Universal Robina Corporation (URC) Earnings Call Transcript & Summary

Good afternoon, 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 on April 18 and 19, 2022, 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 78.17% 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 now during this live broadcast, the corporation has requested stockholders to send their questions or comments by e-mail. Questions which were received by May 4, 2022, 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 2021 Annual Meeting of the Stockholders held on May 13, 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 77.83% of the total outstanding shares of the corporation.

Thank you. The minutes are hereby approved as presented. Moving on the next item on 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 all our beloved shareholders, my warmest greetings. I hope you and your families remain safe and healthy as we continue to live in extraordinary times. For our Annual Shareholders Meeting today, I will be providing you the final 2021 results, a brief update on our quarter 1, 2022 results, key highlights of our strategic initiatives and our refreshed sustainability commitments. But before I present the management results of the company for 2021, I would like to begin by providing a recap of the 2 significant changes to the URC portfolio that have reshaped our direction and focus for the coming years. The first is the divestment of our Oceania business, and the second is our acquisition of Munchy's in Malaysia. The acquisition of Griffin's Foods New Zealand and Snack Brands Australia where URC's biggest forays outside of Asia. Over the past years, the company has invested in delivering significant operational improvements in manufacturing, supply chain and other value creation programs while gaining experience in navigating developed markets dominated by a few strong retail trade players. Intersnack, our partners in Oceania made an unsolicited offer for URC's stake in the middle of 2021, which we accepted. Through this sale, URC monetized the efficiencies and synergies created in these markets. We ended the year with the acquisition of Munchy's, one of the leading manufacturers in Malaysia, which scales up our Malaysia business and positions us well with a pivot to our higher growth developing markets. Munchy's will be included in our results from this year 2022 and I will provide an update later today. Now let me show our management results for continuing operations without Oceania for both 2020 and 2021. On this basis, our sales grew 3% on the back of international and commodities growth, while we are seeing accelerating sales momentum in the Philippines. Total group sales are now well above pre-pandemic levels. Operating margins, on the other hand, were impacted by the surging cost environment as commodity prices skyrocketed from the second quarter of 2021 onwards. Pricing actions and optimization of costs helped mitigate the impact of these cost headwinds on margins. For 2021, URC showed a 23% growth in net income, driven by foreign exchange gains, proceeds from the sale of idle assets and the CREATE tax savings. And taking the gain from the Oceania sale into account, net income for the year surged 109% to PHP 24.2 billion. The markets we compete in have not yet recovered from the COVID declines with most categories down from their 2019 levels. However, across the major categories we play in, URC has mostly performed better than the overall market situation. As such, our market shares have remained strong, and we have held on to the market share gains that we delivered over the period of the pandemic. We are seeing good signs of recovery and are well positioned with a solid base to grow in 2022. Now looking at the cost side, 2021 saw a hyperinflationary environment for commodities. As COVID restrictions and logistics challenges snarled supply chains worldwide. And URC, like all companies, was not spared from this difficult situation. For us in URC, we faced around PHP 6 billion in cost increases across all of our businesses in '21 compared to 2020. This is an unprecedented level of cost headwinds. We have now programmed early pricing action midway through last year, did another round of pricing towards the end of last year, November and into early this year, January 2022. We also further optimize spending without sacrificing brand-building investments, and this helped temper overall margin decline, but we expect further challenges ahead as costs have continued to rise. Now after looking at our overall picture in market growth and the overall cost environment, let's now discuss the 3 different business divisions and their operating results. Starting with Branded Consumer Food Philippines, or BCF Philippines. Full year sales were down slightly by 2%, but we have seen promising signs of recovery as mobility restrictions ease, with our fourth quarter sales up versus prior quarters and up versus the same period last year. We have seen this momentum continuing into 2022, and we are confident of our growth trajectory. On operating income, BCF Philippines saw a decline in earnings before income tax, driven by cost headwinds from commodity prices, which impacted our margins by around 4 percentage points. Now these cost headwinds were met squarely on and they were partially offset by pricing actions, mix improvements and operating expense savings, thus, limiting the total impact to margins to just 0.8 percentage points. And as mentioned, we instituted a second round of price increases from November to January to further support our margins. Now across the major categories we play in the Philippines, total markets are still down about 8% versus 2019. Although in 2021, we saw some growth, which mitigated versus the minus 13% decline that we saw in 2020. Our URC internal sales were better than these degree of market declines. As such, our market shares have remained strong, and we have held on to the market share gains that we got over the period of the pandemic. Now moving to our international business. Top line grew 4% for the year in Philippine peso terms, and plus 5% in constant currency as markets recovered from the COVID Delta surge in the third quarter of 2021. Indochina, in particular, grew 8% in dollar terms and 9% in constant currencies. Overall, business also saw a recovery against the challenges of quarter 3, 2021, with the fourth quarter up 15% versus prior quarter. On operating income, similar to the Philippines, margin eroded on the back of higher input prices, trade costs and plant shutdowns, particularly in Malaysia and Vietnam in the third quarter due to the COVID Delta surges. Countries have executed pricing, mix and cost improvement programs to strengthen margin positions entering into 2022. And finally, our Agro-Industrial & Commodities group saw growth driven by sugar and renewables. Our acquisitions of La Carlota and Roxol have performed ahead of expectations. We have also dealt with the difficult weather conditions in 2022 that ended with a devastating typhoon Odette in the Negros region where most of our sugar mills are. Our flour division saw higher selling prices, but low volume growth with rapid price increases needed throughout 2021 due to the surging wheat costs. Our Agro-Industrial Group continued to work through the strategic downsizing of our farms business, but double-digit growth in Pet Foods helped offset declines in farms and animal feeds. Pet Food has now crossed over the PHP 2 billion mark in sales. On the cost side, the strong performance of sugar helped offset the challenges faced by flour from surging wheat costs. Flour has instituted numerous price increases over 2021, but was not able to fully pass on costs due to the hyperinflationary behavior from wheat and our Agro-Industrial Group also felt the pinch from higher input costs. Turning to our balance sheet. Our financial position remains very, very healthy. With the divestment of Oceania, we have taken out all of our long-term debt from our books and we ended 2021 in a net cash position. We have used our strong EBITDA to continue investing into the business. With new site acquisitions in 2021, like in Sariaya, Quezon and Malvar, Batangas as well as our regular capacity and production line expansions. We expect capital expenditures to be at a higher level in the coming years as we fit out the new sites and expand capacities further on the back of our expectations on strong growth. With a challenging 2021 done, we now move on to 2022, where we are more optimistic about our top line momentum, but at the same time, remain vigilant on the continued uncertainty in cost pressures. Over the past few months, countries in the region have opened up their economies as most governments have been able to manage pandemic infection rates through broad vaccination and targeted containment. As COVID transitions to an endemic phase, we have seen a recovery in broad market growth. While most categories are still below their pre-pandemic levels, their growth has been accelerating, and URC has been riding this momentum upwards. This has allowed URC to post very strong growth numbers for the first quarter with sales from January to March 2022, up 22% and all business units showing double-digit growth. Our Munchy's acquisition is now consolidated in our results and accounted for almost 5% of this growth figure. We also managed to grow our absolute earnings before income tax despite the unprecedented spikes in commodity prices over the last year. This has helped us grow our net income for the first quarter 2022 by 20% versus same period last year. Cost volatility will remain a challenge this year, and we have programmed further pricing actions and cost savings programs for the rest of the year to support our bottom line. While top line growth has bounced back, cost pressures have continued unabated. Prices of key commodities, such as sugar, wheat, palm oil, coffee, dairy products and specialty fats and oils have remained elevated since running up in 2021. At the start of this year, 2022, we already were expecting that we have to deal with annual cost inflation in the range of PHP 8 billion to PHP 10 billion versus 2021, which already had its share of PHP 6 billion. And we prepared our pricing moves and our cost actions accordingly. Today, based on our latest estimate, this annual cost inflation is now looking more like PHP 12 billion with additional supply challenges coming from the Russia with Ukraine conflict that started within the first quarter of 2022. And the result in protectionist measures that have come from all countries, and protectionist measures by countries to help themselves, such as the recent ban on palm oil exports from Indonesia. We will be announcing significant pricing moves in the second quarter across key tech categories as well as accelerate our savings programs in order to lessen the impact of these unprecedented cost pressures. However, this will have a time lag effect versus the rapid and volatile movements in costs, and we expect profitability over the next few quarters to continue being choppy. Our balance sheet, however, still remains healthy, close to a net cash position. There was an increase in current liabilities at the end of the first quarter of 2022 versus the end of 2021 because we accrued PHP 7.6 billion in dividends, which then was paid out last April 29. This dividend declaration in 2022 is a 5% increase over last year's dividend. Our share buyback program also continues and URC's cash generation remains very healthy. This increase in dividends and the share buyback program, our testimony to our confidence and our belief in improving our total shareholder return for the long term. As we look towards 2022 and beyond, I want to provide an update on how we navigated through the pandemic and how our strategies have positioned us to accelerate growth further. We have ended by our Where To Play strategies centered on growing our core businesses while simultaneously expanding into new adjacencies, categories and geographies. Our How To Win strategies are captured in our 4-piece wheel enabled by people and planet-friendly culture, we develop products and brands people love, to become preferred partners of choice for our customers and suppliers enabled by transformation of our product supply chain to better serve consumers and customers at best value and cost. URC is uniquely strong with a wide and diverse portfolio of products from discretionary to staples, value to premium and strong market leadership across categories. Our brands have been built over many years and are staple of Filipino households. We believe that strong brands are a major competitive advantage and investment in brands pay off. Even during the downturn, URC kept investing to increase brand equity. We pivoted to where our consumers' eyeballs were with a doubling of investment in digital media over the past 2 years and all with a goal of increasing mental availability to our consumers. In addition to brand strength and mental availability, we addressed our fundamentals to improve physical availability of our brands. Over the past 3 years, we have grown our universe of buying accounts and expanded direct coverage of stores. For example, in the Philippines, we now cover over 250,000 stores directly. The focus on customers is paying off. In the most recent Advantage survey in the Philippines where end retailer score branded manufacturing suppliers across various metrics such as strategic alignment, category development, consumer and trade shopper marketing, supply chain and customer service, URC is now among the top 5 ranked suppliers and is the highest ranking local manufacturer among the 30 suppliers covered in the survey. Innovation continues to be a driver of growth for the company. Between 4% to 7% of our sales were contributed by products launched in the last 3 years. Innovation continues to drive our growth engine, and we have quickly and purposefully developed new products and concepts to address key consumer themes of health, value for money, in-home consumption and affordable indulgence, consumer trends that became even more relevant during the pandemic. We deliberately entered into the health and wellness space, answering relevant needs in the new normal with functional fortified products. We also provided strong value for money offerings particularly in coffee for cash strapped consumers. As mobility was restricted, we introduced more products that consumers can enjoy in the comforts of their homes. We also grew the affordable premium offering space in our portfolio, providing more indulgent options to shoppers. Now outside of these internal organically developed innovations, we also looked to inorganic acquisitions to bolster our growth. Our M&A moves over the last 2 years have borne significant fruit with our 2 major acquisitions performing very well so far. La Carlota and Roxol have cemented our #1 position in sugar and have contributed growth above expectations in this volatile environment. And now focusing in on Munchy's, this acquisition has performed to expectations. And in the beginning of 2022, the first quarter, Munchy's grew 7% versus the same period last year. We are laying the groundwork to expand the Munchy's portfolio across the region starting with our core Philippine market this coming third quarter and expanding to the rest of ASEAN thereafter. The integration of Munchy's and the existing URC Malaysia business is also being accelerated with structure and manning being optimized and with the appointment of Rodney Wong to run the combined business effective this July 2022. Turning to our supply chain transformation. This will provide us the continued fuel for growth to our business. We have identified a new phase of PHP 5 billion in potential savings over the next 5 years, coming from further optimization of our supply network, manufacturing operations and product portfolio. Some of these savings will translate into improved operating income, but some will also be reinvested into the business, both in brand building and in capacity building. This will support our future growth. We have recently acquired 2 new sites for our expansions and we continue to invest in new production lines for the future. And to make all of this work, it must be underpinned by the quality of our organization. And therefore, we continue to upscale and develop our people as they will drive our future growth. We recently embarked over the past year on an enterprise-wide agile at scale transformation program. We started it during the pandemic, and we have learned to reinvent our ways of working to be closer to the customer and the consumer with a focus on action, rapid prototyping, and more multifunctional collaboration. This agile at scale initiative has already paid dividends with Agile Squads generating significant operational savings and adding to our pipeline of innovative new products for the future. More recently, we have also put together a digital transformation office to ensure that we help our efforts to accelerate digital. And we will focus on digital acceleration across the spaces affecting customers, consumers, operations and employees. Lastly, before I conclude, I would like to update you on the progress of URC's sustainability and our renewed commitments. We continue to make sustainability a priority to future-proof our business. Our sustainability agenda has broadened to focus on 6 key areas aligned with the UN sustainable development goals. We have made good progress against our original commitments that we made public in 2019, and have recently updated and refreshed our targets based on the progress we've made over the last 3 years. We will be making our latest sustainability report accessible on our website this month to provide more details for those interested. But I want to zoom in on 2 particular focus areas that will garner more attention in the immediate future. And these are strides that we're making in the areas of packaging and climate action. As we aim to reduce our packaging footprint and promote a circular economy, URC is committing to increase the share of recyclable content in our packaging and work with our stakeholders to reach plastic neutrality by 2030. In addition, we are also continuing our move towards a low-carbon economy by committing to a 30% reduction in our energy use ratio by 2030 and also targeting the net zero carbon by 2050. We believe that these are necessary steps that we need to take towards a more sustainable future for the business and for the planet. I would like to close by revisiting URC's purpose, values and ambition or PVA, which we shared with all of you last year. Our PVA will continue to guide us as we transform our company. We will continue to delight everyone with good food choices, living through our 4 core values of putting people first, owning it, daring to do and moving forward fast, all towards achieving our ambition of becoming a sustainable global enterprise of world-class talent, giving everyone access to high-quality planet-friendly products as well as enhancing the lives of our employees, customers, consumers and communities. We look forward to a stronger and more sustainable future for all. That concludes the business and strategy updates for URC. Thank you for your continued support, always and stay safe.

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 77.82% 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. Now going 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; and Mr. Irwin C. Lee, and the independent directors are Mr. Cesar V. Purisima; Ms. Rizalina G. Mantaring; Ms. Christine Marie B. Angco; and Mr. Antonio Jose U. Periquet Jr.

Thank you. May we now have a 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; and Mr. Irwin C. Lee, and as independent directors Mr. Cesar V. Purisima; Mr. Rizalina G. Mantaring, Ms. Christine Marie B. Angco; and Mr. Antonio Jose U. Periquet Jr. 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 left and qualified. Mr. James L. Go with total votes of 75.82%; Mr. Lance Y. Gokongwei with total votes of 76.11%, Mr. Patrick Henry C. Go with total votes of 77.36%; Mr. Johnson Robert G. Go, Jr. with total votes of 77.3%, and Mr. Irwin C. Lee, with total votes of 77.64%. And for our independent directors, Mr. Cesar V. Purisima with total votes of 76.85%, Mr. Rizalina G. Mantaring with total votes of 77.30%, Ms. Christine Marie B. Angco with total votes of 77.82% and Mr. Antonio Jose U. Periquet Jr. with total goods of 76.92%.

Let us move on to the next item on the agenda, which is the appointment of the External Auditor of Corporation. May I call on the Corporate Secretary to present the results of the 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 2022. After tabulation of the votes, the appointment of SyCip Gorres Velayo & Company as external auditor of the corporation has been approved by the stockholders, representing 77.9% 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 2022. Let us proceed to the next item on 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 is being shown right now on the screen. Copies of the sales 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 and by inclusion of the said acts for ratification in the information statement. After tabulation of the votes, we are pleased to report that stockholders representing 77.81% 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 stockholders after 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 are earlier submitted via e-mail. Your questions will be answered by the President and CEO, Mr. Irwin Lee.

Well, COVID has become endemic and we're seeing some very positive signs of recovery, I think we still have to be very careful. We're not out of the woods. I think there are still new variants, strains that are evolving. But so we are cautiously optimistic, I mean, the outlook for 2022. We started the year by thinking that we would grow in the high single digits or low double digits. We now think given the strength of quarter 1 and the momentum we're seeing in quarter 2, that we now expect our top line to be growing low to mid-teens. However, the aftereffects of COVID are still there and is wrecking a lot of havoc on supply chain disruptions. So you add on to that the uncertainty of the Russia, Ukraine conflict, it then is a recipe for a very uncertain, unpredictable bottom line and cost management arrangement for the rest of 2022. Be that as it may, we're committed to repeating with any of these eventualities and are taking the right set of actions in both pricing and cost management. Acquisitions and divestitures are an important part of company strategy. And we have always had a continued diligence in studying opportunities and candidates for both. However, the nature of acquisitions and divestitures is very unpredictable. The timing cannot be certain, and therefore, it is difficult to say when some of these opportunities would crystallize. And as you can appreciate, it's also probably not appropriate in a more public forum to be identifying specifically what those opportunities are. But rest assured, we have over the years, looked at what will best fit and provide best value to the company and are looking at these and just working out whether some of these opportunities come to fruition. As I said, with the timing being very, very uncertain. New products, product innovation is a lifeblood for URC. And so we continue to have a good pipeline and a good stream of new product launches for this year as we have done in the past. As I mentioned in my prepared remarks, even during the pandemic -- the 2 years of the pandemic, we did not stop. There was a lot of debate on whether the pandemic was an appropriate condition to be launching new products. We pivoted, adjusted some of the game plans during the pandemic, but we continued with new product launches. And that will be the same for this year with some very exciting product launches into new segments and new spaces. We already had some launch in the beginning of the year. And there are more exciting new products to be launched in the back half of the year. And I hope you look forward to them, and then you'll see some of the exciting new product developments work out from our innovation teams that will, for sure, can give us a good basis for growth not only this year but into the future years as well.

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

There are none, Mr. Chairman.

As we close this meeting, I would like to thank our Board of Directors, management, employees and you, our shareholders, for their continued trust and support over the years. As we enter a new phase of growth with COVID-19 receding into the background, we know that we are positioned for stronger growth in the years to come. This was made possible by all the foundational work we have done over the last 2 years, reshaping our portfolio, refreshing our new product pipeline and routes to market, revitalizing our ways of working and reinforcing our distribution channels. We look forward to sprinting towards sustained success riding the momentum forward and bringing your company to new heights. We have weathered the storms of 2021 together and are ready to accelerate the business into tomorrow. This ends the 2022 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 and stay safe wherever you may be.