JG Summit Holdings, Inc. (JGS) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. Thank you for coming to this meeting. May I request the Corporate Secretary to please certify on the sending of notices to the stockholders and to the existence of a quorum for this meeting.

Mr. Chairman, I hereby certify that notice of this meeting had been sent to the stockholders of record as of April 4, 2022, via the following methods: first, by publication in the Manila Standard and the BusinessWorld for 2 consecutive days in both online and print formats; second, by posting on the website of the corporation; and third, by disclosure to the Philippine Stock Exchange. Thus, the stockholders have been notified of this meeting in compliance with applicable rules and regulations. I hereby certify that there are present in this meeting, via remote communication or by proxy, stockholders entitled to vote representing 87.86% of the corporation's total outstanding shares and that this meeting is therefore competent to transact the business provided for in the agenda.

There being a quorum, the Annual Meeting of the Stockholders of JG Summit Holdings, Inc. is hereby called to order. May I request the Corporate Secretary to share with us the rules and procedures for this meeting.

The rules and procedures are set forth in the definitive information statement and in the explanation of agenda items integrated into the notice of this meeting. All tabulation results for this meeting are subject to validation by SyCip Gorres Velayo & Co. For the information of the stockholders who are with us now, during this live broadcast, the corporation has requested stockholders to send their questions or comments by e-mail at the e-mail address flashed on the screen. Questions which were received by May 5, 2022, have been collated, and selected questions will be answered during this meeting. The corporation will reply to the questions and comments not taken up during this meeting through e-mail.

Let us now proceed to the next item in the agenda. The approval of the minutes of the Annual Meeting of the Stockholders held on May 14, 2021.

Mr. Chairman, copies of the minutes have been distributed to the stockholders by providing the link to the said minutes in the information statement and by showing the QR code on the screen prior to the meeting. The minutes have been approved as submitted by votes representing 87.86% of the total outstanding shares of the corporation.

Thank you. The minutes are hereby approved as presented. Let us move on to the next item in the agenda, which is the amendment of the Article Sixth of the Articles of Incorporation. May I call on the Corporate Secretary to explain this proposal?

Mr. Chairman, the amendment in Article Sixth of the Articles of Incorporation is being proposed to reduce the number of seats in the Board of Directors of the corporation from 11 to 9. The proposed amendment is being flashed on screen. This proposal was approved by the Board during its meeting last November 11, 2021, and is now being presented to the shareholders for their approval. The reduction in the number of BOD seats is in line with the corporation's goal to have a smaller and more active board. Studies have shown that companies with smaller boards reap considerably greater rewards for investors. Aside from improving engagement, there's also more effective oversight of management with a smaller Board.

Corporate Secretary, do you have the results of voting for this agenda item?

Mr. Chairman, after tabulating the votes, we are pleased to report that the amendment to Article Sixth of the corporation's Articles of Incorporation was approved by affirmative votes, representing 87.86% of the total outstanding shares of the corporation.

Thank you. The amendment to Article Sixth of the Articles of Incorporation of the corporation is hereby approved. Moving on, the next item in the agenda, may I now call on Mr. Lance Y. Gokongwei, President and Chief Executive Officer of the corporation, to present his report together with the audited financial statements for the preceding calendar year?

Let me begin this presentation with a brief context of what happened in 2021. In 2021, we've seen spikes in COVID cases around March and April and another in September. Following the Delta wave in Q3, cases dropped and remained low until the end of the year. And our consumer-facing businesses, URC, Cebu and RLC benefited from relaxed mobility restrictions. However, there were also some headwinds with higher crude prices, inflation rates and peso weakness. Overall, while the reopening of the economy presented an opportunity for the JG Summit Group, rising input costs continued to be a challenge. Let me now discuss our financial and operating performance in 2021. Starting off with revenues. Most of our subsidiaries registered top line growth year-on-year in 2021, given the partial reopening of the economy, while Cebu continued to improve quarter-on-quarter. Total consolidated core net income rose seven-fold, mainly due to the 46% growth in RLC and larger contributions from our core investments. Net income shifted to positive territory at PHP 5.1 billion, boosted by the gain from URC's Oceania divestment and CREATE. Excluding airline, our businesses are close to full recovery with core net income of 96% and total revenues already ahead of pre-pandemic levels. On key performances and development per business unit, beginning with URC. Revenues, excluding Oceania, were up 3%, driven by commodities, while BCF Philippines displayed recovery from a muted first half, growing 5% year-on-year in Q4. URC sales are now higher than pre-pandemic level. EBIT margin contraction from input cost pressures was mitigated to only 140 basis points, given pricing adjustments and OpEx optimization. Despite these pressures, bottom line was boosted by gains on sale of land and CREATE tax savings. The sale of URC's Oceania business resulted in a healthy gain of USD 206 million, driving net income to PHP 23.3 billion, up 117% year-on-year. Separately, URC acquired Munchy's, Malaysia's leading biscuit brand. Malaysia will now be URC's third stock arm internationally behind Thailand and Vietnam. URC also continued to grow through innovations, with new products contributing between 4% to 7% of sales in the last year. Next, for Cebu Air, full year revenues dropped 30% year-on-year, given high base effects, but has since improved quarter-on-quarter, given steep domestic growth, driven by easing travel regulations and the Christmas peak. Full year revenues were cushioned by strong cargo operations. As for profitability, margins were negatively impacted by higher fuel price maintenance expenses, interest and peso depreciation. Nonetheless, Cebu successfully raised over PHP 1.6 billion through various funding initiatives, providing the airline a 24-month liquidity runway and further strengthening its balance sheet. The continuous implementation of its Future Size and Shape or FSAS program, which rightsized the fleet, has already generated over PHP 2 billion in cost savings. Moving on to Robinsons Land Corporation. Revenues grew 29%, given Chengdu sales, realized sales of Bridgetown Properties and a strong performance of the office division. These offset the softer demand in residential and mall divisions. Net income rose 53%, boosted by EBITDA recovery across most BUs, CREATE and the listing of RLC's Commercial REIT, which enjoys more favorable tax treatment. RCR became the largest fleet in the Philippines in terms of market size. RCR became the largest fleet in the Philippines in terms of market size. RCR became the largest fleet in the Philippines in terms of market cap, IPO size and portfolio valuation, providing RLC an additional PHP 23.5 billion of funding to support further growth. RLC launched 1 mall, 3 offices, 1 hotel, 3 residential projects and 3 industrial facilities in the Philippines, while it is ramping up its Chengdu project, which is almost fully sold and complete with 89% of the capital already repatriated. For Petrochem, strong volume and higher average selling prices, plus fresh contributions from its LPG trading business and its new aromatics extraction unit led revenues and EBITDA to grow 90% and 460% year-on-year, respectively. This was also driven by improved utilization rates, considering the plant shutdowns in the first quarter 2020. Unfortunately, higher depreciation, interest and ForEx losses resulted in about the same net loss year-on-year. One key business update, JGSOC began operating its aromatics extraction unit and completed its butadiene extraction unit before 2021 ended. It also entered the LPG trading business through Peak Fuel Corporation. Meanwhile, the construction of its PE3 facility is expected to conclude by the second half of this year. For RBank, loans expanded 14% year-on-year versus the industry's 5%. This plus higher commission income offset lower trading gains. Coupled with stable net interest margins and better cost-to-income ratios, such stronger volumes drove the 33% increase in net income. And despite faster loan expansion, RBank's NPL ratio of 3.3% as end of 2021 remained lower than the industry average of 4.0%. Some key business updates RBank include the launch of RBank Remit and its Digital app, RDX, the introduction of InstaBale, which allows eligible employees to get cash advances on their upcoming salary credits through the app and its investment in Unicon Insurance and renewed bancassurance partnership with Pru Life UK. On our core investments, equity and net earnings of Meralco significantly increased to PHP 6.7 billion in 2021, given strong energy consumption across all segments and the absence of last year's impairment charge on its PacificLight Power investment. For Singapore Land Group, the recognition of income from its residential joint venture project, Tre Ver, tempered the negative impact of the pandemic on its property trading and technology operations segment. Meanwhile, PLDT raised its annual dividend to PHP 82 per share versus PHP 77 per share in the same period last year, given improved earnings momentum on many of its business. Now we go to our ecosystem base. JGDEV, our venture capital arm, continues to screen and invest in digital startups with presence in Southeast Asia. Among others, its portfolio now includes strategic investments in Tyme, Growsari and Darwinbox. And Darwinbox has just achieved unicorn status. DAVI, JG Summit's data analytics arm, operates Go Rewards, which is one of the top loyalty programs in the Philippines, with a base of over 5.5 million members. This wide base allows DAVI to leverage data to, for instance, develop its customer data platform and provide an omnichannel experience for members activating real-time trigger marketing and personalized campaigns. And moving on to LIPAD. The company successfully performed the operations readiness for airport transfer for the new Clark Terminal 2. It also signed up in-terminal concessions to improve commercial offerings at the airport. Lastly, the trucking requirements for the raw materials and packaging materials and bagged flour of URC as well as transport operations for Robinsons supermarkets were transitioned to our joint venture, DSSI. Moving on to our balance sheet. JG Summit's gearing and debt equity ratios improved to 0.68 and 0.48, respectively, with consolidated net debt declining 13% to PHP 213 billion as of the end of 2021. At the parent level, cash balances were at PHP 26.5 billion, down 12% due to debt settlement, including loan prepayments and the repayments of retail bonds as well as JG's participation in Cebu Pacific's financing. These were offset by PHP 12.5 billion of dividends, mainly from URC, Meralco and PLDT and the proceeds from the sale of Global Business to Meralco. Thus year-end net debt stood at PHP 70.8 billion, down 4% versus December 2020 for our parent company. Blended cost of parent's long-term debt was at 3.8% with an average remaining term of 3.7 years. Now on to our group's CapEx. For the full year of 2021, we have spent EUR 45.7 billion, an increase of 22% versus 2020. Majority was for petrochemicals expansion projects, RLC's land acquisitions and the development of investment portfolio as well as URC's capacity improvements and purchase of properties for future expansion. Meanwhile, Cebu Air and Robinsons Bank spent for the maintenance and ground operations and various business development initiatives, respectively. Based on our CapEx budget, we expect to spend a bit lower at PHP 41.5 billion in 2022, as we are at the tail end of our expansion project in petrochemical and URC returns to its usual CapEx spending without the 2021 property acquisitions. Moreover, Cebu's CapEx of PHP 2 billion is only going to maintenance and ground operations, as the 7 aircraft deliveries this year will all be financed via sale and leaseback agreements. On the other hand, we also see CapEx increases in RLC, as they continue to invest in land banking and expansion projects across all divisions and RBank for their digitalization and innovation initiatives. Also 2021 presented challenges to the group. We have seen signs of improvement in the market and recovery in consumer demand for products and services as vaccination rollouts accelerated towards the end of the year. While the sentiment is getting better and the [indiscernible] top line back to pre-pandemic levels as the economy opens up, inflationary pressures and volatility will continue and this will have an impact on our margins. Our plan is to manage these headwinds through better pricing and cost management measures. In line with our OGSM refresh, we expect to pivot back to recovery in 2022 and reach pre-COVID levels by 2023 in our total core earnings. The road to recovery may still be uncertain. But as we remain to embody our purpose, values and key strategic enablers, we are well positioned not only to navigate the challenges of COVID-19, but also to thrive in the post-pandemic world. I enjoin you all to continue to help us build a more sustainable future for all our stakeholders. I would like to thank all of you for your continued trust and support.

Thank you. May I call on the Corporate Secretary to present the results of voting for the approval of the audited financial statements for the preceding fiscal year.

Mr. Chairman, we are pleased to report that stockholders representing 87.80% of the total outstanding shares of the corporation have approved the audited financial statement of the corporation for the preceding calendar year as presented. The report of the President is hereby also duly noted.

The report of the President is accordingly noted and the audited financial statements for the preceding calendar year are hereby approved as presented. We now go to the election of the members of the Board of Directors. May I request the Corporate Secretary to read the names of the incumbent members of the Board of Directors.

Mr. Chairman, the incumbent members of the Board of Directors are: Mr. James L. Go; Mr. Lance Y. Gokongwei; Mr. Patrick Henry C. Go; Ms. Robina Y. Gokongwei-Pe; Mr. Johnson Robert G. Go, Jr. And the independent directors are Mr. Jose T. Pardo, Mr. Renato T. De Guzman, Mr. Antonio L. Go; and former Chief Justice, Artemio V. Panganiban.

Thank you. We now have the list of nominees for election to the Board of Directors and the voting results.

Mr. Chairman, in accordance with the nomination process stated in the bylaws of the corporation, the following have been nominated as members of the Board of Directors and have consented to their nomination. Mr. James L. Go, Mr. Lance Y. Gokongwei, Ms. Robina Y. Gokongwei-Pe; Mr. Patrick Henry C. Go; and Mr. Johnson Robert G. Go, Jr. And as independent directors, Mr. Jose T. Pardo, Mr. Renato T. De Guzman, Mr. Antonio L. Go; and former Chief Justice, Artemio V. Panganiban. There being no other nominations, the affirmative votes in favor of those nominated have been tabulated, and they have received enough votes for election to the Board. The following are hereby declared as the duly elected members of the Board of Directors of the corporation for the ensuing year until their successors have been elected and qualified. Mr. Chairman, shown on the screen are the numbers of affirmative votes for each director: Mr. James L. Go with total votes of 87.10%; Mr. Lance Y. Gokongwei with 87.33%; Ms. Robina Y. Gokongwei-Pe with 87.54%; Mr. Patrick Henry C. Go with 87.57%; and Mr. Johnson Robert G. Go, Jr. with 87.62%. And for our independent directors, Mr. Jose T. Pardo with total votes of 86.11%; Mr. Renato T. De Guzman with 87.81%; Mr. Antonio L. Go with 87.30%; and former Chief Justice, Artemio V. Panganiban with 86.15%.

Let us move on to the next item in the agenda, which is the appointment of the external auditor of the corporation. May I call on the Corporate Secretary to present the results of voting for this agenda item?

Mr. Chairman, the accounting firm of SyCip Gorres Velayo & Co. has been nominated as the external auditor of the corporation for the calendar year 2020. After tabulation of the votes, the appointment of SyCip Gorres Velayo & Co. as external auditor of the corporation has been approved by stockholders representing 87.8% of the total outstanding shares of the corporation.

Thank you. The accounting firm of SyCip Gorres Velayo & Co. is hereby appointed as the external auditor of the corporation for the calendar year 2022. Let us proceed to the next item in the agenda, which is the ratification of the acts of the Board of Directors and its committees, officers and the management of the corporation.

Mr. Chairman, the list of acts for ratification of the stockholders are shown right now on the screen. Copies of the said list have also been distributed to the stockholders present by showing the link and QR code to the said list on the screen prior to the meeting. After tabulation of the votes, we are pleased to report that stockholders representing 87.83% of the total outstanding shares of the corporation have confirmed and ratified the acts of the Board of Directors and its committees, officers and the management of the corporation for the period beginning from the last annual stockholders' meeting up to the current stockholders' meeting as duly recorded in the corporate books and records of the corporation.

Thank you. The acts of the Board of Directors and its committees, officers and management of the corporation for the period beginning from the last annual meeting of the stockholders up to the current meeting of the stockholders as duly recorded in the books and records of the corporation are hereby confirmed and ratified. We now respond to questions, which were earlier submitted via e-mail. The questions will be answered by the President and CEO, Mr. Lance Gokongwei.

How is the JG Summit Group managing current inflationary pressures and increased volatility in commodity prices? Admittedly, we are feeling such upward pressures across all cost inputs in energy, food, commodities and property construction costs. But we are seeing manufacturing businesses being the most affected. For instance, on our food business, cost pressures have been exacerbated by freight challenges and the Russia-Ukraine contract. We are actively managing this by accelerating our cost saving programs and by implementing price increases. We have already done 2 rounds of price increases in Branded Consumer Foods group back in 2021, and we opened 2022 with another round last January and February. We are continuously evaluating our pricing actions versus the trend on world prices and agricultural inputs. We do expect margin contraction in the first 2 quarters of this year, but we also anticipate recovery as our demand goes up and as our initiatives on pricing and cost savings come to fruition. Then on our Petrochem business, the impact includes high naphtha costs coupled with record low conversion margins into ethylene and propylene, which is being experienced by all petrochemical players throughout Asia. So production has been supported -- so production has been decreased to support prices. Nonetheless, we are at the tail end of our expansion project, which should help bring in incremental margins to the company and conserve our cash flow. Group-wide, we believe 2022 will be a better year than 2021. We expect our profitability, excluding Cebu Pacific, will continue to improve. That said, we forecast that the net loss for the year will be reduced versus 2021, given improvements in domestic travel and as international markets also begin to open. And we expect that the group will exceed its pre-COVID income levels by 2023. What's your recovery outlook for Cebu Air? The progress that the government made on the vaccination rollout facilitated the lifting of mobility restrictions where any transport business can now operate at full capacity. We are optimistic that demand will come back strongly over the summer for the domestic and then internationally as economies open back up. We are also seeing positive consumer response through forward bookings, and this validates the strategic decision that we planned in the past few years. In 2021, we continued delivery of aircraft to address the fast growth trajectory. We expect that in 2024, we will surpass the previous high watermark on passengers carried on an annual basis, both domestic and international. And in addition, our cargo division continues to grow as we maximize our fleet and aircraft capacity by offering cargo solutions to customers. On the sustainability front, we are transitioning from our CEOs to NEOs. NEOs are the most sustainable aircraft, and we aim to be the most sustainable and have the youngest fleet, making us more cost competitive with a fuel burn of at least 15% less. With over $1 million of funds that we raised last year, we have more than enough liquidity runway to navigate the current environment. We are also continuing with our Future Size and Shape program to be very cost competitive such that it will be very hard to replicate for new players in the years to come. Our airline business will pivot back. While we expect losses in 2022, this should be significantly lower than 2021. We forecast to be profitable to end 2023 and reach our pre-COVID profitability by 2024.

Thank you. Are there any other matters to be taken up for consideration of the stockholders?

There are none, Mr. Chairman.

I'm pleased to announce that the Board of Directors of JG Summit has approved the declaration of cash dividends. The approved cash dividend amounts to PHP 0.40 per common share for stockholders on record as of May 26, 2022, which shall be paid on June 14, 2022. Details are being flashed on the screen. For 2022, we remain hopeful that the more relaxed alert level after the surge from the Omicron variant will positively impact our consumer-facing business. On the other hand, we are cautious that headwind will continue to affect us, given the current volatility in oil and commodity prices, rising input costs and peso devaluation. In line with this, we will continue to be proactive in mitigating margin pressures by managing the pricing and product mix and implementing productivity initiatives in the organization. JG Summit through our long culture of agile is in embarked on digital transformation, which will continue to make us be resilient and be ready to take advantage of the many opportunities ahead. Our entrepreneurial mindset and grit will allow us to thrive in this new normal as we plan to forge ahead in providing our customers with better choices and will continue to create success with our stakeholders. To our shareholders, on behalf of JG Summit, we would like to thank you for your trust and support in the organization. This ends the 2022 Annual Stockholders' Meeting of JG Summit Holdings, Inc. A link where the replay of this meeting may be viewed shall be made available on the website of the corporation. Once again, thank you very much for joining. Please take care and stay healthy.