SAN MIGUEL PURE FOODS COMPANY, INC. Primary Offer in the Philippines of up to 15,000,000 Preferred Shares at an Offer Price of P 1,000 per Share to be listed and traded on the First Board of The Philippine Stock Exchange, Inc. Joint Issue Managers and Joint Lead Underwriters BDO Capital & Investment Corporation The Hongkong and Shanghai Banking Corporation Limited RCBC Capital Corporation SB Capital Investment Corporation Standard Chartered Bank Co-Lead Underwriter First Metro Investment Corporation Participating Underwriters China Banking Corporation Insular Investment and Trust Corporation Multinational Investment Bancorporation Philippine Commercial Capital, Inc. Underwriters Unicapital, Inc. Vicsal Investment, Inc. Financial Advisor to the Issuer ATR KimEng Capital Partners, Inc. Selling Agents The Trading Participants of The Philippine Stock Exchange, Inc. This Prospectus is dated February 8, 2011
SAN MIGUEL PURE FOODS COMPANY, INC. JMT Building, ADB Avenue Ortigas Center, Pasig City 1605 Philippines Telephone number (632) 702-5000 FAX number (632) 914-0314 http://sanmiguelpurefoods.com This Prospectus relates to the offer and sale by way of a primary offer in the Philippines (the “Offer”) of up to 15,000,000 cumulative, non-voting, non-participating, non-convertible preferred shares with a par value of P10.00 each (the “Preferred Shares” or “Shares”) of San Miguel Pure Foods Company, Inc. (“SMPFC”, the “Company” or the “Issuer”), a corporation duly organized and existing under Philippine law. The Preferred Shares will be issued by the Company from its 40,000,000 authorized and unissued preferred share capital. The Preferred Shares are being offered for subscription solely in the Philippines through the Joint Issue Managers and Joint Lead Underwriters, BDO Capital & Investment Corporation, The Hongkong and Shanghai Banking Corporation Limited, RCBC Capital Corporation, SB Capital Investment Corporation and Standard Chartered Bank (the “Joint Lead Underwriters”), Sub-Underwriters and Selling Agents named herein at a subscription price of P1,000 per share (the “Offer Price” or the “Issue Price”). Following the Offer, the Company will have (i) 166,667,096 common shares and (ii) 15,000,000 preferred shares issued and outstanding. The holders of the Preferred Shares do not have identical rights and privileges with holders of the existing common shares of the Company. The declaration and payment of dividends on the Preferred Shares will be subject to the sole and absolute discretion of the Issuer’s Board of Directors (the “Board”) to the extent permitted by law. The declaration and payment of dividends (except stock dividends) do not require any further approval from the shareholders. As and if declared by the Board, dividends on the Shares shall be at a fixed rate of 8.0% per annum calculated in respect of each Share by reference to the Issue Price thereof in respect of each Dividend Period (the “Dividend Rate”). Subject to the limitations described in this Prospectus, dividends on the Shares will be payable quarterly in arrears on March 3, June 3, September 3 and December 3 of each year (each a “Dividend Payment Date”). Unless the Shares are redeemed by the Issuer on the fifth anniversary from Listing Date (the “Optional Redemption Date”), the dividends on the Shares will be adjusted on the Optional Redemption Date to the higher of: (a) the Dividend Rate, or (b) the 10-year PDST-F rate for the date corresponding to the Optional Redemption Date plus 3.33% per annum (see “Terms of the Offer” on page 16). Dividends on the Shares will be cumulative. If for any reason the Issuer’s Board does not declare a dividend on the Shares for a dividend period, the Issuer will not pay a dividend on the Dividend Payment Date for the dividend period. However, on any future Dividend Payment Date on which dividends are declared, holders of the Shares must receive the dividends due them on such Dividend Payment Date as well as all dividends accrued and unpaid to the holders of the Shares prior to such Dividend Payment Date (see “Description of the Preferred Shares” on page 24). As and if declared by the Board, the Issuer may redeem the Preferred Shares on the Optional Redemption Date or on any Dividend Payment Date thereafter in whole or in part, at a redemption price equal to the Issue Price of the Shares plus accrued and unpaid dividends for all dividend periods up to the date of actual redemption by the Issuer. The Issuer may purchase the Shares at any time in the open market or by public tender or by private contract at any price through The Philippine Stock Exchange, Inc. (“PSE”). The Shares so purchased may either be redeemed and cancelled after the Redemption Date or kept as treasury shares. The gross proceeds of the Offer are expected to reach approximately P15,000,000,000. The net proceeds from the Offer, estimated to be at P14.83 billion and determined by deducting from the
2
gross proceeds the total issue management, underwriting and selling fees, listing fees, taxes and other related fees and out-of-pocket expenses, will be used by the Company: (i) to repay a payable to San Miguel Corporation (“SMC”) in the amount of P3.615 billion, relating to its acquisition from SMC of food related brands and intellectual property rights and the Vietnam food business (ii) for investment in such investment opportunities or areas for investment as the Board of Directors may hereafter identify; and (iii) for general corporate purposes (see “Use of Proceeds” on page 43). The Joint Lead Underwriters shall receive an estimated underwriting fee of 0.75% of the gross proceeds of the Offer, inclusive of amounts to be paid to any other underwriters and selling agents. Prior to the Offer, there has been no public market for the Preferred Shares. Accordingly, there has been no market price for the Preferred Shares derived from day-to-day trading. No dealer, salesman or any other person has been authorized to give any information or to make any representation not contained in this Prospectus. If given or made, any such information or representation must not be relied upon as having been authorized by the Company or any of the Joint Lead Underwriters and Sub-Underwriters. The distribution of this Prospectus and the offer and sale of the Preferred Shares may, in certain jurisdictions, be restricted by law. The Company, Joint Lead Underwriters and Sub-Underwriters require persons into whose possession this Prospectus comes, to inform themselves of and observe all such restrictions. This Prospectus does not constitute an offer of any securities, or any offer to sell, or a solicitation of any offer to buy any securities of the Company in any jurisdiction, to or from any person to whom it is unlawful to make such offer in such jurisdiction. Unless otherwise stated, the information contained in this Prospectus has been supplied by the Company. To the best of its knowledge and belief, the Company (which has taken all reasonable care to ensure that such is the case) confirms that the information contained in this Prospectus is correct, and that there is no material misstatement or omission of fact which would make any statement in this Prospectus misleading in any material respect. Unless otherwise indicated, all information in the Prospectus is as of September 30, 2010. Neither the delivery of this Prospectus nor any sale made pursuant to this Prospectus shall, under any circumstances, create any implication that the information contained herein is correct as of any date subsequent to the date hereof or that there has been no change in the affairs of the Company and its subsidiaries since such date. Market data and certain industry forecasts used throughout this Prospectus were obtained from internal surveys, market research, publicly available information and industry publications. Industry publications generally state that the information contained therein has been obtained from sources believed to be reliable, but that the accuracy and completeness of such information is not guaranteed. Similarly, internal surveys, industry forecasts and market research, while believed to be reliable, have not been independently verified, and none of the Company, Joint Lead Underwriters and the Sub-Underwriters makes any representation, undertaking or other assurance as to the accuracy or completeness of such information or that any projections will be achieved, or in relation to any other matter, information, opinion or statements in relation to the Offer. Any reliance placed on any projections or forecasts is a matter of commercial judgment. Certain agreements are referred to in this Prospectus in summary form. Any such summary does not purport to be a complete or accurate description of the agreement and prospective investors are expected to independently review such agreements in full. Each person contemplating an investment in the Preferred Shares should make his own investigation and analysis of the creditworthiness of SMPFC and his own determination of the suitability of any such investment. The risk disclosure herein does not purport to disclose all the risks and other significant aspects of investing in the Shares. A person contemplating an investment in the Preferred Shares should seek professional advice if he or she is uncertain of, or has not understood any aspect of the securities to invest in or the nature of risks involved in trading of securities, especially those high-risk securities. Investing in the Preferred Shares involves a higher degree of risk compared to debt instruments. For a discussion of certain factors to be considered in respect of an investment in the Preferred Shares, see the section on “Risks Factors” starting on page 29.
3
Table of Contents Forward-Looking Statements…………………………………………………………………………………..6 Definition of Terms………………………………………………………………………………………………7 Executive Summary…………………………………………………………………………………………......9 Summary of Financial Information……………………………………………………………………………13 Capitalization……………………………………………………………………………………………………15 Terms of the Offer……………………………………………………………………………………………...16 Description of the Preferred Shares………………………………………………………………………….24 Risk Factors…………………………………………………………………………………………………….29 Use of Proceeds………………………………………………………………………………………...……..43 Determination of Offer Price…………………………………………………………………………………. 45 Dilution…………………………………………………………………………………………………………. 46 Plan of Distribution……………………………………………………………………………………………..47 The Company…………………………………………………………………………………………………..51 Description of Property………………………………………………………………………………………...75 Legal Proceedings……………………………………………………………………………………………..82 Ownership and Capitalization………………………………………………………………………………...83 Market Price of and Dividends on SMPFC’s Common Equity and Related Stockholder Matters……..85 Directors and Executive Officers……………………………………………………………………………..87 Certain Relationships and Related Transactions…………………………………………………………..95 Selected Financial Information and Other Data…………………………………………………………….97 Management’s Discussion and Analysis of Results of Operations and Financial Condition…………100 External Audit Fees and Services…………………………………………………………………………..122 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure………..123 Interest of Named Experts and Counsel…………………………………………………………………...124 Taxation………………………………………………………………………………………………………..125 Industry Overview…………………………………………………………………………………………….130 Regulatory Framework……………………………………………………………………………………….138 The Philippine Stock Market…………………………………………………………………………………143 Appendix……………………………………………………………………………………………………….148
5
Forward-Looking Statements This Prospectus contains forward-looking statements that are, by their nature, subject to significant risks and uncertainties. These forward-looking statements include, without limitation, statements relating to: •
known and unknown risks;
•
uncertainties and other factors which may cause SMPFC’s actual results, performance or achievements to be materially different from any future results; and
•
performance or achievements expressed or implied by forward-looking statements.
Such forward-looking statements are based on numerous assumptions regarding SMPFC’s present and future business strategies and the environment in which SMPFC will operate in the future. Important factors that could cause some or all of the assumptions not to occur or cause actual results, performance or achievements to differ materially from those in the forward-looking statements include, among other things: •
SMPFC’s ability to successfully implement its strategies;
•
SMPFC’s ability to anticipate and respond to consumer trends;
•
changes in availability of raw materials used in SMPFC’s production processes;
•
SMPFC’s ability to successfully manage its growth;
•
the condition and changes in the Philippines, Asian or global economies;
•
any future political instability in the Philippines;
•
changes in interest rates, inflation rates and the value of the Peso against the U.S. dollar and other currencies;
•
changes in government regulations, including tax laws, or licensing requirements in the Philippines; and
•
competition in the food industry in the Philippines and globally.
Additional factors that could cause SMPFC’s actual results, performance or achievements to differ materially include, but are not limited to, those disclosed under “Risk Factors” and elsewhere in this Prospectus. These forward-looking statements speak only as of the date of this Prospectus. SMPFC and the Joint Lead Underwriters and Sub-Underwriters expressly disclaim any obligation or undertaking to release, publicly or otherwise, any updates or revisions to any forward-looking statement contained herein to reflect any change in SMPFC’s expectations with regard thereto or any change in events, conditions, assumptions or circumstances on which any statement is based. This Prospectus includes forward-looking statements, including statements regarding the Issuer’s expectations and projections for future operating performance and business prospects. The words “believe”, “expect”, “anticipate”, “estimate”, “project” and similar words identify forward-looking statements. In addition, all statements other than statements of historical facts included in this Prospectus are forward-looking statements. Statements in the Prospectus as to the opinions, beliefs and intentions of the Issuer accurately reflect in all material respects the opinions, beliefs and intentions of SMPFC’s management as to such matters at the date of this Prospectus, although the Issuer can give no assurance that such opinions or beliefs will prove to be correct or that such intentions will not change. This Prospectus discloses, under the section “Risk Factors” and elsewhere, important factors that could cause actual results to differ materially from the Issuer’s expectations. All subsequent written and oral forward-looking statements attributable to the Issuer or persons acting on behalf of either the Issuer are expressly qualified in their entirety by cautionary statements.
6
Definition of Terms In this Prospectus, unless the context otherwise requires, the following terms shall have the meanings set forth below. Agro-Industrial Cluster………………….. SMPFC’s poultry, feeds and fresh meats businesses. ASEAN .................................................. The Association of Southeast Asian Nations, including Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam. Banking Day .......................................... A day other than Saturday or Sunday on which banks are open for business in Metro Manila, Philippines. BIR ........................................................ The Philippine Bureau of Internal Revenue. Board of Directors ................................. The Board of Directors of SMPFC. Brands Acquisition ............................... The acquisition by SMPFC of the SMPFC Brands from SMC on July 30, 2010. Breeder.................................................. A type of chicken raised to produce hatching eggs that will eventually become broilers. Broiler .................................................... A type of chicken raised specifically for production of chicken meat for human consumption. BSP ....................................................... Bangko Sentral ng Pilipinas, the Central Bank of the Philippines. CAGR .................................................... Compound annual growth rate. Co-Lead Underwriter…………………… First Metro Investment Corporation Corporation Code .................................. Batas Pambansa Blg. 68, otherwise known as “The Corporation Code of the Philippines”. DENR .................................................... The Philippine Department of Environment and Natural Resources. Depository Agent………………………... Philippine Depository & Trust Corporation. Dividend Rate Setting Date
February 8, 2011
DOH………………………………………. The Philippine Department of Health. ECC ....................................................... Environmental Compliance Certificate. EISS Law............................................... The Philippine Environmental Impact Statement System. Food Development Center .................... An agency of the National Food Authority of the Philippines. Foreign Investments Act ....................... Foreign Investments Act of 1991. Government .......................................... The Government of the Republic of the Philippines. Hormel ................................................... Hormel Foods Corporation. IFRIC ..................................................... International Committee.
Financial
Reporting
Interpretations
IFRS ...................................................... International Financial Reporting Standards. MCIT...................................................... The minimum corporate income tax under the National Internal Revenue Code of 1997 of the Philippines, as amended, which is currently fixed at 2.0% of gross income. Nielsen…………………………………...
The Nielsen Company (Philippines) Inc.
Joint Lead Underwriters ........................ BDO Capital & Investment Corporation, The Hongkong and Shanghai Banking Corporation Limited, RCBC Capital Corporation, SB Capital Investment Corporation and Standard Chartered Bank.
7
Listing Date………………………………. March 3, 2011 PAB ....................................................... The Philippine Pollution Adjudication Board. Participating Underwriters……………... China Banking Corporation, Insular Investment and Trust Corporation, Multinational Investment Bancorporation and Philippine Commercial Capital, Inc. PAS ....................................................... Philippine Accounting Standards. PDTC……………………………………... Philippine Depository & Trust Corporation Peso or P............................................... Philippine Peso, the lawful currency of the Republic of the Philippines. PFC ....................................................... Pure Foods Corporation. PFRS ..................................................... Philippine Financial Reporting Standards. PSE ....................................................... The Philippine Stock Exchange, Inc. Receiving Agent…………………………. SMC Stock Transfer Service Corporation Recent Acquisitions............................... The Vietnam Acquisition, together with the Brands Acquisition. SEC ....................................................... The Securities Philippines.
and
Exchange
Commission
of
the
Selling Agents…………………………… The Trading Participants of the PSE. Shares or Preferred Shares .................. The Preferred Shares being offered hereby by the Issuer. SFAS ..................................................... Statements of Financial Accounting Standards. SMC ...................................................... San Miguel Corporation. SMC Group ........................................... SMC and its subsidiaries, including SMPFC. SMPFC or the Company or the Issuer .. San Miguel Pure Foods Company, Inc. Unless the context otherwise requires, references herein to SMPFC or the Company or the Issuer include the businesses and operations of SMPFC’s consolidated subsidiaries and the other entities described herein in which SMPFC has significant direct or indirect equity interests. SMPFC Brands ..................................... Certain brands, related trademarks and other intellectual properties that SMPFC acquired from SMC and that it uses to prepare, package, advertise, distribute and sell its products in the Philippines. SRC ....................................................... Republic Act No. 8799, otherwise known as “The Securities Regulation Code of the Philippines”, as amended from time to time, and including the rules and regulations issued thereunder. Step-up Rate…………………………….. The rate which is the higher of: the Dividend Rate, or the 10-year PDST-F rate for the date corresponding to the Optional Redemption Date plus 3.33% per annum. Sub-Underwriters……………………….. Co-Lead Underwriter, Underwriters
Participating
Underwriters
and
Underwriters…………………………….. Unicapital, Inc. and Vicsal Investment, Inc. U.S. dollars or US$ ............................... The lawful currency of the United States of America. VAT ....................................................... Value-added tax. Vietnam Acquisition .............................. The acquisition by SMPFC of SMC’s 51% stake in the Vietnam food business on July 30, 2010.
8
Executive Summary The following summary is qualified in its entirety by, and should be read in conjunction with the more detailed information and audited financial statements, including notes thereto, found elsewhere in this Prospectus. Prospective investors should read this entire Prospectus fully and carefully, including the section on “Risk Factors”. In case of any inconsistency between this summary and the more detailed information in this Prospectus, then the more detailed portions, as the case may be, shall at all times prevail.
Brief Background on the Company OVERVIEW San Miguel Pure Foods Company, Inc. (“SMPFC”) provides a broad line of food products and services for both household and institutional customers in the Philippines. SMPFC’s main businesses are its poultry, feeds, fresh meats, value-added meats, flour, and dairy, spreads and oils businesses. SMPFC’s other businesses include coffee, food service and development of retail outlets, as well as two regional operations located in Indonesia and Vietnam. SMPFC further organizes its businesses into the following clusters: Agro-Industrial, comprised of its poultry, feeds and fresh meats businesses; Value-Added Meats, comprised of its value-added meats business; Milling, comprised of its flour business; and Others, comprised of its dairy, spreads and oils, food service, retail, regional and other businesses. On July 30, 2010, SMPFC acquired SMC’s majority interest in the Vietnam business. For more information, see “Recent Acquisitions”. Set forth below are the contributions of each of SMPFC’s businesses to its total revenues during the year ended December 31, 2009 and the nine months ended September 30, 2010.
Breakdown of 2009 Revenues by Business(1) Dairy, Spreads and Oils, 7.1%
Others, 1.0%
Flour, 10.6% Poultry , 34.3%
Value-Added Meats, 15.0%
Fresh Meats, 9.7% Feeds, 22.3%
9
Breakdown of Revenues for the Nine Months Ended September 30, 2010(2) Dairy, Spreads and Oils, 6.6%
Others, 1.7%
Flour, 9.9% Poultry , 35.6%
Value-Added Meats, 13.8%
Fresh Meats, 8.1% Feeds, 24.3%
________________ (1) Revenues from the flour business also include revenues from SMPFC’s discontinued snacks and noodles business. (2) Percentages reflect revenue breakdown prior to eliminations from intersegment transactions.
SMPFC’s products include some of the best known and well-regarded brands in the Philippine food industry, among them Magnolia, Purefoods, Monterey, B-Meg, Star, Dari Crème and JellyAce. SMPFC enjoys leading market shares in several of its major businesses and product lines, including poultry, feeds, pork, hotdogs, flour and butter spreads. SMPFC was formed through the integration in 2001 of SMC’s food businesses and PFC. SMC currently owns 99.92% of SMPFC’s outstanding common shares. SMC first entered the food industry with the introduction of its Magnolia ice cream in 1925. In 1953, SMC began producing animal feeds with protein-rich by-products from its beer brewing operations. Over the next few decades, SMC’s food business expanded into other areas, such as poultry, livestock, dairy products and fresh and processed meats. PFC was incorporated in 1956 and was primarily engaged in the business of manufacturing and marketing processed meat products. PFC later diversified into feeds, poultry, flour and food service. In 1981, PFC was acquired by the Ayala Corporation. In 2001, SMC acquired PFC from the Ayala Group and combined it with its food business to form the San Miguel Pure Foods Company, Inc. SMPFC is a corporation duly organized and existing under the laws of the Republic of the Philippines with its principal office located at The JMT Corporate Condominium, ADB Avenue, Ortigas Center, Pasig City, 1605, the Philippines. SMPFC’s website is www.sanmiguelpurefoods.com. Information on the SMPFC’s website does not constitute a part of this Prospectus. The common shares of SMPFC were listed on April 2, 1973, and are currently traded under the symbol “PF”, on the PSE.
About San Miguel Corporation San Miguel Corporation is a publicly listed food, beverage and packaging holding company headquartered in the Philippines. Established in 1890 as a single-product brewery, SMC’s corporate history and business have evolved over the years to offer an extensive product portfolio, which includes beer, hard liquor, non-carbonated non-alcoholic beverages, processed and packaged food products, meat, poultry, dairy products, flour, coffee, vegetable oils, animal and aquatic feeds and a number of packaging products. Since 2007, SMC has diversified from its traditional core businesses and has made several investments in industries such as power, energy, telecommunications, mining and infrastructure. In 2009, the SMC Group generated approximately 3% of the Philippine gross national product. SMC is listed on the PSE under the symbol “SMC”.
10
Industry Overview The Company primarily operates in the Philippine food industry. The performance of the food industry in the Philippines is closely correlated to the Philippines’ economic growth, as well as to trends and developments in each of the segments within the industry.
Competitive Strengths SMPFC believes that its competitive strengths will enable it to protect and build on its leadership position in the food industry. At the same time, leveraging on its existing assets and expertise, SMPFC will pursue opportunities that will complement its core business and capture higher-value products and markets. SMPFC believes that its principal strengths include the following: •
many leading brands known for quality;
•
broad and diverse food product portfolio;
•
extensive and multi-pronged distribution network across the Philippines;
•
vertically integrated business model;
•
presence in the Philippines and Southeast Asian markets with the largest potential consumer markets;
•
strong track record of innovation in products and distribution;
•
experienced management and technical teams; and
•
the “San Miguel” brand, reputation and ownership.
Strategies SMPFC’s key strategies include the following: Accelerate the growth of SMPFC’s branded consumer business to achieve market leadership by: • continuing to build brand equity; • launching new products; • expanding distribution reach; • aggressively growing SMPFC’s food service business; and • continuing to pursue growth opportunities in priority countries. Achieve cost leadership by: • expanding SMPFC’s raw material supply base and identifying alternative raw materials; • adopting technologies designed to attain best in class efficiencies; • maximizing synergies through shared services and organizational integration; and • continuing and expanding the outsourcing of labor intensive and process-oriented operations.
11
Explore new growth opportunities, including: • new product categories; • further vertical integration; • geographical diversification; and • co-investments with SMC.
Risks of Investing Prospective investors should consider the following risks of investing in the Preferred Shares: 1. Macroeconomic risks, including the current and immediate political and economic factors in the Philippines as a principal risk for investing in general; 2. Risks relating to SMPFC, its subsidiaries and their business and operations; and 3. The absence of a liquid secondary market for the Preferred Shares and other risks relating to the Preferred Shares. (for a more detailed discussion, see “Risk Factors” on page 29)
Use of Proceeds The offer price shall be at P 1,000. The net proceeds from the Offer are estimated to be P14.83 billion, after deducting expenses relating to the issuance of the Preferred Shares. Proceeds of the Offer will be used by the Company: (i) to repay a payable to San Miguel Corporation (“SMC”) in the amount of P3.615 billion, relating to its acquisition from SMC of food related brands and intellectual property rights and the Vietnam food business; (ii) for investment in such investment opportunities or areas for investment as the Board of Directors may hereafter identify; and (iii) for general corporate purposes. (see “Use of Proceeds” on page 43)
Plan of Distribution SMPFC plans to issue the Preferred Shares to institutional and retail investors through a public offering to be conducted through the Joint Lead Underwriters and Sub-Underwriters. (see “Plan of Distribution” on page 47)
Expected Timetable The timetable of the Offer is expected to be as follows: Dividend Rate Setting Date Start of Offer Period Last Day of Offer Period Listing Date and Commencement of Trading on the PSE
February 8, 2011 February 14, 2011 February 25, 2011 March 3, 2011
The dates indicated above are subject to market and other conditions and may be changed subject to the approval by the PSE.
12
Summary of Financial Information Prospective purchasers of the Preferred Shares should read the summary financial data below together with the financial statements, including the notes thereto, included in this Prospectus and “Management's Discussion and Analysis of Results of Operations and Financial Condition”. The summary financial data for the three years ended December 31, 2009, 2008 and 2007 are derived from SMPFC's audited financial statements, including the notes thereto, which are found elsewhere in this Prospectus. The detailed financial information for the three years ended December 31, 2009, 2008 and 2007 and the nine months ended September 30, 2010 and 2009 may be found on page 97 of this Prospectus. SMPFC’s summary financial and operating information presented below as of and for the years ended December 31, 2007, 2008 and 2009 were derived from SMPFC’s consolidated financial statements, audited by Manabat Sanagustin & Co. and prepared in compliance with PFRS. SMPFC’s financial and operating information presented below as of and for the nine months ended September 30, 2009 and 2010 were derived from the unaudited consolidated financial statements of SMPFC prepared in compliance with PAS 34, “Interim Financial Reporting” and reviewed by Manabat Sanagustin & Co. in accordance with PSRE 2410, “Review of Interim Financial Information performed by the Independent Auditors of the Entity.” The information below should be read in conjunction with SMPFC’s consolidated financial statements and the related notes thereto, which are included elsewhere in this Prospectus. SMPFC’s historical financial condition, results of operations and cash flows are no guarantee of its future operating and financial performance. As of and for the years ended December 31,
As of and for the nine months ended September 30, 2007 2008 2009 2009 2010 P P P P P (Audited) (Unaudited) (in thousands except per share figures or where otherwise indicated) Consolidated Statements of Income Data Revenues ..................................................... Cost of sales................................................. Gross Profit ................................................... Selling and administrative expenses ............. Interest expense and other financing charges ...................................................... Interest income .............................................. Gain (loss) on sale of property and equipment .................................................. Other income (charges) - net .......................... Income Before Income Tax ........................... Income Tax Expense ..................................... Net Income .................................................... Attributable to Equity holders of the Parent Company .......... Non-controlling interests ................................ Basic and diluted earnings per share attributable to Equity Holders of the Parent Company.......................................
62,052,029 51,845,187
71,075,925 60,609,663
75,042,967 61,684,667
54,302,835 45,298,696
56,567,267 45,194,294
10,206,842 (7,810,920) (667,972)
10,466,262 (8,623,651) (830,914)
13,358,300 (8,720,676) (751,042)
9,004,139 (6,747,884) (622,118)
11,372,973 (7,182,624) (259,112)
84,407 (18,010)
54,323 2,815
69,141 (24,663)
42,517 1,555
77,058 5,826
(696,049) 1,098,298 916,205 182,093
(451,279) 617,556 468,870 148,686
(88,968) 3,842,092 1,183,625 2,658,467
(30,861) 1,647,348 546,450 1,100,898
73,713 4,087,834 1,184,232 2,903,602
30,591 151,502 182,093
77,194 71,492 148,686
2,596,963 61,504 2,658,467
1,059,868 41,030 1,100,898
2,772,886 130,716 2,903,602
0.22
0.55
18.39
7.50
16.64
22,622,750 10,721,752
26,132,071 10,869,960
28,595,652 11,580,221
28,014,827 15,584,731
33,344,502
37,002,031
40,175,873
43,599,558
18,088,670
21,725,705
21,950,096
18,321,505
Consolidated Statements of Financial Position Data Assets Total Current Assets ...................................... Total Noncurrent Assets ................................ Total Assets................................................... Liabilities and Equity Current Liabilities Total Current Liabilities ..................................
13
Total Noncurrent Liabilities ............................
445,690
315,718
580,527
4,028,842
Equity Attributable to Equity Holders of the Parent Company .......................................
12,554,855
12,625,822
15,244,923
17,980,111
Non-controlling Interests................................
2,255,287
2,334,786
2,400,327
3,269,100
Total Equity ...................................................
14,810,142
14,960,608
17,645,250
21,249,211
Total Liabilities and Equity .............................
33,344,502
37,002,031
40,175,873
43,599,558
1,149,241 (1,325,058) (613,821) –
(77,361) (1,509,785) 3,026,709 –
5,536,207 (1,517,777) (2,850,290) –
2,967,539 (1,143,911) (3,020,380) –
3,480,362 (1,144,477) (2,618,205) (2,648)
(789,638)
1,439,563
1,168,140
(1,196,752)
(284,968)
2,132,281
1,342,643
2,782,206
2,782,206
3,950,346
1,342,643
2,782,206
3,950,346
1,585,454
3,665,378
Equity
Cash Flow Data Net cash provided by (used in): Operating activities ........................................ Investing activities ......................................... Financing activities ........................................ Effect of exchange rates changes in cash and cash equivalents ................................. Net increase/(decrease) in cash and cash equivalents................................................. Cash and cash equivalents at beginning of year ............................................................ Cash and cash equivalents at end of period .........................................................
14
Capitalization The following table sets forth the Company’s unaudited consolidated short-term and long-term debt and capitalization as of September 30, 2010. This table should be read in conjunction with the more detailed information and audited and unaudited financial statements, including notes thereto, located elsewhere in this Prospectus.
As of Sept 30, 2010 (Unaudited)
As adjusted for maximum Issue Size of P 15 Billion
Short Term Debt Bank loans Current portion of long-term debt Total Short-Term Debt
6,738 6,738
6,738 6,738
Long Term Debt(1) Long term debt – net of current portion Total Debt
6,738
6,738
1,709
1,709
(in P Millions)
Equity Common stock – P 10 par value Authorized – 246,000,000 shares (2) Issued – 170,874,854 shares (3) Preferred stock – P 10 par value Authorized – 40,000,000 shares Additional paid-in capital Revaluation Surplus Cumulative Translation Adjustments Retained earnings Treasury Stock Equity attributable to equity holders of the parent Non-controlling interests Total Equity Total Capitalization
150(4) 5,821 18 (86) 10,700 (182) 17,980 3,269 21,249 27,987
20,496 (5) 18 (86) 10,700 (182) 32,805 3,269 36,074 42,812
Notes: (1) On December 7, 2010, San Miguel Foods, Inc. issued corporate notes with aggregate principal amount of P4.5 billion and with maturity period of 5 years (2) Reduced to 206 million shares after the Company’s Board and Stockholders approved on September 15 and November 3, 2010, respectively, the reclassification of 40 million shares from common to preferred shares. (3) Inclusive of 4,207,758 treasury shares (4) The Company intends to offer 15 million shares at P1,000 per share. (5) Net of estimated upfront fees, listing and professional fees, taxes and other expenses related to the Offer
15
Terms of the Offer The following does not purport to be a complete listing of all the rights, obligations and privileges attaching to or arising from the Preferred Shares. Some rights, obligations or privileges may be further limited or restricted by other documents and subject to final documentation. Prospective Shareholders are enjoined to perform their own independent investigation and analysis of the Issuer and the Preferred Shares. Each prospective Shareholder must rely on its own appraisal of the Issuer and the Preferred Shares and its own independent verification of the information contained herein and any other investigation it may deem appropriate for the purpose of determining whether to invest in the Preferred Shares and must not rely solely on any statement or the significance, adequacy or accuracy of any information contained herein. The information and data contained herein are not a substitute for the prospective Shareholder’s independent evaluation and analysis.
The Offer
The Company, through the Joint Lead Underwriters and SubUnderwriters, is offering up to 15,000,000 cumulative, non-voting, nonparticipating, non-convertible Preferred Shares by way of primary offer in the Philippines.
Par Value
The Preferred Shares have a par value of P10.00 per Share.
Offer Price or Issue Price
The Preferred Shares shall be offered at a price of P1,000 per Share.
Dividend Rate
As and if dividends are declared by the Board, dividends on the Shares shall be at a fixed rate of 8.0% per annum calculated in respect of each Share by reference to the Offer Price thereof in respect of each Dividend Period.
Dividend Rate Step-Up
Unless the Preferred Shares are redeemed by the Company on the Optional Redemption Date, the Dividend Rate shall be adjusted thereafter to the higher of: (a) the Dividend Rate, or (b) the 10-year PDST-F rate for the date corresponding to the Optional Redemption Date plus 3.33% per annum.
Conditions on Payment of Dividends
The declaration and payment of dividends on each Dividend Payment Date will be subject to the sole and absolute discretion of the Board of Directors to the extent permitted by law. The Board of Directors will not declare and pay dividends on any Dividend Payment Date where (a) payment of the Dividend would cause the Company to breach any of its financial covenants or (b) the profits available to the Company to distribute as dividends are not sufficient to enable the Company to pay in full both the dividends on the Preferred Shares and the dividends on all other classes of the Company’s shares that are scheduled to be paid on or before the same date as the dividends on the Preferred Shares and that have an equal right to dividends as the Preferred Shares. If the profits available to distribute as dividends are, in the Board’s opinion, not sufficient to enable the Company to pay in full on the same date both dividends on the Preferred Shares and the dividends on other shares that have an equal right to dividends as the Preferred Shares, the Company is required first, to pay in full, or to set aside an amount equal to, all dividends scheduled to be paid on or before that dividend payment date on any shares with a right to dividends ranking in priority
16
to that of the Preferred Shares; and second, to pay dividends on the Preferred Shares and any other shares ranking equally with the Preferred Shares as to participation in profits pro rata to the amount of the cash dividends scheduled to be paid to them. The amount scheduled to be paid will include the amount of any dividend payable on that date and any arrears on past cumulative dividends on any shares ranking equal in the right to dividends with the Preferred Shares. The profits available for distribution are, in general and with some adjustments, equal to the Company’s accumulated, realized profits less accumulated, realized loss. Dividends on the Shares will be cumulative. If for any reason the Company’s Board does not declare a dividend on the Shares for a dividend period, the Company will not pay a dividend on the Dividend Payment Date for that dividend period. However, on any future Dividend Payment Date on which dividends are declared, holders of the Shares must receive the dividends due them on such Dividend Payment Date as well as all dividends accrued and unpaid to the holders of the Shares prior to such Dividend Payment Date. Holders of Shares shall not be entitled to participate in any other or further dividends beyond the dividends specifically payable on the Shares. The Issuer will covenant that, in the event (a) any dividends due with respect to any Preferred Shares then outstanding for any period are not declared and paid in full when due; or (b) any other amounts payable under the Preferred Share terms and conditions described in the Prospectus are not paid in full when due for any reason: 1. It will not declare or pay any dividends or other distributions in respect of, or repurchase or redeem, securities ranking junior to Preferred Shares (or contribute any moneys to a sinking fund for the redemption of any securities ranking junior to Preferred Shares); 2. Subject to legal requirements, the Issuer will procure that no subsidiary over which the Issuer has a Controlling Participation will pay any discretionary dividends or other discretionary distributions on, or at the Issuer's discretion repurchase or redeem, any security ranking senior to the respective subsidiary's common shares other than those senior securities held by the Issuer or a wholly-owned subsidiary thereof (or contribute any moneys to a sinking fund for the purposes of any such redemption). “Controlling Participation” shall refer to the possession, directly or indirectly, of the power to direct or cause the direction of the affairs or management of the corporation, whether through the ownership of voting securities, as trustee or executor, by contract or otherwise, including, without limitation, the ownership, directly or indirectly, of securities having the power to elect a majority of the board of directors or similar body governing the affairs of the corporation.
17
Dividend Payment Dates
Subject to limitations described in this Prospectus, dividends on the Shares will be payable on March 3, June 3, September 3 and December 3 of each year (each a Dividend Payment Date). The dividends on the Shares will be calculated on a 30/360-day basis and will be paid quarterly in arrears on each Dividend Payment Date, as and if declared by the Board. If the Dividend Payment Date is not a Banking Day, dividends will be paid on the next succeeding Banking Day, without adjustment as to the amount of dividends to be paid.
Optional Redemption and Purchase
As and if declared by the Board, the Company may redeem the Preferred Shares on the fifth anniversary from the Issue Date (the Optional Redemption Date) or on any Dividend Payment Date thereafter in whole or in part, at a redemption price equal to the Issue Price of the Shares plus accrued and unpaid dividends for all dividend periods up to the date of actual redemption by the Company (the “Redemption Price”). Subject to the amendment of the Articles of Incorporation of the Issuer and as and if declared by the Board, the Company may also redeem the Preferred Shares on the third anniversary from the Issue Date or on any Dividend Payment Date thereafter in whole but not in part, at the Redemption Price. Subject to the amendment of the Articles of Incorporation of the Issuer, the Issuer may also redeem the Preferred Shares, in whole but not in part, at any time prior to the Optional Redemption Date if an Accounting Event, Tax Event or a Change of Control (“CoC Event”) has occurred and is continuing, in each case at the Redemption Price. The Company may purchase the Shares at any time in the open market or by public tender or by private contract at any price through the PSE. The Shares so purchased may either be redeemed and cancelled (after the Optional Redemption Date) or kept as treasury shares.
No Sinking Fund
The Company has not established, and currently has no plans to establish a sinking fund for the redemption of the Preferred Shares.
Accounting Event
An Accounting Event shall occur if an opinion of a recognised person authorised to provide auditing services in the Republic of the Philippines has stated that there is more than an insubstantial risk that the funds raised through the issuance of the Preferred Shares may no longer be recorded as “equity” pursuant to the PFRS, or such other accounting standards which succeed PFRS, as adopted by the Republic of the Philippines, applied by the Issuer for drawing up its consolidated financial statements for the relevant financial year.
Tax Event
A Tax Event shall occur if dividend payments become subject to any new tax as a result of certain changes in law, rule or regulation, or in the interpretation thereof, and such tax cannot be avoided by use of reasonable measures available to the Issuer.
Change of Control (“CoC Event”)
Change of Control shall be deemed to have occurred if any person or persons acting in concert or any third person or persons acting on behalf of such person(s) at any time acquire(s) directly or indirectly a Controlling Participation in SMPFC pursuant to the Philippine laws.
18
The Dividend Rate will be increased by 4% from the day (inclusive) falling 180 days after the day, on which a CoC Event has occurred. If a Change of Control has occurred, the Issuer may call and redeem the Preferred Shares (in whole but not in part) at their Issue Price, plus any unpaid dividend until the redemption date (exclusive). Taxation
Subject to the proviso set forth below, all payments in respect of the Preferred Shares are to be made free and clear of any deductions or withholding for or on account of any future taxes or duties imposed by or on behalf of Republic of the Philippines, including but not limited to, stamp, issue, registration, documentary, value added or any similar tax or other taxes and duties, including interest and penalties. If such taxes or duties are imposed, the Issuer will pay additional amounts so that holders of the Preferred Shares will receive the full amount of the relevant payment which otherwise would have been due and payable. Provided, however, that the Issuer shall not be liable for, and the foregoing payment undertaking of the Issuer shall not apply to: (a) the applicable final withholding tax applicable on dividends earned on the Preferred Shares prescribed under the National Internal Revenue Code, (b) any expanded value added tax which may be payable by any holder of the Preferred Shares on any amount to be received from the Company under the Offer and (c) any withholding tax on any amount payable to any holder of Preferred Shares or any entity which is a nonresident foreign corporation. Documentary stamp tax for the primary issue of the Shares and the documentation, if any, shall be for the account of the Company. The standard taxes applicable to any subsequent sale of the Preferred Shares by any holder of the Preferred Shares shall be for the account of the said holder. See also the discussion under “Taxation” on page 125.
Liquidation Rights
In the event of a return of capital in respect of the Company’s winding up or otherwise (whether voluntarily or involuntarily) but not on a redemption or purchase by the Company of any of its share capital, the holders of the Preferred Shares at the time outstanding will be entitled to receive, in Pesos out of the Company’s assets available for distribution to shareholders, together with the holders of any other of the Company’s shares ranking, as regards repayment of capital, pari passu with the Preferred Shares and before any distribution of assets is made to holders of any class of the Company’s shares ranking after the Preferred Shares as regards repayment of capital, liquidating distributions in an amount equal to the Issue Price of the Preferred Share plus an amount equal to any dividends declared but unpaid in respect of the previous dividend period and any accrued and unpaid dividends for the then-current dividend period to (and including) the date of commencement of the Company’s winding up or the date of any such other return of capital, as the case may be. If, upon any return of capital in the Company’s winding up, the amount payable with respect to the Preferred Shares and any other of the Company’s shares ranking as to any such distribution pari passu with the Preferred Shares are not paid in full, the holders of the Preferred Shares and of such other shares will share ratably in any such distribution of the Company’s assets in proportion to the full respective preferential amounts to which they are entitled. After payment of the full amount of the liquidating distribution to which they are entitled, the holders of the Preferred Shares will have no right or claim to any of the Company’s remaining
19
assets and will not be entitled to any further participation or return of capital in a winding up. Form, Title and Registration of the Preferred Shares
The Preferred Shares will be issued in scripless form through the electronic book-entry system of SMC Stock Transfer Service Corporation as Registrar for the Offer, and lodged with PDTC as Depository Agent on Listing Date through PSE Trading Participants nominated by the Applicants. Applicants shall indicate in the proper space provided for in the Application Form the name of the PSE Trading Participant under whose name their Shares will be registered. After Listing Date, Shareholders may request the Registrar, through their nominated PSE Trading Participant, to (a) open a scripless registry account and have their holdings of the Preferred Shares registered under their name (“name-on-registry account”), or (b) issue stock certificates evidencing their investment in the Preferred Shares. Any expense that will be incurred in relation to such registration or issuance shall be for the account of the requesting Shareholder. Legal title to the Shares will be shown in an electronic register of shareholders (the “Registry of Shareholders”) which shall be maintained by the Registrar. The Registrar shall send a transaction confirmation advice confirming every receipt or transfer of the Preferred Shares that is effected in the Registry of Shareholders (at the cost of the requesting Shareholder). The Registrar shall send (at the cost of the Company) at least once every year a Statement of Account to all Shareholders named in the Registry of Shareholders, except certificated Shareholders and Depository Participants, confirming the number of Shares held by each Shareholder on record in the Registry of Shareholders. Such Statement of Account shall serve as evidence of ownership of the relevant Shareholder as of the given date thereof. Any request by Shareholders for certifications, reports or other documents from the Registrar, except as provided herein, shall be for the account of the requesting Shareholder. (For the full description of the Form, Title and Registration of the Preferred Shares, please see “The Philippine Stock Market” on page 143).
Selling and Transfer Restrictions
Initial placement of the Preferred Shares and subsequent transfers of interests in the Preferred Shares shall be subject to normal selling restrictions for listed securities as may prevail in the Philippines from time to time.
Enabling Resolutions
The Board of Directors of the Company shall, pursuant to Article SEVENTH of the Articles of Incorporation as amended, issue an Enabling Resolution/s incorporating the Preferred Share terms agreed upon, and stating that the terms shall not be amended, repealed, or revised without the affirmative vote of at least 2/3 of the holders of the Preferred Shares then outstanding; provided, however, that an amendment to authorize a redemption of the Preferred Shares (i) on the third anniversary from the Issue Date or any Dividend Payment Date thereafter or (ii) at any time prior to the Optional Redemption Date if an Accounting Event, Tax Event or a CoC Event has occurred and is continuing shall only require the affirmative vote of at least 2/3 of the outstanding capital stock of the Issuer.
Listing
The Preferred Shares are expected to be listed on the PSE on March 3, 2011.
20
Governing Law
The Preferred Shares will be issued pursuant to the laws of the Republic of the Philippines.
Other Terms of the Offer Offer Period
The Offer Period shall commence at 9:00 a.m. on February 14, 2011 and end at 12:00 noon on February 25, 2011. The Company and the Joint Lead Underwriters reserve the right to extend or terminate the Offer Period with the approval of the SEC and the PSE. Applications to subscribe to the Preferred Shares (each an “Application”) must be received by the Receiving Agent, not later than 11:00 a.m., Manila time on February 24, 2011 if filed through a Selling Agent or a Sub-Underwriter, or not later than 12:00 noon Manila time on February 25, 2011 if filed directly with the Joint Lead Underwriters. Applications received thereafter or without the required documents and/or full payments will be rejected. Application shall be considered irrevocable upon submission to any Selling Agent, and shall be subject to the terms and conditions of the Offer as stated in this Prospectus and in the application to subscribe and purchase form (the “Application Form”).
Minimum Subscription to the Preferred Shares
Each Application shall be for a minimum of 50 Shares, and thereafter, in multiples of 10 Shares. No Application for multiples of any other number of Shares will be considered.
Eligible Investors
The Preferred Shares may be owned or subscribed to by any person, partnership, association or corporation regardless of nationality. In addition, under certain circumstances the Company may reject an Application or reduce the number of Preferred Shares applied for subscription or purchase. Subscription to the Preferred Shares may be restricted in certain jurisdictions. Foreign investors interested in subscribing or purchasing the Preferred Shares should inform themselves of the applicable legal requirements under the laws and regulations of the countries of their nationality, residence or domicile, and as to any relevant tax or foreign exchange control laws and regulations affecting them personally. Foreign investors, both corporate and individual, warrant that their purchase of the Preferred Shares will not violate the laws of their jurisdiction and that they are allowed to acquire, purchase and hold the Preferred Shares.
Procedure for Application
Application Forms may be obtained from any of the Joint Lead Underwriters and Sub-Underwriters. All Applications shall be evidenced by the Application Form, duly executed in each case by an authorized signatory of the applicant and accompanied by two (2) completed signature cards, the corresponding payment for the Shares covered by the Application and all other required documents including documents required for registry with the Registrar and Depository Agent. The duly executed Application Form and required documents should be submitted to the Joint Lead Underwriters, Sub-Underwriters or Selling Agents on or prior to the set deadline for submission of Applications for Underwriters and Selling Agents, respectively. If the Applicant is a corporation, partnership, or trust account, the Application must be accompanied by the following documents: a. a certified true copy of the Applicant’s latest articles of incorporation and by-laws and other constitutive documents, each as amended to
21
date, duly certified by the corporate secretary; b. a certified true copy of the Applicant’s SEC certificate of registration, duly certified by the corporate secretary; and c. a duly notarized corporate secretary’s certificate setting forth the resolution of the Applicant’s board of directors or equivalent body authorizing the purchase of the Preferred Shares indicated in the application, the designated signatories authorized for the purpose, including their respective specimen signatures. Payment for the Preferred Shares
The Issue Price of the Preferred Shares must be paid in full upon submission of the Application. Payment shall be in the form of a Metro Manila clearing Cashier’s/Manager’s or corporate check or personal check drawn against a bank account with a Bangko Sentral ng Pilipinas-authorized agent bank located in Metro Manila and dated as of the date of submission of the Application Form covering the entire number of Offer Shares covered by the same Application. Checks should be made payable to “SMPFC Preferred Shares Offer”. Cash payments will not be accepted. Applicants submitting their application to any of the Joint Lead Underwriters or Sub-Underwriters may remit payment for their Preferred Shares through the Real Time Gross Settlement facility of the BSP to the Joint Lead Underwriter to whom such application was submitted or via direct debit to their deposit account maintained with the Joint Lead Underwriter or Sub-Underwriter.
Acceptance/Rejection of Applications
The actual number of Preferred Shares that an Applicant will be allowed to subscribe to is subject to the confirmation of the Joint Lead Underwriters. The Company reserves the right to accept or reject, in whole or in part, or to reduce any Application due to any grounds specified in the Underwriting Agreement entered into by the Company. Applications which were unpaid or where payments were insufficient and those that do not comply with the terms of the Offer shall be rejected. Moreover, any payment received pursuant to the Application does not mean approval or acceptance by the Company of the Application. An Application, when accepted, shall constitute an agreement between the Applicant and the Company for the subscription to the Preferred Shares at the time, in the manner and subject to terms and conditions set forth in the Application Form and those described in this Prospectus. Notwithstanding the acceptance of an Application by the Company, the actual subscription by the Applicant for the Preferred Shares will become effective only upon listing of the Preferred Shares on the PSE and upon the obligations of the Underwriters under the Underwriting Agreement becoming unconditional and not being suspended, terminated or cancelled, on or before the Listing Date, in accordance with the provision of the said agreement. If such conditions have not been fulfilled on or before the periods provided above, all Application payments will be returned to the Applicants without interest.
Refunds of Application Payments
In the event that the number of Preferred Shares to be allotted to an Applicant, as confirmed by an Underwriter, is less than the number covered by its Application, or if an Application is wholly or partially rejected by the Company, then the Company shall refund, without interest, within five (5) Banking Days from the end of the Offer Period,
22
all, or a portion of the payment corresponding to the number of Preferred Shares wholly or partially rejected. All refunds shall be made through the Joint Lead Underwriters or Selling Agent with whom the Applicant has filed the Application. Tentative Listing and Trading Date
The Preferred Shares are expected to be listed on the PSE on March 3, 2011. Trading of the Preferred Shares shall commence on the same date. Shareholders may trade their Preferred Shares by giving appropriate written instructions to any PSE Trading Participant.
Receiving Agent
SMC Stock Transfer Service Corporation
Registrar and Paying Agent
SMC Stock Transfer Service Corporation
23
Description of the Preferred Shares Set forth below is information relating to the Preferred Shares. This description is only a summary and is qualified by reference to Philippine law and SMPFC’s Articles of Incorporation and By-laws, copies of which are available at the SEC.
SMPFC’s Share Capital A Philippine corporation may issue common or preferred shares, or such other classes of shares with such rights privileges or restrictions as may be provided for in the articles of incorporation and the bylaws of the corporation. As of September 30, 2010, the Company had an authorized capital stock of Two Billion Four Hundred Sixty Million Pesos (P2,460,000,000), divided into Two Hundred Forty Six Million (246,000,000) common shares, with par value of Ten Pesos (P10.00) each, of which One Hundred Sixty Six Million Six Hundred Sixty Seven Thousand and Ninety Six (166,667,096) shares were issued and outstanding. On September 15, 2010, the Board of Directors approved the amendment to the Company’s Articles of Incorporation to reclassify up to a total of Seventy Five Million (75,000,000) unissued common shares with par value of Ten Pesos (P10.00) per share to up to Seventy Five Million (75,000,000) preferred shares with par value of Ten Pesos (P10.00) per share. On November 3, 2010, stockholders holding at least two-thirds of the outstanding capital stock of the Company approved the amendment to the Company’s Articles of Incorporation to reclassify a total of Forty Million (40,000,000) unissued common shares with par value of Ten Pesos (P10.00) per share to Forty Million (40,000,000) preferred shares with par value of Ten Pesos (P10.00) per share. On December 23, 2010, the SEC approved the foregoing amendment to the Articles of Incorporation of the Company. As of February 8, 2011, and following the approval by the SEC of the Amended Articles of Incorporation providing for the preferred shares, the Company has an authorized capital stock consisting of: (a) 206,000,000 common shares with a par value of P10.00 per share; and (b) 40,000,000 preferred shares with a par value of P10.00 per share. Following the Offer, the Company will have the following issued and outstanding shares: (a) 166,667,096 common shares; and (b) 15,000,000 preferred shares.
The Preferred Shares General Features The Preferred Shares have the following features, rights and privileges: No Voting Rights The Preferred Shares have no voting rights except as specifically provided by the Corporation Code. Thus, holders of the Preferred Shares are not eligible, for example, to vote for or elect the Company’s Directors or to vote for or against the issuance of a stock dividend. Holders of Preferred Shares, however, may vote on matters which the Corporation Code considers significant corporate acts that may be implemented only with the approval of shareholders, including those holding shares denominated as non-voting in the articles of incorporation. These acts, which require the approval of shareholders representing at least two-thirds of the issued and outstanding capital stock of the Company in a meeting duly called for the purpose, are as follows:
Amendment of the Articles (including any increase or decrease of capital stock);
24
Amendment of the Company’s By-laws;
Sale, lease, exchange, mortgage, pledge or other disposition of all or a substantial part of the Company’s assets;
Incurring, creating or increasing bonded indebtedness;
Increase or decrease of capital stock;
Merger or consolidation of the Company with another corporation or corporations; and
Investment of corporate funds in any other corporation or business or for any purpose other than the primary purpose for which the Company was organized; and
Dissolution of the Company.
Entitled to cumulative preferential dividends at such rate as shall be determined by the Board of Directors The declaration and payment of dividends on each Dividend Payment Date will be subject to the sole and absolute discretion of the Board to the extent permitted by law. As and if dividends are declared by the Board, dividends on the Shares shall be at a fixed rate of 8.0% per annum calculated in respect of each Share by reference to the Offer Price thereof in respect of each Dividend Period. Unless the Preferred Shares are redeemed by the Company on Optional Redemption Date, the Dividend Rate shall be adjusted on the Optional Redemption Date to the Step-up Rate. Dividends on the Shares will be payable on March 3, June 3, September 3 and December 3 of each year (each a Dividend Payment Date). The dividends on the Shares will be calculated on a 30/360day basis and will be paid quarterly in arrears on each Dividend Payment Date, as and if declared by the Board. If the Dividend Payment Date is not a Banking Day, dividends will be paid on the next succeeding Banking Day, without adjustment as to the amount of dividends to be paid. The Board of Directors will not declare and pay dividends on any Dividend Payment Date where (a) payment of the Dividend would cause the Company to breach any of its financial covenants or (b) the profits available to the Company to distribute as dividends are not sufficient to enable the Company to pay in full both the dividends on the Preferred Shares and the dividends on all other classes of the Company’s shares that are scheduled to be paid on or before the same date as the dividends on the Preferred Shares and that have an equal right to dividends as the Preferred Shares. If the profits available to distribute as dividends are, in the Board’s opinion, not sufficient to enable the Company to pay in full on the same date both dividends on the Preferred Shares and the dividends on other shares that have an equal right to dividends as the Preferred Shares, the Company is required first, to pay in full, or to set aside an amount equal to, all dividends scheduled to be paid on or before that dividend payment date on any shares with a right to dividends ranking in priority to that of the Preferred Shares; and second, to pay dividends on the Preferred Shares and any other shares ranking equally with the Preferred Shares as to participation in profits pro rata to the amount of the cash dividends scheduled to be paid to them. The amount scheduled to be paid will include the amount of any dividend payable on that date and any arrears on past cumulative dividends on any shares ranking equal in the right to dividends with the Preferred Shares. The profits available for distribution are, in general and with some adjustments, equal to the Company’s unrestricted retained earnings. Dividends on the Shares will be cumulative. If for any reason the Company’s Board does not declare a dividend on the Shares for a dividend period, the Company will not pay a dividend on the Dividend Payment Date for that dividend period. However, on any future Dividend Payment Date on which dividends are declared, holders of the Shares must receive the dividends due them on such Dividend Payment Date as well as all dividends accrued and unpaid to the holders of the Shares prior to such Dividend Payment Date. Holders of Shares shall not be entitled to participate in any other or further dividends beyond the dividends specifically payable on the Shares.
25
Redeemable at the option of the Company under such terms as the Board of Directors may approve As and if declared by the Board, the Issuer may redeem the Preferred Shares on the fifth anniversary from the Listing Date (the Optional Redemption Date) or any Dividend Payment Date thereafter in whole or in part, at a redemption price equal to the Issue Price of the Shares plus accrued and unpaid dividends for all dividend periods up to the date of actual redemption by the Company. The Company has not established, and currently has no plans to establish, a sinking fund for the redemption of the Preferred Shares. The Company may purchase the Shares at any time in the open market or by public tender or by private contract at any price through the PSE. The Shares so purchased may either be redeemed and cancelled (after the Optional Redemption Date) or kept as treasury shares. With preference over holders of common stock in the distribution of corporate assets in the event of dissolution and liquidation of the Company In the event of a return of capital in respect of the Company’s winding up or otherwise (whether voluntarily or involuntarily) but not on a redemption or purchase by the Company of any of its share capital, the holders of the Preferred Shares at the time outstanding will be entitled to receive, in Pesos out of the Company’s assets available for distribution to shareholders, together with the holders of any other of the Company’s shares ranking, as regards repayment of capital, pari passu with the Preferred Shares and before any distribution of assets is made to holders of any class of the Company’s shares ranking after the Preferred Shares as regards repayment of capital, liquidating distributions in an amount equal to the Issue Price of the Preferred Share plus an amount equal to any dividends declared but unpaid in respect of the previous dividend period and any accrued and unpaid dividends for the then-current dividend period to (and including) the date of commencement of the Company’s winding up or the date of any such other return of capital, as the case may be. If, upon any return of capital in the Company’s winding up, the amount payable with respect to the Preferred Shares and any other of the Company’s shares ranking as to any such distribution pari passu with the Preferred Shares are not paid in full, the holders of the Preferred Shares and of such other shares will share ratably in any such distribution of the Company’s assets in proportion to the full respective preferential amounts to which they are entitled. After payment of the full amount of the liquidating distribution to which they are entitled, the holders of the Preferred Shares will have no right or claim to any of the Company’s remaining assets and will not be entitled to any further participation or return of capital in a winding up. No Pre-emptive Rights There are no pre-emptive rights extended to holders of Preferred Shares in respect of any and all share issuances of the Company. Not convertible into Common Shares The Preferred Shares shall not be convertible into SMPFC’s common shares.
Other Rights and Incidents Relating to the Preferred Shares Following are other rights and incidents relating to the Preferred Shares, which may also apply to other classes of SMPFC’s stock. Appraisal Rights Philippine law recognizes the right of a shareholder to institute, under certain circumstances, proceedings on behalf of the corporation in a derivative action in circumstances where the corporation itself is unable or unwilling to institute the necessary proceedings to redress wrongs committed
26
against the corporation or to vindicate corporate rights, as for example, where the directors themselves are the malefactors. In addition, the Corporation Code grants a shareholder a right of appraisal in certain circumstances where he has dissented and voted against a proposed corporate action, including:
An amendment of the Articles of Incorporation which has the effect of adversely affecting the rights attached to his shares or of authorizing preferences in any respect superior to those of outstanding shares of any class or shortening the term of corporate existence;
The sale, lease, exchange, transfer, mortgage, pledge or other disposal of all or substantially all of the assets of the corporation;
The investment of corporate funds in another corporation or business for any purpose other than the primary purpose for which the corporation was organized; and
A merger or consolidation.
In these circumstances, the dissenting shareholder may require the corporation to purchase his shares at a fair value which, in default of agreement, is determined by three disinterested persons, one of whom shall be named by the shareholder, one by the corporation, and the third by the two thus chosen. The SEC will, in the event of a dispute, determine any question about whether a dissenting shareholder is entitled to this right of appraisal. The dissenting shareholder will be paid if the corporate action in question is implemented and the corporation has unrestricted retained earnings sufficient to support the purchase of the shares of the dissenting shareholders. Shareholders’ Meetings At the annual meeting or at any special meeting of the Company’s shareholders, the latter may be asked to approve actions requiring shareholder approval under Philippine law. Quorum The Corporation Code provides that, except in instances where the assent of shareholders representing two-thirds of the outstanding capital stock is required to approve a corporate act (usually involving the significant corporate acts where even non-voting shares may vote, as identified above) or where the by-laws provide otherwise, a quorum for a meeting of shareholders will exist if shareholders representing a majority of the capital stock are present in person or by proxy. Voting At each shareholders’ meeting, each shareholder shall be entitled to vote in person, or by proxy, all shares held by him which have voting power, upon any matter duly raised in such meeting. The Company’s By-laws provide that proxies shall be in writing and signed and in accordance with the existing laws, rules and regulations of the SEC. Duly accomplished proxies must be submitted to the office of the Corporate Secretary not later than 10 trading days prior to the date of the stockholders’ meeting. Fixing Record Dates The Board has the authority to fix in advance the record date for shareholders entitled: (a) to notice of, to vote at, or to have their votes voted at, any shareholders’ meeting; (b) to receive payment of dividends or other distributions or allotment of any rights; or (c) for any lawful action or for making any other proper determination of shareholders’ rights. The Board may, by resolution, direct the stock transfer books of the Corporation be closed for a period not exceeding 20 days preceding the date of any meeting of stockholders. The record date shall in no case be more than 60 days or less than 35 days preceding such meeting of shareholders.
27
Accounting and Auditing Requirements/Rights of Inspection Philippine stock corporations are required to file copies of their annual financial statements with the SEC. Corporations whose shares are listed on the PSE are also required to file quarterly and annual reports with the SEC and the PSE. Shareholders are entitled to request copies of the most recent financial statements of the corporation which include a statement of financial position as of the end of the most recent tax year and a profit and loss statement for that year. Shareholders are also entitled to inspect and examine the books and records that the corporation is required by law to maintain. The Board is required to present to shareholders at every annual meeting a financial report of the operations of the corporation for the preceding year. This report is required to include audited financial statements.
28
Risk Factors General Risk Warning An investment in the Preferred Shares involves a number of risks. The price of securities can and does fluctuate, and any individual security may experience upward or downward movements, and may even become valueless. There is an inherent risk that losses may be incurred rather than profit made as a result of buying and selling securities. Past performance is not a guide to future performance and there may be a large difference between the buying price and the selling price of the Preferred Shares. The occurrence of any of the following events, or other events not currently anticipated, could have a material adverse effect on the Company’s business, financial condition, results of operations and cause the market price of the Preferred Shares to decline. All or part of an investment in the Preferred Shares could be lost. There is an extra risk of losing money when securities are issued by smaller companies. Investors deal in a range of investments each of which may carry a different level of risk. Prudence Required The risk disclosure does not purport to disclose all the risks and other significant aspects of investing in these securities. Investors should undertake independent research and study on the trading of these securities before commencing any trading activity. Investors may request publicly-available information on the Preferred Shares and the Company from the SEC and PSE. Professional Advice An investor should seek professional advice if he or she is uncertain of, or has not understood, any aspect of the securities to invest in or the nature of risks involved in trading of securities, especially high risk securities. Risk Factors This Prospectus contains forward-looking statements that involve risks and uncertainties. SMPFC adopts what it considers conservative financial and operational controls and policies to manage its business risks. The Company’s actual results may differ significantly from the results discussed in the forward-looking statements. See section “Forward-Looking Statements” of this Prospectus. Factors that might cause such differences, thereby making the offering speculative or risky, may be summarized into those that pertain to the business and operations of SMPFC, in particular, and those that pertain to the over-all political, economic, and business environment, in general. These risk factors and the manner by which these risks shall be managed are presented below. The risk factors discussed in this section are of equal importance and are only separated into categories for easy reference. Investors should carefully consider all the information contained in this Prospectus including the risk factors described below, before deciding to invest in the Preferred Shares. The Company’s business, financial condition and results of operations could be materially adversely affected by any of these risk factors.
Risks Related to the Company SMPFC’s business, financial condition and results of operations may be materially and adversely affected by any disruptions in the supply of, and price fluctuations in, major raw materials. Production of many of SMPFC’s products requires raw materials that SMPFC procures from third parties, including purchases of some critical raw materials from outside the Philippines. These raw
29
materials are subject to price volatility caused by a number of factors, including changes in global supply and demand, foreign exchange rate fluctuations, weather conditions and governmental laws and policies. For example, in 2007 and 2008, prices of certain raw materials used in SMPFC’s dairy, spreads and oils business, including milk, dairy curds and others, increased significantly as a result of reduced global supply caused by unfavorable weather conditions, reduced number of cattle herds, strong currencies in certain export-oriented countries and the elimination of export subsidies in the European Union. Similarly, in 2008, net income from SMPFC’s flour business was negatively affected by recordhigh prices for wheat purchased for its flour products, which substantially increased the costs of production in SMPFC’s flour business. SMPFC actively monitors the availability and prices of raw materials and employs partial hedging strategies to protect itself against price increases and exchange rate movements. However, there can be no assurance that there will be an adequate supply of the raw materials required by SMPFC, that raw materials will not be subject to significant price fluctuations or that SMPFC’s hedging strategies will be successful. Furthermore, SMPFC cannot assure prospective investors that it will be able to pass increases in production costs to consumers. As a result, any significant shortages or material increase in the market price of such raw materials may have a material adverse effect on SMPFC’s financial condition and results of operations. For more information on SMPFC’s strategy to reduce risks relating to the availability and prices of raw materials, see “Business – Strategies – Achieve Cost Leadership” on page 56. SMPFC may also face increased costs due to the imposition of new regulations. For example, in Mindanao, in the southern part of the Philippines, a significant portion of the population is Muslim, and thus, all of SMPFC’s poultry processing plants in that region are halal-certified. Legislation has been proposed that would require additional halal certification for the feedmills that serve the poultry farms from which halal products are sourced. If this proposed legislation is implemented, certain raw materials may have to be eliminated from SMPFC’s poultry feeds used in this region, thereby driving up the cost of poultry feeds and, consequently, the cost of poultry production in the region, which may have a material adverse effect on SMPFC’S financial condition and results of operations.
Outbreaks of disease at any of SMPFC’s owned or contracted hog, cattle or poultry farms could materially and adversely affect SMPFC’s business, financial condition and results of operations. SMPFC’s fresh meats and poultry businesses are subject to risk of losses caused by outbreaks of disease at any of the hog, cattle or poultry farms owned or contracted by SMPFC. The livestock industry in the Philippines has experienced outbreaks of disease in the past. In particular, an industrywide porcine epidemic diarrhea outbreak that affected several of SMPFC’s facilities in the second quarter of 2008 and the third quarter of 2010 and a porcine reproductive and respiratory syndrome outbreak at contract growing facilities in the second and third quarters of 2008 negatively affected revenue growth in SMPFC’s fresh meats business during those periods. In addition, actual or suspected outbreaks of avian flu or other emerging diseases in SMPFC’s poultry facilities could negatively affect its poultry business. While there have been no known cases of avian flu in the Philippines to date, a false positive case of avian flu in 2005 contributed to decreased growth in the Philippine poultry industry during that year. To mitigate this risk, SMPFC has adopted policies and controls in its facilities to prevent the outbreak or recurrence of diseases, including the separation of its hog breeding, nursery and growing operations, bird proofing to prevent the entry of outside birds into its poultry farms and implementation of strict visitor screening and sanitation procedures for entrance to any of its poultry facilities. However, SMPFC cannot assure prospective investors that its policies and controls will be successful in preventing disease outbreaks or recurrences. Any such outbreak or recurrence could have a material adverse effect on SMPFC’s business, financial condition and results of operations.
30
Product liability claims or other circumstances could harm the reputation of, and customer support for, SMPFC’s products and materially reduce SMPFC’s sales and profitability. The success of SMPFC depends largely upon consumers’ perception of the reliability and quality of its products. Any event or development that detracts from the perceived reliability or quality of SMPFC’s products could materially reduce demand for its products. For example, a contamination of products by bacteria or other external agents, whether arising accidentally or through deliberate third-party action, could potentially result in product liability claims. While no material product liability claim has been filed against SMPFC, any such product liability claim, whether or not successful, could damage the reputation of SMPFC and its products. These problems may have a material adverse effect on the financial condition, prospects and customer demand for SMPFC’s products, which may result in reduced sales and profitability of the affected products. For more information on SMPFC’s strategy to reduce risks relating to product liability claims, see discussion on “Health, Safety and Environmental Matters” on page 70.
SMPFC’s business and prospects may be materially and adversely affected by changes in consumers’ preferences or purchasing power. The ability of SMPFC to successfully launch new products and maintain or increase demand for its existing products depends on the acceptance of those products by consumers, as well as the purchasing power of consumers. Consumer preferences may shift for a variety of reasons, including changes in demographic and social trends or consumer lifestyle choices. SMPFC has pursued in the past, and intends to continue to pursue, marketing campaigns focused on creating awareness of and influencing consumer preferences towards its brands. For example, recent advertising campaigns by SMPFC’s poultry business have featured celebrity endorsers to encourage consumers to purchase marinated cut-ups and choice cuts from its Magnolia Chicken Stations. However, SMPFC cannot guarantee that such marketing strategies will be successful. If SMPFC’s marketing strategies are not successful or SMPFC does not respond effectively to changes in consumer preferences, SMPFC’s business and prospects may suffer. In addition, demand for many of SMPFC’s food products is tied closely to consumers’ purchasing power and disposable income levels, which may be adversely affected by unfavorable economic developments in the Philippines. Any decrease in consumers’ purchasing power and disposable income levels could have a material adverse effect on SMPFC’s financial condition and results of operations. For example, in 2008, the macroeconomic slowdown in the Philippines negatively affected sales volumes in SMPFC’s flour and dairy, spreads and oils businesses, as consumers prioritized staple commodities such as rice over bread and bread spreads. A significant decrease in disposable income levels or consumers’ purchasing power in the Philippines could materially decrease SMPFC’s sales and profitability.
SMPFC operates in a competitive environment, and if it is unable to maintain its competitive position, SMPFC’s market share and operating margins may be reduced, and its business, financial condition, results of operations and prospects may be materially and adversely affected. The Philippine food industry is, in general, highly competitive. While SMPFC currently enjoys market leadership across several of its product categories, SMPFC cannot assure prospective investors that it will be able to maintain or grow its current market share. In the food industry, competitive factors generally include price, product quality, brand awareness, distribution coverage, customer service and the ability to respond effectively to shifts in consumer tastes and preferences. Consolidation of SMPFC’s competitors, the entry of new, larger competitors into the Philippine food market or other actions or irrational behavior by SMPFC’s competitors could exert downward pressure on prices or cause SMPFC’s market share to decline. Any failure by SMPFC to successfully compete with its competitors would have a material adverse effect on its business, financial condition, results of operations and prospects.
31
In order to maintain its customer base and market share, SMPFC has continuously developed new and innovative products to meet its customers’ demands. If its competitors are able to develop more innovative or better quality products or less expensive products of similar quality, SMPFC may not be able to maintain its competitive edge or market share, and SMPFC’s financial condition, business, results of operations and prospects would be materially and adversely affected. Please see “Description of the Business – Competition” and “Description of the Business – Strengths” for further details. Some of SMPFC’s products are regarded as commoditized products, including certain products from its feeds, flour, fresh meat and poultry businesses, which represented 76.9% and 77.8% of sales in 2009 and the nine months ended September 30, 2010, respectively.
SMPFC outsources most of its manufacturing, production and distribution operations to third parties. If any of these third parties fails to perform its obligations to produce and deliver SMPFC’s products, or if SMPFC is unable to find new contractors to meet increased demand for its products, SMPFC’s business, financial condition, results of operations and prospects may be materially and adversely affected. SMPFC continuously monitors the efficiency and manufacturing capabilities of its several contractors’ production facilities. (Please see “The Company – Agro-Industrial” on pages 57 to 62.) However, any of those contractors may, from time to time, experience production difficulties that may cause shortages and delays in deliveries, as is common in the manufacturing industry. If one or more of SMPFC’s contract manufacturers or other contractors fails to or is unable to manufacture, package or distribute products for SMPFC in sufficient quantities or at satisfactory quality levels, or to perform its obligations in a timely manner, SMPFC’s ability to bring products to the market and its reputation could suffer, which may have a material adverse effect on SMPFC’s business, financial condition, results of operations and prospects. In addition, SMPFC cannot assure prospective investors that it will be able to find new contract manufacturers or other contractors in line with increased customer demand in the future, which may materially and adversely affect SMPFC’s business and prospects.
SMPFC’s business and prospects may be materially and adversely affected by increased imports of lower-priced products as import duties are decreased or eliminated. SMPFC may face increased competition from less expensive imports to the Philippines as import duties on those products are decreased or eliminated. The Philippines is a signatory to several free trade agreements, including the ASEAN Free Trade Agreement, the ASEAN-China Free Trade Agreement, the ASEAN-Korea Free Trade Area Agreement, the Japan-Philippines Economic Partnership Agreement, the ASEAN-Japan Comprehensive Economic Partnership and the ASEANAustralia-New Zealand Free Trade Area Agreement and the ASEAN-India Free Trade Area Agreement. SMPFC is subject to increasing competition from lower-priced imported products, resulting from decreases in trade barriers under the terms of such trade agreements. For example, as of January 1, 2010, import duties on certain value-added products, such as instant coffee, was reduced from 5.0% to zero on imports from other ASEAN countries (although the 40.0% tariff on luncheon meats from China remains in place). SMPFC has already experienced the effects of increased competition as a result of the elimination of these import duties and expects that competition from imported products will continue to increase. If SMPFC is unable to compete effectively with lower-priced imports, its market share and sales will decrease, and SMPFC’s business, financial condition, results of operations and prospects may be materially and adversely affected. For more information on SMPFC’s efforts to mitigate this risk, see discussions on “The Company Strategies – Achieve Cost Leadership” on page 56 and “Pricing and Selling Strategy” on page 101.
32
SMPFC’s operations depend on certain trademarks and proprietary rights owned by SMPFC, and infringement of these rights could have a material adverse effect on SMPFC’s competitive position. SMPFC owns various brand names, related trademarks and other intellectual property rights to prepare, package, advertise, distribute and sell its products in the Philippines. Protection of these brands and related intellectual property rights is important to maintaining SMPFC’s distinctive corporate and market identities. If other parties sell products that use counterfeit versions of SMPFC’s brands or otherwise look like SMPFC’s brands, consumers may confuse inferior products with SMPFC’s products. This could cause consumers to refrain from purchasing SMPFC’s products in the future and materially and adversely affect SMPFC’s brand image and sales. SMPFC is responsible for defending against any infringements on its brands or other proprietary rights. In this connection, SMPFC vigilantly monitors products released in the market that may mislead consumers as to the origin of such products and attempt to ride on the goodwill of SMPFC’s brands and other proprietary rights. SMPFC has also retained independent external counsels to alert the Company of any such attempts and to enjoin third parties from the use of colorable imitations of SMPFC’s brands and/or marked similarities in general appearance or packaging of products, which may constitute trademark infringement and unfair competition. However, SMPFC cannot assure prospective investors that it will be successful in this regard. Any failure by SMPFC to protect its proprietary rights could have a material adverse effect on SMPFC’s competitive position, results of operations and prospects.
SMC is able to exercise substantial influence over SMPFC’s corporate policies and direct the outcome of corporate actions and there can be no assurance SMC and its officers or directors will act in the best interests of SMPFC. SMC, SMPFC’s controlling shareholder, holds approximately 99.92% of SMPFC’s Common Shares. SMC has effective control over SMPFC, including SMPFC’s management, policies and business, through its ability to control actions that require majority shareholder approval and through its representatives on SMPFC’s Board of Directors. The interests of SMC may not always be consistent with SMPFC’s interests or those of its other shareholders, including holders of the Preferred Shares. To the extent that there are conflicts of interest between SMC and SMPFC or its other shareholders, there can be no assurance that SMC will not choose to pursue strategic objectives that conflict with the interests of SMPFC or its other shareholders, including holders of the Preferred Shares, or that those shareholders will not be disadvantaged as a result. In addition, SMC has ownership interests in a number of companies in the Philippines, including companies that are involved in businesses related to SMPFC’s businesses or that have entered into, or may enter into, business transactions with SMPFC, such as, for example, transactions with San Miguel Yamamura Packaging Corporation for packaging materials. There can be no assurance that SMC or its officers or directors will make corporate opportunities available to SMPFC. Furthermore, certain other members of the SMC Group have significant commercial transactions with SMPFC. These transactions have generally been entered into on arm’s length commercial terms. For further information, see “Related Party Transactions”. SMPFC strives to mitigate the foregoing risks through adherence to good corporate governance principles and practices. Please see “Directors and Executive Officers – Corporate Governance” on page 91.
The growth of supermarkets as well as a general consolidation of wholesale buyers in the Philippine market may have a material adverse effect on SMPFC’s financial condition and results of operations. The Philippine retail market has historically been highly fragmented among numerous small neighborhood stores, groceries and more traditional wet markets. These small neighborhood stores serve limited geographical areas and purchase relatively small quantities of SMPFC’s products from
33
distributors and larger supermarkets. In recent years, larger supermarkets have begun to gain market share in the Philippines. There is a risk that SMPFC’s business may become concentrated in fewer, larger customers, which could increase the relative bargaining power of these customers. SMPFC cannot assure prospective investors that supermarkets or one of these larger customers will not exert downward pressure on wholesale prices of SMPFC’s products, which may have a material adverse effect on SMPFC’s financial condition and results of operations. In addition, traditional wet markets remain a major source of food products for many Philippine consumers. Because the Government may periodically move to protect consumers from rising prices, SMPFC may be constrained from passing on price increases to wet market retailers who sell its poultry, fresh meats and value-added meats products. Please see discussion on “Pricing and Selling Strategy” and “New Products and Branding Initiatives” on page 101 and 102.
SMPFC is exposed to the credit risks of its customers, and defaults in payment by its customers could have a material adverse effect on SMPFC’s financial condition, results of operations and liquidity. SMPFC is exposed to the credit risk of its customers, and defaults on material payments owed to SMPFC by customers could significantly reduce SMPFC’s operating cash flows and liquidity, as well as have a material adverse effect on SMPFC’s financial condition and results of operations. Some of SMPFC’s customers could also experience cash flow difficulties or become subject to liquidation, which could in turn lead to SMPFC experiencing long delays in collection of payments, if at all. SMPFC’s average trade receivables turnover in 2007, 2008 and 2009 and the nine months ended September 30, 2010 was approximately 43, 41 and 52 and 42 days, respectively. For further information, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Quantitative and Qualitative Disclosures About Market Risk – Credit Risk” on page 120. SMPFC cannot provide any assurance that its exposure to the risk of delayed payments from its customers or defaults in payment by its customers will not increase, or that it will not experience losses or cash flow constraints as a result. If any of these events were to occur, SMPFC’s financial condition and results of operations could be materially and adversely affected.
SMPFC generally does not have long-term contracts with its customers, and it is subject to uncertainties and variability in demand and product mix, which could materially decrease net sales and negatively affect its profitability. As is common in the industries in which SMPFC operates, SMPFC does not have long-term contracts with its customers, and, consequently, its revenues are subject to short-term variability resulting from the seasonality of, and other fluctuations in demand for, its products. SMPFC’s customers have no obligation to place new orders with SMPFC following the expiration of their current obligations, and may cancel, reduce or delay orders for a variety of reasons. The level and timing of orders placed by SMPFC’s customers may vary due to a number of factors including: • • • •
seasonality and other fluctuations in demand for SMPFC’s products; the competitiveness of SMPFC’s selling prices in the industry; customer satisfaction with the level of service SMPFC provides; and customers’ inventory management.
SMPFC has experienced terminations of, and reductions and delays in, its customers’ orders in the past. Furthermore, terminations of, or reductions or delays in, orders placed by SMPFC’s customers or inability by SMPFC to substitute new orders for cancelled orders, could lower its facility utilization rates, which would materially decrease SMPFC’s revenues and profitability. In addition, seasonality in demand for SMPFC’s products could materially and adversely affect SMPFC’s results of operations and financial results from quarter to quarter.
34
For further information regarding seasonality in certain of SMPFC’s businesses, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Quantitative and Qualitative Disclosures about Market Risk – Seasonality”. Please see also the discussion under the heading “The Company – Strategies” on page 55.
SMPFC intends to use part of the proceeds from the Offer to co-invest alongside SMC, potentially in areas outside its core business areas, and the loss of any or all of the principal of these investments could materially and adversely affect its financial condition and results of operations. SMPFC intends to use a portion of the proceeds from the Offer to co-invest alongside SMC, potentially in areas outside of its traditional food businesses. Because these investments may extend outside SMPFC’s core competencies, SMPFC may lack the expertise to assess and manage the risks associated with these investments to the same extent as it could on investments in the food industries. In addition, SMPFC expects that these investments would be passive in nature, meaning SMPFC would not have meaningful control of the management or policies of its investees. The loss of any or all of these investments could materially and adversely affect SMPFC’s financial condition and results of operations. SMPFC’s Board has not yet identified any definite investee targets and is continually assessing investment opportunities as they arise, taking into consideration, among others, the attractiveness of the expected returns from said investments
SMPFC may be subject to labor unrest, slowdowns and increased wage costs. As of September 30, 2010, SMPFC had 3,701 regular employees, including 620 employees who are members of various labor unions (including employees of the Vietnam business). SMPFC has in the past, and may in the future, be required to defend against labor claims. For example, in 2010, SMPFC’s decision to convert one of its poultry plants located in San Fernando, Pampanga into a toller-operated plant was resisted by many of that plant’s employees. As a result, SMPFC had to temporarily close that plant and institute legal proceedings. While SMPFC ultimately won those legal proceedings, and plans to re-open the poultry plant by early 2011, there can be no assurance that similar labor disputes in the future will not require the closure of other SMPFC facilities. SMPFC considers its labor relations to be good; however, there can be no assurance that it will not experience future disruptions to its operations due to disputes or other issues with its employees, which may materially and adversely affect its business, financial condition and results of operations.
SMPFC may be subject to potential liability for any failure to comply with prescribed environmental standards and limits. Various environmental laws and regulations govern the operations of SMPFC, including, but not limited to, the management of solid waste, water and air quality, toxic substances and hazardous waste at SMPFC’s facilities. Non-compliance with the legal requirements or violations of prescribed standards and limits under these laws could expose SMPFC to potential liabilities, including administrative penalties. Violations of environmental laws could also result in the suspension and/or revocation of permits or licenses held by SMPFC or suspension or closure of operations. In addition, environmental laws and regulations have, in general, tended to become more restrictive over time, as amendments to existing laws and regulations and new legislation are introduced. SMPFC may be required to expend substantial resources in the future, as it continuously adjusts its operations to comply with new environmental laws and regulations. Such developments could adversely affect SMPFC’s business and results of operations. See discussion on “Health, Safety and Environmental Matters” on page 70.
35
SMPFC may be materially and adversely affected by any change in labor, employee health and safety, and other laws and regulations. Such developments could adversely affect SMPFC’s business and results of operations. SMPFC’s operations are subject to a number of national and local laws and regulations, including industry laws and regulations relating to labor, employee health and safety and tax. SMPFC cannot assure prospective investors that changes in such laws or regulations will not result in SMPFC having to incur substantial additional expenditures to upgrade or supplement its existing facilities or comply with increased minimum wage laws or becoming subject to increased tax rates or fines and penalties. Any such changes in laws and regulations could have a material adverse effect on SMPFC’s business, financial condition and results of operations.
SMPFC depends on certain key personnel, and its business and growth prospects may be disrupted if their services are lost. SMPFC’s future success is dependent on the continued service of its key executives and employees. Thus, the Company strives to strengthen the competencies of its employees, specifically those in the succession pipeline of key personnel, through such initiatives as the San Miguel Pure Foods University, and pursues strategic hiring for identified critical positions. However, SMPFC cannot assure potential investors that it will be able to retain these executives and employees. Some members of SMPFC’s management are leaders or members of certain key industry associations in the Philippines, and SMPFC believes it benefits from those relationships. If many of SMPFC’s key personnel were unable or unwilling to continue in their present positions, or if they joined a competitor or formed a competing business, SMPFC may not be able to replace them easily, and the business of SMPFC may be disrupted.
There can be no assurance that SMPFC is fully insured against unexpected losses and accidents. SMPFC may not be fully insured against unexpected losses caused by natural disasters, breakdowns or other events that could affect the facilities or processes used by SMPFC in its businesses. For example, SMPFC does not carry business interruption insurance for any of its businesses. If SMPFC incurs significant unexpected losses for which it is not insured, its business, financial condition and results of operations may be materially and adversely affected. Please see section on “Insurance” on page 70.
Any loss or shutdown of operations at SMPFC’s manufacturing facilities or those of its suppliers could have a material adverse effect on its business, financial condition and results of operations. SMPFC’s facilities and those of its suppliers are subject to operating risks, such as the breakdown or failure of equipment or processes, performance below expected levels of output or efficiency, obsolescence, natural disasters, industrial accidents and the need to comply with the directives of relevant government authorities. For example, SMPFC decided to cease operations at its Marikina plant after it was severely damaged when Typhoon Ondoy hit Metro Manila in September 2009. As a result of that closure, SMPFC was not able to meet volume demand during the period while it was transferring production capacity to its Cavite plant and third-party contracted plants, and SMPFC’s revenues were adversely affected during the fourth quarter of 2009. The occurrence of any of such events could significantly affect its operating results. SMPFC’s business, financial condition and results of operations may be materially and adversely affected by any disruption of operations at its or its suppliers’ facilities, including due to any of the events mentioned above. SMPFC takes precautions to minimize the risk of any significant operational problems at its facilities and continuously monitors the efficiency and manufacturing capabilities of its contractors’ production facilities.
36
Any accident at SMPFC’s facilities could lead to property damage, production loss and accident claims. Any accident at SMPFC’s manufacturing facilities could result in losses for SMPFC. SMPFC could suffer a decline in production, receive adverse publicity and be forced to invest significant resources in addressing such damages, both in terms of time and money. Although there have been few accidents at SMPFC’s facilities in the past, there can be no assurance that there will not be work-related or other accidents in the future. Furthermore, there can be no guarantee that amicable settlements will be secured in the future or that accidents may not result in future litigation or regulatory action against SMPFC. Such events could materially and adversely affect SMPFC’s financial condition and results from operations. Please see section on “Insurance” on page 70.
SMPFC relies significantly on the “San Miguel” brand name, and any dilution of its brand equity could materially and adversely affect SMPFC’s reputation and business. SMPFC believes the San Miguel brand is positively perceived by consumers in the Philippines as a result of its long presence in the Philippine market. SMPFC also believes the San Miguel brand name lends its own products an image of trust and quality. Although SMPFC relies significantly on the San Miguel brand name, SMPFC has little or no control over its use by other SMC Group companies or any other third parties. Any decrease in the brand equity of the San Miguel brand name could materially and adversely affect SMPFC’s reputation, financial condition, results of operations and prospects. The Company, alongside SMC, seeks to protect the San Miguel brand name equity by cultivating a common culture of good corporate governance and food safety prioritization and proactive management of regulatory concerns. Moreover, the Company manages its brands (i.e., Magnolia, Purefoods, Monterey, B-Meg, Dari Crème, Star) at the individual business level, to lessen the impact of any possible dilution in the San Miguel brand equity.
SMPFC is not in compliance with the minimum public ownership requirement imposed by the PSE for listed companies and while SMPFC is currently implementing initiatives to comply with said minimum public ownership requirement, there can be no assurance that such initiatives will be considered fully compliant. The Company is currently not in compliance with the minimum public float of 10% being required by the PSE for listed companies. In a letter dated December 28, 2010 addressed to the SEC, the BIR has sought to impose potentially higher public ownership levels than prescribed by the PSE and indicated that this would be enforced by “strictly imposing the 5%/10% capital gains tax” for trades in listed companies “who will not maintain their public ownership requirement.” In the event that this initiative is carried out, trades in the Company’s outstanding capital stock, including the Preferred Shares, may be subjected to such capital gains tax instead of the stock transaction tax of ½ of 1% of the gross selling price or gross value in money (see “Taxation” at page 126). While the Company is currently implementing initiatives to comply with the minimum public ownership requirement through transactions such as this Offer and other initiatives (see “Compliance with Minimum Public Ownership Requirement” at page 84) there can be no assurance that such initiatives will be considered fully compliant with the relevant requirements of the PSE and/or the BIR in order for the Company to avoid penalties (which include delisting) imposable by the PSE for such breach or the imposition of capital gains tax by the BIR for sales of the Company’s shares, including the Preferred Shares, listed on the PSE.
37
Risks Related to the Philippines SMPFC’s operations are concentrated in the Philippines, and any downturn in general economic conditions in the Philippines could have a material adverse effect on SMPFC’s business, financial condition, results of operations and prospects. Historically, SMPFC’s results of operations have been influenced, and will continue to be influenced, to a significant degree by the general state and performance of the Philippine economy. In the past, the Philippines has experienced periods of slow or negative growth, high inflation, significant devaluation of the Peso and the imposition of exchange controls. In addition, global financial, credit and currency markets have, since the second half of 2007, experienced, and may continue to experience, significant dislocations and liquidity disruptions. There is significant uncertainty as to the potential for a continued downturn in the U.S. and the global economy, which would be likely to cause economic conditions in the Philippines to deteriorate. Any deterioration in the Philippine economy may adversely affect consumer sentiment and lead to a reduction in demand for SMPFC’s products, which may materially reduce SMPFC’s revenues, profitability, cash flows and results of operations generally. There can be no assurance that current or future Governments will adopt economic policies conducive to sustaining economic growth.
Political instability or acts of terrorism in the Philippines could destabilize the country and may have a negative effect on SMPFC. The Philippines has from time to time experienced political and military instability. In the last few years, there has been political instability in the Philippines, including impeachment proceedings against former presidents Joseph Estrada and Gloria Macapagal-Arroyo, and public and military protests arising from alleged misconduct by previous administrations. In addition, there is no guarantee that acts of election-related violence will not occur in the future and such events have the potential to negatively impact the Philippine economy. An unstable political environment, whether due to the imposition of emergency executive rule, martial law or widespread popular demonstrations or rioting, could negatively affect the general economic conditions and operation environment in the Philippines, which could have a material adverse effect on SMPFC’s business, financial condition and results of operations. The Philippines has been subject to a number of terrorist attacks since 2000. The Philippine army has been in conflict with the Abu Sayyaf organization, which has been identified as being responsible for kidnapping and terrorist activities in the Philippines. In the past, bombings have taken place in the Philippines, mainly in cities in the southern part of the country. Although no one has claimed responsibility for these attacks, it is believed that the attacks are the work of various separatist groups, possibly including the Abu Sayyaf organization, which has ties to the al-Qaeda terrorist network. On August 23, 2010, eight hostages were killed in a hostage situation aboard a tour bus in Manila. This resulted in the Hong Kong Special Administrative Region government issuing a “black” travel alert for the Philippines. An increase in the frequency, severity or geographic reach of terrorist, hostage taking or similar acts could destabilize the Philippines, increase internal divisions within the Government as it evaluates responses to that instability and unrest and adversely affect the country’s economy. There can be no assurance that the Philippines and the assets and operations of SMPFC will not be subject to further acts of terrorism in the future, which could have a material adverse effect on SMPFC’s business, financial condition and results of operations.
The credit rating of the Philippines may materially and adversely affect SMPFC’s ability to obtain financing on commercial terms, or at all. International credit rating agencies issue credit ratings for companies with reference to the country in which they are resident. As a result, the sovereign credit ratings of the Philippines directly affect companies that are resident in the Philippines, such as SMPFC. No assurance can be given that Moody’s, S&P or other international credit rating agencies will not downgrade the credit rating of the Philippines in the future. Any such downgrade could have a material adverse effect on liquidity in the Philippine financial markets, the ability of the Government and Philippine companies, including
38
SMPFC, to raise additional financing and the interest rates and other commercial terms on which such additional financing is available, and increase SMPFC’s borrowing and other costs. These factors could have a material adverse effect on SMPFC’s financial condition.
Developments in other markets and countries may adversely affect the Philippine economy and, therefore, the market price of the Preferred Shares. In the past, the Philippine economy and the securities of Philippine companies have been, to varying degrees, influenced by economic and market conditions in other countries, particularly other countries in Southeast Asia, as well as investors’ responses to those conditions. Although economic conditions are different in each country, investors’ reactions to adverse developments in one country may affect the market price of securities of companies in other countries, including the Philippines. For example, the recent economic crisis in the United States and Europe triggered market volatility in other countries’ securities markets, including the Philippines. Accordingly, adverse developments in the global economy could lead to a reduction in demand for, and the market price of, the Preferred Shares.
The occurrence of natural catastrophes and electricity blackouts may materially disrupt SMPFC’s operations. The Philippines has experienced a number of major natural catastrophes in recent years, including typhoons, volcanic eruptions, earthquakes, mudslides, droughts and floods related to El Niño and La Niña weather events. Natural catastrophes may disrupt SMPFC’s ability to produce or distribute its products and impair the economic conditions in affected areas, as well as the overall Philippine economy. For example, volume growth in SMPFC’s poultry business decreased in 2006 after two major typhoons destroyed some of SMPFC’s poultry facilities, killing over a million birds. The Philippines has also experienced electricity blackouts, both from insufficient power generation and from disruptions such as typhoons. These types of events may materially disrupt SMPFC’s business and operations, as well as have a material adverse effect on SMPFC’s business, financial condition and results of operations. Furthermore, SMPFC cannot assure prospective investors that the insurance coverage it maintains for these risks will provide adequate compensation for damages and economic losses resulting from natural catastrophes or blackouts, including possible business interruptions.
Outbreaks of contagious diseases in the Philippines could have a material adverse effect on SMPFC’s financial condition and results of operations. Any outbreak of any contagious disease in the Philippines, including avian influenza (bird flu) and H1N1 (swine flu), could have a material adverse effect on SMPFC’s financial condition and results of operations. In particular, any outbreak of a contagious disease could materially reduce consumer demand for SMPFC’s products, SMPFC’s ability to adequately staff its operations and the distribution networks for SMPFC’s products, as well as the general level of economic activity in the Philippines. SMPFC cannot assure prospective investors that any future outbreak of a contagious disease will not have a material adverse effect on SMPFC’s result of operations, sales and profitability.
If foreign exchange controls were to be imposed in the Philippines, SMPFC’s ability to purchase raw materials or to meet its foreign currency payment obligations could be disrupted. Currently, the Philippines does not have any foreign exchange controls in effect. However, the BSP has statutory authority, with the approval of the President of the Philippines, during a foreign exchange crisis or in times of national emergency, to: • •
suspend temporarily or restrict sales of foreign exchange; require licensing of foreign exchange transactions; or
39
•
require the delivery of foreign exchange to the BSP or its designee banks.
SMPFC purchases certain critical raw materials, such as milk, wheat and soybean meal, from abroad and requires foreign currency to make these purchases. SMPFC cannot assure prospective investors that foreign exchange controls will not be imposed by the Government in the future. If imposed, these restrictions could curtail SMPFC’s ability to obtain raw materials from abroad or to meet its foreign currency payment obligations, which could materially and adversely affect its financial condition and results of operations.
Management of Risks related to the Philippines The Company has been able to survive major economic and political crises brought about by domestic and international developments through the implementation of its core strategies, including least cost formulations, efficiencies improvement, market leadership, innovation and regional diversification. Constant monitoring of market allows the Company to detect risk exposures and react to the external environment appropriately. Although there is no assurance that the Company will be able to fully overcome the adverse effects of any or all crisis, it has in place a system of financial prudence and corporate governance that provides the foundation for its risk management initiatives.
Risks Related to the Preferred Shares The market price of the Shares may be volatile, which could cause the value of investors’ investments in the Preferred Shares to decline. The market price of the Preferred Shares could be affected by various factors, including: • • • • •
general market, political and economic conditions; changes in earnings estimates and recommendations by financial analysts; changes in market valuations of listed stocks, in general, and other food producer stocks, in particular; changes to Government policy, legislation or regulations, and general operational and business risks.
In addition, many of the risks described elsewhere in this Prospectus could materially and adversely affect the market price of the Shares.
Payment of Dividends on Preferred Shares Dividends on the Preferred Shares may not be paid in full, or at all. Under the terms and conditions governing the Preferred Shares, the Company may pay no dividends or less than full dividends on a Dividend Payment Date. Holders of the Preferred Shares will not receive dividends on a Dividend Payment Date or for any period during which the Company does not have retained earnings out of which to pay dividends.
Subordination to the Company’s Other Indebtedness SMPFC’s obligations in respect of the Preferred Shares are subordinated to all of the Company’s indebtedness, and it will not make any payments under the Preferred Shares unless it can satisfy in full all of its other obligations that rank senior to the Preferred Shares. SMPFC’s obligations under the Preferred Shares are unsecured and will, in the event of the windingup of the Company, rank junior in right of payment to all indebtedness of the Company and junior in right of payment to securities of, or claims against, the Company which rank or are expressed to rank senior to the Preferred Shares. Accordingly, SMPFC’s obligations under the Preferred Shares will not
40
be satisfied unless SMPFC can satisfy in full all of its other obligations ranking senior to the Preferred Shares. There is no agreement or instrument that limits SMPFC’s ability to incur additional indebtedness that ranks senior to or pari passu with the Preferred Shares.
Insufficient Distributions upon Liquidation Upon any voluntary or involuntary dissolution, liquidation or winding up of SMPFC, holders of Preferred Shares will be entitled only to the available assets of the Company remaining after the Company’s indebtedness is satisfied. If any such assets are insufficient to pay the full amount due to the holders of the Preferred Shares, then holders of Preferred Shares shall share ratably in any such distribution of assets in proportion to the full distributions to which they would otherwise be respectively entitled.
Ability to Make Payments Under the Shares is Limited by Terms of SMPFC’s Other Indebtedness SMPFC has and will continue to have a certain amount of outstanding indebtedness. The current terms of SMPFC’s financing agreements contain provisions that could limit the ability of the Company to make payments on the Preferred Shares. Also, SMPFC may in the future, directly or indirectly through its subsidiaries, enter into other financing agreements which may restrict or prohibit the ability of the Company to make payments on the Preferred Shares. There can be no assurance that existing or future financing arrangements will not adversely affect SMPFC’s ability to make payments on the Preferred Shares.
Company has the Sole Right to Redemption Holders of the Preferred Shares have no right to require the Issuer to redeem the Preferred Shares. The Preferred Shares are only redeemable at the option of the Issuer on the Optional Redemption Date or any Dividend Payment Date thereafter. Accordingly, if a Preferred Shareholder wishes to obtain the cash value of the investment, the holder will have to sell the Preferred Shares in the secondary market.
Lack of Public Market for the Shares The Philippine securities markets are substantially less liquid and more volatile than major securities markets in other jurisdictions, and are not as highly regulated or supervised as some of these other markets. The Company cannot guarantee that the market for the Preferred Shares will always be active or liquid upon their listing on the PSE.
Limited Liquidity The Joint Lead Underwriters are not obligated to create a trading market for the Preferred Shares and any such market making will be subject to the limits imposed by applicable law, and may be interrupted or discontinued at any time without notice. Accordingly, the Company cannot predict whether an active or liquid trading market for the Preferred Shares will develop or if such a market develops, if it can be sustained. Consequently, a shareholder may be required to hold his Preferred Shares for an indefinite period of time or sell them for an amount less than the Offer Price.
Non-Payment of Dividends may affect the Trading Price of the Preferred Shares If dividends on the Preferred Shares are not paid in full, or at all, the Preferred Shares may trade at a lower price than they might otherwise have traded if dividends had been paid. The sale of Preferred
41
Shares during such a period by a holder of Preferred Shares may result in such holder receiving lower returns on the investment than a holder who continues to hold the Preferred Shares until dividend payments resume. In addition, because of the dividend limitations, the market price for the Preferred Shares may be more volatile than that of other securities that do not have these limitations.
Inability to Reinvest at a Similar Return on Investment On the Optional Redemption Date or at any time redemption occurs, SMPFC may redeem the Preferred Shares for cash at the redemption price, as described in ‘‘Description of the Shares’’. At the time of redemption, interest rates may be lower than at the time of the issuance of the Preferred Shares and, consequently, the holders of the Preferred Shares may not be able to reinvest the proceeds at a comparable interest rate or purchase securities otherwise comparable to the Preferred Shares.
No Voting Rights Holders of Preferred Shares will not be entitled to elect the Directors of the Company. Except as specifically set forth in the Articles of Incorporation and as provided by Philippine law, holders of Preferred Shares will have no voting rights (see ‘‘Description of the Preferred Shares’’ on page 24).
42
Use of Proceeds The gross proceeds of the Offer will amount to P15 billion. The Company estimates that the net proceeds of the Offer shall amount to approximately P14.83 billion, after underwriting fees, commissions and expenses. Estimated fees, commissions and expenses relating to the Issue are as follows: Fees, Commissions and Expenses Gross Underwriting Fees for the Preferred Shares being sold by the Company Taxes to be paid by the Company Philippine SEC filing and legal research fee Estimated PSE listing and processing fee Estimated legal and other professional fees Estimated other expenses TOTAL
In P Millions 120.97 1.65 4.36 15.05 29.89 2.63 174.55
SMPFC intends to use the net proceeds of the Offer as follows: Payables relating to the Brands Acquisition and the Vietnam Acquisition. SMPFC intends to use approximately P 3.615 billion of the net proceeds of the Issue to repay a payable to SMC relating to the Brands Acquisition and the Vietnam Acquisition. The breakdown of the outstanding payable to SMC as of September 30, 2010 is provided below (in million Pesos): Contract Price
Downpayment
90% Balance Before Restatement
3,200 853 4,053
320 85 405
2,880 767 3,647
Brands Vietnam business* Total
90% Balance After Month-End Restatement 2,880 735** 3,615
*Contract price: US$18.6 million **As the contract price for the Vietnam acquisition is denominated in US dollars, its outstanding balance is restated every end of the month to take into account any changes in exchange rates.
The balance of the total contract price is due and payable (i) upon change in the controlling interest of SMPFC to any third person other than an affiliate or (ii) two years from closing date, whichever comes first, as provided in the respective agreements for the Brands Acquisition and the Vietnam Acquisition. For more information, see “Recent Acquisitions”. Investment opportunities. SMPFC intends to invest a portion of the net proceeds of the Issue in one or more potential investment opportunities. SMPFC has no definite investment plans and continually assesses investment opportunities as they arise. Potential areas for investment include, but are not limited to: •
SMPFC’s existing products and businesses;
•
geographical expansion; and
•
participation in SMC’s diversification into power, water and other utilities, and infrastructure.
SMPFC intends to effect the foregoing investments in 2011 up to 2012. General corporate purposes. SMPFC intends to use the remaining net proceeds of the Preferred Shares, if any, for general corporate purposes. The following table provides a breakdown of the amount of the use of proceeds:
43
Amount from Net Proceeds
Planned Use
Estimated Disbursement
P3.615 billion
Products and businesses
First half of 2011
up to P11.210 billion
Investment opportunities
2011 to 2012
General corporate purposes
2011 to 2012
Any remaining balance of the net proceeds, but not to exceed P1.483 billion
Pending its finalization of a definite investment plan, the Company intends to invest the proceeds of the Offer in financial assets. The Company may invest the proceeds temporarily in liquid money market instruments, which provide flexibility for deployment for capital expenditures. If the expected gross proceeds are not realized, the Company will utilize its internally generated funds, existing credit lines, and other potential borrowings to finance the listed Uses of Proceeds. The internally generated funds originate from the Company’s operations. No amount of the proceeds is to be used to reimburse any officer, director, employee, or shareholder, for services rendered, assets previously transferred, money loaned or advanced, or otherwise. Except for the underwriting fees, issue management fees and expenses related to the Offer, no amount of the proceeds will be utilized to pay any outstanding financial obligations to the Joint Lead Underwriters. In the event of any deviation or adjustment in the planned use of proceeds, SMPFC shall inform the SEC and the Preferred Shareholders at least thirty (30) days prior to the implementation of such deviation or adjustment. Any material or substantial adjustments to the use of proceeds, as indicated above, should be approved by the Company’s Board of Directors and disclosed to the PSE. The Company shall disclose to the PSE through the Online Disclosure System (OdiSy) any disbursements from the proceeds generated from the Offer.
44
Determination of Offer Price The Offer Price of P1,000 is at a premium to the Preferred Share’s par value per share of P10.00. The Offer Price was arrived at by dividing the desired gross proceeds of P15 billion by the amount of Preferred Shares allocated for this offering. Prior to this offering, there has been no public market for the Preferred Shares.
45
Dilution The Preferred Shares will not have any dilutive effect on the rights of the holders of the common shares of the Company as these are non-voting, non-convertible and non-participating.
46
Plan of Distribution SMPFC plans to issue the Preferred Shares to institutional and retail investors in the Philippines through a public offering to be conducted through the Joint Lead Underwriters and Sub-Underwriters. The Offer does not include an international offering. Joint Lead Underwriters BDO Capital & Investment Corporation (“BDO Capital”), The Hongkong and Shanghai Banking Corporation Limited (“HSBC”), RCBC Capital Corporation (“RCBC Capital”), SB Capital Investment Corporation (“SB Capital”), and Standard Chartered Bank (“SCB”) (collectively, the “Joint Lead Underwriters”) have agreed to distribute and sell the Preferred Shares at the Issue Price, pursuant to an Underwriting Agreement to be entered into with SMPFC (the “Underwriting Agreement”). Subject to the fulfillment of the conditions provided in the Underwriting Agreement, the Joint Lead Underwriters have committed to underwrite the following amounts on a firm basis: BDO Capital & Investment Corporation
P3 billion
The Hongkong and Corporation Limited
P3 billion
Shanghai
Banking
RCBC Capital Corporation
P3 billion
SB Capital Investment Corporation
P3 billion
Standard Chartered Bank
P3 billion
TOTAL
P15 billion
The Underwriting Agreement may be terminated in certain circumstances prior to payment being made to SMPFC of the net proceeds of the Preferred Shares. The underwriting and selling fees to be paid by the Company in relation to the Offer shall be equivalent to 0.75% of the gross proceeds of the Offer. This shall be inclusive of fees to be paid to the Joint Lead Underwriters and sub-underwriters, if any, and commissions to be paid to the Trading Participants of the PSE. The Joint Lead Underwriters are duly licensed by the SEC to engage in the underwriting or distribution of the Preferred Shares. The Joint Lead Underwriters may, from time to time, engage in transactions with and perform services in the ordinary course of its business for SMPFC or any of its subsidiaries. The Joint Lead Underwriters have no direct relations with SMPFC in terms of ownership by either of their respective major stockholder/s, and have no right to designate or nominate any member of the Board of Directors of SMPFC. The Joint Lead Underwriters have no contract or other arrangement with SMPFC by which it may return to SMPFC any unsold Preferred Shares. BDO Capital is the wholly owned investment-banking subsidiary of Banco de Oro Unibank, Inc. BDO Capital is a full-service investment house primarily involved in securities underwriting and trading, loan syndication, financial advisory, private placement of debt and equity, project finance, and direct equity investment. Incorporated in December 1998, BDO Capital commenced operations in March 1999. HSBC Philippines is a branch of The Hongkong and Shanghai Banking Corporation Limited, a global corporation headquartered in London, United Kingdom, providing a comprehensive range of financial services to customers through Personal Financial Services (including consumer finance), Commercial Banking, Global Banking and Markets, and Private Banking. HSBC has been doing business in the Philippines for 135 years, and currently employs over 8,000 people in the country. HSBC has a
47
universal banking license and carries out its investment banking activities through its Global Capital Markets department, RCBC Capital is a licensed investment house providing a complete range of capital raising and financial advisory services. Established in 1974, RCBC Capital has over 35 years of experience in the underwriting of equity, quasi-equity and debt securities, as well as in managing and arranging the syndication of loans, and in financial advisory. RCBC Capital is a wholly-owned subsidiary of the Rizal Commercial Banking Corporation and a part of the Yuchengco Group of Companies, one of the country‘s largest fully integrated financial services conglomerates. SB Capital is a Philippine corporation organized in October 1995 as a wholly-owned subsidiary of Security Bank Corporation. It obtained its license to operate as an investment house in 1996 and is licensed by the SEC to engage in underwriting and distribution of securities to the public. SB Capital provides a wide range of investment banking services including financial advisory, underwriting of equity and debt securities, project finance, privatizations, mergers and acquisitions, loan syndications and corporate advisory services. SB Capital is also involved in equity trading through its wholly-owned stock brokerage subsidiary, SB Equities, Inc. Standard Chartered Bank is a banking corporation duly organized and incorporated in England with limited liability by Royal Charter 1853, and licensed to act as a banking institution under and by virtue of the laws of the Republic of the Philippines through its Branch Office, with principal offices at the 8th Floor Standard Chartered Bank Building, 6788 Ayala Avenue, Makati City, Philippines. In the Philippines since 1872, Standard Chartered is a universal bank and is the longest established foreign bank in the country with services ranging from transaction banking, financial markets and corporate finance. Sale and Distribution The distribution and sale of the Preferred Shares shall be undertaken by the Joint Lead Underwriters who shall sell and distribute the Preferred Shares to third party buyers/investors. The Joint Lead Underwriters are authorized to organize a syndicate of sub-underwriters, soliciting dealers and/or selling agents for the purpose of the Offer. Of the 15,000,000 Preferred Shares to be offered, 80% or 12,000,000 Preferred Shares are being offered through the Joint Lead Underwriters for subscription and sale to Qualified Institutional Buyers and the general public. The Company plans to make available 20% or 3,000,000 Preferred Shares for distribution to the respective clients of the 133 Trading Participants of the PSE, acting as Selling Agents. Each Trading Participant shall be allocated 22,550 Preferred Shares (computed by dividing the Preferred Shares allocated to the Trading Participants by 133), subject to reallocation as may be determined by the PSE. Trading Participants may undertake to purchase more than their allocation of 22,550 shares. Any requests for shares in excess of 22,550 may be satisfied via the reallocation of any Preferred Shares not taken up by other Trading Participants. The Company will not allocate any Preferred Shares for the Local Small Investors. As defined in the PSE Revised Listing Rules, a Local Small Investor is a share subscriber whose subscription does not exceed P25,000. The Offer will have a minimum subscription amount of P = 50,000.00, which is beyond the prescribed maximum subscription amount for Local Small Investors. Prior to the close of the Offer Period, any Preferred Shares not taken up by the Trading Participants shall be distributed by the Joint Lead Underwriters directly to their clients and the general public. All Preferred Shares not taken up by the Trading Participants, general public and the Joint Lead Underwriters’ clients shall be purchased by the Joint Lead Underwriters pursuant to the terms and conditions of the Underwriting Agreement. Term of Appointment The engagement of the Joint Lead Underwriters shall subsist so long as the SEC Permit to Sell remains valid, unless otherwise terminated pursuant to the Underwriting Agreement.
48
Manner of Distribution The Joint Lead Underwriters shall, at their discretion, determine the manner by which proposals for subscriptions to, and issuances of, the Preferred Shares shall be solicited, with the primary sale of the Preferred Shares to be effected only through the Joint Lead Underwriters. The Joint Lead Underwriters may appoint other entities, including trading participants, to sell on their behalf. No shares are designated to be sold to specific persons. Offer Period The Offer Period shall commence at 9:00 a.m. on February 14, 2011 and end at 12:00 noon on February 25, 2011, or such other date as may be mutually agreed between the Company and the Joint Lead Underwriters. Application to Purchase All applications to purchase the Preferred Shares shall be evidenced by a duly completed and signed application to purchase, together with 2 fully executed signature cards authenticated by the Corporate Secretary with respect to corporate and institutional investors, and shall be accompanied by the payment in full of the corresponding purchase price of the Preferred Shares applied for, by check or by the appropriate payment instruction, and the required documents which must be submitted to the Joint Lead Underwriters or Sub-Underwriters. Corporate and institutional purchasers must also submit a copy of SEC-certified or corporate secretary-certified true copy of the SEC Certificate of Registration, Articles of Incorporation and Bylaws, or such other relevant organizational or charter documents, and the original or Corporate Secretary-certified true copy of the duly notarized certificate confirming the resolution of the board of directors and/or committees or bodies authorizing the purchase of the Preferred Shares and designating the authorized signatory/ies therefor. Individual Applicants must also submit a photocopy of any one of the following identification cards (“ID”): passport/driver's license, company ID, SSS/GSIS ID and/or Senior Citizen's ID or such other ID and documents as may be required by or acceptable to the Registrar and Paying Agent. An Applicant who is exempt from or is not subject to withholding tax or who claims reduced tax treaty rates shall, in addition, be required to submit the following requirements to the relevant Joint Lead Underwriter or Sub-Underwriter (together with their applications) who shall then forward the same to the Registrar and Paying Agent, subject to acceptance by the Company as being sufficient in form and substance: (i) certified true copy of the original tax exemption certificate, ruling or opinion issued by the BIR on file with the Applicant as certified by its duly authorized officer; (ii) with respect to tax treaty relief, proofs to support applicability of reduced treaty rates, consularized proof of tax domicile issued by the relevant tax authority of the Preferred Shareholder, and original or SEC-certified true copy of the SEC confirmation that the relevant entity is not doing business in the Philippines; (iii) an original of the duly notarized undertaking, in the prescribed form, declaring and warranting its tax exempt status, undertaking to immediately notify the Company and the Registrar and Paying Agent of any suspension or revocation of its tax exempt status and agreeing to indemnify and hold the Company, the Registrar and Paying Agent free and harmless against any claims, actions, suits, and liabilities resulting from the non-withholding or reduced withholding of the required tax; and (iv) such other documentary requirements as may be required under the applicable regulations of the relevant taxing or other authorities. The Joint Lead Underwriters shall be responsible for accepting or rejecting any application or scaling down the amount of Preferred Shares applied for. The application, once accepted, shall constitute the duly executed purchase agreement covering the amount of Preferred Shares so accepted and shall be valid and binding on the Company and the Applicant.
49
Minimum Purchase A minimum purchase of 50 shares shall be considered for acceptance. Purchases in excess of the minimum shall be in multiples of 10 shares. Refunds In the event an application is rejected or the amount of Preferred Shares applied for is scaled down, the Joint Lead Underwriters, upon receipt of such rejected and/or scaled down applications, shall notify the Applicant concerned that his application has been rejected or the amount of Preferred Shares applied for is scaled down, and refund the amount paid by the Applicant with no interest thereon. With respect to an Applicant whose application was rejected, refund shall be made by the Joint Lead Underwriters by making the check payment of the Applicant concerned available for his retrieval. With respect to an Applicant whose application has been scaled down, refund shall be made by the issuance by the concerned Joint Lead Underwriter of its own check payable to the order of the Applicant and crossed “Payees' Account Only” corresponding to the amount in excess of the accepted application. All checks shall be made available for pick up by the Applicants concerned at the office of the Joint Lead Underwriter to whom the rejected or scaled down application was submitted within 5 Banking Days after the last day of the Offer Period. The Company shall not be liable in any manner to the Applicant for any check payment corresponding to any rejected or scaled-down application which is not returned by the relevant Joint Lead Underwriter; in which case, the relevant Joint Lead Underwriter shall be responsible directly to the Applicant for the return of the check or otherwise the refund of the payment. Secondary Market SMPFC may purchase the Preferred Shares at any time without any obligation to make pro rata purchases of Preferred Shares from all Shareholders. Registry of Shareholders The Preferred Shares will be issued in scripless form through the electronic book-entry system of SMC Stock Transfer Service Corporation as Registrar for the Offer, and lodged with PDTC as Depository Agent on Listing Date through PSE Trading Participants nominated by the Applicants. Applicants shall indicate in the proper space provided for in the Application Form the name of the PSE Trading Participant under whose name their Shares will be registered. Legal title to the Shares will be shown in an electronic register of shareholders (the “Registry of Shareholders”) which shall be maintained by the Registrar. The Registrar shall send a Registry confirmation advice confirming every receipt or transfer of the Preferred Shares that is effected in the Registry of Shareholders (at the cost of the requesting Shareholder). The Registrar shall send (at the cost of the Company) at least once every quarter a Statement of Account to all Shareholders named in the Registry of Shareholders, except certificated Shareholders and Depository Participants, confirming the number of Shares held by each Shareholder on record in the Registry of Shareholders. Such Statement of Account shall serve as evidence of ownership of the relevant Shareholder as of a given date thereof. Any request by Shareholders for certifications, reports or other documents from the Registrar, except as provided herein, shall be for the account of the requesting Shareholder (please see “Amended Rule on Lodgment of Securities” on page 146). Expenses All out-of-pocket expenses, including but not limited to, registration with the SEC, printing, publication, communication and signing expenses incurred by the Joint Lead Underwriters in the negotiation and execution of the transaction will be for SMPFC's account irrespective of whether the Offer is completed. Such expenses are to be reimbursed upon presentation of a composite statement of account. See “Use of Proceeds” on page 43 for details of expenses.
50
The Company Description of the Business SMPFC is a leading player in the Philippine food industry, offering a broad range of high-quality food products and services to both household and food service customers. SMPFC’s main businesses are poultry, feeds, fresh meats, value-added meats, flour, and dairy, spreads and oils. SMPFC’s other businesses include coffee, food service and retail, as well as two regional operations located in Indonesia and Vietnam. SMPFC further organizes its businesses into the following clusters: Agro-Industrial, comprised of its poultry, feeds and fresh meats businesses; Value-Added Meats, comprised of its value-added meats business; Milling, comprised of its flour business; and Others, comprised of its dairy, spreads and oils, food service, retail, regional and other businesses. On July 30, 2010, SMPFC acquired a majority interest in the Vietnam business from SMC. Prior to this acquisition, SMPFC provided management services to the Vietnam business, but the majority interest was legally owned by SMC. For more information, see “Recent Acquisitions”. SMPFC owns some of the best known and well-regarded brands in the Philippine food industry, such as Magnolia, Purefoods, Monterey, B-Meg, Star, Dari Crème and JellyAce. SMPFC, which has been listed on the PSE since 1973, was formed through the integration in 2001 of two leading Philippine food groups, the SMC food businesses and PFC. SMC owns 99.92% of SMPFC’s Common Shares. Set forth below is a brief history of SMPFC. 1925
SMC first entered the food industry with the introduction of its Magnolia ice cream
1953
SMC began producing animal feeds with protein-rich by-products from beer brewing
1956
PFC is founded and goes on to become a market leader in the value-added meats industry, diversifying into many new product lines
1972
SMC launched its poultry operations through the acquisition of a breeding farm from Arbor Acres
1980s
SMC formalized its long-standing partnership with New Zealand Dairy Board, now known as Fonterra, in the bread spreads category
1981
PFC was acquired by the Ayala Group
1983
PFC diversified into poultry operations
1990s
SMC acquires the Star and Dari Crème brands from Procter and Gamble, as well as Monterey Farms
1991
PFC diversified into the flour business
1995
PFC entered into a joint venture in Indonesia to produce and sell meat products
1996
PFC diversified into the food service business
1996
SMC entered into the food service business and divested its ice cream operations to Nestle Philippines and licensed its Magnolia brand
1999
PFC spun off its meats division into a joint venture with Hormel
2001
SMC and PFC were integrated, and their food businesses were consolidated under SMPFC (PFC was renamed SMPFC)
2003
SMC acquired a hog farming and feeds business in Vietnam
2004
SMPFC re-launched its milk and ice cream businesses
2005
SMPFC established a joint venture for its coffee business with Super Coffee Corporation
51
Pte, Ltd., its Singaporean partner 2006
SMC and Hormel established their joint venture for the Vietnam business, which subsequently purchased a meat processing plant to enter into the processed meats market in Vietnam
2007
SMC consolidated its ownership of food subsidiaries under SMPFC
2009
SMPFC created San Miguel Integrated Sales and Division Logistics Group
2010
SMPFC acquired the SMPFC Brands and 51% equity stake in the Vietnam food business from SMC
Today, SMPFC produces a wide range of food products, including the following: BUSINESS
MAJOR PRODUCTS
Agro – Industrial Poultry
Branded fresh-chilled and frozen whole and cut-up chickens, easy-toprepare chicken products, customized products for food service customers, supermarket house brands and live chickens
Feeds
Hog, poultry (layer/broiler), gamefowl, aquatic, duck and other customized feeds
Fresh Meats
Pork and beef carcasses, various pork cuts, beef cuts, marinated meats, lamb products, live hogs and cattle Refrigerated processed meats, including hotdogs, cold cuts, hams, bacon, nuggets and other ready-to-eat meat products, as well as canned meats, including corned beef and luncheon meats
Value-Added Meats
Milling Flour
A full range of basic, specialty and customized flour products
Others Dairy, spreads and oils
Bread spreads, cheese, milk, ice cream, jelly-based snacks and cooking oils
Other
Coffee, food distribution service and retail franchise management
SMPFC conducts subsidiaries:
the
above-described
businesses
through
the
following
operating
San Miguel Foods, Inc., a 99.97%-owned subsidiary of SMPFC, operates the integrated poultry and feeds businesses, the San Miguel Food Shop franchising operations, and the San Miguel Integrated Sales selling and distribution activities. San Miguel Mills, Inc., a 100%-owned subsidiary of SMPFC, engages in the manufacture and distribution of flour and premixes. The Purefoods-Hormel Company, Inc., a 60%-40% joint venture between SMPFC and Hormel Netherlands B.V., produces and markets refrigerated processed meats (hotdogs, cold cuts, hams, bacons, nuggets and other ready-to-eat meat products) and canned meat products (corned beef, luncheon meat, sausages, meat spreads and canned viands). Magnolia, Inc., a 100%-owned subsidiary of SMPFC, manufactures and markets butter, margarine and cheese, milk and ice cream. The company also handles the sale and marketing of jellies and desserts. The production of jellies and desserts is currently outsourced to third party tollers after its subsidiary-toller, Sugarland Corporation, ceased its tolling operations in February 2008.
52
PT San Miguel Pure Foods Indonesia (formerly, PT Pure Foods Suba Indah) started as a 49%51% joint venture between the Company and the Hero Group of Companies and organized in 1995 for the manufacture and distribution of processed meats in Indonesia. In 2004, SMPFC increased its ownership to 75%. The remaining 25% is now owned by Penderyn Pte. Ltd., a Singaporean company. San Miguel Super Coffeemix Company, Inc., a 70%30% joint venture between SMPFC and Super Coffee Corp. Pte. Ltd. of Singapore, started commercial operations in April 2005 by marketing 3-in-1 coffee mixes. Since then, the company has introduced a good number of products that include a sugar-free line of coffee mixes, a premium line of flavored coffee mixes, 100% Premium Instant Coffee, and 2-in-1 coffee mixes. The latest addition to the company’s list of products is its pro-health line of coffee mixes which was launched in the first half of 2009. The company imports, packages, markets and distributes coffee and coffee-related products in the Philippines. Great Foods Solutions (GFS) is the food service unit of SMPFC that caters to hotels, restaurants and institutional accounts for their meat, poultry, dairy and flour-based requirements, as well as provides food solutions/recipes and menus. GFS also handles Smokey’s franchising operations and operates San Mig Café restaurant and Outbox food-to-go stall/cart. San Miguel Pure Foods International, Limited is a company incorporated in the British Virgin Islands. It is a wholly-owned subsidiary of SMPFC and the latter’s holding company for its recentlyacquired 51% equity interest in San Miguel Pure Foods (Vn) Co. Ltd., the company that operates the Vietnam food business.
STRENGTHS SMPFC believes that its principal strengths include the following: Many leading brands known for quality Over the years, SMPFC has actively developed a strong portfolio of well-known brands, which includes some of the most recognizable food brands in the Philippines. (A list of these brands is included in the Registration Statement for this Offer, which is available for inspection by interested parties during business hours at the Corporation Finance Department of the SEC.) SMPFC believes it has been able to enhance its brand equity by maintaining consistently high product quality, as well as through active and targeted marketing and promotions. SMPFC has also pioneered brand-building efforts not only for traditional branded food products, such as value-added meats and dairy products, but also for feeds, flour, fresh meats and poultry, which are commonly viewed as commodities. SMPFC believes the strong brand names that it has developed provide SMPFC with greater pricing power relative to its competition. SMPFC enjoys leading market shares in some of the largest and most profitable segments of the food industry, such as poultry, feeds, value-added meats and bread spreads, while maintaining strong second or third place market shares in almost all of its other businesses. Broad and diverse food product portfolio SMPFC offers one of the widest arrays of food products in the Philippines, with products ranging from feeds and flour to meats, milk, coffee and hotdogs. SMPFC believes this diversity allows for a more resilient business model and provides significant growth potential both within and across various product categories. Currently, SMPFC is present in only 50% (weighted by value) of the product categories in the packaged food industry, presenting significant opportunities for SMPFC to expand into other packaged food categories. Moreover, SMPFC’s wide range of food products can be consumed at every meal and by all members of the family. As a result, SMPFC believes that it provides its customers with a one-stop food solution and thereby generates greater brand loyalty.
53
Extensive and multi-pronged distribution network across the Philippines The Philippine population is widely distributed over 7,100 islands, creating a challenge for food and beverage companies to distribute their products effectively. SMPFC’s success in building one of the most extensive distribution networks across the Philippines allows its products to reach every major city. In turn, this creates a strong barrier to entry to the Philippine food market and a significant competitive advantage for SMPFC. In addition to an extensive presence in the traditional modern and general trade distribution platforms, SMPFC has direct distribution capabilities to major food service companies. SMPFC also engages in food service itself through its franchising operations, such as Smokey’s hotdog carts, Outbox food kiosks and others. Vertically integrated business model SMPFC believes its vertically integrated “farm-to-plate” business model provides SMPFC with significant operational flexibility and stable margins. This model allows SMPFC control over the value chain from plantations, feed production, animal growing, to meat processing, and enables SMPFC to deliver fresh, high quality food products to its customers. SMPFC is also able to leverage synergies across its businesses, as well as through its relationship with SMC. For example, SMPFC’s feeds business is capable of effectively utilizing beer by-products, such as spent grain and brewer’s yeast, and offal and feathers from poultry, as feed ingredients. Although much of the production and distribution of SMPFC’s products is outsourced to third parties, SMPFC is actively engaged in setting and maintaining quality standards throughout the production and distribution chain. SMPFC’s business model provides better economies of scale through consolidated raw material sourcing, integrated production, sales and distribution networks and shared brands and support functions across SMPFC’s and its contracted facilities. Presence in the Philippines and Southeast Asian markets with the largest potential consumer markets SMPFC is currently present in the three most densely populated Southeast Asian markets, the Philippines, Indonesia and Vietnam. In addition, per capita meat consumption has been increasing rapidly in Vietnam and Indonesia over the past several years, and remain well below current levels in the Philippines. Strong track record of innovation in products and distribution SMPFC has a strong track record of launching innovative products and services to address changing consumer needs and preferences. For example, SMPFC has launched the following new products, which are reflective of health and wellness, convenience, flavor and packaging trends. Health and Wellness: Magnolia Gold Lite Butter, Magnolia No Sugar Added Ice Cream and the San Mig Coffee Pro-Health line. Flavor: An Asian line of marinated meats, fruit flavored chocolate milk drinks and flavored refrigerated margarine. Convenience: Ulam King products and chicken nuggets. Packaging: Cooking oil in tubes and in-mould labeled packaging for bulk ice cream. In addition, SMPFC continuously develops innovative food retailing formats, with the objective of establishing closer contact with its customers and increasing SMPFC’s share in its customers’ food budgets. For example, SMPFC introduced Monterey Meat Shops in 1993 as a way to differentiate SMPFC’s fresh meats products from its competitors’ unbranded products. SMPFC also introduced Magnolia Chicken Stations in 2004, which have been a significant success and have now grown to nearly 400 outlets in just over five years. As of September 30, 2010, there were more than 682 Purefoods hotdog carts, 220 Smokey’s deli hotdog bars, 109 Outbox carts and kiosks, 5 San Miguel Food Shops and 1 San Mig Café restaurant.
54
SMPFC has also successfully developed the concept of “paid sampling”, where customers can, for example, sample hotdog products at strategically located hotdog carts, by launching several retail models to serve as a closer point of contact with consumers and as a trial venue for new product ideas. Total amount spent by the Company and its significant subsidiaries on research and development for the years 2009, 2008 and 2007 were P55.7 million, P52.1 million and P49.1 million, respectively. As a percentage of net sales to revenues, spending on research and development for the last three years translates to barely 0.1%. Experienced management and technical teams SMPFC has a management team with a proven track record and an average of more than 20 years of industry and management experience. The management team is well accustomed to the Philippine operating environment and has been able to effectively manage SMPFC through periods of economic crisis and political instability. The strength and depth of SMPFC’s management and technical teams’ experience have been demonstrated by their successful implementation of a range of efficiency programs and product innovations throughout the years. The management team holds a number of leadership positions in food industry organizations, which not only demonstrates the high regard in which they are held in the industry, but also creates a valuable local network and better government relations for SMPFC. The “San Miguel” brand, reputation and ownership As a member of the SMC Group, SMPFC believes that it also benefits from SMC’s strong market position and extensive range of product offerings in its other businesses, particularly with respect to consumers’ and retailers’ positive perception of the “San Miguel” name. SMPFC also believes that SMC is well regarded in the Philippine business community and believes that it benefits from SMC’s strong business reputation. STRATEGIES SMPFC has a three-pronged strategy to achieve profitable growth. Accelerate growth of SMPFC’s branded consumer business to achieve market leadership •
SMPFC intends to continue building brand equity through advertising and promotional activities.
•
SMPFC intends to launch new products that will complement its existing brands. As part of this strategy, SMPFC has launched a formal company-wide innovation program to drive the introduction of breakthrough products and services.
•
SMPFC intends to continue to strengthen and expand its distribution capabilities in both the traditional and modern trade channels. To reduce volatility in its commodities businesses, SMPFC will continue to grow its meat shops and chicken stations and provide value-adding activities.
•
SMPFC intends to aggressively grow the food service business by marketing customized products and services through food solution packages, including menu analysis and planning, food safety training and recipe and product development.
55
Achieve Cost Leadership Expand raw material supply base and identify alternative raw materials. •
SMPFC has a program to encourage farmers to plant cassava and other crops that can be used as feeds ingredients. SMPFC, through assemblers, provides farmers a stable market, technical assistance and access to financing. SMPFC, in turn, benefits from an expanded raw material supply base, lower costs and less price volatility.
•
SMPFC’s strong research and development team is responsible for identifying cost improvements, while still maintaining product quality. This is achieved by exploring the use of alternative raw materials, from grains and by-products used in SMPFC’s feeds products to alternative protein sources and flavors in processed meats.
Adopt technologies designed to attain best in class efficiencies. •
In its poultry and livestock operations, SMPFC has adopted climate-controlled housing to minimize temperature variability, thereby improving animal productivity. By the end of 2009, more than half of the poultry business’ growing capacity had already been moved into climate-controlled housing. SMPFC also maintains state-of-the-art facilities for its flour business.
Maximize synergies through shared services and organizational integration •
To achieve synergies, SMPFC has organized its businesses into clusters. SMPFC has integrated its poultry and livestock businesses to maximize synergies across functions, as well as to realize certain tax benefits.
•
SMPFC will continue to simplify its organizational structure and standardize its business processes in preparation for future growth. SMPFC expects to establish by 2011 a finance shared service delivery center. This center is intended to serve all of SMPFC’s businesses and perform transaction processing activities to improve efficiencies and reduce administrative expenses.
Continue and expand the outsourcing of labor intensive and process-oriented operations •
SMPFC intends to continue to reduce its direct labor costs by outsourcing its more labor intensive and process-oriented operations to take advantage of the more competitive wage levels available to contractors.
•
SMPFC intends to outsource these lower value-added activities of its value chain, while maintaining control over its more specialized, higher value-added operations.
•
SMPFC believes outsourcing its labor intensive and process-oriented operations will allow its personnel to focus more on SMPFC’s core competencies, such as marketing and product development, which are key to the future growth of SMPFC’s businesses.
•
SMPFC intends to use outsourcing arrangements as its primary tool to achieve future capacity expansion or replacement. SMPFC expects that only projects of high strategic importance, or that cannot otherwise be outsourced, will be considered for inclusion in SMPFC’s own capital expenditure budget.
•
SMPFC has been, and intends to remain, actively involved in certain key aspects of the outsourced activities. SMPFC provides ongoing training and technical support to all of its third-party contractors. In addition, SMPFC representatives are assigned to oversee the results of outsourced operations and work closely with third-party management to improve operational efficiencies, while ensuring SMPFC’s food safety requirements and quality standards.
56
Explore New Growth Opportunities Growth opportunities in new product categories •
SMPFC intends to explore new growth opportunities that would enable it to enter into new product categories in which it is not currently present, allowing SMPFC to offer new products that will complement its current portfolio.
Opportunities for further vertical integration •
SMPFC intends to explore opportunities that will help SMPFC grow its capabilities and competencies and maximize synergies in its current markets.
Opportunities for geographical diversification •
SMPFC will continue to pursue strategic opportunities in priority countries, such as Vietnam, Indonesia and other Asian countries to diversify geographic risk and tap into fast-growing emerging markets in Asia. SMPFC has already begun to implement this strategy with its operations in Indonesia and Vietnam. Over the medium-term, SMPFC intends to tap opportunities presented by the liberalization of trade policies in Asia by importing new products that will complement SMPFC’s current portfolio. In the longer-term, SMPFC plans to establish regional production bases in lower cost producing countries.
New growth opportunities for co-investments with SMC •
SMPFC intends to explore opportunities to co- invest alongside SMC. These investments may include areas outside SMPFC’s traditional businesses in the food and beverage industries, for example in the power, energy and infrastructure industries.
AGRO-INDUSTRIAL SMPFC’s Agro-Industrial cluster consists of its poultry, feeds and fresh meats businesses. SMPFC’s Agro-Industrial revenues (inclusive of sales to other segments outside the agro-industrial cluster) were P49,779.48 million and P38,423.78 million in the year ended December 31, 2009 and the nine months ended September 30, 2010, respectively. POULTRY BUSINESS Overview SMPFC believes it was the largest poultry producer and marketer in the Philippines in 2009 by volume and revenues. In addition, it enjoys high brand recognition in the Philippines with approximately 40% of the broiler market in 2009 by volume. SMPFC’s poultry business includes the breeding, producing and marketing of broilers, mostly for the retail market. Sales volumes in SMPFC’s poultry business increased by 7.6% in 2009 compared with 2008. SMPFC offers a wide range of poultry products. SMPFC’s branded products are sold under the Magnolia Fresh Chicken label and include fresh-chilled and frozen whole chickens and a variety of chicken cut-ups. In addition, Magnolia Chicken Stations offer conveniently cut products and easy-tocook and ready-to-eat products. SMPFC serves customized marinated cut-ups and de-boned products to food service clients and whole chicken and cut-ups for supermarket house brands, and also sells live chickens to dealers. SMPFC’s revenues from its poultry business increased by 16.2% to P25,709.18 million in 2009 from P22,119.32 million in 2008. Revenues in SMPFC’s poultry business were P20,145.39 million in the nine months ended September 30, 2010.
57
Production SMPFC sources its chicks for breeding from two major suppliers, namely Cobb Vantress Inc. and The Aviagen Group. The Company does not consider its reliance on these suppliers a material risk as these two suppliers account for about 90-95% of broiler day old chicks (DOC) supply in the world. All of the feeds for SMPFC’s poultry operations is supplied by SMPFC’s feeds business, allowing its poultry business to realize cost and quality benefits. SMPFC utilizes both self-owned and third-party owned (tolled) facilities for its poultry production. Approximately 99% of SMPFC’s poultry growing output and 85% of its processing output come from tolled facilities, as this allows SMPFC not only to outsource production at a lower cost but also to direct more resources toward improving core competencies. SMPFC’s poultry business oversees approximately 1,400 tolled growing farms nationwide, with an estimated annual capacity of nearly 300 million birds. As of September 30, 2010, SMPFC also contracts with approximately 100 breeder farms for grandparent and parent stocks, approximately 20 hatcheries and approximately 40 Company-owned and tolled processing plants. SMPFC’s vertically controlled poultry operations also include an extensive network of cold storage warehouses and distribution facilities, both owned and tolled. Marketing, Sales and Distribution SMPFC actively markets its poultry products through the use of celebrity endorsers and other advertising campaigns that highlight the freshness, quality and safety of its Magnolia products, as compared with other domestic competitors and cheaper imported products, such as chicken leg quarters from the United States. SMPFC has also sought to use these campaigns to build consumer awareness of its Magnolia Chicken Stations. SMPFC’s poultry business distributes its products through a number of different channels in order to maximize market penetration throughout the Philippines. Distribution channels utilized by Company include: SEGMENT DISTRIBUTION Commodity Segments Live Directly sold to live chicken dealers Wet Markets Distributor-served market stalls, where dressed chicken is sold by SMPFC’s exclusive, third-party distributors to wet market dealers and retailers Supermarkets Other direct and distributor-served supermarkets Stable-priced Segments Chicken Stations Directly-served outlets in supermarkets and meat shops Major Food Service Directly served by SMPFC’s food service business with the supply Chains chain managed by SMPFC’s poultry business Lechon Manok Directly-served major chains selling roasted chicken and mostly distributor-served small outlets in the provinces Value-Added Meats Raw materials supplied to SMPFC’s value-added meats business Export Served through trading companies to barbecue chains, supermarkets and processors In general, live sales, wet markets and supermarkets tend to be commodity markets, where prices are less stable. By comparison, chicken stations, major food service chains, lechon manok, sales to the value-added meats business and exports tend to have more stable prices. In 2009, the commoditylike distribution channels accounted for 65% of the poultry business’ total sales volumes, while the channels with more stable prices accounted for the remaining 35%. In 2004, as part of its strategy to grow its poultry business, SMPFC introduced Magnolia Chicken Station outlets in supermarkets nationwide, an innovation that offers consumers more choices of chicken formats and better customer service in a clean and safe environment. By using its chicken station model in supermarkets, SMPFC also hopes to “bring the wet market to the supermarket”,
58
converting consumers from buying poultry in more traditional wet markets to buying at SMPFC’s chicken stations. Generally, SMPFC contracts with supermarkets to set-up the chicken sections of their stores. The Magnolia Chicken Stations are manned by a third-party contractor. The supermarkets purchase chicken meat from SMPFC, which then prepares and sells the chicken through Magnolia Chicken Stations. As of September 30, 2010, there were 433 Magnolia Chicken Stations in operation, which have generated substantial volume growth for SMPFC’s poultry business. While wet markets remain the most popular source of chicken for consumers in the Philippines, Magnolia Chicken Station outlets will be SMPFC’s major focus over the next few years, as its poultry business looks to further build on its strong brand reputation and protect market share. Competition SMPFC’s poultry business faces local competition from numerous smaller, independent broiler producers and a small number of larger integrators. SMPFC competes with integrators such as Bounty Agri Fresh Foods, Inc., Universal Robina Corporation (URC), Swift Foods, Inc. and other independent commercial growers. SMPFC believes that one of those larger competitors held less than one-half of SMPFC’s market share in 2009, while another held approximately 7.0% of the Philippine broiler market in 2009. From time to time, SMPFC also faces competition from low-priced imports, primarily from the United States and Canada. Furthermore, the poultry industry is generally attracting more new entrants, as a result of frequent occurrences of supply shortages and high prices over the last few years. FEEDS BUSINESS Overview SMPFC’s feeds business is the largest producer of feeds in the Philippines, with an estimated market share of 39% of the commercial feeds market in 2009 by volume. The feeds business produces feeds for (i) SMPFC’s poultry business, (ii) SMPFC’s fresh meats business and (iii) the commercial feeds market, which accounted for 50%, 10% and 40%, respectively of its volumes in 2009. SMPFC’s competitive advantages include: (1) synergies with SMC’s and SMPFC’s other businesses, (2) economies of scale and (3) extensive localized research and development. SMPFC’s feeds business plays an important role in creating synergy between its businesses, supplying hog feeds to SMPFC’s fresh meats business and breeder and broiler feeds to its poultry business, while utilizing by-products from other businesses for its own production. For example, the feeds business is capable of effectively using beer by-products, such as brewer’s spent grain and yeast, and poultry products, such as offals and feathers, as feed ingredients. Having established significant economies of scale, the feeds business is the biggest Philippine importer of soybean meals and buyer of corn, which has allowed it to develop strong relationships with the Government and acquire favorable tariff rates. To expand the market for its feed products, SMPFC is implementing programs designed to convert homemix feed producers into commercial feed users. As a result of SMPFC’s competitive pricing and customization options, SMPFC is already serving a number of these small to medium-scale farms. Furthermore, SMPFC’s feeds business is able to conduct extensive research on feed formulations in a controlled environment through its many small and medium-scale farm facilities. The locallydeveloped products that are proven successful are then replicated on a larger scale. Only a small number of SMPFC’s competitors have comparable research and development and replication capabilities. SMPFC produces several different types of feeds products. Its commercial products include hog feeds, layer feeds, broiler feeds, gamefowl feeds, aquatic feeds, branded concentrates and customized feeds. These are sold under a number of different brand labels such as B-Meg, Pureblend, Bonanza and Jumbo. The feeds business also produces breeder and broiler fees and hog feeds for its own poultry and fresh meats businesses. SMPFC’s revenues from its feeds business were relatively flat from 2008 to 2009, decreasing slightly by 0.6% to P16,766.83 million in 2009 from P16,873.97 million in 2008 (excluding internal sales to SMPFC’s fresh meats business). SMPFC’s market share in the Philippine feeds industry was
59
estimated to be 39% in 2009 (including the hog, poultry gamefowl and aquatic feeds segment) and sales volumes decreased 6.3% in 2009 compared with 2008. SMPFC’s feeds business has been able to maintain a relatively stable market share from 2006 to 2009 despite contraction in the backyard hog segment, disease outbreaks and natural disasters. SMPFC has accomplished this by refocusing its efforts on the small and medium-sized farms and specialty and customized feeds segments and increasing its participation in the aquatic feeds industry. Revenues in SMPFC’s feeds business were P13,721.38 million in the nine months ended September 30, 2010.
Production A majority of the raw materials used in SMPFC’s feeds business is provided through SMPFC’s business procurement group, while some local ingredients are sourced directly by the business from various suppliers and traders accredited by SMPFC. In certain instances, SMPFC’s feeds business will purchase ingredients such as corn in the open market. SMPFC’s feeds business also maintains relationships with plantations to supply locally available raw materials, such as cassava. Cassava is relatively stable, low-priced crop that can be used as a safe and effective alternative ingredient in animal feeds. The proportion of cassava used in feeds products can be adjusted upward or downward depending on the relative price of corn and certain other feeds ingredients. SMPFC developed cassava as a strategic raw material to replace corn as an energy source in animal feeds. In 2009, total cassava production was approximately 148 thousand metric tons with more than 47 thousand hectares of land nationwide. This undertaking provided the business a net savings/cost avoidance of approximately P200 million the same year. In 2010, the business intends to increase, production as well as expand area planted in Luzon. The business will also invest in the use of high yielding varieties of cassava and will aggressively develop other and locally available strategic materials to substitute for its protein and energy components in animal diets. For certain imported raw materials, such as soybean meal, SMPFC’s feeds business participates in hedging transactions to minimize the risk of unexpected price increases. SMPFC also maintains strategic buying programs for corn to ensure that a substantial portion of its supply requirements through the next harvest season are secured. By-products of SMC’s beer business, such as brewer’s spent grain and yeast, and from SMPFC’s poultry dressing plants, such as offal and feathers, are also collected, processed and used as raw materials for feeds production. SMPFC currently has contracts with two tolled rendering facilities and expects to put up additional rendering plants in the future. Compound feeds are manufactured at six SMPFC-owned but third party-operated facilities and 35 third-party owned and operated feeds plants, strategically located throughout the Philippines. Most of these plants are capable of producing pelleted and crumble format feeds, and three plants have extrusion capabilities to produce aquatic floating feeds. SMPFC’s feeds business’ research and development group conducts extensive research on feed formulations at several SMPFC-owned research facilities. These facilities are designed to detect small, statistical differences in average daily weight gain, feed conversion efficiency and other performance parameters and to allow a variety of tests to be conducted at the same time. The results of these tests are immediately applied to SMPFC’s commercial feed formulations, with the aim of reducing feed costs and enhancing efficiency in animal growth. These research facilities include one bio assay-focused research facility, one metabolizable energy-focused research facility, one research facility for tilapia, three farms for hog research and three farms for broiler research. In addition, SMPFC owns one fry production facility and operates various hatching facilities for tilapia breeding. Marketing, Sales and Distribution The marketing strategy of SMPFC’s feeds business is to create greater awareness of its existing products and to develop new products that will allow the business to participate in all price segments
60
for all species. SMPFC is also focused on providing technical support and services to its feeds customers, including: • technical seminars at the grassroots level; • technical training on animal health, husbandry and breeding, and • veterinary missions at the grassroots level to provide health care to the animal population in specific areas. SMPFC’s commercial feeds business sells its products through several different distribution channels. In 2009, 79% of SMPFC’s commercial feeds were sold to distributors authorized to sell SMPFC’s products within a defined territory, while 21% were directly sold to end users, who own hog, poultry or aquatic farms. SMPFC’s commercial feeds business has a sales network comprised of more than 19 sales offices across the Philippines. Distribution and sale of its commercial feeds products are supported by an expert sales team, focused on developing new markets for, and expanding the reach of, SMPFC’s feeds products. Competition While SMPFC’s commercial feeds business currently holds the largest market share in the Philippines, SMPFC has faced increasing competition from foreign feeds manufacturers entering the Philippine market. The commercial feeds market in the Philippines includes approximately 300 registered small players, as well as a small number of large regional players. SMPFC competes with five national and numerous regional feed mill companies including Univet Nutrition and Animal Health Care Co., URC, Purina/Cargill, General Milling Corporation (GMC), Cheil Jedang, Selecta, and other local feed millers. SMPFC caters to all segments of the feeds market; however, the majority of its sales comes from the higher value segments of the feeds market.
FRESH MEATS BUSINESS Overview SMPFC’s fresh meats business breeds, grows and slaughters hogs and cattle and produces and trades beef and pork products. The business sells a large variety of products in the Philippines under the well-recognized Monterey brand name. In 1993, SMPFC’s fresh meats business first introduced Monterey neighborhood meat shops, which sell a wide variety of its branded meat products, as part of SMPFC’s strategy to differentiate its products from those of its competitors. SMPFC’s fresh meats business produces its hogs using a three-site system, in which breeding, nursery and growing operations are separated into isolated facilities to minimize losses from disease outbreaks or recurrences. SMPFC also pioneered the use of the vertically controlled pork and beef production system in the Philippines, controlling the entire value chain from selection of genetic stocks to SMPFC’s meat shop operations. SMPFC’s fresh meats product portfolio includes pork and beef in carcass and primals formats sold to franchisees, poultry distributors, the value-added meats business and SMPFC’s food service customers, pork and beef retail cuts sold in S&R outlets and live hogs and cattle sold to traders. Pork, beef and lamb retail cuts and marinated products are sold in Monterey Meatshops through its franchisees. SMPFC’s revenues from its fresh meats business increased by 14.7% to P7,303.47 million in 2009 from P6,367.29 million in 2008. Based on the sow levels in 2009, SMPFC’s industry share in the Philippine pork industry was estimated to be 2.4%. Sales volumes in the fresh meats business grew by 16.1% in 2009 compared with 2008. Revenues in SMPFC’s fresh meats business were P4,557.00 million in the nine months ended September 30, 2010. Production SMPFC’s fresh meats business produces and distributes its products through a vertically controlled value chain, comprised of numerous production and processing centers located throughout the
61
Philippines. The majority of SMPFC’s fresh meats business’ production facilities are third-party owned and operated. As of September 30, 2010, SMPFC owned two hog farms located in Bulacan and Bukidnon, both of which are third-party operated, and contracted with over 350 third-party owned and operated farms for breeding, nursery and growing operations, three Company owned and third-party operated cattle farms and 11 slaughter plants, of which one is Company-owned and ten are thirdparty owned and operated. Most of SMPFC’s parent breeding hogs are produced from its own nucleus and multiplier farms, where grandparents and great grandparents are bred, and the balance are directly purchased from pig breeding companies such as PIC and Topigs. Meanwhile, more than 30.0% of its required feeder cattle are sourced from Australia. Most of SMPFC’s boxed beef is imported from Australia, New Zealand and Brazil. All of the feeds required by SMPFC’s fresh meats business are supplied by SMPFC’s feeds business. Marketing, Sales and Distribution SMPFC’s fresh meats business has an ongoing customer loyalty program for its neighborhood meat shops. SMPFC also conducts below-the-line promotions for its fresh meats business, such as product sampling and product bundling with other SMC products. In addition, SMPFC’s fresh meats business has redesigned the merchandising materials in all of its meat shops. In order to tap the different markets for fresh meats, SMPFC’s fresh meats business distributes its products through a variety of channels, including those set forth below. CHANNEL DESCRIPTION Supermarket and Neighborhood Fastest growing modern trade channel operated by franchisees Meat Shops under the Monterey name and located in supermarkets and standalone meat shops operated by franchisees Distributors Supply unbranded hog carcasses to wet market retailers Live Sales Sell live hogs and cattle to traders Internal Supply fresh meat to SMPFC’s value-added meats and food service businesses SMPFC’s fresh meats business has adopted a strategy focusing on the modern trade market to accelerate its pork sales. It first introduced a Monty’s supermarket meat shop in 1990, followed by stand-alone Monterey meat shops in neighborhoods and supermarkets in 1993. As of September 30, 2010, SMPFC’s fresh meats business had approximately 367 meat shops in operation across the Philippines. As of the same date, SMPFC had two third-party owned and operated live selling stations. SMPFC’s fresh meats business has recently converted almost all of its meat shops to franchised operations in order to reduce the selling cost of products. Under this model, certain operational functions, such as inventory monitoring and manpower-related requirements for franchised meat shops outlets, are undertaken by qualified operators and franchisees. SMPFC’s fresh meats business provides marketing support to franchisees. As part of its strategy to boost sales volumes, improve profitability and ensure focused customer service in the meat shop segment, SMPFC is actively seeking entrepreneurs to become franchisees. Competition SMPFC’s fresh meats business competes with Robina Farms, Foremost Farms and several other commercial-scale and numerous small-scale hog farms that supply live hogs to traders, who in turn supply hog carcasses to wet markets and supermarkets. While the majority of fresh meat purchases in the Philippines continue to be made in the more traditional, outdoor wet markets, we view our competition as being with the larger producers selling in the smaller, but more profitable, modern trade channels.
62
VALUE-ADDED MEATS BUSINESS Overview SMPFC’s value-added meats business produces both refrigerated meats and canned meats. Its refrigerated meat products include hotdogs, bacon, hams, chicken nuggets and a line of local Philippine products, which are offered under brand names such as Purefoods, Tender Juicy, Star, Vida, Beefies and Monterey. Canned products, such as corned beef, luncheon meats, sausages, and ready-to-eat viands, are sold under the Purefoods, Ulam King and Mom’s Kitchen brands. PFC was established in 1956 and was later acquired by Ayala Corporation in 1981. PFC entered into a joint venture agreement with Hormel Netherlands B.V. in 1999, and the meat processing division was spun-off and named as The Purefoods-Hormel Co., Inc. In 2001, San Miguel Corporation purchased PFC which included The Purefoods-Hormel Co., Inc. SMPFC owns 60% of the joint venture, and Hormel owns the remaining 40%. The strategic alliance with Hormel has provided SMPFC’s value-added meats business with a number of benefits, including technology transfer, technical assistance, industry know-how and raw material sourcing. SMPFC’s value-added meats business has also benefited from strong brand recognition, its ability to introduce innovative new product lines, a large cold-chain distribution network and award-winning manufacturing facilities. SMPFC’s revenues from its value-added meats business decreased by 2.5% to P11,280.97 million in 2009 from P11,566.93 million in 2008. SMPFC achieved this revenue level despite weak consumer demand in the first nine months of 2009 and the forced shut-down of its Marikina plant because of typhoon damage in October 2009. Volumes declined by approximately 9.3% during 2009 compared to 2008. Revenues in SMPFC’s value-added meats business were P7,811.49 million in the nine months ended September 30, 2010. Production SMPFC’s value-added meats business sources most of its raw materials through SMPFC’s business procurement group, which strives to provide the value-added meats business with raw materials at prices lower than the prevailing market or published rates. The business procurement group maintains a pool of suppliers that have been accredited by SMPFC for both local and imported raw materials. A quality assurance team from SMPFC regularly audits the quality of the raw materials supplied to the value-added meats business. SMPFC’s value-added meats business owns two meat processing plants in Luzon, one in Marikina City and one in Cavite. The Cavite plant manufactures hotdogs, hams, bacon, dry sausages, meat toppings, cold cuts and nuggets. The Marikina plant, which was insured, was severely damaged when Typhoon Ondoy hit Metro Manila in September 2009. It has not been operational since October 2009 and ceased all operations as of December 31, 2009. SMPFC does not currently intend to re-open its Marikina plant and has contracted with additional toll packers to replace its capacity to pre-storm levels. SMPFC has received a substantial portion of the insurance claims for the typhoon damages at the Marikina plant. To augment its production capacity and meet volume demands, SMPFC’s value-added meats business maintains toll-manufacturing agreements with various suppliers. One of SMPFC’s toller partners operates a halal-accredited manufacturing facility, which allows exports of SMPFC’s halal corned beef products to the Middle East and predominantly Muslim countries. In addition, SMPFC plans to expand its Cavite plant by 2012 in order to increase production capacity for its hotdog, chicken nuggets and Philippine local product lines. To capture a significant untapped market for chicken nuggets, SMPFC’s value-added meats business purchased a new production line to support growth for this category.
63
Marketing, Sales and Distribution SMPFC’s marketing strategy is focused on reinforcing its core brands, such as Tender Juicy hotdogs, primarily through television and billboard advertising. SMPFC also conducts advertising campaigns for certain of its seasonal products, such as Christmas hams. Distribution for SMPFC’s value-added meats products is handled by SMPFC’s integrated sales operations and food service business. The sales operations group generally handles sales of valueadded meat products in modern and general trade markets, as well as exports to Asia, North America and Europe. SMPFC’s food service business markets and sells SMPFC’s value-added meats products to food service operators, such as hotels, restaurants, fast food chains and food kiosks and carts. These sales groups are assisted by SMPFC’s logistics group, which manages the demand planning, technical logistics services, warehousing and transportation activities for the value-added meats business. Personnel from SMPFC’s value-added meats business monitor storage and warehouse inventory levels. With the help of these logistics and distribution networks, SMPFC’s value-added meats business is able to tap into a variety of distribution channels, including wet markets, supermarkets, groceries, convenience stores and sari-sari stores. These sales groups also enable SMPFC’s value-added meats business to reach out to institutional food service clients and deliver its products to Filipino communities abroad. Approximately 53% of SMPFC’s refrigerated meats and 30% of the grocery and canned meat products are sold in general trade channels, which includes the wet markets, market stands and “sarisari” stores. The balance of 47% of SMPFC’s refrigerated meats and 70% of the grocery and canned meat products are sold in modern trade channels, which includes supermarkets, groceries and convenience stores. Competition SMPFC’s value-added meats business is a key player in three segments of the Philippine processed meats industry. According to Nielsen, hotdogs, the largest segment, had an estimated value of P10.6 billion in the twelve-month period ended June 2010. The combined shares of its various hotdog brands have positioned SMPFC’s value-added meats business as the market leader, with a market share of 57% by sales in the same period. The other two segments, corned meats and luncheon meats, have an estimated value of P7.8 billion and P4.8 billion, respectively, by sales in the twelvemonth period ended July 2010, also according to Nielsen. For these segments, Nielsen estimated SMPFC’s shares in the same period to be 23% for corned meats and 15% for luncheon meats. In recent years, SMPFC’s value-added meats business has faced increased competition from both established local players, which are employing aggressive pricing and promotion schemes, and from new entrants to the market. Other players in the processed meats business include Foodsphere, Inc. (CDO), Virginia Foods, Inc. (Winner and Champion), RFM (Swift), Mekeni, Pacific Meat Company, Inc. (Argentina and 555) and the distributors of “Maling”. SMPFC has responded to this competition by increasing its below-the-line spending on promotions for its value-added meats businesses, as well as introducing new product lines. The value-added meats business has employed a strategy of launching fighter brands and engaging in extensive advertising and promotion for its key brands to maintain its leadership position. It continues to innovate and launch new brands to sustain its market position.
MILLING SMPFC’s flour business currently comprises its milling segment. The milling segment previously included the snacks and noodles product lines, which commenced operations in 2006 but were discontinued in 2009.
64
FLOUR BUSINESS Overview SMPFC believes its flour business is the largest producer, seller and distributor of flour in the Philippines by volume. SMPFC sells its flour to large institutional clients and other intermediaries, such as bakeries. The business offers a variety of flour products, including bread flour, noodle flour, biscuit and cracker flour, all-purpose flour, cake flour, whole wheat flour, premixed flour and customized flour. SMPFC has been setting the trend toward the use of customized flours for making products such as noodles and pandesal, a soft bread commonly eaten in the Philippines during breakfast. SMPFC’s flour products are sold under 17 brand names, and SMPFC enjoys strong brand loyalty among its institutional clients. SMPFC believes that its market share in the Philippine flour industry was 18% by volume in 2009. While sales volumes of the flour business (excluding the snacks and noodles business) increased by 5.9% in 2009 compared with 2008, SMPFC’s revenues from its flour business decreased by 8.7% to P7,929.30 million in 2009 from P8,684.01 million in 2008, as flour prices decreased significantly in 2009 in tandem with downward corrections to global wheat prices following record high levels in 2008. Revenues in SMPFC’s flour business were P5,613.14 million in the nine months ended September 30, 2010. Production The principal raw material used by SMPFC’s flour business is wheat, the majority of which SMPFC sources from the United States and Canada. SMPFC monitors worldwide wheat prices daily to determine its long-term and short-term buying strategies in order to control costs in its flour business. SMPFC’s flour business operates the largest flour milling facilities in the Philippines. The business owns two flour mills, located in Mabini and Tabangao in Batangas, Luzon. Its flour mills have a combined rated milling capacity of 1,660 tons per day. SMPFC’s milling system includes two flour blending facilities in Mabini capable of blending flours at a rated capacity of 45 tons per hour, which allows SMPFC to produce its customized flours. The flour business also operates a 46 ton-per-day premix plant, which produces different premix products for both the retail and the institutional markets. SMPFC’s production capabilities are further augmented by its flour technology center, the first of its kind in the Philippines, which develops customized flour blends and new flour-based products. The center is supported by trained research and development personnel and houses both basic and advanced bakery equipment. SMPFC owns and operates all of the flour production facilities used in its flour business. SMPFC is in the process of adding two additional wheat storage silos and expanding its premix facilities, which will allow SMPFC’s flour business to incorporate more types of wheat into its flour products. Port Operations SMPFC owns and operates two deep water ports, which are located in Mabini and Tabangao in Luzon next to SMPFC’s two flour milling facilities. These ports allow SMPFC to realize substantial savings on shipping, unloading and other costs, as raw materials and finished flour products can be directly unloaded from and loaded into its production facilities. Both ports have piers equipped with pneumatic unloaders, with a combined capacity of over 7,500 metric tons per day. SMPFC coordinates with the local customs office and port authority in Batangas with respect to required licenses and payment of tariffs. Marketing, Sales and Distribution The marketing activities of SMPFC’s flour business are focused on supporting its strategy to make available the widest array of differentiated flour products in the Philippine market. The flour business’ sales team of approximately 30 people across the Philippines contact SMPFC’s flour customers to determine their specific flour product needs. Customization of flour products for customers is
65
supported by the business’ research and development team, which works alongside the sales team and SMPFC’s customers to develop individual formulations, and by SMPFC’s bakery technicians, who conduct field baking tests and demonstrations. SMPFC manages a nationwide network of more than 100 distributors, who handle distribution of flour and other bakery ingredients to major flour users as well as to small, backyard and major users across the Philippines. SMPFC is the largest supplier of flour to big institutional customers like biscuits makers, noodle factories and big bakery chains. Competition In 2009, SMPFC’s flour business held 18% of the Philippine flour market. SMPFC’s flour business competes on the basis of price, quality and distribution, primarily with a small number of large competitors. Other players with vast resources and who compete for market share are GMC, URC, Philippine Foremost Milling, Wellington Flour Mills, PILMICO Foods Corporation, RFM Corporation (RFM), Morning Star, Liberty Flour Mills, Philippine Flour Mill, Delta and Monde Nissin. Currently, most of SMPFC’s competitors participate in the basic, or commoditized, market segments. In the future, SMPFC may face increased competition in the value-added segment. In addition, other international and regional flour producers have entered the Philippine flour market through imports in recent years, although volumes have generally been sporadic. SMPFC’s flour business differentiates itself by focusing on higher priced and/or customized flours, making it more difficult for its competitors to enter those markets and compete.
OTHERS SMPFC’s other businesses include its dairy, spreads and oils, coffee, food service and regional businesses. DAIRY, SPREADS AND OIL BUSINESS Overview SMPFC’s dairy, spreads and oils business manufactures and markets a variety of bread spreads, milk, ice cream, jelly-based snacks and cooking oils. Bread spreads make up the largest portion of this business, and contributed approximately 72.9% of the business’ revenues in 2009. The bread spreads category includes butter, refrigerated and non-refrigerated margarines and cheeses, which are sold primarily under SMPFC’s Magnolia Gold, Dari Creme, Star and Cheezee labels. In addition, SMPFC’s dairy and spreads business offers flavored and unflavored milks under the Magnolia and Chocolait brands, ice cream under the Magnolia name and jelly snacks and fruit jams under the JellyAce and Magnolia brands. SMPFC’s cooking oil products are also Magnolia-branded. In the future, SMPFC expects increased demand for products offering health benefits and for lower priced products. In addition, SMPFC expects the importance of retail chains to continue to grow, with increased competition for shelf space. SMPFC expects the ready-to-drink milk market to continue to expand in response to marketing campaigns that aim to increase milk consumption and the introduction of more flavored milk products in the Philippines. SMPFC re-entered the Philippine ice cream industry in 2004 under its familiar Magnolia brand name after a temporary, eight-year exit in 1996, when SMPFC sold its ice cream and milk business to Nestle Philippines. JellyAce brand is a major player of the market, and SMPFC expects that existing players will continue to have an advantage over new entrants to the market as a result of established economies of scale and brand loyalty.
66
SMPFC expects the recent trend toward healthier oil alternatives, such as coconut, palm and olive oil, to continue. SMPFC’s revenues from its dairy, spreads and oils business increased by 9.8% to P5,283.29 million in 2009 from P4,813.01 million in 2008. Revenues in SMPFC’s dairy, spreads and oils business were P3,721.89 million in the nine months ended September 30, 2010. According to Nielsen, SMPFC’s market shares in 2009 in the Philippine butter, refrigerated margarine, non-refrigerated margarine and cheese market segments were approximately 42%, 85%, 97% and 22%, by volume, respectively. SMPFC’s share in the Philippine ice cream industry was approximately 11% in 2009, and its share in the Philippine jelly-based snacks industry was approximately 33% in 2009. SMPFC’s share in the cooking oil industry was approximately 1.3% in 2009. SMPFC’s market shares in white and flavored milk were 16.6% and 8.8% respectively in 2009, while in cooking oil it was approximately 1.3% in 2009.
Production All of the raw materials required by SMPFC’s dairy, spreads and oils business are sourced from third parties. Approximately 70.0% of dairy materials such as cheese curds, rennet casein, and milk powders are imported, mostly from New Zealand, while vegetable oils are locally sourced. For its bread spreads products, SMPFC conducts all manufacturing activities at its own facilities, including pasteurization, blending, chilling and packing for yellow spreads and cooking, filling, prepacking and end-packing for cheeses. All manufacturing activities for SMPFC’s milk, jelly-based snacks and cooking oil lines are outsourced to third parties (two tollers for milk; two tollers for jellybased snacks; and three tollers for cooking oil), who are required to meet SMPFC’s quality standards. SMPFC also directly manages a variety of support activities for its dairy, spreads and oils business, including logistics, research and development, marketing, quality assurance, planning and information management and finance. SMPFC’s ice cream business currently outsources its manufacturing to a third party, while SMPFC concentrates on sales, marketing, quality assurance, and logistics. Marketing, Sales and Distribution SMPFC’s dairy, spreads and oils business advertises on television, radio and billboards, as well as in print. Star Margarine has implemented the school-based “Nutriskwela” caravan and “Search for Batang Star” campaign since 2006. These initiatives promote the importance of healthy balanced meals in developing tall, stand out kids with the help of Star Margarine. Dari Creme, on the other hand, launched a tri-media campaign “Lessons” to communicate how Dari Creme helps mothers make everyday meal extra special for the family. The campaign is also supported by below the line initiatives, particularly Mothers Day events. SMPFC’s dairy, spreads and oils business also makes use of effective product endorsers, such as Manny Pacquiao and family for its Magnolia Milk advertising campaign in 2009, to assert Magnolia’s strong brand heritage across generations of Filipino families. SMPFC’s dairy, spreads and oils business has observed an increasing health and wellness trend in Philippine consumers’ preferences and offers a variety of corresponding products. These include its recently launched Low Fat UHT milk, Dari Creme Lite, and Magnolia Lite, a low fat, low salt spreadable margarine. A majority of the distribution channels for SMPFC’s dairy, spreads and oil products are situated in the greater Manila and Luzon areas, where there has been substantial growth in consumption. At the same time, SMPFC’s dairy, spreads and oils business has also begun to focus more attention on developing regional distribution channels through exports. The largest distribution channel for SMPFC’s dairy, spreads and oils business is supermarkets, although a variety of other channels are also used to distribute its products. In addition to supermarkets, retail channels through which SMPFC distributes its dairy, spreads and oil products
67
include groceries, sari-sari stores, market stalls, bakeries, wholesale outlets and convenience stores. SMIS serves as the distribution arm of Magnolia for both modern and general trade channels. Food chain and other institutional distribution channels for SMPFC’s dairy, spreads and oils business include bakeshops, food manufacturing companies, restaurants, hotels, pizza chains, burger joints and hospitals. Competition SMPFC’s dairy, spreads and oils business faces intense competition in many of its product segments, particularly milk and cheese. Competitors in the dairy, spreads and oils business include many multinational companies, such as Kraft, Nestle, Unilever and New Zealand Milk, as well as some domestic players such as San Pablo. In recent years, many of SMPFC’s competitors have increased advertising and promotional spending to protect their market shares.
OTHER BUSINESSES Coffee SMPFC’s coffee business is a joint venture with a Singaporean partner, Super Coffee Corporation Pte, Ltd., and is 70% owned by SMPFC. The joint venture commenced operations in 2005 and sells coffee products under the San Mig Coffee brand. In 2009, SMPFC’s coffee business had revenues of P473.91 million and an estimated market share of 7.0% by volume in the Philippine coffee mix market, according to Nielsen. All of the coffee business’ raw materials procurement, manufacturing and pre-packing are handled by SMPFC’s Singaporean partner, with certain subsidiaries of the SMC Group managing re-packing and distribution in the Philippines. Revenues in SMPFC’s coffee business were P396.91 million in the nine months ended September 30, 2010. The coffee industry, composed of instant coffee, coffee mixes and ready-to-drink coffee, is dominated by Nestle but other market players like Tridharma Marketing Corp. (Kopiko), URC (Great Taste), Kraft Foods Inc. (Maxwell House), Commonwealth Foods, Inc. (Café Puro) and Goldshine Pharmaceuticals, Inc. (Jimm’s) are also becoming more aggressive. Food Service SMPFC’s food service business was established in 2002 and is the largest food service provider in the Philippines. The food service business distributes and markets SMPFC’s generic and customized food service products, including value-added meats, fresh meats, poultry, dairy, oil, flour and coffee. The food service business receives a percentage of the selling price of the products as a development fee. The business’ key strategies include selling customized solutions, direct marketing to its customers and focused relationship management, and was responsible for generating P6.3 billion of revenues of the SMPFC Group in 2009. SMPFC’s food service business reported revenues of P2,059.31 million in 2009 and P1,471.64 million in the nine months ended September 30, 2010.
REGIONAL BUSINESSES Indonesia SMPFC’s business in Indonesia is a joint venture with Penderyn that produces a variety of halalcertified and non-halal processed meats for the Indonesian market. The joint venture is 75% owned by SMPFC. SMPFC’s Indonesian business had revenues in 2009 of P689.87 million, and its share of the Indonesian chilled processed meats market was approximately 27.7% by revenue in 2009, according to Euromonitor International, September 2010 release. Revenues in SMPFC’s Indonesian business were P590.78 million in the nine months ended September 30, 2010. Penderyn Pte. Ltd. is a limited private company incorporated in Singapore on December 28, 2006. It is an investment holding company that holds 25% equity in PT San Miguel Pure Foods Indonesia (PT
68
SMPFI) and 80% equity in PT Lasallefood Indonesia. The latter used to be the partner of SMPFC in PT SMPFI. Penderyn has no commercial operations. Vietnam The Vietnam food business is a joint venture between SMPFC, which holds 51.0%, and Hormel, which holds 49%. SMPFC acquired its 51% interest in the Vietnam business from SMC on July 30, 2010. Prior to that acquisition, SMC owned 51% of the Vietnam food business, and SMPFC provided management services to the Vietnam food business under a shared services agreement. For more information, see “Recent Acquisitions” on page 71. The Vietnam food business primarily engages in live hog farming and the production of feeds and fresh and processed meats. The Vietnam food business had revenues of P1,923.77 million in 2009. Revenues in SMPFC’s Vietnam business were P1,458.32 million in the nine months ended September 30, 2010. Of the total amount P354.72 million was consolidated into SMPFC’s results, representing revenues for the months of August and September 2010. SMPFC began consolidating the results of the Vietnam business on August 1, 2010.
RECENT ORGANIZATIONAL INITIATIVES – SHARED SERVICES The functions which can be optimally shared and utilized within and across each business cluster have been organized so as to generate synergies for SMPFC: •
Business procurement group is a shared service unit in SMPFC established to lead and manage the procurement function of the various business units as well as the contracting of all inbound logistics services such as shipping, import/integrated services and local transport.
•
San Miguel Integrated Sales (SMIS) is the sales team that has been developed for all branded businesses considering that they use the same channels of modern and general trade.
•
Division Logistics group was developed to support SMIS for its outbound logistics and warehousing requirements.
•
Poultry and Meats sales is handled by one sales force serving the following channels: live sales, wet markets, supermarkets and franchised outlets (meatshops, chicken stations)
REGULATION The Company and its subsidiaries have obtained all material permits, licenses and government approvals required to manufacture and sell its products. The Company and its subsidiaries have no knowledge of recent or probable governmental regulations, the implementation of which can result in a material adverse effect on the Company and its significant subsidiaries’ business or financial position. See “Regulatory Framework” starting on page 138. EMPLOYEES The following table sets forth a breakdown of SMPFC’s employees by business segment as of September 30, 2010. BUSINESS Poultry & Fresh Meats Feeds Value-Added Meats Flour Dairy, Spreads and Oils Coffee Retail Subtotal
NUMBER OF EMPLOYEES 711 396 480 154 289 13 18 2,061
69
SHARED SERVICES Division Office Shared Services – AgroIndustrial San Miguel Integrated Sales Food Service Subtotal Total – Domestic Indonesia Vietnam Grand Total – Company
SHARING ENTITIES All businesses Poultry, Feeds and Fresh Meats Branded and businesses All business
Value-added
133 158 331 76 698 2,759 206 736 3,701
There are 8 organized labor unions in SMPFC, 7 of which are domestic unions and have collective bargaining agreements (“CBA”) with the Company. SMPFC’s CBA negotiations with SMFI Employees Union and Magnolia Poultry Employees Union are now on going. The Company’s CBA with the other 5 domestic unions will expire in 2011. As of September 30, 2010, the Company’s employees totaled 3,701 broken down as follows: 42 Executives, 211 Managerial, 1,945 Professional and Technical employees, and 1,503 Rank and File employees. The geographical expansion may require additional hiring to support the same, the number of which cannot be determined until project implementation proceeds. EMPLOYEE BENEFITS The Company provides medical benefits, insurance, transportation and communication allowances to its employees. The Company also has a retirement plan and extends loan facilities and other cash assistance to its employees. Regular employees with at least one-year tenure are entitled to participate in SMC’s stock purchase plan. INSURANCE SMPFC has an all-risk policy that covers its facilities and inventories, other than livestock, against a variety of risks, including fire, lightning, catastrophic perils, such as typhoons, floods, earthquakes and volcanic eruptions, machinery breakdowns, explosions, civil commotion, riots or strikes, malicious damage and others. SMPFC’s facilities and inventories are insured with Prudential Guarantee and Assurance, Inc. SMPFC does not maintain business interruption insurance for its production facilities. The maximum coverage available under this policy is approximately US$315 million, with a maximum recovery for any single loss of US$250 million for each and every occurrence applied collectively to the SMC Group. SMPFC also maintains various general liability and product liability insurance policies covering its operations. These policies do not cover liabilities resulting from pollution or other environmental damage caused by SMPFC. SMPFC has a marine cargo insurance policy to cover domestic and international shipments of goods and equipment. A product liability insurance policy insures all of SMPFC’s exported products. SMPFC’s insurance policies are provided by leading Philippine insurance companies that are generally reinsured by major international insurance companies. HEALTH, SAFETY AND ENVIRONMENTAL MATTERS SMPFC applies its quality standards uniformly across all of its production facilities, whether SMPFCowned or contracted. SMPFC also provides training to its third-party operators before their operations commence. SMPFC representatives are assigned to oversee toll plant operations on a daily basis, providing technical support and working closely with the third-party operators’ management. Periodic audits are also conducted by SMPFC’s internal quality assurance personnel and customer quality representatives, as well as by Government inspectors.
70
SMPFC intends to continue to strengthen its commitment to food safety standards, including HACCP, GMP, ISO 22000 and ISO 9001. HACCP is a systematic preventive approach to food safety management that addresses physical, chemical and biological hazards. GMP is a system to manage manufacturing and quality testing systems. ISO 22000 is the global standard for food safety management systems. Effective GMP and HACCP implementation are prerequisites to successful implementation of ISO 22000. ISO 9001 institutionalizes the principles of quality management to ensure quality standards are consistently met. Set forth below is the status of implementation of the different quality and food safety systems at SMPFC’s facilities as of December 31, 2009.
Current Food Safety Status of Manufacturing Facilities Facilities Certified Certifiable Total
GMP
HACCP
ISO 22000
ISO 9001
68
46
5
10
7
7
2
10
75
53
7
20
In 2009, the Company and its subsidiaries incurred about P34.5 million in expenses for environmental compliance. On an annual basis, operating expenses incurred by SMPFC and its subsidiaries to comply with environment laws are not significant or material relative to the Company and its subsidiaries’ total cost and revenues. RECENT ACQUISITIONS On July 30, 2010, SMPFC completed the Brands Acquisition and the Vietnam Acquisition. In connection with the Recent Acquisitions, SMPFC is obligated to pay aggregate consideration of P4.05 billion to SMC, of which P3.615 billion is still outstanding. SMPFC intends to use a portion of the net proceeds of the issuance of the Preferred Shares to settle this outstanding payable to SMC. For more information, see “Use of Proceeds”. THE SMPFC BRANDS On July 30, 2010, SMPFC acquired from SMC certain major brands, related trademarks and other intellectual properties that SMPFC uses to prepare, package, advertise, distribute and sell its products in the Philippines (the “SMPFC Brands”). Prior to the completion of the Brands Acquisition, SMPFC licensed the SMPFC Brands from SMC. Following the completion of the Brands Acquisition, SMPFC is no longer required to pay royalties to SMC for the right to use the SMPFC Brands. Pursuant to the Intellectual Property Rights Transfer Agreement governing the Brands Acquisition, the contract price for the Brands Acquisition is P3.2 billion, of which the Company has paid a 10% downpayment of P320 million. The balance of the contract price is payable (i) upon change in the controlling interest of SMPFC to any third person other than an affiliate; or (ii) two years from closing date, whichever comes first. A portion of the net proceeds of the Offer will be used to fully pay said remaining balance. The table set forth below provides a summary of the brands transferred to SMPFC. Details of these brands are included in the list of brands submitted with the Registration Statement for this Offer, which is available for inspection by interested parties during business hours at the Corporation Finance Department of the SEC.
BRAND Feeds Business B-MEG and its sub-brands
COUNTRIES Australia Bangladesh
NUMBER OF MARKS 2 1
71
China Egypt Hong Kong Indonesia South Korea Laos Malaysia Myanmar Philippines Saudi Arabia Singapore Thailand Vietnam
3 1 1 1 1 1 1 1 11 1 1 1 1
BONANZA and its sub-brands
Laos Myanmar Philippines Vietnam
1 1 1 1
PUREBLEND and its sub-brands
Philippines Vietnam
2 1
DYNAMIX
Vietnam
1
Other Feed Brands
Philippines
4
Other Feed Brands
Bangladesh, China, Malaysia
5
BIBOY BABOY
Philippines
2
PETKO
Philippines
4
Poultry and Dairy, Spreads and Oils Business MAGNOLIA and its sub-brands Australia Bahrain Bangladesh Brunei China Dominican Republic Fiji France India Indonesia Japan South Korea Kuwait Laos Macau Micronesia New Zealand Nicaragua Pakistan Philippines Saudi Arabia Taiwan Thailand United Arab Emirates United Kingdom Vietnam GOLD LABEL and its sub-brands
Bahrain Brunei China Hong Kong
9 3 1 1 4 7 1 1 1 2 13 7 1 3 2 5 4 2 1 63 1 1 7 1 2 2 1 1 1 2
72
Indonesia Japan New Zealand Oman Qatar Singapore United Arab Emirates
3 4 1 1 1 1 1
STAR and its sub-brands
Cambodia Hong Kong Malaysia Micronesia Myanmar Philippines Singapore Thailand
2 4 1 1 1 5 1 3
DARI CRÈME and its sub-brands
China Indonesia Micronesia Philippines Vietnam
1 1 2 1 2
Other Brands
China, Hong Kong, Taiwan, Thailand, Indonesia Philippines
8 6
Philippines
4
Philippines United States
29 2
Philippines Vietnam
1 2
KING PRINCE COUNT EMPEROR EMPRESS DUCHESS ROYAL ZUPRIM BAKE BEST PACIFIC SILVER DRAGON
Flour Business Philippines Philippines Philippines Philippines Philippines Philippines Philippines Philippines Philippines Philippines Philippines
2 3 2 2 1 1 1 2 1 1 1
E-AJI and other Snacks brands
Philippines
7
Micronesia Philippines Taiwan
1 16 1
SAN MIG COFFEE and its subbrands
Philippines
29
GREAT FOOD SOLUTIONS and sub-brands
Philippines
6
Other Patents Meats Business PUREFOODS and its sub-brands
MONTEREY and its sub-brands
Other Businesses JELLYACE and its sub-brands
73
SMC and SMPFC engaged Fortman Cline Capital Markets Limited (FCCM) as financial adviser to perform a third party valuation of the SMPFC Brands. SMC and SMPFC arrived at the purchase price of P3.2 billion after taking into account the valuation study. A copy of the Valuation Opinion Report of FCCM is available for inspection by interested parties during business hours at the Corporation Finance Department of the SEC.
THE VIETNAM BUSINESS On July 30, 2010, SMPFC, through its wholly-owned subsidiary San Miguel Pure Foods International Limited, acquired SMC’s 51% interest (through San Miguel Foods and Beverage International Limited) in San Miguel Pure Foods Investment (BVI) Limited. Hormel continues to own the remaining 49% in San Miguel Pure Foods Investments (BVI) Limited. The latter owns 100% of San Miguel Purefoods (Vn) Co, Ltd, the company that operates the Vietnam food business. Prior to the completion of the Vietnam Acquisition, SMPFC provided management services to the Vietnam food business, but the majority interest in the Vietnam food business was legally owned by SMC. Pursuant to the Agreement governing the Vietnam Acquisition, the contract price is P853 million, of which the Company has paid a 10% downpayment of P85 million. The balance of the contract price is payable (i) upon change in the controlling interest of SMPFC to any third person other than an affiliate; or (ii) two years from closing date, whichever comes first. A portion of the net proceeds of the Offer will be used to fully pay said remaining balance.
74
Description of Property The general asset description and locations of the various plants and farms owned and leased by the Company are set out below. The Company owns most of its major facilities outside of the Agro-Industrial Cluster (Feeds and Poultry and Meats), i.e., flour mills, meats processing and butter, margarine and cheese plant. Most of the facilities of the Agro-Industrial Cluster are contracted from third parties. Only six feedmills, three poultry processing plants, three poultry hatcheries, one broiler farm, two hog farms, three cattle farms and one hog/cattle slaughterhouse are company-owned, although all are operated by third parties. The properties owned by the Company are not subject to any mortgage. OWNED PROPERTIES Address MAIN OFFICE JMT Corporate Condominium Building
ADB Avenue, Ortigas Center, Pasig City
ADMINISTRATION OFFICES Feeds and Poultry & Meats Iloilo Office
Melliza St., Zamora, Iloilo City
MANUFACTURING PLANTS/ FACILITIES Processed Meats Marikina Plant Processed Meats Cavite Plant Mabini Flourmill Tabangao Flourmill San Fernando Poultry Dressing Plant Cebu Poultry Dressing Plant Davao Poultry Dressing Plant Feeds Spent Grain Drying and Rendering Plant Tarlac Feedmill B-Meg Pangasinan Plant Isabela Feedmill Bataan Feedmill Feeds Spent Grain Drying Plant General Santos Feedmill Cagayan de Oro Feedmill Bukidnon Feedmill Magnolia Plant Monterey Meat Plant Processed Meats Indonesia Plant FARMS/ HATCHERIES/ COLD STORAGE Calamba Hatchery Bulacan Hatchery Orion Experimental and Training Broiler Farm Bukidnon Hatchery Calauan Experimental Farms – leased from SMC Isabela Cattle Farm Polomolok 1 Cattle Farm San Miguel Hog Farm
JP Rizal St., Bo. San Roque, Marikina City Bo. De Fuego, Brgy. San Francisco, Gen. Trias, Cavite Brgy. Bulacan, Mabini, Batangas Brgy. Tabangao, Batangas City SMC Complex, Bo. Quebiawan, San Fernando, Pampanga Brgy. Canduman, Mandaue City Toril, Sirawan, Davao City SMC Complex, San Fernando, Pampanga Luisita Industrial Park, San Miguel, Tarlac City Km. 189, Brgy. Bued, Binalonan, Pangasinan Bo. Soyung, Echague, Isabela Mindanao Avenue, cor 10th Avenue, BEZ, Mariveles, Bataan SMC Complex, Highway, Mandaue City Bo. Calumpang, Gen. Santos City Brgy. Baloy, Tablon, Cagayan de Oro City Milmar Cpmd., Impalutao, Impasug-ong, Bukidnon Bo. De Fuego, Governor’s Drive, Gen. Trias, Cavite Governor’s Drive, Langkaan, Dasmariñas, Cavite Jl. Raya Bogor Km. 37 Sukamaju, Sukmajaya, Indonesia
Brgy. Licheria, Calamba City Km. 37, Pulong Buhangin, Sta, Maria, Bulacan Brgy. Lim, Orion, Bataan Kapitan Bayong, Impasug-ong, Bukidnon SMC Cmpd., Brgy. Mabacan, Calauan, Laguna Bo. San Luis, Cauayan, Isabela National Highway, Bo. Matin-ao, Brgy. vSilway 8, Polomolok, South Cotabato Pulong Bayabas, San Miguel, Bulacan
75
Sumilao Hog Farm Processed Meats Fairview Cold Storage Polomok 2 Cattle Farm
San Vicente, Sumilao, Bukidnon 34 Consul St., cor Carmel St., District 2, North Fairview, Quezon City Brgy. Glamang, Polomok, South Cotabato
At the moment, the Company has no plans to acquire real estate properties in the next twelve months.
LEASED PROPERTIES Address MANUFACTURING PLANTS B-Meg Pangasinan Plant (lot only) B-Meg Bataan Plant (lot only) Magnolia Poultry Processing Plant (lot only) Orion Experimental and Training Broiler Farm (lot only) Great Food Solutions Commissary
FORESHORE (Flour) Mabini Tabangao
Km. 189, Brgy. Bued, Binalonan, Pangasinan Mindanao Avenue, cor 10th Avenue, BEZ, Mariveles, Bataan SMC Complex, Bo. Quebiawan, San Fernando, Pampanga Barangay Lim, Orion, Bataan Lapu-Lapu Ave. cor. North Bay Blvd., Navotas, Metro Manila
Brgy. Bulacan, Mabini, Batangas Brgy. Tabangao, Batangas City
WAREHOUSE/ SALES & ADMINISTRATION OFFICES Office Space for BPG 4th Floor, Unit D, JMT Corporate Condominium, ADB Avenue, Ortigas Center, Pasig City SMPFC Food Complex Legaspi cor Eagle St., Ugong, Pasig City Food Group Consolidated Warehouse 403 F. Legaspi Street, Maybunga, Pasig Flour Bulacan Warehouse
Poultry & Meats Pampanga Pangasinan Isabela Zambales Batangas MIPC Office and LTF - Warehouse Live Operations and Southern Tagalog Region Offices Quezon Albay Bohol Bacolod Dumaguete Tacloban Cebu Ormoc
Sta. Rita, Guiguinto, Bulacan
RRK Bldg. Olongapo-Gapan Road, Dolores, San Fernando Pampanga Brgy. San Vicente, San Jacinto, Pangasinan Brgy. Rizal, Santiago City, Isabela Brgy. Mangan-vaca, Subic, Zambales 437 V&F Cold Storage, San Roque, Sto. Tomas, Batangas 114 East Science Drive, Laguna Techno Park, Biñan, Laguna DENCRIS Bldg. 3rd and 4th Flrs, Brg. Halang, Calamba City, Laguna Brgy. Bocohan, Lucena City Brgy. Anislag, Daraga, Albay Albur Dressing Plant, Eastern Poblacion, Alburquerque, Bohol VCY Center, Hilado Extn., Shopping Center, Bacolod City North Road, Hi-way, Dumaguete City, Negros Oriental Sibulan, Negros Oriental Robledo Compound, Real St., Brgy. Campitik, Palo, Leyte 6th Flr Clotilde Bldg., Casuntingan, Mandaue City, Cebu Door 4, 2nd Flr, Tan Bldg., Lilia Ave., Cogon, Ormoc
76
Davao Zamboanga Cagayan de Oro Ozamis Butuan Pampanga Livestock Selling Station Batangas Livestock Selling Station Tacloban Office Mandaue Office Bukidnon Live Operations Office Passi Office Feeds Cebu Office Bacolod Sales Office Cagayan de Oro Sales Office Bukidnon Office Butuan Sales Office Tacoma PNOC Airmoving G1 Logistics Corporation NFA Isabela Plaridel BMEG Warehouse Alejo Sim Morning Star Warehouse YKK Warehouse Malitlit Warehouse William Sim PKS Shipping San Miguel Shipping and Lighterage General Milling Corporation MELACO Enterprise Marichu Sack Dealer Rocksun Warehouse Bacolod Warehouse B SIAIN Warehouse Bassett Land, Inc. MARBEMCO LMDC Enterprises Co. CATIMCO Warehouse Western Feedmill Corp. MIMIJOE Greenhills Milling Corporation PKS Shipping DCCB Enterprise Southern Mindanao Commodities Agway Nixon Lim Warehouse Mach-one Lube LYL Development
Coaco Road, Sasa, Davao City Door #2, Nuño Bldg, MCLL Highway, Guiwan, Zamboanga City 3rd Flr, HBL Bldg., Gusa, Cagayan de Oro City Mialen, Clarin, Misamis Occidental Km 9, Tag-ibo, Butuan City Sta. Barbara, Bacolor, Pampanga Brgy. San Felix., Sto. Tomas, Batangas 17 Justice Romualdez, Tacloban City SFI Bldg., S. E. Jayme St., Pakna-an, Mandaue City Malaybalay, Bukidnon Passi City, Iloilo
Ground Flr., GSMI Bldg., Subangdaku, Mandaue City, Cebu JA Building, San Patricio, Banago, Bacolod City HBL Bldg., Gusa, Cagayan de Oro City Malaybalay, Bukidnon Brgy. 23, Langihan Road, Butuan City Tacoma & 2nd St., Port Area, Manila Bauan, Batangas 3270 Merville, NIA Road Dist., Brgy 201, Pasay Northern Philippine Grains Complex,Echague, Isabela Cabiawan St., Banga 1st, Plaridel, Bulacan Nancayasan, Urdaneta City, Pangasinan and Villasis, Pangasinan Brgy. Rizal, Moncada, Tarlac Mabini, Moncada, Tarlac Brgy. Malitlit, Sta. Rosa, Laguna Urdaneta, Pangasinan Sitio Tawagan, Tayud Consolacion, Cebu Looc, Mandaue City, Cebu Marasbaras, Tacloban City 32/F, Export Bank Plaza cor. Chino Roces Ave. Makati City Metro Manila 1358A Road 10, Pier 12, North Harbour, Tondo, Manila Alicia, Isabela Marasbaras, Tacloban City JA Building, San Patricio, Banago, Bacolod City Brgy. Loboc, Lapaz, Iloilo City Sitio Tawagan, Consolacion, Cebu Marvick Compound, Sitio Tawagan, Consolacion, Cebu Tayud, Consolacion, Cebu Puntod, Cagayan de Oro City Coaco Road, Sasa, Davao City Ladislawa Village, Buhangin, Davao City MCLL Highway, Culianan, Zamboanga City Sitio Tawagan, Tayud Consolacion, Cebu North Reclamation Area, Mabolo, Cebu City, Cebu San Patricio Rd., Banago, Bacolod City Apopong, National Highway, Gensan City Km 10, Sasa, Davao City Km 12, Sasa, Davao City Malagamot Rd., Panacan, Davao City Baloy, Cdo
Great Food Solutions
77
Cebu Office Davao Office San Miguel Integrated Sales Pasig Office Pampanga Office
Bacolod Office Iloilo Office San Miguel Integrated Sales Mandaue Office Tacloban Office Cagayan de Oro Office Davao Office PT SMPF Indonesia Bandung Office Surabaya Office Yogyakarta Office
SMDCI Bldg., SMC Complex, Highway, Mandaue City Coaco Road, Bo. Pampanga, Lanang, Davao City
El Magnifico Bldg. No. 19 General Atienza St., San Antonio Village, Pasig City 2F Rickshaw Arcade, Greenfield Square, Km. 76, Mc Arthur Highway, Sindalan, San Fernando City, Pampanga William Lines Warehouse, Magsaysay, Araneta St., Singcang, Bacolod City YK Marine Bldg., Iloilo Fishing Port Complex, Brgy. Tanza, Baybay, Iloilo City Mandaue Brewery, SMC Complex, Mandaue City Barangay No. 91, Abucay, Tacloban City San Miguel Brewery Cmpd., Luyong Bon Bon Opol, Misamis Oriental Door #6 Plug Holding Cmpd., R. Castillo St., Agdao, Davao Jl. Soekarno Hatta No 606 Bandung Perumahan Citra Harmoni Block C1 No. 25 Trosobo Jawa Timur Jl. Anggajaya II Gg. Merak No. 219A Condong Catur Sleman Yogyakarta
SMPFVN Ho Chi Minh Long An Cu Chi Tay Ninh Tien Giang 1 Tien Giang 2 Dong Nai 1 Dong Nai 2 Dong Nai 3 Vinh Long Soc Trang Tra Vinh Bac Ninh Lam Dong 1 Lam Dong 2 Dak Lak Ha Noi Binh Dinh
6F Mekong Tower, 235-241 Ward 13, Tan Binh, Ho Chi Minh City High Way 1A, 1 Hamlet, My Yen, Ben Luc, Long An, Vietnam Tan Thanh Tay, Cu Chi District, Ho Chi Minh City, Vietnam Long Binh, Long Thanh Nam, Hoa Thanh, Tay Ninh, Vietnam Phuoc Hoa, Phuoc Thanh, Chau Thanh, Tien Giang, Vietnam Tan Thanh, Thanh Nhut, Go Cong Tay, Tien Giang, Vietnam 39/2 An Hoa, Tay Hoa, Trang Bom, Dong Nai, Vietnam Bao Hoa Village, Xuan Loc District, Dong Nai, Vietnam 160 Tho Lam 2, Phu Xuan, Tan Phu, Dong Nai, Vietnam 194/2 Pham Hung St, Ward 9, Vinh Long, Vinh Long, Vietnam Dong Hai, Dai Hai, Ke Sach, Soc Trang, Vietnam Xom Trang, Nguyet Hoa, Chau Thanh, Tra Vinh, Vietnam Dinh Bang Village, Tu Son District, Bac Ninh, Vietnam 1023, Tran Phu Road, Loc Tien, Bao Loc,Lam Dong, Vietnam 5 Thon An Hiep I, Lien Hiep, Duc Trong, Lam Dong, Vietnam Tan Hoa Ward, Buon Ma Thuoc City, Dak Lak 116 Thanh Liet, Thanh Tri, Ha Noi, Vietnam 150 Tran Phu St., Tuy Phuoc Town, Tuy Phuoc District, Binh Dinh, Vietnam
COLD STORAGE/ REEFER VANS Poultry and Meats
78
Vifel Cold Storage Estrella Cold Storage Integrated Meats Processing Plant SG Farms Polytrade Sales and Services Diaz Dressing Plant Kenwood Construction Lolim’s Dressing Plant Cheers Tradestar, Inc. New Vreed Dressing Plant Johanna’s Chicken Processing Center Gallintina Industrial Corp. Palmas Agribusiness Inc. Johanna’s Chicken Proc. Center Silangan Poultry Farms Cariño & Sons Agri-Dev’t Inc. MKC Poultry Dressing Plant Technofreeze, Inc. Albur Dressing Plant Malogo Agri Ventures First Farmers Food Corp. Corden Agro FBIC Reefer Corporation DCTV Network Big Blue Logistics Coldlink Asia Logistics Corp. Cebu Sherilin Agro-Industrial Corp. Mindanao Coolers Corporation Elim Dressing Plant Green Pine Dressing Plant St. Jude Dressing Plant MK Business Ventures ECA Cold Storage Davao Fresh Foods Corporation Sirawan Ice Plant Polar Bear Corporation V & F Cold Storage ACES AMC IPPC Dressing Plant Koldstor Centre Philippines, Inc. Mets Logistics Corporation Container Bridge Specialist, Inc. Reefer Van Specialist, Inc. Icon Reefer Corp. Supreme Aqua Resources Corporation Sunpride Foods, Inc.
Matutum Meat Packaging Co. Purefoods-Hormel PMC Logistics Vifel Estrella Ice Plant Royal Cargo Combined Logistic
North Bay Blvd., Navotas, Metro Manila Valenzuela, Metro Manila Hermosa, Bataan San Simon, Pampanga Lagundi, Mexico, Pampanga Km. 104, Brgy. Tabuating, San Leonardo, Nueva Ecija Brgy. San Vicente, San Jacinto, Pangasinan Brgy. Rabon, Rosario, La Union Brgy. Rizal. Santiago City, Isabela Brgy. Mangan-vaca, Subic, Zambales Brgy. Lagalag, Tiaong, Quezon GIC Compound, Brgy. Tagbong, Pili, Camarines Sur Brgy. Anislag, Daraga, Albay Brgy. Bocohan, Lucena City San Jose, Lipa City Brgy. Aya, San Jose, Batangas Brgy. Tagburos, Puerto Princesa City, Palawan 114 East Science Drive, Laguna Techno Park, Biñan, Laguna Eastern Poblacion, Alburquerque, Bohol Singko de Nyubembre St., Silay City, Negros Occidental Brgy. Dos Hermanos, Talisay City, Neg. Occidental Brgy. Tungay, Sta, Barbara, Iloilo Dumaguete City, Negros Oriental Riverside, Canduman, Mandaue City, Cebu Brgy. Paknaan, Mandaue City, Cebu PC Suico St., Tabok, Mandaue City Brgy. Pangdan, Naga, Cebu Dacudao Cmpd., Corrales Ext., Cagayan de Oro City Mialen, Clarin, Misamis Occidental Km 9, Tag-ibo, Butuan City Mohon, Tagoloan, Misamis Oriental Boalan, Zamboanga City Tambler, General Santos City Km. 20 Los Amigos, Tugbok, Davao City Brgy. Toril, Sirawan, Davao City Phividec, Tagoloan, Misamis Oriental & Davao Fishing Port Complex, Toril, Davao City Brgy, San Roque, Sto. Tomas, Batangas Brgy, Garit, Echague, Isabela Anabu Hills Industrial Estate, Anabu I-C, Imus, Cavite Bo, Bangkal, Governor’s Drive, Carmona, Cavite 10th Floor, Unit TN6-TN7 Times Plaze Bldg., UN Ave., Corner Taft Ave., Ermita, Manila Unit 2103, Antel Global Corporate Center Doña Julia Vargas Avenue, Ortigas Unit 526 5F Valero Plaza Building, Salcedo Village, Makati City 17 Justice Romualdez St., Tacloban City SFI Bldg., S.E. Jayme St., Pakna-an, Mandaue City, Cebu Brgy, Glamang, Polomolok, South Cotabato
Marcos Highway, Barrio Mayamot, Antipolo City North Bay Blvd., Navotas, Metro Manila Valenzuela, Bulacan Sta. Aqueda Ave., Pascor Drive, Parañaque City
79
Magnolia Koldstor Centre Philippines, Inc. Royal Cargo Combined Logistics Inc. PT SMPF Indonesia PT Haga Jaya Kemasindo Sarana Tiga Raksa Satria PT. Sewu Segar Nusantara Joko P DEPOTS Great Food Solutions Cebu Bacolod Iloilo Cagayan de Oro Davao San Miguel Integrated Sales Pasig Dagupan Naga Pampanga Cebu Bacolod Iloilo Cagayan de Oro Davao
CONVENIENCE STORES/ FOOD STALLS Food Shop Outlets Retiro Novaliches Redemptorist Ruby Road Mabalacat
Anabu Hills Industrial Estate, Anabu I-C, Imus, Cavite Emilio Aguinaldo Hi-way, Salitran 1, Dasmariñas, Cavite
Graha Cempaka Block C28, Jl. Letjend Suprapto, Jakarta Pusat Jl. Soekarno Hatta No 606 Bandung Jl. Beringin Bendo Kawasan Industri Ragam II Kav. 8 RT 06/08 Taman Sepayang Surabaya Jl. Ring Road Utara Pandega Patma DP 16D Yogyakarta
SMC-SL Compound, M. Ceniza St., Brgy. Looc, Ouano Wharf, Mandaue City Zone 2 Calong Calong, Airport Subd., Bacolod City Fishing Port, Tanza, Iloilo City Door 4 Alwana Business Park, Cugman, Cagayan de Oro City Door#6 Plug Holdings Cmpnd, R. Castillo St. Davao City 8 Elisco Road, Kalawaan Sur, Pasig City Barangay Bolosan, Dagupan City Olivan Compound, Concepcion Pequeña, Naga City San Fernando Brewery, San Fernando, Pampanga SMC-SL Compound, M. Ceniza St., Brgy. Looc, Ouano Wharf, Mandaue City Calong-calong, Airport Subd., Brgy. Singcang, Bacolod City Iloilo Fishing Port, Tanza, Iloilo City Door #4 Misco Compound, Alwana Business Park, Cugman, Cagayan de Oro City Amon Bldg., Km. 6, Lanang, Davao City and Km. 8, Ulas Talomo, Davao City
474-486 N. S. Amoranto Ave., Sta. Mesa Heights, Q. C. 248 Gen. Luis St., Novaliches Proper, Novaliches, Quezon City 83 Redemptorist Rd., Baclaran, Parañaque City Ground Floor, Agustin I Bldg., Ruby St. near cor. Julia Vargas St., Ortigas Center, Pasig City Mc Arthur Highway, Mabalacat, Brgy. Tabun, Pampanga
These leases will expire in various years. The annual rentals of the Company and its subsidiaries for properties leased amounted to P638.9 million on an aggregate basis for 2009. The breakdown per business in terms of lease payment is as shown below:
Poultry Feeds Fresh Meats Value Added Meats Flour Dairy, Spreads and Oils Others* Total
Lease Payments (in Million Pesos) 89.0 187.4 47.9 150.0 13.0 33.9 117.7 638.9
80
*Includes the leases of the integrated sales group of the Company (SMIS) of P68.045 for various sales offices and warehouses
CONDITION OF PROPERTIES The properties owned and leased by the Company are in good condition, ordinary wear and tear excepted, and are free from liens and encumbrances. The Company has no present plans to acquire any material fixed assets except for those in connection with capital expenditure projects. All of the Company’s existing lease contracts contain a provision that the contract is renewable upon agreement by the parties.
81
Legal Proceedings Neither SMPFC nor any of its subsidiaries is a party to, nor are its properties the subject of, any material pending legal proceeding that could be expected to have a material adverse effect on SMPFC or its business, financial condition and results of operations. SMC is a party to certain lawsuits or claims (mostly labor related cases) filed by third parties which are either pending decision by the courts or are subject to settlement agreements. According to SMC, the outcome of these lawsuits or claims cannot be presently determined. In the opinion of SMC management and its legal counsel, the eventual liability from these lawsuits or claims, if any, will not have a material effect on the financial condition and results of operations of SMC nor its shareholdings in SMPFC. In the opinion of SMPFC, the outcome of these lawsuits or claims will not have a material effect on the shareholdings of SMC in SMPFC.
82
Ownership and Capitalization Share Capital As of December 31, 2010, the Company had a total of 166,667,096 common shares issued and outstanding. Following the Offer, the Company will have (i) 166,667,096 common shares and (ii) 15,000,000 preferred shares issued and outstanding.
Ownership Structure As of December 31, 2010, 166,526,487 common shares comprising 99.92% of the outstanding common shares of the Company are held by SMC. The remaining 140,609 shares are held by other shareholders numbering 125.
Top 20 Stockholders Listed below are the top 20 stockholders of SMPFC as of December 31, 2010.
Rank
Name
Nationality
No. of shares
%
1
San Miguel Corporation
Filipino
166,526,487
99.915635%
2
PCD Nominee Corporation (Filipino)
Filipino
50,351
0.030240%
3
PFC ESOP / ESOWN Account
22,975
0.013785%
4
Ortigas, Cecille Y.
19,374
0.011624%
5
Chua, Ramon L.
6,538
0.003923%
6
Ramos, Jorge
5,868
0.003521%
7
Ortigas, Ana Maria de Olondriz
4,688
0.002813%
8
De Ocampo, Pacifico
3,665
0.002199%
9
Garcia, Antonio G.
2,910
0.001746%
10
Pendarvis, William
2,489
0.001493%
11
PCD Nominee Corporation (Non-Filipino)
1,650
0.000990%
12
Buendia, Honesto
1,198
0.000719%
13
Quijano, Teodoro
1,198
0.000719%
14
Reyes, Principe P.
1,198
0.000719%
15
Senga, Maxima A.
1,106
0.000664%
16
Fernan, Francis
1,038
0.000623%
17
Buendia, Honesto B.
997
0.000598%
18
Sugcang, Josefa
899
0.000539%
19
Avellana, Jose
831
0.000499%
83
20
Metcalf, Peter F.
628
0.000377%
Compliance with Minimum Public Ownership Requirement On October 28, 2010, the PSE adopted amendments to its rules on minimum public ownership of listed companies and announced guidelines in determining public ownership or free float levels in relation to such rules (the “Minimum Public Ownership Requirement”). Shares held by non-controlling individuals, PSE brokers, mutual funds, investment funds or pension funds are generally considered publicly held. The aforementioned rules, among others, also prescribe a minimum public ownership of 10% of issued and outstanding shares of any PSE listed company. The PSE may impose penalties on any listed company that fails to meet such minimum free float requirement, ranging from a fine in an amount between two to three times the annual listing maintenance fees due from such listed company or a trading suspension. The PSE also has the prerogative to institute delisting procedures for prolonged and continued violation of its minimum public ownership rule. The BIR, in a letter dated December 28, 2010 addressed to the SEC, stated that it would “strictly impose the 5%/10% capital gains tax” for trades in listed companies “who will not maintain their public ownership requirement”, said public ownership requirement being the 10% to 33% public ownership levels (based on the listed company’s market capitalization) required for an initial public offering or IPO. The BIR letter would effectively require listed companies to maintain potentially higher public ownership levels than prescribed by the PSE. This BIR letter was referred to the PSE by the SEC on January 3, 2011. The PSE subsequently issued a memorandum dated January 20, 2011 in response to the SEC on the BIR’s statements. The PSE noted that the Tax Code imposes a stock transaction tax of ½ of 1% of the gross selling price or gross value in money of shares of stock listed and traded on the PSE, without qualification and that the powers of the Secretary of Finance to promulgate rules and regulations implementing the Tax Code should be confined to the details for implementing the law as it has been enacted and such powers cannot be extended to amend or expand the statutory requirement of the Tax Code. The Company’s public ownership percentage is currently below the 10% level required by the PSE. However, the Company has initiated steps to comply with the Minimum Public Ownership Requirement of the PSE at the earliest possible time and has communicated its plans to do so with the PSE. In order to prepare the Company for a broader investor base and greater public participation, the Company secured Board of Directors approval on February 2, 2010 for a re-launch of the Company’s common shares by way of a trade sale or a marketed placement to investors, and the issuance of existing and/or new shares of the Company. To implement these initiatives, the required stockholder approval was secured on March 12, 2010 for the de-classification of the Company’s common shares to allow holders thereof to freely transfer their shares to persons of any nationality (subject to applicable laws), and the increase in the Company’s authorized capital stock after such de-classification. The Amended Articles of Incorporation of the Company reflecting both the de-classification of common shares and increase in capital stock have been approved by the SEC.
84
Market Price of and Dividends on SMPFC’s Common Equity and Related Stockholder Matters Market Information The registrant’s common equity is principally traded at the Philippine Stock Exchange. The high and low sales prices for each period are indicated in the table below: Class Period 2010 1st Quarter 2nd Quarter 3rd Quarter 2009 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter 2008 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
Class A
Class B
High
Low
High
Low
300.00 350.00
91.00 250.00
-
-
55.00 -
50.00 -
-
-
55.00 82.00
55.00 49.50
-
-
The total number of stockholders as of December 31, 2009 was 126. The last closing price prior to the last trading day of the year, December 31, 2009, was P55.00 for Class “A” shares (on January 7, 2009) and P74.50 for Class “B” shares (on May 6, 2009). As of September 30, 2010, the total number of stockholders was 126 and the stock price was P320 per share. Dividends and Dividend Policy On February 2, 2010, the Board of Directors declared an 18% stock dividend payable out of the increase in the authorized capital stock of the Company that was approved by the Board Directors on the same date. Said stock dividend declaration and the related increase in authorized capital stock were approved by the stockholders of the Company on March 12, 2010 and by the SEC on May 21, 2010. Said 18% stock dividend consisted of 25,423,746 common shares. Except as aforementioned, the Company has not distributed any dividends within the last three years. The cash dividend policy of SMPFC provides for the distribution of annual cash dividends to the holders of the common shares of the Company in an amount equivalent to approximately 70% of the prior year’s recurring net income (which is net income calculated without respect to extraordinary events that are not expected to recur), subject to applicable laws and regulations and the approval of the Board of Directors, taking into consideration factors such as implementation of business plans, debt service requirements, debt covenant restrictions, funding for new investments, major capital expenditure requirements, appropriate reserves and working capital, among others. Sale of Unregistered or Exempt Including Securities Constituting an Exempt Transaction Pursuant to the stock dividend declaration described above, the Company issued a total of 25,423,746 common shares to its stockholders of record as of June 30, 2010.
85
Except as aforementioned, the Company has not issued any equity securities within the last three years.
86
Directors and Executive Officers Board of Directors The table below sets forth each member of the Board of Directors of SMPFC as of the date of this Prospectus. A vacancy in the Board exists with the resignation of Mr. Jose T. Pardo from the Board effective as of January 20, 2011. Name Eduardo M. Cojuangco, Jr. Ramon S. Ang Francisco S. Alejo III Menardo R. Jimenez
Age 74 56 62 77
Citizenship Filipino Filipino Filipino Filipino
Position Chairman Director Director Director
Cancio C. Garcia Mario C. Garcia Carmelo L. Santiago Plaridel M. Abaya
72 58 67 76
Filipino Filipino Filipino Filipino
Independent Director Director Independent Director Independent Director
Eduardo M. Cojuangco, Jr. is the Chairman of SMPFC, a position he has held since May 22, 2001. He is also Chairman and Chief Executive Officer of SMC and Ginebra San Miguel, Inc. In addition, he is the Chairman of ECJ and Sons Agricultural Enterprises, Inc. and the Eduardo Cojuangco, Jr. Foundation, Inc. and is a Director of Cainaman Farms, Inc., Petron Corporation and Manila Electric Company. Ramon S. Ang has been a Director of SMPFC since May 22, 2001. He also holds, among others, the following positions: Vice Chairman, President and Chief Operating Officer of SMC; Chairman of San Miguel Brewery Inc., San Miguel Properties, Inc., San Miguel Yamamura Packaging Corporation, The Purefoods-Hormel Company, Inc., Anchor Insurance Brokerage Corporation and San Miguel Brewery Hong Kong Limited (Hong Kong); and Director of Ginebra San Miguel, Inc. and San Miguel Energy Corporation. In addition, he is: the Chairman and Chief Executive Officer of Petron Corporation; ViceChairman of Manila Electric Company; Chairman of Liberty Telecoms Holdings Inc., Philippine Diamond Hotel & Resort, Inc., Philippine Oriental Realty Development, Inc., Atea Tierra Corporation and Cyber Bay Corporation; and an independent director of Philweb Corporation. Mr. Ang has held directorships in various subsidiaries of SMC during the last five years. Francisco S. Alejo III is the President of SMPFC, and has held this position since May 20, 2005. He has been a Director of SMPFC since May 22, 2001. In addition, he holds the following positions: Chairman and Chief Executive Officer of Monterey Foods Corporation; Vice Chairman of San Miguel Foods, Inc. and San Miguel Mills, Inc.; President of Magnolia Inc., The Purefoods-Hormel Company, Inc. and San Miguel Super Coffeemix Co., Inc.; and Chairman and President of Sugarland Corporation and Star Dari, Inc.; Chairman of San Miguel Pure Foods (Vn) Co., Ltd.; Director of San Miguel Foods & Beverage International Limited, San Miguel Pure Foods Investment (BVI) Ltd. and San Miguel Pure Foods International, Limited; and President Commissioner of PT San Miguel Pure Foods Indonesia. Menardo R. Jimenez has been a Director of SMPFC since April 25, 2002. He is also a Director of SMC and Magnolia Inc. In addition, he holds the following positions: President and Chief Executive Officer of Albay-Agro Industrial Development Corporation; Chairman and President of Majent Management and Development Corporation, Majent Agro Industrial Corporation, M. A. Jimenez Enterprises, Inc., Pac Rim Realty Development Corporation, Television International Corporation, Alta Tierra Resources, Inc. and Fibers Trading, Inc.; Chairman of Cable Entertainment Corporation, Majent Foundation, Inc., and Meedson Properties Corporation; and Adviser of First Metro Investment Corporation, Cunickel Mining Corporation, Mabuhay Philippines Satellite Corporation, CBTL Holdings, Inc. and CCC Insurance Corporation. Cancio C. Garcia has been an Independent Director of SMPFC since June 27, 2008. He is also a Director of San Miguel Properties, Inc. Justice Garcia is a former Associate Justice of the Supreme Court of the Philippines. He was also Presiding Justice of the Court of Appeals (2003-2004).
87
Mario C. Garcia has been a Director of SMPFC since November 4, 2009. He is also a Director of San Miguel Properties, Inc. and represents the National Government in the Board of Directors of the Subic Bay Metropolitan Authority. He is a TV Host of Kapihan ng Bayan, NBN-4 and Comentaryo, NBN-4, a Radio Host/Anchorman of Uno Por Dos, PBS Radio ng Bayan, Interim National President of KBP Society of Broadcast Journalists, and Consultant of Radio Affairs, Pulis Ng Bayan, PNP. He was previously a Board member of Clark Development Corporation (November 2009-March 2010), member of the Board of Advisers of Freeport Service Corporation (2007-2008),Consultant for Special Projects at the Philippine Daily Inquirer (February-November 2008), Director and Vice Chairman of the Quezon City Red Cross (2006-2007), and Vice President for Programming and Operations and Station Manager of Radio Veritas. Carmelo L. Santiago has been an Independent Director of San Miguel Corporation (SMC) since July 24, 2008, Chairman of SMC’s Audit Committee and Member of SMC’s Executive Committee, Executive Compensation Committee and Nomination and Hearing Committee. He is an Independent Director of San Miguel Brewery Inc., Ginebra San Miguel, Inc., Anchor Insurance Brokerage Corporation, Liberty Telecom Holdings, Inc., San Miguel Properties, Inc., and San Miguel Brewery Hong Kong Limited; and Director of Terbo Concept. Mr. Santiago is the founder and owner of several branches of Melo’s Restaurant and founder of Wagyu Restaurant. Plaridel M. Abaya has been an Independent Director of SMPFC since November 11, 2010 and is also a Director of Grayline Services, Inc. (a management company) and La Saga Commercial Corporation (a financing company). He established Progressive Homes, Inc. and Baypoint Estates Development Corporation, both housing development companies with projects in Laguna and Cavite. He was previously Congressman representing the First District of Cavite in the Philippine House of Representatives (1995 – 2004), and served in the Philippine military for over 30 years (until 1987). Senior Management The table below sets forth SMPFC’s executive officers as of the date of this Prospectus. Name Francisco S. Alejo III Zenaida M. Postrado Ma. Soledad E. Olives Eliezer O. Capacio Rita Imelda B. Palabyab Florentino C. Policarpio Alexandra Bengson Trillana
Age 62 55 51 55 51 60 37
Citizenship Filipino Filipino Filipino Filipino Filipino Filipino Filipino
Position President Division Chief Finance Officer Vice President and Compliance Officer Vice President President, San Miguel Foods, Inc. President, San Miguel Mills, Inc. General Counsel and Corporate Secretary
Francisco S. Alejo III is the President of SMPFC. As SMPFC’s President, Mr. Francisco “Butch” Alejo III has successfully developed the SMC’s Food Group into a leading food company that delivers food products and services from farm to plate. Mr. Alejo brings to SMPFC the strategic focus and established business judgment gained from almost three decades of diverse leadership in SMC Group. An accomplished corporate strategist, Mr. Alejo acquired solid training ground when he first joined renowned multinational companies S.C. Johnson and Son, Inc., Warner Chilcot and Pepsi Cola Bottling Company, as sales and product manager handling SMPFC’s top brands. He joined PFC in 1979 as group product manager, and eventually rose from the ranks to become its Vice-President for the Sales and Processed Meats Division, and President of The Purefoods-Hormel Company, Inc. Today, he leads a management committee of twenty officers, steering the organization to maintain its position as a top food company in the Philippines and a strong regional player in Asia. Mr. Alejo is a graduate of the Advanced Management Program of the Harvard Business School, and holds a BS Business Administration degree from De La Salle University. Zenaida M. Postrado is the Vice President and Chief Finance Officer of SMPFC. Ms. Zenaida “Aida” Postrado is a Certified Public Accountant, with over 25 years’ experience in finance and accounting. Before joining, Ms. Postrado was an auditor at SGV & Co. She was invited to join the San Miguel Pure Foods family in 1981 and eventually rose to become Assistant Manager for the Internal Audit
88
Team. Determined to fully develop her skills toward a career in Finance, she embraced the role as Manager of the firm’s Corporate Accounting/Controllership group and subsequently became Finance Manager for various business units, initially for the Tuna and Aqua/Exports Division, then for the Poultry and Livestock Division, and finally for The Purefoods-Hormel Company, Inc., where she also became General Manager. Ms. Postrado holds a BS in Business Administration and an accountancy degree from the University of the East. Ma. Soledad E. Olives is the Vice President and Manager, Corporate Planning and Management Services Group. With a proven track record in business planning and development, Ms. Maria Soledad “Toy” Olives has centered her work on achieving significant competitive advantage by developing clear business strategies and improving productivity. Twenty-five years with the SMC Group has sharply honed Toy’s planning abilities, thus allowing her to successfully take up challenging roles as Industrial Engineer and Systems Analyst for the Feeds Business, where she also rose to become the Information Systems Manager. She eventually worked her way up and became Planning Manager for the Feeds and Poultry Businesses in Luzon. After proving her strength and expertise in business planning and development, she was appointed Business Planning and Information Systems Manager for Monterey Foods Corporation. Her role as Planning Manager for the Integrated Agro Industrial Zone Project allowed her to complete the development plans for the IAIZ Zones. Ms. Olives is a graduate of BS Industrial Management Engineering and minored in Chemical Engineering from the De La Salle University. She also underwent the Management Development Program at the Asian Institute of Management. Eliezer O. Capacio is the Vice President and Manager of SMPFC’s Division of Human Resources. With over 28 years of solid managerial experience in strategic human resources, administration management, and business operations, Mr. Eliezer “Eli” Capacio, fits the description of a dynamic human resources leader. He is not only an expert in human resource policies, labor relations, people development and employee relations, but in general business management as well, having led several leadership positions within and outside the SMC Group. Mr. Capacio’s extensive strategic and operational knowledge in various aspects of human resources and business operations began when he worked for the Elizalde Group initially as Personnel Officer, and subsequently as General Services Manager. He later joined Purefoods Corporation as Group Manager for Poultry’s HR department, and moved up to become AVP for Purefoods HR. In October 2000, he became president and general manager of MPM Noodles Corporation, thus, allowing him to directly influence and control the operations of the business. Mr. Capacio earned his Master’s in Management degree from the Asian Institute of Management, and graduated with distinction. He is an alumnus of De La Salle University (AB Behavioral Science) and Sacred Heart Seminary (AB Philosophy). Rita Imelda B. Palabyab is the President of San Miguel Foods, Inc. Ms. Rita Imelda “Tatish” Palabyab has distinctly made her mark as one of the top leading experts in the poultry industry. Her 29-year journey in San Miguel began as Operations Research Analyst for San Miguel Corporation’s Corporate Planning Group. She then moved to the Feeds and Livestock Division as Staff Planner, and later, as Senior Staff Planner for the spun-off San Miguel Foods, Inc. The first high point in her career came when she was assigned Planning Manager for SMFI-Poultry Business. Later on, she handled the planning for SMFI-Feeds Business as well, when both Feeds and Poultry were merged into a single business. Within six years, she rigorously proved her sharp business acumen and moved on to become Poultry’s Marketing and Business Planning Manager. In less than four years, she became the General Manager for the SMFI-Poultry business, where she led its transformation into a major profit contributor at SMPFC. In 2010, she was appointed as President of San Miguel Foods, Inc., heading SMPFC’s Agro-Industrial Sector cluster, which is comprised of its poultry, feeds and fresh meats businesses. Ms. Palabyab is a BS Mathematics graduate, Cum Laude, from the University of the Philippines.
89
Florentino C. Policarpio is the President of San Miguel Mills, Inc. An expert strategist is the best way to describe San Miguel Mills, Inc. President Mr. Florentino “Poyen” C. Policarpio who has over two decades of leadership experience in planning, finance, production, sales, purchasing and marketing. After a few months in his first job at San Miguel’s Corporate Planning team, Poyen set-off to pursue a career in government as Project Planner for the National Electrification Administration. Proving that his strength lies in planning, Mr. Policarpio rose to become the government agency’s Chief of the Financial Management Division. Four years later, he further proved his versatility in various critical areas of business management when he joined Ayala Corporation’s Purefoods company, where he managed the Tuna Business in General Santos, then the Feedmill in Sta. Rosa, Laguna, and finally the Poultry Dressing Plant in Marikina. He was also tapped by the Purchasing Department to handle sensitive materials as Group Manager. Then, he was asked to handle sales and marketing for the newly-born Flour Business. Within a year, he became Assistant Vice-President for Sales and Marketing of the Flour Division and eventually rose to become Vice-President of the Flour Division. Mr. Policarpio earned two degrees from De La Salle University and graduated Cum Laude for both courses. He holds a Bachelor of Arts degree, major in Economics, and a Bachelor of Science in Commerce, major in Accounting. Alexandra Bengson Trillana is the General Counsel of the San Miguel Food Group and Corporate Secretary of the Company. Before her appointment as Corporate Secretary, Atty. Alexandra “Alex” Bengson Trillana was the Assistant Corporate Secretary of the Company, a position she has held since April 26, 2004. She is also currently Corporate Secretary of San Miguel Foods, Inc., San Miguel Mills, Inc., Magnolia, Inc., Sugarland Corporation, The Purefoods-Hormel Company, Inc. and San Miguel Super Coffeemix Co,, Inc. Atty. Trillana has been in the practice of law for over ten years. She began her career with the SMC Group in 2003 when she joined SMC’s Office of the General Counsel (OGC) where she was promoted quickly to become Senior Manager for Commercial Transactions. When SMC devolved its corporate services functions to its major subsidiaries, she was tasked to head the Food Group OGC, managing the legal affairs of the San Miguel Food Group. She was previously an associate for four years with the law firm of SyCip Salazar Hernandez & Gatmaitan, trained in the practice areas of Special Projects, Banking, Finance & Securities, and Corporate Services. Atty. Trillana earned her Juris Doctor from Ateneo De Manila University School of Law, and holds a BS Commerce degree, major in Legal Management from De La Salle University.
Board Committees Executive Committee The Executive Committee of SMPFC is composed of four Directors, which include the Chairman of the Board of Directors and the President. Mr. Eduardo M. Cojuangco, Jr. is the Chairman of the Executive Committee and the members are Mr. Ramon S. Ang, Mr. Francisco S. Alejo III and Justice Cancio C. Garcia. The Executive Committee is tasked to help and assist the officers of SMPFC in the management and direction of the affairs of SMPFC. The Board of Directors may delegate to the Executive Committee its powers, authority and duties, except as specifically limited by law. Audit Committee The Audit Committee of SMPFC is composed of five Directors, including the two Independent Directors. Justice Cancio C. Garcia is the Chairman of the Audit Committee. The members are Mr. Menardo R. Jimenez, Mr. Carmelo L. Santiago and Mr. Ferdinand K. Constantino as non-director member. There is one vacancy in the Audit Committee as of the date hereof. The Audit Committee is responsible for assisting the Board of Directors in the performance of its oversight responsibility for financial reports and financial reporting process, internal control system, audit process and in monitoring and facilitating compliance with both the internal and financial management handbook and pertinent accounting standards, legal and regulatory requirements. It
90
performs financial oversight management functions, specifically in the areas of managing credit, markets liquidity, operational, legal and other risks of SMPFC, and crisis management. Nomination and Hearing Committee The Nomination and Hearing Committee of SMPFC is composed of three voting directors and one non-voting member in the person of Mr. David S. Santos, SMC’s Human Resources Head. Two voting directors, namely, Justice Cancio C. Garcia and Mr. Francisco S. Alejo III are presently members of this Committee. The position of Committee Chairman is presently vacant, with the resignation of Mr. Jose T. Pardo from the Board effective as of January 20, 2011. The Nomination and Hearing Committee is responsible for making recommendations to the Board of Directors on matters relating to the Directors’ appointment, election and succession, with the view of appointing individuals to the Board of Directors with the relevant experience and capabilities to maintain and improve the competitiveness of SMPFC and increase its value. It pre-screens and shortlists all nominees in accordance with the qualifications and disqualifications for Directors set out in the Manual. Executive Compensation Committee The Executive Compensation Committee of SMPFC is composed of four members, including Mr. Menardo R. Jimenez, Carmelo L. Santiago, Justice Cancio C. Garcia and Ferdinand K. Constantino as non-director member. Mr. Menardo R. Jimenez is the Chairman of the Committee. The Executive Compensation Committee is responsible for advising and assisting the Board of Directors in the establishment of a formal and transparent procedure for developing a policy on executive remuneration and for fixing the remuneration packages of SMPFC’s officers and Directors, and provides oversight over remuneration of senior management and other key personnel, ensuring that compensation is consistent with SMPFC’s culture, strategy and control environment. It designates the amount of remuneration, which shall be in a sufficient level to attract and retain Directors and officers who are needed to run SMPFC successfully.
Corporate Governance Manual on Corporate Governance The Manual on Corporate Governance (the “Manual”) of SMPFC was approved by the Board of Directors on August 16, 2002 and amended on March 30, 2010. The monitoring of the implementation of the evaluation system of SMPFC to measure and determine the level of compliance of the Board of Directors and top level management with the Manual is vested by the Board of Directors in the Compliance Officer. Compliance and Monitoring System The Compliance Officer of SMPFC is Ma. Soledad Olives. The Compliance Officer is appointed by the Board of Directors. He or she is responsible for monitoring compliance by SMPFC with the provisions and requirements of the Manual and the rules and regulations of the relevant regulatory agencies, and ensures adherence to corporate principles and best practices. The Compliance Officer holds the position of a Vice President or its equivalent and has direct reporting responsibilities to the Chairman of the Board of Directors. The Compliance Officer has certified that, for 2010, the Company has substantially adopted all the provisions of the Manual as prescribed by SEC Memorandum Circular No. 2, Series of 2002. In this connection, in 2010, SMPFC participated in the annual Corporate Governance Scorecard process for publicly listed companies of the Institute of Corporate Directors, and together with SMC and its other listed subsidiaries, organized a seminar on Corporate Governance attended by its Board of Directors and senior management.
91
Pursuant to its commitment to good governance and business practice, SMPFC continues to review and strengthen its policies and procedures, giving due consideration to developments in the area of corporate governance which it determines to be in the best interests of SMPFC and its stockholders. Investor Relations In addition to being the Chief Finance Officer of the Company, Ms. Zenaida M. Postrado is also the Company’s Corporate Information Officer. Her contact details are as follows: Telephone Number:
(632) 702-5000
Email Address:
[email protected]
Address:
JMT Building, ADB Avenue Ortigas Center, Pasig City 1605 Philippines
See “Senior Management” on page 88 for Ms. Postrado’s brief profile. The Company does not have an Investor Relations Unit. Investor relations management functions are being performed for the Company by SMC under a retainer service agreement (please see “Related Party Transactions” on page 95).
Family Relationships There are no family relationships up to the fourth civil degree either by consanguinity or affinity among directors, executive officers, or persons nominated or chosen by the Company to become directors or executive officers.
Involvement in Certain Legal Proceedings For the past five years and up to the date of this Prospectus, the Company is not aware that anyone of the incumbent directors and executive officers have been the subject of bankruptcy petitions or pending criminal proceedings in court or have been by judgment or decree found to have violated securities or commodities law and enjoined from engaging in any business, securities, commodities or banking activities.
Compensation of Directors and Executive Officers Standard Arrangements SMPFC’s Executive Officers are also regular employees of the Company and are similarly remunerated with a compensation package comprising of twelve (12) months base pay. They also receive whatever bonus the Board extends to the managerial, supervisory and technical employees of the Company. The members of the Board of Directors who are not Executive Officers are elected for a term of one year. They receive per diems in the amount of P10,000 on a per meeting participation. The aggregate compensation paid or incurred during the last two fiscal years and the estimate for the ensuing year are as follows:
92
Compensation of Executive Officers and Directors (In Pesos) President and Senior Officers* All other officers and directors as a group TOTAL
Year 2010 (estimated) 2009 2008 2010 (estimated) 2009 2008 2010 (estimated) 2009 2008
Salary
Bonus
Others
Total
P 43.5 million P 40.6 million P 43.3 million P 126.0 million P 127.3 million P 114.9 million P 169.5 million P 167.9 million P 158.2 million
P12.3 million P8.7 million P 17.5 million P 41.0 million P 32.2 million P 38.8 million P 53.3 million P 40.9 million P 56.3 million
P 9.9 million P 10.3 million P 12.2 million P 44.3 million P 47.1 million P 43.2 million P 54.2 million P 57.4 million P 55.4 million
P 65.7 million P 59.6 million P 73.0 million P 211.3 million P 206.6 million P 196.9 million P 277.0 million P 266.2 million P 269.9 million
*The President and Senior Officers of the Company are as follows: (for 2010 and 2009) Francisco S. Alejo III, Zenaida M. Postrado, Rolando A. Cabredo, Florentino C. Policarpio and Rita Imelda B. Palabyab; and (for 2008) Francisco S. Alejo III, Arthur O. Juan, Rolando A Cabredo, Zenaida M. Postrado and Rita Imelda B. Palabyab. Rolando A. Cabredo, Senior Vice President, retired effective as of December 31, 2010.
There are no compensatory plans or arrangements for Executive Officers resulting from resignation and other termination of employment with the Company or from a change in control of the Company or a change in an Executive Officer’s responsibilities following a change in control of the Company. Other Arrangements There are no other arrangements for which the Directors are compensated by the Company for services other than those provided as a Director. Employment Contract In lieu of an employment contract, the Directors are elected at the annual meeting of stockholders for a one (1) year term. Any Director elected in the interim will serve for the remaining term until the next annual meeting. Warrants or Options There are no warrants or options held by Directors or Officers.
Security Ownership of Management and Certain Record and Beneficial Owners Security ownership of certain record and beneficial owners of more than 5% of common shares as of December 31, 2010: Title of Class
Name & address of record owner & relationship with issuer
Common Stock
San Miguel Corporation SMC Head Office
Name of beneficial owner & relationship with record owner N/A
Citizenship
No. of shares held
Percent
166,526,487
99.92%
Filipino
40 San Miguel Avenue, Mandaluuong City
93
Security ownership of directors and executive officers as of December 31, 2010:
Title of Class Directors Common Stock Common Stock Common Stock Common Stock Common Stock Common Stock Common Stock Common Stock Common Stock Executive Officers
Name of Beneficial Owner
Eduardo M. Cojuangco, Jr. Ramon S. Ang Francisco S. Alejo III Menardo R. Jimenez Jose T. Pardo Cancio C. Garcia Mario C. Garcia Carmelo L. Santiago Plaridel M. Abaya
Zenaida M. Postrado Ma. Soledad E. Common Stock Olives Eliezer O. Capacio Common Stock Rita Imelda B. Palabyab Common Stock Florentino C. Policarpio Common Stock Rolando A. Common Stock Cabredo Alexandra Common Stock Bengson Trillana Directors and Executive Officers as a group Common Stock
Citizenship
Amount and Nature of Beneficial Ownership
Percent of Class
Filipino Filipino Filipino Filipino Filipino Filipino Filipino Filipino Filipino
1 (Direct) 1 (Direct) 1 (Direct) 1 (Direct) 1 (Direct) 1 (Direct) 1 (Direct) 1 (Direct) 1 (Direct)
0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Filipino
N/A N/A
N/A N/A
N/A N/A N/A N/A
N/A N/A N/A N/A
N/A
N/A
9 (Direct)
0.00%
Filipino Filipino Filipino Filipino Filipino Filipino
Voting Trust Holders of 5% or more None of the directors and officers owns 5% or more of the outstanding capital stock of the Company. No person holds 5% or more of the Company’s outstanding shares under voting trust agreement.
Changes in Control There is no provision in the Company’s Articles of Incorporation and By-laws which would delay, deter or prevent a change in control of the Company. There are no existing arrangements to which the Company is a party or which are otherwise known to the Company that may result in a change in control of the Company.
94
Certain Relationships and Related Transactions Principal Shareholder San Miguel Corporation (“SMC”) is a corporation organized and existing under the laws of the Republic of the Philippines, with registered principal office address at No. 40 San Miguel Avenue, Mandaluyong City. SMC is a public company under Section 17.2 of the Securities Regulation Code and its shares are listed on the PSE. SMC, together with its subsidiaries (the “SMC Group”), is the largest publicly listed food, beverage and packaging company in Southeast Asia. The SMC Group is also engaged in the management and development of real estate properties. Established in 1890, La Fabrica de Cerveza de San Miguel, Southeast Asia’s first brewery, produced and bottled what would eventually become one of the bestselling beers in the region. Within the span of a generation, San Miguel Beer had become an icon among beer drinkers. Today, San Miguel Beer, SMC’s flagship product, is one of the largest selling beers and among the top ten beer brands in the world. While brewing beer is SMC’s heritage, the SMC Group has subsequently branched out into the food and packaging businesses. Over recent decades, the SMC Group has diversified to produce a wide range of popular beverage, food and packaging products, which continue to cater to consumers’ ever changing tastes. The SMC Group’s manufacturing and trading operations extend beyond the Philippines to Hong Kong, China, Indonesia, Vietnam, Thailand, Malaysia and Australia, and its products are exported to major markets around the world. In the Philippines, the SMC Group’s corporate strategy is at aimed capitalizing on new growth markets through acquisitions and further enhancing its competitive position by improving synergies across existing operational lines, shifting its focus from commodity goods to value-added and branded products to strengthen its domestic food business and improving its sales and distribution operations. Following approval by its shareholders in 2007, SMC has diversified from its traditional core businesses and has since made investments in industries such as power, energy, telecommunications, mining and infrastructure. The SMC Group has become the Philippines’ largest and one of its most diversified conglomerates. In 2009, the SMC Group generated approximately 3% of the Philippine gross national product.
Related Party Transactions SMPFC engages from time to time in a variety of transactions with related parties. Certain of these related party transactions are described below: •
SMPFC has been a party to trademark licensing agreements with SMC for the licensing of the SMPFC Brands and the know-how on the formulation and production of certain products of SMPFC. Pursuant to the terms of these agreements, for the year 2009, SMPFC paid royalty fees to SMC equivalent to 0.5% to 1% of the net sales revenue of the products carrying the SMPFC Brands. In 2009, SMPFC paid a total of P132.87 million in royalty fees to SMC. Following the Brands Acquisition, all licensing agreements have been terminated. In 2010, prior to the completion of the Brands Acquisition on July 30, 2010, SMPFC paid P79.47 million in royalty fees to SMC.
•
SMPFC is a party to a shared services agreement with SMC, under the terms of which SMC has agreed to share with SMPFC certain corporate, financial, information technology, human resource, procurement, administrative and legal services, and facilities related thereto. Under this agreement, SMPFC shall pay SMC an annual fee equivalent to approximately 0.35% of SMPFC’s consolidated revenues. Unless terminated by either party, this agreement shall continue to be valid and binding on SMPFC and SMC.
95
•
SMPFC is a party to lease agreements with certain members of the SMC Group for the lease of properties used by SMPFC in connection with its business operations. The use by SMPFC of the premises occupied by the Calauan R&D and Luzon Commercial Fry is currently rentfree, but SMPFC is required to pay for security services and real property tax for the premises. The monthly rentals for certain properties are subject to an annual rate escalation of 10% to 15%. The lease agreements are automatically renewed on a monthly basis, except for the lease agreement covering the warehouse at Binalonan, Pangasinan, which shall be renewable on January 2013 on mutually acceptable terms. SMPFC leases its warehouse located at Pandacan, Manila to another member of the SMC Group.
•
SMPFC is a party to trucking, barging and small vessel charter services agreements with certain members of the SMC Group for the hauling and transportation of certain raw materials and commodities of SMPFC. The hauling and transportation fees, which are based on prevailing market rates, vary depending on the destination of the raw materials and commodities. Unless terminated by any of the parties thereto, the trucking, barging and small vessel charter services agreements are automatically renewed on a monthly basis.
•
SMPFC and its subsidiaries regularly purchase certain products, by-products and raw materials from each other based on an agreed selling price. SMPFC also purchases vinegar, spent grain, malt dust and dried yeast from certain members of the SMC Group.
•
SMPFC is a party to packaging products supply agreements with certain members of the SMC Group for the supply of packaging materials for certain products of SMPFC on a per order basis. The consideration for the packaging materials is based on an agreed price which is reflective of the prevailing market price for each type of packaging material.
•
SMPFC is a party to business process outsourcing contracts with members of the SMC Group for the provision of customer care services to SMPFC’s customers, and coding, catalog and contract loading and end-user or supplier enablement services for SMPFC’s EProcurement System. Unless terminated by any of the parties thereto, the business process outsourcing contracts are automatically renewed either on an annual or monthly basis.
•
SMPFC is a party to service and retainer agreements with members of the SMC Group for the provision of power and energy management, stock transfer, business application support, system administration and facilities management, information technology, payroll, data administration, and maintenance services to SMPFC based on an agreed monthly fee for each service. Unless terminated by any of the parties thereto, these are automatically renewed on either a yearly or monthly basis.
•
On May 1, 2009, SMPFC purchased the receivables, inventories and fixed assets of SMC’s Centralized Key Accounts Group (CKAG) for total consideration of P2,352.50 million. CKAG was a unit of SMC engaged in the business of selling and distributing various products of certain companies within the SMC Group, including SMPFC, to modern trade customers.
SMPFC does not have transactions with its directors, executive officers, security holders or members of their respective immediate families. Some of the directors of SMPFC serve as directors and/or executive officers of the SMC Group. None of the directors and officers of SMPFC has any interest in SMPFC’s business transactions that are unusual in nature or their conditions, or significant to SMPFC’s business. For further information on SMPFC’s related-party transactions, see Note 25 of SMPFC’s audited consolidated financial statements as of and for the years ended December 31, 2007, 2008 and 2009 and Note 15 of its consolidated interim financial statements as of and for the nine months ended September 30, 2010, contained elsewhere in this Prospectus.
96
Selected Financial Information and Other Data Prospective investors should read the selected financial information presented below in conjunction with SMPFC’s consolidated financial statements and the notes to those consolidated financial statements included elsewhere in this Prospectus. Prospective investors should also read “Management’s Discussion and Analysis of Financial Condition and Results of Operations”. SMPFC’s selected financial and operating information presented below as of and for the years ended December 31, 2007, 2008 and 2009 were derived from SMPFC’s consolidated financial statements, audited by Manabat Sanagustin & Co. and prepared in compliance with PFRS. SMPFC’s financial and operating information presented below as of and for the nine months ended September 30, 2009 and 2010 were derived from the unaudited condensed consolidated interim financial statements of SMPFC prepared in compliance with PAS 34, “Interim financial Reporting” and reviewed by Manabat Sanagustin & Co. in accordance with PSRE 2410, “Review of Interim Financial Information Performed by the Independent Auditor of the Entity”. SMPFC’s consolidated financial statements are reported in Pesos and are presented in accordance with PFRS. The information below is not indicative of the results of future operations. As of and for the years ended December 31,
As of and for the nine months ended September 30, 2007 2008 2009 2009 2010 P P P P P (Audited) (Unaudited) (in thousands except per share figures or where otherwise indicated) Consolidated Statements of Income Data Revenues ................................................................... 62,052,029 Cost of sales .............................................................. 51,845,187
71,075,925 60,609,663
75,042,967 61,684,667
54,302,835 45,298,696
56,567,267 45,194,294
10,466,262 (8,623,651) (830,914) 54,323 2,815
13,358,300 (8,720,676) (751,042) 69,141 (24,663)
9,004,139 (6,747,884) (622,118) 42,517 1,555
11,372,973 (7,182,624) (259,112) 77,058 5,826
(451,279)
(88,968)
(30,861)
73,713
1,098,298 916,205
617,556 468,870
3,842,092 1,183,625
1,647,348 546,450
4,087,834 1,184,232
182,093
148,686
2,658,467
1,100,898
2,903,602
30,591 151,502 182,093
77,194 71,492 148,686
2,596,963 61,504 2,658,467
1,059,868 41,030 1,100,898
2,772,886 130,716 2,903,602
0.22
0.55
18.39
7.50
16.64
Current Assets Cash and cash equivalents ................................... 1,342,643 Trade and other receivables – net ......................... 7,530,107 Inventories – net .................................................... 10,053,498 Biological assets .................................................... 2,324,265 437,960 Derivative assets ................................................... Prepaid expenses and other current assets .......... 934,277
2,782,206 7,762,091 11,804,788 2,932,421 35,757 814,808
3,950,346 9,023,953 11,804,099 2,524,510 47,070 1,245,674
3,665,378 6,385,695 12,681,008 3,130,351 72,755 2,079,640
Total Current Assets .................................................. 22,622,750
26,132,071
28,595,652
28,014,827
Gross Profit ................................................................ 10,206,842 Selling and administrative expenses.......................... (7,810,920) (667,972) Interest expense and other financing charges ........... 84,407 Interest income .......................................................... (18,010) Gain (loss) on disposal of property and equipment and idle assets .................................... Other Income (charges) - net ..................................... (696,049) Income Before Income Tax ........................................ Income Tax Expense ................................................. Net Income ................................................................. Attributable to Equity holders of the Parent Company ..................... Non-controlling interests ........................................... Basic and diluted earnings per share attributable to Equity Holders of the Parent Company .............................................................. Consolidated Statements of Financial Position Data Assets
97
Noncurrent Assets Investment properties – net ................................... Property, plant and equipment – net ..................... Biological assets – net ........................................... Intangible assets – net .......................................... Goodwill – net ........................................................ Deferred tax assets ............................................... Retirement and other noncurrent assets ...............
56,366 8,251,252 880,271 137,362 187,575 940,991 267,935 10,721,752
71,727 8,058,423 1,115,963 155,808 170,792 1,096,259 200,988 10,869,960
108,065 8,294,593 1,285,125 167,562 170,792 1,219,676 334,408 11,580,221
114,544 9,307,749 1,416,747 3,428,853 416,534 571,465 328,839 15,584,731
Total Assets ............................................................... 33,344,502
37,002,031
40,175,873
43,599,558
8,639,671 9,099,111 349,888
11,666,380 9,850,465 208,860
8,816,090 12,667,086 466,920
6,738,204 11,306,242 277,059
Total Current Liabilities .............................................. 18,088,670
21,725,705
21,950,096
18,321,505
Total Noncurrent Assets ............................................
Liabilities and Equity Current Liabilities Notes payable........................................................ Trade payables and other current liabilities ........... Income tax payable ...............................................
Noncurrent Liabilities Deferred tax liabilities ............................................ Other noncurrent liabilities .....................................
353,082 92,608
238,260 77,458
399,040 181,487
262,157 3,766,685
Total Noncurrent Liabilities ........................................
445,690
315,718
580,527
4,028,842
1,454,510 5,821,288 18,219 (64,189) 5,507,121 (182,094)
1,454,510 5,821,288 18,219 (70,416) 5,584,315 (182,094)
1,454,510 5,821,288 18,219 (48,278) 8,181,278 (182,094)
1,708,748 5,821,288 18,219 (85,976) 10,699,926 (182,094)
12,554,855
12,625,822
15,244,923
17,980,111
2,255,287
2,334,786
2,400,327
3,269,100
Total Equity ................................................................ 14,810,142
14,960,608
17,645,250
21,249,211
33,344,502
37,002,031
40,175,873
43,599,558
(77,361) (1,509,785) 3,026,709 –
5,536,207 (1,517,777) (2,850,290) –
2,967,539 (1,143,911) (3,020,380) –
3,480,362 (1,144,477) (2,618,205) (2,648)
1,439,563 1,342,643
1,168,140 2,782,206
(1,196,752) 2,782,206
(284,968) 3,950,346
2,782,206
3,950,346
1,585,454
3,665,378
3,380,745 1,827,234 593,908 14.73% 4.76% 2.57%
6,248,179 4,543,671 651,422 17.80% 8.33% 6.05%
Equity Equity Attributable to Equity Holders of the Parent Company Capital stock .......................................................... Additional paid-in capital........................................ Revaluation surplus ............................................... Cumulative translation adjustments ...................... Retained earnings ................................................. Treasury stock .......................................................
Non-controlling Interests ............................................
Cash Flow Data Net cash provided by (used in): Operating activities.................................................... 1,149,241 Investing activities ..................................................... (1,325,058) (613,821) Financing activities .................................................... – Effect of exchange rate changes in cash and cash equivalents ................................................... (789,638) Net decrease in cash and cash equivalents.............. 2,132,281 Cash and cash equivalents at beginning of year ....................................................................... Cash and cash equivalents at end of period ............. 1,342,643 Other Financial and Operating Data (1) EBITDA ................................................................... (1) EBIT ........................................................................ Capital expenditure .................................................... (2) Gross profit margin .................................................. (3) EBITDA margin ....................................................... (4) EBIT margin ............................................................
4,175,650 2,717,358 931,601 16.45% 6.73% 4.38%
3,497,348 2,234,178 448,682 16.58% 6.44% 4.11%
5,585,813 4,176,760 485,843 20.10% 9.87% 7.38%
_____________ Note:
(1) EBITDA is calculated as consolidated net income shown in consolidated income statement of SMPFC prepared in accordance with PFRS before the following: a) provision for income taxes, b) interest expense and other financing charges, c) interest income, d) depreciation and amortization, e) realized gain or loss on sale of assets, f) impairment losses, g) net foreign exchange gain or loss, h) unrealized mark-to-market gains or losses on hedging obligations, and i) extraordinary or non-recurring gain or loss. EBIT is calculated as net income
98
shown in consolidated income statement of SMPFC prepared in accordance with PFRS before the following: a) provision for income taxes, b) interest expense and other financing charges, c) interest income, d) realized gain or loss on sale of assets, e) impairment losses, f) net foreign exchange gain or loss, g) unrealized mark-to-market gains or losses on hedging obligations, and h) extraordinary or non-recurring gain or loss. Neither EBITDA nor EBIT is a measure determined in accordance with PFRS or IFRS, and should not be considered as an alternative to net income as a measure of operating performance or to cash flow as a measure of liquidity. The items of net income excluded from EBITDA are significant components in understanding and assessing SMPFC’s financial performance. Neither EBITDA nor EBIT is intended to be a measure of free cash flow for management’s discretionary use, as it does not reflect certain cash requirements such as interest payments, tax payments and capital expenditures. SMPFC’s calculation of EBITDA and EBIT may be different from the calculation used by other companies and, as a result, SMPFC’s EBITDA and EBIT may not be comparable to other similarly titled measures of other companies. (2) Calculated as Gross Profit divided by Revenues. (3) Calculated as EBITDA divided by Revenues. (4) Calculated as EBIT divided by Revenues.
99
Management’s Discussion and Analysis of Results of Operations and Financial Condition Prospective investors should read the following discussion and analysis of SMPFC’s consolidated financial position and performance together with (i) the independent auditor’s reports, (ii) the audited consolidated financial statements for the years ended December 31, 2009, 2008 and 2007 and the notes thereto and (iii) the consolidated interim financial statements for the nine months ended September 30, 2010 and the related notes thereto.
Overview SMPFC is a leading company in the Philippine food industry with a wide portfolio of well-regarded products and brands, serving both household and institutional customers, primarily in the Philippines. SMPFC’s main businesses are its poultry, fresh meats, value-added meats, flour, feeds and dairy, spreads and oils businesses. SMPFC’s other businesses include coffee, food service and retail, as well as regional businesses located in Indonesia and Vietnam. SMPFC’s products use some of the best known and well-regarded brands in the Philippine food industry, including Magnolia, Purefoods, Monterey, Star, B-Meg, Dari Crème and JellyAce. SMPFC enjoys leading market shares in several of its main businesses and product lines, including poultry, feeds, pork, hotdogs, flour and bread spreads. For the year ended December 31, 2009, SMPFC recorded consolidated revenues of P75,042.97 million. SMPFC’s major businesses – poultry, feeds, fresh meats, flour, value-added meats and dairy, spreads and oils contributed approximately 99.0% of SMPFC’s consolidated revenues for year ended December 31, 2009. Set forth below are SMPFC’s revenues by business for the years ended December 31, 2007, 2008 and 2009.
Poultry Feeds Fresh Meats Value-Added Meats (1)(2) Flour Dairy, Spreads and Oils Other Eliminations Total
2007 18,712.75 14,696.32 6,161.04 10,448.51 6,721.49 5,177.25 1,752.67 (1,618.00) 62,052.03
in P millions 2008 2009 22,119.32 25,709.18 16,873.97 16,766.83 6,367.29 7,303.47 11,566.93 11,280.97 8,684.01 7,929.30 4,813.01 5,283.29 1,886.88 2,207.77 (1,235.48) (1,437.84) 71,075.93 75,042.97
Sept. 30, 2010 20,145.39 13,721.38 4,557.00 7,811.49 5,613.14 3,721.89 2,062.04 (1,065.06) 56,567.27
_____________ Note: (1) Includes all of SMPFC’s milling and related operations. (2) Sales by SMPFC’s flour business for the year ended December 31, 2007 are grossed up to include P565.04 million of intersegment sales.
Recent Developments Following the completion of the Brands Acquisition on July 30, 2010, SMPFC’s royalty payments to SMC have been eliminated. For more information on the Brands Acquisition, see “Recent Acquisitions” beginning on page 71 of this Prospectus. Following the completion of the Vietnam Acquisition on July 30, 2010, SMPFC owns a majority interest in the Vietnam business and will consolidate its results of operations. For more information on the Vietnam Acquisition, see “Recent Acquisitions” beginning on page 71 of this Prospectus. Factors Affecting Results of Operations During the years ended December 31, 2007, 2008 and 2009, the financial condition and results of operations of SMPFC were affected by a number of factors including the following principal factors:
100
Consumer Demand Consumer demand for food products is influenced by a number of factors, including macroeconomic conditions, consumer purchasing power, consumer sentiment and consumer preferences. Demand for SMPFC’s food products is influenced by the relative price relationships between its products and other food products sold in the market. Consumers are prone to adjust their buying choices according to shifts in the perceived value-for-money propositions among various food products. For example, in 2008, sharp rises in energy and commodity prices, coupled with weak economic growth due to the global financial crisis, had an adverse impact on consumer purchasing power and disposable income levels in the Philippines. As a result, sales volumes in SMPFC’s flour, dairy, spreads and oils and fresh meats businesses experienced a decline, as consumers prioritized basic commodities while consuming less milk and meat in favor of less expensive protein sources. However, due to the diversity of SMPFC’s product offerings, declines in these businesses were partially offset by a shift towards lower priced meat substitutes, such as chicken and processed meats. SMPFC’s sales and operating results have also varied, and are expected to continue to vary, from quarter to quarter as a result of seasonal demand patterns. Several of SMPFC’s businesses, including its fresh meats and value-added meats businesses, are subject to variations in seasonal demand, with higher sales in the fourth quarter of the fiscal year, when customers place their orders for the Christmas season. As a result, SMPFC’s results of operations may not be comparable from quarter to quarter. Commodity Prices SMPFC’s businesses require significant purchases of commodities. The prices at which these commodities are purchased or sold are primarily determined by reference to market prices, which are subject to significant variation due to such factors as regional and global supply and demand, foreign exchange rate fluctuations, weather conditions and governmental controls. SMPFC’s agro-industrial and milling segments, which together accounted for 76.9% of SMPFC’s revenues in the year ended December 31, 2009, are primarily engaged in the sale of commodities, such as pork, beef, chicken, feeds and flour. Moreover, a significant portion of SMPFC’s businesses is dependent on commodities, such as soybean meal, corn, cassava, wheat, dairy ingredients, hogs and cattle, for the production of its products. Raw material costs accounted for 78.3% of SMPFC’s operating costs in the year ended December 31, 2009. Supply Dynamics SMPFC’s results of operations are affected by the supply dynamics that affect the industries in which SMPFC operates. Changes in the market supply of a particular product that SMPFC sells will likely have a direct impact on the price at which SMPFC can sell its products. Given SMPFC’s significant market share in certain industry segments, such as poultry and feeds, SMPFC believes it has been able to influence supply dynamics. In certain cases, however, these supply dynamics may be outside of SMPFC’s control, particularly when supply disruptions arise from an industry-wide phenomenon, such as availability of raw materials, natural disasters or governmental actions. SMPFC believes its diversified product portfolio helps mitigate the overall impact on its financial performance of supply volatility in any one of its business segment. In addition, SMPFC believes its multiple channel distribution network limits the impact of supply volatility, as some channels are less price elastic than others. For example, SMPFC benefited from a slight reduction in the supply of domestically produced poultry in 2009 due to production problems experienced by some of SMPFC’s competitors. SMPFC was able to benefit from higher prices in the live sales and wet market channels for its products, while prices for its branded goods segment tended to be more stable.
Pricing and Selling Strategy SMPFC has historically been able to charge a premium price for many of its branded products as a result of its focused brand building efforts. SMPFC’s products compete in a competitive marketplace, where consumers can easily shift between competing products. SMPFC’s management actively
101
monitors its pricing and selling strategy, depending on specific circumstances and market dynamics, and may decide to increase prices of its products at the expense of sales volume and market share. SMPFC’s management may shift its sales focus among various products and market channels within a particular business in order to maximize profits.
New Products and Branding Initiatives SMPFC believes that consumer food products are impulse and discretionary purchases, which are particularly sensitive to competitive pressure. A key element in maintaining its market share in the highly competitive Philippine food market has been for SMPFC to continuously introduce new consumer food products and product extensions. SMPFC has launched several new product lines, such as milk and ice cream (Magnolia), and cooking oil (Magnolia Nutri-Oil) in 2004, coffee (San Mig Coffee) and chicken nuggets (Purefoods) in 2005, flour mixes (Magnolia Pancake) in 2006 and ready-to-eat products (Ulam King and Mom’s Kitchen) in 2007. Sales of these new products have grown by 11.1% from P2,161.45 million in 2007 to P2,400.48 million in 2009, and in 2009 accounted for 3.2% of SMPFC’s total sales. In addition to introducing new products, SMPFC has embarked on branding initiatives that involve organized advertising campaigns to differentiate its products and further expand market share. Examples of major marketing campaigns are the value-added meats business, Purefoods TJ Hotdog’s “Team Pa-cute” and “Iron Chef” campaign, Purefoods Chicken Fun Nuggets “Hi, Pogi” campaign, Ulam King’s “Ikaw ang King” and the dairy, spreads and oil business’ Star Margarine “Nutriskwela” and “Search for Batang Star” campaigns. SMPFC devotes significant expenditures to support advertising and branding, including funding for advertising campaigns, such as television commercials and radio and print advertisements, including promotions for new product launches. In the years ended December 31, 2007, 2008 and 2009, SMPFC had advertising and promotion costs of P1.3 billion, P1.5 billion and P1.4 billion, respectively. Advertising and promotion comprised a significant proportion of SMPFC’s selling and administrative expenses (including depreciation) being equal to 16.13%, 17.19% and 16.07% of its operating expenses in the years ended December 31, 2007, 2008 and 2009, respectively. Description of Revenue Cost Items
Revenues The revenues account consists of sales of goods in the course of ordinary activities measured at the fair value of the consideration received or receivable, net of returns, trade discounts, volume rebates and value-added tax. Fair valuation adjustments on agricultural produce also form part of revenues. Cost of Sales Cost of sales consists of: •
inventories used, which are accounted for under the moving average cost method, include the cost of raw materials, such as wheat, corn, soybean meal and anhydrous milk fat, among others;
•
freight, trucking and handling costs relating to the transfers of raw materials from storage to farms and manufacturing or production facilities; depreciation and amortization, pertaining to depreciation of plant equipment, facilities and buildings and amortization of breeder stocks;
• •
communication, light and water expenses incurred in relation to SMPFC’s manufacturing processes and facilities;
•
personnel expenses, which consist of salaries, wages and related employee benefits of employees involved in SMPFC’s manufacturing processes;
102
•
repair and maintenance costs for the upkeep of SMPFC’s manufacturing plant equipment, facilities and buildings;
•
rental costs of manufacturing facilities, warehouses and storage facilities, and
•
other cost of sales, which include tolling fees, contract growing fees, manufacturing supplies and fuel, among others.
In 2007, 2008, and 2009, SMPFC’s consolidated cost of sales were P51,845.19 million, P60,609.66 million and P61,684.67 million, respectively. Selling and Administrative Expenses SMPFC’s consolidated selling and administrative expenses mainly consist of: •
personnel expenses, including salaries, wages and employee benefits of administrative, sales and corporate support unit personnel;
•
freight, trucking and handling expenses related to the shipment and distribution of SMPFC’s finished products;
•
advertising and promotions expenses, which include the cost of tri-media advertisements, event sponsorships, billboards, merchandising activities and other promotional activities;
•
contracted services, which represent cost of jobs performed by outside contractors related to selling and administrative activities; and
•
other selling and administrative expenses, which include rentals, taxes and licenses, professional fees and depreciation and amortization, among others.
In 2007, 2008, and 2009, SMPFC’s consolidated selling and administrative expenses were P7,810.92 million, P8,623.65 million and P8,720.68 million, respectively. Critical Accounting Policies The preparation of SMPFC’s consolidated financial statements in accordance with PFRS requires management to make judgments, estimates and assumptions that affect amounts reported in the consolidated financial statements and related notes, at the reporting date. SMPFC has identified certain accounting policies as critical to an understanding of its financial position and performance, as the application of these policies requires significant management assumptions and estimates that could result in the reporting of materially different amounts if different assumptions or estimates are used. SMPFC’s significant accounting policies and significant accounting judgments, estimates and assumptions are set out in Notes 3 and 4 to SMPFC’s audited consolidated financial statements for the years ended December 31, 2007, 2008 and 2009 included elsewhere in this Prospectus. Financial Performance Nine Months Ended September 30, 2010 Compared to Nine Months Ended September 30, 2009 The following comparison of SMPFC’s financial performance is based on SMPFC’s consolidated interim financial statements as of and for the nine months ended September 30, 2009 and 2010. Revenues Revenues increased by 4.2% from P54,302.84 million in the nine months ended September 30, 2009 to P56,567.27 million in the nine months ended September 30, 2010. This increase resulted primarily from increases in revenues of 8.9% and 7.6% from SMPFC’s poultry and feeds businesses, respectively, which cushioned the impact of decreased revenues from its flour and fresh meats businesses during the period.
103
AGRO-INDUSTRIAL SMPFC’s Agro-Industrial Cluster includes its poultry, feeds and fresh meats businesses. Revenues for the Agro-Industrial Cluster were P36,305.57 million and P38,423.78 million in the nine months ended September 30, 2009 and 2010, respectively. Revenues presented in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” are prior to intersegment sales eliminations reflected in SMPFC’s consolidated interim financial statements for the nine months ended September 30, 2009 and September 30, 2010, which are included elsewhere in this Prospectus. Poultry Revenues in SMPFC’s poultry business increased by 8.9% in the nine months ended September 30, 2010 compared with the same period in 2009 due to improved supply availability arising from expansion and higher productivity of breeding operations that resulted in volume growth of 10.5% in the nine months ended September 30, 2010 compared with the same period in 2009. In the nine months ended September 30, 2010, sales from Magnolia Chicken Stations, food service and wet markets posted double digit growth at 18.6%, 16.7% and 10.8%, respectively, over the same period in 2009. Selling prices declined by 1.7% in the nine months ended September 30, 2010 compared with the same period in 2009, as prices in the third quarter of 2010 decreased by 6.9% due to increased supply levels. Feeds Revenues in SMPFC’s commercial feeds business increased by 7.6% in the nine months ended September 30, 2010 compared with the same period in 2009, due to the 10.2% increase in volume for the same period. The volume increase was driven by double digit growth in broiler, fighting cock and aquatic feeds. Fresh Meats Revenues in SMPFC’s fresh meats business decreased by 10.0% in the nine months ended September 30, 2010 compared with the same period in 2009. Volume decreased by 8.3% over the same period due to limited internal supply of marketable hogs, brought about by the closure of several inefficient contract farms and the ongoing effects of the porcine reproductive and respiratory syndrome (PRRS) in 2009, which affected the 2010 supply. VALUE-ADDED MEATS Revenues in SMPFC’s value-added meats business in the nine months ended September 30, 2010 were at the same level with revenues for the business in the same period in 2009, despite a capacity shortage experienced during the first quarter of 2010. The shortage in capacity, which resulted from the permanent closure of SMPFC’s cannery facility in October 2009, has been fully addressed through its expanded tolling operations. Sales volumes began to normalize in the third quarter of 2010, but not in amounts sufficient to cover the volume shortfall in the first half of 2010. MILLING Flour Revenues in SMPFC’s flour business decreased by 6.1% in the nine months ended September 30, 2010 compared with the same period in 2009, and volume increased by 1.9% over the same period. Average selling prices also declined, reflecting the reduction in wheat costs over this period. The discontinuance of SMPFC’s snacks and noodles businesses in the third quarter of 2009 also contributed to the decline in revenues over this period.
104
OTHERS Dairy, Spreads and Oils Revenues in SMPFC’s dairy, spreads and oils business increased by 3.6% in the nine months ended September 30, 2010 compared with the same period in 2009. The increase in revenues was driven primarily driven by increased sales volume for cheese, milk and ice cream, as SMPFC introduced new product variants and expanded its distribution network. Cost of Sales Despite volume increases in most of the business units, cost of sales decreased slightly by 0.2% from P45,298.70 million in the nine months ended September 30, 2009 compared with the same period in 2010 to P45,194.29 million in 2010, as a result of decreases in raw material prices and improved efficiencies. AGRO-INDUSTRIAL Cost of sales for SMPFC’s Agro-Industrial cluster was P31,372.45 and P32,643.58 in the nine months ended September 30, 2009 and 2010, respectively. Poultry Cost of sales in SMPFC’s poultry business increased by 6.2% in the nine months ended September 30, 2010 compared with the same period in 2009, primarily due to growth in volume, while margins improved due to lower broiler costs and better growing efficiencies. Feeds Cost of sales in SMPFC’s feeds business increased by 8.7% in the nine months ended September 30, 2010 compared with the same period in 2009, which was slightly higher than the 7.6% increase in revenues for this business for the same period. The increase in cost of sales in this period was primarily a result of growth in volume, which was partially offset by savings in direct material costs from substitution and reformulation and decreased raw material costs, particularly for corn and soybean meal. Fresh Meats Cost of sales in SMPFC’s fresh meats business decreased by 14.9% in the nine months ended September 30, 2010 compared with the same period in 2009, which was higher than the 10.0% decrease in revenues in this business for the same period. The decrease in cost of sales was due to the combined effects of decreased volume and lower raw materials and production costs in this period. VALUE-ADDED MEATS Cost of sales in SMPFC’s value-added meats business decreased by 4.4% in the nine months ended September 30, 2010 compared with the same period in 2009, which was higher than the 1.3% decrease in revenues in this business for the same period. The decrease in cost of sales was primarily a result of the use of alternative raw materials, as well as the insurance recovery of certain tolling fees, which mitigated the impact of increased prices of major raw materials. MILLING Flour Cost of sales in SMPFC’s flour business decreased by 22.8% in the nine months ended September 30, 2010 compared with the same period in 2009, which was greater than the 6.1% decrease in revenues in this business for the same period. The decrease in cost of sales was a result of lower wheat and freight costs, as well as the discontinuation of SMPFC’s snacks and noodles business.
105
OTHERS Dairy, Spreads and Oils Cost of sales in SMPFC’s dairy, spreads and oils business decreased by 9.4% in the nine months ended September 30, 2010 compared with the same period in 2009, while revenues for this business increased by 3.6% in the nine months ended September 30, 2010 compared with the same period in 2009. The decline in cost of sales was primarily a reflection of decreased input prices in this period. Gross Profit and Gross Margin Gross margin increased by 3.5 percentage points from 16.6% in the nine months ended September 30, 2009 to 20.1% in the same period in 2010, resulting in gross profits of P11,372.97 million in the nine months ended September 30, 2010, an increase of 26.3% from P9,004.14 million in the same period in 2009. Selling and Administrative Expenses Selling and administrative expenses increased by 6.4%, from P6,747.88 million in the nine months ended September 30, 2009 to P7,182.62 million in the same period in 2010, as a result of increased manpower costs, increased advertising and promotions spending for brand building activities, the impact of the increased fuel prices on distribution and transportation costs, and the transfer of Centralized Key Accounts Group (CKAG) from SMC to SMPFC in May 2009. CKAG, now known as San Miguel Integrated Sales (SMIS), handles selling functions for SMPFC’s modern and general trade customers for its branded products. Interest Expense and Other Financing Charges Interest expense and other financing charges decreased by 58.4% from P622.12 million in the nine months ended September 30, 2009 to P259.11 million in the same period in 2010 due to lower borrowing rates and lower average loan levels. Interest Income Interest income rose by 81.2% from P42.52 million in the nine months ended September 30, 2009 to P77.06 million in the same period in 2010, primarily due to the increase in the average level of money market placements. Gain on Disposal of Property and Equipment and Idle Assets Gains on disposal of property and equipment and idle assets increased from P1.56 million in the nine months ended September 30, 2009 to P5.83 million in the same period in 2010 due to increased disposals of idle assets during this period in 2010 compared with the same period in 2009. Other Income (Charges) – Net Other income (charges) – net of (P30.86 million) in the nine months ended September 30, 2009 improved to P73.71 million in the same period in 2010 due to the appreciation of the Peso that resulted in mark-to-market gains being recognized from SMPFC’s embedded third currency transactions and the flour business’ full settlement of most of its wheat options for 2010. Income Before Income Tax As a result of the foregoing, income before income tax increased by 148.1% from P1,647.35 million in the nine months ended September 30, 2009 to P4,087.83 million in the same period in 2010.
106
Income Tax Expense Income tax expense increased by 116.7% from P546.45 million in the nine months ended September 30, 2009 to P1,184.23 million in the same period in 2010 primarily due to the increased taxable profits in this period.
Net Income As a result of the foregoing, net income increased by 163.7% from P1,100.90 million in the nine months ended September 30, 2009 to P2,903.60 million in the same period in 2010. Year Ended December 31, 2009 Compared to Year Ended December 31, 2008 The following comparison of SMPFC’s financial performance is based on SMPFC’s consolidated audited financial statements as of and for the years ended December 31, 2009 and December 31, 2008. Revenues Revenues increased by 5.6% from P71,075.93 million in 2008 to P75,042.97 million in 2009. This increase resulted primarily from a 16.2% increase in revenues from SMPFC’s poultry business and a 14.7% increase in revenues from SMPFC’s fresh meats business. However, revenues from SMPFC’s flour business declined by 8.7% over the same period as a result of downward adjustments in selling prices following reductions in the cost of wheat. AGRO-INDUSTRIAL SMPFC’s Agro-Industrial Cluster includes its poultry, feeds and fresh meats businesses. Revenues for the Agro-Industrial Cluster were P39,570.11 million, P45,360.57 million, and P49,779.48 million in 2007, 2008 and 2009, respectively. Revenues presented in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” are prior to certain intersegment sales eliminations reflected in SMPFC’s audited consolidated financial statements for the years ended December 31, 2007, 2008 and 2009. Poultry Revenues in SMPFC’s poultry business increased by 16.2% in 2009 compared with 2008, and volume grew by 7.6% over the same period. Volume growth was driven by increased supply of SMPFC and increased demand in chicken stations. Selling prices also generally increased in 2009 compared with 2008 due to limited supply in the market. Feeds Revenue decreased by 0.6% in 2009 compared with 2008 as a result of volume shortfall of 6.3%. Volume declined due to industry wide contraction brought about by disease outbreaks, limited piglet supply and higher input costs. Average selling prices increased as SMPFC maintained a premium pricing strategy. Fresh Meats Revenues in SMPFC’s fresh meats business increased by 14.7% in 2009 compared with 2008. Volume increased by 16.1% over the same period, as SMPFC was able to channel more supply to live sales and wet markets because of synergies with poultry distributors and the expansion of live sales in Central Luzon. The volume increase was partially offset by a decrease in selling prices, as a greater proportion of SMPFC’s volume were sold at wholesale, rather than retail prices.
107
VALUE-ADDED MEATS Revenues in SMPFC’s value-added meats business decreased by 2.5% in 2009 compared with 2008, and volume decreased by 9.3% over the same period. The decline in volume was due to SMPFC’s loss of inventory and the closure of its Marikina plant in October 2009 because of typhoon damage. The volume decline was partially offset by selling prices that increased generally in line with inflation. MILLING Flour Revenue in SMPFC’s flour business decreased by 8.7% in 2009 compared with 2008, and volume of flour excluding snacks and noodles increased by 5.9% over the same period. The volume increase was due to recovery of demand for basic flour following the contraction in 2008 caused by a significant increase in wheat prices. With the correction in wheat prices, selling prices declined, however, the impact of the decreases was tempered by increased growth in sales of customized products. OTHERS Dairy, Spreads and Oils Total revenues in SMPFC’s dairy, spreads and oils business increased by 9.8% in 2009 compared with 2008. The increase in revenues was driven primarily by 9.4%, 21.0% and 9.8% increases in volume for cheese, milk and ice cream, respectively, due to SMPFC’s introduction of new product variants and expanded distribution reach. Selling prices for ice cream increased, while prices for milk declined significantly following a reduction in raw material costs. Oil volume increased by 29.4%, and volume of bread spreads (including jelly snacks) increased by 4.5%. Cost of Sales Cost of sales increased by 1.8% from P60,609.66 million in 2008 to P61,684.67 million in 2009. AGRO-INDUSTRIAL Cost of sales for SMPFC’s Agro-Industrial cluster was P34,523.64 million, P39,836.86 million, and P42,635.65 million in 2007, 2008 and 2009, respectively. Poultry Cost of sales in SMPFC’s poultry business increased by 13.2% in 2009 compared with 2008, which was lower than the 16.2% increase in revenues for this business in 2009 compared with 2008. The increase in cost of sales was primarily a result of growth in volume, while margins improved due to higher selling prices. Feeds Cost of sales per bag increased by 1.1% while total cost of sales decreased by 3.6% in 2009 against 2008 due to lower volume. The gross contribution margin improved significantly due to the premium pricing strategy. Fresh Meats Cost of sales in SMPFC’s fresh meats business increased by 14.8% in 2009 compared with 2008, which was greater than the 14.7% increase in revenues for this business in 2009 compared with 2008. The increase in cost of sales was in line with the growth in volume.
108
VALUE-ADDED MEATS Cost of sales in SMPFC’s value-added meats business decreased by 1.8% in 2009 compared with 2008, which was less than the 2.5% decrease in revenues for this business in 2009 compared with 2008. The decrease in cost of sales was primarily a result of a decline in volume, and also reflected an increase in cost of inputs. MILLING Flour Cost of sales in SMPFC’s flour business decreased by 20.3% in 2009 compared with 2008, which was greater than the 8.7% decrease in revenues for this business in 2009 compared with 2008. The decrease in cost of sales was driven by decreased wheat prices. OTHERS Dairy, Spreads and Oils Cost of sales in SMPFC’s dairy, spreads and oils business decreased by 3.3% in 2009 compared with 2008, while revenues for this business increased by 9.8% in 2009 compared with 2008. The decrease in cost of sales was driven by decreased input prices.
Gross Profit and Gross Margin Gross margin increased by 3.10 percentage points from 14.7% in 2008 to 17.8% in 2009, resulting in gross profits of P13,358.30 million in 2009, an increase of 27.6% from P10,466.26 million in 2008. Selling and Administrative Expenses Selling and administrative expenses increased by 1.1% from P8,623.65 million in 2008 to P8,720.68 million in 2009. This increase resulted from increased personnel expenses due to additional devolvement of corporate services to SMPFC and the full-year effect of SMC’s devolvement actions in 2008, which were partially offset by headcount reductions. Freight, trucking and handling expenses decreased in 2009 compared with 2008 due to a combination of improved utilization of internal distribution functions and the negotiation of unified rates with shippers. Advertising and promotions expenses decreased in 2009 compared with 2008 due to the discontinuation of SMPFC’s noodles and snacks businesses and related advertising and a reduction in year-end advertising campaigns by SMPFC. Contracted services expenses increased in 2009 compared with 2008 as a result of an increase in the number of chicken stations, which was partially offset by reductions in SMPFC’s fresh meats business, as its Monterey meat shops were converted to a franchise model. Interest Expense and Other Financing Charges Interest expense and other financing charges decreased by 9.6% from P830.91 million in 2008 to P751.04 million in 2009 due to decreased borrowing rates and lower average loan levels. Interest Income Interest income rose by 27.3% from P54.32 million in 2008 to P69.14 million in 2009, primarily due to the increase in the average level of money market placements. Gain (Loss) on Sale of Property and Equipment The loss on sale of property and equipment in 2009 includes losses on the retirement of assets and from the rationalization of existing food shop outlets of San Miguel Foods, Inc. and a write down of leasehold improvements by SMPFC’s flour business following a change in management plans for SMPFC’s snacks and noodles lines, resulting in a P24.66 million loss in 2009 following a P2.82 million gain in 2008.
109
Other Charges – Net Other charges in 2009, which include impairment losses on certain assets, decreased by 80.3% from P451.28 million in 2008 to P88.97 million in 2009, primarily due to unrealized mark-to-market gains in 2009 resulting from favorable hedging positions and foreign exchange rates. Income Before Income Tax As a result of the foregoing, income before income tax increased six-fold from P617.56 million in 2008 to P3,842.09 million in 2009. Income Tax Expense Income tax expense increased by 152.4% from P468.87 million in 2008 to P1,183.63 million in 2009. SMPFC’s effective tax rate decreased from 75.9% in 2008 to 30.8% in 2009 due to: •
a reduction in the tax rate from 35.0% in 2008 to 30.0% in 2009,
•
a write-off in 2008 of expired tax benefits from a net operating loss carryover (NOLCO) and creditable minimum corporate income tax (MCIT), and
•
additional income tax expense in 2008 for reduction in deferred tax assets due to a change in tax rate from 35% to 30%, effective January 1, 2009.
Net Income As a result of the foregoing, net income increased eighteen-fold from P148.69 million in 2008 to P2,658.47 million in 2009. FINANCIAL POSITION The following discussion of SMPFC’s financial position is based on SMPFC’s consolidated audited financial statements as of and for the years ended December 31, 2009 and December 31, 2008. SMPFC’s remarkable operating performance in 2009 resulted in improved overall financial position, as current ratio and debt to equity ratio registered at 1.30:1 and 1.28:1, respectively, from 1.20 and 1.47, respectively, in 2008. Total equity increased from P15.0 billion to P17.6 billion while total asset base rose from P37.0 billion to P40.2 billion or a growth of 9%. Below were the major developments in 2009: Investments in Subsidiaries In April 2009, Monterey, a majority-owned subsidiary of SMPFC, acquired the subscription rights of certain individuals in Highbreed Livestock Corporation (HLC), a Philippine company engaged in livestock farming, processing, selling meat products (mainly pork and beef) and leasing of properties. As such, HLC became a subsidiary of Monterey and was consolidated into SMPFC through Monterey. On June 22, 2009, the respective Board of Directors and stockholders of Monterey and HLC approved the merger of HLC into Monterey, with Monterey as the surviving corporation. The consideration of the assignment of the subscription, net of the effect of the merger, amounted to P6.25 million. The SEC approved the merger on October 22, 2009. The Bureau of Internal Revenue (BIR) confirmed the taxfree merger of HLC into Monterey in its Certification No. S40-052-2009 dated December 18, 2009.
110
The fair value of the identifiable assets and liabilities of HLC at acquisition date are as follows:
Cash and cash equivalents Trade and other receivables - net Prepaid expenses and other current assets Property, plant and equipment - net Deferred tax assets Trade payables and other current liabilities Net assets transferred
P458 14,983 13,139 925,854 18,647 (966,831) P6,250
Related Party On May 1, 2009, the transfer of the receivables, inventories and fixed assets of SMC’s Centralized Key Accounts Group (CKAG) to SMFI was completed, for a total consideration of P2,352.5 million. CKAG was a unit of SMC engaged in the business of selling and distributing various products of some companies within the SMC Group, including SMPFC’s subsidiaries, to modern trade customers. Analysis of Financial Position Accounts Cash and cash equivalents grew by 42% compared to 2008 level mainly due to higher cash sales during December and the integration of SMC’s CKAG unit into the Group. The 16% increase in trade and other receivables - net was mainly due to integration of SMC’s CKAG unit and the insurance claims booked by a subsidiary to cover damages caused by a typhoon. Current biological assets declined by 14% due to lower volume of growing hogs and poultry livestock. The 32% increase in derivative assets is primarily attributed to the higher value of outstanding purchase orders that are to be settled using third currencies and the favorable foreign exchange rate at valuation date. Prepaid expenses and other current assets rose by 53% due to the increase in the level of creditable input and withholding taxes for application against future tax liabilities. The integration of CKAG into the Group also contributed to the increase. Investment properties - net went up by 51% due to additional foreclosed properties during the year. The 15% surge in noncurrent biological assets - net was due to the increase in the volume of Monterey and Poultry’s breeding stocks coupled with higher growing costs. The increase in deferred tax assets by 11% was largely due to the recognition of tax asset on future benefit from the tax loss position for the year of a subsidiary. Retirement and other noncurrent assets increased by 66% due to a subsidiary’s reclassification of certain machinery and equipment considered as idle assets from property, plant and equipment to other noncurrent assets following the change in management’s intention on its branded business. Better operating cash flows of most subsidiaries enabled the Group to partially settle their short- term borrowings, thus, the decrease in notes payable by 24%. Trade payables and other current liabilities registered a 29% increase primarily due to the integration of SMC’s CKAG unit into the Group and the acquisition by Monterey of HLC.
111
Accrued expenses and other payables as of December 31, 2009 amounting to P6,443.63 million and presented in Note 14 of the Company’s 2009 Audited Financial Statements consisted of liabilities for the following: Materials & Supplies VAT and other taxes payable Advertising and promotion/discounts/market development Freight/tolling/shipping payable Growers, breeders and distributors fees Payroll-related accounts Other payables Miscellaneous accruals
P911.43 million 686.75 million 502.03 million 425.16 million 351.09 million 326.96 million 40.01 million 3,200.20 million
Income tax payable was significantly higher versus 2008 level mainly on account of the Group’s positive performance resulting in additional income tax. Deferred tax liabilities increased by 67% due to the effect of the recognition of tax liability on unrealized gains on certain derivative financial instruments. Retirement liability went up by 134% due to the recognition of higher provision for pension costs for the year. The 31% drop in cumulative translation adjustments is primarily due to the appreciation of Indonesia’s rupiah against the Philippine peso. The change in retained earnings is primarily on account of the income earned for the year.
Year Ended December 31, 2008 Compared to Year Ended December 31, 2007 The following comparison of SMPFC’s financial performance is based on SMPFC’s consolidated audited financial statements as of and for the years ended December 31, 2008 and December 31, 2007. Revenues Revenues increased by 14.5% from P62,052.03 million in 2007 to P71,075.93 million in 2008. This increase resulted primarily from a 29.2% increase in revenues from SMPFC’s flour business and an 18.2% increase in revenues from SMPFC’s poultry business. However, revenues from SMPFC’s dairy, spreads and oils business declined over the same period. AGRO-INDUSTRIAL Poultry Revenues in SMPFC’s poultry business increased by 18.2% in 2008 compared with 2007, and volume increased by 8.8% over the same period. The increase in volume was driven by increased demand, particularly from SMPFC’s chicken stations. Increases in selling prices were driven by general market conditions, increased feed prices and sales of higher-margin live chickens. Feeds Revenue grew 14.8% in 2008 compared with 2007 as selling prices per bag increased significantly by 16.8%. Selling price increased due to significant increases in raw material prices. Volume was nearly flat despite a nationwide market contraction in the hog segment which comprised majority of the feeds business.
112
Fresh Meats Revenues in SMPFC’s fresh meats business increased by 3.3% in 2008 compared with 2007, and volume decreased by 8.2% over the same period. The decrease in volume was due to supply constraints, as well as a market demand shift to lower cost meat substitutes, such as chicken, following significant increases in the selling prices of pork and beef. On the other hand, selling prices increased in 2008 compared with 2007, reflecting the increased cost of feed raw materials. VALUE-ADDED MEATS Revenues in SMPFC’s value-added meats business increased by 10.7% in 2008 compared with 2007, and volume increased by 4.1% over the same period. The volume increase reflected increased market demand for more affordable products, such as hotdogs and other processed meat products in substitution for fresh meats in light of the generally difficult economic conditions. Selling prices increased in 2008 compared with 2007, reflecting increased cost of inputs and increased consumer demand for higher-margin products, such as chicken nuggets. MILLING Flour Revenues in SMPFC’s flour business increased by 29.2% in 2008 compared with 2007. Volume of flour products (excluding snacks and noodles) decreased by 5.8% over the same period due to increased selling prices reflecting a significant increase in global wheat prices.
OTHERS Dairy, Spreads and Oils Revenues in SMPFC’s dairy, spreads and oils business decreased by 7.0% in 2008 compared with 2007, as volumes generally declined over the same period due to reduced consumer demand in light of price increases, reflecting increased cost of inputs. Ice cream volume increased due to increased distribution points. Cost of Sales Cost of sales increased by 16.9% from P51,845.19 million in 2007 to P60,609.66 million in 2008. This increase was primarily due to a 45.1% increase in the cost of sales of SMPFC’s flour business, reflecting increased wheat prices, as well as 19.6% and 14.7% increases in the cost of sales of the poultry and feeds businesses, respectively. AGRO-INDUSTRIAL Poultry Cost of sales in SMPFC’s poultry business increased by 19.6% in 2008 compared with 2007, while revenues for this business increased by 18.2% over the same period. The increase in cost of sales was driven by increased volume, as well as increased cost of inputs. Feeds Cost of sales increased by 14.7% in 2008 compared with 2007 as an outcome of increasing price of major feed ingredients worldwide. Fresh Meats Cost of sales in SMPFC’s fresh meats business increased by 5.0% in 2008 compared with 2007, while revenues for this business increased by 3.3% over the same period. The increase in cost of sales primarily reflects an increase in cost of feed raw materials.
113
VALUE-ADDED MEATS Cost of sales in SMPFC’s value-added meats business increased by 8.6% in 2008 compared with 2007, which was lower than the 10.7% increase in revenues for this business over the same period. The increase in cost of sales was driven by increased volume. MILLING Flour Cost of sales in SMPFC’s flour business increased by 45.1% in 2008 compared with 2007, while revenues for this business increased by 29.2% over the same period. The increase in cost of sales was driven by a significant increase in wheat prices, which could not be fully passed on through increases in prices to customers. OTHERS Dairy, Spreads and Oils Cost of sales in SMPFC’s dairy, spreads and oils business decreased by 6.2% in 2008 compared with 2007, while revenues for this business decreased by 7.0% over the same period. The cost of inputs over this period generally increased; however, the overall reduction in costs reflects the decline in volume and revenues.
Gross Profit and Gross Margin Gross margin declined by 1.7 percentage points from 16.4% in 2007 to 14.7% in 2008, translating into gross profits of P10,466.26 million in 2008, or an increase of 2.5% from P10,206.84 million in 2007. Selling and Administrative Expenses Selling and administrative expenses increased by 10.4% from P7,810.92 million in 2007 to P8,623.65 million in 2008. This increase resulted primarily from increased personnel expenses due to the devolvement of certain corporate services functions and personnel that were formerly shared among the SMC Group. Freight, trucking and handling expenses increased in 2008 compared with 2007 as a result of increased fuel prices and expansion of SMPFC’s distribution reach. Advertising and promotions expenses increased in 2008 compared with 2007 due to new product launches and related advertising, including for coffee and chicken nuggets. Contracted services expenses increased in 2008 compared with 2007 due to the new product launches and an increase in the number of chicken stations. Interest Expense and Other Financing Charges Interest expense increased by 24.4% from P667.97 million in 2007 to P830.91 million in 2008 due to higher interest rates and use of additional short-term loans to finance working capital requirements and capital expenditures. Interest Income Interest income decreased by 35.6% from P84.41 million in 2007 to P54.32 million in 2008, primarily due to the decline in the average level of money market placements. Gain (Loss) on Disposal of Property and Equipment and Idle Assets There was a P2.82 million gain on sale of property and equipment in 2008, following a P18.01 million loss in 2007 mainly due to retirement of property and equipment from closure of foodshop outlets. The 2008 gain mainly represents gain on the disposal of SMPFC vehicles.
114
Other Charges – Net Other charges in 2008 of P451.28 million, which consist mainly of mark-to-market losses, represent a 35.2% decrease from P696.05 million in 2007. In 2007, subsequent to SMPFC’s majority acquisition of Monterey, this subsidiary aligned its business systems with those of SMPFC’s other subsidiaries. In the course of such alignment, certain asset accounts were adjusted to reflect their net realizable values. Other related liability accounts were likewise adjusted. The impact of the reduction in Monterey’s net assets was presented as part of “Other Charges-net” in SMPFC’s consolidated statements of income. See Note 22 of SMPFC’s audited consolidated financial statements, which are included elsewhere in this Prospectus. Income Before Income Tax As a result of the foregoing, income before income tax decreased by 43.8% from P1,098.30 million in 2007 to P617.56 million in 2008. Income Tax Expense Income tax expense decreased by 48.8% from P916.21 million in 2007 to P468.87 million in 2008. SMPFC’s effective tax rate declined from 83.4% in 2007 to 75.9% in 2008. Both years included writeoffs of tax benefits as a result of NOLCO and MCIT for certain of SMPFC’s subsidiaries. The year ended December 31, 2008 also included additional income tax expense, to adjust reduction in deferred tax benefits due to a change in tax rate. Net Income As a result of the foregoing, net income decreased by 18.3% from P182.09 million in 2007 to P148.69 million in 2008. FINANCIAL POSITION The following discussion of SMPFC’s financial position is based on SMPFC’s consolidated audited financial statements as of and for the years ended December 31, 2008 and December 31, 2007. SMPFC’s financial position remained within threshold as its consolidated current and debt to equity ratios stood at 1.20 and 1.47, respectively. Total equity increased from P14.8 billion to P 15.0 billion while total asset base rose from P33.3 billion to P37.0 billion or a growth of 11%. Below were the major developments in 2008: Investments in Subsidiaries a)
In July and September 2008, respectively, the Company paid as deposits for future stock subscription, the amounts of P400 million for 283,687,943 Magnolia shares of stock and P450 million for 22,500,000 Monterey shares of stock. In February 2009, Magnolia’s application for increase in authorized capital stock was approved by SEC. Following SEC’s approval, Magnolia issued the said 283,687,943 shares to SMPFC out of its unissued shares and increase in authorized capital stock. As of February 12, 2010, Monterey’s application for the increase in its authorized capital stock is pending filing with SEC. The Company’s total payment in 2008 of P850 million was presented as investments and advances in the Parent Company’s statements of financial position as of December 31, 2008.
b)
In March 2007, SMMI’s application for increase in authorized capital stock from P0.25 million (2,500 shares) to P2,000 million (20,000,000 shares) was approved by the SEC. SMMI subsequently issued 16,457,310 shares to SMFI, then 100% owner of SMMI, in consideration for the transfer of the net assets of SMFI’s Flour division valued at P1,645.5 million. The exchange is by virtue of a Deed of Assignment between SMMI and SMFI executed in December 2005. In January 2008, SMFI executed a Deed of Assignment assigning its 16,457,310 shares in SMMI
115
to the Company effective December 28, 2007. The assignment is in accordance with SMFI’s property dividend declaration of its SMMI shares in favor of the Company, subject to the necessary approvals, and as approved by SMFI’s Board of Directors in June 2007. As of March 19, 2009, the declaration of the SMFI’s shares in SMMI as property dividend in favor of the Company is still pending issuance of a certificate of filing of property dividend declaration by SEC. Analysis of Financial Position Accounts Cash and cash equivalents grew twice as much the 2007 level mainly due to collection of intercompany receivables that took place on the last working day of December 2008, improved collection of past due accounts and higher cash sales. The 17% and 8% increase in inventories - net and trade payables and other current liabilities, respectively, is largely attributed to the increasing costs of almost all major raw materials and on account of the Group’s strategy of buying in advance some of its major raw materials such as corn and imported meats in anticipation of short supply and high market prices. The need for additional funds to finance capital expenditures and working capital requirements and settle those maturing short-term loans resulted in more borrowings, thus the 35% increase in notes payable. Current biological assets grew by 26% due to the increase in volume of growing poultry livestock and goods in process coupled with higher feed costs of broiler and hogs. The substantial decline in derivative assets is primarily attributed to the matured wheat options exercised in 2008, the unfavorable market valuation of soybean meal options and the higher valuation of commitments under purchase orders that are to be settled using third currencies as a result of the depreciation of the peso. Prepaid expenses and other current assets dropped by 13% due to the decrease in the level of creditable input taxes for application against future tax liabilities. Investment properties - net went up by 27% due to additional foreclosed properties in 2008. The 27% surge in noncurrent biological assets - net was due to the increase in volume of Monterey and Poultry’s breeding stocks coupled with higher growing costs. The increase in deferred tax assets by 17% was due to the drop in the market prices of wheat options and the depreciation of the peso which resulted in the recognition of tax asset on unrealized losses on derivatives. The recognition of tax asset on future benefit from the tax loss position in 2008 of some subsidiaries likewise contributed to the increase in deferred tax assets. The foreign subsidiary’s write-off of its 2007 tax refund and the absence of pension asset recognized in 2008 caused the 25% decline in retirement and other noncurrent assets. Income tax payable was 40% lower versus 2007 level mainly because of the drop in the subsidiaries’ income. Retirement liability decreased by 16% due to contributions made, net of expense recognized, in 2008. The 33% decrease in deferred tax liabilities was due to lower unrealized gains recognized on certain derivative financial instruments. The higher mark-to-market valuation of hedged fuel oil requirements of a subsidiary, as a result of the depreciation of the peso against the US dollar, resulted in the 10% drop in cumulative translation adjustments.
116
IMPACT OF BRANDS ACQUISITION In 2007, 2008 and 2009, SMPFC paid P107.41 million, P102.24 million and P132.87 million, respectively, to SMC for the use of the SMPFC Brands. SMPFC paid SMC P79.47 million in connection with its use of the SMPFC Brands in 2010 prior to SMPFC’s acquisition of the brand on July 30, 2010. If the Brands Acquisition had been completed as of January 1, 2007, SMPFC would not have paid those amounts to SMC.
LIQUIDITY AND CAPITAL RESOURCES SMPFC’s primary sources of funds are cash from operations and cash from borrowings. Its primary uses of funds are for operating expenses, working capital for operations, capital expenditures and financing costs. In 2009 and 2010, SMPFC’s consolidated cash flows from operations were sufficient to fund SMPFC’s consolidated operating and financing activities. The following table sets out SMPFC’s cash flows for the nine months ended September 30, 2009 and 2010:
Net cash flows provided by operating activities ................................ Net cash flows used in investing activities ....................................... Net cash flows used in financing activities ....................................... Effect of exchange rate changes in cash and cash equivalents ....... Net increase (decrease) in cash and cash equivalents ....................
For the nine months ended September 30, 2009 2010 (in millions of P) 2,967.54 3,480.36 (1,143.91) (1,144.48) (3,020.38) (2,618.20) (2.65) (1,196.75) (284.97)
Net Cash Flows Provided by Operating Activities Net cash flows provided by operating activities were P3,480.36 million for the nine months ended September 30, 2010. SMPFC’s consolidated income before income tax for this period was P4,087.83 million, and this amount was adjusted for, among others, depreciation and amortization of SMPFC’s consolidated property, plant and equipment, noncurrent biological assets, containers, computer software and licenses, small tools and equipment and investment properties of P1,409.05 million, interest expense on short-term loans of P259.11 million and other income net of gain on derivative transactions of P192.54 million, resulting in operating cash flows before working capital changes of P5,480.58 million. Aggregate changes in working capital reduced this amount by P947.40 million, resulting in cash generated from operating activities of P4,533.18 million. This amount was reduced by interest and income taxes paid of P1,052.82 million. Net cash flows provided by operating activities were P2,967.54 million for the nine months ended September 30, 2009. SMPFC’s consolidated income before income tax for this period was P1,647.35 million, and this amount was adjusted for, among others, depreciation and amortization of SMPFC’s consolidated property, plant and equipment, noncurrent biological assets, containers, computer software and licenses, small tools and equipment and investment properties of P1,263.17 million and interest expense on short-term loans of P622.12 million, resulting in operating cash flows before working capital changes of P3,514.56 million. Aggregate changes in working capital increased this amount by P391.58 million, resulting in cash generated from operating activities of P3,906.14 million. This amount was reduced by interest and income taxes paid of P938.6 million. Net Cash Flows Used in Investing Activities Net cash flows used in investing activities were P1,144.48 million for the nine months ended September 30, 2010. This primarily reflects an increase in inventory of noncurrent biological assets and acquisition of property, plant and equipment and intangible assets. Net cash flows used in investing activities were P1,143.91 million for the nine months ended September 30, 2009. This
117
increase for the period in 2009 primarily reflects an increase in inventory of noncurrent biological assets and acquisition of property, plant and equipment.
Net Cash Flows Used in Financing Activities Net cash flows used in financing activities were P2,618.20 million and P3,020.38 million for the nine months ended September 30, 2010 and 2009, respectively, and are primarily attributable to payments of short-term loans.
Financial Position As of September 30, 2010, SMPFC had total assets of P43,599.56 million, including P28,014.83 million of current assets and P15,584.73 million of noncurrent assets. Current assets as of September 30, 2010 included cash and cash equivalents of P3,665.38 million, trade and other receivables of P6,385.70 million, inventories of P12,681.01 million, biological assets of P3,130.35 million, derivative assets of P72.76 million and prepayments and other current assets of P2,079.64 million. Noncurrent assets as of September 30, 2010 included investment properties of P114.54 million, property, plant and equipment of P9,307.75 million, biological assets of P1,416.75 million, intangible assets of P3,428.85 million, goodwill of P416.53 million, deferred tax assets of P571.46 million and other noncurrent assets of P328.84 million. As of September 30, 2010, SMPFC had total liabilities of P22,350.34 million, including P18,321.50 million of current liabilities and P4,028.84 million of noncurrent liabilities. Current liabilities as of September 30, 2010 included notes payable of P6,738.20 million, trade payables and other current liabilities of P11,306.24 million and income tax payable of P277.06 million. Noncurrent liabilities as of September 30, 2010 included deferred tax liabilities of P262.16 million and other noncurrent liabilities of P3,766.68 million. As of the same date, SMPFC’s working capital (current assets minus current liabilities) was P9,693.32 million. SMPFC believes that its working capital is sufficient for its present requirements. Capital Expenditures SMPFC has made certain capital expenditures primarily to expand existing capacities and improve operational efficiencies. The table below sets forth SMPFC’s capital expenditures for the nine months ended September 30, 2009 and 2010. SMPFC has historically sourced funding for its capital expenditures from a combination of internally generated funds and short-term bank borrowings. Nine months ended September 30,
Expenditure (in P millions)
2009 .......................................................................................................................... 449 2010 .......................................................................................................................... 486
Capital expenditures for 2009 and 2010 include capacity expansion, major repairs of existing facilities and equipment and operations improvements. Off-Balance Sheet Arrangements SMPFC does not have any material off-balance sheet arrangements. SMPFC has, however, entered into derivative transactions to manage its exposures to currency exchange rates and fuel oil prices.
118
Derivative Financial Instruments SMPFC, through SMC, enters into various commodity derivative contracts to manage its exposure to commodity price risk. The portfolio is a mixture of instruments including futures and options covering SMPFC’s requirements for wheat and fuel oil. SMPFC’s freestanding and embedded derivative financial instruments are accounted for as hedges or transactions not designated as hedges. A more detailed description of SMPFC’s derivative financial instruments is set out in Notes 17 to SMPFC’s consolidated interim financial statements, which are included elsewhere in this Prospectus.
KEY PERFORMANCE INDICATORS Set forth below are the major performance measures that SMPFC uses. SMPFC employs analyses using comparisons and measurements based on the financial data for current periods against the same period of the previous year. KPI Liquidity: Current Ratio Solvency: Debt to Equity Ratio Profitability: Return on Average Equity Attributable to Equity Holders of the Parent Company
December 31, 2009
September 30, 2010
1.30
1.53
1.28
1.05
18.64%
22.26%
For the nine months ended September 30, 2009 2010
KPI Operating Efficiency: Volume Growth Revenue Growth Operating Margin
4.68% 5.72% 4.15%
3.07% 4.17% 7.41%
The manner in which SMPFC calculates its key performance indicators is set out in the table below: Key Performance Indicator Current Ratio
Debt to Equity Ratio
Return on Average Equity Attributable to Equity Holders of the Parent Company Volume Growth
Revenue Growth
Operating Margin
Formula Current Assets Current Liabilities Total Liabilities (Current and Non-current) Non-controlling Interests + Stockholders’ Equity
Net Income Attributable to Equity Holders of the Parent Company* Average Equity Attributable to Equity Holders of the Parent Company Sum of all Businesses’ Revenue at Prior Period Prices Prior Period Net Sales Current Period Net Sales Prior Period Net Sales
–1
–1
Income from Operating Activities Net Sales
_____________ Note: *Annualized
119
RECENT ACCOUNTING PRONOUNCEMENTS New accounting rules and disclosure requirements could have an impact on SMPFC’s financial results, as well as on the comparability of its financial statements. For a description of recent accounting pronouncements, including the anticipated adoption dates, see Note 3 to SMPFC’s audited consolidated financial statements included elsewhere in this Prospectus.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK SMPFC is exposed to various types of market risks in the ordinary course of business, including interest rate risk, foreign currency risk, commodity price risk, liquidity risk and credit risk. Interest Rate Risk Interest rate risk is the risk that future cash flows from a financial instrument (cash flow interest rate risk) or its fair value (fair value interest rate risk) will fluctuate because of changes in market interest rates. SMPFC’s exposure to changes in interest rates relates primarily to SMPFC’s notes payable. SMPFC follows a prudent policy to ensure that its exposure to fluctuations in interest rates is kept within acceptable limits. SMPFC does not have short-term loans or long-term installment payables with variable interest rates. Foreign Currency Risk SMPFC’s exposure to foreign currency risk results from significant movements in foreign exchange rates that adversely affect the foreign-currency denominated transactions of SMPFC. SMPFC’s risk management objective with respect to foreign currency risk is to reduce or eliminate earnings volatility and any adverse impact on equity. SMPFC enters into foreign currency hedges using non-derivative instruments, such as foreign currency forwards, to manage its foreign currency risk exposure. For more information regarding SMPFC’s foreign currency risk exposure, see Note 28 to SMPFC’s audited consolidated financial statements included elsewhere in this Prospectus. Commodity Price Risk Commodity price risk is the risk that future cash flows from a financial instrument will fluctuate because of changes in market prices. SMPFC, through SMC, enters into various commodity derivatives to manage its price risks on strategic commodities. Commodity hedging allows stability in prices, thus offsetting the risk of volatile market fluctuations. Through hedging, prices of commodities are fixed at levels acceptable to SMPFC, thus protecting against significant increases in raw material costs and preserving margins. For hedging transactions, if prices go down, hedge positions may show mark-to-market losses; however, any loss in the mark-to-market positions is offset by the resulting lower physical raw material cost. SMPFC uses commodity futures and options to manage SMPFC’s exposures to volatility of prices of certain commodities, such as wheat and fuel oil. Liquidity Risk Liquidity risk pertains to the risk that SMPFC will encounter difficulty in meeting obligations associated with financial liabilities that are settled by delivering cash or another financial asset. SMPFC’s objectives to manage its liquidity risk are as follows: (i) to ensure that adequate funding is available at all times; (ii) to meet commitments as they arise without incurring unnecessary costs; (iii) to be able to access funding when needed at the least possible cost; and (iv) to maintain an adequate time spread of refinancing maturities. For more information regarding SMPFC’s liquidity risk exposure, see Note 28 to SMPFC’s audited consolidated financial statements included elsewhere in this Prospectus.
120
Credit Risk Credit risk is the risk of financial loss to SMPFC if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from SMPFC’s trade receivables. SMPFC’s exposure to credit risk is influenced mainly by the individual characteristics of each customer or counterparty. Thus, SMPFC has established detailed credit policies under which each new customer is reviewed individually for creditworthiness before standard payment and delivery terms and conditions are implemented. SMPFC ensures that sales on account are made to customers with appropriate credit history. SMPFC applies detailed credit criteria and several layers of credit approval requirements before engaging a particular customer or counterparty. SMPFC also manages its credit risk mainly through the application of transaction limits and close risk monitoring. SMPFC’s policy is to enter into transactions with a wide diversity of creditworthy counterparties to mitigate any significant concentration of credit risk. For more information regarding SMPFC’s credit risk exposure, see Note 28 to SMPFC’s audited consolidated financial statements included elsewhere in this Prospectus. Financial and Other Risks Relating to Livestock SMPFC is exposed to financial risks arising from the change in cost and supply of feed ingredients and the selling price of chicken, hogs and cattle and related products, all of which are determined by constantly changing market forces of supply and demand, and other factors. The other factors include environmental regulations, weather conditions and livestock diseases over which SMPFC has little control. Seasonality Certain of SMPFC’s businesses are affected to some degree by seasonal variations. For example, sales of SMPFC’s beef and pork products by its fresh meats and value-added meats businesses are generally stronger in May and December compared with other months. Consumption of beef and pork products increases in May due to the numerous town fiestas and festivities that occur in this month. For fiestas, pork is the preferred meat in the provinces. In December, demand is affected by increased available disposable income for many workers due to the thirteenth month pay, bonuses and higher remittances from overseas. Demand is driven by parties in schools, offices and reunion in homes, especially as relatives returning from abroad. Demand for pork and beef in December increases by approximately 30% to 40% compared with October and is especially marked in the last week of December for the New Year’s celebration, where pork is traditionally preferred over chicken in the Philippines. In addition, sales of SMPFC’s refrigerated meat products, which are part of its value-added business, are generally stronger in the fourth quarter compared with other quarters due to high demand for whole hams which form part of most Filipino families’ Christmas and New Year’s eve celebrations. Historically, December sales volume improve by approximately 50% over earlier months. Furthermore, demand for flour generally increases beginning in September as factories start to build up their inventory to meet the Christmas holiday demand, when consumption of breads, pastries, cakes and other flour-based products generally increases.
121
External Audit Fees and Services For the annual review of the financial statements, the Company paid its external auditors the amount of P1.0 million in 2008 and P1.3 million in 2009 (exclusive of VAT and out of pocket expenses). For the review of the financial statements as of and for the period ended September 30, 2010, the Company will pay its external auditors approximately P1.2 million. The Company’s external auditors did not perform any other services for the Company. The Audit Committee of the Company, pursuant to its mandate to assist the Board of Directors in the performance of its oversight responsibility for financial reports and financial reporting process, internal control system, audit process and in monitoring and facilitating compliance with both the internal financial management handbook and pertinent accounting standards, legal and regulatory requirements, performs the following duties and responsibilities relating to the services of the Company’s external auditors: •
Prior to the commencement of the audit, discuss and review all audit plans, scope and audit resources/expenses of the external auditors;
•
Perform oversight functions with respect to the internal and external auditors of the Company, ensuring the independence of one from the other, freedom from interference from outside parties, and their unrestricted access to such records, properties and personnel of the Company necessary to enable them to perform their respective audit functions; and review the reports submitted by them;
•
Evaluate and determine any non-audit work performed by the external auditors, including the fees therefor, and ensure that such work will not conflict with the external auditors’ duties as such or threaten its independence;
•
Review all interim and annual financial statements before submission to the Board of Directors for approval, with particular focus on the following: •
changes in accounting policies and practices;
•
major judgmental areas;
•
significant adjustments resulting from audit;
•
going concern assumptions;
•
compliance with accounting standards; and
•
compliance with tax, legal and regulatory requirements.
122
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure There are no changes in and disagreements with accountants on Accounting and Financial Disclosure.
123
Interest of Named Experts and Counsel Legal Matters All legal opinion / matters in connection with the issuance of the Preferred Shares which are subject of this offer will be passed upon by Picazo Buyco Tan Fider & Santos for the Company and Romulo Mabanta Buenaventura Sayoc & De Los Angeles for the Joint Lead Underwriters. Picazo Buyco Tan Fider & Santos had issued an opinion dated December 28, 2010 stating that the Company has the permits and licenses which are necessary for the Company to be able to conduct, and without which the Company could not validly and legally conduct, its principal business in the manner described in this Prospectus, and that the same permits and licenses are valid and subsisting. Independent Auditors Manabat Sanagustin & Co. audited SMPFC Corporation’s financial statements for the years ended 31 December 2009, 2008 and 2007, included in this Prospectus. There is no arrangement that experts and independent counsels will receive a direct or indirect interest in the Issuer or was a promoter, underwriter, voting trustee, director, officer, or employee of the Issuer.
124
Taxation The following is a discussion of the material Philippine tax consequences of the acquisition, ownership and disposition of the Preferred Shares. This general description does not purport to be a comprehensive description of the Philippine tax aspects of the Preferred Shares and no information is provided regarding the tax aspects of acquiring, owning, holding or disposing of the Preferred Shares under applicable tax laws of other applicable jurisdictions and the specific Philippine tax consequence in light of particular situations of acquiring, owning, holding and disposing of the Preferred Shares in such other jurisdictions. This discussion is based upon laws, regulations, rulings, and income tax conventions (treaties) in effect at the date of this Prospectus. The tax treatment of a holder of Preferred Shares may vary depending upon such holder’s particular situation, and certain holders may be subject to special rules not discussed below. This summary does not purport to address all tax aspects that may be important to a Preferred Shareholder. PROSPECTIVE PURCHASERS OF THE PREFERRED SHARES ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO THE PARTICULAR TAX CONSEQUENCES OF THE OWNERSHIP AND DISPOSITION OF THE PREFERRED SHARES, INCLUDING THE APPLICABILITY AND EFFECT OF ANY LOCAL OR FOREIGN TAX LAWS. As used in this section, the term “resident alien” refers to an individual whose residence is within the Philippines and who is not a citizen thereof; a “non-resident alien” is an individual whose residence is not within the Philippines and who is not a citizen of the Philippines. A non-resident alien who is actually within the Philippines for an aggregate period of more than 180 days during any calendar year is considered a “non-resident alien doing business in the Philippines,” otherwise, such nonresident alien who is actually within the Philippines for an aggregate period of 180 days or less during any calendar year is considered a “non-resident alien not doing business in the Philippines.” A “resident foreign corporation” is a non-Philippine corporation engaged in trade or business within the Philippines; and a “non-resident foreign corporation” is a non-Philippine corporation not engaged in trade or business within the Philippines.
Taxes on Dividends on the Preferred Shares Individual Philippine citizens and individual aliens who are residents of the Philippines are subject to a final tax on dividends derived from the Preferred Shares at the rate of 10%, which tax shall be withheld by the Company. The dividends derived by domestic corporations (i.e. corporations created or organized in the Philippines or under its laws) and resident foreign corporations (i.e. foreign corporations engaged in trade or business within the Philippines) from the Preferred Shares shall not be subject to tax. Non-resident alien individuals engaged in a trade or business in the Philippines are subject to a final withholding tax on dividends derived from the Preferred Shares at the rate of 20% subject to applicable preferential tax rates under tax treaties in force between the Philippines and the country of domicile of such non-resident alien individual. A non-resident alien individual who comes to the Philippines and stays for an aggregate period of more than 180 days during any calendar year is considered engaged in a trade or business in the Philippines. Non-resident alien individuals not engaged in trade or business in the Philippines are subject to a final withholding tax on dividends derived from the Preferred Shares at the rate of 25% subject to applicable preferential tax rates under tax treaties in force between the Philippines and the country of domicile of such non-resident alien individual. The term “non-resident holder” means a holder of the Preferred Shares: (a) who is an individual who is neither a citizen nor a resident of the Philippines or an entity which is a foreign corporation not engaged in trade or business in the Philippines; and (b) should a tax treaty be applicable, whose ownership of the Shares is not effectively connected with a fixed base or a permanent establishment in the Philippines.
125
Dividends received from a domestic corporation by a non-resident foreign corporation are generally subject to final withholding tax at the rate of 30%, subject to applicable preferential tax rates under tax treaties in force between the Philippines and the country of domicile of such non-resident foreign corporation. The 30% rate for dividends paid to non-resident foreign corporations may be reduced to a special 15% rate if: (a) the country in which the non-resident foreign corporation is domiciled imposes no taxes on foreign sourced dividends; or (b) the country in which the non-resident foreign corporation is domiciled allows a credit against the tax due from the non-resident corporation taxes deemed to have been paid in the Philippines equivalent to 15%. Philippine tax authorities have prescribed, through an administrative issuance, procedures for availment of tax treaty relief. Subject to the approval by Philippine tax authorities of a corporation’s application for tax treaty relief, the corporation will withhold at a reduced rate on dividends paid to a non-resident holder of Preferred Shares if such non-resident holder provides the corporation with proof of residence and, if applicable, individual or corporate status. Proof of residence for an individual consists of a certification from his embassy, consulate or other proper authority as to his citizenship and residence. Proof of residence and corporate status for a corporation consists of authenticated copies of its articles of association, or other equivalent certifications issued by the proper government authority, or any other official document proving residence. If the regular rate of tax is withheld by the corporation instead of the reduced rates applicable under a treaty, the non-resident holder of Preferred Shares may file a claim for a refund from the Philippine taxing authorities. However, because the refund process in the Philippines requires the filing of an administrative claim and the submission of supporting information, and may also involve the filing of a judicial appeal, it may be impractical to pursue such a refund.
Taxes on Sale or Other Disposition of the Shares Sales, exchanges or other dispositions of Preferred Shares which are effected through the PSE by persons other than a dealer in securities are subject to a stock transaction tax at the rate of 0.5% based on the gross selling price of the shares. This tax is required to be collected by and paid to the Government by the selling stockbroker on behalf of his client. The stock transaction tax is classified as a percentage tax in lieu of a capital gains tax. Notwithstanding its classification as a percentage tax, exemptions from capital gains tax may also apply to the stock transaction tax under the terms of some tax treaties. The BIR, in a letter dated December 28, 2010 addressed to the SEC, stated that it would “strictly impose the 5%/10% capital gains tax” for trades in listed companies “who will not maintain their public ownership requirement”, said public ownership requirement being the 10% to 33% public ownership levels (based on the listed company’s market capitalization) required for an initial public offering or IPO. This BIR letter was referred to the PSE by the SEC on January 3, 2011. The PSE subsequently issued a memorandum dated January 20, 2011 in response to the SEC on the BIR’s statements. The PSE noted that the Tax Code imposes a stock transaction tax of ½ of 1% of the gross selling price or gross value in money of shares of stock listed and traded on the PSE, without qualification and that the powers of the Secretary of Finance to promulgate rules and regulations implementing the Tax Code should be confined to the details for implementing the law as it has been enacted and such powers cannot be extended to amend or expand the statutory requirement of the Tax Code. Subject to applicable tax treaty rates, a capital gains tax of 5% on the net capital gains realized during the taxable year, not in excess of P100,000.00, and 10% on the net capital gains realized during the taxable year, in excess of P100,000.00, is imposed on sales, exchanges or other dispositions of shares of stock not traded through a local stock exchange. If implemented, the BIR would impose this tax on such transactions in shares of stock of companies not in compliance with the public ownership requirement as stated in the aforementioned BIR letter. As a practical matter, in order for an exemption under a tax treaty to be recognized, an application for tax treaty relief must be filed and approved by Philippine tax authorities. A non-resident holder must submit proof of residence as described above.
126
A certificate from the tax authority of the recipient’s country is a generally accepted proof of residence, for both individuals and corporations. Aside from proof of residence, the BIR also requires the following documents: (a) special power of attorney duly executed by the recipient in favor of its Philippine agent/withholding agent to file a claim for tax treaty relief; (b) certification from the SEC that the recipient company is not registered to engage in business in the Philippines; (c) letter providing information on the transaction covered by treaty provisions and requested tax treatment for such transaction and legal justification; (d) duly notarized certificate of the Corporate Secretary of the Philippine corporation in respect of the resolution of its board of directors declaring the dividends; and (e) duly notarized certification by the Corporate Secretary of the Philippine corporation showing the number and value of the shares of the applicant and the percentage of the latter’s ownership in the Philippine corporation as of the date of the transaction.
Tax Treaties The following table lists some of the countries with which the Philippines has tax treaties and the tax rates currently applicable to non-resident holders who are residents of those countries:
In percentage (%)
Dividends
Canada France Germany Japan Singapore United Kingdom United States
25(1) 15(2) 15(3) 25(4) 25(5) 25(6) 25(7)
Stock transaction tax on sale or disposition effected through the PSE Exempt(8) Exempt(8) 0.5 Exempt(8) Exempt(8) Exempt(10) Exempt
Capital Gains Tax due on disposition of of Shares outside the PSE Exempt(8) Exempt(8) 5/10(9) Exempt(8) Exempt(8) Exempt(10) Exempt(8)
Notes: (1) 15% if recipient company controls at least 10% of the voting power of the company paying the dividends. (2) 10% if the recipient company holds directly at least 15% of the voting shares of the company paying the dividends. (3) 10% if the recipient company owns directly at least 25% of the capital of the company paying the dividends. (4) 10% if the recipient company holds directly at least 25% of either the voting shares of the company paying the dividends or of the total shares issued by that company during the period of 6 months immediately preceding the date of payment of the dividends. (5) 15% if during the part of the paying company’s taxable year which precedes the date of payment of dividends and during the whole of its prior taxable year at least 15% of the outstanding shares of the voting stock of the paying company was owned by the recipient company.
127
(6) 15% if the recipient company is a company which controls directly or indirectly at least 10% of the voting power of the company paying the dividends. (7) 20% if during the part of the paying corporation’s taxable year which precedes the date of payment of dividends and during the whole of its prior taxable year, at least 10% of the outstanding shares of the voting stock of the paying corporation were owned by the recipient corporation. Notwithstanding the rates provided under the RP-US Treaty, residents of the US may avail of the 15% withholding tax rate under the tax-sparing clause of the Philippine Tax Code provided certain conditions are met. (8) Capital gains are taxable only in the country where the seller is a resident, provided the shares are not those of a corporation, the assets of which consist principally of real property situated in the Philippines, in which case the sale is subject to Philippine taxes. (9) Under the RP-Germany Tax Treaty, capital gains from the alienation of shares of a Philippine corporation may be taxed in the Philippines irrespective of the nature of the assets of the Philippine corporation. Tax rates are 5% on the net capital gains realized during the taxable year not in excess of P100,000 and 10% on the net capital gains realized during the taxable year in excess of P100,000. (10) Under the RP-UK Tax Treaty, capital gains on the sale of the stock of Philippine corporations are subject to tax only in the country where the seller is a resident, irrespective of the nature of the assets of the Philippine corporation. * The Philippine tax authorities, in a recent ruling, have taken the position that the stock transaction tax is not identical or substantially similar to the income tax/capital gains tax on a sale of shares in a domestic corporation, and, hence, not covered by the treaty exemption.
Documentary Stamp Taxes on Preferred Shares The Philippines imposes a documentary stamp tax on the issuance of the Preferred Shares at the rate of P1.00 on each P200.00, or fraction thereof, of the par value of the shares. The Philippines also imposes a documentary stamp tax upon transfers of the Preferred Shares at a rate of P0.75 on each P200.00, or fractional part thereof, of the par value of the shares. The documentary stamp tax is imposed on the person making, signing, issuing, accepting or transferring the document and is thus payable either by the vendor and the purchaser of the Preferred Shares. However, the sale, barter or exchange of Preferred Shares should they be listed and traded through the PSE are exempt from documentary stamp tax.
Estate and Gift Taxes The transfer of the Preferred Shares upon the death of a registered holder to his heirs by way of succession, whether such an individual was a citizen of the Philippines or an alien, regardless of residence, will be subject to Philippine estate tax at progressive rates ranging from 5% to 20% if the net estate is over P 200,000.00. Individual registered holders, whether or not citizens or residents of the Philippines, who transfer shares by way of gift or donation will be liable for Philippine donor’s tax on such transfers at progressive rates ranging from 2% to 15% if the total net gifts made during the calendar year exceed P 100,000.00 provided that the rate of tax with respect to net gifts made to a stranger (one who is not a brother, sister, spouse, ancestor, lineal descendant or relative by consanguinity within the fourth degree of relationship) is a flat rate of 30%. Corporate registered holders are also liable for Philippine donor’s tax on such transfers, but the rate of tax with respect to net gifts made by corporate registered holders is always at a flat rate of 30%.
128
Estate and gift taxes will not be collected in respect of intangible personal property (a) if the deceased at the time of death, or the donor at the time of donation, was a citizen and resident of a foreign country which at the time of his death or donation did not impose a transfer tax of any character in respect of intangible personal property of citizens of the Philippines not residing in that foreign country, or (b) if the laws of the foreign country of which the deceased or the donor was a citizen and resident at the time of his death or donation allow a similar exemption from transfer or death taxes of every character or description in respect of intangible personal property owned by citizens of the Philippines not residing in that foreign country.
Corporate Income Tax In general, a tax of 35% is imposed upon the taxable net income of a domestic corporation from all sources (within and outside the Philippines). However, effective January 1, 2009, the corporate income tax rate was reduced to 30% pursuant to Republic Act 9337. Gross interest income from Philippine currency bank deposits and yield from deposit substitutes, trust fund and similar arrangements as well as royalties from sources within the Philippines are however subject to a final withholding tax of twenty per cent of the gross amount of such income.
129
Industry Overview Industry Overview SMPFC primarily operates in the Philippine food industry. The performance of the food industry in Philippines is closely correlated to Philippines’ economic growth, as well as to trends and developments in each of the segments within the industry.
Overview of the Philippine Economy GDP growth The Philippine economy has performed strongly over the past five years. Based on data from Business Monitor International (BMI), Philippine nominal GDP has increased from P5,444 billion in 2005 to P7,679 billion in 2009, representing a compound annual growth rate(“CAGR”) of approximately 9%, driven primarily by growth in domestic consumption and investment. Real GDP grew from P1,211 billion in 2005 to P1,432 billion in 2009 at a CAGR of approximately 4%. The chart below shows the annual nominal and real GDP for the Philippines from 2005 to 2009. Philippines Nominal and Real GDP (2005 – 2009) 10,000
8,000
7,679
7,423 6,647 6,031
6,000
5,444
4,000
2,000
1,211
1,276
1,366
1,419
1,432
0 2005
2006
Nominal GDP (P. billions)
2007
2008
2009
Real GDP (P. billions)
Source: Global Insight The Philippine population has seen a steady growth rate since 2005. According to BMI, the nation’s population grew at a 2005-2009 CAGR of 1.8% from approximately 86 million to approximately 92 million. The chart below shows Philippine population and population growth rates for the period from 2005 to 2009.
130
Population (2005 – 2009) 2.0%
98.0 1.9%
1.9%
1.9% 1.9%
96.0 1.8%
1.8% 1.8%
94.0 92.0
1.7%
92.0 1.6%
90.3 90.0 88.7 88.0 86.0
1.5%
87.1
1.4%
85.5
1.3%
84.0
1.2% 2005
2006
2007
Population (m)
2008
2009
Population growth rate (%)
Source: Business Monitor International According to BMI, the Philippines is the second most populous nation in Southeast Asia. The chart below shows Philippine population relative to other Southeast Asian countries. Population in Southeast Asian Countries (2009) 250
230
Population (in millions)
200
150
92
100
87 68
50 28
28
Others
Malaysia
0 Indonesia
Philippines
Vietnam
Thailand
Note: Others include Timor-Leste, Cambodia, Laos, Brunei and Singapore Source: Business Monitor International and International Monetary Fund As a result of lower population growth in the Philippines relative to GDP growth, nominal GDP per capita has increased from P.63,676 in 2005 to P.83,482 in 2009 according to Global Insight. The chart below sets out the nominal and real GDP per capita for the period from 2005 to 2009.
131
Philippines Nominal and Real GDP Per Capita (2005 – 2009)
Real GDP per capita
20,000
15,000
14,170
14,652
15,403
15,705
15,569
2007
2008
2009
10,000
5,000
0 2005
2006
Source: Global Insight Inflation The Philippine consumer price index has increased at a CAGR of 5.8% from 2004 to 2009. Allowing full fuel price pass-through has led inflation, as measured by the change in consumer price index, to soar in 2008. However, inflation has decreased since 2008 and remained at a relatively low level of 3.2% in 2009 for the same reason. The chart below shows the change in consumer price index in the Philippines from 2005 to 2009. Consumer Price Index Change (2005 – 2009)
10.0%
9.3%
9.0% 8.0%
7.6%
7.0%
6.2%
6.0% 5.0% 4.0%
3.2% 2.8%
3.0% 2.0% 1.0% 0.0% 2005
2006
2007
2008
2009
Source: International Monetary Fund Disposable income
132
According to the Economist Intelligent Unit (EIU), disposable income has increased over the past five years increased from P4,058 in 2005 to P6,116 in 2009, representing a CAGR of approximately 10.8%, as shown in the chart below. Disposable income (2005-2009) 7,000 6,116
Disposable income (P. billions)
6,000
5,650 4,901
5,000
4,450 4,058
4,000
3,000
2,000
1,000
0 2005
2006
2007
2008
2009
Source: Economist Intelligence Unit Private consumption expenditure The recovery of the local economy from the recession in 2008 and 2009 has boosted consumer spending in 2010. Stronger remittances from migrant workers as developed nations rehired foreign workers, and better job security for local employees due to an increase in foreign investments, brought about an improvement in consumer confidence and higher purchasing power. Higher disposable income of Filipinos has been reflected in increasing private consumption expenditures in recent years, which have risen at a CAGR of 10.7% from P.3,772,250 million in 2005 to P5,674,963 million in 2009 according to National Statistical Coordination Board. In addition, the global economic recovery proved to be beneficial for the country as demand for locally-made products continued to increase despite the strengthening of the Peso. The following chart shows private consumption expenditures in the Philippines from 2005 to 2009.
133
Private consumption expenditure (2005 – 2009) 10,000,000
16.0%
14.5%
14.0%
12.7%
12.1%
8,000,000
12.0% 9.0%
6,000,000
5,281,072
5,674,965
4,611,884
4,229,501
8.0%
3,772,248
4,000,000
10.0%
7.5%
6.0% 4.0%
2,000,000 2.0% 0
0.0% 2005
2006
2007
Private consumption expenditure (m)
2008
2009
Private consumption growth rate (%)
Source: National Statistical Coordination Board Food expenditure continues to account for the largest percentage of private consumption in the Philippines according to the National Statistical Coordination Board. Over the past five years, food as a percentage of private consumption has increased from 44.8% in 2005 to 48.1% in 2009 as illustrated in the charts below.
Breakdown of Private Consumption 2005
2007 Miscellaneous 22.7%
Transportation & communications 9.9% Household operations 10.5% Household furnishing 1.6% Fuel light & water 4.9%
2009 Miscellaneous 22.8%
Food 44.8%
Beverages 1.7% Tobacco 1.6% Clothing & footwear 2.3%
Transportation & communications 11.2% Household operations 9.6% Household furnishing 1.3%
Fuel light & water 4.9%
Miscellaneous 21.8% Food 45.1%
Food 48.1%
Transportation & communications 10.5%
Household operations 9.0% Beverages Household Beverages 1.7% furnishing 1.4% Tobacco 1.5% Tobacco 1.5% 1.5% Fuel light & water Clothing & footwear 4.2% Clothing & footwear 2.1% 2.0%
Source: National Statistical Coordination Board Per capital pork and chicken consumption in the Philippines continues to lag behind that of most regional peers. According to Food and Agricultural Policy Research Institute, the Philippine population consumes approximately 13.2 kilograms and 7.4 kilograms per capita annually of pork and chicken, respectively.
134
Per Capita Pork and Chicken consumption Pork
69.7
Chicken
36.7
34.6 21.4 13.2
7.4
10.712.5
Philippines Thailand
19.2 15.2 3.7
Vietnam
Japan
9.8
China
HK
Source: Food and Agricultural Policy Research Institute Change in Philippine Consumer Preferences More Filipinos adopted healthier lifestyles in 2010 as the Philippine Department of Health together with other health advocates continue to invest in health and wellness information campaigns. These campaigns are targeted to increase awareness of real life issues that are currently affecting a significant number of Filipinos such as malnutrition, obesity, high blood pressure, high cholesterol, diabetes, cancer and other health scares that may result in death. Consumers deciding to improve their overall health have created higher demand for healthier food products with the belief that there is a direct connection between food intake and physical health. This transition in consumer preferences has resulted in the development of fortified food products and healthier alternatives to existing packaged food in the market. AGRO-INDUSTRIAL Poultry The broiler industry in the Philippines was estimated to be a P82 billion market in 2009. The Philippine poultry industry had traditionally been a highly fragmented, primarily backyard industry. However, several major players, including SMPFC, have been successful in introducing modern technologies and processes to the industry, allowing them to consolidate market share to achieve economies of scale. Feeds The Philippine feeds industry is comprised of three segments, namely the “homemix” segment, the “intra” segment and the commercial segment. The homemix segment is comprised of small to medium-scale farms that are producing their own feeds. The intra segment includes the large, integrated livestock and poultry farms, which are also producing their own feeds. The commercial segment produces branded feeds for use by third parties. The total feeds industry in the Philippines is estimated to be a P154 billion market, where commercial feeds segment to be a P47 billion market in 2009. Much like the poultry industry, the Philippine feeds industry has been transformed from a fragmented, backyard market into a more concentrated and efficient industry by a small number of feedmillers, who now dominate the Philippine feeds market. Fresh Meats The fresh meats industry in the Philippines remains highly fragmented. While a number of players in the industry have made attempts to modernize the fresh meats market, they have yet to achieve sufficient scale or consolidation for those efforts to succeed. Consolidation of the fresh meats industry is expected to increase in the future as larger players continue to invest in new technologies.
135
The Philippine hog industry, which is the primary source of fresh meats in the Philippines, was valued at approximately P161 billion in 2009 and ranks among the top ten producers in the world with 1.7 million sows, of which approximately 70% are classified as “backyard” in scale. Almost all Philippine hog producers sell only live hogs to traders. VALUE-ADDED MEATS SMPFC’s value-added meats business is a key player in three segments of the Philippine processed meats industry. According to Nielsen, hotdogs, the largest segment, had an estimated value of P11 billion in the twelve-month period ended June 2010. The combined shares of its various hotdog brands have positioned SMPFC’s value-added meats business as the market leader, with a market share of 57% by sales in the same period. The other two segments, corned meats and luncheon meats, had an estimated value of P8 billion and P5 billion, respectively, by sales in the twelve-month period ended July 2010, also according to Nielsen. For these segments, Nielsen estimated SMPFC’s shares in the same period to be 23% for corned meats and 15% for luncheon meats. In recent years, SMPFC’s value-added meats business has faced increased competition from both established local players, which are employing aggressive pricing and promotion schemes, and from new entrants to the market. SMPFC has responded to this competition by increasing its below-the-line spending on promotions for its value-added meats businesses, as well as introducing new product lines. The value-added meats business has employed a strategy of launching fighter brands and engaging in extensive advertising and promotion for its key brands to maintain its leadership position. It continues to innovate and launch new brands to sustain its market position. MILLING Flour While rice has traditionally been the primary source of carbohydrates in the Philippines, bread and noodles have become increasingly popular alternatives in recent years, which has helped drive growth in the Philippine flour industry. In addition, large bakery chains are expanding rapidly in the Philippines at the expense of smaller, more traditional neighborhood bakeries. These larger chains often place greater emphasis on the quality of the flour they use, providing an opportunity for flour producers to sell customized, higher margin flour products. OTHER Dairy, Spreads and Oils The retail bread spreads market in the Philippines has witnessed declines in recent years as a result of the economic downturn and its effects on consumer spending patterns. Consumers in the Philippines have historically consumed powdered milk. Recently, consumers have become increasingly aware of other forms of milk, such as the ready-to-drink milk products that SMPFC offers. According to Nielsen, the Philippine ready-to-drink milk market was approximately P71 million liters in 2009. According to Euromonitor, the Philippine ice cream market volume was approximately 60 million liters in 2009, and the industry has been growing steadily for the past five years. The Philippine ice cream industry is dominated by Selecta and Nestlé, who hold a combined market share of approximately 86%. Magnolia is currently the third largest brand in the Philippine ice cream industry with 11% market share. Growth in the Philippine jelly-based snacks market has slowed in recent years, as more varieties of alternative snack products have become available. SMPFC believes the value of the Philippine oil industry was approximately P12 billion in 2009, and growth has been relatively stable at approximately 5% in recent years.
136
Coffee According to Nielsen, coffee is one of the most consumed beverages in the Philippines. The total retail coffee market in the Philippines had revenues of approximately P18 billion in 2009. The popularization of coffee shop chains, such as Starbucks and Gloria Jean’s, has greatly influenced coffee consumption among Philippine consumers, particularly among the younger generation. Food Service According to Euromonitor, the food service industry in the Philippines was estimated to be worth P349 billion in 2009. While the food service industry registered a CAGR of 5.1% from 2006 to 2009, according to Euromonitor, SMPFC’s food service business outpaced industry growth with a CAGR of 10.0% over the same period.
REGIONAL Vietnam Vietnam’s food processing industry is highly fragmented and dominated by relatively small domestic operators. Although the consumption of processed meats remains fairly low in Vietnam, it has been increasing, particularly in the main population centers of Ho Chi Minh City and Hanoi, as economic development has led to increased demand for processed meats. Indonesia As the fourth most populous nation in Asia with over 230 million people, Indonesia’s annual per capita meat consumption still remains one of the lowest in the region but one that has shown a strong market potential in the recent years. Other than beef, chicken, fish and soybean-based foods, processed meat products has established its position as an increasing alternative protein source for over 50 percent of the Indonesian population, particularly among middle and lower income consumers.
137
Regulatory Framework Various laws and government agencies in the Philippines regulate the manufacturing, processing, sale and distribution aspects of the SMPFC’s businesses. The FDDC Act The Foods, Drugs and Devices, and Cosmetics Act, as amended by the FDA Act of 2009 (the “FDDC Act”), establishes standards and quality measures in relation to the manufacturing and branding of food products to ensure the safe supply thereof to and within the Philippines. The Food and Drug Administration (previously referred to as the Bureau of Food and Drugs) (the “FDA”) is the governmental agency under the Department of Health (“DOH”) tasked to implement and enforce the FDDC Act. The FDDC Act prohibits, among others, (i) the manufacture, importation, exportation, sale, offering for sale, distribution or transfer, non-consumer use, promotion, advertisement or sponsorship food products which are adulterated or misbranded or which, although requiring registration pursuant to the FDDC Act, are not registered with the FDA; and (ii) the manufacture, importation, exportation, transfer or distribution of any food product by any person or entity without a license to operate from the FDA. Any person found in violation of any of the provisions of the FDDC Act shall be subject to administrative penalties or imprisonment or both. Furthermore, the FDA has the authority to seize such food products found in violation of the FDDC Act as well as ban, recall and withdraw any food product found to be grossly deceptive, unsafe, or injurious to the consuming public. SMPFC and its subsidiaries have “Licenses To Operate” from the FDA, which are renewable every year. The Consumer Act The Consumer Act of the Philippines (the “Consumer Act”) establishes quality and safety standards with respect to the composition, contents, packaging, labeling and advertisement of food products. The DOH (which includes the FDA) is the government agency tasked to implement the Consumer Act with respect to food products. The Consumer Act prohibits the manufacture for sale, offer for sale, distribution, or importation of food products which are not in conformity with applicable consumer product quality or safety standards promulgated thereunder. Like the FDDC Act, the Consumer Act also prohibits the manufacture, importation, exportation, sale, offering for sale, distribution or transfer of food products which are adulterated or mislabeled. In connection therewith, the Consumer Act provides for minimum labeling and packaging requirements for food products to enable consumers to obtain accurate information as to the nature, quality, and quantity of the contents of food products available to the general public. In addition, the Consumer Act prohibits the false, deceptive or misleading advertisements and sales promotions and deceptive sales acts and practices in connection with food products. Any person found in violation of the provisions of the Consumer Act shall be subject to administrative penalties or imprisonment or both. Under the Consumer Act, The DOH also has the authority to order the recall, ban, or seizure from public sale or distribution of food products found to be injurious, unsafe or dangerous to the general public. The Livestock and Poultry Feeds Act The Livestock and Poultry Feeds Act and its implementing rules and regulations (the “Livestock and Poultry Feeds Act”), regulates and controls the manufacture, importation, labeling, advertising and sale of livestock and poultry feeds. The Bureau of Animal Industry (the “BAI”) is the governmental office under the Department of Agriculture (“DA”) tasked to implement and enforce the Livestock and Poultry Feeds Act. Under the Livestock and Poultry Feeds Act, any entity desiring to engage in the manufacture, importation, exportation, sale, trading or distribution of feeds or other feed products must first register with the BAI. There must be a separate registration for each type and location of feed establishment.
138
Furthermore, the Livestock and Poultry Feeds Act provides that no feeds or feed products may be manufactured, imported, exported, traded, advertised, distributed, sold, or offered for sale, or held in possession for sale in the Philippines unless the same has been registered with the BAI. There must also be a separate registration for each type, kind, and form of feed or feed product. Feeds and feed products produced through toll manufacturing shall be registered with the company that owns the same. All commercial feeds must comply with the nutrient standards prescribed by the DA. Registration of feed and feed products and feed establishments is required to be renewed on a yearly basis. The Livestock and Poultry Feeds Act also provides branding, labeling and advertising requirements for feeds and feed products and the establishment of in-house quality control laboratories by manufacturers and traders of feed and feed products. Any person found in violation of the provisions of the Livestock and Poultry Feeds Act shall be subject to administrative penalties or imprisonment or both. SMPFC’s feedmills, whether self-owned and tolled, are all registered with the BAI and SMPFC pays monthly inspection fees based on the number of metric tons of feeds produced. SMPFC also seeks approval from the BAI for brand names and registers every new product prior to market launch. To obtain the brand name approval and product registration, SMPFC submits a notarized Application for Feed Product Registration, Certificate of Analysis and three copies of feed tags to be inserted in the packaging of the new product. Based on this information, the BAI makes a determination as to whether the new product is within its specifications. The Meat Inspection Code The Meat Inspection Code of the Philippines (the “Meat Inspection Code”) establishes quality and safety standards for the slaughter of food animals and the processing, inspection, labeling, packaging, branding and importation of meat (including, but not limited to, pork, beef and chicken meat) and meat products. The National Meat Inspection Service (“NMIS”), a specialized regulatory service attached to the DA, serves as the national controlling authority on all matters pertaining to meat and meat product inspection and meat hygiene to ensure meat safety and quality from farm to table. It has the power to accredit meat establishments and exporters, importers, brokers, traders and handlers of meat and meat products. On the other hand, the different local government units, in accordance with existing laws, policies, rules and regulations and quality and safety standards of the DA, have the authority to regulate the construction, management and operation of slaughterhouses, meat inspection, and meat transport and post-abattoir control within their respective jurisdictions, and to collect fees and charges in connection therewith. The Meat Inspection Code covers all meat establishments (including, but not limited to, slaughterhouses, poultry dressing plants, meat processing plants and meat shops) where food animals are slaughtered, prepared, processed, handled, packed, stored, or sold. It requires the inspection of food animals before it shall be allowed for slaughter in licensed private slaughterhouses in which meat or meat products thereof are to be sold. A post-mortem examination is also required for carcasses and parts thereof of all food animals prepared as articles of commerce which are capable of use as human food. Only meat or meat products from meat establishments that have passed inspection and have been so marked may be sold or offered for sale to the public. The Meat Inspection Code provides for labeling, branding and packaging requirements for meat and meat products to enable consumers to obtain accurate information and ensure product traceability. Said Code also requires all meat establishments to (i) comply with the Animal Welfare Act of 1998 for the adequate protection of food animals awaiting slaughter and all pollution control and environmental laws and regulations relating to the disposal of carcasses and parts thereof; and (ii) adopt Good Manufacturing Practices and Sanitation Standard Operating Procedures programs for the production, storage and distribution of its meat products. Any person found in violation of the provisions of the Meat Inspection Code shall be subject to administrative penalties or imprisonment or both. Furthermore, any carcasses, parts of carcasses or products of carcasses found to have been prepared, handled, packed, stored, transported or offered for sale as human food not in accordance with the provisions thereof shall be confiscated and disposed of at the expense of the person found to be in violation thereof.
139
SMPFC’s poultry processing plants and livestock slaughter plants, both SMPFC-owned and tolled, are all accredited by NMIS. SMPFC’s plants have all been categorized by NMIS as either “AA” or “AAA” grade, which qualifies products from those plants for distribution to any location throughout the Philippines or for export. Plant accreditations are renewed annually following inspection by NMIS for compliance with the Good Manufacturing Practices, Sanitation Standard Operating Procedures and Hazard Analysis and Critical Control Points. NMIS inspectors are also stationed at each of SMPFC’s poultry processing plants and livestock slaughter plants on a daily basis and issue certifications for each batch of products that is shipped from any of those plants. The Price Act The Price Act (the “Price Act”) covers basic necessities such as fresh pork, beef and poultry meat, milk, coffee and cooking oil, and prime commodities such as flour, dried, processed and canned pork, beef and poultry meat, other dairy products and swine and poultry feeds. It is primarily enforced and implemented by the DA and Department of Trade and Industry. Under the Price Act, the prices of basic commodities may be automatically frozen in areas declared as disaster areas, under emergency or martial law or in a state or rebellion or war. Unless sooner lifted by the President of the Philippines, prices shall remain frozen for a maximum of sixty days. The President of the Philippines may likewise impose a price ceiling on basic necessities and prime commodities in cases of calamities, emergencies, illegal price manipulation or when the prevailing prices have risen to unreasonable levels. The implementing government agencies of the Price Act are given the authority thereunder to issue suggested retail prices, whenever necessary, for certain basic necessities and/or prime commodities for the information and guidance of concerned trade, industry and consumer sectors. The Price Act prohibits and penalizes illegal price manipulation through cartels, hoarding or profiteering. Any person found in violation of the provisions of the Price Act shall be subject to administrative penalties or imprisonment or both. The Philippine Food Fortification Act The Philippine Food Fortification Act of 2000 (the “PFF Act”) provides for the mandatory fortification of wheat flour, cooking oil and other staple foods and the voluntary fortification of processed food products. The fortification of food products is required to be undertaken by the manufacturers, importers and processors thereof. The FDA is the government agency responsible for the implementation the PFF Act with the assistance of the different local government units which are tasked under the said law to monitor foods mandated to be fortified which are available in public markets, retail stores and food service establishments and to check if the labels of fortified products contain nutrition facts stating the nutrient added and its quantity. Any person in violation of the PFF Act shall be subject to administrative penalties. Furthermore, the FDA may refuse or cancel the registration or order the recall of food products in violation of said law. All Magnolia-branded products are compliant with the PFF Act. For example, SMPFC uses iodized salt in its Magnolia products to comply with Republic Act No. 8172 (An Act for Salt Iodization Nationwide). For wheat flour, the addition of Vitamin A and Iron are mandated under standards set by the DOH. SMPFC’s flour business has been compliant with the requirements of the PFF Act since 2004. Bangko Sentral ng Pilipinas The Bangko Sentral ng Pilipinas (“BSP”) is the central bank of the Republic of the Philippines. It was rechartered on July 3, 1993, pursuant to the provisions of the 1987 Philippine Constitution and the New Central Bank Act of 1993. The BSP was established on January 3, 1949, as the country’s central monetary authority. Among its functions is the management of foreign currency reserves, by maintaining sufficient international reserves to meet any foreseeable net demands for foreign currencies in order to preserve the international stability and convertibility of the Philippine peso.
140
Department of Trade and Industry The Department of Trade and Industry (“DTI”) is the primary government agency with the dual mission of facilitating the creation of a business environment wherein participants could compete, flourish, and succeed and, at the same time, ensuring consumer welfare. It is the enforcement of laws to protect and educate consumers that becomes the driving factor in the relationship of DTI and manufacturers, such as SMPFC. Department of Labor and Employment Department of Labor and Employment stands as the national government agency mandated to formulate policies, implement programs and services, and serve as the policy-coordinating arm of the Executive Branch in the field of labor and employment. The Department has exclusive authority in the administration and enforcement of labor and employment laws and such other laws as specifically assigned to it or to the Secretary of Labor and Employment. Social Security System and PhilHealth An employer is required under the Social Security Act of 1997 (RA 8282), as amended, ensure coverage of its employees following procedures set out by the law and the Social Security System (“SSS”). SMPFTC, as employer, must deduct from its employees their monthly contributions based on a given schedule, pay its share of contribution and remit these to the SSS within a period set by law and SSS regulations. Philippine Health Insurance Corporation (or “PhilHealth”) is a government corporation attached to the DOH, that ensures sustainable, affordable and progressive social health insurance pursuant to the provisions of RA 7875 or the National Health Insurance Act of 1995, as amended. Employers are required to ensure enrollment of its employees in the National Health Program being administered by the PhilHealth. ENVIRONMENTAL MATTERS The operations of SMPFC’s businesses are subject to various laws, rules and regulations that have been promulgated for the protection of the environment. EISS Law The Philippine Environmental Impact Statement System (the “EISS Law”), which is implemented by the DENR, is the general regulatory framework for any project or undertaking that is either (a) classified as environmentally critical or (b) is situated in an environmentally critical area. It requires an entity that will undertake any such declared environmentally critical project or operate in any such declared environmentally critical area to submit an Environmental Impact Statement (“EIS”) which is a comprehensive study of the significant impacts of a project on the environment. The EIS serves as an application for the issuance of an Environmental Compliance Certificate (“ECC”). An ECC is a government certification that the proposed project or undertaking will not cause significant negative environmental impact; that the proponent has complied with all the requirements of the EISS in connection with said project; and that the proponent is committed to implement its approved Environmental Management Plan in the EIS. In general, only projects that pose potential significant impact on the environment shall be required to secure an ECC. The proponent of a project for which an ECC is issued and determined by the DENR to pose a significant public risk or necessitate rehabilitation or restoration shall be required to establish an Environmental Guarantee Fund. Said Fund is intended to meet any damage caused by, as well as any rehabilitation and restoration measures in connection with, the said project. Clean Water Act The Philippine Clean Water Act of 2004 (the “Clean Water Act”) and its implementing rules and regulations provide for water quality standards and regulations for the prevention, control, and abatement of pollution of the country’s water resources. Said Act require owners or operators of facilities that discharge regulated effluents (such as wastewater from manufacturing plants or other
141
commercial facilities) to secure a discharge permit from the DENR which authorizes said owners and operators to discharge waste and/or pollutants of specified concentration and volumes from their facilities into a body of water or land resource for a specified period of time. The DENR, together with other government agencies and the different local government units, are tasked to implement the Clean Water Act. Clean Air Act The Philippine Clean Air Act of 1999 (the “Clean Air Act”) provides for air quality standards and regulations against air pollution. It provides that the DENR shall have authority to issue permits as it may determine necessary for the prevention and abatement of air pollution. Said permits shall cover emission limitations for regulated air pollutants to help attain and maintain the ambient air quality standards. Under the implementing rules and regulations of the Clean Air Act, all sources of air pollution are required to obtain a valid Permit to Operate while new or modified sources must first obtain an Authority to Construct. The DENR, together with other government agencies and the different local government units, are tasked to implement the Clean Water Act. Other Laws Other regulatory environmental laws and regulations applicable the SMPFC’s businesses include the following: The Toxic Substances and Hazardous and Nuclear Waste Control Act of 1990 regulates, restricts or prohibits the (i) importation, manufacture, processing, handling, storage, transportation, sale, distribution, use and disposal of chemical substance and mixtures that present unreasonable risk or injury to health or the environment, and (ii) entry into the Philippines or the keeping in storage of hazardous wastes which include by-products, process residue, contaminated plant or equipment or other substances from manufacturing operations. Said Act is implemented by the DENR. The Ecological Solid Waste Management Act of 2000 provides for the proper management of solid waste which includes discarded commercial waste and non-hazardous institutional and industrial waste. Said Act prohibits, among others, the transporting and dumping of collected solid wastes in areas other than such centers and facilities prescribed thereunder. The National Solid Waste Management Commission, together with other government agencies and the different local government units, are responsible for the implementation and enforcement of the said law. The Sanitation Code provides for sanitary and structural requirements in connection with the operation of certain establishments such as food establishments which include such places where food or drinks are manufactured, processed, stored, sold or served. Under the Sanitation Code, food establishments are required to secure sanitary permits prior to operation which shall be renewable on a yearly basis. Said Code is implemented by the DOH.
142
The Philippine Stock Market The information presented in this section has been extracted from publicly available documents which have not been prepared or independently verified by the Issuer, the Joint Lead Underwriters or any of their respective subsidiaries, affiliates or advisors in connection with sale of the Preferred Shares.
Brief History The Philippines initially had two stock exchanges, the Manila Stock Exchange, which was organized in 1927, and the Makati Stock Exchange, which began operations in 1963. Each exchange was selfregulating, governed by its respective Board of Governors elected annually by its members. Several steps initiated by the Government have resulted in the unification of the two bourses into the Philippine Stock Exchange (“PSE”). The PSE was incorporated in 1992 by officers of both the Makati and the Manila Stock Exchanges. In March 1994, the licenses of the two exchanges were revoked. While the PSE maintains two trading floors, one in Makati City and the other in Pasig City, these floors are linked by an automated trading system which integrates all bid and ask quotations from the bourses. In June 1998, the Philippine SEC granted the Self-Regulatory Organization (“SRO”) status to the PSE, allowing it to impose rules as well as implement penalties on erring trading participants and listed companies. On August 8, 2001, PSE completed its demutualization, converting from a nonstock member-governed institution into a stock corporation in compliance with the requirements of the SRC. The PSE has an authorized capital stock of P36.8 million, of which P30.6 million is subscribed and fully paid-up. Each of the 184 member-brokers was granted 50,000 common shares of the new PSE at a par value of P1.00 per share. In addition, a trading right evidenced by a “Trading Participant Certificate” was immediately conferred on each member broker allowing the use of the PSE’s trading facilities. As a result of the demutualization, the composition of the PSE Board of Governors was changed, requiring the inclusion of seven brokers and eight non-brokers, one of whom is the President. On December 15, 2003, the PSE listed its shares by way of introduction at its own bourse as part of a series of reforms aimed at strengthening the Philippine securities industry. Classified into financial, industrial, holding firms, property, services, and mining and oil sectors, companies are listed either on the PSE’s First Board, Second Board or the Small and Medium Enterprises Board. Each index represents the numerical average of the prices of component stocks. The PSE has an index, referred to as the PHISIX, which as at the date thereof reflects the price movements of selected stocks listed on the PSE, based on traded prices of stocks from the various sectors. The PSE shifted from full market capitalization to free float market capitalization effective April 3, 2006 simultaneous with the migration to the free float index and the renaming of the PHISIX to PSEi. The PSEi includes 30 selected stocks listed on the PSE. With the increasing calls for good corporate governance, PSE has adopted an online daily disclosure system to improve the transparency of listed companies and to protect the investing public. The table below sets out movements in the composite index from 1995 up to December 1, 2010 and shows the number of listed companies, market capitalization, and value of shares traded for the same period:
143
Year
Composite Index at Closing
Number of Listed Companies
1995 1996 1997 1998 1999 2000 2001 Year
2,594.2 3,170.6 1,869.2 1,968.8 2,142.9 1,494.5 1,168.1 Composite Index at Closing
205 216 221 221 226 230 232 Number of Listed Companies
2002 1,018.4 2003 1,442.2 2004 1,822.8 2005 2,096.0 2006 2,982.5 2007 3,621.6 2008 1,872.9 2009 3,052.7 2010* 4.002.9 *as of December 1, 2010 Source: Philippine Stock Exchange, Inc.
234 236 236 237 240 244 248 248 252
Aggregate Market Capitalization (in P ‘billions) 1,545.7 2,121.1 1,261.3 1,373.7 1,938.6 2,577.6 2,142.6 Aggregate Market Capitalization (in P ‘billions) 2,083.2 2,973.8 4,766.2 5,948.4 7,172.8 7,980.0 4,070.0 6,029.1 8,235.1
Combined Value of Turnover (in P ‘billions) 379.0 668.9 588.0 408.7 713.9 357.6 159.5 Combined Value of Turnover (in P ‘billions) 159.7 145.4 206.6 383.5 572.6 1,340.0 763.9 994.2 658.9
Trading The PSE is a double auction market. Buyers and sellers are each represented by stockbrokers. To trade, bids or ask prices are posted on the PSE’s electronic trading system. A buy (or sell) order that matches the lowest asked (or highest bid) price is automatically executed. Buy and sell orders received by one broker at the same price are crossed at the PSE at the indicated price. Payment of purchases of listed securities must be made by the buyer on or before the third trading day (the settlement date) after the trade. Trading on the PSE starts at 9:30 a.m. and ends at 12:00 p.m. with a 10-minute extension during which transactions may be conducted, provided that they are executed at the last traded price and are only for the purpose of completing unfinished orders. Trading days are Monday to Friday, except legal holidays and days when the BSP clearing house is closed. Minimum trading lots range from 10 to 5,000,000 shares depending on the price range and nature of the security traded. Odd-sized lots are traded by brokers on a board specifically designed for odd-lot trading. To maintain stability in the stock market, daily price swings are monitored and regulated. Under current PSE regulations, when the price of a listed security moves up by 50% or down by 40% in one day (based on the previous closing price or last posted bid price, whichever is higher), the price of that security is automatically frozen by the PSE, unless there is an official statement from the company or a government agency justifying such price fluctuation, in which case the affected security can still be traded but only at the frozen price. If a company fails to submit such explanation, a trading halt is imposed by the PSE on the listed security the following day. Resumption of trading shall be allowed only when the disclosure of the company is disseminated, subject again to the trading ban.
144
Settlement The Securities Clearing Corporation of the Philippines ("SCCP") is a private institution organized primarily as a clearance and settlement agency for depository eligible trades executed in the PSE. The PSE holds 100% ownership of SCCP. SCCP received its permanent license to operate on January 17, 2002. It is responsible for: (a) synchronizing the settlement of funds and the transfer of securities through Delivery versus Payment (DVP) clearing and settlement of transactions of Clearing Members, who are also Trading Participants of the Exchange; (b) guaranteeing the settlement of trades in the event of a Trading Participant’s default through the implementation of its Fails Management System and administration of the Clearing and Trade Guaranty Fund (“CTGF”), and; (c) performance of Risk Management and Monitoring to ensure final and irrevocable settlement. SCCP settles PSE trades on a three-day rolling settlement environment, which means that settlement of trades takes place three (3) trading days after transaction date (“T+3”). The deadline for settlement of trades is 12:00 noon on T+3. Securities sold should be in scripless form and lodged under the book-entry system of the Philippine Depository & Trust Corporation’s (“PDTC”, formerly the Philippine Central Depository, Inc). Each Trading Participant maintains a Cash Settlement Account with one of the two existing Settlement Banks of SCCP which are Banco de Oro Unibank, Inc. and Rizal Commercial Banking Corporation. Payment for securities bought should be in good, cleared funds and should be final and irrevocable. Settlement is presently on a broker level. SCCP implemented its new clearing and settlement system called Central Clearing and Central Settlement (“CCCS”) on May 29, 2006. CCCS employs multilateral netting whereby the system automatically offsets “buy” and “sell” transactions on a per issue and a per flag basis to arrive at a net receipt or a net delivery security position for each Clearing Member. All cash debits and credits are also netted into a single net cash position for each Clearing Member. Novation of the original PSE trade contracts occurs, and SCCP stands between the original trading parties and becomes the Central Counterparty to each PSE-Eligible trade cleared through it.
Scripless Trading In 1995, the Philippine Depository & Trust Corporation (formerly the Philippine Central Depository, Inc.), was organized to establish a central depository in the Philippines and introduce scripless or book-entry trading in the Philippines. On December 16, 1996, the PDTC was granted a provisional license by the Philippine SEC to act as a central securities depository. All listed securities at the PSE have been converted into book-entry settlement in the PDTC. The depository service of the PDTC provides the infrastructure for lodgment (deposit) and upliftment (withdrawal) of securities, pledge of securities, securities lending and borrowing and corporate actions including shareholders’ meetings, dividend declarations and rights offerings. The PDTC also provides depository and settlement services for non-PSE trades of listed equity securities. For transactions on the PSE, the security element of the trade will be settled through the book-entry system, while the cash element will be settled through the current settlement banks, Rizal Commercial Banking Corporation and Banco de Oro – Unibank, Inc. In order to benefit from the book-entry system, securities must be immobilized into the PDTC system through a process called lodgment. Lodgment is the process by which shareholders transfer legal title (but not beneficial title) over their shares of stock in favor of PCD Nominee Corporation (‘‘PCD Nominee’’), a corporation wholly owned by the PDTC whose sole purpose is to act as nominee and legal title holder of all shares of stock lodged into the PDTC. ‘‘Immobilization’’ is the process by which the warrant or share certificates of lodging holders are canceled by the transfer agent and the corresponding transfer of beneficial ownership of the immobilized shares in the account of PCNC through the PDTC participant will be recorded in the Issuer’s registry. This trust arrangement between
145
the participants and PDTC through PCD Nominee is established by and explained in the PDTC Rules and Operating Procedures approved by the Philippine SEC. No consideration is paid for the transfer of legal title to PCD Nominee. Once lodged, transfers of beneficial title of the securities are accomplished via book-entry settlement. Under the current PDTC system, only participants (e.g. brokers and custodians) will be recognized by the PDTC as the beneficial owners of the lodged equity securities. Thus, each beneficial owner of shares through his participant, will be the beneficial owner to the extent of the number of shares held by such participant in the records of the PCD Nominee. All lodgments, trades and uplifts on these shares will have to be coursed through a participant. Ownership and transfers of beneficial interests in the shares will be reflected, with respect to the participant’s aggregate holdings, in the PDTC system, and with respect to each beneficial owner’s holdings, in the records of the participants. Beneficial owners are thus advised that in order to exercise their rights as beneficial owners of the lodged shares, they must rely on their participant-brokers and/or participant-custodians. Any beneficial owner of shares who wishes to trade his interests in the shares must course the trade through a participant. The participant can execute PSE trades and non-PSE trades of lodged equity securities through the PDTC system. All matched transactions in the PSE trading system will be fed through the Securities Clearing Corporation of the Philippines (SCCP), and into the PDTC system. Once it is determined on the settlement date (trading date plus three trading days) that there are adequate securities in the securities settlement account of the participant-seller and adequate cleared funds in the settlement bank account of the participant-buyer, the PSE trades are automatically settled in the SCCP Central Clearing and Central Settlement (‘‘CCCS’’) system, in accordance with the SCCP and PDTC Rules and Operating Procedures. Once settled, the beneficial ownership of the securities is transferred from the participant-seller to the participant-buyer without the physical transfer of stock certificates covering the traded securities. If a stockholder wishes to withdraw his stockholdings from the PDTC System, the PDTC has a procedure of upliftment under which PCD Nominee will transfer back to the stockholder the legal title to the shares lodged. The uplifting shareholder shall follow the Rules and Operating Procedures of the PDTC for the upliftment of the shares lodged under the name of the PCD Nominee. The transfer agent shall prepare and send a Registry Confirmation Advice to the PDTC covering the new number of shares lodged under the PDC nominee. The expenses for upliftment are for the account of the uplifting shareholder. The difference between the depository and the registry would be on the recording of ownership of the shares in the issuing corporations’ books. In the depository set-up, shares are simply immobilized, wherein customers’ certificates are canceled and a new certificate is issued in the name of PCD Nominee Corp. to confirm new balances of the shares lodged with the PDTC. Transfers among/between broker and/or custodian accounts, as the case may be, will only be made within the book-entry system of PDTC. However, as far as the issuing corporation is concerned, the underlying certificates are in the nominee’s name. In the registry set-up, settlement and recording of ownership of traded securities will already be directly made in the corresponding issuing company’s transfer agents’ books or system. Likewise, recording will already be at the beneficiary level (whether it be a client or a registered custodian holding securities for its clients), thereby removing from the broker its current ‘‘de facto’’ custodianship role.
Amended Rule on Lodgment of Securities On June 24, 2009, the PSE apprised all listed companies and market participants through Memorandum No. 2009-0320 that commencing on July 1, 2009, as a condition for the listing and trading of the securities of an applicant company, the applicant company shall electronically lodge its registered securities with the PDTC or any other entity duly authorized by the SEC, without any jumbo or mother certificate in compliance with the requirements of Section 43 of the Securities Regulation Code. In compliance with the foregoing requirement, actual listing and trading of securities on the scheduled listing date shall take effect only after submission by the applicant company of the documentary requirements stated in Article III Part A of the Revised Listing Rules.
146
Further, the PSE apprised all listed companies and market participants on May 21, 2010 through Memorandum No. 2010-0246 that the Amended Rule on Lodgment of Securities under Section 16 of Article III, Part A of the Revised Listing Rules of the Exchange shall apply to all securities that are lodged with the PDTC or any other entity duly authorized by the Philippine SEC. For listing applications, the amended rule on lodgment of securities is applicable to: a. The offer shares/securities of the applicant company in the case of an initial public offering; b. The shares/securities that are lodged with the PDTC, or any other entity duly authorized by the Philippine SEC in the case of a listing by way of introduction; c. New securities to be offered and applied for listing by an existing listed company; and d. Additional listing of securities of an existing listed company. Pursuant to the said amendment, the PDTC issued an implementing procedure in support thereof to wit: For new companies to be listed at the PSE as of July 1, 2009, the usual procedure will be observed but the Transfer Agent on the companies shall no longer issue a certificate to PCD Nominee Corp but shall issue a Registry Confirmation Advice, which shall be the basis for the PDTC to credit the holdings of the Depository Participants on listing date. On the other hand, for existing listed companies, the PDTC shall wait for the advice of the Transfer Agents that it is ready to accept surrender of PCNC jumbo certificates and upon such advice the PDTC shall surrender all PCNC jumbo certificates to the Transfer Agents for cancellation. The Transfer Agents shall issue a Registry Confirmation Advice to PCNC evidencing the total number of shares registered in the name of PCNC in the Issuer’s registry as of confirmation date.
Issuance of Certificated Shares On or after the listing of the shares on the PSE, any beneficial owner of the shares may apply to PDTC through his broker or custodian-participant for a withdrawal from the book-entry system and return to the conventional paper-based settlement. If a stockholder wishes to withdraw his stockholdings from the PDTC System, the PDTC has a procedure of upliftment under which PCD Nominee will transfer back to the stockholder the legal title to the shares lodged. The uplifting shareholder shall follow the Rules and Operating Procedures of the PDTC for the uplifting of the shares lodged under the name of the PCD Nominee. The transfer agent shall prepare and send a Registry Confirmation Advice to the PDTC covering the new number of shares lodged under PCD Nominee. The expenses for upliftment are on the account of the uplifting shareholder. Upon the issuance of certificated shares in the name of the person applying for upliftment, such shares shall be deemed to be withdrawn from the PDTC book-entry settlement system, and trading on such shares will follow the normal process for settlement of certificated securities. The expenses for upliftment of beneficial ownership in the shares to certificated securities will be charged to the person applying for upliftment. Pending completion of the upliftment process, the beneficial interest in the shares covered by the application for upliftment is frozen and no trading and book-entry settlement will be permitted until certificated shares shall have been issued by the relevant company's transfer agent.
147
Appendix A.
Reviewed Unaudited Consolidated Financial Statements as of and for the nine months ended September 30, 2010
B.
Audited Consolidated Financial Statements as of and for the years ended December 31, 2009, 2008 and 2007
148
A.
Reviewed Unaudited Consolidated Financial Statements as of and for the nine months ended September 30, 2010
149
B.
Audited Consolidated Financial Statements as of and for the years ended December 31, 2009, 2008 and 2007
150
SA MIGUEL PURE FOODS COMPAY, IC. AD SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS December 31, 2009, 2008 and 2007
ABCD
Manabat Sanagustin & Co., CPAs TheKPMGCenter,9/F 6787AyalaAvenue MakatiCity1226,MetroManila,Philippines Branches·Subic·Cebu·Bacolod·Iloilo
Telephone +63(2)8857000 Fax +63(2)8941985 Internet www.kpmg.com.ph E-Mail
[email protected] PRC-BOARegistrationNo.0003 SECAccreditationNo.0004-FR-2 BSPAccredited
REPORT OF IDEPEDET AUDITORS
The Stockholders and Board of Directors San Miguel Pure Foods Company, Inc. We have audited the accompanying consolidated financial statements of San Miguel Pure Foods Company, Inc. and Subsidiaries, which comprise the consolidated statements of financial position as at December 31, 2009 and 2008, and the consolidated statements of income, consolidated statements of comprehensive income, consolidated statements of changes in equity and consolidated statements of cash flows for each of the three years in the period ended December 31, 2009, and notes, comprising a summary of significant accounting policies and other explanatory information. Management’s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with Philippine Financial Reporting Standards. This responsibility includes: designing, implementing and maintaining internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances. Auditors’ Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with Philippine Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors’ judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditors consider internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
theKPMGnetworkofindependentmemberfirmsaffiliatedwithKPMG
International,aSwisscooperative.
ManabatSanagustin&Co.,CPAs,aPhilippinepartnershipandamemberfirmof
ABCD
Manabat Sanagustin & Co., CPAs
Manabat Sanagustin & Co., CPAs, a Philippine Partnership and a member firm of the KPMG network of Independent member firms affiliated with KPMG International, A Swiss cooperative.
Telephone +63 (2) 885 7000
SA MIGUEL PURE FOODS COMPAY, IC. AD SUBSIDIARIES COSOLIDATED STATEMETS OF FIACIAL POSITIO (Amounts in Thousands) December 31 ote
2009
2008
ASSETS Current Assets Cash and cash equivalents Trade and other receivables - net Inventories - net Biological assets Derivative assets Prepaid expenses and other current assets Total Current Assets
6, 28, 29 4, 7, 25, 28, 29 4, 8, 25 9 28, 29
P3,950,346 9,023,953 11,804,099 2,524,510 47,070 1,245,674 28,595,652
P2,782,206 7,762,091 11,804,788 2,932,421 35,757 814,808 26,132,071
oncurrent Assets Investment properties - net Property, plant and equipment - net Biological assets - net Goodwill and other intangible assets - net Deferred tax assets Retirement and other noncurrent assets Total oncurrent Assets
4, 11 4, 12, 25 4, 9 4, 13 4, 23 4, 12, 24, 28, 29
108,065 8,294,593 1,285,125 338,354 1,219,676 334,408 11,580,221
71,727 8,058,423 1,115,963 326,600 1,096,259 200,988 10,869,960
P40,175,873
P37,002,031
14, 28, 29 15, 28, 29
P8,816,090 12,667,086 466,920 21,950,096
P11,666,380 9,850,465 208,860 21,725,705
23 24
399,040 181,487 580,527
238,260 77,458 315,718
LIABILITIES AD EQUITY Current Liabilities Notes payable Trade payables and other current liabilities Income tax payable Total Current Liabilities oncurrent Liabilities Deferred tax liabilities Retirement liability Total oncurrent Liabilities Equity Equity Attributable to Equity Holders of the Parent Company Capital stock Additional paid-in capital Revaluation surplus Cumulative translation adjustments Retained earnings Treasury stock on-controlling Interests Total Equity
16
1,454,510 5,821,288 18,219 (48,278) 8,181,278 (182,094) 15,244,923 2,400,327 17,645,250 P40,175,873
See &otes to the Consolidated Financial Statements.
1,454,510 5,821,288 18,219 (70,416) 5,584,315 (182,094) 12,625,822 2,334,786 14,960,608 P37,002,031
SA MIGUEL PURE FOODS COMPAY, IC. AD SUBSIDIARIES COSOLIDATED STATEMETS OF ICOME FOR THE YEARS EDED DECEMBER 31, 2009, 2008 AD 2007 (Amounts in Thousands, Except Per Share Data)
ote
2009
2008
2007
17, 25
P75,042,967
P71,075,925
P62,052,029
18, 25, 31
61,684,667
60,609,663
51,845,187
13,358,300
10,466,262
10,206,842
REVEUES COST OF SALES GROSS PROFIT SELLIG AD ADMIISTRATIVE EXPESES
19, 25
(8,720,676)
(8,623,651)
(7,810,920)
ITEREST EXPESE AD OTHER FIACIG CHARGES
14, 22
(751,042)
(830,914)
(667,972)
6, 22
69,141
54,323
84,407
(24,663)
2,815
(18,010)
ITEREST ICOME GAI (LOSS) O SALE OF PROPERTY AD EQUIPMET OTHER CHARGES - Net
22
ICOME BEFORE ICOME TAX ICOME TAX EXPESE ET ICOME
23
Attributable to: Equity holders of the Parent Company Non-controlling interests Basic and Diluted Earnings Per Share Attributable to Equity Holders of the Parent Company
See &otes to the Consolidated Financial Statements.
26
(88,968)
(451,279)
(696,049)
3,842,092
617,556
1,098,298
1,183,625 P2,658,467
468,870 P148,686
916,205 P182,093
P2,596,963 61,504 P2,658,467
P77,194 71,492 P148,686
P30,591 151,502 P182,093
P18.39
P0.55
P0.22
SA MIGUEL PURE FOODS COMPAY, IC. AD SUBSIDIARIES COSOLIDATED STATEMETS OF COMPREHESIVE ICOME FOR THE YEARS EDED DECEMBER 31, 2009, 2008 AD 2007 (Amounts in Thousands)
ote ET ICOME EXCHAGE DIFFERECES O TRASLATIO OF FOREIG OPERATIOS
2009 P2,658,467
2008 P148,686
16,147
1,544
2007 P182,093
(44,260)
ET GAI (LOSS) O CASH FLOW HEDGES
29
11,196
(11,196)
75
ICOME TAX BEEFIT (EXPESE)
29
(3,359)
3,359
(26)
ET GAI O AVAILABLEFOR-SALE FIACIAL ASSETS ICOME TAX EXPESE OTHER COMPREHESIVE ICOME (LOSS) - ET OF TAX TOTAL COMPREHESIVE ICOME - ET OF TAX Comprehensive Income Attributable to: Equity holders of the Parent Company Non-controlling interests
See &otes to the Consolidated Financial Statements.
2,434 (243)
26,175
502
3,216
(50)
(322)
(5,841)
(41,317)
P2,684,642
P142,845
P140,776
P2,619,101 65,541 P2,684,642
P70,967 71,878 P142,845
P339 140,437 P140,776
SA MIGUEL PURE FOODS COMPAY, IC. AD SUBSIDIARIES COSOLIDATED STATEMETS OF CHAGES I EQUITY FOR THE YEARS EDED DECEMBER 31, 2009, 2008 AD 2007 (Amounts in Thousands)
Capital Stock (Note 16)
Additional Paid-in Capital (Note 16)
At January 1, 2009 Foreign currency translation differences Changes in the fair value of cash flow hedges, net of tax Changes in fair value of available-forsale financial assets, net of tax Total other comprehensive income Net income for the year Total comprehensive income for the year At December 31, 2009
P1,454,510
P1,454,510
P5,821,288
P18,219
At January 1, 2008 Foreign currency translation differences Changes in the fair value of cash flow hedges, net of tax Changes in fair value of available-forsale financial assets, net of tax Total other comprehensive income Net income for the year Total comprehensive income for the year
P1,454,510
P5,821,288
P18,219
Addition in non-controlling interests At December 31, 2008
P1,454,510
Forward
P5,821,288
Equity Attributable to Equity Holders of the Parent Company Cumulative Translation Adjustments Retained Fair Earnings Value Revaluation Translation Hedging (Note 16) Reserve Surplus Reserve Reserve P18,219
(P66,657)
(P7,837)
P4,078
P5,584,315
Treasury Stock (Note 16) (P182,094)
oncontrolling Interests
Total Equity
Total P12,625,822
P2,334,786
P14,960,608
-
-
-
12,110
-
-
-
-
12,110
4,037
16,147
-
-
-
-
7,837
-
-
-
7,837
-
7,837
-
-
-
12,110 -
7,837 -
2,191 2,191 -
2,596,963
-
2,191 22,138 2,596,963
4,037 61,504
2,191 26,175 2,658,467
12,110 (P54,547)
7,837 P -
2,191 P6,269
2,596,963 P8,181,278
(P182,094)
2,619,101 P15,244,923
65,541 P2,400,327
2,684,642 P17,645,250
(P67,815)
P -
P3,626
P5,507,121
(P182,094)
P12,554,855
P2,255,287
P14,810,142
386
1,544
-
-
-
1,158
-
-
-
-
1,158
-
-
-
-
(7,837)
-
-
-
(7,837)
-
-
-
-
1,158 -
(7,837) -
452 452 -
77,194
-
452 (6,227) 77,194
386 71,492
452 (5,841) 148,686
-
-
-
1,158
(7,837)
452
77,194
-
70,967
71,878
142,845
(P7,837)
P4,078
P5,584,315
P12,625,822
7,621 P2,334,786
7,621 P14,960,608
P5,821,288
P18,219
(P66,657)
(P182,094)
(7,837)
Capital Stock (Note 16) At January 1, 2007 Foreign currency translation differences Changes in the fair value of cash flow hedges, net of tax Changes in fair value of available-forsale financial assets, net of tax Total other comprehensive income Net income for the year Total comprehensive income for the year Issuance of capital stock Reduction in non-controlling interests At December 31, 2007
P745,859
Additional Paid-in Capital (Note 16) P1,938,944
Equity Attributable to Equity Holders of the Parent Company Cumulative Translation Adjustments Retained Fair Earnings Value Revaluation Translation Hedging (Note 16) Reserve Surplus Reserve Reserve P18,219
(P34,620)
-
-
-
(33,195) -
49 -
2,894 2,894 -
30,591
-
(33,195) -
49 -
2,894 -
30,591 -
-
P3,626
P5,507,121
-
-
-
-
-
-
-
P5,821,288
See &otes to the Consolidated Financial Statements.
P18,219
P7,963,521
49
(33,195)
P1,454,510
Total
(P182,094) -
-
3,882,344
P5,476,530 -
-
(P67,815)
-
P732 -
-
708,651
(P49)
Treasury Stock (Note 16)
P -
(P182,094)
(33,195) 49 2,894 (30,252) 30,591 339 4,590,995 P12,554,855
oncontrolling Interests
Total Equity
P5,613,182
P13,576,703
(11,065) (11,065) 151,502 140,437 -
(44,260) 49 2,894 (41,317) 182,093 140,776 4,590,995
(3,498,332) (3,498,332) P2,255,287 P14,810,142
SA MIGUEL PURE FOODS COMPAY, IC. AD SUBSIDIARIES COSOLIDATED STATEMETS OF CASH FLOWS FOR THE YEARS EDED DECEMBER 31, 2009, 2008 AD 2007 (Amounts in Thousands)
ote CASH FLOWS FROM OPERATIG ACTIVITIES Income before income tax Adjustments for: Depreciation and amortization 20 Interest expense 14, 22 Other charges net of loss (gain) on derivative transactions 22 One-time recognition of negative goodwill Interest income 6, 22 Decline in value of investments 13 Impairment loss on investment properties 11 Impairment loss on land and other noncurrent assets 22 Loss (gain) on sale of property and equipment Operating income before working capital changes Allowance for impairment losses on receivables and inventory losses Decrease (increase) in: Trade and other receivables Inventories Biological assets Prepaid expenses and other current assets Increase in trade payables and other current liabilities Cash generated from operations Interest paid Income taxes paid (including final tax) Interest received Net cash flows provided by (used in) operating activities Forward
2009
2008
2007
P3,842,092
P617,556
P1,098,298
1,704,508 751,042
1,553,510 830,914
1,458,292 667,972
114,935
733,126
1,074,263
(69,141) -
(54,323) 16,783
3,114
5,359
-
53,873
-
-
24,663
(2,815)
18,010
(115,697) (84,407) 928
6,425,086
3,700,110
4,117,659
193,192
115,039
156,815
(1,349,470) (26,575) 407,911
(114,304) (1,996,485) (608,156)
(1,343,433) (974,401) (411,060)
(430,237)
108,713
(235,729)
1,706,284 6,926,191 (569,452)
179,884 1,384,801 (629,043)
1,008,474 2,318,325 (623,825)
(872,252) 51,720
(878,758) 45,639
(616,340) 71,081
5,536,207
(77,361)
1,149,241
ote CASH FLOWS FROM IVESTIG ACTIVITIES Acquisitions of property, plant and equipment Decrease (increase) in: Biological assets - net Other noncurrent assets Proceeds from sale of property and equipment Transfer of cash from a new subsidiary Cash received from merger transaction Net cash flows used in investing activities CASH FLOW FROM A FIACIG ACTIVITY Net availments (payments) of notes payable ET ICREASE (DECREASE) I CASH AD CASH EQUIVALETS CASH AD CASH EQUIVALETS AT BEGIIG OF YEAR CASH AD CASH EQUIVALETS AT ED OF YEAR
See &otes to the Consolidated Financial Statements.
12
10
2009
2008
2007
(P651,422)
(P593,908)
(P931,601)
(1,023,292) 117,352
(972,614) 45,407
(648,327) (85,072)
39,127
11,330
-
-
458
-
3,221 336,721 -
(1,517,777)
(1,509,785)
(1,325,058)
(2,850,290)
3,026,709
(613,821)
1,168,140
1,439,563
(789,638)
2,782,206
1,342,643
2,132,281
P3,950,346
P2,782,206
P1,342,643
SA MIGUEL PURE FOODS COMPAY, IC. AD SUBSIDIARIES OTES TO THE COSOLIDATED FIACIAL STATEMETS (Amounts in Thousands, Unless Otherwise Indicated)
1. Reporting Entity San Miguel Pure Foods Company, Inc. (“SMPFC” or the “Company”) was incorporated in the Philippines. The consolidated financial statements of the Company as at and for the year ended December 31, 2009 comprise the financial statements of the Company and its Subsidiaries (collectively referred to as the “Group”). The Company is a public company under Section 17.2 of the Securities Regulation Code and its shares are listed in the Philippine Stock Exchange (PSE). The Group is involved in poultry operations, livestock farming and processing and selling of meat products, processing and marketing of refrigerated and canned meat products, manufacturing and marketing of feeds and flour products, cooking oils, breadfill, desserts and dairy-based products, and importation and marketing of coffee and coffee-related products. The registered office address of the Company is JMT Corporate Condominium, ADB Ave., Ortigas Center, Pasig City. San Miguel Corporation (SMC) is the ultimate parent company of the Group. The consolidated financial statements as at and for the year ended December 31, 2009 were authorized for issue by the Board of Directors (BOD) on February 12, 2010.
2. Basis of Preparation Basis of Measurement The consolidated financial statements of the Group have been prepared on a historical cost basis, except for the following:
derivative financial instruments are measured at fair value; available-for-sale (AFS) financial assets are measured at fair value; defined benefit asset is measured as the net total of the plan assets, less unrecognized actuarial gains and the present value of the defined benefit obligation; and agricultural produce are measured at fair value less estimated costs to sell at the point of harvest.
Functional and Presentation Currency The consolidated financial statements are presented in Philippine peso, which is the Company’s functional currency. All values are rounded to the nearest thousand (P000), except when otherwise indicated. Statement of Compliance The consolidated financial statements have been prepared in compliance with Philippine Financial Reporting Standards (PFRS). PFRS includes statements named PFRS and Philippine Accounting Standards (PAS), and Philippine Interpretations from International Financial Reporting Interpretation Committee (IFRIC), issued by the Financial Reporting Standards Council (FRSC).
Basis of Consolidation The consolidated financial statements include the accounts of the Company and the following subsidiaries as of December 31, 2009 and 2008:
San Miguel Foods, Inc. (SMFI) San Miguel Mills, Inc. (SMMI) Magnolia, Inc. and subsidiary (Magnolia) Monterey Foods Corporation (Monterey) PT San Miguel Pure Foods Indonesia Ltd. (PTSMPFI) San Miguel Super Coffeemix Co., Inc. (SMSCCI) The Purefoods-Hormel Company, Inc. (PF-Hormel) RealSnacks Mfg. Corp. (RealSnacks)* San Miguel Pure Foods International, Limited (SMPFIL) **
Country of Incorporation Philippines Philippines Philippines Philippines Indonesia Philippines Philippines Philippines British Virgin Islands
Percentage of Ownership 100.00 100.00 100.00 97.68 75.00 70.00 60.00 100.00 100.00
* Incorporated in April 2004 and has not yet started commercial operations. ** Incorporated in February 2007 and has not yet started commercial operations.
A subsidiary is an entity controlled by the Group. Control exists when the Group has the power, directly or indirectly, to govern the financial and operating policies of an entity so as to obtain benefit from its activities. In assessing control, potential voting rights that are presently exercisable or convertible are taken into account. The financial statements of the subsidiaries are included in the consolidated financial statements from the date when the Group obtains control and continue to be consolidated until the date when such control ceases. The consolidated financial statements are prepared for the same reporting period as the Company, using uniform accounting policies for like transactions and other events in similar circumstances. Intergroup balances and transactions, including intergroup unrealized profits and losses, are eliminated in preparing the consolidated financial statements. Non-controlling interests represent the portion of profit or loss and net assets not held by the Group and are presented in the consolidated financial statements separately from the equity holders of the Parent Company. Non-controlling interests represent the interests not held by the Group in PF-Hormel, Monterey, PTSMPFI and SMSCCI in 2009 and 2008.
3. Significant Accounting Policies The accounting policies set out below have been applied consistently by the Group to all periods presented in the consolidated financial statements. Adoption of New Standards, Amendments to Standards and Interpretations The FRSC approved the adoption of new or revised standards, amendments to standards, and interpretations as part of PFRS. Accordingly, the Group changed its accounting policies in the following areas: Adopted effective 2009
PFRS 8, Operating Segments, introduces the “management approach” to segment reporting.
-2-
Starting January 1, 2009, the Group determined and presented operating segments based on the information internally provided to the BOD. Previously, operating segments were determined and presented in accordance with PAS 14, Segment Reporting. The new accounting policy in respect of segment operating disclosures is presented as follows:
•
Comparative segment information have been re-presented in conformity with the transitional requirements of such standard. Since the change in accounting policy only impacts presentation and disclosure aspects, there is no impact on basic and diluted earnings per share (EPS).
•
An operating segment is a component of the Group that engages in business activities from which it may earn revenues and incur expenses, including revenues and expenses that relate to transactions with any of the Group’s other components. An operating segment’s operating results are reviewed regularly by the BOD to make decisions about resources to be allocated to the segment and assess its performance, and for which discrete financial information is available.
•
Segment results that are reported to the BOD include items directly attributable to a segment as well as those that can be allocated on a reasonable basis. Unallocated items comprise mainly of corporate assets (primarily the Company’s headquarters), certain head office expenses, and deferred tax assets and liabilities.
•
Segment capital expenditure is the total cost incurred during the period to acquire property, plant and equipment, and intangible assets other than goodwill.
Revised PAS 1, Presentation of Financial Statements (2007), introduces the term total comprehensive income, which represents changes in equity during a period other than those changes resulting from transactions with owners in their capacity as owners. Total comprehensive income may be presented in either a single statement of comprehensive income (effectively combining both the statement of income and all non-owner changes in equity in a single statement), or in a statement of income and a separate statement of comprehensive income. The Group applied Revised PAS 1, which became effective as of January 1, 2009. The Group presented in the consolidated statements of changes in equity all owner changes in equity, whereas all non-owner changes in equity are presented in the consolidated statements of comprehensive income. Comparative information have been re-presented so that it is also in conformity with the revised standard. Since the change in accounting policy only impacts presentation aspects, there is no impact on basic and diluted EPS.
Revised PAS 23, Borrowing Costs, removes the option to expense borrowing costs and requires an entity to capitalize borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset as part of the cost of that asset. Prior to this revised standard, the Group already capitalizes borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset as part of the cost of that asset.
-3-
Amendments to PFRS 7, Financial Instruments: Disclosures - Improving Disclosures about Financial Instruments, require disclosures relating to fair value measurements using a three-level fair value hierarchy that reflects the significance of the inputs used in measuring fair values and provide more direction on the form of quantitative disclosures about fair value measurements and require information to be disclosed in a tabular format unless another format is more appropriate. In addition, the amendments clarify and enhance the existing requirements for the disclosure of liquidity risk. Effective January 1, 2009, the said new required disclosures have been included in Note 29 to the consolidated financial statements. Also, as allowed by the amendments, in the first year of application, comparative information is not required to be disclosed.
Embedded Derivatives - Amendments to Philippine Interpretation IFRIC 9, Reassessment of Embedded Derivatives and PAS 39, Financial Instruments: Recognition and Measurement, clarify that on reclassification of a financial asset out of the “at fair value through profit or loss” category, all embedded derivatives have to be assessed and, if necessary, separately accounted for in the consolidated financial statements. The amendments are effective for annual periods ending on or after June 30, 2008.
Philippine Interpretation IFRIC 13, Customer Loyalty Programmes addresses the accounting by entities that operate, or otherwise participate in, customer loyalty programmes under which the customer can redeem credits for awards such as free or discounted goods or services. The interpretation takes effect for annual periods beginning on or after July 1, 2008.
Philippine Interpretation IFRIC 16, Hedges of a &et investment in a Foreign Operation, applies to all entities using net investment hedging for investments in foreign operations and clarifies that net investment hedging can be applied only when the net assets of the foreign operation are included in the financial statements of the entity. The requirements in the interpretation do not apply to other forms of hedge accounting under PAS 39 and cannot be applied by analogy. IFRIC 16 provides guidance on the following issues: (a) nature of the hedged risk and the amount of the hedged item for which a hedging relationship may be designated; (b) where the hedging instrument can be held and assessing hedge effectiveness; and (c) disposal of a foreign operation. The interpretation is effective for annual periods beginning on or after October 1, 2008.
Amendments to PAS 32, Financial Instruments: Presentation and PAS 1, Presentation of Financial Statements - Puttable Financial Instruments and Obligations Arising on Liquidation, became effective for financial years beginning on or after January 1, 2009. The standards have been amended to require puttable instruments, and instruments that impose on the entity an obligation to deliver to another party a pro rata share of the net assets of the entity only on liquidation, to be classified as equity if certain conditions are met.
Amendment to PFRS 2, Share-based Payment - Vesting Conditions and Cancellations, became effective for financial years beginning on or after January 1, 2009. The standard has been amended to clarify the definition of vesting conditions (which are service conditions and performance conditions only), introduce the concept of non-vesting conditions, require non-vesting conditions to be reflected in grant-date fair value and provide the accounting treatment for non-vesting conditions and cancellations.
-4-
Amendments to PFRS 1, First-time Adoption of Philippine Financial Reporting Standards and PAS 27, Consolidated and Separate Financial Statements - Cost of an Investment in a Subsidiary, Jointly Controlled Entity or Associate, became effective for financial years beginning on or after January 1, 2009. The amendments to PFRS 1 allow a first-time adopter, at its date of transition to PFRS in its separate financial statements, to use deemed cost to account for an investment in a subsidiary, jointly controlled entity or associate. The amendments to PAS 27 remove the definition of “cost method” currently set out in PAS 27, and instead require all dividend from a subsidiary, jointly controlled entity or associate to be recognized as income in the separate financial statements of the investor when the right to receive the dividend is established.
Improvements to PFRS 2008 - various standards (except as related to PFRS 5, &oncurrent Assets Held for Sale and Discontinued Operations), discusses 35 amendments and is divided into two parts: (a) Part I includes 24 amendments that result in accounting changes for presentation, recognition or measurement purposes; and (b) Part II includes 11 terminology or editorial amendments that the International Accounting Standards Board expects to have either no or only minimal effects on accounting. These improvements are effective for annual periods beginning on or after January 1, 2009.
Improvements to PFRS 2009 - Amendment to PAS 18, Revenue, Determining whether an entity is acting as a principal or as an agent. The appendix accompanying PAS 18 is amended to specify that an entity acts as a principal when it is exposed to the significant risks and rewards associated with the sale of goods or rendering of services. The amendments also include in the appendix to PAS 18 a number of indicators for consideration in assessing whether an entity is acting as a principal or as an agent. As this is an amendment to an appendix, there is no related effective date and therefore is applicable immediately.
The adoption of these foregoing new or revised standards, amendments to standards and Philippine Interpretations of IFRIC did not have a material effect on the consolidated financial statements. &ew or Revised Standards and Amendments to Standards and Interpretations &ot Yet Adopted The Group will adopt the following new or revised standards, amendments to standards and interpretations on the respective effective dates:
Revised PFRS 3, Business Combinations (2008), effective for annual periods beginning on or after July 1, 2009, incorporates the following changes that are likely to be relevant to the Group’s operations: •
The definition of a business has been broadened, which is likely to result in more acquisitions being treated as business combinations.
•
Contingent consideration will be measured at fair value, with subsequent changes therein recognized in profit or loss.
•
Transaction costs, other than share and debt issue costs, will be expensed as incurred.
-5-
•
Any pre-existing interest in the acquiree will be measured at fair value with the gain or loss recognized in profit or loss.
•
Any non-controlling interest will be measured at either fair value, or at its proportionate interest in the identifiable assets and liabilities of the acquiree, on a transaction-by-transaction basis.
Revised PFRS 3, which becomes mandatory for the Group’s 2010 consolidated financial statements, will be applied prospectively.
Revised PAS 27, Consolidated and Separate Financial Statements (2008), effective for annual periods beginning on or after July 1, 2009, requires accounting for changes in ownership interests by the Group in a subsidiary, while maintaining control, to be recognized as an equity transaction. When the Company loses control of a subsidiary, any interest retained in the former subsidiary will be measured at fair value with the gain or loss recognized in profit or loss. Revised PAS 27 will become mandatory for the Group’s 2010 consolidated financial statements.
Amendments to PAS 39, Financial Instruments: Recognition and Measurement Eligible Hedged Items, provide for the following: a) new application guidance to clarify the existing principles that determine whether specific risks or portions of cash flows are eligible for designation in a hedge relationship; and b) additional application guidance on qualifying items; assessing hedge effectiveness; and designation of financial items as hedged items. The amendments are effective for annual periods beginning on or after July 1, 2009. Amendments to PAS 39 will become mandatory for the Group’s 2010 consolidated financial statements.
Philippine Interpretation IFRIC - 17, Distributions of &on-cash Assets to Owners, provides guidance on the accounting for non-reciprocal distributions of non-cash assets to owners acting in their capacity as owners. It also applies to distributions in which the owners may elect to receive either the non-cash asset or a cash alternative. The liability for the dividend payable is measured at the fair value of the assets to be distributed. The interpretation is effective for annual periods beginning on or after July 1, 2009.
Revised PFRS 1, First-time Adoption of Philippine Financial Reporting Standards, restructures the format of PFRS 1 without changing the standard’s technical content. The revised version moves the exemptions and exceptions contained in the main body of PFRS to different appendices, and also removes PFRS 1 transitional provisions that are no longer considered relevant. The revised standard is effective for annual periods beginning on or after July 1, 2009.
Improvements to PFRS 2008 - Amendments to PFRS 5, &oncurrent Assets Held for Sale and Discontinued Operations, specify that if an entity is committed to a plan to sell a subsidiary, then it would classify all of that subsidiary’s assets and liabilities as held for sale when the held for sale criteria in paragraphs 6 to 8 of PFRS 5 are met; this applies regardless of the entity retaining an interest (other than control) in the subsidiary; and disclosures for discontinued operations are required by the parent company when a subsidiary meets the definition of a discontinued operation. The amendments are effective for annual periods beginning on or after July 1, 2009.
-6-
Amendments to PFRS 1, First-time Adoption of Philippine Financial Reporting Standards - Additional Exemptions for First-time Adopters, provide additional optional exemptions for first-time adopters of PFRS that will permit entities not to reassess the determination of whether an arrangement contains a lease if the same assessment as that required by Philippine Interpretation IFRIC 4 was made under previous GAAP; and allow entities in the oil and gas industry to use their previous GAAP carrying amounts as deemed cost at the date of transition for oil and gas assets. The amendments are effective for annual periods beginning on or after January 1, 2010.
Amendments to PFRS 2, Share-based Payment: Group Cash-settled Share-based Payment Transactions, clarify the scope of PFRS 2, that an entity that receives goods or services in a share-based payment arrangement must account for those goods or services no matter which entity in the group settles the transaction, and regardless of whether the transaction is equity-settled or cash-settled; and the interaction of PFRS 2 and other standards, that in PFRS 2, a “group” has the same meaning as in PAS 27, Consolidated and Separate Financial Statements, that is, it includes only a parent and its subsidiaries. The amendments are effective for annual periods beginning on or after January 1, 2010.
Improvements to PFRS 2009, include 15 amendments to 12 standards. Some of these amendments may have significant implications for current practice, in particular the amendments to PAS 17, Leases may affect the classification of leases of land and buildings, particularly in jurisdictions in which such leases often are for a long period of time. The improvements are generally effective for annual periods beginning on or after January 1, 2010.
Amendment to PAS 32, Financial Instruments: Presentation - Classification of Rights Issues, permits rights, options or warrants to acquire a fixed number of the entity’s own equity instruments for a fixed amount of any currency to be classified as equity instruments provided the entity offers the rights, options or warrants pro rata to all of its existing owners of the same class of its own non-derivative equity instruments. The amendment is applicable for annual periods beginning on or after February 1, 2010.
Philippine Interpretation IFRIC 19, Extinguishing Financial Liabilities with Equity Instruments, addresses issues in respect of the accounting by the debtor in a debt for equity swap transaction. It clarifies that equity instruments issued to a creditor to extinguish all or part of a financial liability in a debt for equity swap are consideration paid in accordance with PAS 39 paragraph 41. The interpretation is applicable for annual periods beginning on or after July 1, 2010.
Revised PAS 24, Related Party Disclosures (2009), amends the definition of a related party and modifies certain related party disclosure requirements for government-related entities. The revised standard is effective for annual periods beginning on or after January 1, 2011.
Prepayments of a Minimum Funding Requirement (Amendments to Philippine Interpretation IFRIC 14: PAS 19 - The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction). These amendments remove unintended consequences arising from the treatment of prepayments where there is a minimum funding requirement and result in prepayments of contributions in certain circumstances being recognized as an asset rather than an expense. The amendments are effective for annual periods beginning on or after January 1, 2011.
-7-
PFRS 9, Financial Instruments, is the first standard issued as part of a wider project to replace PAS 39. PFRS 9 retains but simplifies the mixed measurement model and establishes two primary measurement categories for financial assets: amortized cost and fair value. The basis of classification depends on the entity’s business model and contractual cash flow characteristics of the financial asset. The guidance in PAS 39 on impairment of financial assets and hedge accounting continues to apply. The new standard is effective for annual periods beginning on or after January 1, 2013.
The Group will assess the impact of the new or revised standards, amendments to standards and interpretations on the consolidated financial statements upon adoption. Financial Assets and Liabilities Date of Recognition. The Group recognizes a financial asset or a financial liability in the consolidated statements of financial position when it becomes a party to the contractual provisions of the instrument. In the case of a regular way purchase or sale of financial assets, recognition is done using settlement date accounting. Initial Recognition of Financial Instruments. Financial instruments are recognized initially at fair value of the consideration given (in case of an asset) or received (in case of a liability). The initial measurement of financial instruments, except for those designated at fair value through profit and loss (FVPL), includes transaction costs. Subsequent to initial recognition, the Group classifies its financial assets in the following categories: held-to-maturity (HTM) investments, AFS financial assets, FVPL financial assets, and loans and receivables. The Group classifies its financial liabilities as either FVPL financial liabilities or other liabilities. The classification depends on the purpose for which the investments are acquired and whether they are quoted in an active market. Management determines the classification of its financial assets and financial liabilities at initial recognition and, where allowed and appropriate, re-evaluates such designation at every reporting date. Determination of Fair Value. The fair value for financial instruments traded in active markets at the reporting date is based on their quoted market price or dealer price quotations (bid price for long positions and ask price for short positions), without any deduction for transaction costs. When current bid and asking prices are not available, the price of the most recent transaction provides evidence of the current fair value as long as there has not been a significant change in economic circumstances since the time of the transaction. For all other financial instruments not listed in an active market, the fair value is determined by using appropriate valuation techniques. Valuation techniques include the discounted cash flows method, comparison to similar instruments for which market observable prices exist, options pricing models, and other relevant valuation models. Day 1 Profit. Where the transaction price in a non-active market is different from the fair value of the other observable current market transactions in the same instrument or based on a valuation technique whose variables include only data from observable market, the Group recognizes the difference between the transaction price and fair value (a Day 1 Profit) in the consolidated statements of income unless it qualifies for recognition as some other type of asset. In cases where use is made of data which are not observable, the difference between the transaction price and model value is only recognized in the consolidated statements of income when the inputs become observable or when the instrument is derecognized. For each transaction, the Group determines the appropriate method of recognizing the ‘day 1’ profit amount.
-8-
Financial Assets Financial Assets at FVPL. Financial assets at FVPL include financial assets held for trading, financial assets designated upon initial recognition as at FVPL and those classified under this category through the fair value option. Derivative instruments (including embedded derivatives), except those covered by hedge accounting relationships, are classified under this category. Financial assets are classified as held for trading if they are acquired for the purpose of selling in the near term. Financial assets may be designated by management at initial recognition as at FVPL or reclassified under this category through fair value option, when any of the following criteria is met:
the designation eliminates or significantly reduces the inconsistent treatment that would otherwise arise from measuring the assets or recognizing gains or losses on a different basis; or
the assets and liabilities are part of a group of financial assets, financial liabilities or both which are managed and their performances are evaluated on a fair value basis, in accordance with a documented risk management or investment strategy; or
the financial instrument contains an embedded derivative, unless the embedded derivative does not significantly modify the cash flows or it is clear, with little or no analysis, that it would not be separately recognized.
The Group carries financial assets at FVPL using their fair values. Fair value changes and realized gains and losses are recognized as part of consolidated statements of income. Fair value changes from derivatives accounted for as part of an effective accounting hedge are recognized in the consolidated statements of comprehensive income. Any interest earned shall be recognized as part of “Interest income” in the consolidated statements of income. Any dividend income from equity securities classified as FVPL shall be recognized in the consolidated statements of income when the right of payment has been established. The Group’s derivative assets are classified under this category. The carrying values of financial assets under this category amounted to P47.1 million and P35.8 million as of December 31, 2009 and 2008, respectively (Note 29). Loans and Receivables. Loans and receivables are non-derivative financial assets with fixed or determinable payments and maturities that are not quoted in an active market. They are not entered into with the intention of immediate or short-term resale and are not designated as AFS or financial asset at FVPL. Subsequent to initial measurement, loans and receivables are carried at amortized cost using the effective interest rate method, less any impairment in value. Any interest earned on loans and receivables shall be recognized as part of “Interest income” in the consolidated statements of income on an accrual basis. Amortized cost is calculated by taking into account any discount or premium on acquisition and fees that are integral part of the effective interest rate. The periodic amortization is also included as part of “Interest income” in the consolidated statements of income. Gains or losses are recognized in the consolidated statements of income when loans and receivables are derecognized or impaired, as well as through the amortization process.
-9-
Cash includes cash on hand and in banks which are stated at face value. Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash with original maturities of three months or less and are subject to an insignificant risk of change in value. The Group’s cash and cash equivalents and trade and other receivables are included in this category (Notes 6 and 7). The carrying values of financial assets under this category amounted to P12,974.3 million and P10,544.3 million as of December 31, 2009 and 2008, respectively (Note 29). HTM Investments. HTM investments are quoted non-derivative financial assets with fixed or determinable payments and fixed maturities for which the Group’s management has the positive intention and ability to hold to maturity. Where the Group sells other than an insignificant amount of HTM investments, the entire category would be tainted and classified as AFS financial assets. After initial measurement, these investments are measured at amortized cost using the effective interest rate method, less impairment in value. Any interest earned on the HTM investments shall be recognized as part of “Interest income” in the consolidated statements of income on an accrual basis. Amortized cost is calculated by taking into account any discount or premium on acquisition and fees that are an integral part of the effective interest rate. Gains and losses are recognized in the consolidated statements of income when the HTM investments are derecognized or impaired, as well as through the amortization process. As of December 31, 2009 and 2008, the Group has no investments accounted for under this category. AFS Financial Assets. AFS financial assets are non-derivative financial assets that are either designated in this category or are not classified under any of the other financial asset categories. Subsequent to initial recognition, AFS financial assets are carried at fair value in the consolidated statements of financial position. The effective yield component of AFS debt securities is reported as part of “Interest income” in the consolidated statements of income. Any interest earned on AFS debt securities shall be recognized as part of “Interest income” in the consolidated statements of income on an accrual basis. Dividends earned on holding AFS equity securities are recognized as “Dividend income” when the right of payment has been established. Any unrealized gains or losses for the period arising from the fair valuation of AFS financial assets are reported as part of other comprehensive income, while the accumulated unrealized gains or losses are reported as a separate component of the Group’s equity. When individual AFS financial assets are either derecognized or impaired, the related accumulated unrealized gains or losses previously reported in equity are transferred to and recognized in the consolidated statements of income. The Group’s investments in shares of stock included under “Retirement and other noncurrent assets” are classified under this category. The carrying values of financial assets under this category amounted to P13.8 million and P11.4 million as of December 31, 2009 and 2008, respectively (Note 29). Financial Liabilities Financial Liabilities at FVPL. Financial liabilities are classified under this category through the fair value option. Derivative instruments (including embedded derivatives) with negative fair values, except those covered by hedge accounting relationships, are also classified under this category.
- 10 -
The Group carries financial liabilities at FVPL using their fair values and reports fair value changes as part of consolidated statements of income. Fair value changes from derivatives accounted for as part of an effective accounting hedge are recognized in the consolidated statements of comprehensive income. Any interest expense incurred shall be recognized as part of “Interest expense” in the consolidated statements of income. The carrying values of financial liabilities under this category amounted to P13.4 million and P144.2 million as of December 31, 2009 and 2008, respectively (Notes 15 and 29). Other Financial Liabilities. This category pertains to financial liabilities that are not designated or classified as at FVPL. After initial measurement, other financial liabilities are carried at amortized cost using the effective interest rate method. Amortized cost is calculated by taking into account any premium or discount and any directly attributable transaction costs that are considered an integral part of the effective interest rate of the liability. Included in this category are the Group’s notes payable and trade payables and other current liabilities (Notes 14, 15 and 29). The carrying values of financial liabilities under this category amounted to P21,469.8 million and P21,372.6 million as of December 31, 2009 and 2008, respectively (Note 29). Debt Issue Costs Debt issue costs are considered as an adjustment to the effective yield of the related debt and are deferred and amortized using the effective interest rate method. When a loan is paid, the related unamortized debt issue costs at the date of repayment are charged against current operations. Derivative Financial Instruments and Hedging Freestanding Derivatives For the purpose of hedge accounting, hedges are classified as either: a) fair value hedges when hedging the exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment (except for foreign currency risk); b) cash flow hedges when hedging exposure to variability in cash flows that is either attributable to a particular risk associated with a recognized asset or liability or a highly probable forecast transaction or the foreign currency risk in an unrecognized firm commitment; or c) hedges of a net investment in foreign operations. At the inception of a hedge relationship, the Group formally designates and documents the hedge relationship to which the Group wishes to apply hedge accounting and the risk management objective and strategy for undertaking the hedge. The documentation includes identification of the hedging instrument, the hedged item or transaction, the nature of the risk being hedged and how the entity will assess the hedging instrument’s effectiveness in offsetting the exposure to changes in the hedged item’s fair value or cash flows attributable to the hedged risk. Such hedges are expected to be highly effective in achieving offsetting changes in fair value or cash flows and are assessed on an on-going basis to determine that they actually have been highly effective throughout the financial reporting periods for which they were designated.
- 11 -
Fair Value Hedge. Derivatives classified as fair value hedges are carried at fair value with corresponding change in fair value recognized in the consolidated statements of income. The carrying amount of the hedged asset or liability is also adjusted for changes in fair value attributable to the hedged item and the gain or loss associated with that remeasurement is also recognized in the consolidated statements of income. When the hedge ceases to be highly effective, hedge accounting is discontinued and the adjustment to the carrying amount of a hedged financial instrument is amortized immediately. For fair value hedges relating to items carried at amortized cost, the adjustment to carrying value is amortized through the consolidated statements of income over the remaining term of maturity. Amortization may begin as soon as an adjustment exists and shall begin no later than when the hedged items cease to be adjusted for changes in its fair value attributable to the risk being hedged. The Group discontinues fair value hedge accounting if the hedging instrument expires, is sold, terminated or exercised, the hedge no longer meets the criteria for hedge accounting or the Group revokes the designation. As of December 31, 2009 and 2008, the Group has no outstanding derivatives accounted for as fair value hedges. Cash Flow Hedge. Changes in the fair value of a hedging instrument that qualifies as a highly effective cash flow hedge are recognized in the consolidated statements of comprehensive income. The ineffective portion is immediately recognized in the consolidated statements of income. If the hedged cash flow results in the recognition of an asset or a liability, all gains and losses previously recognized as part of other comprehensive income are transferred from equity and included in the initial measurement of the cost or carrying value of the asset or liability. Otherwise, for all other cash flow hedges, gains and losses initially recognized in equity are transferred from equity to net income in the same period or periods during which the hedged forecasted transaction or recognized asset or liability affect the consolidated statements of income. When the hedge ceases to be highly effective, hedge accounting is discontinued prospectively. The cumulative gain or loss on the hedging instrument that has been reported as part of other comprehensive income is retained in equity until the forecasted transaction occurs. When the forecasted transaction is no longer expected to occur, any net cumulative gain or loss previously reported in equity is recognized in the consolidated statements of income. As of December 31, 2009, the Group has no outstanding commodity options accounted for as cash flow hedge. As of December 31, 2008, the Group has outstanding commodity options accounted for as cash flow hedge. &et Investment Hedge. As of December 31, 2009 and 2008, the Group has no hedge of a net investment in a foreign operation. For derivatives that do not qualify for hedge accounting, any gains or losses arising from changes in fair value of derivatives are taken directly to profit or loss during the year incurred.
- 12 -
Embedded Derivatives The Group assesses whether embedded derivatives are required to be separated from host contracts when the Group becomes a party to the contract. An embedded derivative is separated from the host contract and accounted for as a derivative if all of the following conditions are met: a) the economic characteristics and risks of the embedded derivative are not closely related to the economic characteristics and risks of the host contract; b) a separate instrument with the same terms as the embedded derivative would meet the definition of a derivative; and c) the hybrid or combined instrument is not recognized at fair value through profit or loss. Reassessment only occurs if there is a change in the terms of the contract that significantly modifies the cash flows that would otherwise be required. Derecognition of Financial Assets and Liabilities Financial Assets. A financial asset (or, where applicable, a part of a financial asset or part of a group of similar financial assets) is derecognized when:
the rights to receive cash flows from the asset have expired;
the Group retains the right to receive cash flows from the asset, but has assumed an obligation to pay them in full without material delay to a third party under a ‘passthrough’ arrangement; or
the Group has transferred its rights to receive cash flows from the asset and either (a) has transferred substantially all the risks and rewards of the asset, or (b) has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset.
When the Group has transferred its rights to receive cash flows from an asset and has neither transferred nor retained substantially all the risks and rewards of the asset, nor transferred control of the asset, the asset is recognized to the extent of the Group’s continuing involvement in the asset. Continuing involvement that takes the form of a guarantee over the transferred asset is measured at the lower of the original carrying amount of the asset and the maximum amount of consideration that the Group could be required to pay. Financial Liabilities. A financial liability is derecognized when the obligation under the liability is discharged or cancelled or expired. When an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability, and the difference in the respective carrying amounts is recognized in the consolidated statements of income. Impairment of Financial Assets The Group assesses at reporting date whether a financial asset or group of financial assets is impaired. A financial asset or a group of financial assets is deemed to be impaired if, and only if, there is objective evidence of impairment as a result of one or more events that have occurred after the initial recognition of the asset (an incurred loss event) and that loss event has an impact on the estimated future cash flows of the financial asset or the group of financial assets that can be reliably estimated.
- 13 -
Assets Carried at Amortized Cost. For assets carried at amortized cost such as loans and receivables, the Group first assesses whether objective evidence of impairment exists individually for financial assets that are individually significant, or individually or collectively for financial assets that are not individually significant. If no objective evidence of impairment has been identified for a particular financial asset that was individually assessed, the Group includes the asset as part of a group of financial assets pooled according to their credit risk characteristics and collectively assesses the group for impairment. Assets that are individually assessed for impairment and for which an impairment loss is, or continues to be, recognized are not included in the collective impairment assessment. Evidence of impairment for specific impairment purposes may include indications that the borrower or a group of borrowers is experiencing financial difficulty, default or delinquency in principal or interest payments, or may enter into bankruptcy or other form of financial reorganization intended to alleviate the financial condition of the borrower. For collective impairment purposes, evidence of impairment may include observable data on existing economic conditions or industry-wide developments indicating that there is a measurable decrease in the estimated future cash flows of the related assets. If there is objective evidence of impairment, the amount of loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows (excluding future credit losses) discounted at the financial asset’s original effective interest rate (i.e., the effective interest rate computed at initial recognition). Time value is generally not considered when the effect of discounting the cash flows is not material. If a loan or receivable has a variable rate, the discount rate for measuring any impairment loss is the current effective interest rate, adjusted for the original credit risk premium. For collective impairment purposes, impairment loss is computed for the risk groups based on their respective default and historical loss experience. The carrying amount of the asset shall be reduced either directly or through use of an allowance account. The impairment loss for the period shall be recognized in the consolidated statements of income. If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized, the previously recognized impairment loss is reversed. Any subsequent reversal of an impairment loss is recognized in the consolidated statements of income, to the extent that the carrying value of the asset does not exceed its amortized cost at the reversal date. AFS Financial Assets. If an AFS financial asset is impaired, an amount comprising the difference between the cost (net of any principal payment and amortization) and its current fair value, less any impairment loss on that financial asset previously recognized in the consolidated statements of income, is transferred from equity to the consolidated statements of income. Reversals in respect of equity instruments classified as AFS are not recognized in profit or loss. Reversals of impairment losses on debt instruments are reversed through profit or loss, if the increase in fair value of the instrument can be objectively related to an event occurring after the impairment loss was recognized in the consolidated statements of income. In the case of an unquoted equity instrument or of a derivative asset linked to and must be settled by delivery of an unquoted equity instrument, for which its fair value cannot be reliably measured, the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows from the asset discounted using its historical effective rate of return on the asset.
- 14 -
Classification of Financial Instruments Between Debt and Equity From the perspective of the issuer, a financial instrument is classified as a debt instrument if it provides for a contractual obligation to:
deliver cash or another financial asset to another entity; or
exchange financial assets or financial liabilities with another entity under conditions that are potentially unfavorable to the Group; or
satisfy the obligation other than by the exchange of a fixed amount of cash or another financial asset for a fixed number of own equity shares.
If the Group does not have an unconditional right to avoid delivering cash or another financial asset to settle its contractual obligation, the obligation meets the definition of a financial liability. Offsetting Financial Instruments Financial assets and financial liabilities are offset and the net amount is reported in the consolidated statements of financial position if, and only if, there is a currently enforceable legal right to offset the recognized amounts and there is an intention to settle on a net basis, or to realize the asset and settle the liability simultaneously. This is not generally the case with master netting agreements, and the related assets and liabilities are presented at gross in the consolidated statements of financial position. Inventories Inventories are valued at the lower of cost and net realizable value. Costs incurred in bringing each inventory to its present location and condition are accounted for as follows: Finished goods and goods in process
-
Raw materials, feeds, feed ingredients, factory supplies and others
-
cost includes direct materials and labor and a proportion of manufacturing overhead costs based on normal operating capacity but excluding borrowing costs; costs are determined using the moving average method; at cost using the moving average method
Net realizable value of finished goods and goods in process is the estimated selling price in the ordinary course of business, less the estimated costs of completion and the estimated costs necessary to make the sale. Net realizable value of raw materials, feeds, feed ingredients, factory supplies and others is the current replacement cost. Biological Assets and Agricultural Produce The Group’s biological assets include breeding, growing poultry livestock, hogs and cattle and goods in process which are grouped according to their physical state, transformation capacity (breeding, growing or laying), as well as their particular stage in the production process.
- 15 -
Growing hogs, cattle and poultry livestock and goods in process are carried at accumulated costs while breeding stocks are carried at accumulated costs, net of amortization and any impairment in value. The costs and expenses incurred up to the start of the productive stage are accumulated and amortized over the estimated productive lives of the breeding stocks. The Group uses this method of valuation since fair value cannot be measured reliably. The Group’s biological assets have no active market and no active market for similar assets prior to point of harvest are available in the Philippine poultry and hog industries. Further, the existing sector benchmarks are determined to be irrelevant and the estimates (i.e., revenues due to highly volatile prices, input costs, efficiency values, production) necessary to compute for the present value of expected net cash flows comprise a wide range of data which will not result to a reliable basis for determining the fair value. The carrying values of the biological assets are reviewed for impairment when events or changes in circumstances indicate that the carrying value may not be recoverable. The Group’s agricultural produce, which consists of grown broilers and marketable hogs and cattle harvested from the Group’s biological assets, are measured at their fair value less estimated costs to sell at the point of harvest. The fair value of grown broilers is based on the quoted prices for harvested mature grown broilers in the market at the time of harvest. For marketable hogs and cattle, the fair value is based on the quoted prices in the market at any given time. The Group in general, does not carry any inventory of agricultural produce at any given time as these are either sold as live broilers, hogs and cattle or transferred to the different poultry or meat processing plants and immediately transformed into processed or dressed chicken and carcass. Amortization is computed using straight-line method over the following estimated productive lives of breeding stocks: Number of Years 3 years or 6 births, whichever is shorter 2.5 - 3 years 2.5 - 3 years 40 - 44 weeks
Hogs - sow Hogs - boar Cattle Poultry breeding stock
Interest in Joint Venture The Group recognizes its interest in the joint venture using proportionate consolidation. The Group combines its share in each of the assets, liabilities, income and expenses of the joint venture with similar items, line by line, in its consolidated financial statements. The financial statements of the joint venture are prepared for the same reporting period as the Parent Company, using uniform accounting policies for like transactions and other events in similar circumstances. Adjustments are made to bring into line any dissimilar accounting policies that may exist. The joint venture is proportionately consolidated until the date when the Group ceases to have joint control over the joint venture.
- 16 -
Investment Properties Investment properties consist of land and buildings held to earn rentals and/or for capital appreciation. Buildings are measured at cost less accumulated depreciation and any impairment in value. The carrying amount of buildings includes the cost of replacing part of an existing investment property at the time the cost is incurred, if the recognition criteria are met, and excludes the costs of day-to-day servicing of an investment property. Land is stated at cost less any impairment in value. Depreciation on buildings is computed using the straight-line method over 20 to 40 years. Investment property is derecognized either when it has been disposed of or when it is permanently withdrawn from use and no future economic benefit is expected from its disposal. Any gains and losses on the retirement and disposal of investment property are recognized in the consolidated statements of income in the period of retirement or disposal. Transfers are made to investment property when, and only when, there is a change in use, evidenced by ending of the owner’s occupation or commencement of an operating lease to another party. Transfers are made from investment property when, and only when, there is a change in use, evidenced by commencement of the Group’s occupation or commencement of development with a view to sale. For a transfer from investment property to owner-occupied property or inventories, the cost of property for subsequent accounting is its carrying value at the date of change in use. If the property occupied by the Group as an owner-occupied property becomes an investment property, the Group accounts for such property in accordance with the policy stated under property, plant and equipment up to the date of change in use. Property, Plant and Equipment Property, plant and equipment, except land, are stated at cost less accumulated depreciation and any impairment in value. Such cost includes the cost of replacing part of the property, plant and equipment at the time that cost is incurred, if the recognition criteria are met, and excludes the costs of day-to-day servicing. Land is stated at cost less any impairment in value. The initial cost of property, plant and equipment comprises of its construction cost or purchase price, including import duties, taxes and any directly attributable costs in bringing the asset to its working condition and location for its intended use. Cost also includes any related asset retirement obligation and interest incurred during the construction period on funds borrowed to finance the construction of the projects. Expenditures incurred after the asset has been put into operation, such as repairs, maintenance and overhaul costs, are normally recognized as expense in the period the costs are incurred. Major repairs are capitalized as part of property, plant and equipment only when it is probable that future economic benefits associated with the items will flow to the Group and the cost of the items can be measured reliably. Construction in progress represents structures under construction and is stated at cost. This includes the costs of construction and other direct costs. Borrowing costs that are directly attributable to the construction of property, plant and equipment are capitalized during the construction period. Construction in progress is not depreciated until such time that the relevant assets are ready for use.
- 17 -
Depreciation is computed using the straight-line method over the following estimated useful lives of the assets:
Land improvements Buildings and improvements Machinery and equipment Office furniture and equipment Transportation equipment Factory furniture, equipment and others
Number of Years 5 - 10 5 - 50 5 - 20 3-5 5 3-5
The remaining useful lives, residual values and depreciation method are reviewed and adjusted, if appropriate, periodically to ensure that such periods and method of depreciation are consistent with the expected pattern of economic benefits from the items of property, plant and equipment. The carrying values of property, plant and equipment are reviewed for impairment when events or changes in circumstances indicate that the carrying value may not be recoverable. Fully depreciated assets are retained in the accounts until they are no longer in use and no further depreciation is credited or charged to current operations. An item of property, plant and equipment is derecognized when either it has been disposed of or when it is permanently withdrawn from use and no future economic benefits are expected from its use or disposal. Any gain or loss arising on the retirement and disposal of an item of property, plant and equipment (calculated as the difference between the net disposal proceeds and the carrying amount of the asset) is included in the consolidated statements of income in the period of retirement or disposal. Business Combinations Business combinations are accounted for using the purchase method of accounting. The cost of acquisition is the aggregate of the fair values, at the date of exchange of assets given, liabilities incurred or assumed and equity instruments issued by the acquirer, in exchange for control over the net assets of the acquired company, plus any directly attributable costs. The identifiable assets, liabilities and contingent liabilities that satisfy certain recognition criteria have to be measured initially at their fair values at acquisition date, irrespective of the extent of any non-controlling interests. Transfers of assets between commonly controlled entities are accounted for under historical cost accounting. When a business combination involves more than one exchange transaction (occurs in stages), each exchange transaction is treated separately by the Group, using the cost of the transaction and fair value information at the date of each exchange transaction, to determine the amount of goodwill associated with that transaction. Any adjustment to fair values relating to the previously held interest is a revaluation and is accounted for as such. When subsidiaries are sold, the difference between the selling price and the net assets plus goodwill is recognized in the consolidated statements of income.
- 18 -
Goodwill Goodwill acquired in a business combination is initially measured at cost being the excess of the cost of the business combination over the Group’s interest in the net fair value of the acquiree’s identifiable assets, liabilities and contingent liabilities. Subsequently, goodwill is measured at cost less any accumulated impairment in value. Goodwill is reviewed for impairment, annually or more frequently, if events or changes in circumstances indicate that the carrying value may be impaired. For the purpose of impairment testing, goodwill acquired in a business combination is, from the acquisition date, allocated to each of the Group’s cash-generating units, or groups of cash-generating units that are expected to benefit from the synergies of the combination, irrespective of whether other assets or liabilities of the Group are assigned to those units or groups of units. Each unit or group of units to which the goodwill is so allocated:
represents the lowest level within the Group at which the goodwill is monitored for internal management purposes; and
is not larger than an operating segment determined in accordance with PFRS 8, Operating Segments.
Impairment is determined by assessing the recoverable amount of the cash-generating unit or group of cash-generating units, to which the goodwill relates. Where the recoverable amount of the cash-generating unit or group of cash-generating units is less than the carrying amount, an impairment loss is recognized. Where goodwill forms part of a cash-generating unit or group of cash-generating units and part of the operation within that unit is disposed of, the goodwill associated with the operation disposed of is included in the carrying amount of the operation when determining the gain or loss on disposal of the operation. Goodwill disposed of in this circumstance is measured based on the relative values of the operation disposed of and the portion of the cash-generating unit retained. An impairment loss with respect to goodwill is not reversed. When the Group acquires a business, embedded derivatives separated from the host contract by the acquiree are not reassessed on acquisition unless the business combination results in a change in the terms of the contract that significantly modifies the cash flows that would otherwise be required under the contract. Negative goodwill which is not in excess of the fair values of acquired identifiable nonmonetary assets of subsidiaries and associates is charged directly to income. Intangible Assets Intangible assets acquired separately are measured on initial recognition at cost. The cost of intangible assets acquired in a business combination is its fair value as at the date of acquisition. Subsequently, intangible assets are carried at cost less any accumulated amortization and accumulated impairment losses, if any. Internally generated intangible assets, excluding capitalized development costs, are not capitalized and expenditure is charged against profits in the year in which the expenditure is incurred. The useful lives of intangible assets are assessed to be either finite or indefinite.
- 19 -
Intangible assets with finite lives are amortized over the useful economic life and assessed for impairment whenever there is an indication that the intangible asset may be impaired. The amortization period and amortization method used for an intangible asset with a finite useful life are reviewed at least at each reporting date. Changes in the expected useful life or the expected pattern of consumption of future economic benefits embodied in the asset is accounted for by changing the amortization period or method, as appropriate, and treated as changes in accounting estimates. The amortization expense on intangible assets with finite lives is recognized in the consolidated statements of income in the expense category consistent with the function of the intangible asset. Amortization of computer software and licenses is computed using the straight-line method over the estimated useful life of 2 to 8 years. Trademarks and formulas and recipes with indefinite useful lives are tested for impairment annually either individually or at the cash-generating unit level. Such intangibles are not amortized. The useful life of an intangible asset with an indefinite life is reviewed annually to determine whether indefinite life assessment continues to be supportable. If not, the change in the useful life assessment from indefinite to finite is made on a prospective basis. Gains or losses arising from disposal of an intangible asset are measured as the difference between the net disposal proceeds and the carrying amount of the asset and are recognized in the consolidated statements of income when the asset is derecognized. Impairment of Other Non-financial Assets The carrying values of investments and advances, property, plant and equipment, investment properties, biological assets, other intangible assets with definite useful lives, and idle assets, included under retirement and other noncurrent assets, are reviewed for impairment when events or changes in circumstances indicate that the carrying value may not be recoverable. If any such indication exists, and if the carrying value exceeds the estimated recoverable amount, the assets or cash-generating units are written down to their recoverable amounts. The recoverable amount of the asset is the greater of fair value less costs to sell or value in use. The fair value less costs to sell is the amount obtainable from the sale of an asset in an arm’s-length transaction between knowledgeable, willing parties, less costs of disposal. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessment of the time value of money and the risks specific to the asset. For an asset that does not generate largely independent cash inflows, the recoverable amount is determined for the cash-generating unit to which the asset belongs. Impairment losses of continuing operations are recognized in the consolidated statements of income in those expense categories consistent with the function of the impaired asset. An assessment is made at each reporting date as to whether there is any indication that previously recognized impairment losses may no longer exist or may have decreased. If such indication exists, the recoverable amount is estimated. A previously recognized impairment loss is reversed only if there has been a change in the estimates used to determine the asset’s recoverable amount since the last impairment loss was recognized. If that is the case, the carrying amount of the asset is increased to its recoverable amount. That increased amount cannot exceed the carrying amount that would have been determined, net of depreciation and amortization, had no impairment loss been recognized for the asset in prior years. Such reversal is recognized in profit or loss. After such a reversal, the depreciation and amortization charge is adjusted in future periods to allocate the asset’s revised carrying amount, less any residual value, on a systematic basis over its remaining useful life.
- 20 -
Provisions Provisions are recognized when the Group has (a) a present obligation (legal or constructive) as a result of a past event; (b) it is probable ( i.e., more likely than not) that an outflow of resources embodying economic benefits will be required to settle the obligation; and (c) a reliable estimate can be made of the amount of the obligation. If the effect of the time value of money is material, provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessment of the time value of money and, where appropriate, the risks specific to the liability. Where discounting is used, the increase in the provision due to the passage of time is recognized as interest expense. Where the Group expects a provision to be reimbursed, the reimbursement is recognized as a separate asset but only when the receipt of the reimbursement is virtually certain. Provisions are reviewed at each reporting date and adjusted to reflect the current best estimate. Share Capital Common Shares Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of ordinary shares and share options are recognized as a deduction from equity, net of any tax effects. Treasury Shares Own equity instruments which are reacquired are carried at cost and are deducted from equity. No gain or loss is recognized on the purchase, sale, issue or cancellation of the Group’s own equity instruments. When the shares are retired, the capital stock account is reduced by its par value and the excess of cost over par value upon retirement is debited to additional paid-in capital to the extent of the specific or average additional paid-in capital when the shares were issued and to retained earnings for the remaining balance. Revenue Recognition Revenue is recognized to the extent that it is probable that the economic benefits will flow to the Group and the revenue can be reliably measured. The following specific recognition criteria must also be met before revenue is recognized: Sales. Revenue from the sale of goods in the course of ordinary activities is measured at the fair value of the consideration received or receivable, net of returns, trade discounts and volume rebates. Revenue is recognized when the significant risks and rewards of ownership of the goods have passed to the buyer and the amount of revenue can be measured reliably, which is normally upon delivery. Agricultural Produce. Revenue from initial recognition of agricultural produce is measured at fair value less estimated costs to sell at the point of harvest. Fair value is based on the relevant market price at point of harvest. Interest. Revenue is recognized as the interest accrues, taking into account the effective yield on the asset. Dividend. Revenue is recognized when the Group’s right as a shareholder to receive the payment is established. Gain or Loss on Sale of Investments in Shares of Stock. Gain or loss is recognized if the Group disposes of its investment in a subsidiary or joint venture. Gain or loss is computed as the difference between the proceeds of the disposed investments and its carrying amount, including the carrying amount of goodwill, if any.
- 21 -
Rent. Revenue from investment properties is recognized on a straight-line basis over the lease term or based on the terms of the lease, as applicable. Rent income is included as part of other income. Cost and Expense Recognition Cost and expenses are recognized in the consolidated statements of income upon receipt of goods, utilization of services or at the date they are incurred. Share-based Transactions Under SMC’s Employee Stock Purchase Plan (ESPP), employees of the Group receive remuneration in the form of share-based payments transactions, whereby the employees render services as consideration for equity instruments of SMC. Such transactions are handled centrally by SMC. Share-based transactions in which SMC grants option rights to its equity instruments direct to the Group’s employees are accounted for as equity-settled transactions. SMC charges the Group for the costs related to such transactions with its employees. The amount is charged to operations by the Group. The cost of ESPP is measured by reference to the market price at the time of the grant less subscription price. The cumulative expense recognized for share-based transactions at each reporting date until the vesting date reflects the extent to which the vesting period has expired and SMC’s best estimate of the number of equity instruments that will ultimately vest. Where the terms of a share-based award are modified, as a minimum, an expense is recognized as if the terms had not been modified. In addition, an expense is recognized for any modification, which increases the total fair value of the share-based payment arrangement, or is otherwise beneficial to the employee as measured at the date of modification. Where an equity-settled award is cancelled, it is treated as if it had vested on the date of cancellation, and any expense not yet recognized for the award is recognized immediately. However, if a new award is substituted for the cancelled award, and designated as a replacement award on the date that it is granted, the cancelled and new awards are treated as if they were a modification of the original award. Operating Leases Leases where the lessor retains substantially all the risks and benefits of ownership of the asset are classified as operating leases. Operating lease payments are recognized as an expense in the consolidated statements of income on a straight-line basis over the lease term. Associated costs such as maintenance and insurance are expensed as incurred. Borrowing Costs Borrowing costs are capitalized if they are directly attributable to the acquisition or construction of a qualifying asset. Capitalization of borrowing costs commences when the activities to prepare the asset are in progress and expenditures and borrowing costs are being incurred. Borrowing costs are capitalized until the assets are substantially ready for their intended use. If the carrying amount of the asset exceeds its recoverable amount, an impairment loss is recognized. Research and Development Costs Research costs are expensed as incurred. Development costs incurred on an individual project are carried forward when their future recoverability can reasonably be regarded as assured. Any expenditure carried forward is amortized in line with the expected future sales from the related project.
- 22 -
The carrying value of development costs is reviewed for impairment annually when the related asset is not yet in use. Otherwise, this is reviewed for impairment when events or changes in circumstances indicate that the carrying value may not be recoverable. Retirement Costs The Company and majority of its subsidiaries have separate funded, noncontributory retirement plans, administered by the respective trustees, covering their respective permanent employees. Retirement costs are actuarially determined using the projected unit credit method. This method reflects service rendered by employees up to the date of valuation and incorporates assumptions concerning employees’ projected salaries. Retirement cost includes current service cost, interest cost, expected return on plan assets, amortization of unrecognized past service costs, recognition of actuarial gains and losses, and effect of any curtailments or settlements. Past service cost is recognized as an expense on a straight-line basis over the average period until the benefits become vested. If the benefits are already vested immediately following the introduction of, or changes to the plan, past service cost is recognized immediately as an expense. Actuarial gains and losses are recognized as income or expense when the net cumulative unrecognized actuarial gains and losses at the end of the previous reporting year exceed the greater of 10% of present value of the defined benefit obligation or the fair value of plan assets at that date. These gains or losses are recognized over the expected average remaining working lives of the employees participating in the plan. The transitional liability as of January 1, 2005, the date of adoption of PAS 19, Employee Benefits, is recognized as an expense over five years from date of adoption. The defined benefit liability is the aggregate of the present value of the defined benefit obligation and actuarial gains and losses not recognized, reduced by past service cost not yet recognized and the fair value of plan assets out of which the obligations are to be settled directly. If such aggregate is negative, the resulting asset is measured at the lower of such aggregate or the aggregate of cumulative unrecognized net actuarial losses and past service cost and the present value of any economic benefits available in the form of refunds from the plan or reductions in the future contributions to the plan. If the asset is measured at the aggregate of cumulative unrecognized net actuarial losses and past service cost and the present value of any economic benefits available in the form of refunds from the plan or reductions in the future contributions to the plan, net actuarial losses of the current period and past service cost of the current period are recognized immediately to the extent that they exceed any reduction in the present value of those economic benefits. If there is no change or an increase in the present value of the economic benefits, the entire net actuarial losses of the current period and past service cost of the current period are recognized immediately. Similarly, net actuarial gains of the current period after the deduction of past service cost of the current period exceeding any increase in the present value of the economic benefits stated above are recognized immediately if the asset is measured at the aggregate of cumulative unrecognized net actuarial losses and past service cost and the present value of any economic benefits available in the form of refunds from the plan or reductions in the future contributions to the plan. If there is no change or a decrease in the present value of the economic benefits, the entire net actuarial gains of the current period after the deduction of past service cost of the current period are recognized immediately.
- 23 -
Foreign Currency Transactions and Translations The consolidated financial statements are presented in Philippine peso, which is the Company’s functional currency. Each entity in the Group determines its own functional currency and items included in the financial statements of each entity are measured using that functional currency. Transactions in foreign currencies are initially recorded in the functional currency rate at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are restated at the functional currency rate of exchange at reporting date. All differences are taken to the consolidated statements of income. Nonmonetary items that are measured in terms of historical cost in foreign currency are translated using the exchange rates as at the dates of the initial transactions. Nonmonetary items measured at fair value in foreign currency are translated using the exchange rates at the date when the fair value was determined. Foreign currency gains and losses are reported on a net basis. The functional currency of PTSMPFI is the Indonesian rupiah. As at the reporting date, the assets and liabilities of this subsidiary are translated into the presentation currency of the Company at the rate of exchange ruling at the reporting date and its income and expense accounts are translated at the monthly weighted average exchange rates for the year. The resulting translation differences are included in the consolidated statements of comprehensive income. On disposal of a foreign subsidiary, the accumulated exchange differences are recognized in the consolidated statements of income as a component of the gain or loss on disposal. Taxes Current Tax. Current tax assets and liabilities are measured at the amount expected to be recovered from or paid to the taxation authorities. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted at reporting date. Deferred Tax. Deferred income tax is provided using the balance sheet liability method on all temporary differences at the reporting date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. Deferred tax liabilities are recognized for all taxable temporary differences, except:
where the deferred tax liability arises from the initial recognition of goodwill or of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and
with respect to taxable temporary differences associated with investments in subsidiaries, associates and interests in joint ventures, where the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future.
Deferred tax assets are recognized for all deductible temporary differences, carryforward benefits of unused tax credits - Minimum Corporate Income Tax (MCIT) and unused tax losses - Net Operating Loss Carry Over (NOLCO), to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, and the carryforward benefits of MCIT and NOLCO can be utilized, except:
where the deferred tax asset relating to the deductible temporary difference arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and
- 24 -
with respect to deductible temporary differences associated with investments in subsidiaries, associates and interests in joint ventures, deferred tax assets are recognized only to the extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable profit will be available against which the temporary differences can be utilized.
The carrying amount of deferred tax assets is reviewed at each reporting date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be utilized. Unrecognized deferred tax assets are reassessed at each reporting date and are recognized to the extent that it has become probable that future taxable profit will allow the deferred tax asset to be recovered. Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the year when the asset is realized or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at reporting date. Income tax relating to items recognized directly in equity is recognized in the consolidated statements of comprehensive income and not in the consolidated statements of income. Deferred tax assets and deferred tax liabilities are offset, if a legally enforceable right exists to set off current tax assets against current tax liabilities and the deferred taxes relate to the same taxable entity and the same taxation authority. Value-added Tax (VAT). Revenues, expenses and assets are recognized net of the amount of VAT, except:
where the tax incurred on a purchase of assets or services is not recoverable from the taxation authority, in which case the tax is recognized as part of the cost of acquisition of the asset or as part of the expense item as applicable; and
receivables and payables that are stated with the amount of tax included.
The net amount of tax recoverable from, or payable to, the taxation authority is included as part of receivables or payables in the consolidated statements of financial position. Related Parties Parties are considered to be related if one party has the ability, directly or indirectly, to control the other party or exercise significant influence over the other party in making financial and operating decisions. Parties are also considered to be related if they are subject to common control. Related parties may be individuals or corporate entities. Transactions between related parties are on an arm’s length basis in a manner similar to transactions with non-related parties. Basic and Diluted Earnings Per Share (EPS) Basic and diluted EPS is computed by dividing the net income for the period attributable to equity holders of the Company by the weighted average number of issued and outstanding common shares during the period, with retroactive adjustments for any stock dividends declared.
- 25 -
Operating Segments The Group’s operating segments are organized and managed separately according to the nature of the products and services provided, with each segment representing a strategic business unit that offers different products and serves different markets. Financial information on operating segments is presented in Note 5 to the consolidated financial statements. Contingencies Contingent liabilities are not recognized in the consolidated financial statements. They are disclosed unless the possibility of an outflow of resources embodying economic benefits is remote. Contingent assets are not recognized in the consolidated financial statements but are disclosed when an inflow of economic benefits is probable. Subsequent Events Post-year end events that provide additional information about the Group’s position at reporting date (adjusting events) are reflected in the consolidated financial statements. Post-year end events that are not adjusting events are disclosed in the notes to the consolidated financial statements when material.
4. Significant Accounting Judgments, Estimates and Assumptions The Group’s consolidated financial statements prepared in accordance with PFRS requires management to make judgments, estimates and assumptions that affect amounts reported in the consolidated financial statements and related notes, at the reporting date. However, uncertainty about these estimates and assumptions could result in outcome that could require a material adjustment to the carrying amount of the affected asset or liability in the future. Judgments In the process of applying the Group’s accounting policies, management has made the following judgments, apart from those involving estimation, which have the most significant effect on the amounts recognized in the consolidated financial statements. Operating Leases. The Group has entered into various lease agreements as a lessee. The Group has determined that the lessor retains all significant risks and rewards of ownership of these properties which are leased out under operating lease arrangements. Rent expense charged to operations amounted to P659.3 million, P662.5 million and P597.0 million in 2009, 2008 and 2007, respectively (Notes 18, 19 and 27). Contingencies. The Group currently has several tax assessments and legal claims. The Group’s estimate of the probable costs for resolution of these assessments and claims has been developed in consultation with in-house as well as outside counsel handling the prosecution and defense of these cases and is based on an analysis of potential results. The Group currently does not believe that these tax assessments and legal claims will have a material adverse effect on the consolidated financial position and financial performance. It is possible, however, that future financial performance could be materially affected by changes in the estimates or in the effectiveness of strategies relating to these proceedings (Note 31).
- 26 -
Estimates The key estimates and assumptions used in the consolidated financial statements are based upon management’s evaluation of relevant facts and circumstances as of the date of the consolidated financial statements. Actual results could differ from those estimates. Allowance for Impairment Losses on Trade and Other Receivables. Provisions are made for specific and groups of accounts where objective evidence of impairment exists. The Group evaluates these accounts on the basis of factors that affect the collectability of the accounts. These factors include, but are not limited to, the length of the Group’s relationship with the customers and counterparties, the customers’ current credit status based on third party credit reports and known market forces, average age of accounts, collection experience, and historical loss experience. The amount and timing of recorded expenses for any period would differ if the Group made different judgments or utilized different methodologies. An increase in allowance for impairment losses would increase the recorded selling and administrative expenses and decrease current assets. The allowance for impairment losses on trade and other receivables amounted to P633.9 million and P610.9 million as of December 31, 2009 and 2008, respectively. The carrying value of trade and other receivables amounted to P9,024.0 million and P7,762.1 million as of December 31, 2009 and 2008, respectively (Note 7). Allowance for Inventory Losses. The Group provides an allowance for inventory losses whenever net realizable value of inventories becomes lower than cost due to damage, physical deterioration, obsolescence, changes in price levels or other causes. Estimates of net realizable value are based on the most reliable evidence available at the time the estimates are made of the amount the inventories are expected to be realized. These estimates take into consideration fluctuations of price or cost directly relating to events occurring after the reporting date to the extent that such events confirm conditions existing at the reporting date. The allowance account is reviewed periodically to reflect the accurate valuation in the financial records. The allowance for inventory losses amounted to P150.0 million and P143.7 million as of December 31, 2009 and 2008, respectively. The carrying value of inventories as of December 31, 2009 and 2008 amounted to P11,804.1 million and P11,804.8 million, respectively (Note 8). Estimated Useful Lives of Investment Properties and Property, Plant and Equipment. The Group estimates the useful lives of investment properties and property, plant and equipment based on the period over which the assets are expected to be available for use. The estimated useful lives of the assets are reviewed periodically and are updated if expectations differ from previous estimates due to physical wear and tear, technical or commercial obsolescence and legal or other limits on the use of the assets. In addition, estimation of the useful lives of investment properties and property, plant and equipment is based on collective assessment of industry practice, internal technical evaluation and experience with similar assets. It is possible, however, that future financial performance could be materially affected by changes in estimates brought about by changes in factors mentioned above. The amounts and timing of recorded expenses for any period would be affected by changes in these factors and circumstances. A reduction in the estimated useful lives of investment properties and property, plant and equipment would increase recorded cost of sales and operating expenses and decrease noncurrent assets.
- 27 -
Accumulated depreciation and impairment losses of investment properties and property, plant and equipment amounted to P7,683.4 million and P7,233.3 million as of December 31, 2009 and 2008, respectively. Investment properties and property, plant and equipment, net of accumulated depreciation and impairment losses, amounted to P8,402.7 million and P8,130.2 million as of December 31, 2009 and 2008, respectively (Notes 11 and 12). Estimated Useful Lives of Intangible Assets with Finite Lives. The useful lives of intangible assets are assessed at the individual asset level as having either a finite or indefinite life. Intangible assets are regarded to have an indefinite useful life when, based on analysis of all of the relevant factors, there is no foreseeable limit to the period over which the asset is expected to generate net cash inflows for the Group. Intangible assets with finite useful life amounted to P77.4 million and P65.7 million as of December 31, 2009 and 2008, respectively (Note 13). Realizability of Deferred Tax Assets. The Group reviews its deferred tax assets at each reporting date and reduces the carrying amount to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be utilized. The Group’s assessment on the recognition of deferred tax assets on deductible temporary difference and carry forward benefits of MCIT and NOLCO is based on the projected taxable income in the subsequent periods. Deferred tax assets amounted to P1,219.7 million and P1,096.3 million as of December 31, 2009 and 2008, respectively (Note 23). Impairment of Other &on-financial Assets. Except for intangible assets with indefinite useful lives, PFRS requires that an impairment review be performed on investments and advances, property, plant and equipment, investment properties, biological assets, other intangible assets with definite useful lives and idle assets when events or changes in circumstances indicate that the carrying value may not be recoverable. For intangible assets with indefinite useful lives, impairment testing is performed on an annual basis. Determining the net recoverable value of assets requires the estimation of cash flows expected to be generated from the continued use and ultimate disposition of such assets. While it is believed that the assumptions used in the estimation of fair values reflected in the consolidated financial statements are appropriate and reasonable, significant changes in these assumptions may materially affect the assessment of recoverable values and any resulting impairment loss could have a material adverse impact on the financial performance. The aggregate amount of noncurrent biological assets, investment properties, property, plant and equipment, goodwill and other intangible assets, and idle assets amounted to P10,207.2 million and P9,572.7 million as of December 31, 2009 and 2008, respectively (Notes 9, 11, 12 and 13). Present Value of Defined Benefit Obligation. The present value of the retirement obligations depends on a number of factors that are determined on an actuarial basis using a number of assumptions. These assumptions are described in Note 24 to the consolidated financial statements and include discount rate, expected return on plan assets and salary increase rate. Actual results that differ from the assumptions are accumulated and amortized over future periods and therefore, generally affect the recognized expense and recorded obligation in such future periods.
- 28 -
The assumption of the expected return on plan assets is determined on a uniform basis, taking into consideration the long-term historical returns, asset allocation and future estimates of long-term investment returns. The Group determines the appropriate discount rate at the end of each year. It is the interest rate that should be used to determine the present value of estimated future cash outflows expected to be required to settle the retirement obligations. In determining the appropriate discount rate, the Group considers the interest rates on government bonds that are denominated in the currency in which the benefits will be paid. The terms to maturity of these bonds should approximate the terms of the related retirement liability. Other key assumptions for retirement obligations are based in part on current market conditions. While it is believed that the Group’s assumptions are reasonable and appropriate, significant differences in actual experience or significant changes in assumptions may materially affect the Group’s retirement obligations. The Group has a net cumulative unrecognized actuarial gain (loss) amounting to P119.5 million and (P219.7 million) as of December 31, 2009 and 2008, respectively (Note 24). Fair Value of Agricultural Produce. The Group determines the fair value of its agricultural produce based on most recent market transaction price provided that there has been no significant change in economic circumstances between the date of transactions and reporting date. Costs to sell are estimated based on most recent transaction and are deducted from the fair value in order to measure agricultural produce at point of harvest. Unrealized gain (loss) on fair value adjustments included in the cost of inventories as of December 31, 2009 and 2008 amounted to P62.7 million and (P2.0 million), respectively (Note 8). Financial Assets and Liabilities. The Group carries certain financial assets and liabilities at fair value, which requires extensive use of accounting estimates and judgment. The significant components of fair value measurement were determined using verifiable objective evidence (i.e., foreign exchange rates, interest rates, volatility rates). However, the amount of changes in fair value would differ if the Group utilized different valuation methodologies and assumptions. Any changes in fair value of these financial assets and liabilities would affect net income and equity. The fair values of financial assets and liabilities are presented in Note 29. Asset Retirement Obligation. Determining asset retirement obligation requires estimation of the cost of dismantling property and equipment and other costs of restoring the leased properties to their original condition. The Group determined that there are no significant asset retirement obligations as of December 31, 2009 and 2008.
- 29 -
5. Segment Information Operating Segments The operating segment is determined as the reporting format as the Group’s risks and rates of return are affected predominantly by differences in the products and services produced. The operating businesses are organized and managed separately according to the nature of the products produced and services provided, with each segment representing a strategic business unit that offers different products and serves different markets. The Group has three reportable segments, namely, Agro-Industrial, Value-Added Meats and Milling. Management identified and grouped the operating units in its operating segments with the objective of transforming the Group into a more rationalized and focused organization. The structure aims to boost efficiencies across the Group and raise effectiveness in defining and meeting the needs of consumers in innovative ways. The Agro-Industrial segment includes the integrated Feeds, Poultry and Basic Meats operations. These businesses are involved in poultry and feeds production and selling, and in livestock farming, processing and selling of basic meat products. The Value-Added Meats segment is engaged in the processing and marketing of refrigerated and canned meat products. The Milling segment is into manufacturing and marketing of flour products, premixes, and flour-based products. The non-reportable operating segments of the Group include dairy-based products, breadfill, desserts, cooking oil, importation and marketing of coffee and coffee-related products and processed meats operation of a foreign subsidiary. The Group does not have a single external customer, sales revenue generated from which amounted to 10% or more of the total revenue of the Group. Segment Assets and Liabilities Segment assets include all operating assets used by a segment and consist principally of operating cash, receivables, inventories, biological assets and property, plant and equipment, net of allowances and accumulated depreciation and amortization. Segment liabilities include all operating liabilities and consist principally of wages, taxes currently payable and accrued liabilities. Segment assets and liabilities do not include deferred income taxes. Inter-segment Transactions Segment revenues, expenses and performance include sales and purchases between operating segments. Transfer prices between operating segments are set on an arm’s length basis in a manner similar to transactions with third parties. Such transfers are eliminated in consolidation.
- 30 -
Operating Segments Financial information about reportable segments follow: 2009
Agro-Industrial 2008
2007
Value-Added Meats 2008 2007 2009
2009
Milling 2008
2007
Total Reportable Segments 2008 2007 2009 (In Millions)
2009
Others 2008
2007
2009
Eliminations 2008
2007
2009
Consolidated 2008
2007
Revenue External Inter-segment
P49,069 711
P44,981 379
P39,099 471
P11,234 47
P11,566 1
P10,440 8
P7,482 447
P8,199 485
P6,133 24
P67,785 1,205
P64,746 865
P55,672 503
P7,258 233
P6,330 370
P6,380 550
P (1,438)
P (1,235)
P (1,053)
P75,043 -
P71,076 -
P62,052 -
Total revenue
P49,780
P45,360
P39,570
P11,281
P11,567
P10,448
P7,929
P8,684
P6,157
P68,990
P65,611
P56,175
P7,491
P6,700
P6,930
(P1,438)
(P1,235)
(P1,053)
P75,043
P71,076
P62,052
P3,085
P1,601
P1,491
P489
P626
P554
P752
P558
P4,326
P2,191
P2,603
P333
P94
(P118)
(P1)
P10
P4,541
P1,924
P2,707
(188) 5
(142) 5
(130) 6
-
-
-
(751) 69
-
(25)
Result Segment operating result* Interest expense and financing charges Interest income Gain (loss) on sale of property and equipment Other income (charges) net Income tax benefit (expense) et income Other Information Segment assets Goodwill and other intangible assets Deferred tax assets
(428) 37
(492) 26
(322) 49
6
4
1
7
2
-
(88) 6 (19)
(P36) (113) 4
(64) 15
-
(704) 48
1
(8)
(747) 35 8
(516) 70 2
(P266)
(47) 21
(84) 19
(152) 14
(10)
3
(20)
(86)
(67)
(93)
(183)
159
83
(166)
148
(8)
(435)
240
16
762
(525)
(418)
(74)
(85)
(169)
(220)
111
(230)
(1,014)
(499)
(817)
(166)
20
P1,980
P530
P734
P146
P223
P420
P514
(P200)
P428
P2,640
P553
P1,582
P147
P454
P2,238
(P129)
(P858)
P21,588
P18,493
P16,857
P9,376
P9,277
P7,935
P3,505
P4,658
P4,091
P34,469
P32,428
P28,883
P10,053
P4,760
P5,409
(P5,904)
11
285 -
153 -
123 -
-
-
1 -
289 -
156 -
135 -
1,367 -
1,367 -
1,384 -
2 (720)
3
4
2,413
(8)
(7)
(859)
-
(111)
(3,660)
10
(1,007) (916)
(P3,638)
P2,658
P149
P182
(P1,609)
(P2,213)
P38,618
P35,579
P32,079
(1,318) -
(1,196) -
(1,194) -
338 1,220
327 1,096
325 941
P40,176
P37,002
P33,345
(P5,820) -
(P1,529) -
(P2,263) -
P12,849 8,816 467 399
P9,928 11,666 209 238
P9,191 8,640 350 353
-
-
-
P9,075 -
P6,746 -
P6,560 -
P1,339 -
P1,535 -
P1,264 -
P785 -
P845 -
P735 -
P11,199 -
P9,126 -
P8,559 -
P7,470 -
P2,331 -
P2,895 -
P22,531
P22,041
P18,534
P266
P259
P384
P210
P170
P232
P57
P87
P192
P533
P516
P808
P118
P78
P124
P -
P -
P -
P651
P594
P932
1,124 -
1,034 -
947 -
286 46
241 -
227 -
143 8
133 -
129 -
1,553 54
1,408 -
1,303 -
152 3
146 5
155 -
-
-
-
1,705 57
1,554 5
1,458 -
Consolidated total liabilities Capital expenditures Depreciation and amortization Impairment losses
(532)
(18)
(469)
Consolidated total assets Segment liabilities Notes payable Income tax payable Deferred tax liabilities
8
3
(668) 84
(1,184)
(4)
12
(831) 54
* Including realized mark-to-market gains (losses) on commodity derivatives presented as part of “Other Charges - &et” in the consolidated statements of income.
- 31 -
6. Cash and Cash Equivalents This account consists of: 2009 P3,240,212 710,134 P3,950,346
Cash on hand and in banks Short-term placements
2008 P2,479,006 303,200 P2,782,206
Cash in banks earn interest at the respective bank deposit rates. Short-term placements are made for varying periods of up to three months depending on the immediate cash requirements of the Group, and earn interest at the respective short-term placement rates.
7. Trade and Other Receivables This account consists of: ote 25 25
Trade receivables Amounts owed by related parties Other receivables Less allowance for impairment losses
2009 P7,323,462 254,376 2,080,017 9,657,855 633,902 P9,023,953
2008 P5,619,084 2,042,497 711,397 8,372,978 610,887 P7,762,091
Trade receivables are non-interest bearing and are generally on 30 days term. Other receivables include P1,038 million claims from insurers mainly representing the value of certain inventories and property, plant and equipment damaged by a typhoon. The movements in the allowance for impairment losses follow: 2009 P610,887 113,762 (84,771) (5,976) P633,902
Balance at beginning of year Charge for the year Write off of amounts Reversal of unused amounts Balance at end of year
2008 P649,621 39,640 (56,392) (21,982) P610,887
As at December 31, the aging of receivables are as follows: Gross Amount 2008 2009 P5,378,262 P6,211,094 1,262,791 1,058,538 170,991 100,653 127,116 545,023 1,433,818 1,742,547 P8,372,978 P9,657,855
Current Past due 1-30 days Past due 31-60 days Past due 61-90 days Past due over 90 days
- 32 -
8. Inventories This account consists of:
Finished goods and goods in process - at net realizable value Raw materials, feeds and feed ingredients - at net realizable value Factory supplies and others - at cost Materials in transit - at cost Total inventories at lower of cost and net realizable value
2009
2008
P3,081,429
P3,053,769
8,572,674 72,450 77,546
8,399,003 61,670 290,346
P11,804,099
P11,804,788
The cost of finished goods and goods in process amounted to P3,168.3 million and P3,125.6 million as of December 31, 2009 and 2008, respectively. The cost of raw materials, feeds and feed ingredients amounted to P8,635.8 million and P8,470.8 million as of December 31, 2009 and 2008, respectively. Finished goods and goods in process include net unrealized gain of P62.7 million and net unrealized loss of P2.0 million on fair valuation of agricultural produce as of December 31, 2009 and 2008, respectively. The fair value of agricultural produce less costs to sell, which formed part of finished goods inventory, amounted to P287.0 million and P556.8 million as of December 31, 2009 and 2008, respectively, with corresponding costs at point of harvest amounting to P224.3 million and P558.8 million, respectively.
9. Biological Assets This account consists of:
Current: Growing stocks Goods in process Total Current Noncurrent: Breeding stocks - net
2009
2008
P2,309,139 215,371 2,524,510
P2,707,025 225,396 2,932,421
1,285,125 P3,809,635
1,115,963 P4,048,384
The amortization of breeding stocks charged to operations amounted to P854.1 million and P736.9 million in 2009 and 2008, respectively (Note 20). Growing stocks pertain to growing broilers, hogs and cattle and goods in process pertain to hatching eggs and carcass.
- 33 -
The movements in biological assets, including the effects of foreign exchange adjustments are as follows:
Balance at beginning of year Increase (decrease) due to: Purchases Production Mortality Sales Harvest Amortization during the year Balance at end of the year
2009 P4,048,384
2008 P3,204,536
13,390,005 9,061,227 (533,373) (5,345,293) (15,957,185) (854,130) P3,809,635
11,732,401 33,539,845 (31,314) (67,296) (43,592,866) (736,922) P4,048,384
The Group harvested approximately 348.1 million and 322.9 million kilograms of grown broilers in 2009 and 2008, respectively, and 0.68 million and 0.53 million heads of marketable hogs and cattle in 2009 and 2008, respectively.
10. Investments and Advances Investments in Subsidiaries The following are the developments relating to the Company’s investments in subsidiaries in 2009 and 2008: a) In April 2009, Monterey, a majority-owned subsidiary of SMPFC, acquired the subscription rights of certain individuals in Highbreed Livestock Corporation (HLC), a Philippine company engaged in livestock farming, processing, selling meat products (mainly pork and beef) and leasing of properties. As such, HLC became a subsidiary of Monterey and was consolidated into SMPFC through Monterey. On June 22, 2009, the respective BOD and stockholders of Monterey and HLC approved the merger of HLC into Monterey, with Monterey as the surviving corporation. The consideration of the assignment of the subscription, net of the effect of the merger, amounted to P6.25 million. The SEC approved the merger on October 22, 2009. The Bureau of Internal Revenue (BIR) confirmed the tax-free merger of HLC into Monterey in its Certification No. S40-052-2009 dated December 18, 2009. The fair value of the identifiable assets and liabilities of HLC at acquisition date are as follows: ote Cash and cash equivalents Trade and other receivables - net Prepaid expenses and other current assets Property, plant and equipment - net Deferred tax assets Trade payables and other current liabilities Net assets transferred
- 34 -
12
P458 14,983 13,139 925,854 18,647 (966,831) P6,250
b) In July and September 2008, respectively, the Company paid as deposits for future stock subscription, the amounts of P400 million for 283,687,943 Magnolia shares of stock and P450 million for 22,500,000 Monterey shares of stock. In February 2009, Magnolia’s application for increase in authorized capital stock was approved by SEC. Following SEC’s approval, Magnolia issued the said 283,687,943 shares to SMPFC out of its unissued shares and increase in authorized capital stock. As of February 12, 2010, Monterey’s application for the increase in its authorized capital stock is pending filing with SEC. The Company’s total payment in 2008 of P850 million was presented as investments and advances in the Parent Company’s statements of financial position as of December 31, 2008. c) In March 2007, SMMI’s application for increase in authorized capital stock from P0.25 million (2,500 shares) to P2,000 million (20,000,000 shares) was approved by the SEC. SMMI subsequently issued 16,457,310 shares to SMFI, then 100% owner of SMMI, in consideration for the transfer of the net assets of SMFI’s Flour division valued at P1,645.5 million. The exchange is by virtue of a Deed of Assignment between SMMI and SMFI executed in December 2005. In January 2008, SMFI executed a Deed of Assignment assigning its 16,457,310 shares in SMMI to the Company effective December 28, 2007. The assignment is in accordance with SMFI’s property dividend declaration of its SMMI shares in favor of the Company, subject to the necessary approvals, and as approved by SMFI’s BOD in June 2007. As of February 12, 2010, the declaration of the SMFI’s shares in SMMI as property dividend in favor of the Company is still pending issuance of a certificate of filing of property dividend declaration by SEC. Investments in Joint Venture In 2007, the Company provided full allowance for the impairment in value of its investment in Philippine Nutrition Technologies, Inc. (PNTI), a joint venture between the Company and the Great Wall Group of Taiwan. Application with the SEC for the dissolution of PNTI, through the shortening of its corporate term, which was approved by the BOD and stockholders of PNTI in August 2005, will be filed by the Company following the receipt on February 4, 2010 of the tax clearance from the BIR and the completion of other SEC requirements necessary for such filing.
- 35 -
11. Investment Properties The movements in investment properties follow: Land and Land Improvements
Buildings and Improvements
Total
P54,827 20,861 75,688 39,593 115,281
P2,865 2,865 2,865
P57,692 20,861 78,553 39,593 118,146
Cost: Balance at January 1, 2008 Additions Balance at December 31, 2008 Additions Balance at December 31, 2009 Accumulated depreciation: Balance at January 1, 2008 Additions
-
1,326 141
1,326 141
Balance at December 31, 2008 Additions Balance at December 31, 2009
-
1,467 141 1,608
1,467 141 1,608
Accumulated impairment losses: Balance at January 1, 2008 Additions
5,359
-
5,359
Balance at December 31, 2008 Additions
5,359 3,114
-
5,359 3,114
Balance at December 31, 2009
8,473
-
8,473
et book value: Balance at December 31, 2009
P106,808
P1,257
P108,065
Balance at December 31, 2008
P70,329
P1,398
P71,727
The fair value of investment properties as of December 31, 2009 and 2008 amounted to P280.9 million and P279.1 million, respectively, determined based on valuations performed either by independent appraisers or by the credit management group of the Company.
- 36 -
12. Property, Plant and Equipment This account consists of:
ote Cost: Balance at January 1, 2008 Additions Disposals Transfers, reclassifications and others Balance at December 31, 2008 HLC balance Additions Disposals Transfers, reclassifications and others Exchange differential
P1,474,063 16,402 5,879 10a
Balance at December 31, 2009 Accumulated depreciation and impairment losses: Balance at January 1, 2008 Additions Disposals Transfers, reclassification and others Exchange differential Balance at December 31, 2008 HLC balance Additions Impairment loss Disposals Transfers, reclassification and others Exchange differential Balance at December 31, 2009
Land and Land Improvements
Buildings and Improvements P3,872,021 24,830 (9,826)
P514,201 1,649 (23,837)
Construction in Progress
Total
P1,360,207 P15,021,598 509,337 593,908 (550) (57,216)
163,326
528,336
14,190
(985,167)
8,348,129 35 209,984 (225,864)
506,203 13,015 (58,997)
883,827 97,914 425,600 -
89,517 3,159
361,311 2,691
(228,462) 13,183
10,914 2,462
(763,601) 925
2,340,923
4,391,727
8,117,005
473,597
644,665
1,485,568 170,975 (3,687)
4,607,183 481,389 (21,906)
443,688 33,858 (23,108)
-
6,770,346 703,653 (48,701)
(1,005) (58)
(197,222) (513)
(69)
-
(198,227) (640)
1,651,793 14,873 183,601 (90,065)
4,868,931 8 543,099 (206,860)
454,369 23,911 (51,090)
-
7,226,431 25,493 774,525 45,863 (348,015)
(59,740) 7,984
52 2,330
-
(62,517) 11,544
-
-
22
P7,801,106 41,690 (23,003)
Transportation Equipment
4,050,351 102,210 2,108 (126,944)
1,496,344 751,188 715 -
233,907 17,431 -
10a
Machinery Equipment, Furniture and Others
251,338 10,612 23,914 45,863 (2,960) -
131 1,230
(273,436) 15,284,854 951,347 651,422 (411,805) (530,321) 22,420 15,967,917
328,767
1,761,563
5,153,422
429,572
7,673,324
Balance at December 31, 2009
P2,012,156
P2,630,164
P2,963,583
P44,025
P644,665
P8,294,593
Balance at December 31, 2008
P1,245,006
P2,398,558
P3,479,198
P51,834
P883,827
P8,058,423
et Book Value:
Depreciation charged to operations amounted to P774.5 million in 2009, P703.7 million in 2008 and P687.8 million in 2007 (Note 20). These amounts include annual amortizations of capitalized interest amounting to P2.6 million, P3.8 million and P5.4 million in 2009, 2008 and 2007, respectively. Unamortized balance of capitalized interest as of December 31, 2009, 2008 and 2007 amounted to P26.9 million, P29.5 million and P33.3 million, respectively. No interest was capitalized in 2009 and 2008. Transfers, reclassification and others in 2009 include certain property, plant and equipment that were damaged by typhoon amounting to P215.8 million (Note 7). In addition, certain machinery and equipment with a book value of P189.1 million and considered as idle assets, were reclassified to other noncurrent assets following the change in management’s intention on its branded business (Note 22). Land and land improvements include a 144-hectare property in Sumilao, Bukidnon, acquired by SMFI in 2002, which later became the subject of a petition for revocation of conversion order filed by MAPALAD, a group of Sumilao farmers, with the Department of Agrarian Reform (DAR), and appealed to the Office of the President (OP). Total acquisition and development costs included in the account as of December 31, 2008 amounted to P37.4 million.
- 37 -
To settle the land dispute, a Memorandum of Agreement (MOA) was executed among SMFI, MAPALAD, OP and DAR on March 29, 2008. The MOA provided for the release of a 50-hectare portion of the property to qualified farmer-beneficiaries, and the transfer of additional 94 hectares outside of the property to be negotiated with other Sumilao landowners. Under the MOA, SMFI shall retain ownership and title to the remaining portion of the property for the completion and pursuit of the hog farm expansion. Implementation of the MOA provisions is ongoing. The cost of farm improvements, buildings, machinery and equipment and construction in progress incurred for Monterey’s hog farm expansion project situated in Sumilao amounted to P676.4 million and P481.4 million in 2009 and 2008, respectively.
13. Goodwill and Other Intangible Assets This account consists of:
Goodwill Trademarks Formulas and recipes Computer software and licenses - net
2009 P170,792 32,558 57,591 77,413 P338,354
2008 P170,792 32,558 57,591 65,659 P326,600
2009
2008
The movement in goodwill is shown below:
Balance at beginning of year Goodwill from acquisitions of PTSMPFI and Magnolia Impairment loss Balance at end of year
P170,792 P170,792
P187,575 (16,783) P170,792
Magnolia reduced the carrying value of its investment in Sugarland Corporation, a 100% subsidiary, in the amount of P16.8 million following the latter’s shutdown of its tolling operations in February 2008. The movements in computer software and licenses are shown below: 2009
2008
Cost: Balance at beginning of year Additions/reclassifications during the year Balance at end of year
P134,806 26,370 161,176
P100,589 34,217 134,806
Accumulated amortization: Balance at beginning of year Additions/reclassifications during the year Balance at end of year
69,147 14,616 83,763
53,376 15,771 69,147
P77,413
P65,659
Net book value
- 38 -
14. otes Payable Notes payable mainly represents unsecured peso and foreign currency-denominated amounts payable to local and foreign banks. Interest rates for peso-denominated loans range from 3.10% to 6.79% and 7.25% to 8.75% in 2009 and 2008, respectively. Interest rate for foreign currency-denominated loan is 12.08% and 15.77% in 2009 and 2008, respectively.
15. Trade Payables and Other Current Liabilities This account consists of: ote Trade payables Amounts owed to related parties Acceptances payable Accrued expenses and other payables
25
2009 P3,472,303 2,732,207 18,950 6,443,626 P12,667,086
2008 P4,114,563 1,607,446 43,968 4,084,488 P9,850,465
The accrued expenses and other payables account consists of freight payable, contract growers/breeders’ fees, guarantee deposits, derivative liabilities, accrued interest payable, expenses payable, tax-related and payroll-related accruals. Derivative liabilities included under “Accrued expenses and other payables” amounted to P13.4 million and P144.2 million as of December 31, 2009 and 2008, respectively (Note 29).
16. Equity The Parent Company’s capital stock, at P10 par value, consists of the following number of shares as of December 31, 2009 and 2008:
Authorized shares
Class “A” 95,128,000
Class “B” 50,872,000
Total 146,000,000
Issued shares
95,049,129
50,401,979
145,451,108
Class “A” and Class “B” shares are identical in all respects, except that Class “A” shares are transferable only to Philippine nationals and shall at all times be not less than 60% of the voting capital stock. Treasury shares, totaling 385,456 Class “A” shares and 3,822,302 Class “B” shares in 2009 and in 2008, are carried at cost. Issued and outstanding shares include 86,708,547 shares, listing application for which will be re-filed with the PSE upon completion of certain PSE requirements. The Parent Company’s retained earnings as of December 31, 2009 and 2008 is restricted in the amount of P182.1 million representing the cost of shares held in treasury. The Group’s unappropriated retained earnings include the Company’s accumulated equity in net earnings of subsidiaries amounting to P3,355.4 million, P847.6 million and P1,700.9 million in 2009, 2008 and 2007, respectively. Such amounts are not available for declaration as dividends until declared by the respective investees.
- 39 -
17. Revenues Revenue account consists of sales of goods and fair valuation adjustments on agricultural produce. Total sales of goods amounted to P74,979.9 million, P71,077.9 million and P62,000.3 million for the years ended December 31, 2009, 2008 and 2007, respectively. The aggregate fair value less estimated costs to sell of agricultural produce harvested during the year, determined at point of harvest, amounted to P25,826.8 million, P23,527.0 million and P22,534.4 million for the years ended December 31, 2009, 2008 and 2007, respectively.
18. Cost of Sales This account consists of: ote Inventories used Freight, trucking and handling Depreciation and amortization Communication, light and water Personnel expenses Repairs and maintenance Rentals Others
20
21 27
2009 P55,100,325 1,911,469 1,482,653
2008 P54,050,525 1,626,949 1,315,729
2007 P45,300,631 1,398,375 1,230,983
866,722 862,438 336,721 171,108 953,231 P61,684,667
922,063 1,002,888 326,397 190,396 1,174,716 P60,609,663
1,086,623 1,259,764 396,135 209,475 963,201 P51,845,187
2009 P1,853,815 1,781,191
2008 P1,830,162 1,831,557
2007 P1,462,353 1,640,260
1,401,340 1,251,772 488,197 242,131 235,588
1,482,056 1,134,313 472,116 194,513 159,847
1,260,131 863,951 387,476 183,193 290,822
221,855 205,391
237,781 185,968
227,309 181,313
185,459 143,087 111,475 599,375 P8,720,676
151,164 193,335 109,773 641,066 P8,623,651
168,364 175,686 115,357 854,705 P7,810,920
19. Selling and Administrative Expenses This account consists of:
Personnel expenses Freight, trucking and handling Advertising and promotions Contracted services Rentals Taxes and licenses Professional fees Depreciation and amortization Supplies Communication, light and water Travel and transportation Repairs and maintenance Others
ote 21
27
20
- 40 -
20. Depreciation and Amortization Depreciation and amortization are distributed as follows:
Cost of sales: Property, plant and equipment Biological assets Others
ote
2009
2008
2007
12 9
P607,857 854,130 20,666 1,482,653
P551,438 736,922 27,369 1,315,729
P528,359 660,919 41,705 1,230,983
166,668 55,187 221,855
152,215 85,566 237,781
159,482 67,827 227,309
P1,704,508
P1,553,510
P1,458,292
Selling and administrative expenses: Property, plant and equipment 12 Others
Others include amortization of containers, computer software and licenses, small tools and equipment and investment properties amounting to P75.9 million, P112.9 million and P109.5 million in 2009, 2008 and 2007, respectively.
21. Personnel Expenses This account consists of: ote Salaries and allowances Retirement costs Other employee benefits
24
2009 P1,396,610 238,627 1,081,016 P2,716,253
2008 P1,661,083 145,506 1,026,461 P2,833,050
2007 P1,869,934 126,717 725,466 P2,722,117
The above amounts are distributed as follows:
Cost of sales Selling and administrative expenses
ote 18
2009 P862,438
2008 P1,002,888
2007 P1,259,764
19
1,853,815 P2,716,253
1,830,162 P2,833,050
1,462,353 P2,722,117
- 41 -
22. Interest Expense and Other Financing Charges, Interest Income and Other Income (Charges) These accounts consist of:
Interest expense and other financing charges: Short-term loans Other financing charges
ote
2009
2008
2007
14
P701,726 49,316 P751,042
P774,597 56,317 P830,914
P604,877 63,095 P667,972
P35,017 34,124 P69,141
P27,479 26,844 P54,323
P35,860 48,547 P84,407
P54,477 118
(P388,327) 55
P616,956 168
Interest income: Money market placements Cash in banks Other income (charges): Gain (loss) on derivatives Dividend income Foreign exchange gains (losses) - net Impairment loss Research and development costs Others - net
28
(978) (53,873) (88,712) (P88,968)
5,943 (170) (68,780) (P451,279)
(54,298) (16,199) (1,242,676) (P696,049)
In 2009, the Group recognized provisions for impairment loss on land and idle assets (included under “Retirement and other noncurrent assets”) amounting to P45.9 million and P8.0 million, respectively, computed as the difference between the carrying amount of the assets and their fair value based on reports by qualified property appraisers, less costs to sell. In 2007, subsequent to the Company’s majority acquisition of Monterey, this subsidiary aligned its business systems with the Company’s other subsidiaries. In the course of such alignment, certain asset accounts consisting of trade receivables, inventories and biological assets were adjusted to reflect their net realizable values. Other related accounts such as trade payables, deferred tax assets and liabilities were likewise adjusted. The impact of the reduction in Monterey’s net assets amounting to P1,330 million in 2007 was presented as part of “Other charges - net” in the consolidated statements of income.
- 42 -
23. Income Taxes a. The components of the Group’s deferred tax assets and liabilities as at December 31 are as follows:
Deferred tax assets: NOLCO Allowance for impairment losses on receivables and inventory losses Unrealized mark-to-market loss Unamortized past service cost MCIT Others Deferred tax liabilities: Unrealized mark-to-market gain Accelerated depreciation Others
2009
2008
P452,793
P276,907
230,837 168,433 116,537 76,266 174,810 P1,219,676
223,127 165,565 85,698 85,360 259,602 P1,096,259
P184,585 51,426 163,029 P399,040
P128,233 56,344 53,683 P238,260
b. As of December 31, 2009, the NOLCO and MCIT that can be claimed as deduction from future taxable income and deduction from corporate income tax due, respectively, are as follows: Year Incurred/Paid 2007 2008 2009
Carryforward Benefit Up To December 31, 2010 December 31, 2011 December 31, 2012
NOLCO P22,608 527,971 958,730 P1,509,309
MCIT P20,189 22,297 33,780 P76,266
c. The components of the income tax expense (benefit) consist of:
Current: Corporate income tax Final tax withheld on interest income Deferred
- 43 -
2009
2008
2007
P1,112,770
P729,248
P831,418
17,542 1,130,312 53,313 P1,183,625
8,482 737,730 (268,860) P468,870
13,455 844,873 71,332 P916,205
d. The reconciliations between the statutory income tax rate on income before income tax and non-controlling interests and the Group’s effective income tax rates follow:
Statutory income tax rate Additions to (reductions in) income tax resulting from the tax effects of: Interest income subjected to final tax Unused NOLCO and MCIT Others - net Effect of change in tax rate Effective income tax rates
2009 30.00%
2008 35.00%
2007 35.00%
(0.13) 1.10 (0.16) 30.81%
(8.80) 25.98 0.58 23.16 75.92%
(2.68) 3.10 48.00 83.42%
24. Retirement Plans The Company and majority of its subsidiaries have funded, noncontributory retirement plans covering all of their permanent employees. Contributions and costs are determined in accordance with the actuarial studies made for the plans. Annual cost is determined using the projected unit credit method. The Group’s latest actuarial valuation date is December 31, 2009. Valuations are obtained on a periodic basis. Retirement costs charged by the Parent Company to operations amounted to P4.2 million, P7.3 million and P1.0 million in 2009, 2008 and 2007, respectively, while those charged by the subsidiaries amounted to P234.4 million, P138.2 million and P125.7 million in 2009, 2008 and 2007, respectively. The Group’s annual contribution to the retirement plans consists of payments covering the current service cost and amortization of past service liability. The components of retirement costs recognized in the consolidated statements of income in 2009, 2008 and 2007 and the amounts recognized in the consolidated statements of financial position as of December 31, 2009 and 2008 are as follows: a. Retirement costs
Current service cost Interest cost Expected return on plan assets Net actuarial gain (loss) Past service cost Effect of curtailment Effect of asset limit Amortization of transitional liability Net retirement costs Actual return (loss) on plan assets
- 44 -
2009 P131,158 262,237 (197,554) (2,695) 192 (19,806) -
2008 P96,730 137,847 (161,894) 7,535 193 -
2007 P91,054 130,585 (164,120) 4,356 210 (690)
65,095 P238,627
65,095 P145,506
65,322 P126,717
P329,582
(P103,770)
P205,329
The retirement costs are recognized in the following line items in the consolidated statements of income: ote Cost of sales Selling and administrative expenses 21
2009 P16,724
2008 P32,010
2007 P31,207
221,903 P238,627
113,496 P145,506
95,510 P126,717
b. Retirement asset
Fair value of net plan assets Present value of defined benefit obligation Unrecognized actuarial gains
2009 P94,058 (44,432) (43,364) P6,262
2008 P P -
c. Retirement liability
Present value of defined benefit obligation Fair value of net plan assets Unrecognized: Past service costs Net actuarial gains (losses) Net transitional liability
2009 P2,335,856 (2,229,645)
2008 P2,759,339 (2,396,143)
(856) 76,132 P181,487
(951) (219,692) (65,095) P77,458
The movements in the present value of the defined benefit obligation are as follows: 2009 P2,759,339 262,237 131,158 51,036 (562,069) (230,864) (36,134) 5,585 P2,380,288
Balance at beginning of year Interest cost Current service cost Transfer from other plans Benefits paid Actuarial (gains) losses Transfer to other plans Effect of curtailment Balance at end of year
- 45 -
2008 P1,810,951 137,730 96,598 898,516 (155,401) 9,888 (38,943) P2,759,339
The movements in the fair value of net plan assets are as follows: 2008 P1,649,977 161,894 145,764 898,516 (155,401) (38,943) (265,664) P2,396,143
2009 P2,396,143 197,554 145,145 51,036 (562,069) (36,134) 132,028 P2,323,703
Balance at beginning of year Expected return Contributions by employer Transfer from other plans Benefits paid Transfer to other plans Actuarial gains (losses) Balance at end of year
The major categories of plan assets as a percentage of the fair value of total plan assets are as follows: 2008 13% 87%
2009 22% 78%
Stock trading portfolio Fixed income portfolio
The overall expected rate of return is determined based on historical performance of investments. The principal actuarial assumptions used to determine retirement benefits are as follows: 2009 8.28% to 10% 10% 8%
Discount rate Expected return on plan assets Salary increase rate
2008 8.85% to 12% 9% 6% to 8%
The historical information for the current and previous three annual periods are as follows:
Present value of defined benefit obligation Fair value of net plan assets Deficit in the plan Experience adjustments on plan liabilities Experience adjustments on plan assets
2009
2008
2007
2006
P2,380,288 2,323,703
P2,759,339 2,396,143
P1,810,951 1,649,977
P1,596,744 1,489,585
56,585
363,196
160,974
107,159
(230,864) 132,028
9,888 (265,664)
173,538 39,413
141,002 194,020
The Group expects to contribute about P187.7 million to its defined benefit plans in 2010.
25. Related Party Disclosures Transactions with related parties are made at normal market prices. For the periods ended December 31, 2009 and 2008, the Group did not provide any allowance for impairment losses relating to amounts owed by related parties. An assessment is undertaken at each financial year by examining the financial position of the related party and the market in which the related party operates.
- 46 -
Transactions with related parties and the related balances include the following: Name of Company SMC
SMC Shipping and Lighterage Corporation
San Miguel Rengo Packaging Corporation
San Miguel Yamamura Packaging Corporation
Relationship* Parent Company
Affiliate
Affiliate
Affiliate
San Miguel International, Ltd. and subsidiaries
Affiliate
Anchor Insurance Brokerage Corporation
Affiliate
2009
2008
Sales Purchases Trade and other receivables Trade payables and other current liabilities
Nature of Transactions
P2,187,330 292,327
P7,437,073 561,929
88,122
1,906,940
1,778,448
704,221
Sales Purchases Trade and other receivables Trade payables and other current liabilities
135 240,927
204,298
14,380
17,925
409,074
534,820
81,651
193,022
Purchases Trade and other receivables Trade payables and other current liabilities Sales Purchases Trade and other receivables Trade payables and other current liabilities Trade and other receivables Trade payables and other current liabilities Purchases Trade and other receivables Trade payables and other current liabilities
245
-
16,650
54,798
2,083 102,095
5,702 117,632
8,117
18,480
61,730
86,848
41,186
42,990
9
3,612
49
12,044
585
204
241
190
SMC Stock Transfer Service Corporation
Affiliate
Sales Trade and other receivables
86
147
Ginebra San Miguel, Inc. and subsidiaries
Affiliate
Sales Purchases Trade and other receivables Trade payables and other current liabilities
1,314 472,815
2,110 553
68,739
19,148
62,612
11,168
Sales Purchases Trade and other receivables Noncurrent receivables Trade payables and other current liabilities
51
957
230 -
1,312 291
San Miguel Properties, Inc.
SMITS, Inc. and a subsidiary
SDI
Affiliate
Affiliate
Affiliate
Forward
- 47 -
Sales Purchases Trade and other receivables Trade payables and other current liabilities Purchases Trade and other receivables Trade payables and other current liabilities
54
-
-
395
691
116 18,347
251 57,675
854
1,040
121,126
88,617
12,533
6,883
530 -
89,287
Name of Company ArchEn Technologies, Inc.
San Miguel Yamamura Asia Corporation
San Miguel Brewery Inc.
San Miguel Beverages, Inc.
Relationship* Affiliate
Affiliate
Affiliate
Affiliate
Nature of Transactions
2009
2008
Sales Purchases Trade and other Receivables Trade payables and other current liabilities
P28 1,005
P 1,601
94
122
7,806
2,288
Purchases Trade and other receivables Trade payables and other current liabilities
32,962
30,240
5,534
4,126
Sales Purchases Trade and other receivables Trade payables and other current liabilities
2,748 716,471
7,859 3,241
23,943
20,857
250,097
19,955
Sales Purchases Trade and other receivables Trade payables and other current liabilities
4,755 83,213
4,322 1,363
7,145
12,618
5,492
2,875
SM Bulk Water Company, Inc.
Affiliate
Trade payables and other current liabilities
San Miguel Distribution Co., Inc.
Affiliate
Sales Purchases Trade and other receivables Trade payables and other current liabilities
479
-
36
93
7 4,349
4,294
28
209
20
3,169
Beer World Inc.
Affiliate
Trade payables and other current liabilities
31
-
Mindanao Corrugated Fibreboard, Inc.
Affiliate
Purchases Trade payables and other current liabilities
16,146
-
11,523
-
Pacific Central Properties, Inc.
Affiliate
Trade payables and other current liabilities
545
-
Philippine Breweries Corporation
Affiliate
Trade payables and other current liabilities
839
678
* Affiliates refer to companies owned by SMC.
On May 1, 2009, the transfer of the receivables, inventories and fixed assets of SMC’s Centralized Key Accounts Group (CKAG) to SMFI was completed, for a total consideration of P2,352.5 million. CKAG was a unit of SMC engaged in the business of selling and distributing various products of some companies within the SMC Group, including SMPFC’s subsidiaries, to modern trade customers. On December 28, 2004, SMC and Monterey executed a Trademark Licensing Agreement with PF-Hormel to license the Monterey and Gannado trademarks for a period of 20 years renewable for the same period for a royalty based on net sales revenue. The royalty fee will apply only for as long as SMC and any of its subsidiaries own at least 51% of PF-Hormel. In the event that the ownership of SMC and any of its subsidiaries is less than 51%, the parties will negotiate and agree on the royalty fee on the respective licenses of the Monterey and Gannado trademarks.
- 48 -
The compensation of the key management personnel of the Group, by benefit type, follows: 2009 P52,878 22,417 P75,295
Short-term employee benefits Retirement costs
2008 P44,053 13,267 P57,320
2007 P28,892 2,609 P31,501
Several key management personnel of the Group were employees of SMC in 2008 and 2007. The compensation of key management personnel, which were charged by SMC to the Group as management fee, amounted to P6.4 million, P26.7 million and P62.1 million in 2009, 2008 and 2007, respectively.
26. Basic and Diluted Earnings Per Share Basic EPS is computed as follows: 2009
2008
2007
P2,596,963
P77,194
P30,591
141,243,350
141,243,350
70,378,272
141,243,350
141,243,350
70,865,078 141,243,350
P0.55
P0.22
Net income attributable to equity holders of the Parent Company (a) Common shares issued and outstanding Add weighted average number of shares issued during the year Weighted average number of shares (b) Basic EPS (a/b)
P18.39
The Group does not have diluted earnings per share for the years ended December 31, 2009, 2008 and 2007.
27. Operating Lease Agreements The Group entered into various operating lease agreements. These non-cancellable leases will expire in various years. All leases include a clause to enable upward revision of the rental charge on an annual basis based on prevailing market conditions. The minimum future rental payables under these operating leases as of December 31 are as follows:
Within one year After one year but not more than five years After more than five years
2009 P34,460 109,122 409,280 P552,862
2008 P109,234 174,688 406,798 P690,720
Rent expense charged to operations amounted to P659.3 million, P662.5 million and P597.0 million in 2009, 2008, and 2007, respectively (Notes 18 and 19).
- 49 -
28. Financial Risk Management Objectives and Policies Objectives and Policies The Group has significant exposure to the following financial risks primarily from its use of financial instruments:
interest rate risk foreign currency risk commodity price risk liquidity risk credit risk
This note presents information about the Group’s exposure to each of the foregoing risks, the Group’s objectives, policies and processes for measuring and managing these risks, and the Group’s management of capital. The Group’s principal non-trade related financial instruments include cash and cash equivalents, AFS financial assets, short-term loans and derivative instruments. These financial instruments, except derivative instruments, are used mainly for working capital management purposes. The Group’s trade-related financial assets and liabilities such as trade and other receivables and accounts payable and accrued expenses arise directly from and are used to facilitate its daily operations. The Group’s outstanding derivative instruments such as commodity options are intended mainly for risk management purposes. The Group uses derivatives to manage its exposures to commodity price risks arising from the Group’s operations. The BOD has the overall responsibility for the establishment and oversight of the Group’s risk management framework. The Group’s risk management policies are established to identify and analyze the financial risks faced by the Group, to set appropriate risk limits and controls, and to monitor risks and adherence to limits. Risk management policies and systems are reviewed regularly to reflect changes in market conditions and the Group’s activities. The Group Audit Committee oversees how management monitors compliance with the Group’s risk management policies and procedures, and reviews the adequacy of the risk management framework in relation to the risks faced by the Group. The Group Audit Committee is assisted in its oversight role by Internal Audit. Internal Audit undertakes both regular and ad hoc reviews of risk management controls and procedures, the results of which are reported to the Audit Committee. The Group’s accounting policies in relation to derivatives are set out in Note 3 to the financial statements. Interest Rate Risk Interest rate risk is the risk that future cash flows from a financial instrument (cash flow interest rate risk) or its fair value (fair value interest rate risk) will fluctuate because of changes in market interest rates. The Group’s exposure to changes in interest rates relates primarily to the Group’s notes payable (Note 14). The Group follows a prudent policy to ensure that its exposure to fluctuations of interest rates is kept within acceptable limits. The Group does not have short-term loans and long-term installment payables with variable interest rates.
- 50 -
Foreign Currency Risk The Group’s exposure to foreign currency risk results from significant movements in foreign exchange rates that adversely affect the foreign-currency denominated transactions of the Group. The Group’s risk management objective with respect to foreign currency risk is to reduce or eliminate earnings volatility and any adverse impact on equity. The Group enters into foreign currency hedges using non-derivative instruments such as foreign currency forwards to manage its foreign currency risk exposure. Information on the Group’s foreign currency-denominated monetary assets and liabilities and their Philippine peso equivalents are as follows: 2008
2009
Assets: Cash and cash equivalents Accounts receivable (included under “Trade and other receivables - net” account in the consolidated statements of financial position) Total Liabilities (included under “Trade payables and other current liabilities” account in the consolidated statements of financial position): Acceptances payable Trade payables Total Net foreign currency-denominated assets
U.S. Dollar
Peso Equivalent
U.S. Dollar
Peso Equivalent
US$1,157
P53,453
US$1,127
P53,556
2,724 3,881
125,849 179,302
3,049
144,889
4,176
198,445
410 1,478
18,942 68,284
925 1,340
43,956 63,677
1,888
87,226
2,265
107,633
US$1,993
P92,076
US$1,911
P90,812
The Group reported net foreign exchange gains (losses) amounting to (P1.0 million), P5.9 million and (P54.3 million) in 2009, 2008 and 2007, respectively, with the translation of its foreign currency-denominated assets and liabilities. These resulted from the movements of the Philippine peso against the US dollar as shown in the following table: Peso to US Dollar 46.20 47.52 41.28
December 31, 2009 December 31, 2008 December 31, 2007
- 51 -
The following table demonstrates the sensitivity to a reasonably possible change in the US dollar exchange rate, with all other variables held constant, of the Group’s profit before income tax (due to changes in the fair value of monetary assets and liabilities) and the Group’s equity (due to translation of results and financial position of foreign operations) as of December 31, 2009 and 2008. 2009 P1 decrease in the US dollar exchange rate Effect on Income Effect on before Equity (net Income Tax of tax) Cash and cash equivalents Trade and other receivables Trade payables and other current liabilities
(P1,157) (2,724) (3,881)
(P810) (1,907) (2,717)
1,888
1,322
(P1,993)
(P1,395)
P1 increase in the US dollar exchange rate Effect on Effect on Income Equity before (net of Income Tax tax) P1,157 2,724 3,881
P810 1,907 2,717
(1,888)
(1,322)
P1,993
P1,395
2008 P1 decrease in the US dollar exchange rate Effect on Effect on Income before Equity (net Income Tax of tax) Cash and cash equivalents Trade and other receivables Trade payables and other current liabilities
P1 increase in the US dollar exchange rate Effect on Effect on Income before Equity (net Income Tax of tax)
(P1,127) (3,049)
(P733) (1,982)
P1,127 3,049
P733 1,982
(4,176)
(2,715)
4,176
2,715
2,265
1,472
(2,265)
(1,472)
(P1,911)
(P1,243)
P1,911
P1,243
Commodity Price Risk Commodity price risk is the risk that future cash flows from a financial instrument will fluctuate because of changes in market prices. The Group, through SMC, enters into various commodity derivatives to manage its price risks on strategic commodities. Commodity hedging allows stability in prices, thus offsetting the risk of volatile market fluctuations. Through hedging, prices of commodities are fixed at levels acceptable to the Group, thus protecting raw material cost and preserving margins. For hedging transactions, if prices go down, hedge positions may show mark-to-market losses; however, any loss in the mark-to-market positions is offset by the resulting lower physical raw material cost. The Group uses commodity futures and options to manage the Group’s exposures to volatility of prices of certain commodities such as wheat and fuel oil. Liquidity Risk Liquidity risk pertains to the risk that the Group will encounter difficulty in meeting obligations associated with financial liabilities that are settled by delivering cash or another financial asset.
- 52 -
The Group’s objectives to manage its liquidity risk are as follows: a) to ensure that adequate funding is available at all times; b) to meet commitments as they arise without incurring unnecessary costs; c) to be able to access funding when needed at the least possible cost; and d) to maintain an adequate time spread of refinancing maturities. The table below summarizes the maturity profile of the Group’s financial assets and liabilities based on contractual undiscounted payments as of December 31, 2009 and 2008. 2009
Financial Assets Cash and cash equivalents Trade and other receivables - net Derivative assets AFS financial assets (included under “Retirement and other noncurrent assets” account in the consolidated statements of financial position) Financial Liabilities Notes payable including accrued interest Trade payables and other current liabilities Derivative liabilities (included under “Trade payables and other current liabilities” account in the consolidated statements of financial position)
Carrying amount
Contractual cash flow
Less than 1 year
P3,950,346 9,023,953 47,070
P3,950,346 9,023,953 47,070
P3,950,346 9,023,953 47,070
13,761
13,761
13,761
8,841,254
8,858,334
8,858,334
12,628,560
12,628,560
12,628,560
13,362
13,362
13,362
Carrying Amount
Contractual cash flow
P2,782,206 7,762,091 35,757
P2,782,206 7,762,091 35,757
P2,782,206 7,762,091 35,757
11,426
11,426
11,426
11,749,174
11,784,993
11,784,993
9,623,458
9,623,458
9,623,458
144,213
144,213
144,213
2008
Financial Assets Cash and cash equivalents Trade and other receivables - net Derivative assets AFS financial assets (included under “Retirement and other noncurrent assets” account in the consolidated statements of financial position) Financial Liabilities Notes payable including accrued interest Trade payables and other current liabilities Derivative liabilities (included under “Trade payables and other current liabilities” account in the consolidated statements of financial position)
- 53 -
Less than 1 year
Credit Risk Credit risk is the risk of financial loss to the Group if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from the Group’s trade receivables. The Group’s exposure to credit risk is influenced mainly by the individual characteristics of each customer or counterparty. Thus, the Group has established detailed credit policies under which each new customer is reviewed individually for creditworthiness before standard payment and delivery terms and conditions are implemented. The Group ensures that sales on account are made to customers with appropriate credit history. The Group has detailed credit criteria and several layers of credit approval requirements before engaging a particular customer or counterparty. The Group also manages its credit risk mainly through the application of transaction limits and close risk monitoring. It is the Group’s policy to enter into transactions with a wide diversity of creditworthy counterparties to mitigate any significant concentration of credit risk. The Group has regular internal control reviews to monitor the granting of credit and management of credit exposures. Goods are subject to retention of title clauses so that in the event of default, the Group would have a secured claim. Where appropriate, the Group obtains collateral or arranges master netting agreements. The Group recognizes provision for uncollectible accounts and impairment losses, based on specific and collective impairment tests, when objective evidence of impairment has been identified either on an individual account or on a portfolio level. Financial information on the Group’s maximum exposure to credit risk as of December 31, 2009 and 2008, without considering the effects of collaterals and other risk mitigation techniques, are presented below. ote 6 7 29 29
Cash and cash equivalents Trade and other receivables - net Derivative assets AFS financial assets
2009 P3,950,346 9,023,953 47,070 13,761 P13,035,130
2008 P2,782,206 7,762,091 35,757 11,426 P10,591,480
The Group has no significant concentration of credit risk with any counterparty. Financial and Other Risks Relating to Livestock The Group is exposed to financial risks arising from the change in cost and supply of feed ingredients and the selling price of chicken, hogs and cattle and related products, all of which are determined by constantly changing market forces of supply and demand, and other factors. The other factors include environmental regulations, weather conditions and livestock diseases for which the Group has little control. The mitigating factors are listed below.
The Group is subject to risks affecting the food industry, generally, including risks posed by food spoilage and contamination. Specifically, the fresh meat industry is regulated by environmental, health and food safety organizations and regulatory sanctions. The Group has put into place systems to monitor food safety risks throughout all stages of manufacturing and processing to mitigate these risks. Furthermore, representatives from the government regulatory agencies are present at all times during the processing of dressed chicken, hogs and cattle in all dressing and meat plants and issue certificates accordingly. The authorities, however, may impose additional regulatory requirements that may require significant capital investment at short notice.
- 54 -
The Group is subject to risks relating to its ability to maintain animal health status considering that it has no control over neighboring livestock farms. Livestock health problems could adversely impact production and consumer confidence. However, the Group monitors the health of its livestock on a daily basis and proper procedures are put in place.
The livestock industry is exposed to risk associated with the supply and price of raw materials, mainly grain prices. Grain prices fluctuate depending on the harvest results. The shortage in the supply of grain will result in adverse fluctuation in the price of grain and will ultimately increase the Group’s production cost. If necessary, the Group enters into forward contacts to secure the supply of raw materials at reasonable price.
Capital Management The primary objective of the Group’s capital management is to ensure that it maintains a strong credit rating and healthy capital ratios in order to support its business and maximize shareholder value. The Group manages its capital structure and makes adjustments, in the light of changes in economic conditions. To maintain or adjust the capital structure, the Group may adjust the dividend payment to shareholders, pay-off existing debts, return capital to shareholders or issue new shares. The Group defines capital as paid-in capital stock, additional paid-in capital and retained earnings, both appropriated and unappropriated. Other components of equity such as treasury stock and cumulative translation adjustments are excluded from capital for purposes of capital management. The BOD has overall responsibility for monitoring capital in proportion to risk. Profiles for capital ratios are set in the light of changes in the Group’s external environment and the risks underlying the Group’s business, operation and industry. The Group monitors capital on the basis of debt-to-equity ratio, which is calculated as total debt divided by total equity. Total debt is defined as total current liabilities and total noncurrent liabilities, while equity is total equity as shown in the consolidated statements of financial position. There were no changes in the Group’s approach to capital management during the year. The Group is not subject to externally imposed capital requirements.
- 55 -
29. Financial Assets and Liabilities The table below presents a comparison by category of carrying amounts and fair values of the Group’s financial instruments as of December 31, 2009 and 2008: 2009 Carrying Amount Fair Value Financial Assets: Cash and cash equivalents Trade and other receivables - net Derivative assets AFS financial assets (included under “Retirement and other noncurrent assets” account in the consolidated statements of financial position) Financial liabilities: Notes payable Trade payables and other current liabilities Derivative liabilities (included under “Trade payables and other current liabilities” account in the consolidated statements of financial position)
2008 Carrying Amount
Fair Value
P3,950,346 P3,950,346 P2,782,206 P2,782,206 7,762,091 7,762,091 9,023,953 9,023,953 35,757 35,757 47,070 47,070
13,761
13,761
11,426
11,426
8,816,090
8,816,090
11,666,380
11,666,380
12,653,724
12,653,724
9,706,252
9,706,252
13,362
13,362
144,213
144,213
The following methods and assumptions are used to estimate the fair value of each class of financial instruments: Cash and Cash Equivalents and Trade and Other Receivables. The carrying amounts of cash and receivables approximate their respective fair values primarily due to the relatively short-term maturity of these financial instruments. Derivatives. The fair values of forward exchange contracts are calculated by reference to current forward exchange rates. In the case of freestanding commodity derivatives, the fair values are determined based on quoted prices obtained from their respective active markets. Fair values for stand-alone derivative instruments that are not quoted from an active market and for embedded derivatives are based on valuation models used for similar instruments using both observable and non-observable inputs. AFS Financial Assets. The fair values of publicly traded instruments and similar investments are based on quoted market prices in an active market. For debt instruments with no quoted market prices, a reasonable estimate of their fair values is calculated based on the expected cash flows from the instruments discounted using the applicable discount rates. Unquoted equity securities and derivative instruments linked to unquoted stocks are carried at cost less impairment. &otes Payable and Trade Payables and Other Current Liabilities. The carrying amounts of notes payable and trade payables and other current liabilities approximate their respective fair values due to the relatively short-term maturity of these financial instruments. Derivative Financial Instruments The Group, through SMC, enters into various commodity derivative contracts to manage its exposure on commodity price risk. The portfolio is a mixture of instruments including futures and options covering the Group’s requirements on wheat and fuel oil.
- 56 -
The Group’s freestanding and embedded derivative financial instruments are accounted for as hedges or transactions not designated as hedges. Derivative Instruments Accounted for as Hedges Cash Flow Hedge. The Group had options in 2008 entered into on its behalf by SMC, designated as hedge of forecasted purchases of fuel oil requirements for 2009. These options were exercised at various calculation dates in 2009 with specified quantities on each calculation date. As of December 31, 2008, the notional quantity allocated to the Group is 571 metric tons. The net unrealized fair value change (after tax) reported as part of other comprehensive income and the amount charged to profit and loss on these call and put options as of December 31, 2008 amounted to P7.8 million and (P0.2 million), respectively. As of December 31, 2009, the Group has no outstanding options designated as hedge on the purchase of commodity. However, the amount charged to profit and loss for 2009 amounted to P7.6 million. These option contracts are being used to hedge the commodity price risk of the Group’s commitments. There were no ineffective portions in this hedge. Other Derivative Instruments Not Designated as Hedges The Group enters into certain derivatives as economic hedges of certain underlying exposures. Such derivatives, which include freestanding commodity options and embedded currency forwards, are not designated as accounting hedges. Changes in fair value of these instruments are accounted for directly in the 2009 and 2008 consolidated statements of income. Details are as follows: Freestanding Derivatives. Freestanding derivatives consist of various commodity options entered into by SMC on behalf of the Group. The Group had bought and sold options to hedge fuel oil requirements in 2009. These options were exercised at various calculation dates in 2009 with specified quantities on each calculation date. As of December 31, 2009, the Group has no outstanding commodity option for the purchase of fuel oil. As of December 31, 2008, the notional quantity allocated to the Group is 1,714 metric tons. The negative fair value of these options amounted to P25.8 million. The Group also had outstanding bought and sold wheat options with various maturities in 2009 and 2010. As of December 31, 2009 and 2008, the notional quantity allocated to the Group is 59,874 and 34,292 metric tons, respectively. The net negative fair value of these options as of December 31, 2009 and 2008 amounted to P5.8 million and P93.9 million, respectively. Embedded Derivatives. The Group’s embedded derivatives include currency forwards embedded in non-financial contracts. As of December 31, 2009 and 2008, the total outstanding notional amount of such embedded currency forwards amounted to US$28.6 million and US$23.4 million, respectively. These non-financial contracts consist mainly of foreign-currency denominated purchase orders, sales agreements and capital expenditures. As of December 31, 2009 and 2008, the net positive fair value of these embedded currency forwards amounted to P39.5 million and P21.1 million, respectively. For the years ended December 31, 2009 and 2008, the Group recognized mark-to-market gains (losses) from freestanding and embedded derivatives amounting to P54.5 million and (P388.3 million), respectively.
- 57 -
Fair Value Changes on Derivatives The net movements in fair value changes of all derivative instruments for the years ended December 31, 2009 and 2008 are as follows:
Balance at beginning of year Net changes in fair value of derivatives: Designated as accounting hedges Not designated as accounting hedges
2009 (P108,456) 3,645 55,267 (49,544) (83,252) P33,708
Less fair value of settled instruments Balance at end of year
2008 P437,927 (10,945) (472,066) (45,084) 63,372 (P108,456)
Hedge Effectiveness Results. The Group has no outstanding derivatives designated as hedges as of December 31, 2009. As of December 31, 2008, the effective fair value changes, net of tax, on the Group’s cash flow hedges that were deferred in equity amounted to P7.8 million. Fair value hierarchy The table below analyzes financial instruments carried at fair value, by valuation method. The different levels have been defined as follows:
Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2: inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.
Level 3: inputs for the asset or liability that are not based on observable market data. 2009
Financial Assets Derivative assets AFS financial assets Financial Liabilities Derivative liabilities
Level 1
Level 2
Total
P4,863 -
P42,207 13,761
P47,070 13,761
10,698
2,664
13,362
As of December 31, 2009, the Group has no financial instruments valued based on Level 3. During the year, there were no transfers between Level 1 and Level 2 fair value measurements, and no transfers into and out of Level 3 fair value measurements.
30. Employee Stock Purchase Plan SMC offers shares of stocks to employees of SMC and its subsidiaries under the Employee’s Stock Purchase Plan (ESPP). Under the ESPP, all permanent Philippinebased employees of SMC and its subsidiaries who have been employed for a continuous period of one year prior to the subscription period will be allowed to subscribe at a price equal to the weighted average of the daily closing market prices for three months prior to the offer period less 15% discount. A participating employee may acquire at least 100 shares of stocks through payroll deductions.
- 58 -
The ESPP requires the subscribed shares and stock dividends accruing thereto to be pledged to SMC until the subscription is fully paid. The right to subscribe under the ESPP cannot be assigned or transferred. A participant may sell his shares after the second year from exercise date. The ESPP also allows subsequent withdrawal and cancellation of participants’ subscriptions under certain terms and conditions. Expenses for share-based payments charged to operations and included in “Selling and Administrative Expenses” amounted to P6.3 million, P5.5 million and P6.1 million in 2009, 2008 and 2007, respectively.
31. Other Matters a. Toll Agreements The significant subsidiaries are into toll processing with various contract growers, breeders, contractors and processing plant operators (collectively referred to as “the Parties”). The terms of the agreements, among others, include the following:
The Parties have the qualifications to provide the contracted services and have the necessary manpower, facilities and equipment to perform the services contracted.
Tolling fees paid to the Parties are based on the agreed rate per acceptable output or processed product. The fees are normally subject to review in cases of changes in costs, volume and other factors.
The periods of the agreement vary. Negotiations for the renewal of any agreement generally commence six months before expiry date.
Total tolling expenses in 2009, 2008 and 2007 amounted to P3,137.9 million, P2,663.8 million, and P2,876.9 million, respectively. b. Contingencies The Group is a party to certain lawsuits or claims (mostly labor related cases) filed by third parties which are either pending decision by the courts or are subject of settlement agreements. The outcome of these lawsuits or claims cannot be presently determined. In the opinion of management and its legal counsel, the eventual liability from these lawsuits or claims, if any, will not have a material effect on the Group’s consolidated financial statements. c. Commitments The outstanding capital and purchase commitments as of December 31, 2009 and 2008 amounted to P9,516.0 million and P9,640.9 million, respectively. d. Registration with the Board of Investments (BOI) Certain operations of consolidated subsidiaries are registered with the BOI as pioneer and non-pioneer activities. As registered enterprises, these consolidated subsidiaries are subject to some requirements and are entitled to certain tax and non-tax incentives which are considered in the computation of the provision for income tax.
- 59 -
Monterey Monterey’s Sumilao Hog Project (Sumilao Project) was registered with the BOI under Registration No. 2008-192, in accordance with the provisions of the Omnibus Investment Code of 1987 on a pioneer status as New Producer of Hogs on July 30, 2008. As a BOI-registrant, the Sumilao Project is entitled to incentives which included, among others, income tax holiday (ITH) for a period of six (6) years, extendable under certain conditions to eight (8) years, from February 2009 or actual start of commercial operations, whichever is earlier, but in no case earlier than the date of registration. SMFI SMFI was registered with the BOI on a non-pioneer status as a New Producer of Animal Feeds for its Mariveles, Bataan plant and as a New Producer of Chicken (Dressed) for its Orion, Bataan farm in August 2006 and July 2007, respectively. Under the terms of SMFI’s BOI registration and subject to certain requirements as provided in the Omnibus Code of 1987, SMFI is entitled to incentives which included, among others, ITH for a period of four (4) years from January 2007 for Animal Feeds and from October 2007 for Dressed Chicken (can be extended to maximum of 8 years provided certain conditions are met). PF-Hormel The existing registration of PF-Hormel with the BOI was made on May 18, 2006 in accordance with the provisions of the Omnibus Investments Code of 1987 as a new producer of processed meat products on a non-pioneer status. Under the terms of this new registration, PF-Hormel is entitled to certain tax incentives, including income tax holiday (ITH) for four years from July 2007, or from the actual start of commercial operations, which ever comes first, but in no case earlier than the date of registration. PF-Hormel’s new registered activity with the BOI commenced commercial operations in July 2007 and began to avail tax incentives since then.
32. Subsequent Events On February 2, 2010, the Company’s BOD approved, among others, the following corporate actions, subject to the necessary approvals of the Company’s stockholders, as necessary, and of the SEC:
De-classification of SMPFC’s common shares and increase in SMPFC’s authorized capital stock by P1,000 million or 100,000,000 shares at P10.00 par value.
Declaration of 18% stock dividend based on the issued and outstanding shares to be taken out of the proposed increase in authorized capital stock.
Potential issuance of up to 75,000,000 new SMPFC shares to SMC or third parties.
- 60 -
The BOD also approved on the same date the proposal of SMPFC management to a) purchase food-related brands and intellectual property rights from SMC at a purchase price of P3,200 million, and b) acquire, through SMPFIL, a British Virgin Islands company and a wholly-owned subsidiary of SMPFC, SMC’s 51% interest, through San Miguel Foods and Beverage International Limited, in San Miguel Pure Foods Investment (BVI) Limited (SMPFI Limited) at book value. SMPFI Limited owns 100% of San Miguel Pure Foods Vietnam (SMPFVN). The unaudited financial information relative to the acquisition of SMPFVN as of December 31, 2009 follows:
Cash and cash equivalents Trade and other receivables - net Inventories - net Prepaid expenses and other current assets Property, plant and equipment - net Intangible assets Other noncurrent assets Trade payables and other current liabilities Other noncurrent liabilities Net assets
- 61 -
P107,589 126,532 540,857 23,647 1,162,875 71,518 14,508 (543,070) (2,848) P1,501,608
Parties to the Offer Issuer
SAN MIGUEL PURE FOODS COMPANY, INC. JMT Building, ADB Avenue, Ortigas Center, Pasig City
Lead Underwriters
BDO CAPITAL & INVESTMENT CORPORATION 20th Floor, South Tower, BDO Corporate Center 7899 Makati Avenue, Makati City THE HONGKONG AND SHANGHAI BANKING CORPORATION LIMITED HSBC Centre, 3058 Fifth Avenue West, Bonifacio Global City, Taguig City RCBC CAPITAL CORPORATION 7th Floor, Yuchengco Tower, RCBC Plaza 6819 Ayala Avenue, Makati City SB CAPITAL INVESTMENT CORPORATION 18th Floor, Security Bank Center 6776 Ayala Avenue, Makati City STANDARD CHARTERED BANK 6788 Ayala Avenue, Makati City
Co-Lead Underwriter
FIRST METRO INVESTMENT CORPORATION 45th Floor, GT Tower, 6813 Ayala Avenue corner H.V. dela Costa St., Makati City
Participating Underwriters
CHINA BANKING CORPORATION 5th Floor, 8745 Paseo de Roxas cor. Villar St., Makati City INSULAR INVESTMENT AND TRUST CORPORATION 2nd Floor, Insular Life Building, 6781 Ayala Avenue, Makati City MULTINATIONAL INVESTMENT BANCORPORATION 22nd Floor, Multinational Bancorporation Centre, 6805 Ayala Avenue, Makati City PHILIPPINE COMMERCIAL CAPITAL, INC. PCCI Corporate Ctr., 118 L.P. Leviste St., Salcedo Village, Makati City
Underwriters
UNICAPITAL, INC. 3rd Floor, Majalco Building, Benavidez cor. Trasierra Sts., Legaspi Village, Makati City VICSAL INVESTMENT, INC. 1009 - 1011 Tower One & Exchange Plaza, Ayala Triangle, Ayala Avenue, Makati City
Financial Advisor to the Issuer
ATR KIMENG CAPITAL PARTNERS, INC. 17th Floor, Tower One and Exchange Plaza Ayala Triangle, Ayala Avenue, Makati City
Selling Agents
THE TRADING PARTICIPANTS OF THE PHILIPPINE STOCK EXCHANGE, INC.
151
Legal Counsel to the Issuer
PICAZO BUYCO TAN FIDER & SANTOS 18th Floor, Liberty Center 104 H. V. dela Costa Street, Salcedo Village, Makati City
Legal Counsel to the Lead Underwriters
ROMULO MABANTA BUENAVENTURA SAYOC & DE LOS ANGELES 30th Floor, Citibank Tower 8741 Paseo de Roxas, Makati City
Receiving Agent and Registrar and Paying Agent
SMC STOCK TRANSFER SERVICE CORPORATION Podium Level, SMC Head Office 40 San Miguel Avenue, Mandaluyong City
Depository Bank
BANK OF COMMERCE G/F PhilFirst Building, 6764 Ayala Avenue, Makati City
Independent Auditors
MANABAT SANAGUSTIN & CO. The KPMG Center, 9/F 6787 Ayala Avenue Makati City
152
