Beyond the numbers

By Eduardo M. Cojuangco Jr.
Chairman, San Miguel Corp.

San Miguel had a relatively solid year in 2007. Revenue as reported was P155 billion, up 10 percent. Earnings from continuing operations were P8.21 billion, slightly higher than 2006 despite the lower-than-expected profits from our liquor and packaging businesses. Net income was P8.63 billion, down from last year’s P10.3 billion, the decline was mainly due to the performance of discontinued operations.

Clearly, going by the numbers alone, our results were somewhat wanting. What our numbers don’t reveal—and what is perhaps San Miguel’s most notable accomplishment during this period—is that we achieved these results, not only facing a headwind of cost inflation, but while still fundamentally reshaping our company.

What we have done is to prepare the company for growth and leadership in what we see is going to be a very different future—while, at the same time, continuing to deliver steady results.

In the short and medium term, the operating environment will continue to be tough. Inflationary pressures remain a concern as fuel prices and raw material costs have risen sharply. However, we have covered these cost pressures through cost savings—using our scale to drive business efficiency. We’re confident that San Miguel’s portfolio of well-known, quality food and beverage brands will stand it in good stead during this economic slowdown.

But we also realize that growth—particularly for a company as large as San Miguel—requires more than fundamentals and good execution. Growth that just keeps pace with what we’ve shown in the past would be difficult to sustain.

And this is why last year, we sought your approval to venture into new industries where your investment can enjoy advantages of fast-growing pools of revenue.

One year on, we are still on the lookout for potential and prospective investments. There are a few companies out there that we are looking at, and we will report to you as soon as something concrete materializes. We believe in acting prudently and making the right choices because where to compete is just as important to us as how. The choices we make today about our business mix will shape our growth trajectory over the next five to 10 years.

In the meantime and over the last two years, you’ve seen us make changes in our portfolio, in our capabilities and to our company’s structure.

First, changes to our portfolio. We exited businesses like Coca-Cola Bottlers Philippines Inc., National Foods and our other Australian businesses.

Second, changes to our capabilities… vertically integrating and consolidating many of our businesses, but particularly the Food Group, where we have in place an agricultural model that will allow us to manage costs better. 

And last, changes to our organization. We successfully carved out our beer and packaging units, listed our beer subsidiary and are now preparing for a secondary offering of our food business and an IPO for our packaging business.

With the company offering 886.1 million shares, including shares for overallotments, San Miguel Brewery’s IPO generated considerable interest and demand both in the domestic equity markets and abroad. So far, the share price response to SMB Inc. has been positive. Upon listing, we bucked the trend of the weak worldwide equity markets, gaining 6.25 percent in price for our stock market debut.

Operating different businesses within one holding company sometimes suppresses the value implicit in the various component elements—in our case food, beverage and packaging.

We believe that separating the businesses will allow them to be individually—and properly—valued. This is why we are asking you to give us the authority to implement a corporate restructuring plan that will enable each of our operating businesses to focus more fully on optimizing the underlying potential of each business which investors could more easily appreciate.

The restructuring may require the divestment of part of our interest in our major subsidiaries through either an IPO or follow-on offering, and strategic partnerships with existing partners and other industry leaders. In the event that we do pursue such a partnership, San Miguel would retain controlling interest of at least 51 percent.

Our divestments have resulted in financial flexibility. We are in a substantially strong position to capture the most valuable opportunities that we know exist.

We are also in the position to do expand our corporate social responsibility programs. Very recently, we joined forces with businessman-philanthropist Robert Kuok to launch a $1-billion food security initiative in cooperation with the Philippine government to address the problems arising from the escalation of food prices worldwide.

Our target is to develop 1 million hectares of government-owned land for the sole purpose of promoting agricultural productivity and developing a sustainable food supply for the Philippines. 

We already have ongoing agricultural and raw material sourcing programs in several provinces throughout the Philippines, but our partnership with Mr. Kuok will allow us to take concrete steps to energize food production on a national level and generate much-needed jobs, especially for smallholder farmers.

Together with the Kuok Group, we have committed to providing financial assistance, technical expertise and off-take contracts to buy all agricultural produce. We are very proud of this initiative and as shareholders of San Miguel, we hope you share in this pride as well. The Kuok Group also joined us in matching our $500,000 donation to the victims of Typhoon Frank.

Fellow stockholders, it may seem that far too much is fluid. Some San Miguel watchers are even wondering why we have not made any acquisition. We understand that, but we feel that caution and discipline are the best operating principles that we can wield in this time of market disruptions.

We have always kept our eyes firmly on the goals that will produce the kind of profitability you demand from us. We’re certainly off to a good start. For the first five months of the year, we posted net income of P17 billion, up by about 200 percent from the same period last year—some of it coming from one-time gains, but a large part from the strong performance of our core businesses.

As a result of certain strategic decisions, San Miguel’s business model today is not only more aligned with our future plans for this company, but is also a stronger engine of financial performance. Given our results thus far and the shape we are in, you have every reason to be confident in your investment.

This article is based on Mr. Cojuangco’s address at the San Miguel Corp. stockholders’ meeting Thursday.

San Miguel had a relatively solid year in 2007. Revenue as reported was P155 billion, up 10 percent. Earnings from continuing operations were P8.21 billion, slightly higher than 2006 despite the lower-than-expected profits from our liquor and packaging businesses. Net income was P8.63 billion, down from last year’s P10.3 billion, the decline was mainly due to the performance of discontinued operations.

Q: What criteria should be used to determine if you have been with the same company too long? --Jason Morrow, Salt Lake City

A: Your question reminds us of a friend of ours, an investment manager at a highly regarded company in the Midwest, who drove to work one morning, parked his car in the usual spot and then found he simply could not bring himself to get out.