LETTER TO OUR STOCKHOLDERS
To the Stockholders and Friends of MVC:
The economic malady that befell the Asian region during the second half of 1997, which was characterized by devaluation, rise in interest rates and tight credit, took a heavy toll on business, including manufacturing. Your Company, Mabuhay Vinyl Corporation, did not escape this period unscathed but because of its inherent strength in being a multi-product producer, MVC withstood all the threats and in fact, even broke its bottom line record on a consolidated basis, registering an all time high of P112.1 million profit.
It should be of special interest for MVC investors to note that the alliance your company forged with Tosoh Corporation, Mitsubishi Corporation and the Bank of the Philippine Islands in establishing Philippine Resin Industries, Inc. (PRII) has started to bear fruits. This is in the form of interest income PRII earned from the proper handling of its invested funds from equity contribution while awaiting disbursement for capital items.
The construction of the PRII plant is slightly ahead of schedule. As of the end of April 1998, it is 65.1% complete and is expected to start commercial operation by December 1998. Upon completion, it shall be the largest producer of polyvinyl chloride (PVC) in te country with a capacity of 70,000 MTPY.
MVC continues to reaffirm its ISO 9002 certification for its entire Luzon operations including its Laguna Technopark hypochlorite facility. As proof of MVC's sustained commitment to product quality and services, your Company received for the second consecutive year the "Supplier of the Year" award from one of its loyal customers, Colgate-Palmolive, Phils. Another testimony to MVC's ability to exceed customer satisfaction was the decision of San Miguel Corporation, one of the country's biggest users of liquid caustic soda to appoint MVC, the country's biggest producer of liquid caustic soda as its exclusive and nationwide supplier of the product. This decision of SMC becomes precedent setting since it demonstrates hat the commonly adopted "two-supplier-policy" could be disregarded when there is a real working partnership between the supplier and end-user. Our quest foe excellence should even be more evident with the implementation of a computerization system that would improve communication with customers, contractors, banks and related services.
Your Company completed an incremental expansion of is chlor-alkali plant in Iligan City that included a small sodium hypochlorite plant. With the rapid increase in the demand for the product in Luzon, the Iligan unit will be harnessed to serve the Visayas-Mindanao market. This hypochlorite plant can readily be scaled up as demand warrants. We continue to explore diversification and expansion opportunities, even though market complexion and dimension have been affected by the current economic situation.
It was to the mutual satisfaction of management and labor when the Secretary of Labor handed down its decision to the stalemated negotiations with the rank-and-file labor union. The new Collective Bargaining Agreement should provide industrial peace during its tenure.
Despite the economic uncertainty in the short term brought about by the regional currency turmoil, the petrochemical industry is meeting the year with optimism. It is in 1998 when the world will witness the Philippines attain a world scale petrochemical industry with the establishment of a polypropylene plant in the Bataan Petrochemical Estate and the completion of your own Philippine Resin Industries, Inc. PVC plant.
While addressing the challenges brought about by current condition upon MVC's operation, your Company did not diminish its contribution to the environmental well being of the community. It took an active role in expanding, education and participating in the promotion of solid waste management, which involved the Judge Guillermo B. Guevarra Foundation, the City of Iligan, the Philippine Business for Social Progress, and the local business organizations.
The year will indeed be formidable. There will be greater interplay of economic elements not only domestically but also within the Southeast Asian region. But we are confident that your company will be able to weather these challenges. Our leadership in the market is further strengthened by our dual roles as the biggest manufacturer and largest importer of the products we market. This is complemented by a very healthy balance sheet achieved from years of profitable operations, fiscal prudence in handling your company's finances and various competencies available from strategic partnerships with companies that enhance your company's strengths.
The success we achieved with our operating results in 1997 despite the economic confusion that ensued could not have been possible had it not been for the loyalty and dedication of our employees at all levels. We also wish to acknowledge and express our appreciation to our Board of Directors, our stockholders, creditors, bankers, and most of all our customers for the confidence and patronage they have provided to Mabuhay Vinyl.
Maraming salamat sa inyong patuloy na pagtitiwala.
RICARDO P. GUEVARA
Chairman, President and Chief Executive Officer
EDWIN LL. UMALI
Executive Vice President & Chief Operating Officer
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REVIEW OF 1997 OPERATIONS
MARKETING
Net revenues for 1997 amounted to P1.234 billion reflecting a slight increase over the previous year's figure of P1.228 billion. 1997 sales performance was essentially affected by a 25% average reduction in the domestic selling price of caustic soda. This was due to a dramatic drop in international process. The unstable price brought down revenues from caustic soda by as much as P120 million. All other product lines showed increases in both prices and volumes thus offsetting the effect of the reduction in caustic soda revenues.
There was a modest reduction of 2% in the sales volume of liquid caustic soda due to the entry of new caustic traders and a weakening in the demand towards the last quarter of the year. The general business slowdown experienced by all the industry sectors also reduced total demand for caustic soda. Despite these market conditions, MVC managed to preserve its market share.
Sales volume for Hydrochloric Acid increased by 4% despite the slowdown in economic activity. A 50% reduction in HCl used by a major steel manufacturing company due to the activation of their acid regeneration plant was anticipated early enough. This and the timely investment in a second HCl vessel allowed MVC to service new HCl requirements in geothermal acidizing projects.
Liquid Chlorine volume increased by 19% resulting from increase in demands. Noteworthy is the new and large chlorine requirement of the Hopewell Pagbilao Power Project.
Aggressive selling of PVC resin produced a 6% increase in volume in 1997. Local production was complemented by additional material coming from imports.
The biggest jump of 53% in sales volume came from sodium hypochlorite where MVC invested and made available to its biggest customer quality enhancing equipment which allowed the introduction of scented lines and improved consumer products.
In an environment of general economic slowdown, Mabuhay Vinyl succeeded in preserving market shares and at the same time and more laudably, managed to keep margins and profits at respectable levels
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FINANCE
Net profit surpassed for the first time the P100 million mark, reaching a record high of P112.1 million or an increase of 18% from the previous year. The increase was due to the equity in net earnings (totaling P18.4 million) of Philippine Resins Industries, Inc. (PRII) a company owned 49% by MVC. These earnings were essentially interest income from capital contribution to finance the PRII plant.
MVC operation contributed P93.7 million notwithstanding the peso depreciation and high interest costs that weighed down on the company's net income. These adverse factors however, were partially offset by foreign exchange gain of P11.6 million arising from the PRII capital call and higher interest due to the IPO proceeds.
At the end of the year, total liabilities amounted to P379 million without any long-term debt and dollar loan. Current ratio improved to 1.99:1 and 2.42:1 on a consolidated basis from 1.88:1 in the previous year and so did our debt-to-equity ratio of 0.34:1 from 0.46:1. These reflect the favorable impact of the Initial Public Offering last February 1997.
As a result of the improved financial condition, the company granted a 20% stock dividend to shareholders of records as of March 16, 1997. The stock dividends amounted to P131.4 million.
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MANUFACTURING
The year saw the completion of two projects in the Iligan Plant. First, the successful commissioning of the additional six (6) diaphragm cells was carried out in December. This effectively increased the chlor-alkali production by 20%. Secondly, in an effort to be cost effective in the sodium hypo business in the Vis-Min area, a sodium hypochlorite production facility was installed using a mothballed glass-lined reactor from the old catalyst plant. Test runs yielded satisfactory results and commercial operation started in January 1998.
Finally the year 1997 emerged as the "safest" year in the past five years with accident frequency rate of 4.38 and severity rate of 29.22 as against the industry standards of 12.15 and 85.0 respectively.
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HUMAN RESOURCES
Continued efforts to reduce operating costs by streamlining the organization through job simplification and consolidation of functions resulted in a reduction of manpower.
The year also witnessed the conclusion of the collective bargaining agreement when management and labor finally signed the agreement in December after almost two years of negotiation.
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PLANS AND PROJECTS
The construction of the PVC of the Philippine Resins Industries, Inc. (PRII) is currently underway and construction is slightly ahead of schedule. Overall engineering work is now at 95% while the procurement of equipment and materials is already at 96%. It will be in commercial operation by December 1998.
In May 1997, PRII has also secured an approval from the Board of Investments covering the expansion of the present 70,000 MTPY plant to 140,000 MTPY. Likewise, the BOI has registered PRII's upstream project for the back integration of its operations to include Ethylene Dichloride (EDC) / Vinyl Chloride Monomer (VMC) and chlor-alkali production.
The company is studying possible diversification into downstream PVC products. Significant inroads have been made in the study of plastic films and sheets. The market study has been completed and several equipment proposals have been received which were to be incorporated in the formal feasibility study. Participation in a PVC compounding project is also presently under serious consideration.
In 1998, two (2) projects are lined up for implementation that will enhance profitability and more importantly will contribute positively to a cleaner environment. These projects are:
1. Hydrogen as an alternative Boiler fuel
2. Upgrading of the Chlorine Liquefaction Plant
Lastly, to benefit from the advances in information technology and help upgrade the company's existing information systems, MVC has engaged the services of a management consulting firm to develop the system for information gathering, flow and processing. The objective of the project is to provide quick dissemination and access of information among its offices, plants and depots. To date, the company has invested a substantial amount in hardware acquisition, software upgrade and other appurtenances.
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