Fernando Zobel De Ayala: 2018 Annual Stockholders' Meeting President's Report
Good morning to everyone.
We are pleased to report that 2017 was another strong year for Ayala. The aggressive expansion strategy we embarked on several years ago across our portfolio of businesses continues to bear fruit.
Our net income climbed 16 percent to ₱30.3 billion, with solid growth led by our real estate and power businesses.
We continue to lay the foundation for sustained growth, and ensure our resilience and relevance in the fast-paced business environment.
Our businesses have made significant progress towards both our 2020 goals, and our desire to help build the nation and uplift the lives of more Filipinos. This is what we mean when we speak of shared value—when the achievements of our businesses result in a greater positive impact on society.
INTRODUCTION: SIX THEMES
Today, we will depart from the traditional way we report our performance. Instead of a detailed discussion on our financial and operating results, we would like to focus on the tangible ways in which our businesses have had a positive impact on society. We have grouped our initiatives into six broad themes, which we believe appropriately represents our contribution in the industries where we operate, the lives of the communities we serve, and our country’s development agenda.
These six themes are Empowering Filipinos, Innovating in business, Accelerating broad-based development, Connecting communities, Transforming industries to improve quality of life, and Diversifying into new sectors for future growth.
Let me start with the first theme: Empowering Filipinos.
When our businesses meet basic needs, and ensure access to critical services, we are able to contribute to human capital development and help empower our countrymen to achieve their aspirations.
AC Education has continued to scale its operations to bring its specialized curriculum and programs to even more Filipino students. At the end of 2017, AC Education had a student population of approximately 16,000 across 23 APEC Schools and 8,000 in the University of Nueva Caceres in Bicol.
APEC uses a specially-designed curriculum that equips students with the skills and characteristics that employers look for. This is combined with a technology-based learning environment that creates a unique educational experience. Through APEC, Filipino students receive the education they need to go on to college, or to find employment.
Together with industry partners such as Globe, BPI, Convergys, and Accenture, the University of Nueva Caceres implemented a novel intervention to improve the employment prospects of graduating students. The Professional Employment Program or PEP places students in a working professional environment. It also develops skills such as English communication, critical thinking, and the practical application of technology.
This past school year, 89 percent of the UNC-PEP participants found employment within three months after graduation, compared to only 50 percent of students who did not undergo the program. UNC-PEP graduates went on to work for companies like BPI, Sutherland Global Services, Ford Philippines, and Telus Manila, among others. They also received average salaries that are 54 percent higher than those who did not join PEP.
This is just the beginning, and AC Education is determined to work even harder to improve these numbers and reach more students.
Early this year, AC Education signed a non-binding term sheet for a potential merger with iPeople, which operates Mapua University in Metro Manila, Laguna, and Mindanao. Mapua consistently produces some of our country’s best engineers and technicians. We look forward to this partnership with iPeople and to combining our resources and capabilities to further develop our country’s human capital.
AC Education also recently acquired a 96 percent stake in National Teachers College. NTC has made a name for itself through its track record in teacher education, having produced thousands of excellent teachers across different educational levels.
AC Education would introduce its governance system and unique capabilities to further enhance NTC’s long-held standards of excellence. Working together, we can positively impact the lives of even more Filipino students across the archipelago—producing even more capable, empowered, and skilled teachers for the next generation.
INNOVATING IN BUSINESS
Let me move on to the second theme, which is centered around “innovating in business.”
We are well aware that innovation is the key to any company’s survival, especially with the rapid pace at which industries are changing today. Innovation has long been a key driving force of Ayala’s longevity and ability to remain relevant across multiple macroeconomic and socio-political cycles in our country’s history. Today, we actively work to embed innovation in our core and make it part and parcel of how we do business.
Doing this has helped us evolve and transform our businesses, contribute to the growth of local industries, and serve our customers better. Let me cite a few examples, starting with one of our newest business units, AC Industrials.
Through AC Industrials, Ayala is establishing a foothold in the rapidly-evolving global industrial technologies sector, particularly in the automotive industry. Formed two years ago, AC Industrials is anchored on two of the Ayala group’s long-held businesses: our electronics manufacturing services unit IMI and our automotive retail unit. IMI, in particular, started as a homegrown manufacturing company more than three decades ago.
IMI has over time earned a niche in global electronics manufacturing. Today, it is the sixth largest electronics manufacturing services company for automotive and the 18th largest in overall electronics manufacturing services in the world. What was once a relatively small local operation now provides jobs to almost 17,000 people around the world.
AC Industrials has made strategic acquisitions in the past couple of years as it builds a unique portfolio of capabilities. Germany-based VIA Optronics is revolutionizing display systems, while Merlin Solar has developed unique and innovative solar solutions for applications in transport and infrastructure.
STI gives us exposure into technologically-advanced industries like aerospace and defense, while MT Technologies allows us to participate in the early design stages of a car.
All these strategic acquisitions are complementary with one another and give us access to disruptive technologies, industry knowledge, and innovations to capture the opportunities in global industrial technologies. It is a source of pride for all of us to be able to develop AC Industrials into a global player in advanced technologies.
AC Industrials can leverage its body of knowledge to move the Philippines up the global value chain, and help develop our local manufacturing sector and help stimulate economic development and job generation for Filipinos.
To complement this, IMI has a strong training program to upgrade the skills of its employees, who at a minimum, have high school diplomas. Through different platforms, including partnerships with local colleges, IMI employees are trained to operate sophisticated machinery and equipment and develop skills that allow them to remain relevant amid the transformation taking place in the manufacturing industry.
Another example is how we harness innovation to contribute to economic inclusivity. In our financial system, for instance, much work needs to be done to widen its reach and bring greater access to financial products and services to unserved areas. It is unacceptable that half of our adult population is not part of the formal banking system, and that 35 percent of our municipalities still have no physical access to a bank.
This is complicated further by the Philippines’ archipelagic setting, which makes it costly and inefficient for traditional banks to serve rural areas. A number of banking requirements also prove to be too stringent for the lower-income tier. Many current product offerings are also deemed unaffordable for the lower-income segment.
Ayala is doing its part to help alleviate this challenge. Globe’s fintech platform, Mynt, leverages technology to serve those who do not have access to any form of basic banking or formal lending transactions. Now a joint venture with Ant Financial, Mynt makes financial services accessible to segments of the population that would not otherwise qualify under traditional requirements.
Mynt’s business is built around the use of mobile phones: GCash is a mobile wallet and micropayments platform, while Fuse is a technology-based lending company.
The use of mobile phones to enable access to financial services is particularly relevant to the Philippine context, where the majority of Filipinos own at least one mobile phone. With many communities and barangays in rural areas, mobile phones can be used to literally connect Filipinos to the financial system.
GCash, for example, is a way through which Filipinos can send money and pay their bills. Meanwhile, Fuse is a licensed lending institution that strives to understand the loan needs of its customers to ensure that it provides the right products. Fuse allows clients to avail of loans ranging from ₱300 pesos to ₱300,000. It communicates updates and approvals to their clients through mobile phones. Last year alone, Fuse released ₱332 million through 66,000 loans, and we expect this to grow significantly in the coming years to reach more customers.
Technology is not just changing the way we pay our bills or take out loans—it is also changing the way we shop. In many countries around the world, customer preference is shifting to e-commerce from traditional brick-and-mortar retail stores.
In our country, this trend is taking hold, through increasing access to the internet and more affordable smartphones. While more Filipinos are shopping online, e-commerce in the country today still represents under one percent of the total retail market. However, with increasing adoption of mobile and digital platforms, this number is expected to grow to five percent by 2025.
To take advantage of the high growth potential of e-commerce, the Ayala group has invested in Zalora, the most popular fashion retail online platform in the Philippines.
Zalora already receives around 100 million visits every month. Investing in this platform gives us the opportunity to understand the new needs of shoppers; learn from its operations; and harness synergies with Ayala Land, which, as you know, operates shopping malls around the country.
ACCELERATING BROAD-BASED DEVELOPMENT
While many are benefitting from our country’s economic growth, there remains the challenge of narrowing the income gap and accelerating broad-based development, which is the third theme I want to highlight. As we ramp up the scale of our businesses, we want to make sure that we accelerate the progress of communities and the upliftment of our countrymen.
For instance, BPI, which has traditionally been strong in corporate and retail banking, is now widening its reach to provide financial services to the underserved and unserved segments of the population.
BPI is now providing greater focus to the small and medium enterprises of the country. We know that they make up the vast majority of Filipino businesses, and are crucial in driving economic growth.
As a dedicated group for SMEs, BPI has created a new unit called the Business Banking Segment. This group will work with small and medium enterprises to help them make the best financial decisions to grow their businesses. The BPI Business Banking Segment provides loans to SMEs ranging from ₱300,000 to ₱100 million pesos.
Complementing this is BPI Direct BanKo, which provides financial solutions to self-employed microentrepreneurs.
BanKo provides micro-business owners access to loans with simple administrative requirements. With loans ranging from ₱20,000 to ₱300,000, this platform reduces reliance on unlicensed moneylenders that may charge exorbitant rates.
In its first year of operations, BPI Direct BanKo has already provided over ₱400 million in loans to more than 8,000 clients. From only nine pilot branches in 2016, it has grown elevenfold to a network of 103 branches and microbanking offices in just a year. We aim to widen the reach of our operations further, to achieve total loans of ₱2 billion at the end of 2018. By 2022, we are targeting our total loans disbursed to be six times bigger.
The fourth theme I want to highlight is the critical need to connect communities. Through Globe and AC Infrastructure, we are ensuring that Filipinos can stay connected to each other, and that people, goods, and services can easily and safely move from point to point.
As a first example, Globe has established its number one position in the telecommunications industry and its identity as the purveyor of the Filipino digital lifestyle.
It has consistently deployed massive amounts of capital in recent years to improve its network infrastructure, towards delivering faster and more reliable internet speeds. With capital expenditures of about US$800 million annually, Globe is working to achieve its goal of ensuring first-world internet connectivity for Filipino consumers and businesses.
Globe also offers an expanding variety of content for consumers: from the social media platforms that help customers keep in touch with friends and family to entertainment channels that delight customers, including Netflix, Disney, and Spotify.
The United Nations has declared internet access as a human right, and Globe is doing its part to make sure that all Filipinos have this. In 2017, Globe connected 1.3 million Filipino homes through high-speed internet. It is well on its way to achieving its goal of connecting two million homes in 20,000 barangays by 2020. It also has a goal to provide mobile services to 95 percent of cities and municipalities in the Philippines by the end of the year.
Meanwhile, AC Infrastructure continues to contribute to the Philippines’ need for efficient transport infrastructure. Through LRMC, it has significantly improved the service provided by the LRT-1, the oldest elevated rail line in the country. Since taking over operations in 2015, AC Infra in partnership with Metro Pacific, has increased the number of Light Rail Vehicles in operation, from 77 to 109.
Within a short span of time, other improvements have been made, which have resulted in shorter time between trips and 99 percent train punctuality in 2017. Today, it only takes an average of eight minutes from arrival at the train station to boarding a train.
This has allowed the LRT-1 to accommodate even more passengers. It has an average daily ridership of 435,000, a 12 percent improvement since LRMC took over the operations in late 2015. Clearly, improving the quality of all rail systems will result in significant benefits to millions of Filipinos.
AC Infrastructure continues to look for opportunities to augment our country’s transportation challenges. It has submitted unsolicited proposals to government to build much-needed infrastructure projects.
One of the most critical infrastructure needs of the country is the rehabilitation of the Ninoy Aquino International Airport. NAIA was originally built to handle only 31 million passengers every year. Last year, it handled over 42 million passengers. We have all seen how NAIA has been left behind by its regional peers in terms of airport development.
Early this year, as part of a consortium with Changi Airports, one of the world’s premier airport operators, and six other leading Filipino companies, AC Infra submitted an unsolicited proposal to redevelop NAIA. The proposal entails improving and expanding the airport’s capacity to serve passenger traffic, which has grown significantly and will continue to grow in the coming years. The consortium is prepared to spend ₱102 billion over the next five years to develop a modern airport complex that will meet the long-term passenger demand at NAIA and transform it into a world-class facility and a regional air transport hub.
Ayala’s drive to build better businesses has created innovative business models, and transformative products and services that have redefined industries and uplifted the quality of life of our customers.
With a solid track record in diversified segments of property development, Ayala Land is widely recognized for its unique expertise to develop large-scale, masterplanned mixed use estates in different parts of the country.
In building these estates, Ayala Land pays special attention to the environment and in providing a better quality of life for the communities it serves.
To improve the overall urban experience in its established estates such as Makati, Nuvali, and Bonifacio Global City, Alabang, and Cebu, Ayala Land ensures pedestrian mobility and transit connectivity. It also incorporates transit terminals in all its 25 estates to create a positive commuting experience and ease vehicular traffic in and around the area.
In addition, Ayala Land ensures sufficient green space across its developments to provide areas for leisure, environmental sustainability, as well as disaster resilience.
More importantly, Ayala Land’s developments serve as a platform for economic activity and concentrations of opportunity. These projects generate employment and business opportunities across the development cyclem, whether through the merchants and tenants of its malls and offices or the service providers in its construction, property management, sales, and hospitality segments. Moreover, Ayala Land deliberately integrates local enterprises and cultures in its developments to drive economic progress in those communities.
Ayala Land is also ramping up its presence in the tourism sector, which is an important growth engine for the Philippine economy. It has launched Lio in El Nido, the first masterplanned tourism estate in the country. Lio is being developed around the goal of providing leisure and recreation to visitors, while preserving the natural beauty and biodiversity of the environment.
Ayala Land has also expanded across the country. Traditionally, Ayala Land focused its developments in Metro Manila. Today, it is helping spur growth in other key areas, with over 10,000 hectares of developable land in 25 estates in 55 growth centers around the country.
Manila Water is another example of a business that has redefined an entire industry. One of the most successful public-private partnerships in the country, Manila Water has transformed the water services that 6.8 million Filipinos receive in the eastern part of Metro Manila.
When it took over operations at the height of the water crisis in the 1990s, potable water was supplied to only half of the residents of the metropolis, and the average availability of service was only about 16 hours per day. Operations had steadily deteriorated due to massive underinvestment in the 120-year old pipeline network. It also had significant water systems loss, or wasted water due to faulty infrastructure and illegal connections, at about 63 percent.
Today, 94 percent of the population of Metro Manila’s east zone enjoys 24 hours of uninterrupted water supply, including low-income communities. Water systems loss is down to 11 percent, which is a global standard. Since taking over operations, Manila Water has replaced and laid down over 5,000 kilometers of pipes.
Moreover, Manila Water has a flagship program, Tubig Para sa Barangay, which was created to provide an affordable, steady, and predictable supply of potable water for marginalized communities.
Tubig Para sa Barangay is an innovative business model that included flexible financing options and socialized tariff scheme. Participants in the program enjoy savings on their water costs, the water-borne diseases in their areas have been reduced, and the overall sanitation conditions in their communities have improved.
The expertise Manila Water has built in over two decades has allowed it to work for the benefit of more communities. In the Philippines, Manila Water now operates in Clark, Laguna, Boracay, Cebu, Bulacan, Zamboanga, Tagum, Pangasinan, and Ilagan, among others.
Manila Water is also exporting its competencies to other markets in ASEAN. It is now the largest foreign investor in Vietnam’s water industry, and it has recently entered Thailand and Indonesia. Manila Water today is providing critical water services to over 17 million customers in the Philippines and in Vietnam.
Similarly, AC Health is another platform that has developed an innovative business model that works to improve healthcare services in the country. We entered healthcare because we recognized that significant gaps still exist in the sector, with a general lack of awareness on the importance of primary care.
Healthcare is an important part of the national agenda, but many challenges still remain. Studies conducted by AC Health showed that around 45 percent of middle-income Filipinos go a year without visiting a primary care doctor. Those that do, typically go to barangay health centers that are not well-equipped, or have to travel long distances to visit a public hospital.
In response to this, AC Health has put up a chain of community-based clinics called FamilyDOC. FamilyDOC combines primary care, laboratory, and pharmacy services in one facility, locating in high-density communities to provide maximum access.
Consultations at FamilyDOC can cost as low as ₱350, which is significantly cheaper than private hospitals. Follow-ups are also free within the first seven days after the first check-up.
Diversifying for growth
The sixth and final theme that I want to touch on is our effort in recent years to generate new sources of growth by diversifying into new businesses, new markets, and new products and services.
In 2011, Ayala entered new sectors in need of private sector participation. One of these sectors was power. We established AC Energy to serve as a new growth platform for Ayala, while doing our part to alleviate the power shortage the Philippines was facing. We knew that if the shortage continued, it would be a serious deterrent to investment and a massive challenge to sustained economic development.
In just six years, AC Energy has grown twentyfold: from about 80 megawatts of attributable capacity in 2011 to over 1,600 megawatts of attributable capacity today. Of this amount, 1,300 megawatts are sourced from thermal energy, while 300 megawatts are from renewable energy, particularly wind, solar, and geothermal.
AC Energy has started to contribute meaningfully to Ayala’s bottomline. In line with this, AC Energy has an ambitious target to double its capacity to 2,000 megawatts by 2020, of which 1,000 megawatts will come from renewable sources. We believe the development of renewable energy is critical to mitigate the impact of climate change, as well as ensure a more sustainable growth path for the Philippines and for the rest of the world.
AC Energy’s accelerated growth is contributing not only to the needs of the Philippines; it has now reached other Southeast Asian markets, particularly Vietnam and Indonesia. In Vietnam, with its partner the BIM group, AC Energy has just broken ground on the first phase of a 300 megawatt solar project in the Ninh Thuan province. Meanwhile, AC Energy completed last month the 75 megawatt Sidrap project, the first wind farm in Indonesia.
Beyond just a holding company, AC Energy today is transforming into a full-fledged energy platform, with development, operation, and retail capabilities.
AC Energy is just one among a number of Ayala enterprises that has brought its unique skills to foreign markets.
International diversification is in line with our groupwide target to achieve 10 percent of equity earnings contribution from international platforms by 2020. We are happy to report that we have made progress in this, with our overseas units contributing seven percent to our equity earnings for 2017.
Across the group, our various businesses have also expanded their products and services to cater to a wider segment of the market.
Through these examples, we have tried to show the role that Ayala plays as a key partner in development. We strive to create value that helps uplift the lives of our stakeholders.
Beyond operational results, Ayala has helped to drive inclusive economic growth by creating employment opportunities for 139,000 people yearly, and paying nearly ₱240 billion in taxes to the national government over the past six years.
Recognizing the impact that our businesses have across the country, the Ayala group has always sought to create value beyond success in financial and operating metrics. A commitment to national development has always been a defining pillar of the Ayala group. Last year, our Chairman and CEO was recognized by the United Nations Global Compact for Ayala’s commitment to sustainable business strategy and operations.
Anchoring our shared value creation process and sustainability framework on the UN Sustainable Development Goals has allowed us to report the different ways through which we contribute to the development of the country. With goals such as “No Hunger” and “Zero Poverty,” the SDGs represent the world’s ambitions for all people.
The success we have had in creating shared value and contributing to the achievement of the SDGs is due to the hard work of our board, management, and employees.
We are fortunate to be working with the best possible talent with a shared commitment to make a positive impact on society through the work that we do.
In closing, we would like to thank all our stakeholders for their strong engagement and continued trust and support for the Ayala group.
INTRODUCTION TO THE VIDEO
We would now like to present a short video to highlight our milestones and theme for 2017. Our groupwide annual reports this year were created under the theme, “Ayala in motion”, which represents our passion to make “every day” better for Filipinos.
As a committed partner in national development, we want to help drive inclusive economic growth by creating jobs and business opportunities, by making quality healthcare and education more affordable and accessible, by improving on the delivery of basic needs, and by investing in new technologies and innovations that will make for a better future. At Ayala, it’s not just about investing in business—it’s about improving lives.