2020 VISION & MISSION SMB is a dynamic company, the undisputed leader in the alcohol beverage industry, and a significant and profitable challenger in the NAB market. We will lead the beverage market, anchored on our tradition of San Miguel Beer business excellence. We will make accessible in existing and new markets, our world-class portfolio of products and services, to continually serve the ever-challenging tastes and preferences of our consumers. We will deliver superior long-term value to our stakeholders inspired by our drive to be the best for the world. Through our products and services, every occasion will be a drink to life. We are SMB: Vibrant, Inspired, Bold & Entrepreneurial Up the Vibe! Drink to Life! CONTENTS 3 Message to Stockholders 6 Financial Highlights 8 Management’s Discussion & Analysis 12 Milestones: It’s a Ten! 16 Corporate Social Responsibility 22 Board of Directors 26 Corporate Governance 41 Financial Statements GAME-CHANGING DECADE It has been 10 years since San Miguel Brewery Inc. (SMB) was established. We changed the way we do business. We reshaped our strategies, expanded our brand portfolio and package offerings, broadened our footprint in the international market, embarked on capacity expansion projects and entered into the non-alcoholic beverage business. We widened our customer reach with fresh and trendsetting marketing campaigns, tapped emerging channels, and strengthened ties with our trade partners. Yes, in many ways, we have changed our game. 2 ANNUAL REPORT 2017 RAMON S. ANG CHAIRMAN OF THE BOARD ROBERTO N. HUANG PRESIDENT SAN MIGUEL BREWERY INC. 3 GAME- CHANGING DECADE MESSAGE TO STOCKHOLDERS Ten years ago, San Miguel Brewery Inc. With every challenge, our employees (SMB) was spun-off from its parent and business partners have worked company San Miguel Corporation as a doubly hard to protect volume gains, standalone subsidiary with the end in maintain profitable growth, and maximize view of unlocking the beer business’ production capacities to serve the growing true value and potential. Today, our demand for our products. Each function company is as strong as it has ever been: is focused on executing projects designed We are generating the highest profits to improve operations in order to make and revenues in our history; serving SMB even more competitive and profitable new markets with a wider portfolio of not just today but for the longer term. world-class beers, and built to better With improved distribution, the upgrade withstand challenges and cyclical strains of production facilities, adoption of new to our business. technologies, and well-timed execution of expansion plans, SMB is ready to serve From 2007 to 2017, our financial results increasing demand for our well-loved, have been remarkable. In the past two homegrown products. years alone, we registered double-digit growth, with 2017 consolidated revenues Our sales team meanwhile continued growing 17% to an unprecedented P113 to further strengthen ties with selling billion, while our operating income reached outlets—both on- and off-premise— P31 billion. to ensure that our brands especially new products and package offerings Our success has been hard-fought. Over are available and easily accessible to the years, we weathered the impact of consumers. It is, after all, availability of our huge tax increases and implemented products that has allowed us to maintain pricing strategies to ensure continued our position as one of the top players in increase in volume. With competition in the the country’s beverage industry. broader alcoholic beverage market always nipping at our heels, SMB continues to We foresee a continued rise in demand keep the consumer at the center of all our for San Miguel Beer products both in efforts, addressing competitive challenges our domestic and international markets. with effective sales and marketing This is grounded on the continued strong programs, and continued strong levels economic performance in the global of consumer advertising to support our market and our drive to export SMB different brands. products to new international markets. 4 ANNUAL REPORT 2017 “THERE WILL BE MANY CHALLENGES ALONG THE WAY, BUT WITH OUR FOCUS AND RESOLVE, WITH OUR ENTREPRENEURIAL SPIRIT AND PASSION FOR CREATING WORLD-CLASS BEERS, WE ARE CONFIDENT THAT WE WILL CONTINUE TO LEAD THE BEVERAGE INDUSTRY.” SAN MIGUEL BREWERY INC. 5 Domestically, the government’s aggressive Looking ahead, we are confident that economic development programs and the strategies and programs we have policies have resulted in rapid urbanization. put in place today, will result in another Investments in infrastructure have resulted decade of growth. We have a strong lineup to job creation and greater economic of marketing events, sales promotions development in major cities and towns— and brand activations planned for the all of which should benefit our business. year. We expect our capacity expansion programs and companywide productivity As such, our capacity expansion program initiatives to redound to higher margins is now underway. We recently broke and profitability in the years ahead. ground for a new brewery in Tagoloan, Misamis Oriental, the company’s sixth There will be many challenges along the in the country, while construction of way, but with our focus and resolve, with more breweries in key locations across our entrepreneurial spirit and passion the country are already planned. We will for creating world-class beers, we are maintain financial discipline on how we confident that we will continue to lead the use our strong cash flows to generate beverage industry. more business for SMB—making sure our products reach our consumers, whenever Arangkada SMB! Up the Vibe! Drink to Life! they need it, and wherever they might be. Cheers! In the same way, we make ourselves accountable for the targets we set and recognize the efforts of each and every Ramon S. Ang Roberto N. Huang employee for their contributions to Chairman of the Board President our goals. Likewise, our achievements would not have been possible without the continued support of our business partners, our shareholders, and most importantly, our consumers, who continue to patronize our products. 6 ANNUAL REPORT 2017 113,255 97,160 82,374 FINANCIAL HIGHLIGHTS FOR THE YEARS 2015-2017 IN PESO MILLIONS 2015 2016 2017 REVENUE SAN MIGUEL BREWERY INC. 7 GAME- CHANGING DECADE 31,161 20,711 27,188 17,658 22,631 13,518 2015 2016 2017 2015 2016 2017 OPERATING INCOME OPERATING NET INCOME 8 ANNUAL REPORT 2017 MANAGEMENT’S DISCUSSION AND ANALYSIS San Miguel Brewery Inc. delivered outstanding financial results. Hefty sales performance translated to top-line growth of 17% with consolidated revenue increasing to P113 billion. Consolidated net income grew 17%, reaching almost P21 billion, mainly driven by 13% volume growth. DOMESTIC OPERATIONS Consumption of San Miguel Pale Pilsen In 2017, SMB exhibited strength and continued to increase through visibility fortified its market leadership through programs highlighting the brand’s “original” equity-boosting and consumption- equity and offtake-generating programs as generating programs to support the well as innovative above-the-line and digital company’s expansion. Sustained economic executions, bar tours and sponsorships. growth alongside the company’s pricing strategy, equity-building, demand- Red Horse further strengthened its generating and efficiency programs position as the leading strong beer brand spurred consumption. Most beer with two thematic campaigns through TV brands exceeded last year’s results commercials (TVCs) complemented by non- with high volumes for Pale Pilsen, traditional out-of-home (OOH) placements, Red Horse, San Mig Light and San Miguel annual hosting of its trademark event Flavored Beer. “Pambansang Muziklaban” and various on-the-ground activations. Meanwhile, our non-alcoholic beverage (NAB) business continued to expand San Mig Light enhanced its message of “light supported by availability and sampling on stomach” and relevance in social culture initiatives as well as targeted advertising. with new thematic campaigns via new TVCs, Magnolia Healthtea and Purewater were digital and OOH in strategic locations while the key growth contributors. San Mig Cola protecting its key channels with outlet- was also launched in identified regions in based consumer promotions, image-building March 2017, marking the company’s entry events and merchandising displays with into the carbonated soft drinks segment premium bucket designs. and contributing to volume growth. SAN MIGUEL BREWERY INC. 9 GAME- CHANGING DECADE Economy brand Gold Eagle (GE) upheld its and “Pambansang Beer” campaigns, and position in the regional markets by means “Divercities”-themed Oktoberfest activities of localized TVCs and radio commercials including media-based and sponsored (RCs), GE totem poles, volume-generating major events nationwide. programs, provincial events and community partner programs rolled out to improve For our NAB business, consumption availability in remote and rural tertiary improved using regional advertising, outlets. increased number of productive outlets, product sampling, strategic merchandising Seriously fun San Miguel Flavored Beer and trade programs. strengthened its brand image through tradigital executions, OOH in key areas, San Mig Cola commenced selling in sari-sari “SMFBU Fun Fair ng Barkada” signature stores and selected on-premise outlets event as well as demand-generating in identified regions. The new product promotions