Fellow Stockholders and Staff-members, Friends and Other Stakeholders of First Philippine Holdings Corporation, Ladies and Gentlemen:
Good Afternoon and welcome to this, our 42nd Annual Stockholders Meeting.
Once again, it is my privilege and pleasure to present the highlights of our operating year that ended on December 31, 2003, and to discuss issues that I feel are important to the continuing success and prosperity of our Corporation. Thereafter, our President and Chief Operating Officer, Mr. Elpidio L. Ibanez, shall render a more detailed summary of our operating and financial highlights for 2003.
You will also have received a copy of our Annual Report for 2003 that provides a comprehensive summary and discussion of the state of our Corporation.
As our operating results for 2003 will indicate, First Holdings has not spent its time idly.
For the year 2003, the Corporation registered consolidated revenues of P38.4 Billion, and a net income of P3.82 Billion. Our net income translates to earnings per share of P6.995, or approximately 25% of our current share price of P28.00. The revenue and net income aggregates are the highest we have reported in the history of our Corporation. Taking into account all adjustments occasioned by changes in accounting standards, our next best year in terms of net income would be 2001 when we reported P3.78 Million in earnings.
I would now like to recognize the principal contributors to our success in 2003.
Power distribution, principally represented by our 17.7% ownership interest in Meralco, continues to be an important component of our business portfolio. For 2003, Meralco earned a profit of P907 Million on revenues of P132 Billion. This is a welcome return to profitability, after the P28.2 Billion loss Meralco reported in 2002. However, Meralcos situation still reflects the continuing unwillingness of government, be it the regulators or the judiciary, to grant rate adjustments to most utilities to enable them to earn market rates of return. But governments position is not consistent. By contrast, for example, TRANSCO, the state owned power transmission monopoly, reports that it generated a net income of P15.38 Billion in 2003 and P13.73 Billion the year before that.
Last November 27, 2003, the Energy Regulatory Commission granted Meralco a 12-centavo per kilowatt hour rate increase, effective January 2004, in response to Meralcos application to increase its rates by 13.58 centavos per kilowatt hour. Unfortunately, this has yet again been forestalled by the Supreme Court and it is uncertain when a final decision will be rendered. In the meantime, its cash reserves depleted by the refunds that it has had to make to its consumers, which now amounted to Php 6.9 Billion as of March 31, 2004, without counting the 4th phase of the refund which will amount to about Php 18.7 billion.
I would also like to draw your attention to adjustments that we have had to make to our 2002 accounts as a result of the adverse November 15, 2002 Supreme Court decision on the Meralco refund issue and its subsequent April 10, 2003 decision denying the Motion for Reconsideration filed by Meralco. As a consequence of this decision, Meralco booked a P23.8 Billion extraordinary loss in its 2002 statements of income, as well as a P2.7 Billion charge against its 2002 income from ordinary operations. We have made corresponding adjustments to our 2002 accounts of P4.5 Billion and P520 Million, respectively. The net effect of these is a P5.0 Billion charge against our retained earnings as of December 31, 2002.
Earlier this year, Meralco reached an agreement with the Energy Regulatory Board to carry out refunds to customers in four phases. Phase One, involving refunds amounting to about P2.17 Billion to residential and commercial customers consuming 100 kilowatt hours or less per month, has been completed. Phase Two, involving refunds amounting to about P4.6 Billion to residential and commercial customers consuming 101 to 300 kilowatt hours per month has also been completed. Phase One and Two represent approximately 22% of the total refund but cover approximately 82% of all customers entitled to refunds.
Phase Three is ongoing and Phase Four is still to be filed with the ERB. The major challenge facing Meralco is where to find the cash to pay out the refunds. As a result, Meralco is actively exploring alternative ways of making good its obligations to those customers still owed a refund.
Power generation, represented by our 88.44% ownership interest in First Generation Holdings Corporation, or First Gen, was again our stellar performer, accounting for more than 90% of our consolidated revenues and net income.
The 1,000-megawatt Santa Rita gas turbine plant completed its third year of commercial operation in 2003 and reported a 24% increase in output as capacity utilization improved to 65% from 52% in 2003. The plants availability factor of 93% was higher than its target of 90%, while its reliability factor of 96% also bettered the target of 94%.
The 500-megawatt San Lorenzo plant also reported capacity utilization of 67% during its first full year of commercial operation, up from 54% during the three months that it operated in 2001. San Lorenzo met its target availability factor of 90% and also reported a reliability factor of 96%, higher than its target of 92%.
Together, these plants earned P7.65 Billion on revenues of P35.93 Billion during 2003.
For its part, the 225-megawatt Bauang diesel plant generated a net income of P947.3 Million on revenues of P2.9 Billion for the year, serving primarily in a reserve or standby role for the National Power Corporation.
In June of 2003, for liquidity and other reasons, we decided to divest our 60.29% interest in Panay Power Corporation, the investment vehicle for our 72-megawatt diesel plant in Iloilo City. A total consideration of P1.17 Billion was received, and a net gain of P318 Million recognized by our Corporation on the sale of the asset.
Despite the difficult conditions that we continued to encounter in our home market, all our other major businesses remained profitable. These include Philippine Electric Corporation, our manufacturer of industrial and utility transformers; First Electro Dynamics Corporation, our repair center for distribution and power transformers; First Sumiden Circuits, Inc., our manufacturer of flexible printed circuits for electronics applications; First Philippine Industrial Corporation, our pipeline transporter of petroleum products; First Philippine Balfour Beatty Corporation, our general construction company; and First Philippine Industrial Park, our joint venture with Sumitomo Corporation.
Philippine Electric Corporation, or PHILEC, earned a net income of P40.6 Million, slightly lower than its previous years income of P47 Million, on revenues of P660.1 Million. While PHILEC continued to strengthen its market share in the non-Meralco market, which is now over 50%, Meralcos orders for transformers continued at a low ebb of about half of the normal volume of orders last seen in 1997.
First Electro Dynamics Corporation, or Fedcor, our repair center for power and distribution transformers, continued to benefit from the increased reliance by many utilities on rehabilitated or repaired transformers, instead of new transformers. Revenues rose by 9% to P100.6 Million and net income improved to P3.6 Million from P3.4 Million in 2002.
First Sumiden Circuits, Inc., the joint venture with Sumitomo Electric in which we have a 40% ownership interest, more than doubled its net income to US.6 Million, or approximately P141.3 Million, up from .0 Million the year before. This was primarily due to increased productivity and the production of higher-margin products, since sales in 2003 only improved by 3.3% over 2002. However, reflecting the recovery of the electronics industry worldwide, First Sumiden is currently doubling its capacity and it must begin to operate at a higher capacity by the third quarter of 2004.
First Philippine Industrial Corporation, our petroleum pipeline company, reported P84.9 Million in net income on revenues of P443.0 Million. This is quite an improvement on the break-even performance reported the year before, when FPIC had to take an extraordinary charge of P35.0 Million due to the impairment of its black oil pipeline assets.
First Philippine Balfour Beatty Corporation, our construction subsidiary, earned a profit of P17.1 Million on revenues of P806.2 Million. During the year, First Balfour discontinued the metal fabrication operations of its subsidiary, Philippine Steel Fabricators, Inc., and recognized a P25.0 Million charge on the closure. First Balfours results reflect the continued slump in our property and construction markets, but the company is to be congratulated for delivering a positive result for the year.
First Philippine Industrial Park reported a net income of P33.6 Million on sales of P269.9 Million and these aggregates also reflect a continuing slump in the market for prime industrial and export manufacturing sites. Our partner, Sumitomo Corporation, also has an industrial park joint venture similar to FPIP in Vietnam. Last year, we chanced to visit this industrial park and found that lots were selling like veritable hotcakes. Surely, it must be of great concern to our economic managers that emerging economies that we consider to be direct competitors, such as Vietnam, currently appear to be performing at a much higher level than ours.
But, to end this operating summary on a positive note, I would also like to mention that Rockwell Land Corporation, in which we have a 24.5% equity stake, registered a net income of P130.4 Million on revenues of P2.2 Billion for 2003, a significant turnaround from 2002 when it reported a P481.3 Million loss. The major factor behind this turnaround was Rockwells successful launch of the fast-rising Manansala residential condominium tower, to mainly overseas Filipino buyers, at a time when the local market was mired in an oversupply situation. The decision to launch Manansala in such a soft market was a daring move on the part of Rockwells management and they are to be congratulated for their confidence in their ability to make the project fly. It appears that Rockwell is now enjoying the same level of success in pre-selling its next project, the Joya residential condominium towers, which should commence construction by the latter part of this year.
To recapitulate, 2003 proved to be a record year for both revenues and profit for your Corporation. While our power generation business turned in a stellar performance, we would not have achieved these records without the gritty performance and competitive results contributed by all our other major operating companies despite a generally adverse business climate. Looking back further, our past three years have been characterized by this dogged and determined commitment by all our operating companies to deliver a profitable performance, regardless of the challenges and difficulties they have encountered. For that, I commend and thank all of them.
But, as I mentioned at the start of my remarks, I believe that the best is yet to come. There are a number of activities and projects that we have already undertaken to ensure that our business base will be stronger and more diversified in the coming years. Let me describe them to you.
1. First, if any of you have driven north from Manila lately, you may have noticed that work on the reconstruction and modernization of the North Luzon Expressway has proceeded at a very brisk pace. Contractually scheduled for completion by February 2005, it appears that the project might be delivered by the contractors as early as October 2004 and that would enable us to enter into commercial operation of the modernized tollroad before the end of this year.
Back in 1995, First Holdings had originally agreed to take a 50% stake in First Philippine Infrastructure Development Corporation that, in turn, owns 67% of Manila North Tollways Corporation, the project sponsor and development company. But then, in the late 1990s, we had to prioritize our investments in the Santa Rita and San Lorenzo power projects, and so we opted to reduce our participation in FPIDC to 30%. Now, as we near completion of the North Luzon Expressway project towards the end of this year, it is our intention to raise our stake in FPIDC to 51%. This is already gradually being achieved as we make periodic matching equity contributions to the project as the project loans are drawn down.
After a protracted wait, the NLE project has been undertaken supported by US7.5 Million in equity and US3.5 Million in project loans. To date, your Corporation and its partners which includes PNCC (3.7%), Egis Projects S.A. of France (10%) plus our Australian highway contractors, Leighton Asia Ltd. (10%), have contributed US Million of equity, with the balance of US.5 Million to follow before the final drawdown on the project loans, all in keeping with the project funding agreements. This project, huge as it is, enjoys no government guarantee on construction, traffic, operational and financial risks. However, the project was developed on the basis of toll rates committed by the Toll Regulatory Board that provide a reasonable attractive rate of return over the 25-year life of the franchise. There are government undertakings to ensure that the agreed toll rates are enforced, or otherwise compensated for. Over its life, the project will be an active cash generator for its proponents. The agreed toll rate levels are competitive with other tollroads in the Philippines, and are much lower than toll rates encountered elsewhere in other ASEAN countries.
Although this project will probably not have a positive impact on our financials for 2004, we expect it to be a major contributor of earnings and dividends from 2005 and for 25 years thereafter.
2. Second, during the past year, we managed the liability side of our balance sheet so that, over the next eight years, we should comfortably be able to retire our remaining debt and reduce our vulnerability to any major fluctuations in interest rates.
We successfully retired all borrowings that matured in 2003 starting with P560 Million in maturing commercial paper. This was followed by another P240 Million repayment in January 2004, thus completing the retirement of all our peso-denominated commercial paper. We retired our maturing US Million syndicated loan and pre-paid US.0 million in convertible notes that were to mature in February 2004.
We have a total of US Million in remaining indebtedness. By spreading out the repayment of these loans over a seven-year period from 2005, we feel that the debt service requirements, which average about US Million annually, are comfortably within our ability to repay from operating cash flows. Unless there are major new investments undertaken, we do not anticipate having to incur additional indebtedness in the foreseeable future.
3. Third, which I am sure is of great interest to all of you, we are resuming the payment of cash dividends. I am not prepared to announce a formal dividend declaration or policy today, but what I am at liberty to tell you is that we will commence the payment of cash dividends this year and, in a matter of a few weeks, we will formalize and communicate such a policy to all our shareholders.
We last paid out cash dividends in 1999, but over the last twenty years, our records show that the most we ever paid out was ten centavos per share in any given year. In some years, we supplemented these with stock dividends. The cash dividends that we expect to commence paying will be considerably higher than those that we have customarily paid out in the past. Moreover, we fully intend that they will be sustainable over the longer term.
We recognize the patience you have demonstrated over the years as we have reconstructed our core competencies and businesses and it is with great anticipation that we look forward to rewarding your patience. It is our desire to treat all of our stockholders equitably and the best way to do that is to resume a cash dividend policy that distributes the Corporations gains evenly among its stockholders. Furthermore, the best way to demonstrate that our earnings are real and sustainable is to pay out cash dividends every year.
I am hopeful that, with the articulation of a sustainable dividend policy, the market will also begin to value your Corporations shares in a manner more in keeping with the underlying values of its assets and its earnings potential. I realize that our share price has drifted at a weak level the past couple of years, for a variety of probable reasons: regulatory risk, as it has impacted upon Meralco; the problems that have beset other Lopez business interests, including our parent, Benpres Holdings Corporation; the overall mood of drift in the local economy; and the plain and simple fact that we have fallen off the radar screens of most international investors.
By emphasizing the quality of our business base, its potential for sustained profits and dividends and its inherent growth potential, we hope that our shares can trade at a level commensurate with our underlying true values.
4. Fourth, outside of major project undertakings like the large power plants and the tollroad, we do make portfolio adjustments based on what makes sense for us. The sale of our ownership interest in Panay Power is an example. The new Epira law precluded us from increasing capacity in Panay, despite a generation shortfall in Iloilo province principally because we also owned a 30% stake in Panay Electric Co., the electric distribution company in Iloilo City. We were offered a very good price for Panay Power by a group of investors who did not suffer the same restrictions. So we sold. And while we did not have occasion to immediately reinvest the proceeds in another power project, we were able to utilize the funds to retire maturing debt.
Another case in point is our investment in SiRF Technologies, Inc., a Silicon Valley start-up specializing in global positioning system or GPS chipsets for the electronics and automotive industries. Over the past 7 years, First Holdings had accumulated 2.2 million shares in SiRF at an average cost of US.40 per share principally because we had faith in the management of the company, which was chaired by the foremost Filipino entrepreneur in Silicon Valley, Diosdado Banatao. Originally, it was intended to take SiRF to go public within three years or so. However, an IPO was delayed initially due to the dotcom collapse, and subsequently, the 9/11 events.
Earlier this year, we sold half of our shares for a total consideration of US.6 Million in order to recover our original investment and because we needed the cash to retire maturing debts. We recognized a gain of Php 229 Million on that sale. Since then, SiRF has undergone a successful initial public offering in the U.S. and its shares have held well at above .00 per share. We are subject to a six-month lockout that ends in October, at which time we would have the option of selling the rest of our shares for a handsome profit if the price continues to hold.
5. Fifth, in First Holdings, we continue to define a competitiveness philosophy in terms of what world-class companies do to encourage and maintain performance excellence as leaders in their respective industries and markets. Just about five years ago, we compelled all our companies to develop and install Environment, Safety and Occupational Health programs tailored to the unique requirements of their businesses. Some of our companies have come to be considered benchmarks in ESH and have been asked to describe their programs in local and international conferences. A year later, we set out on our ISO 9000 program based on internationally accepted quality standards. Today, all First Holdings companies are ISO 9000-certified and nine of our operating subsidiaries carry an Integrated Management System certification consisting of ISO 9000, ISO 14000 and OHSAS 18000, which also encompasses the highest world-class safety occupational health & environmental standards
Two years ago, in the guise of a recognition system that we refer to as our Oscars, we began to apply the Malcolm Baldrige framework used by the United States for its national quality awards, in order to measure how and where we rate in performance excellence compared to the best companies in the US. Nine of our operating companies have subjected themselves to the Baldrige assessment and have truly begun their journey to becoming world class. Eight other companies will do so within the next two years.
To pursue the same standards of performance excellence in individuals, we also initiated an Executive Learning Program, principally in conjunction with the Asian Institute of Management, which is delivered at our Eugenio Lopez Development Center in Antipolo.
Most recently, we have launched the Six Sigma program, made famous by companies like General Electric and Motorola, as yet another means to achieving performance excellence in our manufacturing businesses, and eventually, also in our service businesses.
We have also centralized within the Lopez Group of Companies the control and coordination of our Corporate Social Responsibility or CSR activities under one umbrella organization called the Lopez Group Foundation, to ensure that we maximize the beneficial impact of the resources we set aside every year for environment improvement and assistance to the poorer and underprivileged sectors of our society.
6. Finally, for close to twenty years, ever since we had to abandon the Corporations erstwhile offices in Makati in 1986 with First Holdings teetering on the brink of bankruptcy, we had been without a corporate headquarters. During the better part of that period, as we nursed the Corporation back to financial health and as we developed its new business base, we were tenants in our present address, while our new companies located and grew wherever they could.
We felt it was time to have a home where we could bring all our businesses under one roof, to foster unity, to cultivate the common passion for performance excellence, to share our successes and from which to propel our businesses into the future. It is for this reason that we have acquired the Benpres property and building on Exchange Road in Pasig City, as well as the Eugenio Lopez Development Center in Antipolo. It has been a lucky address for First Holdings and its individual businesses since we transferred our offices to Benpres Building in 1986, and although we are not particularly superstitious, it does not hurt to lock in good fortune. In the Antipolo Lopez Center, we also now have a facility singularly well suited to the development of the competencies and sense of common purpose of our officers, managers and employees.
There are two honors accorded me these past few months which I would like to share with you, not so much because they involve a recognition of my work for this Company but because one way or the other, both honors recognize First Philippine Holdings Corporation as one of the top companies in Asia. The first one is contained in a letter to me as FPHC CEO by the President and CEO of CNBC Asia Pacific, Mr. Alexander P. Brown. The letter dated May 5, 2004 reads as follows:
Dear Mr. Lopez,
On behalf of the Asia Business Leaders Awards 2004, I am pleased to advise that you are one of the top 20 finalists of this years awards. This is an accomplishment in itself, considering that starting point of the tough evaluation process saw over 5,500 companies in Asia evaluated The Asia Business Leader Awards is about honoring Asias business leaders and you will be inducted into the 2004 Asia Business Leader Awards Honour Roll, a permanent list of exemplary chief executives. (close quote)
The letter goes on to state that the Awards will be given at an Awards Gala Dinner and Summit forum at the Four Seasons Hotel Shanghai on May 25 & 26, 2004 or about a week from now.
As you probably know, CNBC Asia Pacific is a subsidiary of the giant media network in the U.S. NBC, which also includes Dow Jones and the Wall Street Journal. One of the CNBC publication here in Asia is the Far Eastern Economic Review as well as the Asian edition of the Wall Street Journal.
Upon inquiry about the selection process used in the Asia Business Leader Awards, the initial screening is apparently done by a team of 2 academics from the University of Chicago Graduate School of Business, and this is followed by a 2 to3 hours personal interview, which I also had to go through.
From the top 20 finalists, the judges will still select 4 awardees for the following categories : -
1) Asia Business Leader of the year
2) Innovator of the year
3) Corporate citizen of the year
4) China CEO of the year
But even if we do not make it to one of the 3 top awards open to us, I am still pleased that we made the Honour Roll list of 20 finalists, which gives FPHC the distinction of being recognized as one of the top companies in Asia. I therefore would also not want to miss this chance to share the recognition with the men and women of First Holdings, all of whom have contributed to the renaissance of First Holdings from the very dark days of near-bankruptcy in 1986.
The other honor I received last month was due to the Companys work in corporate social responsibility or CSR, and more particularly on the environmental conservation work the Company is pursuing in collaboration with Conservation International, where I also sit on the Board of Directors. C.I. has its headquarters in Washington D.C. but its work on biodiversity conservation is spread out in more than 20 countries.
Last month, on the occasion of my 74th birthday, the top botanist and the Executive Director of C.I. Philippines came to my office to present me with an article written in the Edinburgh Journal of Botany by 3 writers, describing a new plant species discovered in the Sierra Madre mountains of Luzon by C.I.P., which was named Vaccinium Oscarlopeziarum.
According to this article, the new plant species was named, and I quote in honor of Mr. Oscar M. Lopez, eminent Filipino industrialist and conservation advocate, for his commitment and leadership in biodiversity conservation in the Philippines, particularly in the Sierra Madre Biodiversity Conservation Corridor, where this new species was discovered. Close quote.
This signal accolade given me by C.I.P. made my mind race back in time 6 years ago, when I decided to organize a small intrepid group of 4 hikers from our Company to visit our C.I.P. forest research station in the Sierra Madre Mountains. We took a small plane, because this was the only way you could get there, to the inaccessible town of Palanan on the eastern coast of Isabela province, from where we started our trek through many hills and mountain streams to reach our destination deep in the forests of the Sierra Madre, in the C.I.P. campsite where we stayed overnight.
It was on this occasion that I met Mr. Leonard Co, our eminent C.I.P. botanist, who subsequently discovered the new plant species and named it in my honor. Now I am taken to wondering that if I did not make the supreme effort of going to the Sierra Madre 6 years ago, would Mr. Co still have named that new species after me. I must ask him this question next time I see him or perhaps it was foreordained that C.I.P. would actually name a plant in my honor.
But let me say again that I am very grateful to C.I. Philippines and particularly to Mr. Leonardo Co for this grand gesture on their part. In effect, what more can anyone wish for in this life than to be immortalized by having a living plant carry your name, and then have that event written about in a learned journal abroad for posterity.
On this happy note, I conclude my speech . I shall now call on our president, Mr. Ibanez, to give his report.
Thank you and good afternoon.