

Luis Hilado – HSBC Securities Rama Maruvada – Daiwa Capital Neeraja Natarajan – Nomura Financial Chate Ben – Credit Suisse Arthur Pineda – Citigroup Navin Killa – Morgan Stanley Kunal Vora – BNP Paribas.

Good afternoon everyone and welcome to the PLDT conference call to discuss the company’s financial and operating results for the first half of 2014. (Operator Instructions) 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..

Good afternoon, and thank you for joining us today to discuss the company’s financial and operating results for the first half of 2014. 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 under the Investor Relations section. Today’s presentation, we have with us members of the PLDT Group management team; namely, Manny Pangilinan, Chairman of the Board, 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..

expansion of our data network with our combined 3G, HSPA+ [inaudible] cover now at 82%; extending the fiber optic network to over 88,000 kilometers; increase in FD and TD LTE coverage to around 1,800 base stations; reinforcement of existing network infrastructure to improve resiliency against severe weather conditions – this includes buried fiber optic links, deployment of super-sized base stations, and the construction of elevated equipment shelters, among others; enhancing the group’s [inaudible] additional VDSL coverage and additional FTTH and NGN lines.

We continue with the integration of Sun and Smart networks as well as various projects aimed to enhance our multi-media and IT capabilities. That ends my presentation. Let me now turn over to our Chairman and VP for outlook for the rest of the year and beyond. Thank you..

Thank you, Poly. Good afternoon to all of you. PLDT group guidance for 2014, we are maintaining our core net income number at P39.5 billion which was the number earlier conveyed to you, I think sometime in March this year. So that’s about P800 million higher or 2% higher than the 2013 core income.

In CapEx, it’s similar to what had earlier conveyed, P31 billion to P32 billion for the year, no more than 20% of service revenues.

On a consolidated basis, in capital management, we have adjusted somewhat our interim dividend policy now being 75% of interim core and 70% -- and it’s likely we can maintain 100% dividend payout for the full year of core, and if that were to happen, that will be the 8th consecutive year that PLDT has given out in dividends being 100% of core income..

We will now open the floor for questions. We will first take questions from the conference facility before we take questions from the floor.

Operator?.

(Operator Instructions) Our first question comes from Luis Hilado of HSBC..

I have three questions. The first one is regarding outlook for the second half. You've reaffirmed your guidance for the full year, just wondering in second half whether this will be boosted by further sales in Meralco or it's going to be cost reduction driving it or revenue push. The second question is, as Mr.

Nazareno mentioned about SMS, the erosion seems to have slowed down in this quarter versus the previous quarter.

What would you attribute this to? I think in the previous quarter you mentioned the free Facebook promotion was part of the pressure behind it, is that now the reason why it's not as bad? And last question is the lower financing costs for the quarter, is that a sustainable trend that we are going to see going forward?.

On the financial costs, I guess, it will be partly a function of where the exchange rate will be but we are seeing there some dollar [indiscernible]. But on a general basis we don’t see a significant sort of spike in our financial costs in the second half..

I think there is no additional [indiscernible] there might not be some transactions in the second half but [inaudible]. Luis, you are right, three – that was the pressure on SMS, our pressure, and that was tough sometime towards the end of April this year.

And therefore the ensuing reduction on SMS revenues have gone to 300 million from roughly about 800 million previous quarter. We see that there will be further reductions but not to the same magnitude when there was free Facebook.

We recently launched certain service offerings that would enhance the quality and the relevance of SMS, and the sexiness of SMS and right now we don’t offer cash offers out of the text chat and therefore we are really catering to the more than 45% of feature phone owners within our subscriber base, at the same time manage the long tail of SMS..

Just had one follow-up question regarding the second half.

Since it's not likely to be a Meralco gain too much, is it going to be more of cost reduction driving performance in the second half or you're more bullish in terms of revenue outlook?.

We are looking at the cost now – and especially because [inaudible] undergoing a shift in our business structure or in the dynamics of our services, partly – there is more postpaid so that as they shift from prepaid to postpaid and certainly [inaudible]. And secondly, the introduction is also – pressure on our SMS and [inaudible]..

Our next question comes from Rama Maruvada..

Two questions. Firstly with regards to your wireless business, just trying to get a better sense of what's driving the volume trends. If we were to look at even the voice call, the volumes were down; subscribers, you seem to have lost subscribers for the quarter; SMS count is down.

So just trying to understand is it a function of competition or how should we think about the volume as well as subscriber trends going forward? That will be good. The second one is with regards to the wireless EBITDA margins, again there seemed to have a little bit of a margin erosion this quarter.

If you could just point towards what you think would be sustainable EBITDA margins for the wireless business and if there are any one-offs in this quarter that will be good?.

Rama, the voice calls, regarding the domestic voice revenues decreased by 7%, and this is largely due to the shift from prepaid to postpaid and little bit – shift from unlimited to bucket price, and these are consciously driven by our marketing people.

So that is certainly an increase in minutes but the users [indiscernible] from 63 to 70 plus per minute.

Well we are looking at reviewing the cost at this point and we will decide our margin base segment of 44%, and we think that this would be enhanced in the second half, as we review our cost and we look at how we can restructure ourselves to adjust the [inaudible]..

Thank you. Our next question comes from Neeraja Natarajan..

I know that there was already a question on costs and margins and things like that. I just want to understand in this pickup in sales and marketing, are you also booking some of the subsidies under that or is it just purely advertising campaigns? That's my first question.

And secondly, just on the cost side of things, [inaudible] this cost structure but where do you think there's room to sort of improve the cost structure better and how long will it take for example to see that transition come through if at all? The second question is also on the competitive side of things.

I know that there was a Facebook free promo offer and perhaps because of that there has been some SMS impact, but it just seems like I know PLDT has this whole need to price offerings kind of approach, but then how do you sort of react to when competition does this even if it's not on a sustained basis, but if it's on a one-off sort of offers, but it keeps consistently coming up.

Do you feel like you need to review your strategy? And my last question is last year in the back half, you had a low tax rate. Should we expect something like that in the back half of this year as well? Thank you..

On your first question, on selling expenses – which are really booked in the cost of sales, versus what we call [indiscernible] but there are some cost related to subscriber acquisitions, so for example, you pay commission to sales agents, those type of costs would be the selling and promotion cost aside from A and B and other selling agents that we may deploy.

In terms of where the scope for improvement on [inaudible] consummation of the integration of the networks of Smart and Sun and so we [inaudible] there should be some savings with respect to rents, utilities, maintenance et cetera as we try to [indiscernible] tax officials.

On the tax rate, to the last question, for the competition question, we did that – generally the tax rate is probably maybe around first half – obviously towards the year end, particularly as there are some tax losses in some of the [inaudible].

Just to come back on the S&P question.

So even if a subscriber is recontracting and going in for a new smartphone, that still comes under the subsidies rather than the selling and promotions?.

Yes, that’s correct..

Okay. And then just on the cost side, I mean you said network cost, but it seems like that's where sort of the costs have actually picked up. Also if I look at in the last six quarters or so, your rents are up, your repairs and maintenance are up.

So, is there like any new timeline that we can look at?.

But there are several things on the rent side here, obviously [inaudible].

Our scope of coverage and also by delivering data you also have a certain rent expenses with respect to delivering from the international site to circuits. There are expense related also in the aftermath of Yolanda.

So post Yolanda there is higher fuel cost, higher CapEx or rental cost, that we had to bear as a result of the typhoon sort of aftermath..

What was your question again?.

I just said like for example, your SMS sort of got impacted based on these short-term promos from competition and it seems like from time to time they do rejig this. I'm just wondering like if you have to sort of review your competitive strategy as well versus I mean going ahead and just wanted to get your thoughts on that..

Well it is pretty dynamic in terms of the short term sort of promotions and offers that [inaudible]. So you are right we do respond to what our competition does in that respect..

Thank you. Our next question comes from Chate Ben..

I have three questions -- the first one is again related to revenue and competition. Basically if you look at in terms of number of subscribers in conjunction with the volume as well, it seems like you're losing subscriber market share to your peers and therefore that translates into a loss of revenue market share as well.

So would you think at the current point in time, you should try to do something to gain that subscriber momentum back in order to kind of catch up on the revenue growth line? Should we expect that to pick up? The second question is regarding your change in the dividend payout.

I understand that and this has partly been clarified as well, but I just would like to understand you have been paying 100% payout over the past seven years and as much as that's not called as regular, seems to be perceived by the market as being kind of regular and best case assumption already.

What's the rationale behind changing from 70% to 75% and will that have any implication on your 100% payout? The third thing is your statement seems to be talking about reviewing exciting opportunities in broadband and ICT and that you expect to announce some details of that soon.

Is there anything that you can share right now, what kind of opportunity or assets you are looking and what kind of timeframe we are looking at?.

I will take the first question which is the subscriber base. We’ve had a clean-up in the subscriber base and additional one which is the final shoe that has dropped on Talk 'N Text. It is in relation to its Alkansya promo of a reduction of 1.4 billion subscribers.

But let me just point out and this is very important, that the VLR active subscriber base grew by 4% in the first half of this year compared to last year, so in terms of utilization of that [inaudible] there is EBITDA growth of sometime 60% utilization to 67% utilization of network which is important thing because the VLR is something that we constantly monitor on a daily basis.

So, that gives you an indication of activity in our subscriber base. The 1.4 billion that we have [inaudible] additional one is – what’s the second thing – I think I think Chate, there is no big changes in the dividend policy. I think there remains a instead of doing a regular dividend, special dividend.

You may notice – up a little bit by 5% given that we are pretty close to 100% -- doing more or less of that. Manny, you might say one or two comments on the internet opportunity..

Well we have been looking at the [inaudible] and we have come down to two possible candidates for both the investments and strategic partnerships.

One of the two is we're in an advanced state of discussion and so I think there is reference to an announcement we made in our quarter two, so I think – at the moment I think it’s actually quite exciting opportunity for us, it’s not just making our investments in that particular internet company but also striking a strategic initiatives with that in various activities..

Just follow-up questions on two things.

Regarding the dividend, just to put it in the simplest terms so we should continue to expect 100% payout or should we not? Whether the new M&A activities would have any bearing on that? And recapping the acquisition opportunity, If I may ask, are you looking to strike a deal that would actually be supporting the revenue generation of existing revenues or we are talking more of a new revenue stream altogether from the new business?.

I think in terms of the dividends, it remains always the same position that we have this on a concept of the regular dividend and the look back.

I think Chate, the move from 70% to 75% doesn’t that change that, we will pay the regular dividend toward the end or beginning of the following year and then achieve 100% to be paid and I think Manny said in his remarks I think our target remains to pay that.

In terms of any transaction that we are looking at – I think [inaudible] – paying the proceeds from the SBI transaction that have not yet been – the transaction in 2Q, when we have some initial payback – have the initial payback and also generate additional funds for us.

So we are moving to re-allocate these funds rather than to use regular current cash flow for the acquisition activity.

Generate new revenues of – enhance existing revenues – again this is not just an investment for us, it is an opportunity for us that have made us easiest investment and again we can’t say too much at the moment, it will just probably be in hopefully a few days’ time, as you will see it – it is an opportunity for us to actually enhance our existing businesses, I think we have to be little bit cautious on what we say at this stage..

Thank you. Our next question comes from Arthur Pineda..

You mentioned a cleanup of the dormants in the mobile space. I just wanted to get some clarity on where that subscription should be if we exclude such cleanup activities.

So I'm wondering if the end of Globe's prepaid promotion in April and May had resulted in any subsequent usage or subscriber migration back to PLDT in June or July or you have seen no signs of that? Second question, wondering what's the key difference on the SMS between yourself and your competitor.

They seem to have a much more stable SMS revenue momentum, any major differences between your offers and theirs which is driving this difference? Lastly, just to clarify on the sales and promotional trends.

Given that this result includes handset subsidies, what's been driving significant increase year-on-year and quarter-on-quarter? Are you seeing elevated levels of competition materializing in the market now, which necessitates the additional spending?.

I think as Mr. Nazareno indicated earlier, in terms of the – start the VLR or happy subscriber base, about 4% increase in VLR, notwithstanding that the headline subscriber numbers are down, because of the clean-up in the inventory..

If you were taking that at a Q-on-Q basis, would we have a better matching? How does it compare with the Q-on-Q?.

That was the 4%..

The increase is about active subscribers that come out in the switch at any one point in time. Right now we were looking at about 45 million coming out in the switch, which was an increase of 4% compared the same period last year. So that is the measurement..

I think frankly we sort of talked about this in many respects, I think the old paradigm was a measure of how you’re growing is the number of subscribers you have in each quarter, whatever each – I think those days are gone.

Increasing in the subscribers – given in the context of a changing paradigm of the business, particularly in the cellular side, it’s not a real measure of how revenues and profits could grow.

So there was a clean-up I think end of last year – there was a further cleanup within the first half this year, that's why the sub base has come down 2.68 million. And what Poly is saying that the ratio of the active subscribers in the subscriber base has actually risen this past – I would say past 12 months.

And that’s because those are your active and revenue generating subscribers, that’s the real measure of what counts, in terms of revenues and bottom line. So [inaudible] you grew your sub base by – so I think that’s what we say..

On the SMS side?.

Generally along the SMS side, the voice and SMS promos are generally in line with each other, given that these are more traditional balance of the offer.

And on your question on the selling – higher expenses in the second quarter, I think it’s a bit about timing last year, the spend on ANP and some other selling trends were more back ended in the second semester, whereas in this year we deliberately did more even outer spending program..

Thank you. Your next question comes from Navin Killa..

I had a couple of questions.

First with regards to this free Facebook promotion of Globe over the period of the last six, nine months, would you have an estimate of the number of customers that you might have lost to Globe because if we look at their numbers, both their voice as well as SMS revenues have been growing so I would imagine that they've probably taken some traffic from your network? And then the second question which has been asked in different forms before.

With regards to the revenue market share, it continues to inch down, could be promotions from the competition, could be other factors; but is there a number which you would consider your threshold and which would trigger a more significant reaction from PLDT? I guess the question is again how long can this trend of market share loss continue and how do you address it over the longer term?.

On the prepaid book promo, our analysis of the impact is that – subscribers is take on second stage – to take advantage of the free Facebook promo of the competition. So it seems to about their SIMs, from our side but they did take on a second SIM.

So to some extent their usage of text and voice did get diluted from our side given that they have now two SIMs that we have..

I think also what is important to note is that in terms of the subscriber base, unique subscribers in the second quarter of this year compared to the first has remained more or less the same. And it has improved slightly.

So therefore it’s not so much the subs moving into the other side – to the other side but it’s more the usage has gone down mainly because of the free Facebook, they started taking advantage is what Anabelle was saying of the SIM – applicable SIM of the other side..

So would that then mean that as promotion has been taken away, have you seen the usage come back to you or have they stayed on the other side?.

For certain extent, yes, because if you look at the SMS revenues in the second quarter, the decline is not just – of the decline of the first quarter which was P800 million whereas the second quarter was 300 million..

And any thoughts on my second question I guess with regards to longer-term trends around market share and how do you stop that?.

Questions market share, is there a threshold that which you will get back – we will go preserve, is that the question? I guess there will be a threshold and which will be alarmed if the market share were in some numbers, or in revenue terms, it will get to a point of concern. Quite what the number is, I don’t know, I don’t think we do.

We will focus on that. I think if you look at the results for the first half, what you have seen from that in full year results, the fixed line business is doing very well, probably one of the fixed line businesses in the world where growth is coming, both in terms of the revenues and EBITDA contribution.

Revenues are up by 1.5 billion for the first semester, flat, so that’s why the EBITDA margin in fixed has risen from 35%, about 39% -- it’s happened on the cellular side, where revenues [inaudible] for the first half and margins has gone up by 3 billion – in the expense base as we see, that’s where we’ve got hit in terms of the margins and uplifting whatever constraints that might be [inaudible] that gives me free Facebook offering of Globe – we should determine pretty soon.

So that has been an adverse effect on the SMS volume for the first half of this year.

But I think we have to realize well the exchange side, because clearly the business model of the cellular business is – it seems – it’s changing very fast and it’s upon us already, so we have to really look at our exchange base and how we are – should be better organized in order to accommodate not only the changing revenue – the expense base moving forward.

We just cannot accept that this expense base will continue, in a business where the margins are drawn – as you switch from legacy which we are trying to attach to long tail SMS and voice which have high margin business, to data broadband which are lower margins.

And the only way we could do that would be not only the revenue and sub base, but as well the expense base, that’s the reality. Is there a panic bottom line? Well, maybe we will focus on that but I think we have to talk first on what’s happening on our cellular base which is changing, it is changing and changing very rapidly..

(Operator Instructions) Our next question comes from Kunal Vora..

First, can you provide some insights on the media broadcasting business television; how it's done in the first half, what kind of losses are incurred, and how it's being financed? That's one. Second is if I look at your mobile Internet revenue, the growth in mobile Internet revenue in absolute terms is lagging the decline in SMS revenue.

When do you expect this to change? I mean are we like pricing data right, the data growth seems to be slower compared to the cannibalization in SMS?.

Well in terms of the media asset that is –.

It is around more focus on the broadcasting TV5..

Okay, the number one is the print assets are doing quite well, no problem they are making money and their dividend paid.

Number two, the signal television which has already broken even in the first semester of this year, not only EBITDA but in terms of the bottom line, it’s growing pretty fast, as we see we are at least 750,000 subs, more likely by the end of this month, 800,000 subs.

So it is – about equal to the combined Sky Cable and Destiny Cable sub base of ADS CDN. The problem is on the TV5, which is your [inaudible] are continuing but on a declining basis. So we have managed to increase somewhat the revenues on a modest way on the TV5 broadcasting but expenses have gone down.

So I think we are being more efficient in terms of how we manage the TV5 of the business but it won’t be a quick turnaround, I think we have said that, so it will probably take two to three years before we can see our breakeven position for TV5. So that is evolving. In particularly it has to be addressed, and will have to be a medium term solution..

I think with regard to the mobile internet revenues, as mentioned earlier, the revenues grew by 77% and then in terms of volume in the first half of this year – the traffic that went through mobile internet was over 15,000 terabytes, which is roughly 121% more than same period last year [inaudible] going up and the revenues are also following but not as much, so we are looking at how we can monetize even further the volumes that are coming through.

Now with regards to [inaudible] erosion in SMS – well that is true but in the first quarter but in the second quarter erosion or decline – it is no longer lagging but this is a continuing balancing act for us, as the smartphone penetration goes up, right now we estimate that the total penetration is maybe a 27% including the smartphones that don’t come out in our switch because they are not under the 3GPP standards.

So it is moving up already and therefore that is the thing that we have to balance..

On TV5, would it be possible to give us some guidance on the loss for this year?.

Basically the funding – if you’re going to the funding, I think we are looking maybe between now and the end of the year there would be an additional funding of about [inaudible] that is not the direct funding by PLDT. The actual TV5 assets are owned by the PLDT retirement fund.

So PLDT will contribute additional amounts to the retirement fund to partially fund that. But it’s not a direct funding from the PLDT perspective..

As of the meantime, we don’t have any more questions, I will hand the call back to Ms. Melissa..

If there are no more questions, I will turn the facility over to the operator for the replay information..

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 August 19, 2014. Replay information for the CPM call, international caller number is 852-3018-4365. The U.S. toll-free number would be 1888-566-0360. The Passcode would be 8087.

And conference leader is Melissa Vergel de Dios. I will now turn the conference back to PLDT for any additional or closing remarks..

Thank you all for joining us this afternoon. And we look forward to seeing you in the third quarter results. Thank you..

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