What Tomorrow
Looks Like
Annual Report 2018
What Tomorrow
In 2018, we achieved one of our most significant goals yet, realizing trillion-peso level revenues a full two years ahead of our target.
We achieved this in a year when record inflation, volatile world oil prices, and foreign currency movements had a dampening effect on companies and consumers alike.
While each of our businesses had different ways of addressing these challenges, it’s a tribute to our people that despite difficulties, our businesses performed exceedingly well.
Consolidated revenues reached P1.02 trillion, 24% higher than the previous year. Our food, beverage, packaging, fuels, power, and infrastructure businesses continued to experience robust volume growth, giving our current and planned capacity expansions greater impetus.
Operating income rose by 5% to P117.1 billion, due to sustained strong volumes and higher revenues. Growth was, however, partly held back by higher raw material costs for the Food Group, and inventory losses for Petron Corporation of about P10 billion.
Consolidated recurring net income reached P55.2 billion, a slight improvement from the previous year. Petron bore the brunt of sharp declines in world crude prices in the last quarter of 2018. Overall, this, together with foreign exchange translation losses, tempered income growth. Consolidated EBITDA rose 7% to P157.9 billion.
What we'd like to emphasize is that despite the unique challenges that weighed down some of our major businesses, San Miguel as a whole, continued to deliver strong growth, leveraging on the strength of our diversified portfolio. More importantly, our consistently growing revenues and the continuing expansion of our operations point to even greater growth in the years to come.
Everything we’ve done is focused on ensuring the sustainability of our business and our country’s growth: our diversification, our investments in future-ready infrastructure, the ongoing expansion of our businesses, and our deliberate efforts to address social and environmental issues.
We continue to pursue long-term programs that will enable us to diversify and add new revenue streams, narrow the gap between supply and consistently higher demand, and further scale our impact on important social, economic, and environmental issues.
Eduardo M. Cojuangco, Jr. Chairman and Chief Executive Officer
Ramon S. Ang President and Chief Operating Officer
Vital to our vision of the future is the creation of new economic centers throughout the country, away from the big cities and into rural Philippines.
In areas where we’ve opened new manufacturing facilities and provided jobs, small businesses and micro economies have taken root. By establishing regional manufacturing hubs with access to affordable, reliable power and efficient infrastructure, we fulfill our commitment to help our nation achieve its development goals.
In its first full year of operations as a consolidated company, San Miguel Food and Beverage, Inc. (SMFB) benefited from investments to put up new facilities. This is reflected in the company’s results and on the positive performance of its share price.
Yet again, San Miguel Brewery Inc. (SMB), recorded strong volume growth for the year. With production reaching maximum capacity, SMB’s ongoing expansion program is well-timed.
Our consistently growing revenues and the investments we’ve made to expand our operations point to even greater growth in the years to come.
Work is in full swing on the Tagoloan Brewery in Misamis Oriental in Mindanao. This facility, with an initial capacity of one million hectoliters, is the first of several planned breweries to be built in strategic regional centers nationwide. We are also converting the Sta. Rosa, Laguna bottling facility into a full-scale brewery with a similar initial capacity of one million hectoliters. Over the long term, these new facilities will allow us to address growing demand and maximize efficiencies throughout the supply chain.
For the Food Group, the coming onstream of new facilities—which include a new hotdog plant in Cavite and two feed mills in Bataan and Bulacan—will address strong demand and partially offset the effects of inflation and higher raw material prices.
These new plants, part of the Food Group’s expansion program, will do more than just enhance our capability to produce food for a greater number of Filipinos. This strategy will give us greater control over the manufacturing process. It will help us ensure product quality and encourage innovation and more sustainable practices throughout the company.
It was a banner year for the spirits business, Ginebra San Miguel, Inc. (GSMI). Recording the highest volumes in years, the company returned to billion-level profitability resulting from a strong marketing campaign, improvements to its distribution system, better manufacturing efficiencies, and share and volume gains from other key brands.
The San Miguel Packaging Group had an equally strong year, with increased demand across all business segments and significant growth in its Australia operations. The Packaging Group completed two major acquisitions. In June, it acquired JMP Holdings Pty. Ltd., a supplier of packaging products for various industries, and in January 2019, it completed the acquisition of INSA Alliance Sdn Bhd, a Malaysian manufacturer of high-quality bulk bags.
SMC Global Power Holdings Corp made steady progress across many areas of its business. Our mission to provide stable and affordable power to more consumers nationwide received a significant boost, with the coming onstream of new capacities in our Malita, Davao and Limay, Bataan power plants, which now have a combined capacity of 750 MW. Together with the acquisition of the Masinloc Power Plant in Zambales in March 2018, our total capacity as of end-2018 reached 4,197 MW.
As one of the leading power producers in the Philippines, we have a responsibility to contribute to government’s effort to meet the country’s power requirement by 2030. We have identified strategic areas where we plan to build power plants that use new technologies to round out our portfolio of renewable and traditional energy sources, using cleaner, more sustainable methods.
We’ve already gained significant experience in this area. By utilizing circulating fluidized bed (CFB) technology in our greenfield plants, we’ve consistently brought down emission levels to significantly lower than those prescribed by government and the World Bank. The Masinloc power plant uses technology that allows it to produce energy using less coal.
We also continue to pursue innovation that makes us a more sustainable business. One of these is the possible conversion of our coal-powered plants to multi-fuel plants. We are looking at using rice husks, food waste, and plastic wastes as feedstock.
Separately, the Masinloc plant has deployed the latest battery storage technology to help stabilize the power grid. All in all, these initiatives reflect our philosophy when it comes to power—and that is to keep moving the needle towards greater sustainability, however and wherever we can.
Petron substantially reduced its use of water by substituting it with non-scarce water. For 2018, its total water reduction reached 15.3 million cubic meters, a 26% improvement over the previous year.
Despite a challenging operating environment, Petron Corporation focused on expanding its reach, broadening its offerings, and increasing efficiencies. It is the fastest-growing fuel company in the country with 2,400 stations nationwide—more than the total number of stations managed by three of its closest competitors combined. In Malaysia, its network has expanded to 640 stations.
Petron reached most of its targets for 2018: improving its product line and achieving its highest annual crude run equivalent to a 95% utilization rate, well beyond the global average of 85%. It added 370,000 barrels of new storage capacity in key locations ahead of future demand, as part of a larger logistics master plan. The company is also close to completing its polypropylene facility, which will provide the business higher margins.
Petron also led in many of our environmental initiatives, including our water sustainability initiative. Utilizing a combination of desalination technology and rainwater harvesting, Petron substantially reduced its use of surface water. For 2018, its total water reduction reached 15.3 million cubic meters, a 26% improvement over the previous year.
For SMC Infrastructure, work continued throughout 2018 to complete ongoing projects, even as we realized higher returns from operating infrastructure investments. We made significant progress on right-of-way issues concerning various sections of Skyway Stage 3, which will connect our toll roads in the south to northernmost Metro Manila and beyond. Before the end of 2018, we opened to the public a segment of the stretch from Gil Puyat in Makati heading towards Quirino Ave.
A new section of the Tarlac-Pangasinan-La Union Expressway (TPLEX) up to the Pozzorubio exit is now operational. The last section to Rosario, La Union is scheduled for completion by end of 2019. Even then, we’re already gearing up for the TPLEX extension project, which the government has allowed us to undertake. This will extend TPLEX from Rosario to San Juan in La Union.
The MRT-7 project, a major component of our larger infrastructure master plan, is progressing well. The latest major rail project in the Philippines since LRT-2, MRT-7 is crucial to opening up the province of Bulacan as a major growth center, much like Laguna and Cavite in the south.
Before the end of 2018, we completed construction on Phase 1 of the Bulacan Bulk Water Supply Project. Since the start of the year, it has begun supplying potable water to six out of the 24 water districts under its concession agreement.
Our proposal to build a new, world-class international gateway— the New Manila International Airport (NMIA)—has undergone extensive review by various government agencies. From the beginning, we were fully aware of the difficulties of a project such as this; nothing of this magnitude has ever been completed. But we know that to truly solve our decades-long problem of land and air congestion and to fully tap our economic potential, our country needs a future-proof solution.
The past year strengthened our resolve to push for this long-overdue game-changer, particularly as the Swiss Challenge phase for our proposal is, as of this writing, well underway.
This airport will be our biggest contribution to the Philippine economy, one that will generate millions of direct and indirect jobs; revive local industries and give rise to new ones; accelerate our exports; attract foreign investment; revitalize tourism, and boost national pride.
Very recently, we signed a share purchase agreement with LafargeHolcim Ltd., Europe’s largest cement company, to acquire for US$2.15 billion its entire 85.7% shareholding in Holcim Philippines, the leading cement manufacturing company in the country.
This acquisition will increase our foothold in the cement business and provide us the opportunity to expand our cement business nationwide.
Cement is a highly strategic business for us, given our major infrastructure projects and a growing construction industry.
We continue to evolve in the way we approach issues that impact not just our business but society as a whole. More and more, the lines that once separated our business concerns with our social and environmental commitments are becoming less distinct, giving way to clearer sustainability goals.
By investing in manufacturing facilities, we create more jobs and give rise to new economies. By making power reliable and available to more people, we help make our regions attractive to investors and improve daily lives. By expanding our network of gas stations, we make the entire archipelago accessible to commerce and tourism. By building roads, mass transport systems, seaports, and airports, we bridge infrastructure gaps and increase our competitiveness as a country.
But our version of the future does not stop at building the foundations of our nation’s growth. Our needs do not outweigh the needs of millions of ordinary Filipinos. There is a lot more at stake for us if resources vital to our operations—and the daily lives of our consumers—are not protected. As such, we have a bigger responsibility to ensure that these resources will still be there for future generations.
In this regard, we are glad to report significant wins in the area of environmental sustainability. Our water initiative, “Project 20x2025: Water for All”—which will see us cut operational water use by 50% by year 2025—achieved a landmark 25.3% reduction in 2018. What makes this milestone truly special is that we've exceeded our target of 20% reduction by 2020 a full two years ahead of schedule.
Also in 2018, we rolled out the next leg of our sustainability program—addressing solid waste pollution. With the help of various stakeholders, we aim to make a difference across three important fronts.
Our first project will have us partnering with a host community to build a local recycling and sorting facility. Plastics will be broken down to become either feedstock or input to other materials that can be used in construction.
We continue to evolve in the way we approach issues that impact not just our business but society as a whole. More and more, the lines that once separated our business concerns with our social and environmental commitments are becoming less distinct.
Our second initiative is the construction of the Philippines’ first-ever recycled plastics roads. Hard-to-recycle plastics will be converted into raw material for asphalt which can then be used for road construction. The project will help take plastic wastes out of our environment. We will be working with materials science firm Dow Chemicals to pilot-test this technology in select areas.
Our third major initiative is an investment of P1 billion for five years to dredge and revive the 59.24-kilometer Tullahan River, which starts at the La Mesa Reservoir, spans Valenzuela and Malabon cities, and drains into the Manila Bay.
For decades now, we have been helping the local government clean up this major tributary, considered biologically dead because of pollution.
With the full backing of the Department of Environment and Natural Resources (DENR), we are determined to clean up Tullahan River in support of government's project to rehabilitate the Manila Bay.
We’re aligning our many ongoing projects to the United Nations Sustainable Development Goals (UN SDGs) and we’re proud to say that much of what we’ve done has always been embedded in our operations.
Thank you for supporting us this past year. We hope that with greater understanding of your company, you will continue to support our initiatives, patronize our products, and contribute, in your own way, to the goal of making the Philippines a better, stronger, more prosperous nation.