LETTER TO OUR SHAREHOLDERS

The global economy experienced rapid growth in 2005 despite a slowdown in industrial production and the adverse impact of higher fuel prices.

In the Philippines, 2005 was a very challenging year. For the most part, the economy grappled with higher oil prices, rising global interest rates, lower farm output and political wrangling. Fortunately, the resurgence of agriculture and the strong performance of the industry and services sectors in the last quarter of the year propelled the economy to achieve a Gross Domestic Product (GDP) growth rate of 5.1%. The extraordinary high dollar inflows from overseas-based Filipinos drove the Gross National Product to 5.7% and led to a stronger peso and glowing macroeconomic figures.

However, doubts remain if the strong performance of the GDP, stock market and the peso has translated to more jobs and greater spending power for the masses.

In the chlor-alkali industry, the year started with a tightening in the supply of caustic soda in the world market. As the year progressed, the tight situation became even more pronounced due to a resurgent Japanese economy; higher demand by the Australian alumina producers and in emerging economies namely China, India and Brazil; and a shortage in the US west coast market.

By the third quarter, hurricanes Katrina and Rita brought havoc and destruction in the southern US states, disrupting supply and causing prices to spike to unprecedented levels in North America.

In the domestic chlor-alkali market, demand for most of your company’s products remained relatively flat. Even though the events in the Western Hemisphere drove the regional caustic soda prices to new levels as a number of big Asian producers sought instead to supply the US market offering at much higher FOB prices, margins in the domestic market remained thin as competitors intensified their activities. As a result, less volume of products was sold compared to the preceding year.

However, riding on its unique position as a manufacturer and importer, our company was able to mitigate the adversities by maximizing domestic production to take advantage of higher regional prices of caustic soda. We ended the year with a positive variance of 41% in NaOH sales revenue.

Clearly, our experiences in 2005 indicate that competitive advantage resulting from the ability to produce products at lower costs is the key to sustainable profitability amid unforgiving market conditions.

On the other hand, the availability of hydrochloric acid, a co-product of potassium sulfate from a new fertilizer producer, precipitated an even more intense competition among suppliers. However, our perseverance to develop new markets and seek new customers paid off as it allowed Mabuhay Vinyl to weather the onslaught. Sales performance of liquid chlorine fell short of expectations with the implementation of a new inventory management strategy of a major water utility concessionaire.

Sodium hypochlorite again performed creditably, increasing its sales volume and revenue. However, production costs continue to rise, driven by higher raw material and power costs. Increasingly, success in this business means having a reliable domestic chlor-alkali production base that will shield it from the volatility of the world/regional markets.

Even with these developments, our company achieved a record growth in revenues of P1.425 Billion during the year - the highest in its 40-year history. This was certainly a fitting climax as the company celebrated its 40th anniversary. And it was accomplished in the face of the renewed aggressiveness of competitors and a perceived instability of the Philippine political landscape.
Net income after tax stood at P81.3 million, a 17% increase from the P69.7 million in 2004. The rise was attributed to better prices of its main product - caustic soda - which was sustained throughout the year, while the continuous search for and implementation of cost improvements resulted to a 4% decline in operating expenses compared to the previous year. To enhance services to customers, major equipment purchases were undertaken. During the year, a significant amount of the capital expenditure budget was committed and employed for the acquisition of additional chlorine cylinders. Not only will this measure replace cylinders that fail to pass their regular re-qualification test, but also enhance chlorine inventory management and allow servicing the requirements of new customers. The new Polyaluminum Chloride (PAC) pilot plant was also put up to allow the development of downstream products from the main chlor-alkali business of the company.

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Prospects for 2006

Barring any natural calamity, expectations are that oil prices will stay at their present level and will not rise dramatically. Galloping world economies are reining in their growth, in step with the expected world growth rate average at 3%. Similarly, prospects for the country are bright on the assumption that a balance budget scenario is realizable, especially with the imposition of tax measures aimed at raising government revenues. Already, there were positive developments for the country, such as the expected increase in tax collections, the improved international credit ratings of the country, and the strengthening of the peso-dollar exchange rate.

However, 2006 remains to be a challenging year for MVC. We expect income to be more modest/subdued compared to recent years. The strong peso will limit your company’s ability to maintain desired margins as caustic soda is priced on import parity basis. Likewise, a strong peso diminishes the competitiveness of domestic production. Furthermore, the impact of higher power, fuel, manpower and trucking costs will be severely felt as weak regional caustic soda C&F prices and fever-pitch domestic competition preclude simply passing the incremental cost to end-users.

Nevertheless, Mabuhay Vinyl will continue to invest in the future. One that is fast gaining momentum is retrofitting the 16,000 MTPY diaphragm cell plant that has been in operation since 1979. The project involves replacing the diaphragm cell process with the most advanced ion exchange membrane technology of a similar capacity but with an option to increase to 24,000 MTPY or by an additional 50%. The modernization will improve the company’s competitiveness significantly, as the more advanced ion exchange membrane process needs less direct materials and power than the existing technology.

Corporate Social Responsibility

Since Mabuhay Vinyl was founded, our company has always been an advocate of initiatives that demonstrate the attributes of a conscientious and responsible corporate citizen. We became a subscriber of the UN Global Compact to declare our unequivocal support for human rights, labor, the environment and anti-corruption initiatives. We are an active practitioner of Responsible Care® as we are determined to deal with the health, safety and environment concerns on chemicals and chemical operations. We have been a member of the Philippine Business for Social Progress from the time it was formed, as this serves as a venue for socially relevant activities not only for the company but also for its employees.

We have also pursued programs with other non-government organizations that share our passion in promoting projects that are meaningful, uplifting and for the common good. An example is the Solid Waste Management Project at Barangays Maria Cristina and Buruun which host our main manufacturing facilities in Iligan City. To ensure maximum participation and involvement of all residents of the barangays in the project, we conducted an information dissemination and education campaign at the household level and ascertain that project implementors underwent and completed the mandatory capability building training and seminars.

At present, the Company with the Judge Guillermo B. Guevara Foundation, Inc. is working closely with the Barangay Solid Waste Management Committee for the establishment of the Barangay Materials Recovery Facility. As soon as the project becomes operational, we expect it to become a visual showcase in solid waste management and its replication in other barangays. The project is jointly funded with the German Development Services and is being implemented in coordination with the Judge Guillermo B. Guevara Foundation, Inc.

Another activity that we are proud of was the donation of funds for the construction of a two-classroom building at the Francesca Paradela Legaspi Memorial Elementary School in Barangay Buruun through the CGMA (Classroom Galing sa Mamamayang Pilipino Abroad) Project of the Department of Labor and Employment, Department of Foreign Affairs, Department of Education and the Federation of Filipino-Chinese Chamber of Commerce and Industry, Inc. It made the 40th anniversary of MVC more momentous for us and significant to our community.

The success and accomplishments of MVC will not be complete if not for the unceasing patronage of our customers, the unconditional support of our stakeholders, the efforts of our bankers, contractors and suppliers to service our needs, the unstinting loyalty of our employees and officers and the unwavering confidence of the Board of Directors to the management of the company. To all of you, our sincerest thanks and appreciation.



RENATO B. MAGADIA
Chairman and Chief Executive Officer


EDWIN LL. UMALI
President & Chief Operating Officer

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REVIEW OF OPERATIONS

Marketing

Mabuhay Vinyl Corporation generated sales of P1.425 billion in 2005 — the highest in its 40 years of existence.

Demand for liquid caustic soda weakened significantly during the year, mainly due to lower consumption by major customers, process change in some industries, and the continuing use of substitute materials in others. In addition, competition intensified efforts to win more customers.

With both domestic and imported sources of liquid caustic soda, MVC chose to strike a balance between higher sales volume and achieving respectable margins. The strategy to maximize sales from domestic production effectively improved margins and provided competitively priced material that restricted the gains made by competition.

The chlorine derivatives market, composed of hydrochloric acid, liquid chlorine and sodium hypochlorite grew slightly in 2005. Intense competition likewise characterized this arena, especially with the start-up of a new potassium sulfate-HCl producer. Still, the company was able to defend its position in the market, successfully limiting the competitor’s penetration even as it employed low-price tactics just to gain a foothold of the market.

The events of 2005 were unexpected but demonstrated the resiliency of MVC as it adapted to the changing market conditions.

As we progress into 2006, we will create closer relationships with our customers, forging beneficial partnerships that complement our respective businesses.

Manufacturing

Mindful of the need to maintain manufacturing operations at its optimum, the operation of the main manufacturing facilities in Iligan was generally sustained at stable levels of 92% and 97% in electrolysis operating time for the Diaphragm Cell and the Ion Exchange Membrane plants, respectively.

Actual operating time would have been higher if not for the deliberate reduction of current load to the Diaphragm Cell Plant (DCP) because of the instability of demand for hydrochloric acid and liquid chlorine. The load reductions explain the slightly low unfavorable variance in caustic soda volume. Actual production volumes for caustic soda, however, increased by 7% compared to 2004 levels.

Production output for sodium hypochlorite was 15% higher than the 2004 volume as the market for the material continues to grow in the Visayas and Mindanao regions.

At the Mabuhay Premium Bleach Plant at the Laguna Technopark in Biñan, Laguna, actual production volume improved by 9% over 2004 while exceeding production budget by 6%. The need for sodium hypochlorite continues to grow as the material finds acceptance in a very wide range of uses.

Production Cost

Complementing manufacturing operation’s efforts at maximizing the various facilities and equipment are conscious endeavors to reduce costs, resulting to substantial savings in overhead costs and on material usages in both plants in Iligan and Biñan. These reflect, not only the Company’s commitment to attaining volume targets, but more importantly, producing at the most cost-efficient manner.

Finance

Focused on ensuring a decent return on investment (ROI) to shareholders, MVC generated a net income of P81.3 million in 2005, an improvement of 17% from the P69.7 million made in 2004.

The progress came from better-selling prices which were sustained throughout the year, the continuous implementation of cost reduction measures, and the income contribution from services, among other factors.

MVC also generated a 52% increase in Other Income and has reduced its Operating Expense by 4% compared to the preceding year.

Earnings per share went up to P0.115 from P0.092 in 2004. Similarly, book value per share increased to P1.609 from P1.465 in 2004. The Company is optimistic it can sustain this momentum in the year ahead.

Quality Management System

MVC maintains its quality management systems in accordance with the standards of ISO 9001:2000. The system is regularly assessed by SGS Philippines to ensure the company’s compliance with ISO standards. It covers the manufacture of caustic soda, liquid chlorine, hydrochloric acid and sodium hypochlorite by diaphragm cell and ion exchange membrane processes, and the nationwide logistics operation of chlor alkali product and manufacture of sodium hypochlorite.

These quality management systems mirror not only the Company’s continuous commitment to excellence, but pronounces its firm assurance to the Company’s stakeholders, customers, clients, and employees — that indeed, MVC has always been unwavering in its obligation to guarantee worthy investments and return of money’s value. And it is pleasant too that the effort did not go unnoticed and was acknowledged by some, such as Mirant Philippines which awarded a plaque of recognition for Exemplary Performance for 2005 as a supplier in the Chemicals and Gases Category.

Corporate Planning

Corporate Planning department is the group that is in the forefront of conducting studies on a variety of projects which the company plans to undertake. Realizing its role in the organization, the group facilitated the manufacture of polyaluminum chloride, which eventually led to the installation of a pilot plant.

Polyaluminum chloride utilizes the finished products of the company as the main raw material component in its manufacturing process. With this development, the long-term strategy is now to undertake further studies to determine the full range of products which may be developed using the pilot plant.

Another project that would shape the future of the Company is the Diaphragm Cell Retrofitting Project, which involves the conversion of the 16,000 DMTPY diaphragm cell process caustic soda plant built in 1979 into the more modern ion exchange membrane plant of the same capacity.

The change in the technology will provide the company the option to increase capacity to 24,000 DMTPY when the need arises while keeping capital outlay to a minimum. It will also improve the company’s competitiveness significantly as the ion membrane process uses less electric power, less steam and less salt than the current technology.

Meanwhile, the sharp increase in weighing cost prompted the company to program the construction of its own truck scale at the BBTI depot in Bauan, Batangas. With weighing cost becoming a major expense in the delivery of products, the company sees the benefit of investing in its own weighing scale while ensuring that delivery trucks will not exceed allowable axle weight during delivery.

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Logistics

Taking action on customer needs and showing the company’s enthusiasm to deliver, the hydrochloric acid storage capability at the BBTI depot was further augmented with the installation of two additional HCI tanks. These tanks would enhance the capability of the depot to continue to deliver products to customers even during periods of typhoons and heavy seas when our chemical vessels cannot dock or unload their cargo at the BBTI pier.

Supporting these efforts, the company continues to find ways to bring down the cost of product transshipment. A novel delivery of liquid chlorine was started, initially to the Mabuhay Premium Bleach Plant in Biñan, Laguna and eventually, to selected chlorine customers. The procedure utilizes the services of an experienced third-party logistics company.

It is expected that with the partner’s expertise, delivery and turn-around cycle of cylinders to the Iligan liquid chlorine plant would improve. This will reduce the handling process and eliminate the storage of cylinders; while at the same time hastening transshipment of empty cylinders to Iligan for refilling.

Safety Health and the Environment

Fortifying itself as a safety compliant and environment-friendly company, MVC continues to undertake safety, health and environment programs, in close coordination and partnership with customers, suppliers, local government and the national government. A firm commitment across the organization, teams in the manufacturing facilities, distribution operations, among others have come up with initiatives to ensure that the triad — safety, health and environment — is given utmost significance and awareness.

MVC’s safety programs included hazard identification, reporting and corrective action plannings, safe product handling seminars, and safety inspections. The Responsible Care Committee has likewise been firmed up in support of the company’s thrust of providing a safe working environment. Fire and Emergency Evaluation drills and Chemical Spill Response drills have also been conducted to leverage employees’ confidence and preparedness for such emergency instances. Year-round wellness programs, sports activities and employee relations projects are implemented to keep employees physically, mentally, socially, and morally fit.

Community Relations and Development

Anchored on its firm dedication to instill the worth of “integrating” the company’s vision and mission and of “assimilating” its values to its immediate community, MVC takes pride in being at the forefront of various Community Relations and Development activities.

Realizing the community’s need for safer water supply and capitalizing on its technical skills/expertise, MVC took an active role in the construction of a water supply system for the residents of Our Lady of Fatima Parish of Dingkilaan, Iligan City.

As part of its community capability building endeavors, the company continues to provide livelihood skills training to Timoga Multi-Purpose Cooperative — a successful livelihood story of hypo repacking project MVC initiated. The cooperative started with a capital of P5,000 and became a million worth after only six months of operations.

Recognizing the key role of the youth in the community, MVC hosted a Youth Leadership Training for 30 youth leaders of Barangay Buruun. The activity highlighted the youth’s role in community and nation building, and teaching them the basic qualities of being a good and real leader.

As a fitting integration of the company’s environmental advocacy, MVC also sponsored a Summer Children’s Choir and Song Interpretation Workshop where values were showcased via music, songs, and dances.

Committed to being community advocates, MVC also organized a plant tour/on-site community visit to reorient the immediate communities on the company’s awareness campaign on Responsible Care and Corporate Social Responsibility (CSR).

Human Resources Development

Recognizing that people are the company’s best assets, MVC has consistently put Human Resources Development initiatives at the center of its yearly plans and projects.

Dovetailing last year’s initiatives, MVC implemented an improved Pay-for-Performance Plan (PPP) for 2005. Its salient features focused on providing incentives differentiation for varying levels of performance, both to create an impact and enhance the PPP’s motivational effectiveness. Performance rating was based on 50% individual performance and 50% departmental performance. The amount of the PPP incentive for covered employees was determined by the extent to which their respective departments attained their Key Success Factors (KSF) objectives, as well as their individual performance ratings. The better performance results, the better PPP amount is expected at the end of the year. These improvements were geared towards fostering a culture of excellence in both team and individual performances.

In support of cultivating a performance-based culture, Competency Development Plan per Department for each employee was also introduced. The Training Plan covered management systems development, business concepts and processes, technical concepts and processes, health, safety and environmental protection and information technology. This was also the roadmap used in determining appropriate trainings abroad to further deepen knowledge of select employees on the Chlor-Alkali industry and related earnings on safety/environmental protection.

MVC’s commitment to quality and excellence continued to reap honors. It was recognized as a “Hall of Fame Awardee for Pro-active Programs for Competitiveness” by the Department of Trade and Industry-Center for Industrial Competitiveness. It also won “Best Entry” in the 8th National Quality Network Forum by the Societe General de Surveillance (SGS) where the company’s documentation on the topic, Overcoming Challenges Through Quality, bested other corporate entries from quality certified firms, among others. Internally, the Company has institutionalized its annual search for the “Outstanding Quality Employee of the Year” (Oquey) in recognition of Mabuhay Vinyl Corporation’s exceptional employees, who are committed to providing excellent job results and quality service to both internal and external customers. Awardees are also selected by virtue of their distinct involvement in company programs and initiatives and other outstanding accomplishments worthy of emulation. The distinguished 2005 Oquey awardee is Mr. Bienvenido Dungog, Diaphragm Cell/HCl Synthesis Senior Operator. Past winners were Messrs. Manuel Palermo, MPBP Plant Superintendent and Jimmy Dandasan, Sr. Operator (2002), Elmer Edrozo, Buyer (2003) and Antonio Novecio, Industrial Engineer (2004). Since its launching in 2002, the Oquey award has become one of the company’s most-sought after employee recognition programs.

Labor-management relations remain a reflection of trust, cooperation and support, with both the Council of Solidarity (COS) in the Head Office and the Industrial Peace Council (IPC) in the plant actively participating in resolving employee concerns, recommending employee relations activities and in implementing these.

“Work-Life Balance” has likewise been integral in the company’s way of doing business. Community projects and socio-civic involvements, like the “Pamaskong Handog sa Kabataan” of the IPC, benefited at least a hundred children from Purok 13 and Purok Tonggo in the Iligan plant vicinity. The COS, for their part, conducted a “Tree Planting” in the Batangas depot, and had a similar environmental activity in Brgy. Bukal, Liliw, Laguna in coordination with Philippine Business for Social Progress (PBSP).

Intertwined with the Company’s human resources’ enthusiasm to deliver results, is their zest for fun and enjoyment as well. The fun-filled summer outings, sports festivals, and Christmas activities were among the sweet “icings” that completed a year’s worthwhile involvement in the Company’s quest for continued dominance in the chemical industry!

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MVC’s Responsible Care (RC) Program

Being part of the global voluntary initiative of the chemical industry commit its management policy to secure and protect the environment, health and safety (EHS) of its stakeholders, Mabuhay Vinyl Corporation has initiated milestone in support of ethical, attitudinal, and principled ways of conducting its business and relating the same to the company’s role in society.

A Responsible Care (RC) Manual has been prepared to enshrine Mabuhay Vinyl Corporation’s guiding principles, vis-à-vis the RC declarations. Safety, Health and Environment policies have been revisited and firmed up; promotional activities, orientation and trainings were extensively implemented to ensure a successful program launching in June 2003.

To date, MVC’s RC program has been continuously monitored and visited by different organizations. Verification process has likewise been conducted by representatives of the Japanese Responsible Care Council (JRCC), Japanese Export Trade Organization (JETRO), and the Responsible Care Council/Chemical Industries Association of the Philippines or Samahan sa Pilipinas ng mga lndustriyang Kimika (SPIK).

MVC recognizes that all its efforts towards implementing its various Responsible Care programs and initiatives are always in a “continuous improvement mode.” The Feb. 2006 Evaluation of Self-Assessment provided by the Chemical Industries Association of the Philippines affirmed this “continuous improvement cycle” as it accounted: “MVC has updated result of Self-assessment checklist required by SPIK. Based on this, they were able to establish their priority issue which is Environmental Conservation particularly on chemical spill/release which has a big impact on the environment and the community…”

Indeed, aligning MVC’s Environmental Management Program with the Responsible Care’s Codes of Management Practices, not only reverberate the company’s commitment to responsible product stewardship, but more so, MVC’s innate concern and dedication to gain the public’s trust to operate safely, profitably and with due care for the welfare of future generations.

This commitment shall persist.

Corporate Governance Provides Confidence and Protection

The Company has been in observance of its Manual on Corporate Governance (Manual) for the completed year 2005. There were two independent directors appointed to the Board of Directors, both of whom are also members of the Audit Committee. The committee checks the financial reports for compliance with internal policies and accounting standards. With the help of the Internal Audit, they also review and report on the effectiveness of internal controls and compliance with regulatory requirements.

Mabuhay Vinyl Corporation also maintains a Code of Business Conduct. The Code clarifies the Company’s corporate values, provides the Statement of Ethical Standards including the Ethical Standards for Specific Relational Domains expected from its officers and employees as well as its position should an officer or employee be faced with possible conflict of interest situations. Part of the process is to re-orient and cascade to officers and employees specific corporate value on a regular basis to create and support the desired organizational culture.

The majority of the members of the Board of Directors have attended and completed a seminar on Corporate Governance to keep them abreast with developments and compliance requirements with the local, national and international laws as it affects the business.

Compliance with the Manual has enhanced transparency, accountability, reliability, responsibility and fairness, thereby strengthening the Company’s competitive position. Said continued adherence to good corporate governance has encouraged the Company’s directors and officers to make sound decisions and act with sense of responsibility and professionalism. As a result, more efficient allocation of resources and improved opportunities to compete on a level playing field were achieved.

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