Good morning ladies and gentlemen. Welcome to our annual stockholders’ meeting. I appreciate your taking time to join us here today.
Strong macroeconomic fundamentals created a favorable operating environment
2007 was a good year for the entire Ayala group. The strong macro-economic fundamentals created a very positive operating environment for our key businesses. The broad-based growth of the domestic economy, which posted its highest GDP growth in more than three decades at 7.3%, was fuelled in large part by the robust level of private consumption. This was reflected in its 6% growth, which was the highest percentage growth in nearly a decade.
Remittances from overseas Filipino expatriates coupled with declining interest rates have helped stimulate appetite for retail spending, mortgage loans, and other consumer products and services. These directly benefited our key businesses in real estate, banking, telecommunications, water distribution, and automotive dealerships as they each maintained dominant and competitive positions in their respective markets, allowing them to take advantage of opportunities as the economy turned around. Altogether, their strong financial performance contributed to the record results achieved by the group in 2007.
Overview of financial and share price performance
Let me just start with a quick snapshot of our financial performance. Our consolidated net income reached a new high in 2007. The level we reached at 16.2 billion pesos was 33% higher than the prior year. Over the past six years the company recorded considerable double-digit net income growth, posting a compounded annual growth of 37% over the period. Our return-on-equity also reflected this as it reached its highest level so far at 19.7% from just 4.7% back in 2002. Your President, Fernando Zobel will provide you more details of this in his report later.
Our strong operating results were reflected in the share price performance of the company as it steadily rose and gained 15% in 2007. This comes after an 87% surge in the share price during the prior year. Combined with steady dividend yields, total return to shareholders in 2007 reached close to 17% and compounded annually over a five year period total return was at 42.5%.
Since December 2007, however, our share price performance has been affected by persistent uncertainties in the global financial markets. This is similarly the case for the entire local equities market as measured by the 17% decline of the Philippine Stock Exchange Index in the first quarter of this year. As we have one of the highest trading liquidity in the stock market, our stock has been subject to heavy selling pressure from foreign institutional funds that were prompted to rebalance portfolios in response to the recent volatility in the global markets.
Consistent dividend payout
In addition to the strong stock price performance last year, we have also been consistent in our dividend payments to our shareholders. Over the past ten years we have paid cash and stock dividends, calibrated yearly depending on our capital expenditure plans and financing programs. By keeping our cash dividend per share rate constant particularly during the heavy investment years of the nineties and early 2000, and complementing these with stock dividends from time to time, we have effectively generated close to a 20% compound annual growth of cash dividends for shareholders over the past ten years.
In 2007 in particular, we declared and paid a 20% stock dividend as well as a special cash dividend of four pesos per share on top of the regular cash dividend rate of four pesos per share. This put total cash dividends for the year at eight pesos per share. When combined with the stock dividend, it is equivalent to a dividend pay out of 60% of our prior year’s net income.
Cycle of investment, value creation, and realization
The consistency in our dividend streams has been a result of our successful efforts to create and realize value from our investments over time. If you recall, our medium-term cycle of creating and realizing value began with a period of heavy investment starting in the mid-nineties through early 2000. As industry structures shifted at that time which opened new sectors to greater private sector participation, we took part and made significant investments particularly in the telecommunications, water distribution, real estate, and banking industries. The capital investments required for the build up of these businesses required a reallocation of assets in our portfolio as well as increased leverage as we tapped both the domestic and international debt market. As we reach the end of this investment cycle, we have seen the market values of our investments move up significantly, particularly in the past six years.
Having successfully nurtured these investments into positions of strength operationally and financially, we have subsequently focused in recent years on unlocking and realizing values from these investments. Over the past two years alone we have generated capital gains of over 12 billion pesos, largely from the calculated sale of shares in Ayala Land, BPI, and Globe as market values became attractive for realizing gains.
Cumulatively, over the past six years, we generated a total of 19 billion pesos in capital gains. This has allowed us to generate liquidity and strengthen our cash dividend payout. It has also given us greater financial flexibility as we look now to begin a new investment cycle.
I do not intend to discuss these new investments in great detail as they will be covered by our President later but let me summarize our key growth initiatives.
Key growth initiatives
First, as a group, we are embarking on a new period of investment. Our graph of consolidated capital investments shows this across our portfolio companies as each continues to invest in their respective growth initiatives.
Combined, the group is allocating P55.3 billion in capital investments this year, the highest by far and 41% higher than actual capital expenditure in 2007. A substantial part of this is allocated to Ayala Land’s real estate development projects, Globe’s expansion of our cellular network and broadband capacities, and continued improvement and expansion of Manila Water’s water distribution network. Our electronics subsidiary, IMI, is also expanding and building a regional manufacturing and sales footprint while Manila Water is also setting its sights on potential water projects in Asia.
Second, we are building new platforms for growth and we are initially pursuing a couple of models:
One is our move to invest in new high-growth sectors and we have identified the offshore and outsourcing market as an area with potential for significant growth. McKinsey estimates that the global O&O market will grow from 46 billion dollars in 2005 to 130 billion dollars in 2010, and that the Philippines can significantly grow its share of the global outsourcing market from five to 10% in the next few years given the country’s many natural competitive advantage in this space. Philippine O&O revenues grew by over 50% to five billion dollars in 2007 and have the potential to hit 13 billion dollars by 2010.
Our businesses in real estate and telecommunications have become increasingly engaged in this sector, with Ayala Land as a supplier of BPO buildings and Globe as a major provider of telecom infrastructure.
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