Against this impressive economic peformance in 2007, your company also had notable achievements to address its long-term objectives.
Firstly, in pursuit of its acquistion of a second IEM plant (IEM2 project) and after having made the initial payment MVC opened an irrevocable letter of credit in favor of the supplier for the remaining balance in February 2007. In an effort to hedge on risk, MVC entered into currency forward contracts that enable the company to fix the peso cost of the major equipment. Corollary to this, MVC's Corporate Planning Department on July 22, 2007, succeeded in securing from the Board of Investments (BOI) their approval to regiser the IEM2 Project on a Pioneer Status. As a registered enterprise, the Company is entitled to certain tax incentives which include among others: Income Tax Holiday (ITH) for six years and zero-duty importation of capital equipment, spare parts and accessories up to June 16, 2011.
Secondly, MVC filed an application to avail of the One-Time Administrative Abatement Program of the Bureau of Internal Revenue last June 29, 2007 relative to BIR-Assessment Notices for alleged Final Withholding Tax Liabilities for CY 1988 and CY 1989 and simultaneously asked for the payment on a staggered basis of the 100% basic tax assessed. On September 11, 2007, the BIR approved the application for staggered payment and further advised that a termination letter will be issued upon full pament of the basic tax assessed plus interest thereon. In sum a total of P101,861,884.26 was paid inclusive of the P95,258,237.80 basic tax.
Although your company believes that it is not liable to pay the alleged deficiency withholding taxes and that the subject assessments are excessive and unjust, it was MVC's sincere desire to put this matter to rest that prompted it to avail of the Abatement Program. The subject case was pending with the BIR and in various courts for almost two decades. Invariably, MVC's plans and programs have been delayed and hampered due to the pendency of the said case.
We would like to beleive that these two initiatives will boost even more the company's ability to innovate and renew itself by creating in the process a more robust chlor-alkali industry. This will provide MVC's customers the impetus to further expand their market in the face of the growing globalization in developing countries like the Philippines. The investment in the IEM2 Project will hopefully make a tangible difference in our customers' business models, in the community we operate, the growth and development of our employees, and in enhancing shareholder value.
Being an important aspect in maintaining leadership in the industry, a general understanding of the business playing field in 2007 becomes imperative. It was again very challenging for the chemical industry amidst increasing crude oil prices and its effect on related costs -- energy and freight and its impact on other inputs as well. The demand for chlor-alkali products during the year was fairlystable with growth in chlorine and its derivatives becoming more and more apparent as opposed to the decline in liquid caustic soda.
It is ironic that while the cost of imported caustic soda was moving upwards, competition in the trade of caustic soda in the domestic market intensified even more during the year. In order to minimize the negative effect of a margin squeeze, better management of the portfolio mix was resorted to where MVC sold less volume of caustoc soda to highly marginal customers while continuing to seek for the slightest improvements in its manufacturing and logistics operations.
The company recorded an operating income of P108.8 million (Gross Profit less Operating Expenses) from a Net Sales turn-over of P1.314 billion. This is substantially higher than the 2006 operating income of P67.4 million. However, the better than expected operating income result was dampened by the availment of the One-Time Administrative Abatement Program of the BIR and the compliance to the appropriate accounting standards covering forward contracts. This resulted to a aloss after tax of P45.298 million.
Outlook for the Rest of 2008
Your company's operation this year is focused principally on the timely completion of the IEM2 Project including the smooth and seamless transition into a 100% IEM grade caustic soda marketer while steadfastly defending market share against intense competition and keeping costs down in the face of rising raw material and other cost inputs.
Demand for caustic soda in the country has weakened slightly but the international price of the chemical has risen dramatically due to increasing cost inputs and the inability to secure reasonable returns from chlorine. Prices have appreciated so rapidly that MVC is having difficulty passing on this cost to customers at a more appropriate pace. As a result, not much profit may be expected from the trading business in the intervening period. In contrast locally produced caustic soda will undoubtedly provide greater contribution to the bottom line should the situation in the region and in North America persist for sometime.
Competition across all products remains fierce but MVC continues to be committed to provide its valued customers quality products at competitive prices. Because 2008 is essentially a re-tooling year for your company, we expect operating income in 2008 to be modest compared to 2007. However, it should be viewed as part of a 'planting season' to secure MVC a productive, sustainable and competitive future.
Even in a challenging business environment, your company reaffirms its commitment to corporate social responsibilty. MVC has several CSR programs focusing on education, health, safety and the environment principally in areas where MVC operates. As a signatory to the UN Global Compact, we reiterate our firm support to the UN-led human rights, labor, the environment and anti-corruption initiatives. MVC remains an active Responsible Care practitioner since 1997 and has been a firm believer in the advocacies of the Philippine Business for Social Progress.
As we progress with optimism, we wish to thank all our customers, shareholders, bankers,contractors and suppliers, employees and officers, the Board of Directors, and look forward to your abiding support as we grow and realize our investments for a brighter and better tomorrow this year and the years ahead.
RENATO B. MAGADIA
Chairman and Chief Executive Officer
EDWIN LL. UMALI
President & Chief Operating Officer
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Our Marketing Department takes pride in achieving Net Sales of P1.314B in 2007 despite the efforts of competition to target MVC's market share.
Net operating profit was substantially higher than budget despite a few seatbacks particularly the delay in completing the drydocking of M/T Michael that hampered the delivery of caustic soda. The net operating results exceeded expectations principally because your company had less sale of caustic soda to marginal customers in addition to a favorable per ton unit cost. The administrative and selling expenses were likewise not far from budget.
In 2007, sales volume of liquid caustic soda, while posting a negative variance, still contributed 58% to the overall sales revenue. The significant improvement in volume sold to the power and energy sectors cushioned the impact of lost sales to the major beverage industry players. Sales to key customers remained high and supply contracts were periodically renewed.
MVC's efforts to win back customers earlier lost to competition, started to gain ground notwithstanding the renewed aggressiveness of traders/importers. This is proof that consistent product quality and service reliability are valued by most customers.
During the year, market activity for hydrochloric acid was fairly strong notwithstanding the competitors' active presence offering low-priced acid to specific markets not requiring high quality materials. Both sales volume and revenue targets were achieved. This can be attributed to several acidizing projects and the higher production load of soy sauce manufacturers, as well as the consistently high offtake of semicon and electronics companies.
Liquid chlorine sales performance was below plan with the availability of imported stocks from Malaysia and Thailand, reportedly being offered at a price even lower than those sold in their respective countries of origin net of freight costs. Major water utility companies therefore adopted the two-supplier policy and gave considerable share of their requirement to importers. Liquid chlorine contributed 8% to the overall sales revenue in 2007.
Sodium hypochlorite sales continued to perform well as the nationwide sales volume surpassed its target.
Driven by our commitment to achieve sales objectives for 2008, we shall continue to establish, sustain and improve customer relationships, forge mutually beneficial business partnerships and guarantee consistent product quality and service reliability. The company shall ensure stable supply of its products while taking cognizance of the caustic-chlorine demand balance.
Manufacturing
The Diaphragm Cell Plant (DCP) managed to produce more volume of caustic soda, hydrochloric acid, liquid chlorine and sodium hypochlorite than planned. This was achieved in spite of the ongoing retrofitting of the DCP to Ion Exchange Membrane technology and the reduction of electrolyzers from 30 to 20 units in the last days of 2007.
On the other hand, the Ion Exchange Membrane Plant is on its fourth year of continuous operation. Since some membrane cells were removed for repair and maintenance, this caused the plant to produce slightly lower than planned volumes of caustic soda and hydrochloric acid. However, during the second half of the year and after the reinstallation of the repaired cells, plant operations resumed with improved efficiency. The experience also enchanced the staff's capability in the ion exchange membrane cells on site, reducing maintenance dependence on foreign technical assistance.
The sodium hypochlorite plants in Biņan, Laguna and in Iligan, continued to find ways to increase production and improve efficiency in both plant operations and material usage.
Production Cost
Improved monitoring of costs helped keep costs at a minimum. Substantial savings were gained on manufacturing overhead and materials usage that resulted in improved unit costs of all products.
Management Systems
QMS-ISO 9001:2001
To confirm that the nationwide Quality Management System of the company conforms with all standard requirements, our third-party certifying body of SGS Philippines, Inc. conducted surveillance and pre-renewal audits. The audit team recommended the QMS certification to be continued based on the audit results and demonstrated state of development and maturity of the system.
EMS-ISO 14001:2004
The first surveillance audit of the Iligan plant's Environmental Management System by TUV-SUD Philippines, Inc. was conducted in January 2008. Concluding that the requirements of ISO 14001:2004 standards were satisfied, the audit team recommended that the plant's EMS certification be maintained and continued.
Luzon Facilities
MVC continues to invest in facilities in order to improve operations at its main depot in Bauan, Batangas. The chemical containment facility was rehabilitated by installing new canals and a treament chamber to ensure that any accidental spill will be collected and neutralized consistent with good engineering and accetable environmental practices. An automated electronic loading system was also installed to improve the accuracy of deliveries to customers.
To further equip our personnel with technical skills and capabilities, training interventions were conducted by partner institutions.
The MPBP Superintendent attended training on "Practical Improvement Programs for Factories" (PIPF) sponsored by the Association of Overseas Technical Scholarship (AOTS), in Japan. Truckers and their delivery crew are given orientation and seminars on safety and proper handling of the company's equipment and products.
Safety, Health and the Environment
Explicit objectives, targets, programs and measured performance indicators relevant to Productivity, Quality, Safety, Health and Environment (PQSHE), helped to improve the company's over-all business performance. Among the most notable contributions were the following: (a) improvement on Energy and Resource Conservation Programs particularly in bunker fuel, electricity and materials usage; (b) the enhanched Solid Waste Managemt Program generated additional but non-traditional income; (c) improved compliance to legal and other requirements regarding environment concerns; (d) attainment of the elusive 400 days No-Lost-Time Accident (NLTA) -- achieving 419 days NLTA as the year 2007 ended. Severity and Frequency Rates (SR and FR) also posted zero for the year 2007; (e) orientation on Hazards Identification, Risk Analysis and Control was conducted and it resulted to a partial completion of the Iligan Plant's Master List of Work Hazards -- a framework for introducing more focused safety and health operational controls, objectives, targets and programs; (f) as a consequence of the campaign for health ad fitness consciousness, 99.4 percent of the employees, the highest in the history of the company, availed of the annual physical examination.
The company's partnership with Barangay Maria Cristina and Barangay Buruun on Solid Waste Management Program (SWMP) for environmental protection created a positive impact to both communities. MVC sponsored /facilitated major capability-building training for the SWMP committee members of the two barangays. After introduction in Barangay Maria Cristina in 2005, the program has become a standard for other institutions and communities on SWMP initiatives to benchmark with. The community was nominated for a National Award for the successful implementation of solid waste management programs. Realizing that we can help protect the critical watershed in the country, Makati MVC employees went to the Ipo watershed in Norzagaray, Bulacan to plant trees. This was done in coordination with Maynilad Water Services, Inc. One reflection summarized the planting experience: "We really lived up to our slogan - I CARE FOR THE ENVIRONMENT, I CARE FOR THE PEOPLE, I AM RESPONSIBLE.".
Finance
Your company did very well this year by posting an operating income of P108.8 million from 2006's P67.4 million. It would have been one of the most profitable years for Mabuhay Vinyl Corporation since there was improved gross profit while keeping down operating expense. However, there were two events which ultimately caused the company to suffer a P45.3 million loss for 2007. The First was the decision to avail of the Buraeu of Internal Revenue's (BIR) One-Time-Administrative Abatement Program for a tax case assessment of alleged deficiency in withholding taxes on loan interest for years 1988 1989.
The second was a foreign exchange loss your company suffered in order to comply with the Philippine Accounting Standards, specifically pertaining to a forward contract the company opened with a bank to fix the cost of imported capital equipment for the IEM2 project lest the project cost may spiral beyond its approved budget due to the highly volatile foreign exchange rate. Except for these, your company would have ended the year in the black notwithstanding the continuous decline of the US Dollar and the unexpected strength of the Philippine Peso.
Interest charges during the year were just as much as the expense in the previous year in spite of the interest paid for the availed tax abatement. However, other income dropped to less than 62% of the previous year because of the non-renewal of the lease of one of MVC's tanks, as well as the lesser income generated from logistics and other offered services.
Because of these events, the operating profits of the year which amounted to P108.8 million from the previous year's P67.4 million were negated. Loss per share for the year was P0.066 against a positive P0.066 for 2006.
Corporate Planning
Corporate Planing was full of activities in 2007 following the company's decision to implement the IEM2 Project. With the signing of the sales agreement with Chlorine Engineers Corp. Ltd. of Japan in December 2006, subsequent activities relating to financing the project, registration with the Board of Investments (BOI) and procurement of equipment proceeded in earnest. The BOI recognized the pioneeing nature of the project, the technology involved, and the magnitude of the investent, and thus granted MVC's application to register the project on Pioneer status. Incentives granted include: (a) zero duty importation of capital equipment from the date of registration until June 6, 2011 and (b) Income Tax Holiday (ITH) for six years from June 2008 of the actual start or commercial operations, whichever is earlier.
Human Resources Department
The awards bestowed on MVC were fitting reminders of how your company has instilled values and principles in the conduct of its business, with employees having readily embraced these and made an integral part of their work habits.
Mabuhay Vinyl Corporation was recognized as a 'Child Friendly Company' by the Employers Confederation of the Philippines (ECOP) and the International Labour Organization (ILO) during the ECOP National Convention on March 20, 2007 at the Manila Hotel. The Iligan City government honored MVC as among the Top Taxpayers in Iligan City, awarded a Plaque of Excellence for the company's exemplary performance in the field of Corporate Social Responsibility (CSR), and took notice of the quality of MVC employees with HRD's Mr. Diosdado T. Reponte awarded as the 2007 Most Outstanding Employee of Iligan City and Lanao Del Norte. Mr. Reponte also bagged the most coveted award as Region X's Outstanding Employee. This is the third time in three consecutive years that an MVC employee received said award. Another employee, Engineering Superintendent Noel Abano, was chosen as Region X's President Ramon Magsaysay Outstanding Filipino Worker.
Before the year 2007 ended, your company was fittingly recognized by the National Conciliation and Mediation Board (NCMB) and the Philippine League of Labor Management Cooperation Practitioners, Inc. (PHILAMCOP) as one of the three Outstanding Labor Management Council (LMC) practitioners in the country. All these recognitions are clear reflections of how the company's human resources have been continuously given the opportunity to become better persons.
The company has always encourage creativity, initiative and innovation in the way they conduct their work in keeping with its commitment to human resource development.
Corporate Social Responsibility
To promote cooperative development and sustainability of the hypo-repacking livelihood projects of Purok 13, Timoga, and Buruun, MVC provided product handling / labeling orientation training to the members of the cooperative. Membership in the Timoga Multi-Purpose Cooperative has grown and benefited other traders in Zamboanga, Dipolog, Pagadian, Misamis Occidental, Misamis Oriental, and provincies in the Visayas.
MVC takes pride in making a difference in the community's lives. As the Philippine Business for Social Progress (PBSP) aptly put it - "They have experienced improvement in their way of living, and above all, learned the values of cooperation, commitment, hard work, and perseverance. All these amount to a triumph over the deprivations of poverty."
Annual activities continue to be supported such as the Medical Mission, Christmas gift-giving, Children's Summer Arts, Fun and Learning Workshop, and involvement in thre Filipino traditon of Flores de Mayo. Theses were actively participated in by employee volunteers and the community.
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