Universal Robina Corporation (URC) Earnings Call Transcript & Summary

The 2020 Annual Stockholders Meeting of Universal Robina Corporation will now start. Good morning, ladies and gentlemen. We will now play the Philippine national anthem. [Presentation]

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 14, 2020, through the following methods: by publication in the Philippine Star and the Philippines Daily Inquirer for 2 consecutive days in both online and print formats, by posting on the website of the corporation and 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 81.44% of the corporation's total outstanding shares and that this meeting is therefore competent to transact the business provided for in the agenda. A quorum is present, Mr. Chairman.

There being a quorum, the annual meeting of the stockholders of Universal Robina Corporation 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 & Company. For the information of the stockholders who are with us now during this broadcast, the corporation has requested stockholders to send their questions or comments by e-mail. Questions which were received by May 7, 2020, have been collated, and selected questions will be answered later. 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 2019 annual meeting of stockholders.

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 81.44% of the total outstanding shares of corporation.

Thank you. The minutes are hereby approved as presented. Moving on to the next item in the agenda. May I now call on Mr. Irwin Lee, President and Chief Executive Officer of the corporation, to present his report, together with the audited financial statements for the preceding calendar year. Mr. President?

Good day to all our shareholders and distinguished members of the Board. I hope you are all keeping well and staying safe. Given the current circumstances we are under, we are doing our first-ever digital annual stockholders meeting. So even if it's on a virtual basis, I'm here to report to you our performance for the calendar year 2019 and also give you an update for the first quarter of 2020. So let's get started with the financial performance of URC in the calendar year 2019. Total URC sales for the full year came in at PHP 134.2 billion, a growth of 5% versus 2018. This led to a 12% growth in operating income amounting to PHP 15 billion, with margins improving by plus 72 basis points versus 2018. The strong operating income growth was generated from all our 3 divisions: Branded Consumer Foods Philippines, International and Agro-Industrial & Commodities. I'll now cover each division in turn. Starting with Branded Consumer Foods or BCF Philippines, we are very pleased to see 2019 sales achieve a record level of PHP 62.4 billion, recovering to a healthy 8% growth from several years of no growth. This growth also manifested in market share gains in our biggest key categories. Our snacks market share added 140 basis points in the last 12 months and our coffee market shares increased almost 260 basis points from January until December 2019. With this strong top line growth plus input cost savings and effective operating expense control, BCF Philippines earnings before income taxes in 2019 rose to PHP 8 billion, plus 12% growth versus 2018. It is gratifying to see the strategies we put in place in 2018 translate to these 2019 results. Key transformation programs in sales and distribution and product supply chain provided strong platforms for our product and brand innovations across categories. Let me share some highlights. Our snack foods business unit grew plus 7% driven by capacity increases in snack chips, expansion of bigger-sized party packs in potato chips, new flavor in Mang Juan and the relaunch of Cloud 9 chocolates. Our noodles joint venture with Nissin grew sales by plus 10% versus a year ago driven by continued high double-digit growth of the Payless brand and innovation in Nissin Cup Noodles, the latest being Cheesy Seafood, in quarter 4 of 2019. Our ready-to-drink tea business also had a good year, growing by plus 7% versus same period a year ago driven by core marketing, distribution to trade programs and better supply fulfillment. Last December, we also launched C2 Plus Fiber for better digestive health as our entry into healthy functional drinks, currently dominated by the juice category. Our coffee business increased by 13% driven by the relaunch of Great Taste White and the addition of White Crema and White Caramel. On the back of these successes, early this year, we launched Great Taste Brown Barako, which is our play outside the white coffee format, for consumers who prefer stronger coffee aroma with the right balance of creaminess. Moving on to our International division. 2019 sales declined by minus 2% in reported peso terms to PHP 42.2 billion, but up plus 2% in constant currency. This means significant foreign exchange devaluation, particularly of the Australian and New Zealand dollars, reduced our International top line growth by minus 4 percentage points. But despite these challenges in top line, operating income increased by plus 8% to PHP 4 billion, with margins growing plus 89 basis points to 9.6%. In local currency terms, international growth was led by Vietnam at plus 9%, with successful launches of C2 Black Tea and C2 Milk Tea; and by Australia at plus 4% driven by strong trading performance and the successful launch of Snackee Crackers. These were offset by a minus 6% decline in Thailand due to weak consumer sentiment, especially in big box retailers. Our third operating division is Agro-Industrial & Commodities, where 2019 sales and operating income both increased by plus 12% to PHP 28.3 billion and PHP 4.9 billion, respectively. Within that, the Commodities Foods Group, consisting of sugar and flour, the revenues grew by plus 12% to PHP 15.2 billion, while earnings before income taxes also increased by plus 12% to PHP 4 billion. These were driven by flour capacity expansion and higher sugar -- volume sales in raw sugar. The Agro-Industrial Group or AIG's revenues grew also by plus 12% to PHP 13.1 billion driven by the strong performance of animal nutrition and health. Earnings, however, increased at a slower pace of 8% as higher volumes and prices in feeds were partly offset by losses in Robina Farms. Our balance sheet maintained a strong position. Our net debt position of PHP 22 billion improved by about PHP 5 billion in 2019, mainly due to the cash proceeds from the Intersnack transaction, which I'll cover in a while. Our gearing ratio remained below 0.5, with the only long-term debt associated with the Oceania acquisitions. We ended 2019 with cash of PHP 20.5 billion. We generated strong EBITDA of PHP 22.3 billion and our major cash outflows were capital expenditures of PHP 9 billion and dividends payments of about PHP 7 billion. Now let me provide some background on the Intersnack transaction. Last July 2019, Intersnack agreed to buy 40% of URC Oceania, which consists of Snack Brands Australia and Griffin's in New Zealand. And this transaction completed last December 2019 after final regulatory approvals. Intersnack Group started as a German potato chips producer in 1968 and has become a European leader in savory snacks over the years. They are privately owned and operate with a sustainable long-term view. Today, the Intersnack Group generates EUR 2.5 billion in sales and is the world's largest processor of snack nuts and Europe's #1 private label snacks company. In Australia, Intersnack owns Yarra Valley, a natural snack producer famous for their organic and gluten-free snack brand lines. For URC, the strategic intent of this transaction is to partly monetize value which we have created in our combined Oceania business, while retaining majority control. Given Intersnack's strong product development and operational capabilities, we believe that they can further add value to our Australia/New Zealand business. The consideration for the 40% of URC Oceania was a combination of cash payment and assets with a combined worth of USD 172 million. The gain from the sale of 40% of Oceania has been booked in our balance sheet under equity reserve, given we retain majority control. Now the final item in our 2019 report is a couple of updates in 2 strategic areas that resulted in the establishment of restructuring reserves which will strengthen our competitive advantage in the long run. One relates to our product supply chain transformation strategy and the other relates to our product portfolio streamlining. Last year, we completed our supply network design study to determine the optimal configuration of our manufacturing facilities. The study indicated the opportunity to improve long-term cost efficiencies while supporting future business expansion. This will entail some facility rationalization, asset write-offs and redundancies in the Philippines and Australia that will occur over next few years. Over the past 1.5 years, we have also reviewed our portfolio with the aim of identifying sustainable top line profit and returns opportunities as well as manage future cyclicality and regulatory threats. As part of this strategic assessment, we have determined that the Agro-Industrial Group, composed of farms and feeds, will be best served by focusing on the profitable and growing animal nutrition and health business and downsizing our live hogs business due to the cyclical nature and biosecurity risks in livestock farm facilities. We will still participate in the hog segment for vertical integration resiliency, but we no longer need as many hog farms and breeder stocks as we had previously. Given these strategic decisions, we have booked a noncash restructuring reserve in our P&L for 2019. In summary, we completed a very strong 2019 with double-digit operating income growth and a strengthened balance sheet with significantly improved cash position. This strength coming out of 2019 has proven to be of huge importance as we faced into the challenges of 2020. Given the COVID-19 pandemic, let me now give you an update of our situation in the first quarter of 2020. I'm going to [Audio Gap] this crisis period, then I'll discuss a snapshot of our unaudited results for the first quarter. And finally, the preparation we are doing for recovery and mid-, long-term new normal. Our first priority in this crisis is to ensure the health and safety of all our URC colleagues. Second, we're maximizing the availability of food and beverage products that people and their families need. The next priority is helping society meet and overcome the challenges we all face. Taken together, these priorities help ensure URC is there. There for our employees, there for consumers and the public, there for communities where we live and operate. Let me briefly cover these priorities in turn. First, employee safety and health. With guidance from health authorities, our human resources and occupational health and safety professionals were constantly evaluating and updating measures already in place to help our people stay safe at work. This includes temperature scans, hand washing, shoe baths, air showers, shuttles, meals, lodging and physical distancing. Fortunately, we have already in place GMP or good manufacturing practice standards and we simply heightened entry screening and hygiene protocols. We're performing comprehensive methodical cleaning of all production areas. We're also equipping and encouraging all employees to make smart appropriate choices such as staying at home if they feel unwell. Beyond the factories and warehouses, we are also supporting our people who can do their work remotely from home. In all cases, we're communicating and partnering with our colleagues on a daily basis to ensure they are protected and safe. Our benefits plans play a critical role in providing URC people with the resources they need to care for themselves and for their families. From paid leave and comprehensive medical care to flexible work arrangements and financial support, our people can work confidently knowing that the company stands with and behind them. It's been very inspiring to witness the many actions people are taking to support and care for each other, demonstrating creativity, flexibility and commitment. Truly, URC people at their best. Turning to product availability. URC plays an essential role in providing affordable food and drinks to the public. We have been working with local governments to make sure we can continue to operate. As of today, our network of over 60 facilities across Asia and Oceania, along with our network of external suppliers, are broadly operational. However, there is a range of modified capacity functionalities as a result of local government unit regulation inconsistencies, checkpoints, travel restrictions, curfews, material availability or quarantine needs. For example, in China, where we have 2 facilities, of course, started their lockdown in January, February, but we have now restarted in March. Our China business declined by about minus 25% in January, February, but recovered in March and April as replenishment occurs. Australia and New Zealand supply operations were severely tested in March where extreme pantry building by shoppers happened, and they passed with flying colors serving high double-digit growth. In the Philippines, we experienced a harder disruption because of the suddenness of the mid-March lockdown. While URC was allowed to continue operating as a food manufacturer, public transport shutdown and other mobility issues were encountered across the entire value chain, from our suppliers to us, to our customers. Many companies saw manning reductions of about 50% to 60%. Many retailers were unable to open all stores and reduce receiving windows for those that were open. Thus, we experienced a larger constraint to our ability to serve all demand. We have now quickly put in place mitigating actions to ramp up production and logistics capabilities. Moving to the next priority on supporting communities. Donations of product and cash are significant and will continue to increase as we work with communities to support their efforts to help people through this crisis. Millions of URC products are being donated, helping to ensure that families have the necessary access to the everyday essentials many of us take for granted. In the Philippines, we're partnering with Gokongwei Brothers Foundation or GBF to provide support to help fight the ongoing impact of the COVID-19 pandemic in the country. As an immediate step, GBF provided urgently needed personal protective equipment or PPE to health care frontliners. We are also donating food products that are basic necessities such as Great Taste Coffee, Magic Crackers, Nissin Cup Noodles, Refresh Mineral Water, C2, B'lue and Vitasoy drinks. Also, work is underway to produce critically needed nonmedical face shields to help augment the requirements of essential workers. We temporarily repurposed some parts of our production line to manufacture reusable face shields vital to frontline health workers. In April, we delivered 40,000 to various hospitals and will complete more deliveries this May. Let me now discuss a snapshot of our quarter 1 financials. In the face of COVID-19 disruptions, we're holding our ground. Thanks to a strong start in January and February, we were able to weather the impacts of enhanced community quarantine that hit hard in March. For the quarter March 31, '20, our sales and operating income are up slightly by plus 0.4% versus last year to PHP 33.5 billion and PHP 4 billion, respectively. BCF Philippines and Commodity Foods Group remained buoyant with strong growth in sales and earnings. On the other hand, International was dragged down by the earlier onset and prolonged effects of COVID-19, particularly in Indochina. And Agro-Industrial Group declined due to the previously announced downsizing, coupled with lower hogs prices from the lingering effects of African swine fever. Importantly, we continue to have a strong balance sheet and a low gearing ratio at 0.42. As of March 31, 2020, we further built up our cash position to PHP 21.8 billion. Other than our healthy cash levels, we also have available bank lines that we can tap into should the need arise and we have proactively implemented programs to ensure our cash levels are optimized. We are closely monitoring our spending and prioritizing those supporting critical business continuity. We have implemented cost-saving measures estimated at over PHP 800 million for the year and we have made decisive choices in our capital expenditure plans to reduce 2020 spend by about PHP 2.8 billion. Despite the COVID-19 situation, we remain confident in our financial position and, therefore, remain committed to our dividend plans. We declared dividends of PHP 3.15 per share. The first tranche was paid last April 21, 2020 at PHP 1.50 per share, while the second tranche of PHP 1.65 per share will be paid on June 26, 2020. How 2020 will unfold, frankly, is highly uncertain. There are wide variations among epidemiologists and economists on best and worst-case scenarios. We may see months of sporadic production suspension due to recurring quarantines or raw material supply. It's not just our operations that matter here. It's those of our suppliers, of contractors and of our transportation partners. A lot must go right in a very challenging environment, and not all of it will. Customers may continue to have closed stores. There will continue to be extreme foreign exchange and commodity cost volatility. Added operational complexity will result in higher costs. Unemployment will impact consumer disposable incomes, and maybe very severely. There's a wide range of possible near-term scenarios. We are stress-testing our business and financial projections on a range of outcomes. But with our healthy cash position and strong balance sheet, we have a strong belief that we can weather these short-term challenges. Now looking at recovery from this crisis and what might be the new normal, we remain well positioned in the long-term to serve consumers and create value in attractive business segments. Therefore, we are anchoring our recovery plans on our set of robust strategies. On people and planet-friendly culture, we are working on capturing learnings on people productivity, planning for new digital workplace and, overall, accelerate our simplification and digital transformation efforts. We'd also enhance our quality, safety and sustainability initiatives. On products and brands people love, we are continuing to invest in our innovation portfolio management process to ensure we capture the shifts in consumer trends. More than ever, health and wellness, value for money and convenience will play a more important part in our portfolio. On product supply chain transformation, we are seeing the early fruits of our LEAN program and supply chain improvements. Accelerating LEAN and supply network optimization will only serve us well in this crisis and beyond. And on being a preferred partner of choice, the step change in customer and supplier relationships we have achieved in the last 1.5 years has really helped us in this crisis. We are able to work together well with our customers and suppliers to keep our operations running. Going forward, we will build on these to address shifts we are seeing in the retail landscape, including the development of new capabilities in e-commerce, social commerce and direct-to-consumer business models. In closing, we'll manage the short to medium term consistent with these strategies and against the immediate priorities of ensuring employee health and safety, maximizing availability of our products and helping society overcome the challenges of this crisis. We will be focused on serving colleagues, consumers, customers, communities, building our business for the many more months that will follow this crisis than the months that we will exist within it. But we'll do this responsibly and keep our choices squarely centered on mid- and long-term value creation in the interest of our long-term shareholders. This ends my presentation. And again, I wish everyone to stay safe and keep healthy. Thank you very much.

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

Mr. Chairman, we are pleased to report that stockholders, representing 81.33% of the total outstanding shares of the corporation, have approved the audited financial statements of the corporation for the proceeding 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.

The incumbent members of the Board of Directors are: Mr. James L. Go, Mr. Lance Y. Gokongwei, Mr. Patrick Henry C. Go, Mr. Johnson Robert G. Go, Jr., Mr. Irwin C. Lee; and Independent Directors are Mr. Wilfrido E. Sanchez and Mr. Cesar V. Purisima.

Thank you. May 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: Mr. James L. Go, Mr. Lance Y. Gokongwei, Mr. Patrick Henry C. Go, Mr. Johnson Robert G. Go, Jr., Mr. Irwin C. Lee; and as Independent Directors, Mr. Wilfrido E. Sanchez and Mr. Cesar V. Purisima. There being no other nominations, the affirmative votes in favor of those nominated have been tabulated and 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 shall have been elected and qualified: Mr. James L. Go, Mr. Lance Y. Gokongwei, Mr. Patrick Henry C. Go, Mr. Johnson Robert G. Go, Jr., Mr. Irwin C. Lee; and as Independent Directors, Mr. Wilfrido E. Sanchez and Mr. Cesar V. Purisima.

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 & Company 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 & Company as external auditor of the corporation has been approved by stockholders, representing 80.27% of the total outstanding shares of the corporation.

Thank you. The accounting firm of SyCip Gorres Velayo & Company is hereby appointed as external auditors of the corporation for the calendar year 2020. Let us proceed to the next item in the agenda, which is the ratification of the acts of 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 81.31% 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 in reference to 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 will now respond to questions, which were earlier submitted via e-mail. These questions will be answered by URC's President and Chief Executive, Mr. Irwin Lee.

On capital expenditures, we typically spend about somewhere between PHP 8 billion to PHP 10 billion a year for total URC. As I mentioned in my prepared remarks earlier, we've taken a very hard look at our CapEx plans for 2020, looked at what can be deferred and what can be saved, prioritizing the most critical ones, and we have sort of shaved somewhere between PHP 2.5 billion to PHP 3 billion already from the 2020 plan. So that's an important part of shoring up our cash, prioritizing what's important and making sure that our CapEx is still working on the right projects that will help us into the future. So we know the priority projects that will help us deliver business for this year as well as some of the foundational spendings that need to be made in order to support growth for the future years as well. The impact on enhanced community quarantine on supply chain is quite complex, but in a nutshell, I think it really boils down to the ability of people to be able to get to work sites. So in the Philippines, because of the suddenness of the ECQ announcement in mid-March, there were some confusion and there was an immediate shutdown of public transport. So in the immediate days following the ECQ lockdown, we saw plant attendance, for example, drop by as much as 50% in some factories. So that clearly had a big impact on our ability to produce. Now since then, we have worked on a lot of mitigating actions, providing shuttle buses, picking up workers as much as possible, giving as many of them lodging, free meals and all of that. And so we've gradually increased our manufacturing attendance. And so we're back to over 80% now at the end of April, and so that has really helped us enhance our manufacturing capabilities. But supply chain is more than just manufacturing. It's an entire chain that starts all the way to procurement of ingredients and raw materials. And therefore, the global supply chain is also very important. Many people affected, not just us, as I mentioned earlier. Quarantines also have an impact on our suppliers, and we have to work very closely with them. Fortunately, prior to even COVID-19 happening, we have been looking at the robustness of our material supply, looking at single-source materials and how to have some diversity in our supplier base, some flexibility in our supplier base, and that has worked well for us. So for now, our material supply is in good order. We've got good inventories of materials. We're obviously closely watching them. We are protected and adequate for the next few weeks and months, but we have a supply planning that goes well beyond that. So we are very thankful to our suppliers for working collaboratively with us and also to our integrated supply chain people, from procurement, to manufacturing, to engineering, to logistics, everybody working very hard to keep the supply chain going.

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

There is none, Mr. Chairman.

At this juncture, I would like to express my gratitude to our Board of Directors, management and employees and to our shareholders for their trust and support over the years, especially during these unprecedented times given the COVID-19 pandemic. I look forward to your continued confidence in Universal Robina Corporation as we weather through the headwinds from this pandemic. And together, we will embark on the next phase of transformation and growth. This ends the 2020 Annual Stockholders Meeting of Universal Robina Corporation. A link where a replay of this meeting may be viewed shall be made available at the website of the corporation. Thank you very much for joining us.