Universal Robina Corporation (URC) 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 understanding of notices to the stockholders and to the existence of a quorum for this meeting.

Chairman, I hereby certify that notice of this meeting has been sent to the stockholders of record as of April 5, 2021 via the following methods: one, by publication in Manila Standard and BusinessMirror on April 15 and 16, 2021, in both online and print formats; two, by posting on the website of the corporation; and three, 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 74.47% 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 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 during this broadcast, the corporation has requested stockholders to send their questions or comments by e-mail. Questions which were received by May 6, 2021 have been collated, and selected questions will be answered later in 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 first item in the agenda, the approval of the minutes of the 2020 annual meeting of the 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 74.46% of the total outstanding shares of the corporation.

Thank you. The minutes are hereby approved as presented. Let us now proceed to the next item in the agenda, which is the approval of the proposed amendment to the Articles of Incorporation. May I call on the corporate secretary to state the proposal?

Mr. Chairman, the corporation is proposing the amendment of Article Second of the Articles of Incorporation in order to incorporate the following changes in the corporation's primary and secondary purposes. First, the enumeration of additional products for manufacture and the inclusion of the distribution and tolling activities of the corporation in the primary purpose. And second, the inclusion of the business of producing and manufacturing pharmaceutical-grade alcohol in the secondary purpose. A summary of the proposed amendments is included in the information statement, which has been distributed to the stockholders.

Thank you. May we have the results of the voting for this agenda item?

After tabulation of the votes, we are pleased to report that stockholders representing 74.34% of the total outstanding shares of the corporation have approved the said amendments to Article Second of the Articles of Incorporation.

Thank you. The amendment of Articles 2 of the Articles of Incorporation is hereby approved. 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?

To our distinguished members of the URC Board of Directors and our beloved shareholders, my warmest greetings and further hope that you are all in good health and spirits wherever you are joining us from despite this continuing pandemic. Today marks the second time we are holding our annual shareholders' meeting virtually, and I will be providing you my report on the final 2020 results, a brief update on our quarter 1, 2021 results and key highlights of our strategic initiatives over the past year. Let's begin with a recap of 2020, a year that will go down in business history as the most disruptive and tumultuous in the past half century. And there's no question that we're still in a very tough situation, still very much in the eye of the storm of this COVID-19 pandemic. This has broadly affected all the markets we operate in. This is, first and foremost, a health crisis, but it's also an economic crisis everywhere, affecting the spending behaviors of consumers. Southeast Asian economies took a big hit in 2020 and none worse than the Philippines, which accounts for more than 2/3 of our business footprint. From the first case detected in January 2020, the government has taken unprecedented steps to try and control the pandemic with mobility impacted by the numerous lockdowns implemented in the country. Other countries have followed suit. This has impacted consumer sentiment and our consumption-driven economy has seen the hit. GDP declined significantly, unemployment spiked and inflation prepped up. But despite these headwinds and market declines, we were able to hold our sales top line and achieve good profit growth in 2020. We've closed out 2020 with sales of PHP 133 billion, down just 1% versus 2019. And we delivered our profit commitment of PHP 16 billion earnings before tax, an increase of 7% versus 2019. Operating margin grew by 86 basis points to hit 12%. We experienced a good combination of chance and choice. We benefited lower input costs like a collapse in oil and resin prices. We had a more profitable product mix as categories and countries with higher margins grew more, while categories with lower margins declined. But we also made important choices and interventions to save cost and cash in our internal operations. Branded Consumer Foods Group in the Philippines accounts for half of the company's earnings. In 2020, we held sales flat, offsetting the tremendous market declines and dampened consumer sentiments with significant market share gains. Earnings before tax grew plus 6% to over PHP 8 billion. All consumer categories we compete in, in the Philippines, suffered contractions, a couple of them by as much as minus 30%. And it took the concerted efforts of everyone in URC outperform this market trend and deliver better than the competition. Turning to International. We are also able to hold our sales and profits in aggregate across all countries outside the Philippines. In local currency terms, 2020 International sales and profits were flat versus 2019. But when converted to Philippine pesos, we recorded minus 5% and minus 6% declines in sales and profits due to foreign exchange movements. We saw a wide range of growth and decline across different countries. This variation largely dependent on the pandemic impact and the nature of our product portfolio in those countries. We saw strong growth in pantry loading in countries like Australia, New Zealand, Hong Kong and Singapore. Medium or smaller impact in Thailand, Malaysia, China and export markets and more severe negative impact in Vietnam, Myanmar and Indonesia. And finally, in our Agro-Industrial & Commodities businesses, they were again a strong engine of growth, delivering 7% in sales, a 19% increase in operating earnings. Strong performance in Sugar and Renewables plus the acquisition of La Carlota sugar mill and Roxol distillery more than offset the continued downsizing of Robina Farms. Our flour mix in animal nutrition and health businesses contributed strong profit growth as well. The heroic efforts of URC people across business units and functions provided the strong profit position we delivered in 2020. And this strong profit position load into strengthening our balance sheet and cash position. We still have over PHP 40 billion of debt to service, but this is healthily serviced by strong cash flows and a cash balance of about PHP 19 billion. Strong profit and cash flow not only enables us to support all our operations, payroll, COVID-related expenses, but also to continue investing in new equipment, capital expenditures and acquisitions like La Carlota and provide dividends to our parent company while servicing our tax obligations to governments. With a good solid 2020 done, we now move on to the challenges of 2021. We look forward and hope for improvements in the health and economic situations of people everywhere. But we also must be prepared that progress may be uncertain in speed and consistency. COVID-19 is still very much with us. Different countries are at different phases of recovery. New waves and higher peaks of cases are happening, most notably in the Philippines. The vaccine rollouts have been slower than expected and the current surges in India have led to more delays. As such, people, in general, are still very concerned and consumers are not yet opening up their wallets in most of the countries we operate in. On the cost environment, where we once had tailwinds, prices of materials and services are reversing into unfavorable conditions. Oil, which plummeted to $30 last year, is back up above $60. Palm oil, wheat and other material prices are rising significantly. Freight and shipping costs have all increased also. So a new set of challenges on top of managing through COVID-19. With this difficult external landscape continuing as a backdrop, I'm pleased to share that URC was still able to turn in a good performance as we start 2021. For the first quarter, January to March, our top line sales grew by 3.5% to just under PHP 35 billion. The recovery of our international business units and growth in our commodities division were able to offset some expected declines in our domestic branded business. Operating income grew faster than top line, up 9% versus the same period last year to end at PHP 4.3 billion. Despite rising commodity costs, URC's sales growth, coupled with strict cost discipline, allowed for an improvement in margins of 61 basis points versus the same period last year. On top of the strong operating income performance, URC's net income increased by 51% to PHP 3.2 billion with the additional benefits of lower foreign exchange losses and the new Philippines CREATE tax bill recently signed into law. Our balance sheet remains healthy with little change from the end of last year. Despite the challenging environment we expect for the rest of the year, we believe that the business is well positioned for growth. We fully expect to continue the program of delivering consistent dividends to shareholders. We are also ramping up investments for the future, with some recent property acquisitions in the Philippines, which will support our long-term expansion plans. Before I conclude, I would like to update you on the progress of URC's continued transformation. Over the last few years, URC has set out on a journey to build on the legacies of our founders and develop a sustainable enterprise for generations to come. In the last 2 to 3 years, we saw the foundations of this transformation take shape. We believe that the 4 how-to-win strategies that URC has aligned on since 2018 have served us well in rejuvenating growth pre-COVID. Last year, as the COVID-19 pandemic engulfed the world and brought turmoil to our business, we've once again anchored on these strategies to protect our people, our business and prepare for a post-COVID future. Everything starts with our people and sustainability focus. And so in the back half of 2020, we embarked on 4 strategic initiatives to reinforce our people and planet-friendly culture: First, we engaged our employees and multiple stakeholders to refresh our purpose, values and ambition; second, we renewed our sustainability commitments as we took stock of our sustainability progress versus goals; third, we sharpened our digital channel transformation road map to capitalize on digital acceleration trends; and fourth, we kicked off an agile at scale program to learn how to become even faster and better in serving our customers. Why work on purpose and value statements in a time of crisis? Because purpose and values are not just words or statements in paper and posters, they come alive in our actions, and there was no better time and example as when we are in a crisis. As we navigated the COVID-19 pandemic, we saw URC people at their best, going above and beyond the call of duty, showing who we are and what we are made of. In difficult times like these, our purpose and our values carry us and define us. We were inspired by so many heroic actions we saw across URC during this pandemic crisis. We were reminded of our social purpose beyond our business purpose. And so we asked a cross-section of our people to codify what URC stands for, why we do what we do, how we show up every day, where we are going from where we are today. As we celebrate our 65th anniversary this year, this set of purpose, values and ambition capture what brought us this far and what will propel us for decades more to come. Our purpose in North Star is to delight everyone with good food choices. We provide quality and accessible nutrition, put a variety of options for everyone, striving always to give people delightful, taste and health. Our 4 values are the foundation of our culture. As we saw during the height of the pandemic, we put people first, making sure that colleagues, customers, consumers and communities are at the center of everything we do. We own it by empowering our people to take accountability while using resources responsibly. We dare to do never forgetting our founder's entrepreneurial boldness to experiment and venture into the unknown. And we move forward fast, acting quickly on opportunities, taking calculated risks and learning from our mistakes. With our purpose and values guiding our actions, our ambition is to grow as a sustainable global enterprise of world-class talent, giving everyone access to high-quality planet-friendly products while enhancing the lives of all our stakeholders. This [ PBA ] anchors our people and planet-friendly culture. And this culture strategy with its people, sustainability, digital and agile initiatives underpins the rest of our strategies. For example, our product supply chain transformation aims to make us leaner and operate more efficiently, providing fuel for our growth. With sustainability at the heart of this transformation, we reduced costs and waste, while doing good for the planet. Since 2018, we have made considerable progress, and we now use less energy, less water, less packaging material per kilo of product we make. In our preferred partner of choice strategy, we are employing digital transformation to respond to the shifting channel trends. COVID-19 accelerated these trends as shopping behaviors adjusted to lockdowns and social distancing. We quickly responded to new ways of reaching the people we serve. With digital storefronts and e-commerce platforms, partnerships with omnichannel customers as well as social commerce innovations to connect distributors to satisfy store owners. With the increased salience of proximity shopping and neighborhood selling, we also ramped up our network of community selling partners in village and office hubs. And in developing products and brands people love, we are practicing agile ways of working to quickly respond to COVID-accentuated consumer trends of health, value for money, shift to in-home and affordable indulgence. Many of the products launched this past year were developed very quickly with rapid prototyping and speed to market. Going through 2020 and 2021, with COVID impacts can be an unnerving time for any person or any organization. But we take solace in these words of wisdom from our founder, Mr. John Gokongwei. He said, "I choose to live my life unafraid even during times that I was afraid. I discovered that opportunities don't find you, you find your opportunities." He lived through numerous crises, wars, economic downturns, political turmoil, revolutions and emerged from each stronger and wiser. As URC navigates through this pandemic, we are confident in the soundness of our strategies, the commitment of our people, the resilience of our spirits and the strength of our culture as embodied in our purpose, values and ambition. We thank you for your continued support. Stay safe, everyone.

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 calendar year.

Mr. Chairman, we are pleased to report that stockholders representing 74.44% of the total outstanding shares of the corporation have approved the audited financial statements 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.

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;, Jr., Mr. Irwin C. Lee; and the independent directors are: Mr. Wilfrido E. Sanchez; Mr. Cesar V. Purisima; Ms. Rizalina G. Mantaring; and Ms. Christine Marie B. Angco.

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 and have consented to their nomination. 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. Cesar V. Purisima; Ms. Rizalina G. Mantaring; Ms. Christine Marie B. Angco; and Antonio Jose U. Periquet Jr. There being no other nominations. The affirmative votes in favor of those nominees that have been tabulated, and the following have received enough votes for election to the Board and 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. Cesar V. Purisima; Ms. Rizalina G. Mantaring; Ms. Christine Marie Angco; and Mr. Antonio Jose U. Periquet Jr.

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 2021. After tabulation of the votes, the appointment of SyCip Gorres Velayo & Company as external auditor of the corporation has been approved by stockholders representing 73.93% of the total outstanding shares of the corporation.

Thank you. The accounting firm of SyCip Gorres Velayo & Company is hereby appointed as the external auditor of the corporation for the calendar year 2021. 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, shown on the screen are the link and the QR code where the list of the acts for ratification may be viewed and downloaded. Prior to this meeting, the said list was distributed to the stockholders present by showing the link and QR code on the screen and by including the set acts for ratification in the information statement. After tabulation of the votes, we are pleased to report that stockholders representing 74.43% 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 will now respond to questions which were earlier submitted via e-mail. The questions will be answered by the President and Chief Executive, Mr. Irwin Lee.

Thank you, Mr. Chairman. Yes, we did receive a few questions prior to this webcast. Let me read out the question and provide a response. The first one is, what are your expectations for the rest of 2021? And when do you believe the recovery can be expected to happen? This is a good question but a difficult one to answer because we really don't have a crystal ball on how things will unfold and how things will turn out. We planned for conservatively for the worst, but we're hoping for the best. Recovery is happening at different phases and different speeds in different countries that we operate in. So for example, we already saw in the first quarter, some recovery in some of our international operations, in countries like Vietnam and Thailand, where they were hit earlier in COVID in 2020. And so they had a much bigger decline in their base and are recovering nicely through the back half of last year and into the first quarter this year. So we're seeing some recovery there. But in a place like the Philippines, where a majority of our business is, the recovery still really has not happened. I think vaccine rollouts are still slowly happening in the very, very early stages. And therefore, it will really depend on the success of those programs and the opening up of the economy. We anticipate that there will be more growth that will be happening in the back half of the year just because of the comparables, things stabilize in the back half of 2020 in the Philippines. Right now, our business is holding. We are continuing at a steady pace from what we saw in the second half of 2020 into the first quarter of 2021. Of course, we wish the country will do better. We wish that everybody will do better as we go along the next few months. And the vaccines rollout becomes more successful and the economy begins to open up even further. So we're planning for the worst, but we are hopeful that things will recover towards the end of 2021. Nevertheless, there are many other modeling that have suggested that full recoveries may not occur until 2022 or the year after. And so I think we should just focus on the things we can control, on things that are within our influence, and that's working well with our customers, innovating into the consumer trend that we are seeing and hopefully providing the communities where we live and operate everything that they need to survive through this pandemic. The second question, it's about a question on balance. The question states, will your focus be on revenue growth or profit growth? The honest answer is we are focusing on both. We are a growth-oriented company. We want to continue focusing on growth. There is a lot of headwinds in front of us because of the health and economic situations, be setting several of the communities where we operate. But our mindset is always to go for growth in our base business, in adding new adjacencies and innovating to help the categories return back to growth. But even though we are growth-minded we are not compromising on our profit margin improvements. We believe that we can do both, that we can achieve growth while delivering on supply chain transformations, organizational efficiencies that will allow us to build margins and profitability as we also build our growth trajectory into the future. And the third question that we have received has to do with legislations affecting the company. The question is there's a lot of legislation being readied that is expected to impact the industry, how will you address this? Can URC increase sales and profits sustainably? Thank you for that question. And the answer is definitely a yes. Part of our whole strategic focus areas is anchored on our sustainability transformation. Everything we do from our product supply chain transformation to partnering with customers and suppliers to developing product innovation, they're all anchored on a sustainability mindset. The legislations that are being considered, whether they relate to some trans fat materials or single-serve plastics are very much in our radar screen. We are fully prepared to address those. It is in the interest of our business, our consumers, our communities and the planet in general that we move forward in addressing these challenges. There are many of the materials that we use that serve a particular purpose in delivering products to consumers. But we also understand the impact they have on the environment. So we are working with various stakeholders from the government to nongovernmental organizations and within our own internal resources to try to make sure that what we are doing is sustainably building our business while preserving the sustainability of the environments where we operate. There's a lot of things that we have already done in reducing our greenhouse footprint, our consumer packaging. We have done many projects already in the past 2 to 3 years to actually reduce our packaging footprint. We have also addressed some of the materials that are in question, removal of partially hydrogenated oils, tartrazine colors, working with all of the legislation that has come into play. We are also working on providing a lot of alternative materials, working on lower sodium, lower sugar formulations and also increasing the wellness criteria of our product portfolio and introducing more and more healthy product lines into our portfolio. So this is picking up steam. We're pleased with the progress we're making, but it's never finished. We will continue to keep going up on this curve and making sure that everything that we do will provide a sustainable glide path to growth, both on the top line and the bottom line. So those are the questions that we have received before this webcast. We thank you again for your continued support and interest in the company. And we look forward to reporting even better results during this pandemic and surviving through this pandemic and well into the recovery phase in the next year. Thank you very much.

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

There is none, Mr. Chairman.

As we close this meeting, I would like to thank our Board of Directors, management, employees and you, our shareholders, for the continued trust and support over the years. The last year has been challenging for all of us, but I am heartened by the strength and resilience of Universal Robina Corporation and the Filipino people as we navigate through this pandemic. I look forward to your continued confidence in the company, and together, we will overcome these challenges. This ends the 2020 Annual Meeting of the Stockholders 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 and stay safe wherever you may be.