LETTER TO OUR SHAREHOLDERS

Economic Background

2003 was punctuated by a number of events in the international and domestic scenes which had an encompassing effect on the economy. The US-led war in Iraq, the persistent terrorist threats and the trepidation over the spread of SARS were just among these.

Right at home, a strong economic performance was expected. But the mutiny in Oakwood and the frenzied change in political scene dampened anew business sentiment in the second half of the year with the peso sliding further and companies with foreign debts having difficulty meeting maturities. Despite these, the country still managed to hold on to its own with the economy registering Gross Domestic Product (GDP) at 4.4% slightly higher than the previous year’s 4.1%, and Gross National Product (GNP) at a high 5.9%, a major improvement over 2002’s 3.1%

A Landmark Year

For a number of reasons, the year 2003 was a defining one for Mabuhay Vinyl Corporation. Not only did the company overcome the effects of a sluggish economy, deteriorating international prices of its main product, caustic soda, as well as setbacks in its logistics and manufacturing operations, but also emerged as a stronger chemical player. Major accomplishments during the year include the successful completion of the state-of-the-art Ion Exchange Membrane Plant, the consolidation of the Luzon depot operations at the Batangas Bay Terminal, Inc., and the acquisition of the second Hydrochloric Acid tanker.

Mabuhay Vinyl Corporation is truly cognizant of the prospects and opportunities that globalization continues to bring about and is enthusiastically preparing for this challenge, hence the major initiatives during the recent years.

The company is transforming from one with a strong manufacturing orientation into a well-engaged marketer of products and services keeping in mind always the potential needs of customers and the impact of global economic developments.

Financial Highlights

The company weathered the year, which turned out to be difficult for most industries, as it continued to be the market leader.

Income for the year was affected by enhancements introduced to its Capex policy that resulted in a higher expense charge. Also, there was a drop in interest income as surplus funds were used for the Ion-Exchange Membrane (IEM) plant project, successfully completed in the last quarter of the year at a total cost lower than projected.

With delivery cost of products and operating expense slightly higher at 23% as against the 22% registered in 2002, net profit after tax dropped to P47.8 million in 2003 vs. P67.6 million in 2002 despite sustained gross profit of 29%.

Earnings per share is P0.063 as against P0.089 in 2002. Book value per share is P1.65 as against P1.64 in 2002. The company paid a total dividend of P45.7 million or P0.06 per share in 2003.

Renewed Vision and Mission

Mindful of emerging challenges, your company has shared its focus through the formulation of a new vision and mission. In the workshop held last September, we refined several core urgencies and challenges and built further on our strategies in order to achieve our new goals, to wit:

1. Improve company’s operating profits and share price
2. Ferociously defend market share
3. Capture new and emerging customers
4. Reduce distribution cost
5. Improve cost competitiveness
6. Set profit targets on new products
7. Improve asset utilization
8. Strengthen organizational development

These will be the building blocks to drive your company to greater heights and success.

Prospects for 2004

Hopes are high that 2004 will bring the country to a resurgence of economic activity. The United States showed a recovery with the growth in productivity at 4.4% in 2003. The recession in Europe appears to be ending and Asia’s economy remains bullish. A recovery in the foreign markets will improve the country’s export, notably electronics, which remain an industry driver for MVC. Other factors such as improved consumer confidence, corporate earnings and improvement in tax and customs collection revenues will drive consumption growth for the year.

Your company has long prepared for the recovery. Actions made in the past were done with such prospect in mind.

Capital Expenditures committed recently bode well for the company’s future. Greater flexibility is attained with the IEM plant on stream since better selling price strategy and/or production mix is achieved. Sales of hydrochloric acid (HCl) are expected to rise steadily, in step with the recovery of the electronic export market and the availability of bigger volumes with the commissioning of the newest HCl tanker of MVC. Sales of liquid chlorine and sodium hypochlorite are anticipated to increase and will remain to be positive contributors.

As a publicly listed corporation, your company submitted to the Securities and Exchange Commission its Manual on the Corporate Governance, which took effect on January 1, 2003. The manual provides the framework that your Board of Directors and Management will pursue in protecting the interest and rights of its shareholders and the public.

As we remain optimistic about the future, we acknowledge the guidance and support of the Board of Directors. We also express our appreciation to the continued patronage and loyalty of our customers in the face of stiff competition. We commend our officers and employees for their dedication and commitment to our business objectives. We also recognize our bankers, contractors and suppliers for continuing to nurture our longstanding partnership. Finally, we thank the shareholders of the company who remain indefatigable in their support and confidence. With these, we are all the more driven and determined to rise above the challenges and continue to do our part in making life better.

Mabuhay.




RENATO B. MAGADIA
Chairman and Chief Executive Officer

EDWIN LL. UMALI
President & Chief Operating Officer

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REVIEW OF OPERATIONS

Marketing

The year 2003 registered total revenues at P891.5M. While this figure was 5% lower compared to the 2003 plan, the company managed to grow by 3.6% as compared to 2002 revenue performance.

The total market demand for caustic soda was relatively flat for the year 2003. Mabuhay’s volume grew by 4.6% and sales revenue has a positive variance of 1.3% as compared to 2002.

Sales revenue from Hydrochloric Acid was above 2002 figures by 7.8% and total sales volume mirrored that of last year’s performance. We are looking forward to a renewed surge in the semicon and electronic industry that started in the last quarter of 2003. Similarly, the primary metal industry, Geothermal and Independent Power Plants are showing bright prospects ahead.

Liquid Chlorine sales revenue had a positive variance of 7.2% compared to 2002 figures while sales volume was up by 10.5%. Sodium hypochlorite sales continued to grow by 3% and 4% in sales volume and revenues respectively. Again, its contribution to the company’s bottomline cannot be overemphasized.

In summary, your company’s performance in the year 2003 was attributable to its relentless drive to deliver its products and services and aligning capabilities with the customer’s specification and expectations. Competition in the market place continued to intensify with lower priced products entering the market thereby putting pressure on margins.

The year 2004 will see the company strengthening further its market position by way of increased production capability, improved logistics and building customer relationships to make them our permanent business partners.

Manufacturing

Production outputs of the Diaphragm Cell Plant in Iligan and Mabuhay Premium Bleach Plant in Biñan, Laguna exceeded the 2002 production volumes. The improved manufacturing outputs were the result of more stable plant operations and prudent management of resources. Savings realized from salt, direct power and steam amounted to P5.7M during the year. Manufacturing overhead variance also continues to be favorable.

The new Ion Exchange Membrane (IEM) plant started commercial operations in October 2003 after it was commissioned with the help of engineers from Chlorine Engineers Corp. Ltd. of Japan. Performance guarantee tests were conducted and officially completed on October 6, 2003. The plant was inaugurated on December 8, 2003.

Corporate Planning

In cognizance of the rapidly changing business environment, a strategic planning workshop was organized last September with the participation of the members of the board and the management team to craft the desired future of MVC. This took into consideration the present urgencies as well as future business challenges to redefine MVC’s vision and mission and reinforce its corporate values to provide guidance to each employees. Strategic thrust were also identified such as developing a market-oriented company, responsiveness to customer needs, product and market development, cost competitiveness, better asset utilization and improving profitability.

Project and Investments

Ion Exchange Membrane Plant Project

MVC completed its first major expansion project in 20 years at the Iligan Plant. The Ion Exchange Membrane Plant has a capacity of 8,000 MTPY of caustic soda and 22,000 MTPY of hydrochloric acid. It employs the state-of-the-art production technology co-developed by Tosoh Corporation and Chlorine Engineers Corp. of Japan. The plant significantly enhances the competitiveness and flexibility of the company to meet the challenges of the market

The plant started commercial operations on October 6, 2003 and was completed within budget.

Improvement at the Batangas Depot

Following our thrust to consolidate our Luzon logistics operation at the BBTI Depot in Bauan Batangas, we renewed our lease on our present site and took out another lease on an adjacent lot both for a period of 15 years. Site development and tank construction started in mid-2003 with the construction of several tanks with a combined capacity of 6,700 cubic meters. All tanks are presently in operation.

HCl Marine Tanker Project

Construction of the company’s second HCl Marine tanker started with a keel laying ceremony held on August 2003 at the Navotas Fishport. Vessel construction was completed in December with the blessing held on December 23, 2003. The vessel is currently in operation hauling hydrochloric acid from Iligan to BBTI Depot.

Retrofitting of Diaphragm Cell Plant

With the successful start-up and operation of the IEM Plant, your company is looking towards retrofitting its existing plant using IEM technology. Built in 1979, the diaphragm plant is not as efficient as the IEM Plant due to higher salt, power and steam consumption. Retrofitting the plant will enable the company to reap the benefits of the latest technology while minimizing capital outlay. Feasibility studies are in progress.

Corporate Governance

The Manual on Corporate Governance submitted to the Securities and Exchange Commission took effect on January 1, 2003. The Board of Directors (BOD) and Management commit themselves to the principles of good governance as embodied in the manual to protect the interest and rights of the shareholders and the public. As a publicly listed company, the practice of good governance is expected to raise investor’s confidence.

Quality Management System

A regular surveillance audit of the Quality Management System in the Iligan Plant was conducted by SGS Phils. ICS in May 2003. It confirms the continuing validity of the Plant’s ISO 9001:2000 certificate. Similar preparations are also underway in Luzon to prepare the nationwide logistics and commercial operations for its certification audit. The third party audit is expected to take place before the year ends.

Corporate Social Responsibility

For your company, corporate citizenship means contributing to nation-building; being part of a business community that is fully and actively committed to making strategic contributions to the development of the society, sustainability of the environment and the improvement of the quality of life of the Filipino.

MVC strengthened its social investment in Barangay Tonggo and Purok Trece in Iligan City by sharing expertise and resources through outreach programs which include a medical/dental mission, livelihood training and cooperative development and capability building. It is undertaking, in cooperation with the Judge Guillermo Guevara Foundation and the PBSP, a water development project that will provide potable water to three rural upland barangays in Iligan City. Its support for local barangays, puroks, schools and parishes, community development is further bolstered through sponsorship in souvenir programs, donations of used drums, scrap and excess materials, and giving of prizes and awards.

Children receive special attention through the Pamaskong Handog sa mga Bata, Storytelling and Arts/ Theatre Summer Workshop, Flores de Mayo and Summer Tennis clinic – projects which provide them with a venue for personal development and confidence building. A Youth Leadership Training was conducted for Kabataan Purok Trece in coordination with DOLE, and the second batch of TESDA scholars were selected in cooperation with the community.

In the spirit of volunteerism, clean-up drives continue to be a part of the activities at the plant. Not only was the community rid of rubbish and underbrush, but relationships among employees and residents were built and nurtured.

Your company launched a tree planting program in partnership with the National Power Corporation and the host communities around the Iligan Plant. Initially, seedlings of different species were planted in and around the plant ensuring the continuous growth of hardwood and protecting the area from erosion. As seedling become available, they will be planted until the immediate communities are carpeted with greenery for everybody to enjoy and as a legacy to the next generations.

Human Resource Development

To complement the thrusts of corporate planning, HRD promoted better synergy among organizational units and implemented programs such as organization development, performance management, training, recruitment and career development.

Training and development continued to focus on honing functional capabilities and promoting more effective teamwork among organizational units.

Positive employee relations are continually nurtured through the Industrial Peace Council in the Iligan Plant and the Council of Solidarity for Luzon operations. These provide employees with opportunities to actively participate in the company’s development programs.

Awards and Recognition

MVC was given recognition as Outstanding LMC for 2003 for its Industrial Peace Council (IPC) in the Iligan Plant. The award was given by the Philippine League of Labor Management Cooperation Practitioners (PHILAMCOP) in cooperation with DOLE’s National Conciliation and Mediation Board, on the occasion of its annual conference last November 18, 2003. The IPC was cited for playing a “vital role in strengthening labor-management relations through difficult times” as it dealt with the effects of competition and globalization in the chemical industry.


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