We have much to be proud of

Chairman and CEO, San Miguel Corp.
Speech delivered at the SMC Annual Stockholders Meeting, 24 July 2007)

First of two parts

So much has happened since we last met so I’m looking forward to updating you on developments at San Miguel.

As you might have read in our annual report, 2006 was, in many respects, a challenging year.

Nevertheless, the strength of our beverage and food businesses mean that we delivered our eighth successive year of good progress against the goals and priorities we adopted in 1998.

For 2006 we grew revenues by 10 percent, with two of our three core businesses growing strongly. Cost savings more than offset continued cost headwinds resulting in a consolidated operating income 18 percent higher than 2005. Net income grew 17 percent over the previous year levels to hit P10.6 billion.

Our annual report provides you with a thorough discussion of our results for our specific businesses and I hope you will refer to it to appreciate our performance.

I’d like to use the next few minutes to review some of the exciting changes and initiatives that are now underway and which will impact on the nature and performance of your business in the years ahead.

At San Miguel we describe ourselves as a leader in the beverage, food and packaging industries — not just here in the Philippines but in the region.

Over the last nine years we’ve significantly expanded our participation in these industries from both a product and geographic perspective through acquisitions and integration. We’ve increased the scale of our core business and implemented a regional strategy that, when fully implemented, will enable us to optimize manufacturing and at the same time improve distribution across our markets.

So we’re in good shape and we have much to be proud of.

Today, I’d like to focus most of my remarks about our new strategy. I’ll try to give you a sense of how the San Miguel of today fits into our plans for the future — how these plans will enhance our growth prospects as a company and how they are entirely consistent with our strategic vision for the business.

Last April, when we first said we were looking to venture into new engines of growth, the news was met with a lot of raised eyebrows. Apparently, the announcement took many by surprise. Analysts who follow San Miguel, media who cover us expressed concern about our diversification plan.

Even our employees who have grown used to thinking of their company largely as a consumer goods company were themselves caught off-guard.

But yet, if you’ve been an investor in San Miguel for very long, you would know that what we’ve been doing to change your company is not entirely a break with the past, but a continuation of it. For nine years, we have been adding and subtracting, planting and pruning until we had businesses that made sense together, businesses that were more productive and profitable because they had things to share.

In the recent past, we accelerated the pace of consolidation where it made sense to do so. We initiated dispositions which freed up considerable amounts of capital from our lower-return, slower growth areas.

Moves which were all designed to create strong and potentially independent core businesses. We restructured and consolidated our food and packaging units, substantially strengthening the position of both through a series of acquisitions and through organic investment. Subsequently, we’ve broadened our partnership with respected world class players like Kirin Brewery, Hormel Foods and Nihon Yamamura ultimately creating, via a series of equity investments, a stronger business.

The spin-off of our beer business into an SMC wholly-owned company is just the next logical step in the same direction. It is a move that will allow us to unlock the value of our flagship and extract the full potential inherent in this business. The time is ripe for Beer to exploit the benefits of focus as a stand-alone business and over the next few months we will be evaluating options on how best to do this.

I’d like to make clear however that following the spin-off of the Beer Divisions, San Miguel Corp. will continue to own the brands and property assets of the independent new company and as a result, income in the form of dividends, royalties and rentals from the new company will continue to accrue to San Miguel.

In recent weeks, there have been headlines speculating that we are looking to sell a portion of holdings in our Australian businesses to either Kirin Brewery or some private investment company. We’ve already confirmed that we are in talks with Kirin about a possible investment in National Foods. Discussions are still exploratory at this stage so there’s not much to share beyond saying that we are indeed talking to one another. We look forward to updating you on the eventual outcome of these talks.

Now that the vertical integration of our major businesses is very nearly complete, we are now looking at ways of growing horizontally into a range of new business areas. I’ve always believed that the best way to steer a company toward growth is to look out four or five years at the big market trends evolving and then work backward to identify opportunities.

We’ve done preliminary studies, going so far as to hire an independent adviser to shortlist for us attractive industries in which we might choose to participate. Industries like mining, power, infrastructure, water, other utilities and property. These are our short listed “new engines of growth” and we are asking you today to help us amend the articles of incorporation so that we can participate in these industries — industries which we believe can earn us the highest sustainable returns needed to grow your company even further.

We want to be in industries that have scale and will grow and we are determined to build leadership positions in key areas where important trends are driving future growth, not just for San Miguel but for the Philippines too.

We want to use our resources to allow our traditional businesses to be as cost competitive as possible, while at the same time allowing us to simultaneously fuel growth on a larger scale. Industries like power, bulk water and property certainly fit these criteria.

Despite our ambitions, which some have criticized as “outsized,” our intent has always been to act with caution. These new businesses that we are looking into will constitute only a fraction of our total portfolio. The much larger portion will still remain our core businesses of food and beverage.

What we’re particularly excited about is the earning potential that these new businesses can bring. For the investment we are likely to infuse into these new businesses, we’re confident that we can extract highly attractive earnings that would significantly improve our aggregate group margins.

In everything, I’d like to assure you that we will demonstrate the same levels of prudence as we have in the past. Our history of building shareholder value through acquisitions is generally sound and successful. The San Miguel Group has managed to grow and prosper as a collection of independent and interdependent operating units. And we’re confident that as we add new businesses into our fold, the same will hold true.

We will be disciplined in reshaping the San Miguel portfolio to higher-growth areas and rigorous in upholding the same performance targets that we have always held our other businesses to account. Our job has always been to optimize the company to be the best it can be and I think we’re on the right course.

It’s in this light that we are also looking to increase our capital stock to enable us to issue 1.5 billion preferred shares. Again we are going to be asking you to vote in favor of amending the articles of incorporation so that we will be allowed to do this. The funds that will be derived from the “preferreds” would give us greater flexibility in raising additional capital and would enable us to pay down debt or fund new businesses and acquisitions.

To be continued