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Press Releases

26

April 2019

FERNANDO ZOBEL DE AYALA PRESIDENT’S REPORT AYALA CORPORATION | ANNUAL STOCKHOLDERS’ MEETING

Fellow shareholders, colleagues in the Board and management, ladies and gentlemen, good morning to all of you.

Before anything else, I believe it is important to address the recent setback that we experienced at Manila Water and our concession area. The water supply shortage has impaired the high standards of service Manila Water has maintained for over 20 years.  A number of factors led to this unfortunate episode, and our team has worked closely with government to improve the situation.

From a low of almost 70% water availability during the first 2 days after breaching the La Mesa critical level of 69m, we are now at 99% water availability of at least 8 hours at the ground floor level or at 7psi. While we still have some service issues which we are managing, the progress of recovery initiatives has been encouraging and steady. We are monitoring the situation closely, although the prolonged summer will be challenging. As most of you know, a key part of this problem was that no new water sources were developed by past MWSS administrations despite our constant warnings of the emerging shortfalls given the rapid growth of the population in Manila. As agent and contractor of MWSS, our mandate is treatment and distribution while MWSS takes the lead in developing new raw water sources. We thank this current the administration for extending the necessary support and ensuring close collaboration with Manila Water in addressing the water supply shortage and in updating the Water Security roadmap. We will not stop working on this problem until it is fully resolved. Critical to this process will be the development of new sources of water so we can finally achieve adequate water security for the East Zone concession area.

As with all the challenges that we face as an organization, we must learn from these experiences and use them to strengthen our systems and make sure that this does not happen again.

Let me now move on to my report of Ayala’s performance in 2018. Despite some setbacks in the domestic environment, we are pleased to report that Ayala ended the year with a net profit of 31.8 billion pesos, five percent higher from a year ago, boosted by our real estate, telecommunications, and power businesses. It is encouraging to see that our investments in AC Energy have come to fruition as the company starts to provide a significant contribution to our earnings and value creation.

These results keep us on track for our five-year target of doubling our net income to 50 billion pesos by 2020.

Included in our 2020 aspirations is a strategic imperative to diversify our earnings stream outside our four established businesses, Ayala Land, BPI, Globe, and Manila Water by ramping up the contribution of our new growth platforms. At the end of 2018, our emerging businesses accounted for 15 percent of our equity earnings, largely driven by AC Energy.

As our Chairman alluded to, the past 10 years marked Ayala’s aggressive expansion with record-high investments across the group. It was a period where we saw consistent profitability growth, with our net income expanding at a compounded annual rate of 15 percent over the past 10 years.

With this record-high capital expenditure and solid profitability growth, our balance sheet remains healthy with enough capacity to undertake investments and cover our dividend and debt obligations. As of end of 2018, parent level cash was at 8.5 billion pesos, while net debt was at 95.9 billion pesos. Loan-to-value ratio or the ratio of parent net debt to the total value of its assets stood at a comfortable 11.8 percent. On the other hand, the cash flow adequacy ratio is currently at 1.66x.

Our peso-dollar debt split was at 64:36 for 2018. Ayala’s dollar denominated debts are fully covered by foreign currency assets. Our average cost of debt was at 4.6 percent.

As the world demands a more holistic engagement from businesses, with accountability to the broader environment and not just their shareholder group, we constantly strive to deliver a meaningful, lasting impact on society together with our economic aspirations.

As we celebrate Ayala’s 185th anniversary this year, one of the most significant changes in our recent corporate history is the greater focus that we have placed in terms of capital, time, and energy to truly align our business objectives with the development needs of the country. This philosophy has become a key part of our strategy and decision-making process.

To institutionalize this perspective, we designed a long-term sustainability blueprint that lays out actionable and measurable targets that address critical environmental, social, and governance gaps that the country faces today. We identified marginalization, large untapped potential of our human capital, and irresponsible growth leading to long-term environmental damage as the three critical challenges our group can focus on.

The Ayala Sustainability Blueprint, specifically designed to support the achievement of the UN Sustainable Development Goals by 2030, will enable us to be more deliberate in monitoring and evaluating our sustainability targets and will help us allocate resources to these initiatives more appropriately. Moreover, this greater level of transparency imposes greater accountability for us to execute on these aspirations.

Under the blueprint, we will focus on contributing to the achievement of three pillars where we believe our businesses can generate the most significant and lasting impact. These are: access and inclusivity, productivity and competitiveness, and responsible growth and innovation. Let me discuss this in greater detail by citing examples of our initiatives across the Ayala group in support of these three pillars.

Let me start with the first pillar, access and inclusivity. While the country has shown very positive growth over the past decade, we continue to see the challenge of making sure that this progress benefits a much larger percentage of the population. We have always believed that in a developing economy like ours, businesses play an important role in addressing this continuing challenge of closing the income gap and ensuring broad based development. This is not just for the government to do.

You may have noticed that across the Ayala group, we have made a conscious effort to help spread our country’s economic gains across all socio-economic groups. Our real estate, banking, telecommunications, and water businesses have expanded their products and services and have diversified geographically to reach a much wider demographic and help drive economic progress in different parts of the country.

Ayala Land has expanded towards affordable and socialized housing, launching two new residential brands, Amaia and Bella Vita, that cater to much lower price points. 

Globe initially only targeted the top-end post-paid market, but over time has aggressively expanded into the prepaid segment which has allowed the company to give mobile access to a much larger percentage of the population. 

We have always regarded our human capital as one of our strongest competitive advantages as a country. Filipinos are well-regarded internationally for our resilience, flexibility, and creativity. Through our investments in education and healthcare, we hope to be able to harness the full potential of Filipinos’ natural strength by helping nurture their intellectual, mental, and physical well-being. We have seen opportunities for positive disruption, particularly in providing quality and affordable education and healthcare.

[Show on slide: SDG 4: Quality education]

Let me touch on our education business. We all know how the Philippines is entering a demographic window that has the potential to create a highly productive workforce over the next decade. However, we need to equip this young population with the relevant skills to prepare them for the major changes in employment requirements of the future. 

It is disheartening to see that the lack of sufficient access to affordable quality education has led to massive dropout rates and quality issues across all educational levels in the country. At Ayala, we see this as an opportunity for positive disruption, and a chance to contribute to our country’s human capital development.

Through our APEC Schools, now the largest chain of stand-alone private high schools in the country, Filipino students receive the education they need to go on to college, or to find entry level professional employment. We are pleased to report that APEC is able to produce graduates who are IT-literate, possess effective business communication and critical thinking skills, and are equipped with broadly applicable service, sales and support skills, as well as industry and job-specific knowledge. Its learning modules also provide its students with valuable soft skills and work habits such as persistence, reliability, integrity, and curiosity.

It is encouraging to see many of the first cohort of APEC graduates make it to a college of their choice. We saw a high acceptance rate among those who applied to selective colleges such as PUP, UP, PLM, FEU Tech, UST, La Salle and Ateneo. Meanwhile, among those who sought employment after graduation, at least 80 percent were employed within 120 days, with significantly above average starting salaries, comparable to those of college graduates. APEC is still in its early stages and we aim to improve these numbers further in the coming years. 

[Show on slide: SDG 6: Clean water and sanitation]

Manila Water continues to expand its footprint across the Philippines and in the Southeast Asian region. Last year, it won 11 new projects and invested in water companies in Thailand and in Indonesia.

[Show on slide: SDG  3: Good health and well-being]

AC Health is establishing itself as a key player in the Philippine healthcare industry through its rapid expansion in preventive care, the sale of affordable generic medicine, and health technology, with future investments in hospitals and specialty care.

With 54 clinics, FamilyDOC is now the largest chain of primary care clinics in the country. Having served over 250,000 unique patients, it is focusing on preventive care at the primary care level, rather than just curative treatment. Through its program called “Double Check”, FamilyDOC wants to improve Filipinos’ perception on preventive care by increasing the number of doctor visits to twice a year from the average of once every two years.

Similarly, Generika is expanding its wellness products offering health consultations and laboratory packages at affordable price points. 

Through its corporate heath solutions platform VigosCARE, AC Health is empowering patients to take ownership of their health through early risk assessment for various lifestyle diseases. 

The enactment of the Universal Healthcare Law will provide a boost to these initiatives and will allow AC Health to capture new opportunities around the country’s healthcare ecosystem.

The second sustainability pillar I want to highlight is productivity and competitiveness. The Ayala group has always supported the country’s efforts on infrastructure development, aligning our own strategy to support the government’s agenda. Our entry into the water distribution and telecommunications sectors during the privatization and liberalization of industries in the 1990s are clear examples of this philosophy.

More recently, we entered the power and transport sectors to contribute to accelerating the development of much-needed physical infrastructure that supports the connectivity and mobility requirements of a growing economy.

[SDG 11: Sustainable cities and communities]

From three major estates in the 1990s including Makati, Ayala Land now has 26 estates spanning 57 growth centers nationwide. All these estates are sustainably and functionally designed, providing a better quality of life as well as economic progress within and around those areas through employment and entrepreneurial activities. These estates feature Ayala Land’s different product lines—from residential, shopping centers, offices, as well as hotels and resorts.

[SDG 11: Sustainable cities and communities]

One of Ayala Land’s newer business lines is our hotels and resorts portfolio, which is building on the massive potential of tourism as a growth engine for the country. I have always been a strong advocate of tourism development for its natural ability to promote social and economic inclusivity by generating mass employment and integrating local communities into the value chain. 

[SDG 9: Industry, Innovation, and Infrastructure]

Globe’s foresight and aggressive growth strategy has enabled a digital revolution in the Philippines, changing the way Filipinos connect and altering their consumer preferences.. As early as 2010, Globe had already seen the market shift towards smartphones and data.

[SDG 9: Industry, Innovation, and Infrastructure]

It is continuously investing and upgrading its network while ramping up its digital content offerings to connect a greater number of Filipinos to the internet.

[SDG 8: Decent work and economic growth]

Similarly, through mobile technology, Globe is helping address economic inclusivity by making financial services more accessible across a broader demographic.

[SDG 9: Industry, Innovation, and Infrastructure]

AC Infra continues to help augment the increasing infrastructure capacity requirements as a result of a growing digital economy.

[SDG 9: Industry, Innovation, and Infrastructure]

Last year, it set up Entrego, a logistics and fulfillment solutions platform, to capture the strong growth of e-commerce in the Philippines. Entrego is expanding its presence nationwide with its 54 hubs covering 95 percent of the country, serving clients in various industries such as e-commerce, fintech, telco, and financial services.

[SDG 8: Decent work and economic growth]

As our Chairman mentioned earlier, over the past 10 years, the Ayala group collectively deployed 1.4 trillion pesos in capital expenditure and paid 404 billion pesos in taxes to the government.

[SDG 8: Decent work and economic growth]

We are proud to say that the Ayala group is one of the largest employers in the country, providing employment opportunities to over 130,000 individuals.

[SDG 8: Decent work and economic growth]

BPI’s digital transformation is addressing financial inclusion as it facilitates higher engagement with the unserved and underserved segments of the population, particularly the micro, small, and medium enterprises and the lower-income consumer segments. With increased efficiencies and lower cost, digitalization will make financial inclusion truly sustainable.

[SDG 8: Decent work and economic growth]

In addition, BPI continues to ramp up its microfinance arm, BPI Direct BanKo. Since its creation three years ago, BanKo has disbursed loans amounting to over 4 billion pesos to nearly 56,000 entrepreneurs. Its number of branches has grown to 200 at the end of 2018. BanKo is targeting to grow its loan portfolio by six to seven times by 2022.

 The third and final pillar that I want to discuss is around responsible growth and innovation. Part of creating sustainable long-term value is holding ourselves accountable not only to our stakeholder community but to the physical environment where we operate. In recent years, we have increasingly placed high importance on how we can contribute to achieving a low carbon and climate resistant environment.

[SDG 13: Climate action / SDG 12: Responsible consumption and production]

Two years ago, Ayala Land announced a target for its commercial properties to achieve carbon neutrality by 2022. We are happy to report that 62 percent of its emissions are now offset by its 560-hectare carbon forest and its properties’ increased reliance on renewable energy sources.

Manila Water continues to look for more ways to improve its efficiencies, in the way it serves its customers and in developing new products and solutions. We are excited about its new initiatives on solid waste management and its potential to help solve our country’s huge waste disposal problem. Waste management is a sector that is ripe for disruption and presents opportunities which Manila Water can capture in a responsible and sustainable manner.

SDG 7: Affordable and clean energy

Over the past couple of years, AC Energy has deliberately redesigned its strategy to focus on renewable energy. It can be recalled that we entered the sector at a time when the Philippines was faced with a looming power shortage and needed reliable and affordable baseload capacity. Since then, the economics, efficiencies, and the ability to build renewable technology to scale has improved significantly. AC Energy is taking advantage of this opportunity and has since overweighted its investments in this space, particularly in solar, wind, and geothermal. In 2018, it generated 2,800 gigawatts of attributable energy, 48 percent of which came from renewable sources.

SDG 7: Affordable and clean energy

AC Energy is committed to scaling up its renewables portfolio and has set a target of achieving five gigawatt hours in capacity across these renewable technologies by 2025, with renewables contributing at least 50 percent of total energy output.

SDG 7: Affordable and clean energy

The 410 million dollars Green Bond it raised early this year will be used to fund solely renewable energy projects.

[SDG 9: Industry, Innovation, and Infrastructure]

AC Industrials continues to assemble a portfolio of global businesses that are in disruptive technologies and rapidly-transforming industries such as manufacturing and automotive. In 2018, it acquired US-based solar technology firm Merlin Solar, which owns a portfolio of proprietary technology that complements AC Industrials’ core strength of providing manufacturing scale through IMI’s global platform. Moreover, it is broadening its display technology capabilities through a joint venture with Toppan. Headquartered in Japan, Toppan allows AC Industrials to offer new solutions for customers in consumer electronics, automotive, and industrial markets.

Closing

These are just some examples of our initiatives across the Ayala group that we believe lay the foundation for us to undertake this ambitious sustainability journey through 2030. This desire to address social and economic inequity and environmental sustainability and our deep commitment to the development of our country, is embedded in our corporate culture and will continue to define our direction in the coming years.

We are fortunate to have individuals in our institution who share our holistic view that beyond traditional financial metrics, a truly sustainable business is one that considers itself as operating within a broader social fabric. We are aware of the challenges that we will face along the way, but we are confident that we will come out stronger than ever as what we have done over the past 185 years.

As a final word, I thank our Board of Directors for their guidance and foresight, our management and staff for their strong engagement across our many initiatives, and once again, our customers, shareholders, business partners and all our stakeholders for their continued trust and support to the Ayala group.

I now invite you to watch our corporate video which describes our philosophy of constantly seeking ways to be relevant, growing with the communities we serve, and seeing the potential in the challenges we face every day.

Thank you.