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24

April 2020

AYALA CORPORATION 2020 ANNUAL STOCKHOLDERS’ MEETING MESSAGE OF THE PRESIDENT

AYALA CORPORATION ASM SPEECH
2020 ANNUAL STOCKHOLDERS’ MEETING
MESSAGE OF THE PRESIDENT & COO FERNANDO ZOBEL DE AYALA
APRIL 24, 2020

Good morning to everyone.

Let me begin by thanking all of you for your continued support and confidence in Ayala. The past year was a trying time for our group as we confronted an unprecedented situation in Manila Water and our Metro Manila concession area. The water supply shortage that emerged in March 2019 impaired the high standards of service Manila Water has maintained over the past 23 years.  Several factors led to this unfortunate incident. While the situation was compounded by low dam levels brought about by the prolonged dry season last year, the main reason for the shortage was the delay in new water source development under the government’s Water Supply Master Plan.

In order to prevent this from happening again, Manila Water is working closely with MWSS and this administration on the timely execution of the Water Supply Master Plan. Several medium-term water supply projects are now in various stages of development. These projects will provide additional water supply for the growing water demand of our East Zone customers in the coming years.

These initiatives, along with the continued network management and optimization program, has enabled water availability for customers to be maintained within regulatory levels despite a lower raw water supply.

Although we faced significant challenges in both our water and global manufacturing businesses in 2019, our real estate, banking, telco, and power units continued to serve as engines of growth. This validates the strength of a diversified portfolio and the expansion strategy we put in place a decade ago.

We are happy to report that in 2019, Ayala recorded ₱35.3 billion in net earnings, an 11 percent increase from 2018. This was lifted by gains from the partial divestment of AC Energy’s thermal assets as it moved towards the creation of a larger portfolio of renewable energy assets and the merger of our education arm with iPeople.

Our results, however, were weighed down by the recognition of a remeasurement loss of ₱18.1 billion arising from a likely reduced stake in Manila Water, whose shareholders are being asked to approve an increased number of shares to open up opportunities for a strategic investor.  We believe a partnership with a strategic investor will accelerate Manila Water’s long-term strategic direction, including its regional aspirations. Over the past decade, Manila Water has established itself as a major water infrastructure player in Southeast Asia with investments in various platforms across Vietnam, Thailand, and Indonesia and today continues to be on the lookout for opportunities in the region.

Let me now touch on the performance of our business units in greater detail.

Ayala Land continued to reap the benefits of its diversification strategy to achieve a better balance between its development and recurring income portfolio as well as in its geographic concentration. Its net profits rose 13 percent to ₱33.2 billion, supported by office and commercial and industrial lot sales as well as a growing leasing operation.

Ayala Land’s geographic diversification continued, with new estates contributing 58 percent to its bottomline as the development of these new areas accelerates. With over 12,000 hectares of landbank, 29 estates, and a presence in 57 growth centers across the country, Ayala Land offers a balanced and complementary mix of residential developments, shopping centers, offices, hotels and resorts. These estates contribute to progress and growth in the many communities they serve through various livelihood and entrepreneurial opportunities and increased economic activity.

Bank of the Philippine Islands continued to work towards its goal of improving its earnings capacity and shareholder returns by focusing on its core lending business and increasing efficiencies through technology. In 2019, the bank’s net earnings reached ₱28.8 billion, jumping 25 percent from 2018 on strong core banking business revenues and a steadily growing fee-based segment, supported by higher securities trading gains.

Consistent with the Ayala group’s thrust to support the growth of MSMEs in the country, BPI aims to reach a greater number of our retail, micro, and SME lending segments, which continues to be underserved today.  MSMEs form an integral part of the Philippine economy, making up 99 and a half percent of businesses, 60 percent of which are microentrepreneurs. In addition, they employ 63 percent of the Filipino workforce and contribute to 35 percent of the country’s GDP.

In 2019, BPI continued to ramp up its microfinance arm BPI Direct BanKo, with 300 branches, servicing more self-employed microentrepreneurs nationwide. Only three years since its relaunch, BanKo is now the second largest microfinance bank in the country having doubled its loan portfolio to ₱4.3 billion. 

BPI’s SME group, the two-year old Business Bank, is likewise gaining traction, particularly in the mass market or loans below ₱15 million. This segment expanded more than fourfold in approved loan applications, reflecting the bank’s dedicated coverage of this customer group.

Globe continued to benefit from high demand for data-related products and services. The 20 percent expansion in its net income to ₱22.3 billion was bolstered by data-driven customers across its mobile and broadband segments. It is worth noting that data-related services accounted for over 70 percent of Globe’s service revenues, which grew 12 percent to ₱149 billion during the year.

Globe continues to harness an increasingly digitally enabled economy to promote financial inclusion through its mobile wallet GCash. As our Chairman mentioned, GCash is the number one mobile wallet in the Philippines today with 20 million registered users and over 75,000 QR merchants and partner billers. To enable access to more financial services to the unbanked population, GCash introduced GSave, which allows first time depositors to participate in the formal banking system. GSave offers a competitive interest rate with no minimum initial deposit or maintaining balance requirement.

AC Energy registered net profits of ₱24.6 billion in 2019, lifted by contributions from its solar projects in Vietnam and gains from the partial divestment of its thermal assets. AC Energy increased its attributable energy output in 2019 by 25 percent to 3,500 gigawatt hours, of which 50 percent came from renewable sources. Given the increasing contribution of AC Energy to Ayala’s equity earnings over the past three years, we have started to classify AC Energy as one of our core business pillars together with Ayala Land, BPI, and Globe.

As it moves away from thermal energy, AC Energy continues to aggressively build up its renewable portfolio. It ended 2019 with an attributable capacity of over 1,800 MW, with 50 percent of total energy output coming from renewable sources. In addition, it has 1,200 MW of various solar and wind projects in the pipeline, bringing it on track to achieve 5,000 MW of renewable capacity by 2025. To support these aggressive targets, AC Energy tapped the capital market through the issuance of two Green Bonds, raising US$810 million in combined proceeds.

Moving to Manila Water, as mentioned earlier, the challenges in the East Zone concession weighed on Manila Water’s performance in 2019. The water crisis took a toll on Manila Water’s profitability, which declined 16 percent to ₱5.5 billion. Business performance was dampened by the impact of the MWSS penalty and a voluntary one-time bill waiver program to assist severely affected customers. This was further affected when raw water allocation from Angat Dam hit its lowest in July. To mitigate this, Manila Water implemented network efficiency measures to maintain service availability and be able to serve more than 7 million people in the East Zone.

Manila Water likewise continued to work towards its goal of providing 32 percent wastewater coverage of the East Zone by 2021. Wastewater coverage currently stands at over 30 percent or equivalent to two million people served through nearly 400 kilometers of laid sewer network. This was only at three percent before Manila Water took over operations from MWSS in 1997.

AC Industrials faced a challenging year due to the difficulties in global manufacturing and the automotive industries. These challenges also included the impact of geopolitical tensions, such as the US-China trade conflict and the prolonged uncertainty on Brexit. These macro headwinds together with the disruptive changes currently affecting many key industries have created a challenging environment for worldwide manufacturing and trade.

In the electronics space, intensifying competition posed operational challenges for companies like AC Industrials, particularly its anchor manufacturing arm, IMI, and new platforms, Merlin Solar and MT Technologies. These challenges resulted in longer fulfillment times and higher material costs. Meanwhile, automotive sales likewise experienced weakness and the industry’s megatrends of connectivity, autonomy, sharing, and electrification continued to disrupt the industry. In this difficult environment, AC Industrials recorded a net loss of ₱2.4 billion in 2019.

During these trying times, we take comfort in the fact that AC Industrials retains specialized technical resources such as advance manufacturing engineering as well as proprietary technologies, including power electronics, camera and vision, smart energy, and connectivity, which all serve as the foundation for future growth.

Finally, we continue to support our long-term investments in infrastructure, healthcare, and education. AC Infra is building up its logistics and fulfillment arm, Entrego, which posted a compounded monthly growth of 14 percent in volume throughout the year. This growth was underpinned by the rising demands of the e-commerce and retail sectors for B-to-B and B-to-C logistics services. Entrego also launched an automated sorting center to drive operational efficiencies and processes.

AC Health acquired a 100 percent stake in Healthway, one of the leading clinic networks in the country. The addition of Healthway’s 7 mall-based multi-specialty clinics and 40 corporate clinics expands AC Health’s clinic portfolio, which today includes 74 FamilyDOC primary care clinics and 10 corporate clinics. It also expanded its pharma portfolio with new investments in IE Medica, one of the major importers of pharmaceutical products in the country, and MedEthix, its affiliated distribution company.

AC Education’s merger with iPeople in 2019 has significantly broadened our education footprint. Our student population has grown from 38,500 before the merger to approximately 60,000 students. The merger has resulted in several synergies, including leveraging the various schools’ complementary strengths to improve the student learning experience and producing greater operational efficiency.

As the Ayala group continued to be optimistic about the domestic macroeconomic environment, our combined capital expenditure reached ₱215 billion in 2019. At the parent level, our balance sheet remained strong with enough capacity to support our future investments and cover dividend and debt obligations. In 2019, we paid ₱8.30 per share in cash dividends, 20 percent higher than its 2018 level. We likewise took advantage of favorable market conditions to raise capital. These included the US$400 million in fixed-for-life senior perpetual notes with an annual coupon of 4.85 percent for life with no step-up, and the ₱15 billion in preferred shares.

In closing, at Ayala, we constantly strive to deliver a more holistic engagement with the communities we serve and we make sure that we create a meaningful, lasting impact in conjunction with our economic aspirations. This desire to help bridge societal gaps has been embedded in our corporate culture and will continue to define our direction in the coming years. We are fortunate to have so many individuals in our institution who share this thinking and enable its execution across our many companies in the Ayala group.

This kind of engagement from our Ayala citizens is evident as our group, along with individuals and institutions collectively do their part in responding to the COVID-19 pandemic.

In these unprecedented times, it is the Ayala group’s foremost priority to ensure the safety of its employees while at the same time securing their financial health. With this in mind, the group has allocated ₱2.4 billion in a relief package to assist our employees, including the daily wage earners or no-work-no pay personnel.

Furthermore, to help mitigate the impact of the Luzon-wide enhanced community quarantine on the urban poor, together with 36 other private institutions, we launched Project Ugnayan to support those who are most in need of help at this time. Through this effort, the consortium has raised over ₱1.7 billion for food vouchers for more than one and a half million urban poor families or approximately 7.5 million of our most vulnerable countrymen in Greater Metro Manila. We worked closely with Caritas Manila and the over 600 parishes of the Catholic Church for the distribution of 1000 peso supermarket vouchers.

These efforts are similarly present across our business units. Ayala Land employees have so far raised ₱71.4 million to help COVID hospitals and Project Ugnayan. In support of the Department of Public Works and Highways’ initiative and through its construction arm, Makati Development Corporation, Ayala Land is in the final stages of the renovation of the World Trade Center in Pasay into a 500-bed quarantine facility.

To aid in the shortfall of personal protective equipment, Ayala, Ayala Land, BPI, and Globe donated to the Philippine Red Cross who facilitated the distribution of over 200,000 face masks to several hospitals in Metro Manila and other front liners in the government, as well as 104 PRC chapters nationwide. Furthermore, Ayala and Ayala Foundation have set aside over ₱15 million to procure additional masks and vitamins for donation to various hospitals and local government units throughout the country, which will be done through AC Health.

Meanwhile, Manila Water, recognizing the importance of sanitation in these times, has donated 1,800 hygiene kits and deployed much needed drinking water to six Quezon City hospitals.

Globe, mindful that efficient communication lines are necessary in battling this crisis, has donated 500 cellphone units to public hospitals and now provides free internet connection to 68 hospitals nationwide with free calls to emergency and government hotlines available to all users.  Globe has also raised ₱43 million from its employees and customers through various donation drives to help hospitals.

AC Health has more than 1,500 employees in its clinic network who are reporting daily, continuing to operate as extended frontliners, and are able to help in the triage efforts of the government and private hospitals. Generika continues to operate and offer medicines at very reasonable prices.

In addition, to help our healthcare system with the growing number of COVID-19 cases, AC Health is leading the Ayala group’s efforts to convert Qualimed Sta. Rosa into a COVID-19 dedicated hospital. This initiative will cost ₱150 million.

Finally, AC Health will work in partnership with other external stakeholders to build a COVID-19 testing facility that will give more Filipinos access to testing.

Apart from bolstering our support to the healthcare system and our economically vulnerable countrymen, we also continue to ensure that the essential services we manage such as water, banking, and telecommunications continue to operate. Select BPI branches remain open with all OTC branch fees and transfer fees to other banks waived during this period. BPI has also offered a grace period and relief options for affected clients with financial obligations to BPI.

Manila Water, while operating with a reduced workforce, has been able to continue providing basic services during this time. Likewise, AC Energy’s plants are sufficiently manned to operate at full capacity and provide vital electricity to our grids. Meanwhile, Globe is doubling down in its efforts to ensure that its network stays reliable and consistent.

Through all these efforts, we hope to instill faith and confidence in the Filipino people. The Ayala Group is ready to carry on and support the country in our battle against COVID-19.

In closing, Ayala owes its success to the commitment of our shared vision across the whole group’s management team and staff, the guidance and leadership of our Board of Directors, and the trust and confidence of our many stakeholders.  We thank you all for your continued commitment and support.

Thank you.