Universal Robina Corporation (URC) Earnings Call Transcript & Summary

The Annual Stockholders' Meeting of Universal Robina Corporation will now start. Ladies and gentlemen, the Philippine National Anthem. [Presentation]

Good morning, ladies and gentlemen. Welcome to the 2023 Annual Stockholders' Meeting of Universal Robina Corporation. May I request the Corporate Secretary to please certify that Notice of this Meeting was sent to the stockholders and to the existence of a quorum for this meeting?

Mr. Chairman, I hereby certify that Notice of this Meeting has been sent to the stockholders of record as of April 5, 2023 via the following networks: first, by publication in the Manila Standard and BusinessWorld for 2 consecutive days, specifically, on April 20 and 21, 2023, 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 and in compliance with applicable rules and regulations. I hereby certify that there are present via remote communication or by proxy stockholders entitled to vote representing 79.13% of the corporation's total outstanding shares, and that this meeting is therefore confident to transact the business provided for in the agenda.

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 & Co. For the information of the stockholders who are with us now during the broadcast, the corporation has requested stockholders to send their questions or comments via email. Questions received by May 5, 2023, had been collated, and selected questions will be answered later this evening. The corporation will reply to the questions and comments not taken up during the meeting through email.

So let's now proceed to the first item in the agenda, which is the approval of the minutes of the 2022 Annual Meeting of the Stockholders held on 11th May 2022.

Mr. Chairman, copies of the minutes have been furnished and 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 78.86% of the total outstanding shares of the 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?

To our distinguished members of the URC Board of Directors and our beloved shareholders, my warmest greetings. For our Annual Shareholders' Meeting today, I will be providing you my report on the company's final 2022 results, including key highlights of our strategic initiatives and a brief update on our first quarter results for 2023. To start, let me present to you the overall performance of URC. 2022 was a banner year for the company as we roll the reopening of the economy and the recovery from the pandemic. URC sales grew an outstanding 28% despite the difficult and high inflationary environment. Consumer demand remained resilient throughout the year as sales momentum from the fourth quarter of 2021 continued into 2022 where we saw sequential quarter-on-quarter growth. Against the backdrop of surging commodity costs, we were still able to grow operating income by 20% versus a year ago through volume growth, brave pricing actions and cost optimization programs. Net income after tax was up 12% as operating income was partially offset by a higher provision for taxes coming from the gain of sale of idle property and the taxes we begin to pay on Munchy's profit, which we started to consolidate in 2022. 2022 was a year of unprecedented changes. Looking across the region where we operate, we saw drastic increases in inflation versus historical rates. Despite this, consumer demand generally remained strong in the markets where we operate as the reopening dividends bolstered growth and kept optimism high. Inflation was a major challenge last year. Key commodity prices, although trending downwards from the highs in quarter 2, remained elevated versus pre-Russia-Ukraine war levels. Cost of key materials, such as potato, corn and particularly sugar in the Philippines, also increased significantly. The impact of these materials and fuel cost increases to the company was staggering at well over PHP 21 billion for the year 2022. Pricing was therefore important, and the pricing actions we made throughout the year allowed us to recover and mitigate the effect of these inflationary costs. Now let me share with you the performances of each of the business units, starting off first with the Branded Consumer Foods Group in the Philippines, which had a stellar performance, growing revenue by 23% versus 2021. Branded Consumer Philippines continued its strong momentum, growing sequentially quarter-on-quarter since the second quarter of 2021 and hitting monthly and quarterly sales records throughout 2022. Operating income in Branded Consumer Foods Philippines grew 11% on the back of strong volume growth along with the brave pricing actions taken and executed cost savings programs. The success story of Branded Consumer Foods in international is similar to that of the Philippines with most markets posting double-digit growth. Top line grew 46% versus year ago with the inclusion of Munchy's, our new acquisition in Malaysia. But even without the Munchy's acquisition, the existing core businesses in international grew 17% in Philippine peso terms or 11% in constant currency led by strong growth in Indochina. We were able to capitalize on the sustained strong consumer demand across markets as we regained the #2 position in ready-to-drink tea in Vietnam and continue to hold market leadership positions in biscuits in Thailand and in Malaysia. Operating income was up 53% with the acquisition of Munchy's, our newest business in Malaysia. Direct and indirect pricing moves for core SKUs in key geographies, coupled with structural improvements in our smaller markets, have helped both absolute profit growth and margin expansion. Finally, our Agro-Industrial & Commodities group posted strong top line across all business units. Sugar and renewables and flour grew behind higher market prices but remained challenged on volumes. The double-digit growth of our Agro-Industrial Group, or AIG, was driven by the feeds business with strong sales volume growth and pricing actions. Pet food, in particular, remained very robust with sales growing plus 50% versus last year. Operating income from the Agro-Industrial & Commodities group posted strong growth, up 29% versus 2021. Despite tight sugarcane supply, sugar and renewables was able to grow operating income significantly through higher market prices and sugar mill operating efficiencies. This was able to offset challenges in flour, which was greatly affected by the hyperinflationary increase in wheat prices and foreign exchange weakness of the Philippine peso. Agro-Industrial Group also faced difficulties in profitability in 2022 due to the recurrence again of African swine fever and sporadic episodes of avian influenza outbreaks on top of higher input costs. But all in all, a strong profit performance from all business units. And this supported a very strong balance sheet, which remains healthy with a net gearing ratio of 0.2 and a return on equity of 12.4% at the end of 2022. Despite the difficult challenges we face, profits and cash were strong. We were able to generate PHP 21.5 billion in EBITDA and continue to invest into the business, spending PHP 9.1 billion in capital expenditures to expand our operating capacities, particularly in the Philippines. Working capital increased with the upsurge in input costs and as we improve supply resiliency. We are, however, maintaining or improving our cash conversion cycle and inventory days. We have also returned over PHP 10 billion in total to our shareholders through our dividends and buyback program. Before we look ahead to 2023, let me revisit the strategies that we've rolled out and which have served us well over the past few years. I have previously spoken about our where-to-play strategy of continuing to grow our core businesses, which provides us the resources to expand for more into adjacencies, new categories and new geographies. This is enabled by our how-to-win strategies of having a portfolio of products and brands people love, having a people- and planet-friendly culture, being a preferred partner of choice, and rolling out a strong product supply chain transformation program. With URC's diverse portfolio, our brands and products have been and continue to be a staple of Philippine households while growing its footprints in international. We believe that strong brands are a major competitive advantage, which is why we continue to invest in and build our brand positions. Our new product pipeline also remains robust in the Philippines and throughout Southeast Asia. We are proud to say that more than 9% of our branded sales for the year have come from new product developments launched over the last 3 years with innovations in both the core and in new category entries. Product extensions in our C2 brand in Vietnam have helped us regain our #2 position in the ready-to-drink tea category, while the launch of our Piattos hot series in Indonesia enabled us to solidify the strength of the brand and improve our offerings in the big modern trade segment in Indonesia while simultaneously raising our price points throughout the country. Continued innovations in the biscuits, wafers, cakes and snacks categories through existing brands reinforced our strong position in Thailand. New flavor offerings in instant noodles also allowed us to flank our competitors in both the pouch and cup segments in the Philippines. Innovation in new categories and new segments were also made as we continue to provide consumers with great food and beverage choices. The launch of Chill Spiked Spirits and Goodday through our partnership with Asahi has allowed us to enter the alcoholic and cultured milk yogurt drink categories in the Philippines. Our Malaysian acquisition, Munchy's, also launched their own lineup of new products, which have done extremely well in the trade. We are happy and excited to say that we've started the expansion of Munchy's to the rest of Southeast Asia, starting with Vietnam in the end of 2022 and then Thailand and the Philippines in 2023. As we strengthen our people- and planet-friendly culture in URC, we continue to focus on our newly updated targets in the 6 sustainability focus areas, namely: people and communities, climate action, product, packaging, water, and sourcing. We have implemented different programs and initiatives in line with our 2030 goal commitments. Solar panels are continuously being installed in both our Philippines and international business units, increasing our use of renewable energy in our operations. We also have the reduce, reuse and recycle program to optimize our water use. Efforts to reach plastic neutrality were also kicked off as we set up plastic collection sites to help convert post-consumer waste into something useful. Initiatives to improve the nutritional quality of our products are also underway. We have set wellness criteria aligned with World Health Organization and Department of Education guidelines. And presently, across the total branded business of URC, 100% of our products passed one wellness criteria, 98% have passed 2 and 90% have passed 3 wellness criteria. This is already above the initial targets we set, and we will look at raising the bar further on this metric. Lastly, we've partnered with various organizations as we promote environmental awareness and protection and reinforce values and best practices to different communities. We continue to strive to be the preferred partner of choice for all our suppliers and importantly, to our customers. For example, in the Philippines general trade, we were able to expand our distribution depth significantly through the reopening of the economy, hitting over 300,000 doors for direct coverage. This improves our depth of distribution to a good base, and we are now working on improving breadth of distribution so that these over 300,000 doors order more product lines across the URC portfolio, including our new products just launched. For modern retailers, we continue to invest in our relationships and collaborate effectively with the most important retail partners. This has paid off as we have been recognized in the Advantage survey between retailers and manufacturers as the highest-scoring local manufacturer in the Philippines for the third straight year and now ranking second overall. And finally, our product supply chain transformation continues as we optimize for future growth. We committed to a PHP 5 billion fuel for growth program at the end of last year where we targeted PHP 1 billion in savings per year over the next 5 years. We are on track to hit that target, and have achieved over PHP 1.5 billion in savings for 2022 alone. We also completed our SAP enterprise resource platform system transition in January across our Philippine business units. This is an important switch in SAP from the previous version to S/4HANA and revamped many of our legacy business processes to take advantage of the new system. This will allow for faster data analysis, more robust data processing and database management, lower hardware maintenance as we shift to the cloud and a leaner workforce working on the back end. This was a multiyear project with a lot of moving parts. And given the complexity of such a big transition, there were some disruptions to operations this January 2023 leading to lower fill rates. We have already recovered our invoicing, and we are catching up on our balanced orders, reaching record volume businesses in the last few months in the first quarter of 2023 and into the second quarter. Lastly, before I conclude, I would like to update you on our 2023 first quarter results, which we disclosed last May 5. For the first quarter of 2023, URC was able to sustain its momentum and grow sales by 11% versus the same period last year with all business divisions exhibiting strong growth. Operating income grew even faster than top line, clocking in at 15% growth as margins expanded on the back of pricing moves implemented last year as well as disciplined cost management. Core net income was up 11% versus a year ago. So that concludes a business update for URC for all of 2022 and a brief overview of the first quarter of 2023. As always, we thank you, our shareholders, for your continued support, and we strive to continue to delight everyone with good food choices and share our success with stakeholders all across the URC ecosystem.

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 78.92% 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., 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 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., and Mr. Irwin C. Lee; and as independent directors, Mr. Cesar V. Purisima, Ms. 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 have been elected and qualified. Mr. Chairman, shown on the screen are the numbers of affirmative votes for each director: 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, Ms. Rizalina G. Mantaring, Ms. Christine Marie B. Angco and Mr. Antonio Jose U. Periquet, Jr.

Let's move on to the next item of 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 the 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 2023. After tabulation of the votes, the appointment of SyCip Gorres Velayo & Co. as external auditor of the corporation has been approved by stockholders representing 78.79% of the total outstanding shares of the corporation.

Thank you. The accounting firm of SyCip Gorres Velayo & Co. is hereby appointed as external auditor of the corporation for the calendar year 2023. Let's proceed to the next item in the agenda, which is the ratification of the acts of the Board of Directors, 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 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 78.91% of 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, 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 are earlier submitted via email. The questions will be answered by the President and Chief Executive Officer. Mr. Irwin Lee.

The integration of the Munchy's acquisition is going very, very well, and it's been a great success and going ahead of plans. The full integration of Munchy's with our existing URC Malaysia business is almost compete. The company is now the #1 biscuits manufacturer in Malaysia, and we are harvesting the synergies of the combined businesses, both growth and cost synergies. Our Jack 'n Jill URC products are now going through a stronger route to market, leading to over 30% growth in the first quarter of 2023. We have harvested savings from the combined scale of the business, done some regional sourcing adjustments as well as benefiting from an improved organizational structure. And we are now launching Munchy's across the region, pipelining in the Philippines just last month in April 2023. So overall, a very good progress on the integration of Munchy's, and we look forward to the strong contribution of Munchy's to the URC portfolio for years to come. We believe that the margin situation will be much better this year in 2023 as we see the full impact of the price increases we did a lot in 2022 and some still in 2023. And in addition, yes, there is some tempering of commodity cost prices. However, certain input costs still remain high, and a lot of volatility remains in the macro environment. That being said, we're doing all we can, and we are targeting to grow our operating income faster than the top line, leading to better margins for 2023 and beyond. Yes, sustaining growth is always a challenge, especially in an inflationary environment. While inflation is moderating across the region, it still remains significantly elevated against normal times, unless we believe that this is the new normal. We do watch consumer confidence closely. We watch their behaviors and look at signs for demand disruptions. But it is during challenging times that URC's superior advantages are able to drive sustained growth. We believe we have a portfolio of strong brands, we have deep distribution, we have an entrepreneurial and agile culture and our passion to serve our customers and consumers, these are the advantages that will play to our strength and these will help us continue to drive sustained growth.

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 dear stockholders, for the continued trust and support over the years. 2022, being a banner year, is a result of your trust, hard work and dedication. The future remains bright for URC. And with your support, opportunities are limitless. This ends the 2023 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 today. Let's stay safe wherever we may be.