Bacnotan group reports downturn

November 19, 1998 PSE CIRCULAR FOR BROKERS NO. 2614-98 Bacnotan group reports downturn Bacnotan Consolidated Industries, Inc. (BCII), with the regional financial crisis erupting at the start of its fiscal year from July 1, 1997 to June 30, 1998, registered its first downturn in sales and net results after more than 12 years of growth since the 1986 EDSA Revolution. The sharp depreciation of the peso beginning July 1997 and the consequent rise in interest rates constricted the construction materials market just as new plant capacities were coming on stream. The resulting glut severely depressed market prices. cdlex BCII's consolidated net sales declined by 12% to P10.7 billion from P12.1 billion in FY 1996-97. Its earnings before interests, taxes, depreciation and amortization (EBITDA) amounted to P2.5 billion. As part of restructuring and consolidation moves to cope with the adverse conditions, two of its subsidiaries Bacnotan Cement Corporation and Davao Union Cement Corporation mothballed their old, wet-process lines and wrote down the remaining book value to ease the burden of depreciation charges in future years. With the weak prices, the effects of the regional financial crisis including one-off net foreign exchange losses of P480.5 million and the extraordinary charges arising from the write-down of the wet-process lines, BCII registered a consolidated net loss of P652.9 million. Prior to this downturn, BCII's consolidated net income rose from P59.4 million in FY 1987 to P632.3 million in FY 1997, for an average annual growth rate of 26.7%. At the end of June 1998, BCII had P26.4 billion in total assets, including P18.1 billion in property, plant and equipment. Its consolidated net debt to equity ratio stood at 4.3 to 1.00. It may be noted that BCII's financial data improved significantly in September 1998 when it received a US$210 million investment from Holderbank Financiere Glaris, Ltd., its new strategic partner in the cement sector. LLpr SUBSIDIARIES Hi Cement Corporation registered a small 7% rise in sales volume to 2.3 million metric tons of cement, given weak demand in Metro Manila and adjacent regions. Low market prices cut its net sales revenue by 9% to P4.3 billion. Hi Cement's EBITDA amounted to P1.05 billion. However, with high financing costs and increased depreciation charges, it registered a net loss of P7.7 million. Its stockholders' equity stood at P4.2 billion at the end of June 1998, on total assets of P9.4 billion. Hi Cement reached full production of its new production line, which has a clinker capacity of 5,000 metric tons per day. Trans-Asia Power Generation Corporation, a joint venture of Hi Cement and Trans-Asia Oil and Energy Corporation, began full operation of its 52-megawatt plant to supply Hi Cement's power requirements. Davao Union Cement Corporation, given an infrastructure construction slowdown in the Visayas and Mindanao, registered a flat sales volume at 1.5 million metric tons. With low market prices, its net sales revenue decreased by 2% to P3.2 billion. Cdphil Davao Union's EBITDA amounted to P896.5 million. It decided to mothball its small, wet-process line and write down the remaining book value to its recoverable level to lift the burden of depreciation charges on future years. With this move, plus the market's weakness and the impact of the financial crisis, it registered a net loss of P263.6 million. Its stockholders' equity stood at P3.1 billion at the end of June 1998, on total assets of P8.8 billion. Bacnotan Cement Corporation registered a 10% decrease in net sales to P2.6 billion as the Northern and Central Luzon markets suffered from the same anemic demand and poor prices as in the other regions. Its EBITDA amounted to P740.5 million. It also decided to mothball its old, wet-process line, and write down its remaining book value to reduce future financial burdens. With this one-time charge taken into account, the result was a net loss of P252 million for the year. It registered P2.7 billion in total stockholders' equity at the end of June 1998, on total assets of P4.6 billion. Bacnotan Steel Corporation (BSC) the wholly owned steel sheet fabrication subsidiary of BCII, incurred foreign exchange losses and increased interest expenses resulting from the dollar-denominated loans it obtained for its expansion and working capital. Its primary market, the low-and medium-cost housing sector, slowed down significantly during the year. United Pulp and Paper Company, Inc. (UPPC) has begun test runs on its P4.2 billion, new paper mill. The new mill has an annual capacity of 150,000 metric tons of container board and brings UPPC's total annual capacity to 200,000 metric tons. LexLib Bacnotan Steel Industries, Inc. (BSII), a joint venture with Filipino and Japanese partners, including Kawasaki Steel Corporation, Mitsui & Co., Inc. and the Japan International Development Organization, has nearly completed civil works for its electric arc furnace and bar mill in Calaca, Batangas. The P5 billion project is expected to begin commercial operation in early 2000. Bacnotan Industrial Park Corporation (BIPC) is in the advanced stages of port construction in its industrial estate, the Batangas Union Industrial Park, at Balayan Bay, in Calaca, Batangas. Its first locator is the BSII plant. GLOBAL PARTNER Early in FY 1998-99, BCII entered into a strategic partnership with Switzerland-based Holderbank Financiere Glaris, Ltd., the biggest cement producer in the world. The partnership was established through Union Cement Corporation (UCC), the holding company for the direct and indirect interests of BCII in Bacnotan Cement, Davao Union and Hi Cement. Holderbank's US$210 million investment comprises US$168 million in shares of UCC stock and US$42 million in UCC convertible bonds. For part of its shares in the three cement subsidiaries, BCII has received US$90 million, which it is using to reduce its debt, strengthen its overall liquidity position, and complete its funding of investment commitments, including those for UPPC, BIPC and BSII. For Bacnotan Cement, Davao Union and Hi Cement, about US$120 million has become available for reducing their debt burden. For BCII and these three subsidiaries, the net interest savings could reach P1.3 billion a year. prLL In technical operations, Holderbank will contribute its product research and its system of applying the best methods at its plants worldwide as models to be followed at other plants.