San Miguel Earns P2.96 Billion in 1997

February 10, 1998 PSE CIRCULAR FOR BROKERS NO. 097-98 February 9, 1998 NEWS RELEASE- SAN MIGUEL EARNS P2 . 96 BILLION IN 1997 San Miguel Corporation made a profit of P2.96 billion in 1997, 51% less than P6.09 billion in 1996 year as foreign exchange losses, a rollback in beer prices, aggressive market building efforts in China, and higher cost of funds and excise taxes eroded overall gains in sales volumes. Before a net non-recurring gain of P223 million, mainly from the sale of certain real estate assets outside the scope of the company's real estate subsidiary, net income declined by 48% to P2.73 billion from P5.26 billion. In 1996 San Miguel had a net non-recurring gain of P825 million mainly from tax writebacks and the sale of some assets. Consolidated net sales amounted to P67.1 billion, an increase of 8% from P61.9 billion in 1996, but cost of sales and operating expenses increased at a faster rate of 12% to P63.5 billion from P56.8 billion. The company's financial statements were restated to reflect the deconsolidation of Coca-Cola Bottlers Philippines following its merger with Coca-Cola Amatil last April. San Miguel accounts for its soft drinks interest, now lodged in CCA, using the equity method. Operating income declined by 28% to P3.66 billion from P5.05 million due partly to the 14% beer price rollback, higher excise taxes on beer and hard liquor and higher imported raw material costs following the devaluation of the peso. Also contributing substantially to the decline in operating income were higher operating losses in the company's international operations which, when translated into pesos, grew even bigger because of the currency's devaluation. The company accelerated spending on brand building and distribution infrastructure in China and sustained operating losses in its otherwise profitable beer and packaging businesses in Indonesia, which has been hardest hit by the regional currency meltdown. This year, San Miguel's management is pursuing a strategy designed to safeguard the company's profitability and conserve its resources in view of the present financial and economic uncertainties. In the near term it is putting off new investments and is limiting capital expenditures only to those that are absolutely essential. It is closely monitoring its price levels and has implemented price increases to recover cost increases caused by the currency depreciation in the Philippines without unduly sacrificing market share. At the same time, the company has instituted a cost reduction program that includes tightening the reins on working capital, slashing cash fixed costs, and rationalizing the use of its fixed assets. In addition it is pursuing a more proactive debt and foreign currency management strategy by which it has been able to pay off most of its dollar-denominated short-term debt and fully hedge the little that remains. After reclassifying the earnings from the soft drinks business into equity income, San Miguel's equity in the earnings of unconsolidated affiliates amounted to P2.21 billion, down 32% from P3.24 billion. This was due mainly to losses suffered by an affiliate in the poultry and feed business in Indonesia and lower profits from CCBPI/CCA which offset higher profits from Nestle Philippines, Inc. The 1997 equity income does not include income from a non-compete agreement with CCA. Other 1997 income consisted mainly of income from San Miguel Properties Philippines Inc., including the second and final tranche of P688 million from the sale of shares in HOC Realty Inc., a subsidiary established to redevelop the site of San Miguel's head office, and P369 million representing three-quarters' amortization of income from the non-compete agreement with CCA. Net financing charges amounted to P4.42 billion, 83% up from P2.42 billion due to foreign exchange losses on dollar loans in the Philippine and Indonesian operations, additional borrowings, and higher interest rates. Foreign exchange losses amounted to P950 million. In spite of its reduced profitability, the financial condition of the company remained strong, with current ratio settling at 1.29, slightly lower than 1.36 in 1996, and debt-to-equity at 1.11 versus 0.85 in 1996. The group's aggregate sales volume grew by 6%, with most products registering healthy volume growth. As a result of the 14% rollback in the prices of top-selling brands San Miguel Pale Pilsen and Red Horse in July, domestic beer sales volume posted an increase of 8% in the second half, reversing a 5% decline in the first half and ending the year with an overall volume growth of 2%. Sales revenue totaled P25.2 billion, 1% higher than P24.9 billion in 1996. Operating income was P2.27 billion, 38% down from P3.00 billion in 1996 due to the increase in the excise tax on beer, the price rollback, and cost increases in the third and fourth quarters brought about by the peso depreciation. Beer prices were increased last December 1 and again on February 10 to recover cost increases. The company's international beer operations experienced a slower volume growth rate in the second half. While volumes suffered a sharp drop in Indonesia, they increased by 5% in China and by 59% in Vietnam. Sales revenue amounted to P7.43 billion, up 8% from P6.86 billion in 1996. However, operating losses went up by 77% to P1.15 billion from P648 million due mainly to the accelerated market development effort. In China, 11 more sales offices were opened, enabling the company to market beer in a total of 27 cities compared to 16 at the end of 1996. Apart from being the largest selling foreign beer brand in Guangzhou, San Miguel now ranks No. 2 in Beijing and No. 3 in Shanghai. For 1997, CCA reported a net income of Aus. $242 million, up 73% from Aus. $140 million in 1996. Sales volumes increased by 3% in Australia, 18% in the Philippines, 9% in the rest of Southeast Asia and the Pacific, and 7% in Europe. The total contribution of San Miguel's soft drinks interest to the Company's net income in 1997 amounted to P1.75 billion. This amount includes P260 million representing the company's 70% share of CCBPI's net income in the first quarter, P1.12 billion comprising the Company's 25% share of CCA's net income for the rest of the year, and P369 million representing three quarters' income from the non-compete agreement. Had CCBPI not been merged with CCA, San Miguel's earnings from its soft drinks interest in 1997 would have amounted to P1.38 billion. Although hard liquor sales volume fell by 7%, La Tondea Distillers, Inc. posted an 11% increase in sales revenue to P8.8 billion from P7.9 billion as a result of higher liquor prices and increased sales volume of fruit drinks and mineral water, which grew by 60% each. However, net income before non-recurring items declined by 67% to P241 million in the face the steep increase in excise taxes and financing costs, and advertising and promotion. The food and agribusiness segment, including San Miguel's share in Nestle Philippines, Inc., registered an increase of 13% in sales revenue to P32.9 billion from P29.1 billion and operating income went up by 65% to P2.99 billion from P1.82 billion. San Miguel Foods, Inc. generated P8.23 billion in revenue, up 27% from P6.49 billion, on volume increases of 17% for feeds and 26% for chicken. Operating income amounted to P123 million compared to an operating loss of P237 million in 1996. However, it suffered a net loss of P349 million, 22% less than P444 million in 1996, as financing charges more than doubled to P468 million, with P306 million of that in the fourth quarter alone. Foreign exchange losses in the fourth quarter totaled P193 million. While the combined sales volume of pork and beef declined by 1% as a result early culling, sales revenue of Monterey Farms Corporation increased to P2.16 billion from P2.12 billion. Operating income jumped by 51% to P139 million due to cost containment efforts. While net income before non-recurring items improved substantially from P13 million in 1996 to P21 million in 1997, it was affected by an increase in financing charges, which went up to P122 million from P93 million, of which P50 million was a foreign exchange loss arising from pre-termination of dollar loans. As a result of a 29% volume growth, better product mix and higher production efficiencies, San Miguel CampoCarne Corporation posted an operating income of P14 million the first time since its establishment in 1992. This contrasted with an operating loss of P52 million in 1996. Revenue improved by 30% to P726 million from P549 million. In spite of sharp increases in direct material costs and financing charges, San Miguel CampoCarne's net loss of P31 million was half the loss in 1996. Sales volumes of butter, cheese and margarine of Philippine Dairy Products Corporation and Star Dari, Inc. registered a combined growth of 9%. Revenue amounted to P2.19 billion, an increase of 6% from P2.06 billion, while operating income showed a decline of 17% to P204 million due to higher imported raw material costs and marketing expenditures. These, along with a 53% increase in financing charges, brought net income down to P88 million from P143 million. Nestle Philippines Inc. reported net sales of P31.0 billion, up 13% from P27.6 billion in 1996, and net income registered an increase of 23% to P2.82 billion from P2.30 billion. This was due to higher sales in most product groups, improved distribution, tight cost control, and effective partnering with suppliers of major raw and packaging materials. Following an improvement in Philippine coconut production in 1997, the company's coconut oil export volume grew by 8%. This, together with the favorable impact of the peso devaluation in the second semester, resulted in a 4% increase in revenue to P2.82 billion from P2.71 billion in 1996. With further improvements in operating efficiencies and benefits from cost containment programs, income from operations more than doubled to P39 million from P17 million the previous year. The packaging business registered a total of P11.1 billion in sales revenue, an increase of 19% from P9.31 billion, and-operating income rose by 4% to P1.63 billion due to cost reduction and productivity measures. Aggregate sales volume increased by 20%, with most products posting double-digit growth rates except international plastics, which grew at a slower pace, and domestic glass and refillable PET bottles which were below the previous year's levels. San Miguel Properties Philippines, Inc. delivered a net income of P818 million compared to P879 million in 1996. The sale of shares in HOC Realty Inc. accounted for P688 million with the balance coming from lease income and housing project sales, which slowed down, however, in the second semester due to the dampening effect of high interest rates.