LETTER TO OUR SHAREHOLDERS

The major drivers of the world economic order resumed their march to progress in 2004. The United States continued to show increased productivity, the recession in Europe appeared to be waning, Japan was shaking off the sluggish in its industry, China was on a sustained high growth, while the rest of Asia was maintaining its bullish streak. Expectedly, the Philippines should show the same experience, albeit the constraints it had to deal with. Most glaring among the areas of concern were the worsening fiscal position, the rising government debt, the deteriorating exchange rate, the flat level of exports, and the low amount of foreign direct investment.

The Philippine economy achieved a 6.1% growth rate in Gross Domestic Product (GDP) and Gross National Product (GNP) in 2004, exceeding the target range of 4.9 – 5.8 percent for GDP and 5.0 – 5.7 percent for GNP. The economy’s growth defied most forecasts. It compared well with the performance of most of our neighbors in the region.

Three major sectors of the economy, namely agriculture, industry and services exceeded over-all growth targets for 2004. The agriculture sector was favored with a bountiful harvest while the services sector, which is still the fastest growing, posted strong performance. The biggest improvement was by industry with the manufacturing sub-sector showing sustained growth. These and the steady rise in personal consumption, the newfound momentum in exports led by electronics, and government’s apparent success in keeping its expenditures below target were the pillars of GDP growth in the past year.

Mabuhay Vinyl Corporation put in a record performance last year with sales hitting P1.17 billion out of the highest volume of caustic soda, hydrochloric acid and sodium hypochlorite sold since the company was put up forty years ago. While sales of a billion pesos had been surpassed in the past, this was the first time it was achieved without any revenue from polyvinyl chloride resin (a product which MVC stopped producing and selling in 2001). The long awaited recovery in prices of caustic soda in the international market finally materialized starting in the second quarter of 2004. Demand and cost pressures pushed domestic prices up to levels where locally produced caustic soda (including diaphragm grade material) was highly competitive, even with the increase in the cost of power and other inputs. The full year operation of the state-of-the-art ion exchange membrane plant enhanced your company’s ability to take on the additional demand for caustic soda brought about by the tight supply in the world market. Co-products hydrochloric acid and liquid chlorine likewise showed strong performance with their selling prices better than anticipated. Downstream product, sodium hypochlorite continued to contribute significantly to the company’s overall profitability.

The volume of products moved and sold during the years was also unprecedented mainly because of the improvement in logistics capability, with two HCl marine tankers in operation and virtually trouble-free operations at our depot facilities. Significantly, the rise in the volume of products sold was not confined to any one particular region. Improvements in the market offerings enabled your company to penetrate even the most astute of customers. These developments resulted in a very good financial performance for the company, generating P1.17 billion in sales and a net income after tax of P71.7 million compared to P0.89 billion and P47.3 million respectively in 2003. The company paid P0.20 per share cash dividend in 2004 with an aggregate amount of P152.3 million.

Prospects for 2005

In general, government planners and even analyst from private think tank institutions believe that 2005 has the potential to be a better year than 2004. For one, sustained efforts in addressing the fiscal concerns which have been hurting the Philippine economy can this time be implemented. Proposed tax measures aimed at raising government revenues are expected to be in place sooner than later, given the growing consensus towards having a more sustainable budget. Recent appointments to key government positions perceived by many as non-political have been well accepted. Expectations are high that subsequent appointments will be similarly decided. Government must continue to keep a close watch on trends that could further aggravate the living conditions of the poor such as worsening inflation and rising prices, low wages and lack of job opportunities which mat de-rail the government’s pursuit of a more stable society.

The economy for most part will still be mainly consumption-led, spiked by IT services (call centers) and tourism. The industry sector, which includes manufacturing, expects to duplicate if not better the previous year’s performance with a growth target of 4.2 – 6.4 percent. We are confident that the renewed interest of investors in the mineral resources of the country, the optimism of entrepreneurs and the export opportunities in both traditional and sunrise industries will provide the momentum for the economy to prosper and for MVC as a company to grow even bigger.

For a long time, we have always positioned MVC for sustainable profitability. And we did this by restructuring the organization for growth, by investing capital expenditures to reduce cost and maximize efficiency, and by opening avenues that will provide us the edge over competition. We shall continue to rationalize operations to remain competitive by focusing our efforts to rein in the effects of unabated rise in fuel prices and power costs. At this moment, we firmly believe that the window of opportunities to upgrade our production facilities is upon us, and that swift and decisive action is necessary to sustain MVC’s dominant position in the market and keep competitors at bay.

The necessity of upgrading the diaphragm cell plant becomes even more apparent in an environment where there is strong expectation that the prices of caustic soda in the midterm can remain relatively firm despite occasional pressure and intrusions form low cost importers. We anticipate the sale of hydrochloric acid to continue its steady rise as the material becomes more readily available to a wider range of industries arising from the improvements in logistics capabilities. Innovative uses of chlorine and sodium hypochlorite for cleansing and disinfecting are projected to drive the demand higher.

Corporate Social Responsibility

We are now renewing our commitment to corporate social responsibility as an integral part of doing business. We are reaffirming our support for the principle on human rights, labor, environment and anti-corruption espoused by the UN Global Compact Initiative. We will continue to pursue our initiatives in Responsible Care? to address public concerns on health, safety and environment as impacted by chemical and chemical operations. We will allocate resources and tap employee volunteerism for the development of the communities where we operate. Our partnership with the Philippine Business for Social Progress in CSR-related activities shall be nurtured. Rest assured that we shall safeguard shareholder’s interests and abide by our Code of Corporate Governance accordingly.

In closing, we acknowledge and thank everyone who contributed to the immense success we achieved during the year particularly the loyalty and patronage of our customers, the unbridled support of the Board of Directors, and the dedication of our officers and employees. We also appreciate the efforts provided by our banker, contractors and suppliers to continue serving our needs despite rising costs and greater demands on them. Lest we forget, we thank the shareholders of the company who never wavered in their support and confidence.

RENATO B. MAGADIA
Chairman and Chief Executive Officer

EDWIN LL. UMALI
President & Chief Operating Officer

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REVIEW OF OPERATIONS

Marketing

The sales of P1.17 billion in 2004 set a new peak in the history of Mabuhay Vinyl Corporation, a fitting accomplishment on the eve of the company’s 40th anniversary. During the year, the company sold the highest volume caustic soda, hydrochloric acid and sodium hypochlorite since the company was established almost forty years ago.

Due to the increasing caustic soda prices in the international market, MVC was able to leverage its strength as both a domestic producer and importer to better serve the needs of its customers.

>From an almost flat demand in 2003 and the year before that, sales volume of caustic soda expanded by 25 percent, while sales revenue showed a hefty increase of 48 percent. Hydrochloric acid sales volume grew by 13 percent and revenues by almost 24 percent. The reliable operation of our newly constructed M/T Snoopy II by the second half of 2004 enabled us to improve product availability. Sales volume of liquid chlorine dropped by 8 percent but recovered in terms of sales revenue by rising almost 4 percent over last year. Sodium hypochlorite posted an increase of 14 percent in volume while sales revenue rose by 19 percent.

The experience in 2004 was remarkable. More than the rise in revenue, the increase in volume sold reflects the capability of the company to withstand competition, cultivate new opportunities and be bold in its commitment to succeed.

Marketing

Manufacturing

2004 was the first full year of operation for the Ion Exchange Membrane plant and it was characterized by consistently reliable performance, much in line with expectations. Furthermore, improvements introduced by our engineers resulted in favorable and stable plant operations, with production cost significantly lower that that of the diaphragm plant. The operation of the Diaphragm Cell Plant was optimized to cope with the market demand for caustic soda and hydrochloric acid. Priority was given to production of hydrochloric acid to respond to increased orders from September to November. Order fulfillment was facilitated by the regularity of marine tankers calling at the plant for loading.

The increasing demand for sodium hypochlorite in the Visayas and Mindanao required additional production from the Iligan sodium hypochlorite plant. Similarly, the Mabuhay Premium Bleach plant in Laguna increased operating hours to meet customer requirements.

Manufacturing

Production Costs

Efforts to bring down costs in Iligan resulted to savings in material usages and consequently lowered manufacturing costs compared to budget. In Mabuhay Premium Bleach Plant, improvements were introduced to address problems associated with tank storage and bring down the cost of tank maintenance.

Quality Management System

During the year, SGS Philippines, Inc. assessed the quality management system of MVC’s nationwide logistics and manufacture of sodium hypochlorite, and found it compliant with the requirements of ISO 9001:2000. With the existing certification of the Iligan Plant, Mabuhay Vinyl Corporation currently enjoys the distinction of having its nationwide operations certified to the latest standards of ISO 9000.

Finance

The company earned a net income after tax of P71.7 million last year, an increase of 52 percent over the previous year’s P47.3 million. This was the result of increased production capacity, soaring prices of caustic soda in the international market and improved logistics performance in moving hydrochloric acid. This favorable financial performance was further bolstered by the income tax holiday given to the company’s new Ion exchange membrane plant.

Cost cutting programs put in place have started to bear fruits thus improving the ration of operating expenses to sales from 24 percent to 23 percent last year. Interest expenses were up P13.5 million, largely due to the P100 million medium term loan drawn to partially finance the construction of the IEM plant.

Corporate Planning

Corporate planning focused on completing the major infrastructure improvement projects at the Batangas Bay Terminal, Inc. depot, consisting of new caustic soda storage tanks and related peripheral facilities. The group also prepared a feasibility study for the second phase on the Ion Exchange Membrane Project.

To emphasize the growing importance of corporate planning, the function of new business development was added to its existing role. An initial development was the appointment of Mabuhay Vinyl Corporation by a US-based chemical plant manufacturer as its sales agent for Southeast Asia.

Plans for this year include exploring the viability of producing and marketing chemicals where the company has the advantage in both raw material and technical knowledge.

Safety, Health and the Environment

As a chemical company, Mabuhay Vinyl ensures that safety, health and environment programs are given special importance and attention. In Luzon, safety and health manuals pertaining to facilities and distribution operations were completed. Emergency response teams were organized in all facilities and regular emergency drills were conducted to hone their skills. The teams are planning to promote greater cooperation with neighboring companies, customers, suppliers, local government and national government agencies to broaden their knowledge and raise their level of proficiency.

In Iligan, new sampling stations new installed for the IEM plant, in addition to existing units, to monitor and analyze wastewater streams. Programs on safety and health including emergency drills were also regularly held. Even customers were trained in emergency handling and response skills as part of the cooperation on safety and technical programs extended to them. This is part of efforts to implements an environmental management system that will comply with ISO 14001 standards.

Human Resource Development

A series of intensive leadership training programs was conducted for managers and supervisors to enable them to create the internal environment where employees can fully involve themselves in pursuing MVC’s business goals. These courses included skills for performance management that would elicit employee commitment towards attaining key results and developing the required competencies for their jobs. A Pay-for-Performance program was established in 2004 to provide incentives for encouraging excellence in team and individual performance. The company continued to send selected employees for technical training abroad to deepen it knowledge base on the chlor-alkali industry and related issues on safety / environmental protection.

The Collective Bargaining negotiations in Iligan on the economic provisions for the next 2 years were cordially concluded in November 2004, without the need for any third party mediation. This further strengthened labor-management partnership that had been nurtured over the years by the plant’s Industrial Peace Council, where participative resolution of employee concerns has been institutionalized.

Community Relations and Development

MVC employee’s concern for the environment found expression in their volunteer activities such as tree planting, information campaign against dynamite fishing and community clean-up activities. The company actively supported the education of children through scholarships, book donations, art workshops and even programs such as “Tutorial Class Under the Tree” for students and out of school youth. The Iligan plant provided on-the-job training to help prepare college students for eventual employment. It also provided assistance to community development in the form of medical missions, livelihood programs and donation of materials. MVC, as one of the founding members of the Philippine Business for Social Progress, continued to be actively involved in developing strategic private sector partnership for urban poverty reduction.

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2004 financial info in PDF

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