San Miguel Net P723 Million in First Half

July 31, 1998 PSE CIRCULAR FOR BROKERS NO. 1787-98 SAN MIGUEL NET P723 MILLION IN FIRST HALF July 30, 1998 San Miguel Corporation reported a net income of P723 million in the first half of 1998, 75% lower than P2.89 billion for the same period last year, as higher financing charges and the economic slowdown, continued to take their toll on the company's operations. This performance reflects an improvement in the company's operations in the second quarter. Although the second-quarter net income of P620 million was 65% lower than a year ago, it was a substantial improvement alongside the 91 % net income decline in the first Quarter. cdlex Consolidated net sales for the first six months of the year amounted to P38.2 billion, up 19% from P32.0 billion a year ago, as a result of higher sales volumes, which grew collectively by 6%, and price increases. Cost of sales and operating expenses increased by 21% to P36.0 billion from P29.8 billion due to higher sales volumes and raw material costs. Although margins improved, operating income for the first half declined by 3% to P2.17 billion from P1.22 billion. The lost operating income included P560 million in profits on inventories of packaging products sold to Coca-Cola Bottlers Philippines, Inc. prior to its merger with Coca-Cola Amatil. Without this gain, operating income would have shown an increase of 30%. Sales volumes of most of San Miguel's domestic businesses continued to grow, with beer posting a growth rate of 7%; packaging 9%; food and agribusiness 10%; bottled water 38%; and juices 62%. These gains were offset, however, by a sharp increase in financing charges, higher translation into pesos of losses in the company's international operations, a squeeze on margins in the packaging operations, weak performance of the real estate business, and foreign exchange losses in Indonesia. Financing charges amounted to P3.19 billion, which was 126% greater than P1.41 billion in the first half of 1997 as a result of higher loan balances and interest rates, and foreign exchange losses. Equity income from unconsolidated affiliates, mainly Nestle Philippines, Inc. and Coca-Cola Amatil Ltd., remained steady at P1.29 billion. Domestic beer sales volumes showed growth in all regions as a result of improvements in distribution and product availability. Revenue went up by 14% to P13.6 billion from P12.0 billion and operating income jumped by 68% to P2.30 billion from P1.37 billion. International beer sales volumes picked up in the second quarter, reducing what was a decline of 14% in the first quarter to a deficit of 8% at the end of the first half. In contrast with declines in the first quarter, second quarter sales volume grew by 5% in China and by 92% in Vietnam. International beer sales revenue amounted to P4.05 billion, up 20% from P3.38 billion mainly because of the higher dollar-to-peso conversion rate. Operating losses increased by 66% to P795 million from P480 million, although in dollar terms the losses increased by only 9% and mainly because of Indonesia. La Tondenia Distillers, Inc. generated P5.14 billion in sales revenue, up 10% from P4.68 billion. A 12% increase in liquor volumes in the second quarter offset a decline of 9% in the first quarter, as its bottled water and juice businesses continued to perform strongly. As a result of the higher volumes and a tighter rein on costs, operating income grew by 24% to P914 million from P739, million. However, financing charges weighed down on net income, which amounted to P152 million, 46% below P280 million a year ago. Sales revenue of the food and agribusiness segment, including SMC's share in Nestle Philippines, Inc., increased by 21% to P18.7 billion from P15.4 billion, and operating income jumped by 18% to P1.40 billion from P1.18 billion. While feed sales volume fell by 3%, sales volume increases for other products ranged from 4% for butter, cheese and margarine; 6% for chicken, 13% for pork and beef; 28% for coconut oil; and 69% for processed meats. aisadc Sales volume of packaging products increased by 9% and revenue grew by 20% to P6.40 billion from P5.31 billion. However, margins were squeezed by the high cost of imported raw materials on one hand and on the other hand by a regional glut in the supply of packaging products which curtailed pricing flexibility. Consequently, the packaging segment's operating income declined by 38% to P479 million from P771 million. San Miguel Properties, Inc. continued to be adversely affected by the weakness of the real estate market and sustained a net loss of P82 million as the high interest regime dampened demand for housing. While the economic slowdown and the effects of the drought pose challenges to business in the months ahead, the company expects some relief in interest expense in the second half of 1998 as the earnings from the proceeds of the sale of its stake in Coca-Cola Beverages, PC offset interest expense.