The company operated amid the backdrop of a robust Philippine economy, mainly driven by strong consumer spending, higher export sales, surging dollar remittances from overseas Filipinos, good fiscal performance, tame inflation, growing gross international reserves, and increased pre-payment of external debts. These developments helped restore confidence in the domestic economy amid global uncertainties over rising oil prices.
MVC in 2006
The resurgent Philippine economy filtered into the operations of MVC as initial results of its operation replicated its performance the previous year. But 2006 will be remembered as the year when the company had an unusual share of setbacks. These setbacks severely challenged the resiliency of MVC’s business model, the organization, and its people.
In late 2005, MVC already braced for a tougher year ahead as we anticipate a correction in the abnormally high import price of caustic soda. With adequate measures in place, we targeted a profit that reflects the risks to be managed.
Indeed, 2006 proved to be an unforgiving year for the chlor-alkali industry. Not only did the new plants in China and Taiwan drove down prices in the world market, but domestic competitors also put up a strong challenge for many of the tenders held in the limited local market.
Until June 2006, MVC was on track in its revenue and profit targets; it even appeared that we were close to exceeding our forecasts by the end of the year. But then unforeseen events occurred.
After unloading its cargo of hydrochloric acid at the BBTI depot, Snoopy 2, a company-owned chemical tanker, sought shelter in a cove to weather a storm only to run aground. The cove happened to be in the direct path of a very destructive typhoon.
This hampered our ability to serve hydrochloric acid (HCl) in Luzon where the bulk of our HCl customers are located. After having a backup plan in place, the supply line suddenly tightened as regulatory agencies started adopting stricter policies.
As if these were not enough, our depot operations almost got suspended after media reports blew out of proportion a minor incident involving a caustic soda spill in the wake of the oil spill in Guimaras.
Industry leadership
By the end of the year, the company posted a net profit of Php46.12 million from sales of Php1.35 billion. This included gains from the sale of MCCI shares and other non-recurring income. It even exceeded its annual sales target of Php1.32 billion while achieving a gross margin of Php 321.49 million. Ironically, as cost of sales were increasing, selling prices of caustic soda, hydrochloric acid and liquid chlorine were falling compared to previous years.
Programs and improvements in operations and management systems designed to reduce cost and increase efficiency were constantly implemented.
After months of evaluation and trial runs, MVC engaged the services of a logistics company to provide seamless management over the transport and delivery of a major product of MVC. The move considerably reduced the volume of work for MVC and allowed the reduction of field offices while centralizing logistics and distribution operations at the Laguna Technopark in Sta. Rosa, Laguna. This is the kind of synergy we should be able to take advantage of in the future to improve services and reduce costs. Your company will always be on the lookout for better, faster and more convenient and efficient methods that will improve the delivery of products and services to customers without sacrificing safety and cost.
Approval to proceed with the implementation of the Ion Exchange Membrane 2 Project (Retrofitting/Revamp of the Diaphragm Caustic Soda Plant into Ion Membrane Process) was secured and the sales contract with Chlorine Engineers Corporation, the technology and equipment supplier, was signed. While the shift in the technology will require huge financing, this undertaking will strengthen the core business of the company and avail of cost-effective economies of scale. Once in place, it will also propel the company way ahead of competition and provide room for further expansion to keep abreast with the requirements of a growing economy.
The Quality Management Systems implemented in the Iligan Plant, the Depots, the Mabuhay Premium Bleach Plant and Makati offices were regularly subjected to surveillance audits by SGS Philippines Inc. This is to ensure that procedures in place are in accordance with the requirements of ISO 9001:2000. Finally, the Iligan manufacturing operations underwent the Stages 1 and 2 audit of its Environmental Management System to ISO 14001:2004 to determine its conformity with standards. In both instances, the Iligan Plant passed and was awarded the honor of being certified to the system.
Prospects for 2007
The macroeconomic picture for the coming year mirrors the optimism of the Philippine government, mainly because of lower borrowing costs, a stronger peso, higher international reserves, a robust stock market and higher investor confidence.
To accelerate the pace of economic growth, the government plans to spend more on infrastructure, such as roads and ports, to create jobs and attract investors. It is expected that Filipinos will finally feel the benefits of a healthy economy as goods and services priced within their reach become available.
MVC shares the government’s optimism. Now that the IEM2 Retrofitting Project is a certainty, collateral plans must also be put in place. These include possible acquisitions and/or strategic alliances with other industry players to create a stronger industry presence and enhanced competitive position. We shall pursue manpower development, define and implement a succession planning roadmap and strengthen organizational structure in all departments to match the expected production capability from the use of the most modern equipment in the manufacture of basic industrial chemicals.
Improvements in peripheral areas of operations shall continue to be pursued with the objective of managing costs. Not only shall these be practiced in the manufacturing, distribution and marketing departments but also in finance, administration and other support groups.
Giving back
Your company did not overlook its social responsibility in communities where we have established our presence and in our active participation in poverty alleviation initiatives of the Philippine Business for Social progress.
In Iligan City where we have our major manufacturing facilities, your company has chosen education and environmental protection as advocacies and channeled resources to support worthy initiatives in these areas.
MVC also makes its contribution to the communities felt through its core of employee volunteers who participate in a host of activities in Bauan, Batangas–from medical missions, relief support and education of children to tree planting, coastal protection against dynamite fishing and cleanup operations.
The Iligan Plant also hosted numerous educational plant tours by students of various fields of discipline all over the country and customers eager to learn and understand chlor-alkali manufacture. It provided on-the job training to graduating engineering students from Mindanao and even as far away as Manila as part of its commitment to help produce world-class engineers. We shall be generous with the resources given us if it will contribute to the training, educational well-being and progress of all.
In closing, we wish to extend our sincerest thanks and express our gratefulness to our customers for their continued patronage despite the adversities we face; to our stakeholders for their unconditional support; to our contractors, bankers and suppliers for their assistance; to our employees and officers for their loyalty and dependability; and the Board of Directors for their confidence and resoluteness in the management of MVC.
RENATO B. MAGADIA
Chairman and Chief Executive Officer
EDWIN LL. UMALI
President & Chief Operating Officer
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2006 started with MVC replicating its gains the previous year. Until the middle of the year, sales were slightly ahead of target. However, this was not sustained throughout the year: net sales slightly dipped to Php 1.35 billion by end of 2006 from Php 1.43 billion in 2005.
The decline resulted from a host of factors that typically affect the commodity nature of chlor-alkali products.
In terms of both volume and revenue, liquid caustic soda posted improvements, with much of the increased demand coming from the food, energy and power producers and other industries that are mainly consumer-driven.
The sales and volume of hydrochloric acid fell short of expectations. Until almost the end of the second quarter, actual sales were actually above forecast levels. But sales performance turned lacklustre when government regulators tightened the noose on the movement of the chemical.
In addition, MVC faced transshipment problems when its vessel, Snoopy 2, ran aground while seeking shelter in a cove against a very strong typhoon. Though sales improved later, efforts were not enough to offset the shortfalls.
The weak performance of liquid chlorine versus target was mainly due to the decision of big-volume customers to import the chemical to take advantage of softening prices overseas and the implementation of a two-supplier strategy in their purchasing management. Sales improvements in the Visayas and Mindanao regions failed to make up for the sales deficiencies.
Sales of sodium hypochlorite continued to be robust in 2006. While sales slowed during one quarter, recovery came from Luzon customers’ increased demand in the second half and from emerging markets in the Visayas and Mindanao regions.
Manufacturing
The imbalance in the demand for caustic soda and its by-products characterized the operating schedule of the diaphragm cell plant and the ion-exchange membrane (IEM) plant during the year.
The situation gave rise to the production of IEM-grade caustic soda at the plant’s optimum capacity, with the older diaphragm cell plant taking up the difference in the production demand. At the same time, this situation helps ensure and sustain MVC’s production reliability.
After three years of operations at rated capacity, the IEM plant performed efficiently. These reduced membranes will be replaced by the middle of 2007.
Increased demand for sodium hypochlorite in the Luzon and VisMin markets outstrips production plans at the MBPB and Iligan plants. The MPBP plant met the higher demand due to earlier production improvements and its capability to cater to special customer requirements for varying NaOCl concentration.
On the other hand, the Iligan sodium hypochlorite plant was upgraded to almost twice its capacity to maximize production and meet the growing demand. The Company also had to add work shifts. The Iligan sodium hypochlorite plant was designed using indigenous and homegrown talent and less dependence on foreign technology.
Production Cost
MVC maximized the use of the IEM plant, mindful of the imbalance in product demand and its significant cost advantage over the diaphragm cell plant. The IEM plant produces more caustic soda and its coproducts using the same quantity of raw materials and less energy. It also helped that the people of MVC continue to be cost-conscious, closely monitoring expenses and sustaining campaigns to improve efficiencies further.
Finance
The softening of international caustic soda prices, successive increases in power and fuel costs, and the reduction in sales volume of two major products were the factors that brought down MVC’s net income to Php 46.2 million in 2006 from the previous year’s Php 81.3 million.
The adverse impact, however, was tempered by the reduction of operating expense by 2% through better utilization of tanker vessels and other cost improvement measures.
Interest charges in 2006 dropped by Php 5.7 million due to the early settlement of trust receipts loan and payment of the Company’s long-term loan. Other income went down because of reduced business from logistics services while interest income also fell due to a significant drop in money market placement rates.
MVC ended the year with an earnings per share of Php 0.066 from Php 0.115 in 2005. Book value per share rose slightly to Php 1.623 in 2006 from Php 1.585 in 2005.
Logistics
MVC engaged the services of a logistics company to provide comprehensive management over the transport and delivery of a major product of MVC. This was after running a series of simulations and a trial run to evaluate the business process and fine-tune operations.
The new arrangement reduced the volume of work considerably, thus rationalizing the Company’s North Harbor operations.
Other functions which provided control over the activities of the service provider were transferred to the MPBP Plant, thus centralizing logistics and other distribution activities for this particular product.
Vessel Operations
MVC maintains a logistics model that is most appropriate and cost efficient given the length and breadth of its operations. This model, which relies on the availability of company-owned and chartered vessels in moving products, will be modified as the need arises and tailored to fit the logistics requirements and the demands of the market.
Environment and Quality Management System
MVC continues to support management systems that promote customer satisfaction and environmental protection. These systems–ISO 9001:2000 for Quality Management Systems (QMS) and ISO 14001:2004 for Environmental Management Systems (EMS)–were regularly and diligently audited by third-party assessors SGS Philippines, Inc and TUV-SUD Management Service, respectively, to ensure MVC’s adherence to the ISO standards.
The EMS is currently available only at the Iligan manufacturing complex, but plans are afoot to adopt the EMS standards in other areas where MVC has a presence and its impact is greater.
Safety, Health and the Environment
MVC has always been an environment-friendly company. Within its limited resources, the Company has invested a considerable number of man-hours to promote environmental protection and the prevention of pollution. At the Iligan plant, an integrated management system was put up to ensure that the environmental management system will meet legal and corporate requirements. In implementing EMS, the plant underwent stages 1 and 2 of an EMS audit. The initial audit was an assessment of the plant’s physical structures and the effectiveness of its environmental management systems, in accordance with the standards of the ISO14001:2004.
The last stage ensured that deficiencies earlier noted were mitigated and/or addressed. That the plant passed this process manifests the commitment and determination of MVC management to do what is right and proper to improve the environmental impact of plant operations to its host community.
The various plant and depot locations have consistently practiced fire and emergency evaluation and chemical response drills to improve employee confidence and preparedness for similar incidents. The company also carried out activities that promote health initiatives, employee relations and the preservation of the environment through tree planting and community cleanups. Plans to expand the participation of families of employees were also drawn up.
MVC was unceasing in its efforts to support the health, safety and environment activities of the communities around its Iligan plant. Donations consisting of plastic drums and trash cans and the turnover of the Materials Recovery Facility (MRF) were made to Barangay Ma. Cristina in its Barangay Solid Waste Management project. Ma. Cristina was the sole barangay in Iligan City that participated in the 2nd Nationwide Search for Model Barangays in the area of eco-waste management in 2006. The MVC plant similarly supported the efforts of Barangay Buruun in its solid waste management program.
Human Resource Development
People are MVC’s most valuable resource. To conserve and nurture its base of talents, the company continues to provide benefits and remuneration comparable to the leading companies in the country. And to further improve productivity, MVC supports programs such as awards for perfect attendance to address tardiness and unplanned absences.
For the second time, the Department of Labor and Employment gave recognition to an MVC employee as “Most Outstanding Employee” of Region X. Bienvenido Dungog is a Senior Operator stationed at the HCl Synthesis of the Diaphragm Cell Plant and has been with the company since August 1979.
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