The Value We Create 2010 ANNUAL REPORT The mix of our new businesses will shape San Miguel’s growth trajectory over the next decade. Many of our recent acquisitions have already given us access to fast-growing streams of revenue, with the potential to outpace our growth in the past. For 120 years, our products have been at the forefront of every Filipino celebration. But today San Miguel is well-placed to literally fuel the progress of our nation. We have moved beyond consumer products, and are participating in businesses that make a measurable difference in people’s lives— providing them with essential services that meet genuine, basic human needs. We are proud to be part of a new San Miguel that keeps as many people as possible working, earning and contributing to our growing economy. 2 Message to Stockholders 7 Synergy the San Miguel Way 15 Our Strategy 16 Management’s Discussion & Analysis 21 Financial Position Profile 22 Corporate Governance 28 Corporate Social Responsibility 32 Board of Directors 34 Key Executives 37 Financial Section 2 SAN MIGUEL CORPORATION 2010 ANNUAL REPORT There are a number of things we believe make San Miguel unique— not least being the diversity and complexity of our portfolio. Eduardo M. Cojuangco, Jr. Chairman & CEO LETTER TO STOCKHOLDERS A Partner in Progress 2010 was a year in which partially reflected in our 2010 on revenue growth and the we executed on our strategy results. effective, efficient use of our of diversifying into non- capital. traditional industries. Having Revenues for the year totaled held market-leading positions P246.1 billion, up 41% We are managing our overall in the domestic food, drinks from 2009, with net income costs with a renewed sense and packaging sectors for amounting to P20.1 billion. of discipline resulting in over the last 100 years, our Our recurring net income of operating income of P34.8 twelfth decade ushered in P17.1 billion is 101% above billion. Indeed, our financial a “new” San Miguel, as we last year’s P8.5 billion, while and operational strength gives firmed up our power, mining, consolidated recurring EBITDA us the ability to carry out our oil refinery, infrastructure of P52.5 billion, is 75% higher plans and make substantial and telecommunications than 2009. investments to grow our core holdings—businesses where and new businesses while we believe there is huge unmet CASH GENERATIVE maintaining a strong balance demand, and a wealth of Driving our revenue growth sheet. opportunity to match. were our domestic beer and Equally important, we food segments, which grew The bulk of our new businesses demonstrated our ability to 9% and 4% respectively—the are immediately cash meet our commitment to you, result of strong demand across generative, requiring relatively strengthening our already our key end markets. Our low capital investment. Over solid financial foundation by power subsidiaries that form the last year, we’ve filled improving revenue growth SMC Global Power Holdings, strategic gaps in our energy and cash flow, while at the contributed revenue of P45.7 sector with the acquisition same time diving quickly into billion. Encouragingly, we of three coal mines and the promising new arenas. San were also able to generate a independent power producer Miguel Corporation today consistent level of earnings agreement (IPPA) for the Ilijan consists of a mix of businesses and revenues across our other power plant—bringing to whose value is already businesses, making progress four—the number of power The Value We Create 3 In the near- and medium-term, we will continue to refine our portfolio by harnessing the full potential of our traditional businesses and investing in new businesses that meet our return criteria. Ramon S. Ang President & COO plants whose contracted assets to maximize value A CHANGING REVENUE AND INCOME MIX capacities are managed creation, while at the same Contribution by revenue* by San Miguel. Coal is an time playing a critical role in important power source for ensuring security of electricity 2009 2010 18% BEVERAGES the Philippines and presently supply for the Philippines. 46% our mining assets in South 43% BEVERAGES Cotabato will provide a hedge An equally important cog in FOOD 16% for our power generation our strategy to increase profits FOOD operations and a potential and improve shareholder resource for our raw material returns is Petron Corporation, 5% requirements. the country’s largest oil 47% PACKAGING refining and marketing PETRON In a relatively short period, company in which we have 11% 14% POWER SMC Global Power has become a 68% stake. Petron’s 38% PACKAGING the largest power producer market share, extensive in Luzon and a state-of-the- distribution network and art platform on which we number of service stations Contribution by EBITDA* 2009 2010 can further build our power brought the refiner close to 67.1% business. In terms of installed P229.1 billion in revenue and 11.8% PACKAGING BEVERAGES 22.3% 32.8% capacity, our power sector P7.9 in annual net income, PETRON BEVERAGES accounts for over 29% of the making it earnings accretive Luzon grid and is an important for us in 2011. Together we 21.1% engine for growth for San will pursue a growth and FOOD Miguel Corporation, capable expansion strategy with an of yielding for us double- eye on assets and acquisitions 28.7% 10.9% digit returns annually. In the that will complement POWER FOOD future, we will actively pursue Petron’s core business and 5.2% vertical integration within our allow the company to adapt PACKAGING energy sector and actively to the market’s shifting manage our power generation needs. To take advantage of * 2010 pro-forma with full consolidation of Petron and power businesses 4 SAN MIGUEL CORPORATION 2010 ANNUAL REPORT growing demand for specialty planned 44-kilometer rail In the near- and medium-term, chemicals such as propylene, and road project. The need we will continue to refine our We believe we have xylene, benzene and toluene for significant infrastructure portfolio by harnessing the made our company and to upgrade to a higher development throughout the full potential of our traditional more competitive conversion capability, Petron Philippines represents an businesses and by investing and we continue to is investing $1.75 billion to important growth opportunity in new businesses that meet modernize its refinery and for San Miguel, not just for our return criteria. To take grow our business petrochemical business in profit, but to contribute to full advantage of emerging in the best public- Bataan, and has bought a 40% nation-building. opportunities from new spirited tradition. stake in Hong Kong-based investors and partners, we We will provide Petrochemical Asia (HK) Ltd. All in all, it is hard to overstate recognize the need to sharpen our consumers Estimates place a premium of the importance of all these our current operations and with excellent $40 a barrel on higher value sectors to the future of San we are mindful of creating customer service, petrochemical products and Miguel. Case in point, SMC the best value from our food, high reliability, and as such, our growth strategy Global Power contributed beverage and packaging affordable prices is to move up the value chain about 29% to the Group’s sectors. through all our from low margin fuel oil into EBITDA in 2010. Once Petron is business lines. higher margin white products fully consolidated in 2011, its DUAL COMMITMENT and petrochemicals—further contribution would represent We believe we have made our expanding into the blending about 44% of our total company more competitive and export of fuel additives. revenues. In fact, following and we continue to grow full consolidation of our new our business in the best Early in January 2011, Petron power generation and oil public-spirited tradition. At bought 35% of Manila North businesses, we expect revenues San Miguel, we have a dual Harbour Port, Inc. for the to more than double for 2011 commitment to social progress purpose of building a fuels to reach a record P530 billion. and business success that terminal. defines the way we operate— Over the next five years, we whether on a national scale or GROWTH OPPORTUNITIES target our portfolio of new in our communities. We will Infrastructure is another businesses to account for an provide our consumers with major target for San Miguel, estimated 70% of our total excellent customer service, and a flourishing economic revenue, contributing greatly high reliability, and affordable sector that promises higher to our organic growth. Stable prices through all our business returns than our traditional macroeconomic conditions lines. Over the last 120 years, businesses. In August 2009, we combined with the Aquino our byword has been profit acquired a 35% stake in Private administration’s programs to with honor and we continue to Infrastructure Development privatize government-owned operate in that great tradition, Corp. (PIDC), the consortium enterprises make this a good managing our business in the of construction firms behind time for us to venture into public interest as well as the the Tarlac Pangasinan La critical industries. interests of our shareholders. Union Expressway (TPLEX). Construction began in April Our telecommunications We are convinced that the 2010 and will take three-and- business has seen the inherent demand for basic a-half years to complete. As acquisition of Bell services and quality products concession holder of this toll Telecommunications is significant, and believe that project and others that we Philippines Inc. and Eastern San Miguel—quite apart from have set our sights on, PIDC Telecommunications the food and beverages we will provide management Philippines, Inc. both of which produce that bring enjoyment services, toll collection, strengthen our telecoms to our consumers—can play traffic safety and security platform previously consisting a pivotal role in helping management, toll road of Liberty Telecommunications bring the transforming maintenance and other related Holdings Inc.