PSE Circular for Brokers No. 282-98

March 5, 1998 PSE CIRCULAR FOR BROKERS NO. 282-98 March 3, 1998 RFM 1997 EARNINGS SURGE 25% Food and beverage giant RFM Corporation disclosed yesterday that it registered P628 million in net income after tax and after unrealized foreign exchange losses for calendar year 1997, 25% better than the P503 million the company reported for calendar year 1996. The Group's net sales increased from P13.7 billion the previous year, to P16.9 billion in 1997, a 23% improvement, despite the difficulties experienced by the economy during the back half of the year, arising out of the Asian currency crisis. Before unrealized foreign exchange losses, RFM posted P1 . 076 billion in earnings, which is 114% higher than previous year's income, and higher than market expectations. Jose A. Concepcion III, RFM President and Chief Executive said, that the P1 . 076 billion is probably more reflective of the Group's actual operating performance in 1997. "Considering that the currency devaluation was a variable completely unexpected and beyond our control P1 . 076 billion would have been our bottomline, if the currency crisis did not happen when it did." Concepcion stated. "The P1 . 076 billion in fact, is still less than what we could have achieved, since this figure is already negatively affected by the higher peso cost of our critical raw materials resulting from the peso devaluation." Concepcion added. The foreign exchange losses recognized by RFM stem from open short-term dollar loans arising out of the company's importation of its raw materials as of year-end, and its $65 million 10-year convertible bond issued in May of 1996. RFM's relatively better performance can be attributed to the resilience of consumer demand for food and beverage products, as well as the impressive performance of its subsidiaries. Cosmos Bottling Corporation, which reported net earnings of P508 million for 1997, remained as the strongest performing unit of the RFM Group. Cosmos' 61% growth in earnings boosted by a similar percentage growth in revenues and volume, is strong evidence of the effectiveness of its strategy. "Happening as it did in the same year that our multinational competitors lowered their prices very close to where our prices were, Cosmos' 1997 sales and earnings performance proves that we can withstand the kind of competitive pressure that they can dish out and still manage to grow aggressively." Concepcion said. Many analysts also attribute Cosmos' performance to its low exposure to imported or foreign currency denominated inputs, its good cashflow which reduced its dependence on high-cost working capital loans, and the positive effect of the warmer weather resulting from the El Nio phenomenon. cdlex Selecta Dairy Products also reported record earnings in 1997 of P128 million , with the dairy subsidiary finally taking market leadership of the Philippine ice cream market. Its continuous success in boosting bulk ice cream demand with the regular launch of creative flavor collections, and the introduction of its new "Ice Buko" line of Filipino frozen novelties, has established Selecta as the new leader in the Philippine ice cream market. The subsidiary's investments in cost-reducing improvements in its ice cream plant, and in a state-of-the-art supply chain management system developed by Oracle, has helped Selecta battle milk cost increases stemming from the peso devaluation. Swift Foods Inc ., RFM's largest subsidiary and the country's biggest poultry producer and meat processor, saw margins from chicken sales recover as selling prices improved, but continued to suffer from higher costs of imported feed raw materials, medicines and vaccines, as well as the lingering effects of the chicken oversupply situation. The peso devaluation also eroded meat margins with the higher cost of meat raw materials during the third quarter, which is when the bulk of meat raw materials are imported in preparation for the big surge of demand in Christmas. Swift actually made P26 million prior to the booking of unrealized foreign exchange losses, but posted an P100 million loss after the said item. This is nevertheless, much smaller than the P200 million loss it incurred in 1996. "Swift's fortunes in 1998, will be the reverse of what it has been in 1996 and 1997." Concepcion stated. "With chicken selling prices improving, the poultry integrators voluntarily reducing output because of the need to keep high-cost working capital loans to a minimum, and total industry supply aligning with demand, we expect all the integrators to make in 1998, what was lost in the last two years." Concepcion added. Swift's investments in the automation of its broiler grow-out farms and its canned meat operations, have also been completed according to company officials, and these are expected to further reduce direct costs, despite the rising peso costs of some of its imported raw materials for feeds and processed meat products. The planned transfer of RFM's export-oriented canned tuna division to Swift sometime in the first half of the year will further boost Swift earnings, and provide the subsidiary a natural foreign exchange hedge.