Lopez Holdings

 

Fellow shareholders,

I am happy to report a number of good news this year, from several of our subsidiaries. The first bit of good news was delivered by First Philippine Holdings Corporation, which registered in 2005 the highest ever revenue and net income in its 44 years of history.Revenues were up 34% to Php 55.4 billion from Php 39.9 billion in 2004.Net income increased by 32% to Php 4.91 billion from Php 3.7 billion.First Holdings is today our principal source of cash dividends.The second bit of good news is from our affiliate Manila North Tollways Corporation (MNTC), which together with its operations and management partner, the Tollways Management Corporation, successfully began commercial operations of the North Luzon Expressway (NLE) on February 10, 2005. MNTC opened for the riding public's use 138 new lane kilometers and 295 upgraded lane kilometers. The NLE now offers seamless and safe travel conforming to international standards. MNTC should also start giving out dividends before the end of this year.

Another bit of good news came from First Gas Power Corporation, owned through First Gen Corporation under First Philippine Holdings Corporation (FPHC). It won an arbitration case against Siemens in November 2005. The International Chamber of Commerce ruled that First Gas is entitled to liquidated damages amounting to US million as a result of the delays incurred by Siemens in constructing the Santa Rita power plant. First Gas also settled its long-standing dispute with its Malampaya gas suppliers headed by Shell Co. resulting in a write-off in take or pay obligations of US million.

Then--¦ Rockwell Land Corporation, sold most of its unfinished Joya Condominium units, and is now working on a sophisticated high-end complex called One Rockwell that will enable it to keep its premier position in the luxury condominium market. Rockwell reported P2.55 billion in consolidated revenues and a 21% growth in net income to P288.5 million last year, and should also start giving out dividends before the end of this year.

And after many years of bad news, we finally saw light at the end of a long tunnel at Maynilad Water Services, Inc. We are hopefully finally out of the woods and out of the company. The issues surrounding the surrender of Benpres's stake in Maynilad, in compliance with Court-approved financial rehabilitation for the water utility, appears to have been finally resolved. An annual stockholders' meeting had been held wherein the Metropolitan Waterworks and Sewerage System took over Maynilad.

We may however, have to wait a little more for the most important bit of good news on our financial restructuring. But, with Maynilad out of the way, we are now more hopeful about reaching a debt restructuring agreement with Benpres creditors, in an earnest and consensual process we began four years ago.

Benpres debt today stands at US0 million, assuming no further changes in the Maynilad situation. We are trying to bring this debt down to a manageable level of around US0 million, either through a sale of assets or through a debt to asset swap.

While we seek agreement on the terms of a realistic and workable debt restructuring, we continue to look toward enhancing the value of our investments. Hence, all our investee-companies have work cut out for them in 2006.

2006 targets

For ABS-CBN Broadcasting Corporation, it is to work toward recovery. The company reported an 8% growth in gross revenues to P17 billion, a 10% reduction in EBITDA to P3.6 billion and a 62% decline in profits to P288 million last year. Despite the launching of new programs and efforts to enhance client alliances, the company continued to lag in the Mega Manila ratings last year. Nonetheless, ABS-CBN continues to innovate with new show concepts led by the groundbreaking Pinoy Big Brother, a joint production with Dutch content provider Endemol that has counterpart shows in 46 countries. The recently instituted approach of using integrated distribution channels for news and current affairs is expected to bear gains for the company in the near future, coupled with the headcount reduction program completed in 2005. Future growth is anchored on the overseas global business with the landmark agreement between ABS-CBN and Direct TV in the U.S. ABS-CBN Global grew its international subscriber base by 30% in 2005.

For Bayan Telecommunications, Inc., it is to seek sustainability. The company continues to show strength in data services with DSL (Digital Subscriber Line) customers doubling to over 11,000 as of end-2005. Total revenues went down by 3% to P5.22 billion but EBITDA went up by 1% to P2.17 billion last year. After two years of positive gains in EBITDA on stable revenues, Bayantel is now developing disruptive products that will be key to its business in a very competitive telecoms environment. One of these new products is the Wireless Local Loop or WLL service, which it began selling under the brand name SPAN in March 2006. The WLL delivers the key benefits of landline and wireless service in a single package. Users can make unlimited landline calls from within and outside their house over a radius of between 3 to 5 kilometers.

This service is currently available in Marikina, Manila, Tacloban City, Davao City and General Santos City. The service is apparently attractive as the Marikina local government immediately ordered a hundred units for use by its mobile workforce. BayanTel expects this project to contribute P100 million to 2006 revenues. The real challenge for the company remains how to allocate its limited resources between its core business and strategic growth projects and payment of its debt. Having said that, it is most encouraging to see a company like BayanTel ably funding its capital expenditures completely from internally generated funds.

For Beyond Cable, the challenge is to establish a platform for growth. In 2005, the company reduced operating expenses by 24% and reported an EBITDA of P507.2 million. Amid the difficulties it faced these past years, Beyond Cable must gear up to establish a platform for growth: an encryption system that aims to increase ARPU (average revenue per user) and improve market penetration and solve signal theft; the extension of loan repayment terms and action plans to improve EBITDA (earnings before interest, taxes, depreciation and amortization) to fund its growth; and a reduction in its programming cost from 54% to 42% of revenues. Digital signal encryption will enable the company to test its impact on reducing the number of illegal connections, test launch prepaid cable TV services and launch a premium tier cable TV service to generate higher ARPU. This premium service called Sky Platinum is now available in selected areas of Metro Manila.

For FPHC, it is to address strategic concerns, particularly in the power generation sector to ensure realization of its growth story. It is good to note that First Gen raised P9.1 billion in capital through its initial public offering in February 2006. The net proceeds will be applied, among others, toward expanding the business by acquiring power generation assets, engaging in greenfield projects, as well as exploring the potential of renewable sources of energy.

At the same time, FPHC is endeavoring to develop its electrical and electronic manufacturing operations into a third sector of its core business together with power generation and tollroads. We think we have proven to ourselves that given the right products, the right technologies and capable managers and workers, we can compete against the best in the world. We have been able to hold our own in our home market against imported transformers and we now have the confidence that we can carry the fight to the overseas market.

For this reason, FPHC organized First Philec, an intermediate holding company, to serve as a vehicle for the growth of its manufacturing activities in both the electrical and electronics sectors to core business proportions. We envision the day in the not too distant future when manufacturing will join power and toll road operations as one of the principal strategic activities of FPHC.

For MNTC, it is to attain the needed traffic volume. Since MNTC started commercial operations, traffic volume on the NLE has always been its primary concern in view of the high cost of fuel and high toll rates and the competition from toll-free MacArthur Highway. A five-pronged approach to traffic enhancement will continue to be the centerpiece of its activities aimed at attaining the needed volume. Among these activities is a tourism promotion campaign called "Rediscovering the North" in cooperation with convention and visitor bureaus formed by tour operators, convention organizers and hotel-resort owners in destinations north of Metro Manila.
For Rockwell, it is to ensure that dividends flow. Steady cash flows from its sales will enable the company to reduce its debt level and allow it to finally start its dividend payout. To sustain this for the long term, Rockwell will diversify into more affordable condominium projects and lower-risk horizontal development projects. With only three spaces left for development inside Rockwell Center, the company is now pursuing opportunities in key locations in Metro Manila through potential joint ventures with landowners.

More challenges ahead

Even as Benpres tackles the problem of its huge debt in 2006, there are clearly many unique challenges facing all of our businesses.

We await the resolution of Meralco's case on its unbundled rates. If the Supreme Court rules in favor of Meralco, then Meralco can move forward positively to what promises to be a most interesting year for the implementation of EPIRA (Electric Power Industry Reform Act). If not, then we could have another problem in our hands.

We are pursuing our efforts to help families of the victims in that Ultra stampede in which 71 fans of ABS-CBN's top noontime show, Wowowee, perished tragically. ABS-CBN paid for the burial of the deceased, covered the medical expenses of the injured, and established the 71 Dreams Foundation to facilitate holistic assistance and assure substantive long-term benefits to the bereaved families. But the company's responsibility goes beyond the financial and while ensuring such an incident will not happen again, it is not shirking its moral and legal obligations to those affected by the unfortunate accident. And because Bayantel was not one of the four telecom companies awarded a 3G franchise by the government, we continue to look for possible ways for Bayantel to somehow develop its niche in wireless communications. It will be extremely difficult to crack the duopoly currently enjoyed by the leading mobile phone operators, but there should be other ways to further build value into Bayantel.

In all our operating companies, we have a continuing commitment to achieve world-class business excellence in the way we manage our businesses, and in the way we set standards for our performance. When things are not going too well, there is a tendency for business managers to concentrate on shorter-term business results using short-term solutions. There is nothing inherently wrong with that, since survival and profitability are our primary accountabilities as managers. But our shareholders can rest assured that we are not forgetting, nor neglecting, nor postponing the disciplines required to ensure longer term success.

As a group, we have been able to align and certify many or our companies to the ISO 9000 quality standard, and the complementary ISO 14000 and OHSAS 18000 standards for environmental practice and occupational safety. But that is only a beginning. To compare ourselves with the best in the world, and to match their best practices, we need to start and persevere in our journeys to business excellence, for which we have adopted the Malcolm Baldridge framework, which is a powerful proven methodology for driving organizational change and developing a high performance management system. This quest for excellence is not something we can turn on or off whenever a crisis occurs. It is a quest that we must persevere with, knowing that the crisis will pass and that we will still be responsible for transforming our companies into world-class competitors.

If the myriad challenges facing our group of companies in 2006 are resolved in a manner favorable to us, then perhaps one day soon we will be able to say that the worst of our problems are behind us and we can again focus our maximum efforts on growing our businesses once more.

So within the Lopez Group, I have issued this challenge: let us not permit ourselves to be crippled by disunity and complacency that we see in the national scene. Rather, let us use adversity to advantage as our motivation to unite, to try harder and, ultimately, to triumph. We don't have to look beyond our own group to identify models to emulate, as this report shows.

To all our stake holders, please accept our sincere gratitude for your continued support and confidence

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CONTACT US

Lopez Holdings Corporation (formerly Benpres Holdings Corporation)
4/F Benpres Building, Exchange Road, 1605 Pasig City, Philippines

  • Trunkline: (632) 449-2345
  • Fax: (632) 634-3009