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Press Releases

26

April 2019

AYALA CORPORATION 2018 INTEGRATED REPORT CHAIRMAN’S MESSAGE

Fellow shareholders,

Let me begin with a review of the macroeconomic environment we faced in 2018 to provide some perspective on the economic forces that defined our business environment in the past year.  The macro-economic setting provides a crucial framework for the delivery of our business results, given our diversity as a multi-business investment house and the many touch points we have across our economy.

On the global front, the world economy was unable to sustain the positive momentum of the previous year, largely fueled by the Federal Reserves’ aggressive interest rate hikes in reaction to an expanding US economy. In addition, the rising trade tension between the US and China, as well as political uncertainties in Europe, dampened global business and investor confidence during the year. These developments trickled down to the ASEAN economies, with most economies in the region experiencing tempered growth as external risks weighed on local demand and exports.

Here at home, the economy expanded 6.2 percent in 2018, slower than the 6.7 percent growth recorded in the previous year, as inflation surged to a 10-year high but still with enough positive momentum to keep our growth initiatives in place. Higher global oil prices, food supply problems, the weaker peso, and the impact of the tax reform law put pressure on local prices at the end of 2018. However, many analysts believe that a recovery is forthcoming as inflation softened at the start of 2019, falling to a one-year low of 3.8 percent this last February.

It is also encouraging to see that, even amidst slower growth, investment spending continues to climb as government ramped up its infrastructure agenda and businesses continued their capacity expansion initiatives. Investment spending as a percentage of GDP improved to 27 percent, the highest since 1996.  This should be seen as a significant contributor to sustainable growth for the country.  Similarly, household consumption growth only slightly decelerated to 5.6 percent, still one of the strongest in the region.

We are happy to report that Ayala has been able to sustain its growth trajectory, within this economic environment. We believe that this continued momentum in our performance validates our long-term strategy of building a more resilient portfolio by investing in a combination of new industries undergoing disruption and expanding on our strong franchises.

As we took advantage of the favorable domestic environment, we invested an unprecedented level of capital across the Ayala group. Over the past 10 years, our group has spent ₱1.4 trillion in capital expenditure to lay the foundation for our ambitious growth aspirations in our core businesses and scale up our emerging businesses.

Throughout the years, we have always prided ourselves in our ability to incubate industry-leading businesses by allocating new capital, setting up the appropriate governance frameworks, using our group corporate infrastructure and assigning committed and effective talent. Our real estate, banking, telecommunications, and water units are distinct examples of our business-building ability – developing them from the ground up and nurturing them to become dominant industry players. 

More recently, we have been directing more of our resources into our new business platforms in energy, industrial technologies, infrastructure, healthcare, and education. Since 2009, we have invested nearly ₱200 billion at the parent level to help these businesses build scale while employing an active portfolio management approach to either realize value or drive the businesses, alone or with partners.

The bulk of our capital expenditure at the parent level was deployed to AC Energy, which has started to be a significant contributor to our portfolio. With its operations now beginning to show predictability and combining this with some opportunities for value creating divestments, we are pleased to see AC Energy starting to provide the necessary revenue and income balance to some of our more cyclical and longer gestation businesses.

AC Energy is now one of the fastest-growing power companies in the region having only started in 2011, with attributable generating capacity of over 1,600 megawatts across renewable and thermal platforms. It has recalibrated its strategy to focus on renewable energy, with a target to assemble five gigawatt hours in capacity across solar, wind, and geothermal technologies by 2025. AC Energy has a pipeline of renewable projects in the Philippines, Vietnam, Australia, and Indonesia, which it has identified as priority markets. 

More importantly, AC Energy has developed financial self-sufficiency and no longer requires capital deployment from Ayala to fund its expansion strategy. A testament to its ability to raise capital independently is its successful issuance of US$410 million in a Green Bond offering, the first publicly syndicated US dollar Green Bond in Southeast Asia, to be certified by the Climate Bonds Initiative. Moreover, it will start upstreaming capital back to Ayala through regular dividend payments beginning in 2019.

Meanwhile, the rest of our emerging businesses are in varying stages of maturity. AC Industrials continues to build its portfolio and now houses platforms in global manufacturing, proprietary enabling technologies, and high value products for end markets. Its automotive retail and distribution segment, AC Motors, now counts Kia Motors in its portfolio of vehicle brands in addition to Honda, Isuzu, Volkswagen, and KTM. Kia is a solid global brand with a wide range of products that built a strong foothold in our local motoring culture over the past two decades.

AC Infrastructure has entered the logistics space, a fast-growing sector boosted by rising consumer demand and growing e-commerce adoption. In 2018, we spun off Zalora’s last-mile delivery services into Entrego, a technology-driven, end-to-end, logistics and fulfillment solutions provider. After its launch in March 2018, it now services the largest e-commerce players in the country as well as clients from various industries.

In education, we are awaiting regulatory approval for the merger of AC Education with iPeople, the Yuchengco group’s education platform that houses the Mapua University portfolio. The merger brings together the seven educational institutions of the two groups, which together will offer quality education to students across all income segments and across their campuses in various parts of the country.

Meanwhile, AC Health continues to ramp up its retail healthcare footprint. We are proud to say that FamilyDoc, our community-based 3-in-1 clinic, laboratory, and diagnostics facility, is now the largest chain of primary care clinics in the country with 54 branches across Greater Metro Manila. AC Health has a target to open 100 clinics by 2020.

Alongside these developments, we are undergoing a transformation journey across the group to build a Digital and Future-Ready Ayala. We recognize that to continue thriving under a rapidly changing environment, we must evolve from traditional analog thinking into incorporating a digital perspective into our strategy and operations.

As you know, we have started to participate in businesses that are part of the current digital wave; particularly in e-commerce, fintech, and healthtech.  These investments are designed to complement our group’s traditional brick-and-mortar operations, future-proof our existing portfolio, and broaden the digital experience of Filipinos.

Our group spent significant time studying other markets last year that are in the advance stages of digital maturity and we have allocated resources to platforms that provide some visibility into emerging trends and technologies. Absorbing and learning from these experiences, we have become more deliberate and unified in mapping out our own digital transformation journey and have elevated it into a group-wide strategic agenda.

Underpinning our transformation framework are five critical components:

·     We will continuously look for ways to disrupt and digitally transform our core businesses to ensure that our companies remain relevant to our partners and stakeholders in this environment that is quickly being redefined by technology.

·     We will look to learn from and invest in emerging technologies and trends at an early stage.  More importantly, we are aiming to build new business models to take advantage of these developments.

·    We will be bolder and more deliberate in our venture capital strategy, seeding new ideas and disruptive businesses, and supporting forward-thinking entrepreneurs with scalable, innovative models.

·     We recognize that data and analytics will be a key strategic discipline and skill set in the future and are thus establishing a center of excellence to participate in and build competence in this space.

·     We are committed to upskilling and empowering our talent base to help them adjust quickly to these changes and to institutionalizing a culture of curiosity, courage, and collaboration, so that we remain ready for the challenges of a digital world.  

We are aware of the long and challenging road ahead in this digital transformation journey. However, with the engagement of our people across all levels, we are confident that the Digital and Future-Ready Ayala that we are aspiring for can be built within the foreseeable future.

As a final word, I want to thank you all for your consistent support to Ayala and our institutional evolution throughout the years. As we celebrate our 185th anniversary this year, it gives us a great sense of pride to see how we have been able to contribute to the country’s economic and social landscape through our businesses.  These have had a significant multiplier effect on our communities:  from the capital we deploy, from the taxes we pay, to the jobs we provide to thousands of individuals as well as to the reinvention we galvanize across multiple products, services, and entire industries.

Our contribution to the country’s economic, social, and environmental agenda has become part and parcel of the way we do things, and I have always believed that this value proposition will remain to be an important cornerstone of our long-term success as an institution.

JAIME AUGUSTO ZOBEL DE AYALA

Chairman and Chief Executive Officer