Smc Annual Report Essay Example

managerial handling of situations. Some names have been disguised.

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San Miguel Corporation (SMC) has become one of the wealthiest and most profitable companies in the Philippines after over 110 years. It is also known as the country's most recognized corporate brand. With approximately 30,000 employees across 90 major facilities in China, Southeast Asia, Australia, and the Philippines itself, San Miguel Corporation serves as the largest food, beverage and packaging company in the country.

San Miguel Corporation has several affiliated brands including Magnolia, Anchor, Coca-Cola, Ginebra San Miguel, Purefoods, and Monterey. The company produces and markets nearly 300 products such as Star, B-Meg, Wilkins, VIVA! Coca-Cola, and Eight O'clock. San Miguel Corporation operates in three core businesses: Beverages (beer, hard liquor, soft drinks, bottled water, fruit juices), Food & Agribusiness (chicken, feeds, pork and beef, processed meats, dairy, oils and fats), and Packaging (glass, metals, plastics, paper products, flexible pouches, and laminates). The beverage sector is San Miguel's largest business segment, accounting for over 58% of its total sales in the year 2000. The Food ; Agribusiness sector contributed 27% to its total sales while the Packaging Sector contributed 15%. In terms of operating income, the beverage segment is also

the largest contributor at 70%, followed by packaging at 22%, and food ; agribusiness at 8%.

The company consistently appears on the list of the country's Top 500 Corporations, ranking ninth in total revenues and registering the third highest reported profit in 1999. This makes it a significant contributor to the Philippine economy, representing 3% of the GDP. Exhibit 1 presents selected financial data for the years 1998 to 2000.

Managing San Miguel, Eduardo "Danding" Cojuangco, Jr. initially acquired 47% of SMC shares under the presidency of Ferdinand Marcos. However, when Marcos fled the country in 1986, Cojuangco also left and his corporate shares were subsequently seized by the new Corazon Aquino government. Following his reinstatement as Chairman and CEO by Philippine President Joseph Estrada in 1998, Cojuangco successfully orchestrated a remarkable transformation at SMC. In 1997, the company was facing significant challenges with a P47 balance.

SMC had a debt of 1 billion, high fixed costs, and was burdened by expansion projects in China. Their three breweries in China were not operating at full capacity. To raise the much-needed cash, Cojuangco sold SMC's 45% stake in Nestle Philippines in 1998. Furthermore, cash was generated when Coca-Cola Amatil, SMC's affiliate, divested its Europe operations. These sales resulted in a cash war-chest of approximately $1.

San Miguel's core businesses are primarily focused on the food and agribusiness sector. They are a leading company in this industry, operating in various segments including feeds, dairy, and poultry. San Miguel is actively involved in different aspects of agribusiness through its subsidiaries and affiliates. For instance, SAN MIGUEL CAMPOCARNE CORPORATION specializes in producing and marketing processed meats. Another subsidiary owned by San Miguel

is SAN MIGUEL FOODS, INC., which engages in activities like breeding, hatching, processing, and marketing of chicken as well as animal feed production.

In addition to that, MONTEREY FOODS CORPORATION handles hog breeding along with hog and cattle fattening while also being responsible for processing and marketing basic and value-added meat products. Furthermore, PHILIPPINE DAIRY PRODUCTS CORPORATION (STAR DARI INC) takes charge of the production and marketing of butter cheese margarine.

The primary emphasis of the company is centered around the production and exportation of coconut oil and other related coconut merchandise. In 2001, SMC purchased PUREFOODS CORP. from Ayala Corporation, a move that significantly bolstered its standing within the sector. The acquisition was appraised at P 7 billion and led to SMC attaining a 50% market stake in the local refrigerated meats market, along with a 17% share in Purefoods' flour milling market. Furthermore, SMC inherited Ayala Corp.'s established brand reputation and positive associations with Purefoods.

Over the past twenty years, Purefoods has had a gross revenue of P6.728 billion in 2000, while San Miguel CampoCarne's gross revenue was only P1 billion. The valuation of Purefoods, which amounted to P7 billion, included all assets except for its profitable franchise chain, Burger King.

SMC had to allocate an additional P1 billion to cover Purefoods' outstanding debt. However, Purefoods had P500 million in cash, making it a beneficial transaction. This acquisition has allowed the company to dominate various markets: 74% of the hotdog market, 40% of poultry, 32% of feeds, 24% of canned meats, and 17% of flour milling. As part of the deal, SMC also acquired the popular Purefoods basketball team franchise. However, due to regulations set by the

Philippine Basketball Association, SMC had to sell off the franchise since they already owned the San Miguel and Ginebra teams. Additionally, San Miguel's influence extends to various packaging materials like metal, plastic, glass, and composite packaging.

The company's Metal Packaging Division produces and markets metal closure and two-piece aluminum cans. It has three plants in the Philippines, a crown line in China, and a crown plant in Vietnam. Its Plastic Packaging Division is responsible for the production and marketing of plastic crates, pallets, and R-PET bottles. It has three domestic plants and one plant each in Indonesia and China. The Glass Packaging Division produces and markets glass containers and glass molds, with three domestic plants and one plastic plant each in China and Indonesia. Additionally, the company has a Paper Packaging Division that handles the production and marketing of corrugated cartons.

San Miguel has two plants in the country and also owns RIGHTPAK INTERNATIONAL CORPORATION, which has one domestic plant for producing and marketing composites. Additionally, the activation of foreign packaging ventures is closely connected to the internationalization of San Miguel's brewery operations. In 1994, the San Miguel Shunde Packaging Corporation in China began operating, coinciding with the establishment of the Shunde Brewery. Furthermore, San Miguel's Vietnam plant, the San Miguel Phu Tho Packaging Co., is also involved in packaging endeavors.

, Ltd. started operating in 1996 when it acquired the San Miguel Vietnam Brewery Ltd. Beverage. San Miguel Beer, which began brewing over a century ago, has been a constant throughout generations, wars, and different governments. Thus, it comes as no surprise that it is the most recognized Philippine brand.

San Miguel Beer Division, located domestically and

internationally, produces and markets San Miguel Beer and other malt beverages. Currently, it holds about 90% of the local beer market, which is estimated at 1.2 billion liters annually. San Miguel Beer, the flagship product, is available in four variants: the 320 ml steinie bottle, the 1000 ml Grande, the 330 ml cans, and San Miguel Draft. Additionally, San Miguel beer is exported to more than 20 countries.

In early 1987, SMC acquired LA TONDENA DISTILLERS, INC. Currently, SMC dominates the hard liquor industry in the Philippines, holding 80% of the market share. La Tondena is responsible for the production and marketing of gin, rum, mineral and distilled water, fruit juices, and juice drinks. The company operates five (5) breweries in the Philippines, including the Davao brewery that was established in 1995. Additionally, it began overseas distribution in Hong Kong in 1948. In 1992, SMC obtained a stake in PT Delta Djakarta in Indonesia.

In the following years, the company embarked on various ventures to expand its presence in the beer industry. In Vietnam, a joint venture agreement was established to produce beer. China's Shunde Brewery was established in 1994. Two important milestones were reached in 1996, as the company entered a brewing agreement with Miller and acquired San Miguel Vietnam Brewery Ltd. In 2000, to establish a presence in the Australian market, SMC acquired J. Boag & Son. However, the company also undertook transactions to strengthen its Beverage business as a whole, not just its beer division, during the past decade.

In 1999, the Metro Pacific Group sold the Metro Bottled Water Corp. to the company. The Metro Bottled Water Corp. was known for producing the well-liked

Viva! and Wilkins brands of bottled water.

In 2000, SMC acquired the Sugarland Beverage Corporation, founded by Dante Y. Go. Sugarland was known for manufacturing the JellyAce brand of jelly candies and the popular instant orange drink, Eight O’ Clock. In 2001, SMC also reacquired COCA-COLA BOTTLERS PHILS, INC., (CCBPI), a producer and marketer of soft drinks, which included the globally recognized brand Coke. The acquisition was made from Coca-Cola Amatil (CCA).

San Miguel Corporation, together with The Coca-Cola Company (TCCC), sold its stake in CCBPI to CCA in 1997. In addition to their main businesses, San Miguel Corporation expanded into the real estate sector by establishing San Miguel Properties, Inc. This subsidiary focuses on the development and management of commercial, industrial, office, and residential properties. Some of the notable projects undertaken by San Miguel Properties are The Legacy, Villa de Calamba, Primavera Hills, Bel Aldea, Maravilla, Buenavista Homes, Lexington, and Greenwoods.

Andres Soriano III, the former Chairman and CEO of SMC, observed that SMC's expansion was no longer reliant on increasing product availability but rather on boosting consumption levels. This growth potential extended beyond the Philippines to countries like China, Vietnam, and Cambodia. Moreover, there were promising opportunities in India and Indonesia where consumption growth prospects were significant. As a result, in 1997, Soriano agreed to a share-swap agreement with Australia-based Coca Cola Amatil. This transaction, combined with the sale of TCCC's 30% share, led to CCA gaining complete control of CCBPI.

SMC exchanged its 70% ownership in CCBPI for a 25% stake in CCA, resulting in a significant deal worth US$2.7 billion. Consequently, SMC became the second largest shareholder in CCA, while TCCC retained a 33%

holding. This transaction positioned Coca-Cola Amatil (CCA) as the primary bottler of The Coca-Cola Company's branded products outside of the United States. Following the separation of its European operations, CCA now operates across seven countries within the Asia-Pacific region and caters to a consumer base of approximately 340 million individuals. In Australia, CCA holds exclusive distribution rights for The Coca-Cola Company's trademarked products to an impressive majority of over 99% of the population.

The company currently has six plants in Australia and a delivery network that serves over 150,000 retail outlets. San Miguel Corp.'s plan to repurchase Coca Cola Bottlers Philippines, Inc. (CCBPI) from CCA, just four years after selling its shares in 1997, received industry support. The management of CCA observed a decrease in profitability due to the weakening peso and worsening national economic conditions. Furthermore, poor management and the absence of San Miguel's extensive marketing network supposedly resulted in a drop in Coke's market share and overall sales volume.

The reacquisition agreement, reached in 2001, was valued at US$ 1.24 billion, which was less than half of the 1997 valuation. San Miguel's initial plan was for a 70% ownership stake in CCBPI, with TCCC from Atlanta, USA holding the rest. However, San Miguel later agreed to a 65% share and full management control in exchange for a discount on the royalties owed to TCCC or the cost of the cola concentrate supplied by SMC.

In a media interview, Cojuangco explains that with the acquisition of CCBPI, SMC becomes the dominant leader in the Philippine beverage Market. This acquisition represents the purchase of a highly successful franchise with extremely loyal customers. SMC is confident that it can

effectively capture growth opportunities and strengthen its position in the beverage industry. The transaction is expected to address the declining market share of Coke and further solidify SMC's control over the Philippine beverage industry, establishing it as the top player in the soft drink, beer, and liquor markets. In July 2001, RFM Corporation agreed to sell its entire 85% stake in Cosmos Bottling Corporation to SMC.

Cosmos, which was the second largest soft drinks manufacturer in terms of nationwide sales after Coca Cola, was acquired by SMC and CCBPI for approximately P14.5 billion. This acquisition ensured that CCBPI would establish a dominant position in the vast Philippine soft drinks market.

In 2001, SMC decided to pursue a comprehensive reorganization due to its growing portfolio of acquisitions. This reorganization resulted in several revisions by the end of the year. One of the changes included the formation of a new subsidiary called Philippine Beverage Partners (PhilBev) under Coca Cola Bottlers Philippines, Inc. PhilBev was intended to be the non-carbonated soft drinks subsidiary of CCBPI. As a result, the former juice and water businesses of La Tondena Distillers Inc. were sold to PhilBev, which included various brands such as Eight O' Clock, Ponkana, Ice Cold Mix, Viva!, Wilkins, Magnolia, Funchum, Zip, and Junior. The Sugarland Beverage Corporation, whose beverages were transferred to PhilBev, transformed into the Sugarland Corporation and focused on its jelly-based snack food business.

Another revision involved La Tondena Distillers Inc., which now focused solely on the hard liquor business. This included popular brands such as Ginebra San Miguel, Anejo Rum Oro, Vino Kulafu, Tondena Manila Rum Gold, and San Miguel Bravo Rum. Exhibit 2 displays SMC's domestic business

portfolio after the reorganization.

At the start of 2002, SMC is still experiencing an acquisitions frenzy. Chairman Eduardo “Danding” Cojuangco has stated that while the San Miguel Corporation will continue to focus on its food and beverage ventures, it is actively seeking new opportunities. The provided press releases in Exhibit 3 demonstrate SMC's strong financial position. Additionally, Kirin Brewery's recent purchase of a 15% stake in SMC (refer to Exhibit 4) is expected to significantly bolster San Miguel's available funds. Therefore, the main challenge now lies in identifying the most promising targets for future acquisitions.

The following questions arise regarding San Miguel Corporation:
1. Considering the company's corporate identity and core businesses, what potential "new opportunities" could San Miguel Corporation explore, and why?
2. What criteria should San Miguel Corporation use when acquiring new business units?
3. Evaluate the reorganized structure of San Miguel Corporation as mentioned above. For example, why was PhilBev established as a "subsidiary within a subsidiary" rather than a direct subsidiary of San Miguel Corporation? Why not transition San Miguel Corporation into a holding company instead?

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sanmiguel.com.ph www.inquirer.net

EXHIBIT Selected Financial Data for San Miguel Corporation

SELECTED FINANCIAL DATA (Amounts in Million Pesos Except per Share and Statistical Data)

For the Year 2000 1999 1998

Net Sales 88,705 75,619 78,226

Income from Operations 7,928 6,688 4,097

Net Income 6,844 6,016 24,409

Basic Earnings per Share3. 042.

529. 83 Taxes 18,458 17,375 19,282 Cash Dividends 2,250 2,759 1,804 Cash Dividends per Share A1. 001. 230.

At Year-End Working Capital 35,581 34,305 51,752

Total Assets 153,029 137,410 139,043

Property, Plant ; Equipment - Net 49,708 45,553 48,276

Stockholders' Equity 65,912 55,733 67,013

Stockholders' Equity per Share A29. 824. 7726. 98

Number of Shares Outstanding - Net

of Treasury Shares 2,250,734,081 2,249,789,366 2,257,516,972

Number of Stockholders 49,687 50,245 51,778

Number of Employees 14,864 14,511 15,923

Financial Statistics % Return on Average Stockholders' Equity 11. 259. 8042.

18 Current Ratio 1.81

87 Debt to Equity Ratio 0.99

110. 86 Market Price C Class A - High 58.

0074.

0055. 00 Low 44.

0039. 6732. 00
Class B
HIgh 57. 086.

5075. 50 Low46. 5045. 4534. 00 A Based on the number of shares outstanding at the end of each year B Total debt to stockholders' equity and minority interest C Adjusted to reflect the retroactive effects of stock dividend in 1999 Source: SMC Annual Report SAN MIGUEL CORPORATION’S DOMESTIC `BUSINESS PORTFOLIO San Miguel Beer Division (Domestic) – San Miguel Pale Pilsen and other beers La Tondena Distillers, Inc.

- Gins and other hard liquors are produced by Coca Cola Bottlers Philippines, Inc.
- Coca Cola is known for its carbonated soft drink products.
- Philippine Beverage Partners Inc. specializes in mineral waters and fruit juices.
- Cosmos Bottling Company, a subsidiary of CCBPI, produces Sarsi and Pop Cola brands of carbonated soft drinks.
- San Miguel Foods, Inc. is involved in poultry breeding and processing as well as the production of animal feeds.
- Agribusiness focuses on the production and export of coconut oil and other coconut products.
- San Miguel Campocarne Corp. specializes in processed meats.
- Monterey Foods Corporation is involved in hog breeding, hog and cattle fattening, as well as the processing and marketing of value-added meat products.
- Pure Foods, a recent acquisition, specializes in canned and processed meats.
- Sugarland Corporation produces gel-based snacks and desserts.
- Philippine Dairy Products Corp. is also part of the company's portfolio.

Star Dari, Inc. (a subsidiary of Philippine Dairy)

specializes in the production of butter, margarine, and cheese, particularly the Star and Dari Creme brands. The Packaging Products Division of San Miguel is involved in the production and marketing of metal closures and aluminum cans, as well as plastic crates, pallets, and R-PET bottles. They also engage in the production and marketing of glass containers and glass molds, paper corrugated cartons, and composites. San Miguel Properties, Inc. focuses on the management and development of office, commercial, industrial, and residential properties. According to a press release dated August 3, 2001, SMC plans to maintain its growth momentum by taking advantage of recent acquisitions and implementing further structural reconfigurations.

Consolidated sales grew by 35% to P57.3 billion as a result of sales revenue increases in the food business (18%), beverage (6%), and packaging (5%). The inclusion of newly acquired Pure Foods Corp. and Coca-Cola Bottlers Philippines Inc. (CCBPI) made a significant impact on sales, with CCBPI contributing P6.7 billion for May and June, and Pure Foods accounting for P3 billion.

In the second quarter, sales reached 9 billion. The operating income for the semester increased by 29% to 5.2 billion compared to 4.0 billion last year. This growth in income was supported by positive results from all of the Company's businesses. As a result, SMC recorded a consolidated net income of 3 billion.

With a net income of P8 billion in the first half of the year, Pure Foods and CCBPI recorded increases of 10% from last year's P3 billion. As San Miguel continues to integrate its operations, synergies are expected to be more noticeable in the near future. The company aims to improve customer service by creating a

Corporate Key Accounts Group (CKAG), which combines the key accounts units of San Miguel Beer Division and La Tondena Distillers, Inc.

San Miguel Food Group (SMFG) and Pure Foods are collaborating in the food business, particularly in processed meats and poultry feeds. This collaboration aims to integrate their market positioning, share facilities, technical know-how, and distribution networks. As a result of this partnership, SMC now holds a significant market share, accounting for 74% of the hotdog market, 24% of canned meats, 40% of poultry, 32% of feeds, and 17% of flour milling. Excluding Pure Foods and the coconut oil business, SMFG's first semester revenues reached P9.5 billion, showing an 18% increase compared to the previous year. The operating income for the first half also significantly improved by 219%, reaching P309 million compared to P97 million last year.

Pure Foods' second quarter sales increased by 24% to P3.9 billion, while net income rose by 11% to P190 million. Meanwhile, CCBPI saw an operating income and net income of P322 million and P231 million for the second quarter, representing a 47% and 85% growth from last year, respectively. In SMC's international beer business, the first half showed an operating income of US$282,000, a significant improvement from an operating loss of US$204,000 last year. Sales volumes reached 16, excluding J. Boag ; Son, the Australian brewer.

85 million cases were sold in the first semester. North China saw an 18% increase in sales, while Indonesia experienced a growth of 10%. The total revenue reached US$109 million, which is 3% higher than the previous year's US$106 million. South China achieved a 37% improvement in operating income, thanks to a product

mix favoring the higher margin Pale Pilsen in steinie bottles. Additionally, J. Boag maintained its strong performance with 1.

SMC's beer operations in the Philippines recorded a total of 6 million cases in sales volume, contributing a brewery operating income of US$1 million. The operating income for SMC's Philippine beer operations reached P2.53 billion, which is slightly higher than the previous year's P2.

Fixed costs were carefully controlled, resulting in a reduction of P1.7 billion or 23% in accounts receivables from P7.7 billion as of June 30, 2000 to P6.0 billion as of June 30, 2001 for La Tondena Distillers Inc.

Consolidated sales revenues for the first half of this year amounted to P7.8 billion, a 12% increase compared to last year's P7.0 billion. The growth was driven by the water and juice businesses and the consolidation of Sugarland, which recorded sales of P1.6 billion. Operating income reached P1.

The total sales revenue for the first semester was P7.4 billion, with liquor making up 84% of the total. San Miguel Packaging Products (SMPP) experienced a 5% increase from last year's P7.1 billion, mainly due to improvements in paper and two-piece cans.

In the first half, operating income reached P849 million. For reader convenience, income statement figures can be converted at the exchange rate of US$1 = P50.00 (see EXHIBIT 4). According to a press release from SMC on February 27, 2002, stockholders of San Miguel Corporation (SMC) approved an increase in SMC's authorized capital stock from P15 billion to P22.5 billion. Additionally, they waived their pre-emptive rights to the issuance of 442.56 million class "B" shares.

The approval and waiving of pre-emptive rights will allow Kirin Brewery Co., Ltd.

to acquire a minority stake in SMC. According to an agreement between San Miguel and Kirin in December 2001, the Japanese company will subscribe to 442.

San Miguel Corporation (SMC) is issuing 6 million new SMC "B" shares at a price of P63 per share. The stake acquired by Kirin, approximately 15 percent of SMC's increased capital, will give the Japanese company the right to appoint two representatives to the San Miguel board. This transaction has a total value of P27.88 billion or $536 million and is anticipated to be completed in early March 2002.

According to SMC, the investment made by Kirin, Japan's leading brewer and one of Asia's largest conglomerates, will bolster San Miguel's presence in the food and beverage industry and provide them with flexibility in the challenging economic environment. Additionally, it will enable San Miguel to effectively utilize its resources and expand in existing and new businesses that benefit both its shareholders and the Philippine economy. SMC noted that Kirin's decision to invest in San Miguel not only reflects confidence in the company's ability to achieve profitable growth but is also a strong endorsement of the Philippine economy. This move underscores Kirin's belief that the Philippines is a strategic market and a valuable stepping stone in their efforts to strengthen their presence in the Asia-Pacific region.