Costs take toll on San Miguel's profitability

By Neil Merrett

- Last updated on GMT

Related tags: Cent, San miguel

San Miguel's first half profits have taken a hit as it continues
to diversify its operations into mining and power to offset
uncertainty's in its core food and beverage brands.

The group, which is Southeast Asia's largest food and drinks manufacturer, posted a nine per cent increase in sales to €1.8bn for the period ending 30 June on attributed to improved sales volumes for its beer and food brands in both domestically and internationally. Operating income for the period was down 19 per cent to €131m, which according to the company reflected increased costs for raw materials and the lower profitability of its packaging operations. Net income was up by 81 per cent to €126m on the back of the €110m sale of its shares of the Pacific Del Monte labels and a local Coca-Cola bottler along with other discontinued operations. These factors reflected the company's continued attempts to move into new area's to offset uncertainty's in food and beverage production. A growing number of multinationals are beginning to invest in new markets to protect their margins from taking hits from external factors like climate change. In May, San Miguel's chairman shocked investors by announcing it would spin off its flagship domestic beer business and regional packaging operation to invest in new industries. Eduardo Cojuangco, chairman and chief executive officer of SMC said at San Miguel's annual stockholders meeting that the new investments would only represent a fraction of the total portfolio. He added nonetheless that they would act as the "new engines of growth"​ delivering shareholder value and higher earnings potential for the company. Of its beverage divisions, the group's domestic beer production posted strong growth as sales rose six per cent to €339m, while operating income for the segment increased 21 per cent to €90m. The growth was attributed to a 3 per cent increase in volume sales and better control of operating expenses, the company said. Sales of the group's international beer labels were also up for the semester, posting a six per cent rise in sales to €106m from increased sales in key markets like North China and Australia and export operations offsetting declines in markets like Indonesia. Partly as a result of these factors, operating profit was up 91 per cent for the period. In its Ginebra San Miguel division, volumes were up three per cent to €101m on the strength of both domestic and export liquor sales, though this was not enough to prevent a 46 per cent drop in operating income to €6m from higher input costs. Through food production, revenues rose by five per cent to €508m. Operating profit increasing by 10 per cent to €18m from improved sales volumes and increases in prices for its goods. Profit was further boosted by significant costs reductions in production of dairy, processed meats and food service operations. However, this performance was not matched by San Miguel's Australian dairy and soft drink subsidiary National foods, which despite a 10 per cent increase in sales to €608m, posted a 39 per cent reduction in operating income to €25m. The decline was in part due to higher prices for juice concentrates from dwindling fruit supply, the group said. The company also made losses through its packaging operations with sales falling nine per cent to €14m. Operating profit fell 89 per cent to €2m as a result of what the company called "sluggish demand"​ for all of its products in the segment. The company said that there had been sales improvements in its glass, plastics and metal segments though during the second quarter which it expected to maintain over the whole year.

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