Ms. Janet A. Encarnacion Head - Disclosure Department

Transcription

1 SanMlguel Pure Foods September 10, 2012 Philippine Stock Exchange, Inc. Disclosure Department Philippine Stock Exchange Plaza Ayala Triangle, Ayala Avenue Makati City Attention: Ms. Janet A. Encarnacion Head - Disclosure Department Gentlemen: Please see the attached letter to the Securities and Exchange Commission dated September 10, 2012 in response to its comments on the Company's nd Quarter Report (SEC Form 17-Q), together with the Company's SEC Form 17-Q re-filed therewith. ;;AA_/~I.~ AL~;;~RA p. TRILLANA Corporate Secretary San Miguel Pure Foods Company, Inc. 23rd Fir., The JMT Corporate Condominium, ADS Avenue 1605 Ortigas Center, Pasig City, Metro Manila, Philippines Tel. No.: Webslte: A Company of SANMIGUEL CORPORATION

2 SanMlguel Pure Foods September 10,2012 Acting Director Justina F. Callangan Corporation Finance Department Securities and Exchange Commission EDSA, Mandaluyong City Re: San Miguel Pure Foods Company, Inc. SEC Form 17-0 Dear Acting Director Callangan: We refer to your letter dated August 28, 2012 (the "Letter"), received by us by facsimile on August 30, 2012, advising San Miguel Pure Foods Company, Inc. (SMPFC or the "Company") that the Company's nd Quarter Report (SEC Form 17-Q), which was filed with the Commission on August 14,2012, is not in full compliance with SRC Rule 17.1 (A) (ii) and Rule 68, as amended. In this regard, the Company was directed to amend its SEC Form 17-Q in accordance with the checklist enclosed with the Letter (the "Checklist"), and file the same with the Commission within 10 business days from actual receipt of the Letter. In compliance with the Letter, the Company IS hereby re-filing its SEC Form 17-Q, subject to the explanation indicated in the attached Checklist. We trust that you will find the SEC Form 17-Q of the Company re-filed herewith, in order. Very truly yours, /JAA~L_,~ ALEXAN~- BtNGSON TRILLANA Corporate Secretary San Miguel Pure Foods Company, Inc. 23rd Fir.. The JMT Corporate Condominium. ADS Avenue '605 Ortigas Center. Pasig City. Metro Manila. Philippines Tel. No.: (632) Webslte: A Company of SANMIGUeL CORPORATION

3 SAN MIGUEL PURE FOODS COMPANY, INe. SEC Form 17-Q filed on August 14,2012 (2 nd Quarter 2012) GENERAL INSTRUCTION: A comment of "Not Disclosed" or "Not complied with" or "Incomplete" is indicated herein to emphasize or highlight the information not found in the report. If the required information is not applicable, please state/explain in a separate sheet. SUMMARY OF COMMENTS PAGE NO. PFRS 9 (Financial Instruments: Recognition and Measurement) SEC Memorandum Circular No. 3, Series of For covered companies that are required to submit interim financial statements to the Commission, they shall comply with the following requirements: (a) Interim fmancial statements (FS) starting with the period ended June 30, 2012 to June 30, 2014 shall contain a disclosure on whether or not the company conducted an evaluation on the possible financial impact of the adoption of PFRS 9 pursuant to paragraph (I) above. The reason for not conducting an impact study shall be indicated in the interim report. SEC REMARKS/ COMMENTS Incomplete COMPANY'S REPLY The unaudited consolidated interim financial statements ofsmpfc and its subsidiarie (collectively, the "Group") as at and for the period ended June 30, 2012 attached as Annex "A" of SMPFC's SEC Form l7-q Report disclosed that the Group conducted an evaluation on the possible financial impact of the adoption of PFRS 9 and does not plan to adopt said standard early. Said disclosure can be found in the discussion on new or revised standards, amendments to standards and interpretations not yet adopted in Note I - "Summary of Significant Accounting and Financial Reporting Policies" in the last paragraph of page I.

4 I SECURITIES AND EXCHANGE COMMISSION SEC Building, EDSA, Greenhills,Mandaluyong City, Metro Manila,Philippines TeI:(632) to 39 Fax:(632) Barcode Page The following document has been received: Receiving Officer/Encoder : Catherine E. Galiza Receiv ing Branch : SEC Head Office Receipt Date and lime: August 14, :29:21 PM Received From : Head Office Company Representative Doc Source Company Information SEC Registration No. Company Name Industry Classification Company Type SAN MIGUEL PURE FOODS COMPANY INC. Stock Corporation Document Information Document ID Document Type Document Code Period Covered No. of Days Late Department Remarks Q (FORM 11-Q:QUARTERLY REPORT/FS) 17-Q June 30, 2012 o CFD

5 ORIGINAL COPY COVER SHEET I ALEXANDRA B. TRILLANA CIJ Month Contact Person CIIJ Dept. Requiring this Doc. I CD Day I I Secondary License Type, If Applicable I (632) Company Telephone Number CD CD Month Day Annual Meeting Amended Articles Number/Section I I Total No. of Stockholders I Total Amount of Borrowings --~~~I I ~~ Domestic Foreign To be accomplished by SEC Personnel concerned =File Number LCU =Document I. D. Cashier STAMPS Remarks = pis. Use black ink for scanning purposes

6 SEC FORM 17-Q QUARTERLY REPORT PURSUANT TO SECTION 17 OF THE SECURITIES REGULATION CODE AND SRC RULE 17(2)(b) THEREUNDER 1. For the quarterly period ended June 30, SEC Identification Number BIR Tax Identification No Exact name of issuer as specified in its charter San Miguel Pure Foods Company, Inc. 5. Philippines 6. SEC Use Only Province, Country or other jurisdiction Industry Classification Code Of incorporation or organization 7. The JMT Corporate Condominium ADB Avenue, Ortigas Center, Pasig City 1605 Address of issuer s principal office Postal code 8. (02) Issuer s telephone number, including area code 9. Not Applicable Former name, former address, and former fiscal year, if changed since last report 10. Securities registered pursuant to Sections 8 and 12 of the Code, or Section 4 and 8 of the RSA Number of Shares and Total Liabilities (As at June 30, 2012) Common Shares - P10 par value 166,667,096 Preferred Shares - P10 par value 15,000,000 Total Liabilities (in 000) P22,111, Are any or all these securities listed on the Philippine Stock Exchange? Yes ( ) No ( ) 12. Indicate by check mark whether the registrant: a) has filed all reports required to be filed by Section 17 of the Code and SRC Rule 17 thereunder or Sections 11 of the Revised Securities Act (RSA) and RSA Rule 11(a)-1 thereunder and Sections 26 and 141 of the Corporation Code of the Philippines during the preceding twelve (12) months (or for such shorter period the registrant was required to file such reports); Yes ( ) No ( ) b) has been subject to such filing requirements for the past ninety (90) days.

7 Yes ( ) No ( ) Item 1. Financial Statements. PART I - FINANCIAL INFORMATION The unaudited consolidated financial statements of San Miguel Pure Foods Company, Inc. ( SMPFC or the Company ) and its subsidiaries (collectively, the Group ) as at and for the period ended June 30, 2012 (with comparative figures as at December 31, 2011 and for the period ended June 30, 2011) and Selected Notes to Consolidated Financial Statements are hereto attached as Annex A. Notes 8 and 9 of the Selected Notes to Consolidated Financial Statements contain the required information on the financial risk exposures and financial instruments of the Company. Item 2. Management s Discussion and Analysis of Financial Position and Financial Performance. The information required by Part III, Paragraph (A)(2)(b) of Annex C, as amended is attached hereto as Annex B. PART II - OTHER INFORMATION SMPFC may, at its option, report under this item any information not previously reported in a report on SEC Form 17-C. If disclosure of such information is made under this Part II, it need not be repeated in a report on Form 17-C, which would otherwise be required to be filed with respect to such information, or in a subsequent report on Form 17-Q.

8 SIGNATURES Pursuant to the requirements of the Securities Regulation Code, the issuer has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Issuer SAN MIGUEL PURE FOODS COMPANY, INC. ~~IV Signature and Title M POSTRADO nd Chief Finance Officer Date August 14, 2012

9 Annex A SEC Number File Number SAN MIGUEL PURE FOODS COMPANY, INC. AND SUBSIDIARIES (Company s Full Name) JMT Corporate Condominium ADB Avenue, Ortigas Center, Pasig City (Company s Address) (Telephone Number) (Year Ending) (month & day) Quarterly Consolidated Financial Statements Form Type Amendment Designation (If applicable) June 30, 2012 Period Ended Date (Secondary License Type and File Number)

10 SAN MIGUEL PURE FOODS COMPANY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (Amounts in Thousands) ASSETS Current Assets Cash and cash equivalents (Notes 8 and 9) Trade and other receivables - net (Notes 5, 8 and 9) Inventories Biological assets Derivative assets (Notes 8 and 9) Prepaid expenses and other current assets Unaudited June P4,312,504 7,631,098 13,254,229 4,368, ,350 2,060,539 Audited December P4,932,718 8,700,217 12,068,381 4,123,777 31,869 1,968,552 Total Current Assets 31,736,509 31,825,514 Noncurrent Assets Investments Investment properties - net Property, plant and equipment - net (Note 4) Biological assets - net of current portion Other intangible assets - net Goodwill - net Deferred tax assets Other noncurrent assets (Notes 8 and 9) 13,199, ,271 9,553,346 1,810,296 3,688, , , ,738 Total Noncurrent Assets 30,251,589 P61,988,098 13,177, ,927 8,744,321 1,811,570 3,657, , , ,051 29,127,456 P60,952,970 LIABILITIES AND EQUITY Current Liabilities Notes payable (Notes 8 and 9) Trade payables and other current liabilities (Notes 5, 8 and 9) Current maturities of long-term debt (Notes 8 and 9) Income tax payable Total Current Liabilities Noncurrent Liabilities Long-term debt - net of current maturities and debt issue costs (Notes 8 and 9) Deferred tax liabilities Other non current liabilities (Notes 8 and 9) Total Noncurrent Liabilities Equity Equity Attributable to Equity Holders of the Parent Company Capital stock Additional paid-in capital Revaluation surplus Cumulative translation adjustments Retained earnings Treasury stock Non-controlling Interests Total Equity P5,418,045 P4,987,929 11,447,115 11,018,877 25,000 25, , ,012 17,113,393 16,336,818 4,637,690 4,646, , , , ,050 4,997,731 4,929,071 1,858,748 1,858,748 20,500,284 20,500,284 18,219 18,219 (221,216) (84,934) 15,201,001 14,475,689 (182,094) (182,094) 37,174,942 36,585,912 2,702,032 3,101,169 39,876,974 39,687,081 P61,988,098 P60,952,970 Note: See accompanying Management Discussion and Analysis and Selected Notes to Consolidated Financial Statements. CERTIFIED CORRECT: --(21/ ~ EN AM. POSTRADO ~ reasure d Chief Finance Officer

11 SAN MIGUEL PURE FOODS COMPANY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (Amounts in Thousands, Except Per Share Data) For the Six Months Ended For the Three Months Ended June 30, 2012 June 30, 2011 June 30, 2012 June 30, 2011 REVENUES (Note 5) P45,349,595 P42,309,860 P22,950,828 P21,720,268 COST OF SALES (Note 5) 37,938,343 34,285,218 18,936,220 17,611,952 GROSS PROFIT 7,411,252 8,024,642 4,014,608 4,108,316 SELLING AND ADMINISTRATIVE EXPENSES (Note 5) (5,549,017) (5,026,967) (2,810,905) (2,668,708) INTEREST EXPENSE AND OTHER FINANCING CHARGES (287,268) (245,781) (147,207) (130,225) INTEREST INCOME 86, ,949 45, ,537 EQUITY IN NET EARNINGS OF AN ASSOCIATE 507, ,708 GAIN (LOSS) ON SALE OF PROPERTY AND EQUIPMENT 27,820 (208) 22, OTHER (INCOME) CHARGES - Net 94,113 (109,090) 38,321 (107,428) INCOME BEFORE INCOME TAX 2,290,196 2,883,545 1,494,812 1,364,552 INCOME TAX EXPENSE 561, , , ,912 NET INCOME Pl,728,704 P2,092,916 Pl,154,392 P996,640 Attributable to: Equity holders of the Parent Company Pl,725,313 P2,010,347 Pl,155,352 P944,429 Non-controlling Interests 3,391 82,569 (960) 52,211 Pl,728,704 P2,092,916 Pl,154,392 P996,640 Basic and Diluted Earnings Per Common Share Attributable to Equity Holders of the Parent Company (Note 7) P6.21 P9.72 P5.11 P3.85 Note: See accompanying Management Discussion and Analysis and Selected Notes to Consolidated Financial CORR~N Statements CERTIFIED ~ EN AM. POSTRADO reasur and Chief Finance Officer

12 SAN MIGUEL PURE FOODS COMPANY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) (Amounts in Thousands) For the Six Months Ended For the Three Months Ended June 30, 2012 June 30, June 30, 2012 June 30, 2011 NET INCOME P1,728,704 P2,092,916 P 1,154,392 P996,640 NET GAIN (LOSS) ON EXCHANGE DIFFERENCES ON TRANSLATION OF FOREIGN OPERATIONS (138,892) (501) (23,855) 4,030 SHARE IN COMPREHENSIVE INCOME OF AN ASSOCIATE 156 NET GAIN (LOSS) ON AVAILABLE-FOR-SALE FINANCIAL ASSETS 91 (3,247) 91 INCOME TAX BENEFIT (EXPENSE) (9) 325 (9) OTHER COMPREHENSIVE INCOME (LOSS) - NET OF TAX (138,810) (3,423) (23,617) 4,030 TOTAL COMPREHENSIVE INCOME - NET OF TAX P1,589,894 P2,089,493 P1,130,775 P1,000,670 Comprehensive Income Attributable to: Equity holders of the Parent Company P1,589,031 P2,006,016 P1,133,361 P948,468 Non-controlling Interests ,477 (2,586) 52,202 P1,589,894 P2,089,493 P1,130,775 Pl,000,670 Note: See accompanying Management Discussion and Analysis and Selected Notes to Consolidated Financial Statements. CERTIFIED CORRECT: --rv IDA M. POSTRADO and Chief Finance Officer

13 SAN MIGUEL PURE FOODS COMPANY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (Amounts in Thousands) Attributable to Equity Holders of the Parent Company Cumulative Translation Adjustments Additional Non- Capital Paid-In Revaluation Translation Fair Value Retained Treasury controlling Total Stock Capital Surplus Reserve Reserve Earnings Stock Total Interest Equity At December 31, 2011 (Audited) 111,858, ,500, ,219 (1186,675) 111, ,475,689 (11182,094) 1136,585, ,101, ,687,08] Net loss on exchange differences on translation of foreign operations (136,364) (136,364) (2,528) (138,892) Net gain on available-for-sale financial assets, net of tax Other comprehensive income (loss) (136,364) 82 (]36,282) (2,528) (138,810) Net income for the period 1,725,313 1,725,313 3,391 1,728,704 Total comprehensive income (loss) for the period (136,364) 82 1,725,313 1,589, ,589,894 Cash dividends (Note 6) (1,000,001) (1,000,001) (400,000) (1,400,001) At June 30, 2012 (Unaudited) 111,858, ,500,284 1"18,219 (1"223,039) 111,823 1"15,201,001 (11182,094) 1"37,174, ,702, ,876,974 At December 31, 2010 (Audited) jll, 708, 748 jl5,821,288 jl18,219 (1"96,102) jl3,610 jlll,773,185 (1"182,094) jl I9,046,854 jl3,171,144 jl22,217,998 Net gain (loss) on exchange differences on translation of foreign operations (1,409) (1,409) 908 (501) Net loss on available-for-sale financial assets, net of tax (2,922) (2,922) (2,922) Other comprehensive income (loss) (1,409) (2,922) (4,331) 908 (3,423) Net income for the period 2,010,347 2,010,347 82,569 2,092,916 Total comprehensive income (loss) for the period (1,409) (2,922) 2,010,347 2,006,016 83,477 2,089,493 Issuance of preferred shares 150,000 14,677,713 14,827,713 14,827,713 Cash dividends (800,001) (800,001) (205) (800,206) At June 30, 2011 (Unaudited) jll,858,748 jl20,499,001 jl18,219 (1"97,511) jl688 jli2,983,531 (jli82,094) 1'35,080,582 jl3,254,416 1'38,334,998 Note: See accompanying Management Discussion and Analysis and Selected Notes to Consolidated Financial Statements. CERTIFIED CORRECT: ~(lj

14 SAN MIGUEL PURE FOODS COMPANY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (Amounts in Thousands) For the Six Months Ended June 30, 2012 June 30, 2011 CASH FLOWS FROM OPERATING ACTIVITIES Income before income tax Adjustments for: Depreciation and amortization Allowance for impairment losses on receivables and inventories Equity in net earnings of an associate Interest expense and other financing charges Interest income Other charges net of loss (gain) on derivatives Loss (gain) on sale of property and equipment P2,290,196 1,163,800 33,113 (507,104) 287,268 (86,192) (148,844) (27,820) fl2,883,545 1,001,703 73, ,781 (240,949) 163, Operating income before working capital changes Decrease (increase) in: Trade and other receivables Inventories Biological assets Prepaid expenses and other current assets Increase (decrease) in trade payables and other current liabilities 3,004,417 1,083,472 (1,185,217) (225,040) (93,255) 542,977 4,127, ,996 (1,723,288) (535,510) 72,779 (1,170,245) Cash generated from operations Interest paid Income taxes paid (including final tax) 3,127,354 (380,873) (620,705) 1,717,854 (245,989) (656,268) Interest received 67, ,661 Net cash flows provided by operating activities 2,192,883 1,000,258 CASH FLOWS FROM INVESTING ACTIVITIES Acquisitions of property, plant and equipment Acquisition of a subsidiary net of cash received Acquisitions of intangible assets Additional investment in subsidiary Increase in: Biological assets Other noncurrent assets Dividend received from associate Proceeds from sale of property and equipment Increase in retirement liability (1,081,950) (357,705) (700,318) (53,048) 242,273 33,310 63,516 (246,821 ) (2,883,793) (720,605) (822,625) (34,825) ,571 Net cash flows used in investing activities (1,853,922) (4,611,831) CASH FLOWS FROM FINANCING ACTIVITIES Net availments of notes payable Proceeds from the issuance of preferred shares - net Dividends paid 460,179 (1,399,862) 450,182 14,828,120 (979,812) Payment of long-term debt (12,500) Net cash flows provided by (used in) financing activities (952,183) 14,298,490 EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS (6,992) (1,003) NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR (620,214) 4,932,718 10,685,914 7,041,345 CASH AND CASH EQUIVALENTS AT END OF THE PERIOD P4,312,504 fli7,727,259 Note: See accompanying Management Discussion and Analysis and Selected Notes to Consolidated Financial Statements. CERTIFIED CORRECT:..-- (2J

15 SAN MIGUEL PURE FOODS COMPANY, INC. AND SUBSIDIARIES AGING OF ACCOUNTS RECEIVABLE AS AT JUNE 30, 2012 I. AGING OF ACCOUNTS RECEIVABLE Type of Receivable: Total Current 1-30 days days days Over 90 days A. Trade P5,989,347, P4,038,253, P1,037,143, P101,265, P76,754, P735,930, Less: Allowance 505,653, ,653, Net Trade Receivable 5,483,694, ,038,253, ,037,143, ,265, ,754, ,276, B. Non-Trade 2,176,016, ,451, ,708, ,078, ,384, ,446,394, Less: Allowance 28,613, ,613, Net Non-Trade Receivable 2,147,403, ,451, ,708, ,078, ,384, ,417,780, Net Receivables P7,631,097, P4,640,704, P1,075,852, P104,343, P162,138, P1,648,057, Accounts Receivable Description Trade - Receivables arising from the ordinary course of business Non - Trade - consist mostly of receivables from affiliates/smc subsidiaries/receivables from employees and deposits/claims from suppliers II. Accounts Receivable Description Type of Accounts Receivable: Nature/Description Collection Period a. Trade Receivables Sales of fresh and processed meats, poultry, feeds, flour, cooking oils, breadfill, desserts and dairy-based products and importation and marketing of coffee and coffee-related products San Miguel Foods, Inc 37 days San Miguel Mills, Inc. and subsidiaries 26 days Magnolia, Inc. and subsidiaries 43 days PT San Miguel Pure Foods Indonesia 60 days San Miguel Pure Foods International Limited 23 days San Miguel Super Coffeemix Co., Inc. 41 days The Purefoods-Hormel Company, Inc. 44 days b. Non-Trade Receivables Advances to affiliates and company loans extended to employees Employee loans and advances Every 15 th & 30 th of the month Advances to Affiliates Upon demand III. Normal Operating Cycle San Miguel Foods, Inc. 91 days San Miguel Mills, Inc. and subsidiaries 95 days Magnolia, Inc. and subsidiaries 153 days PT San Miguel Pure Foods Indonesia 146 days San Miguel Pure Foods International Limited 105 days San Miguel Super Coffeemix Co., Inc. 138 days The Purefoods-Hormel Company, Inc. 138 days

16 SAN MIGUEL PURE FOODS COMPANY, INC. AND SUBSIDIARIES SELECTED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts in Thousands, Except Per Share Data) 1. Summary of Significant Accounting and Financial Reporting Policies The Group prepared its consolidated interim financial statements as at and for the period ended June 30, 2012 and comparative financial statements for the same period in 2011 following the new presentation rules under Philippine Accounting Standard (PAS) No. 34, Interim Financial Reporting. The consolidated financial statements of the Group have been prepared in compliance with Philippine Financial Reporting Standards (PFRS). The consolidated financial statements are presented in Philippine peso and all values are rounded to the nearest thousand (P=000), except when otherwise indicated. The principal accounting policies and methods adopted in preparing the interim consolidated financial statements of the Group are the same as those followed in the most recent annual audited financial statements. Adoption of New Standards, Amendments to Standards and Interpretations The Financial Reporting Standards Council (FRSC) approved the adoption of a number of new or revised standards, amendments to standards and interpretations [based on International Financial Reporting Interpretation Committee (IFRIC) Interpretations] as part of PFRS. Amendments to Standards and Interpretations Adopted in 2012 The Group has adopted the following PFRS starting January 1, 2012 and accordingly, changed its accounting policies in the following areas: Disclosures - Transfers of Financial Assets (Amendments to PFRS 7), require additional disclosures about transfers of financial assets. The amendments require disclosure of information that enables users of the consolidated financial statements to understand the relationship between transferred financial assets that are not derecognized in their entirety and the associated liabilities; and to evaluate the nature of, and risks associated with, the entity s continuing involvement in the derecognized financial assets. Entities are required to apply the amendments for annual periods beginning on or after July 1, Deferred Tax: Recovery of Underlying Assets (Amendments to PAS 12, Income Taxes), introduces an exception to the current measurement principles of deferred tax assets and liabilities arising from investment property measured using the fair value model in accordance with PAS 40, Investment Property. The exception also applies to investment properties acquired in a business combination accounted for in accordance with PFRS 3 provided the acquirer subsequently measure these assets applying the fair value model. The amendments integrated the guidance of Philippine Interpretation Standards Interpretation Committee (SIC) - 21, Income Taxes - Recovery of Revalued Non-Depreciable Assets, into PAS 12, and as a result Philippine Interpretation SIC - 21 has been withdrawn. The effective date of the amendments is for periods beginning on or after January 1, 2012 and is applied retrospectively. The adoption of these foregoing new or revised standards, amendments to standards and Philippine Interpretations of IFRIC did not have a material effect on the interim consolidated financial statements. New or Revised Standards, Amendments to Standards and Interpretations Not Yet Adopted A number of new or revised standards, amendments to standards and interpretations are effective for annual periods beginning after January 1, 2012, and have not been applied in preparing the consolidated financial statements. None of these is expected to have a significant effect on the consolidated financial statements of the Group, except for PFRS 9, Financial Instruments, which becomes mandatory for the Group s 2015 consolidated financial statement and could change the classification and measurement of financial assets. The Group conducted an evaluation on the possible financial impact of the adoption of PFRS 9 and does not plan to adopt this standard early.

17 - 2 - The Group will adopt the following new or revised standards, amendments to standards and interpretations on the respective effective dates: Presentation of Items of Other Comprehensive Income (Amendments to PAS 1). The amendments: (a) require that an entity present separately the items of other comprehensive income that would be reclassified to profit or loss in the future if certain conditions are met from those that would never be reclassified to profit or loss; (b) do not change the existing option to present profit or loss and other comprehensive income in two statements; and (c) change the title of the statement of comprehensive income to the statement of profit or loss and other comprehensive income. However, an entity is still allowed to use other titles. The amendments do not address which items are presented in other comprehensive income or which items need to be reclassified. The requirements of other PFRS continue to apply in this regard. The effective date of the amendments is for periods beginning on or after January 1, PFRS 10, Consolidated Financial Statements, introduces a new approach to determining which investees should be consolidated and provides a single model to be applied in the control analysis for all investees. An investor controls an investee when: (a) it is exposed or has rights to variable returns from its involvement with that investee; (b) it has the ability to affect those returns through its power over that investee; and (c) there is a link between power and returns. Control is reassessed as facts and circumstances change. PFRS 10 supersedes PAS 27 (2008). The new standard is effective for annual periods beginning on or after January 1, PFRS 11, Joint Arrangements, focuses on the rights and obligations of joint arrangements, rather than the legal form (as is currently the case). It (a) distinguishes joint arrangements between joint operations and joint ventures; and (b) always requires the equity method for jointly controlled entities that are now called joint ventures; they are stripped of the free choice of using the equity method or proportionate consolidation. PFRS 11 supersedes PAS 31, Interest in Joint Ventures and Philippine Interpretation SIC-13, Jointly Controlled Entities - Non-Monetary Contributions by Venturers. The new standard is effective for annual periods beginning on or after January 1, PFRS 12, Disclosure of Interests in Other Entities, contains the disclosure requirements for entities that have interests in subsidiaries, joint arrangements (i.e., joint operations or joint ventures), associates and/or unconsolidated structured entities, aiming to provide information to enable users to evaluate the nature of, and risks associated with, an entity s interests in other entities; and the effects of those interests on the entity s financial position, financial performance and cash flows. The new standard is effective for annual periods beginning on or after January 1, PFRS 13, Fair Value Measurement, replaces the fair value measurement guidance contained in individual PFRS with a single source of fair value measurement guidance. It defines fair value, establishes a framework for measuring fair value and sets out disclosure requirements for fair value measurements. It explains how to measure fair value when it is required or permitted by other PFRS. It does not introduce new requirements to measure assets or liabilities at fair value nor does it eliminate the practicability exceptions to fair value measurements that currently exist in certain standards. The new standard is effective for annual periods beginning on or after January 1, Early application is permitted and is required to be disclosed. PAS 19, Employee Benefits (amended 2011), includes the following requirements: (a) actuarial gains and losses are recognized immediately in other comprehensive income; this change will remove the corridor method and eliminate the ability for entities to recognize all changes in the defined benefit obligation and in plan assets in profit or loss, which is currently allowed under PAS 19; and (b) expected return on plan assets recognized in profit or loss is calculated based on the rate used to discount the defined benefit obligation. The adoption of the amended or revised standard is required for annual periods beginning on or after January 1, PAS 27, Separate Financial Statements (2011), supersedes PAS 27 (2008). PAS 27 (2011) carries forward the existing accounting and disclosure requirements for separate financial statements, with some minor clarifications. The adoption of the amended or revised standard is required for annual periods beginning on or after January 1, 2013.

18 - 3 - PAS 28, Investments in Associates and Joint Ventures (2011), supersedes PAS 28 (2008). PAS 28 (2011) makes the following amendments: (a) PFRS 5, Noncurrent Assets Held for Sale applies to an investment, or a portion of an investment, in an associate or a joint venture that meets the criteria to be classified as held for sale; and (b) on cessation of significant influence or joint control, even if an investment in an associate becomes an investment in a joint venture or vice versa, the entity does not remeasure the retained interest. The adoption of the amended or revised standard is required for annual periods beginning on or after January 1, PFRS 9 (2009) is the first standard issued as part of a wider project to replace PAS 39. PFRS 9 (2009) retains but simplifies the mixed measurement model and establishes two primary measurement categories for financial assets: amortized cost and fair value. The basis of classification depends on the entity s business model and the contractual cash flow characteristics of the financial asset. The guidance in PAS 39 on impairment of financial assets and hedge accounting continues to apply. Prior periods need not be restated if an entity adopts the standard for reporting periods beginning before January 1, PFRS 9 (2010) adds the requirements related to the classification and measurement of financial liabilities, and derecognition of financial assets and liabilities to the version issued in November It also includes those paragraphs of PAS 39 dealing with how to measure fair value and accounting for derivatives embedded in a contract that contains a host that is not a financial asset, as well as the requirements of Philippine Interpretation - IFRIC 9, Reassessment of Embedded Derivatives. The adoption of the new standard is required for annual periods beginning on or after January 1, The Group will assess the impact of the new or revised standards, amendments to standards and interpretations on the consolidated financial statements upon adoption in their respective effective dates. 2. Segment Information Operating Segments The reporting format of the Group s operating segments is determined by the Group s risks and rates of return which are affected predominantly by differences in the products and services produced. The operating businesses are organized and managed separately according to the nature of the products produced and services provided, with each segment representing a strategic business unit that offers different products and serves different markets. The Group has three reportable segments, namely, Agro-Industrial, Value-Added Meats and Milling. Management identified and grouped the operating units in its operating segments with the objective of transforming the Group into a more rationalized and focused organization. The structure aims to boost efficiencies across the Group and raise effectiveness in defining and meeting the needs of consumers in innovative ways. The Agro-Industrial segment includes the integrated Feeds, Poultry and Fresh Meats operations. These businesses are involved in feeds production and in poultry and livestock farming, processing and selling of poultry and meat products. The Value-Added Meats segment is engaged in the processing and marketing of refrigerated and canned meat products. The Milling segment is into manufacturing and marketing of flour products, premixes, and flour-based products. The non-reportable operating segments of the Group include dairy-based products, breadfill, desserts, cooking oils, importation and marketing of coffee and coffee-related products, and foreign operations which include hog farming, feeds production and sale of fresh and processed meats by foreign subsidiaries. Inter-segment Transactions Segment revenues, expenses and performance include sales and purchases between operating segments. Transfer prices between operating segments are set on an arm s length basis in a manner similar to transactions with third parties. Such transfers are eliminated in consolidation. The Group does not have a single external customer, sales revenue generated from which amounted to 10% or more of the total revenues of the Group.

19 - 4 - Financial information about reportable segments follows: For the Six Months Ended June 30, 2012 Agro- Value-Added Total Reportable Industrial Meats Milling Segments Others Eliminations Consolidated REVENUES External P=29,926,388 P=5,710,202 P=4,119,644 P=39,756,234 P=5,593,361 P= P=45,349,595 Inter-segment 332,942 5, , , ,991 (908,258) Total revenues 30,259,330 5,715,220 4,508,951 40,483,501 5,774,352 (908,258) 45,349,595 Segment operating results* 371, , ,065 1,563, ,258 36,100 1,896,811 Interest expense and other financing charges (169,194) (29,374) (1,748) (200,316) (86,952) (287,268) Interest income 33,718 10,668 11,573 55,959 30,233 86,192 Equity in net earnings of an associate 507, ,104 Gain (loss) on sale of property and equipment 27,938 27,938 (118) 27,820 Other income (charges) - net (4,827) 10,892 61,420 67,485 (7,948) 59,537 Income tax expense (120,634) (98,763) (277,083) (496,480) (70,080) 5,068 (561,492) Net income P=138,178 P=229,634 P=650,227 P=1,018,039 P=669,497 P=41,168 P=1,728,704 For the Six Months Ended June 30, 2011 Agro- Value-Added Total Reportable Industrial Meats Milling Segments Others Eliminations Consolidated REVENUES External P= 27,649,276 P= 4,904,437 P= 4,046,584 P= 36,600,297 P=5,709,563 P= P= 42,309,860 Inter-segment 139, , , ,161 (615,154) Total revenues 27,789,239 4,904,437 4,342,614 37,036,290 5,888,724 (615,154) 42,309,860 Segment operating results* 1,456, , ,232 2,686, ,497 38,283 3,052,186 Interest expense and other financing charges (179,379) (8,910) (1,044) (189,333) (56,448) (245,781) Interest income 66,856 1,267 5,797 73, , ,949 Gain (loss) on sale of property and equipment (395) (208) Other income (charges) - net (61,450) (1,404) (103,481) (166,335) 2,734 (163,601) Income tax expense (382,296) (62,851) (257,102) (702,249) (89,529) 1,149 (790,629) Net income P= 900,657 P= 194,537 P= 607,402 P= 1,702,596 P= 350,888 P= 39,432 P= 2,092,916 * Including realized mark-to-market gains (losses) on commodity derivatives. 3. Investment in a Subsidiary In June 2012, following the approval of its Board of Directors (BOD), San Miguel Mills, Inc. (SMMI), a wholly-owned subsidiary of San Miguel Pure Foods Company, Inc. (SMPFC), acquired Cobertson Realty Corporation s (CRC) subscribed capital stock equivalent to 25,000 shares with a par value of P1, per share from CRC s individual stockholders. SMMI paid P357.7 million as consideration. As such, CRC became a subsidiary of SMMI and was consolidated into SMPFC through SMMI. CRC is a Philippine company engaged in the purchase, acquisition, development or use for investment, among others, of real and personal property, to the extent permitted by law.

20 Property, Plant and Equipment This account consists of: June 30, 2012 Land and Land Improvements Buildings and Improvements Machinery Equipment, Furniture and Others Transportation Equipment Construction in Progress Total Cost: December 31, 2011 P=1,943,751 P=6,008,481 P=9,367,314 P=458,474 P=131,523 P=17,909,543 Additions 1,582 5, ,114 8, ,158 1,081,950 Disposals (11,743) (346,918) (349,296) (18,426) (726,383) Transfers/reclassifications 393,206 (105,408) (24,588) (11,151) (171,691) 80,368 Currency translation adjustments (1,895) (55,831) (34,301) (2,768) (468) (95,263) June 30, ,324,901 5,505,779 9,217, , ,522 18,250,215 Accumulated depreciation: December 31, ,210 2,465,511 5,938, ,108 9,165,222 Additions 14, , ,171 4, ,212 Disposals (10,283) (344,768) (347,727) (18,115) (720,893) Transfers/reclassifications (8,376) (50,257) (52,379) (2,911) (113,923) Currency translation adjustments (26,427) (27,582) (2,740) (56,749) June 30, ,254 2,155,463 5,802, ,276 8,696,869 Net book value at June 30, 2012 P=2,003,647 P=3,350,316 P=3,414,367 P=17,494 P=767,522 P=9,553,346 June 30, 2011 Land and Land Improvements Buildings and Improvements Machinery Equipment, Furniture and Others Transportation Equipment Construction in Progress Total Cost: December 31, 2010 P=2,378,554 P=5,872,457 P=8,587,104 P=474,296 P=183,197 P=17,495,608 Additions 8, ,139 1,030 58, ,821 Disposals (286) (9,977) (643) (10,906) Transfers/reclassifications 2,443 9, , (140,345) (6,059) Currency translation adjustments 632 (14,598) (3,055) 135 (997) (17,883) June 30, ,381,629 5,875,278 8,875, ,900 99,998 17,707,581 Accumulated depreciation: December 31, ,869 2,254,800 5,395, ,954 8,389,525 Additions 16, , ,548 7, ,424 Disposals (286) (9,502) (643) (10,431) Transfers/reclassifications (222) (222) Currency translation adjustments (6,170) (3,712) 106 (9,776) June 30, ,595 2,358,996 5,656, ,915 8,777,520 Net book value at June 30, 2011 P=2,073,034 P=3,516,282 P=3,219,762 P=20,985 P=99,998 P=8,930,061 Depreciation charged to operations amounted to P423.2 million and P408.4 million in June 30, 2012 and 2011, respectively.

21 Related Party Disclosures Transactions with related parties were made at normal market prices and terms. Transactions with related parties and the related balances include the following: Relationship with Related Parties* Period Revenue from Related Parties Purchases from Related Parties Amounts Owed by Related Parties Amounts Owed to Related Parties SMC Ultimate June 30, 2012 P=138 P=66,940 P=28,709 P=548,732 Parent Company December 31, , ,729 43, ,723 SMC Shipping and Lighterage Affiliate June 30, , ,226 Corporation December 31, ,248, ,853 San Miguel Yamamura Affiliate June 30, , ,743 Packaging Corporation December 31, ,771 7,068 51,560 San Miguel International, Ltd. Affiliate June 30, ,643 and subsidiaries December 31, ,509 Anchor Insurance Brokerage Affiliate June 30, Corporation December 31, Ginebra San Miguel, Inc. and Affiliate June 30, ,653 16,381 subsidiaries December 31, ,777 36,820 31,197 San Miguel Properties, Inc. Affiliate June 30, December 31, SMITS, Inc. and a subsidiary Affiliate June 30, ,917-97,826 December 31, ,369 1, ,649 ArchEn Technologies Inc. Affiliate June 30, ,493-14,135 December 31, , ,824 San Miguel Yamamura Asia Affiliate June 30, ,730-4,272 Corporation December 31, ,240-6,241 San Miguel Brewery, Inc. Affiliate June 30, ,784 10,298 24,783 December 31, ,519 57,681 24,492 24,551 San Miguel Beverages, Inc. Affiliate June 30, December 31, ,466 - Mindanao Corrugated Affiliate June 30, ,500-5,888 Fibreboard, Inc. December 31, , Philippine Breweries Affiliate June 30, ,493 Corporation December 31, Petron Corporation Affiliate June 30, , ,579 1, ,905 December 31, , ,872 11,782 97,406 SMC Global Power Holdings Affiliate June 30, , ,938 Corp. and subsidiaries December 31, ,887-4,923 5,490 San Miguel Holdings Corp. Affiliate June 30, , and subsidiaries December 31, Forward

22 - 7 - Relationship with Related Parties Period Revenue from Related Parties Purchases from Related Parties Amounts Owed by Related Parties Amounts Owed to Related Parties Hormel Netherlands, BV Shareholder June 30, 2012 P=- P=- P=56,492 P=in a December 31, ,838 - Subsidiary Super Coffee Corporation Pte. Shareholder June 30, ,673 Ltd. in a December 31, ,621 Subsidiary Others Affiliate June 30, ,758 December 31, * Affiliate refers to a company owned by SMC. June 30, 2012 P=2,004 P=902,751 P=116,099 P=1,286,355 December 31, 2011 P=42,094 P=2,869,344 P=151,446 P=1,202, Cash Dividends Cash dividends declared by the Company during the period ending June 30, 2012 amounted to P=40.00 and P=2.40 per share to holders of preferred and common shares, respectively. 7. Basic and Diluted Earnings Per Share (EPS) Basic and diluted EPS is computed by dividing the net income for the period attributable to equity holders of the Parent Company by the weighted average number of issued and outstanding common shares during the period, with retroactive adjustment for any stock dividends declared. Basic EPS is computed as follows: For the Six Months Ended June 30, 2012 June 30, 2011 Net income attributable to equity holders of the Parent Company P=1,725,313 P=2,010,347 Less dividends on preferred shares for the period 690, ,000 Net income attributable to common shareholders of the Parent Company (a) P=1,035,313 P=1,620,347 Common shares issued and outstanding 141,243, ,243,350 Stock dividends declared in 2010 including retroactive adjustments 25,423,746 25,423,746 Weighted average number of common shares outstanding (b) 166,667, ,667,096 Basic earnings per common share attributable to equity holders of the Parent Company (a/b) P=6.21 P=9.72 As at June 30, 2012 and 2011, the Group has no dilutive equity instruments. 8. Financial Risk Management Objectives and Policies Objectives and Policies The Group has significant exposure to the following financial risks primarily from its use of financial instruments: Interest Rate Risk Foreign Currency Risk Commodity Price Risk Liquidity Risk Credit Risk

23 - 8 - This note presents information about the Group s exposure to each of the foregoing risks, the Group s objectives, policies and processes for measuring and managing these risks, and the Group s management of capital. The Group s principal non-trade related financial instruments include cash and cash equivalents, available-for-sale (AFS) financial assets, short-term and long-term loans, and derivative instruments. These financial instruments, except derivative instruments, are used mainly for working capital management purposes. The Group s trade-related financial assets and financial liabilities such as trade and other receivables, trade payables and other current liabilities and other noncurrent liabilities arise directly from and are used to facilitate its daily operations. The Group s outstanding derivative instruments such as commodity options are intended mainly for risk management purposes. The Group uses derivatives to manage its exposures to commodity price risks arising from the Group s operations. The BOD has the overall responsibility for the establishment and oversight of the Group s risk management framework. The BOD has established the Risk Management Committee, which is responsible for developing and monitoring the Group s risk management policies. The committee reports regularly to the BOD on its activities. The Group s risk management policies are established to identify and analyze the financial risks faced by the Group, to set appropriate risk limits and controls, and to monitor risks and adherence to limits. Risk management policies and systems are reviewed regularly to reflect changes in market conditions and the Group s activities. The Group, through its training and management standards and procedures, aims to develop a disciplined and constructive control environment in which all employees understand their roles and obligations. The Group Audit Committee oversees how management monitors compliance with the Group s risk management policies and procedures, and reviews the adequacy of the risk management framework in relation to the risks faced by the Group. The Group Audit Committee is assisted in its oversight role by Internal Audit. Internal Audit undertakes both regular and ad hoc reviews of risk management controls and procedures, the results of which are reported to the Audit Committee. The Group s accounting policies in relation to derivatives are set out in Note 9 to the interim consolidated financial statements. Interest Rate Risk Interest rate risk is the risk that future cash flows from a financial instrument (cash flow interest rate risk) or its fair value (fair value interest rate risk) will fluctuate because of changes in market interest rates. The Group s exposure to changes in interest rates relates primarily to the Group s long-term borrowings. Borrowings issued at fixed rates expose the Group to fair value interest rate risk. On the other hand, borrowings issued at variable rates expose the Group to cash flow interest rate risk. The Group manages its interest cost by using an optimal combination of fixed and variable rate debt instruments. Management is responsible for monitoring the prevailing market-based interest rate and ensures that the mark-up rates charged on its borrowings are optimal and benchmarked against the rates charged by other creditor banks. In managing interest rate risk, the Group aims to reduce the impact of short-term fluctuations on the Group s earnings. Over the longer term, however, permanent changes in interest rates would have an impact on profit or loss. The management of interest rate risk is also supplemented by monitoring the sensitivity of the Group s financial instruments to various standard and non-standard interest rate scenarios. Interest rate movements affect reported equity in the following ways: retained earnings arising from increases or decreases in interest income or interest expense as well as fair value changes reported in profit or loss, if any; fair value reserves arising from increases or decreases in fair values of AFS financial assets reported as part of other comprehensive income; and hedging reserves arising from increases or decreases in fair values of hedging instruments designated in qualifying cash flow hedge relationships reported as part of other comprehensive income.

24 - 9 - The sensitivity to a reasonably possible 1% increase in the interest rates, with all other variables held constant, would have decreased the Group s profit before tax (through the impact on floating rate borrowings) by P38.9 million and P37.0 million in June 30, 2012 and 2011, respectively. A 1% decrease in the interest rate would have had the equal but opposite effect. These changes are considered to be reasonably possible given the observation of prevailing market conditions in those periods. There is no impact on the Group s other comprehensive income.

25 Interest Rate Risk Table As at June 30, 2012 and December 31, 2011, the terms and maturity profile of the interest-bearing financial instruments, together with the gross amounts, are shown in the following tables: June 30, 2012 <1 Year 1-<2 Years >2-<3 Years >3-<4 Years >4-<5 Years Total Fixed rate Philippine peso-denominated P - P - P - P800,000 P - P800,000 Interest rate % Floating rate Philippine peso-denominated 25,000 25, ,250 3,700,000-3,891,250 Interest rate 3-month PDST-R1 plus 3-month PDST-R1 plus 3-month PDST-R1 plus margin or BSP overnight margin or BSP overnight margin or BSP overnight rate plus margin, rate plus margin, rate plus margin, 3-month PDST-F +margin whichever is higher whichever is higher whichever is higher P25,000 P25,000 P141,250 P4,500,000 P - P4,691,250 December 31, 2011 <1 Year 1-<2 Years >2-<3 Years >3-<4 Years >4-<5 Years Total Fixed rate Philippine peso-denominated P - P - P - P800,000 P - P800,000 Interest rate % Floating rate Philippine peso-denominated 25,000 25, ,750 3,700,000-3,903,750 Interest rate 3-month PDST-R1 plus 3-month PDST-R1 plus 3-month PDST-R1 plus margin or BSP overnight margin or BSP overnight margin or BSP overnight rate plus margin, rate plus margin, rate plus margin, 3-month PDST-F +margin whichever is higher whichever is higher whichever is higher P25,000 P25,000 P153,750 P4,500,000 P - P4,703,750

26 Foreign Currency Risk The Group s functional currency is the Philippine peso, which is the denomination of the bulk of the Group s revenues. The Group s exposure to foreign currency risk results from significant movements in foreign exchange rates that adversely affect the foreign currency-denominated transactions of the Group. The Group s risk management objective with respect to foreign currency risk is to reduce or eliminate earnings volatility and any adverse impact on equity. The Group enters into foreign currency hedges using non-derivative instruments to manage its foreign currency risk exposure. Information on the Group s foreign currency-denominated monetary assets and liabilities and their Philippine peso equivalents are as follows: June 30, 2012 December 31, 2011 US Dollar Peso Equivalent US Dollar Peso Equivalent Assets Cash and cash equivalents US$5,442 P229,213 US$7,006 P307,143 Trade and other receivables 10, ,559 12, ,590 15, ,772 19, ,733 Liabilities Notes payable 17, ,793 18, ,929 Trade payables and other current liabilities 12, ,030 15, ,173 Other noncurrent liabilities , ,387 30,943 1,303,319 34,842 1,527,489 Net foreign currency-denominated monetary liabilities (US$15,445) (P650,547) (US$15,026) (P658,756) The Group reported net foreign exchange losses of P24.7 million and P10.4 million for the period ended June 30, 2012 and 2011, respectively, with the translation of its foreign currency-denominated assets and liabilities. These mainly resulted from the movements of the Philippine peso against the US dollar as shown in the following table: Peso to US Dollar June 30, December 31, June 30, December 31, The management of foreign currency risk is also supplemented by monitoring the sensitivity of the Group s financial instruments to various foreign currency exchange rate scenarios. Foreign exchange movements affect reported equity in the following ways: retained earnings arising from increases or decreases in unrealized and realized foreign exchange gains or losses; translation reserves arising from increases or decreases in foreign exchange gains or losses recognized directly as part of other comprehensive income; and hedging reserves arising from increases or decreases in foreign exchange gains or losses of the hedged item and the hedging instrument.

27 The following tables demonstrate the sensitivity to a reasonably possible change in the US dollar exchange rate, with all other variables held constant, of the Group s profit before income tax (due to changes in the fair value of monetary assets and liabilities) and the Group s equity (due to translation of results and financial position of foreign operations) as at June 30, 2012 and December 31, June 30, 2012 P1 Decrease in the US dollar Exchange Rate P1 Increase in the US dollar Exchange Rate Effect on Income before Income Tax Effect on Equity (Net of Tax) Effect on Income before Income Tax Effect on Equity (Net of Tax) Cash and cash equivalents (P2,896) (P4,573) P2,896 P4,573 Trade and other receivables (3,392) (9,038) 3,392 9,038 (6,288) (13,611) 6,288 13,611 Notes payable - 17,374 - (17,374) Trade payables and other current liabilities 2,978 11,857 (2,978) (11,857) Other noncurrent liabilities (819) 2,978 30,050 (2,978) (30,050) (P3,310) P16,439 P3,310 (P16,439) December 31, 2011 P1 Decrease in the US dollar Exchange Rate P1 Increase in the US dollar Exchange Rate Effect on Income before Income Tax Effect on Equity (Net of Tax) Effect on Income before Income Tax Effect on Equity (Net of Tax) Cash and cash equivalents (P1,344) (P6,602) P1,344 P6,602 Trade and other receivables (3,873) (11,648) 3,873 11,648 (5,217) (18,250) 5,217 18,250 Notes payable - 18,269 - (18,269) Trade payables and other current liabilities 1,830 15,193 (1,830) (15,193) Other noncurrent liabilities (830) 1,830 34,292 (1,830) (34,292) (P3,387) P16,042 P3,387 (P16,042) Exposures to foreign exchange rates vary during the period depending on the volume of overseas transactions. Nonetheless, the analysis above is considered to be representative of the Group s currency risk. Commodity Price Risk Commodity price risk is the risk that future cash flows from a financial instrument will fluctuate because of changes in commodity prices. The Group, through SMC, enters into various commodity derivatives to manage its price risks on strategic commodities. Commodity hedging allows stability in prices, thus offsetting the risk of volatile market fluctuations. Through hedging, prices of commodities are fixed at levels acceptable to the Group, thus protecting raw material cost and preserving margins. For hedging transactions, if prices go down, hedge positions may show mark-to-market losses; however, any loss in the mark-to-market position is offset by the resulting lower physical raw material cost.

28 SMC enters into commodity derivative transactions on behalf of the Group to reduce cost by optimizing purchasing synergies within the SMC Group of Companies and managing inventory levels of common materials. The Group uses commodity futures and options to manage the Group s exposures to volatility in prices of certain commodities such as soybean meal and wheat. Liquidity Risk Liquidity risk pertains to the risk that the Group will encounter difficulty in meeting obligations associated with financial liabilities that are settled by delivering cash or another financial asset. The Group s objectives to manage its liquidity risk are as follows: (a) to ensure that adequate funding is available at all times; (b) to meet commitments as they arise without incurring unnecessary costs; (c) to be able to access funding when needed at the least possible cost; and (d) to maintain an adequate time spread of refinancing maturities. The Group constantly monitors and manages its liquidity position, liquidity gaps or surplus on a daily basis. A committed stand-by credit facility from several local banks is also available to ensure availability of funds when necessary. The table below summarizes the maturity profile of the Group s financial assets and financial liabilities based on contractual undiscounted payments used for liquidity management as at June 30, 2012 and December 31, 2011: Carrying Amount Contractual Cash Flow June 30, Year or > 1 Year - Less 2 Years > 2 Years - 5 Years Over 5 Years Financial Assets Cash and cash equivalents P4,312,504 P4,312,504 P4,312,504 P P P Trade and other receivables - net 7,631,098 7,631,098 7,631,098 Derivative assets 109, , ,350 AFS financial assets (included under Other noncurrent assets account in the consolidated statements of financial position) 251, , ,135 8,029 Financial Liabilities Notes payable 5,418,045 5,457,997 5,457,997 Trade payables and other current liabilities (excluding derivative liabilities) 11,446,544 11,446,544 11,446,544 Derivative liabilities (included under Trade payables and other current liabilities account in the consolidated statements of financial position) Long-term debt (including current maturities) - net of debt issue costs 4,662,690 5,377, , ,286 4,923,982 Other noncurrent liabilities (excluding retirement liability)

29 Carrying Amount Contractual Cash Flow December 31, Year or > 1 Year - Less 2 Years > 2 Years - 5 Years Over 5 Years Financial Assets Cash and cash equivalents P4,932,718 P4,932,718 P4,932,718 P P P Trade and other receivables - net 8,700,217 8,700,217 8,700,217 Derivative assets 31,869 31,869 31,869 AFS financial assets (included under Other noncurrent assets account in the consolidated statements of financial position) 8,906 8,906 8,906 Financial Liabilities Notes payable 4,987,929 5,030,267 5,030,267 Trade payables and other current liabilities (excluding derivative liabilities) 10,990,164 10,990,164 10,990,164 Derivative liabilities (included under Trade payables and other current liabilities account in the consolidated statements of financial position) 28,713 28,713 28,713 Long-term debt (including current maturities) - net of debt issue costs 4,671,449 5,457,980 32, ,789 5,235,331 Other noncurrent liabilities (excluding retirement liability) 1,466 1,466 1,466 Credit Risk Credit risk is the risk of financial loss to the Group if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from the Group s trade receivables and investment securities. The Group manages its credit risk mainly through the application of transaction limits and close risk monitoring. It is the Group s policy to enter into transactions with a wide diversity of creditworthy counterparties to mitigate any significant concentration of credit risk. The Group has regular internal control reviews to monitor the granting of credit and management of credit exposures. Trade and Other Receivables The Group s exposure to credit risk is influenced mainly by the individual characteristics of each customer. However, management also considers the demographics of the Group s customer base, including the default risk of the industry and country in which customers operate, as these factors may have an influence on the credit risk. The Group has no significant concentration of the credit risk with any counterparty. Goods are subject to retention of title clauses so that in the event of default, the Group would have a secured claim. Where appropriate, the Group obtains collateral or arranges master netting agreements. The Group has established a credit policy under which each new customer is analyzed individually for creditworthiness before the Group s standard payment and delivery terms and conditions are offered. The Group ensures that sales on account are made to customers with appropriate credit history. The Group has detailed credit criteria and several layers of credit approval requirements before engaging a particular customer or counterparty. The Group s review includes external ratings, when available, and in some cases bank references. Purchase limits are established for each customer and are reviewed on a regular basis. Customers that fail to meet the Group s benchmark creditworthiness may transact with the Group only on a prepayment basis.

30 The Group establishes an allowance for impairment that represents its estimate of incurred losses in respect of trade and other receivables. The main components of this allowance are a specific loss component that relates to individually significant exposures, and a collective loss component established for groups of similar assets in respect of losses that have been incurred but not yet identified. The collective loss allowance is determined based on historical data of payment statistics for similar financial assets. Investments The Group recognizes provision for impairment losses based on specific and collective impairment tests, when objective evidence of impairment has been identified either on an individual account or on a portfolio level. Financial information on the Group s maximum exposure to credit risk as at June 30, 2012 and December 31, 2011, without considering the effects of collaterals and other risk mitigation techniques, is presented below: June 30, 2012 December 31, 2011 Cash and cash equivalents P4,312,504 P4,932,718 Trade and other receivables - net 7,631,098 8,700,217 Derivative assets (Note 9) 109,350 31,869 AFS financial assets (Note 9) 251,164 8,906 P12,304,116 P13,673,710 The credit risk for cash and cash equivalents, derivative assets and AFS financial assets is considered negligible, since the counterparties are reputable entities with high quality external credit ratings. The Group s exposure to credit risk arises from default of counterparty. Generally, the maximum credit risk exposure of receivables is its carrying amount without considering collaterals or credit enhancements, if any. The Group has no significant concentration of credit risk since the Group deals with a large number of homogenous trade customers. The Group does not execute any credit guarantee in favor of any counterparty. Financial and Other Risks Relating to Livestock The Group is exposed to financial risks arising from the change in cost and supply of feed ingredients and the selling prices of chicken, hogs and cattle and related products, all of which are determined by constantly changing market forces of supply and demand, and other factors. The other factors include environmental regulations, weather conditions and livestock diseases for which the Group has little control. The mitigating factors are listed below: The Group is subject to risks affecting the food industry, generally, including risks posed by food spoilage and contamination. Specifically, the fresh meat industry is regulated by environmental, health and food safety organizations and regulatory sanctions. The Group has put into place systems to monitor food safety risks throughout all stages of manufacturing and processing to mitigate these risks. Furthermore, representatives from the government regulatory agencies are present at all times during the processing of dressed chicken, hogs and cattle in all dressing and meat plants and issue certificates accordingly. The authorities, however, may impose additional regulatory requirements that may require significant capital investment at short notice. The Group is subject to risks relating to its ability to maintain animal health status considering that it has no control over neighboring livestock farms. Livestock health problems could adversely impact production and consumer confidence. However, the Group monitors the health of its livestock on a daily basis and proper procedures are put in place.

31 The livestock industry is exposed to risk associated with the supply and price of raw materials, mainly grain prices. Grain prices fluctuate depending on the harvest results. The shortage in the supply of grain will result in adverse fluctuation in the price of grain and will ultimately increase the Group s production cost. If necessary, the Group enters into forward contracts to secure the supply of raw materials at reasonable price. Other Market Price Risk The Group s market price risk arises from its investments carried at fair value (AFS financial assets). The Group manages its risk arising from changes in market price by monitoring the changes in the market price of the investments. Capital Management The primary objective of the Group s capital management is to ensure that it maintains a strong credit rating and healthy capital ratios in order to support its businesses and maximize shareholder value. The Group manages its capital structure and makes adjustments, in the light of changes in economic conditions. To maintain or adjust the capital structure, the Group may adjust the dividend payment to shareholders, pay-off existing debts, return capital to shareholders or issue new shares. The Group defines capital as paid-in capital stock, additional paid-in capital and retained earnings, both appropriated and unappropriated. Other components of equity such as treasury stock and cumulative translation adjustments are excluded from capital for purposes of capital management. The BOD has overall responsibility for monitoring capital in proportion to risk. Profiles for capital ratios are set in the light of changes in the Group s external environment and the risks underlying the Group s business, operation and industry. The Group monitors capital on the basis of debt-to-equity ratio, which is calculated as total debt divided by total equity. Total debt is defined as total current liabilities and total noncurrent liabilities, while equity is total equity as shown in the consolidated statements of financial position. There were no changes in the Group s approach to capital management during the period. 9. Financial Assets and Financial Liabilities Date of Recognition. The Group recognizes a financial asset or a financial liability in the consolidated statements of financial position when it becomes a party to the contractual provisions of the instrument. In the case of a regular way purchase or sale of financial assets, recognition is done using settlement date accounting. Initial Recognition of Financial Instruments. Financial instruments are recognized initially at fair value of the consideration given (in case of an asset) or received (in case of a liability). The initial measurement of financial instruments, except for those designated at fair value through profit or loss (FVPL), includes transaction costs. The Group classifies its financial assets in the following categories: held-to-maturity (HTM) investments, AFS financial assets, financial assets at FVPL, and loans and receivables. The Group classifies its financial liabilities as either financial liabilities at FVPL or other financial liabilities. The classification depends on the purpose for which the investments are acquired and whether they are quoted in an active market. Management determines the classification of its financial assets and financial liabilities at initial recognition and, where allowed and appropriate, re-evaluates such designation at every reporting date.

32 Determination of Fair Value. The fair value of financial instruments traded in active markets at the reporting date is based on their quoted market price or dealer price quotations (bid price for long positions and ask price for short positions), without any deduction for transaction costs. When current bid and ask prices are not available, the price of the most recent transaction provides evidence of the current fair value as long as there is no significant change in economic circumstances since the time of the transaction. For all other financial instruments not listed in an active market, the fair value is determined by using appropriate valuation techniques. Valuation techniques include the discounted cash flow method, comparison to similar instruments for which market observable prices exist, options pricing models, and other relevant valuation models. Day 1 Profit. Where the transaction price in a non-active market is different from the fair value of the other observable current market transactions in the same instrument or based on a valuation technique whose variables include only data from observable market, the Group recognizes the difference between the transaction price and fair value (a Day 1 profit) in profit or loss unless it qualifies for recognition as some other type of asset. In cases where the transaction price used is based on data which are not observable, the difference between the transaction price and model value is only recognized in profit or loss when the inputs become observable or when the instrument is derecognized. For each transaction, the Group determines the appropriate method of recognizing the Day 1 profit amount. Financial Assets Financial Assets at FVPL. A financial asset is classified at FVPL if it is classified as held for trading or is designated as such upon initial recognition. Financial assets are designated at FVPL if the Group manages such investments and makes purchase and sale decisions based on their fair value in accordance with the Group s documented risk management or investment strategy. Derivative instruments (including embedded derivatives), except those covered by hedge accounting relationships, are classified under this category. Financial assets are classified as held for trading if they are acquired for the purpose of selling in the near term. Financial assets may be designated by management at initial recognition as at FVPL when any of the following criteria is met: the designation eliminates or significantly reduces the inconsistent treatment that would otherwise arise from measuring the assets or recognizing gains or losses on a different basis; the assets are part of a group of financial assets which are managed and their performances are evaluated on a fair value basis, in accordance with a documented risk management or investment strategy; or the financial instrument contains an embedded derivative, unless the embedded derivative does not significantly modify the cash flows or it is clear, with little or no analysis, that it would not be separately recognized. The Group carries financial assets at FVPL using their fair values. Attributable transaction costs are recognized in profit or loss as incurred. Fair value changes and realized gains or losses are recognized in profit or loss. Fair value changes from derivatives accounted for as part of an effective accounting hedge are recognized in other comprehensive income and presented under the Cumulative translation adjustments (CTA) - Hedging reserve account in equity. Any interest earned is recognized as part of Interest income in the consolidated statements of income. Any dividend income from equity securities classified as FVPL is recognized in profit or loss when the right to receive payment has been established. The Group s derivative assets are classified under this category. The carrying amounts of financial assets under this category amounted to P109.4 million, P67.4 million and P31.9 million as at June 30, 2012, March 31, 2012 and December 31, 2011, respectively.

33 Loans and Receivables. Loans and receivables are non-derivative financial assets with fixed or determinable payments and maturities that are not quoted in an active market. They are not entered into with the intention of immediate or short-term resale and are not designated as AFS financial assets or financial assets at FVPL. Subsequent to initial measurement, loans and receivables are carried at amortized cost using the effective interest rate method, less any impairment in value. Any interest earned on loans and receivables is recognized as part of Interest income in the consolidated statements of income on an accrual basis. Amortized cost is calculated by taking into account any discount or premium on acquisition and fees that are an integral part of the effective interest rate. The periodic amortization is also included as part of Interest income in the consolidated statements of income. Gains or losses are recognized in profit or loss when loans and receivables are derecognized or impaired, as well as through the amortization process. Cash includes cash on hand and in banks which are stated at face value. Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of change in value. The Group s cash and cash equivalents and trade and other receivables are included in this category. The combined carrying amounts of financial assets under this category amounted to P11,943.6 million, P11,276.5 million and P13,632.9 million as at June 30, 2012, March 31, 2012 and December 31, 2011, respectively. HTM Investments. HTM investments are quoted non-derivative financial assets with fixed or determinable payments and fixed maturities for which the Group s management has the positive intention and ability to hold to maturity. Where the Group sells other than an insignificant amount of HTM investments, the entire category would be tainted and reclassified as AFS financial assets. After initial measurement, these investments are measured at amortized cost using the effective interest rate method, less impairment in value. Any interest earned on the HTM investments is recognized as part of Interest income in the consolidated statements of income on an accrual basis. Amortized cost is calculated by taking into account any discount or premium on acquisition and fees that are integral part of the effective interest rate. The periodic amortization is also included as part of Interest income in the consolidated statements of income. Gains or losses are recognized in profit or loss when the HTM investments are derecognized or impaired, as well as through the amortization process. As at June 30, 2012, March 31, 2012 and December 31, 2011, the Group has no investments accounted for under this category. AFS Financial Assets. AFS financial assets are non-derivative financial assets that are either designated in this category or are not classified in any of the other financial asset categories. Subsequent to initial recognition, AFS financial assets are measured at fair value and changes therein, other than impairment losses and foreign currency differences on AFS debt instruments, are recognized in other comprehensive income and presented in the CTA - Fair value reserve account in equity. The effective yield component of AFS debt securities is reported as part of Interest income in the consolidated statements of income. Dividends earned on holding AFS equity securities are recognized as Dividend income when the right to receive payment has been established. When individual AFS financial assets are either derecognized or impaired, the related accumulated unrealized gains or losses previously reported in equity are transferred to and recognized in profit or loss. AFS financial assets also include unquoted equity instruments with fair values which cannot be reliably determined. These instruments are carried at cost less impairment in value, if any. The Group s investments in shares of stock included under Other noncurrent assets are classified under this category. The carrying amounts of financial assets under this category amounted to P251.2 million, P8.4 million and P8.9 million as at June 30, 2012, March 31, 2012 and December 31, 2011, respectively.

34 Financial Liabilities Financial Liabilities at FVPL. Financial liabilities are classified under this category through the fair value option. Derivative instruments (including embedded derivatives) with negative fair values, except those covered by hedge accounting relationships, are also classified under this category. The Group carries financial liabilities at FVPL using their fair values and reports fair value changes in profit or loss. Fair value changes from derivatives accounted for as part of an effective accounting hedge are recognized in other comprehensive income and presented under the CTA - Hedging reserve account in equity. Any interest expense incurred is recognized as part of Interest expense in the consolidated statements of income. The Group s derivative liabilities are classified under this category. The carrying amounts of financial liabilities under this category amounted to P0.6 million, P3.7 million and P28.7 million as at June 30, 2012, March 31, 2012 and December 31, 2011, respectively. Other Financial Liabilities. This category pertains to financial liabilities that are not designated or classified as at FVPL. After initial measurement, other financial liabilities are carried at amortized cost using the effective interest rate method. Amortized cost is calculated by taking into account any premium or discount and any directly attributable transaction costs that are considered an integral part of the effective interest rate of the liability. Included in this category are the Group s liabilities arising from its trade or borrowings such as notes payable, trade payables and other current liabilities, long-term debt and other noncurrent liabilities. The combined carrying amounts of financial liabilities under this category amounted to P21,527.5 million, P18,719.5 million and P20,651.0 million as at June 30, 2012, March 31, 2012 and December 31, 2011, respectively. Debt Issue Costs Debt issue costs are considered as an adjustment to the effective yield of the related debt and are deferred and amortized using the effective interest rate method. When a loan is paid, the related unamortized debt issue costs at the date of repayment are recognized in profit or loss. Derecognition of Financial Assets and Liabilities Financial Assets. A financial asset (or, where applicable, a part of a financial asset or part of a group of similar financial assets) is derecognized when: the rights to receive cash flows from the asset have expired; the Group retains the right to receive cash flows from the asset, but has assumed an obligation to pay them in full without material delay to a third party under a pass-through arrangement; or the Group has transferred its rights to receive cash flows from the asset and either: (a) has transferred substantially all the risks and rewards of the asset; or (b) has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset. When the Group has transferred its rights to receive cash flows from an asset and has neither transferred nor retained substantially all the risks and rewards of the asset, nor transferred control of the asset, the asset is recognized to the extent of the Group s continuing involvement in the asset. Continuing involvement that takes the form of a guarantee over the transferred asset is measured at the lower of the original carrying amount of the asset and the maximum amount of consideration that the Group could be required to repay.

35 Financial Liabilities. A financial liability is derecognized when the obligation under the liability is discharged, cancelled or expired. When an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability. The difference in the respective carrying amounts is recognized in profit or loss. Impairment of Financial Assets The Group assesses at reporting date whether a financial asset or group of financial assets is impaired. A financial asset or a group of financial assets is deemed to be impaired if, and only if, there is objective evidence of impairment as a result of one or more events that have occurred after the initial recognition of the asset (an incurred loss event) and that loss event has an impact on the estimated future cash flows of the financial asset or the group of financial assets that can be reliably estimated. Assets Carried at Amortized Cost. For assets carried at amortized cost such as loans and receivables, the Group first assesses whether objective evidence of impairment exists individually for financial assets that are individually significant, or collectively for financial assets that are not individually significant. If no objective evidence of impairment has been identified for a particular financial asset that was individually assessed, the Group includes the asset as part of a group of financial assets pooled according to their credit risk characteristics and collectively assesses the group for impairment. Assets that are individually assessed for impairment and for which an impairment loss is, or continues to be, recognized are not included in the collective impairment assessment. Evidence of impairment for specific impairment purposes may include indications that the borrower or a group of borrowers is experiencing financial difficulty, default or delinquency in principal or interest payments, or may enter into bankruptcy or other form of financial reorganization intended to alleviate the financial condition of the borrower. For collective impairment purposes, evidence of impairment may include observable data on existing economic conditions or industry-wide developments indicating that there is a measurable decrease in the estimated future cash flows of the related assets. If there is objective evidence of impairment, the amount of loss is measured as the difference between the asset s carrying amount and the present value of estimated future cash flows (excluding future credit losses) discounted at the financial asset s original effective interest rate (i.e., the effective interest rate computed at initial recognition). Time value is generally not considered when the effect of discounting the cash flows is not material. If a loan or receivable has a variable rate, the discount rate for measuring any impairment loss is the current effective interest rate, adjusted for the original credit risk premium. For collective impairment purposes, impairment loss is computed based on their respective default and historical loss experience. The carrying amount of the asset shall be reduced either directly or through use of an allowance account. The impairment loss for the period shall be recognized in profit or loss. If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized, the previously recognized impairment loss is reversed. Any subsequent reversal of an impairment loss is recognized in profit or loss, to the extent that the carrying amount of the asset does not exceed its amortized cost at the reversal date. AFS Financial Assets. If an AFS financial asset is impaired, an amount comprising the difference between the cost (net of any principal payment and amortization) and its current fair value, less any impairment loss on that financial asset previously recognized in profit or loss, is transferred from equity to profit or loss. Reversals in respect of equity instruments classified as AFS financial assets are not recognized in profit or loss. Reversals of impairment losses on debt instruments are recognized in profit or loss, if the increase in fair value of the instrument can be objectively related to an event occurring after the impairment loss was recognized in profit or loss. In the case of an unquoted equity instrument or of a derivative asset linked to and must be settled by delivery of an unquoted equity instrument, for which its fair value cannot be reliably measured, the amount of impairment loss is measured as the difference between the asset s carrying amount and the present value of estimated future cash flows from the asset discounted using its historical effective rate of return on the asset.

36 Classification of Financial Instruments Between Debt and Equity From the perspective of the issuer, a financial instrument is classified as debt instrument if it provides for a contractual obligation to: deliver cash or another financial asset to another entity; exchange financial assets or financial liabilities with another entity under conditions that are potentially unfavorable to the Group; or satisfy the obligation other than by the exchange of a fixed amount of cash or another financial asset for a fixed number of own equity shares. If the Group does not have an unconditional right to avoid delivering cash or another financial asset to settle its contractual obligation, the obligation meets the definition of a financial liability. Offsetting Financial Instruments Financial assets and financial liabilities are offset and the net amount is reported in the consolidated statements of financial position if, and only if, there is a currently enforceable legal right to offset the recognized amounts and there is an intention to settle on a net basis, or to realize the asset and settle the liability simultaneously. This is not generally the case with master netting agreements, and the related assets and liabilities are presented at gross in the consolidated statements of financial position. The table below presents a comparison by category of carrying amounts and fair values of the Group s financial instruments as at June 30, 2012 and December 31, 2011: June 30, 2012 December 31, 2011 Carrying Amount Fair Value Carrying Amount Fair Value Financial Assets Cash and cash equivalents P4,312,504 P4,312,504 P4,932,718 P4,932,718 Trade and other receivables - net 7,631,098 7,631,098 8,700,217 8,700,217 Derivative assets 109, ,350 31,869 31,869 AFS financial assets (included under Other noncurrent assets account in the consolidated statements of financial position) 251, ,164 8,906 8,906 Financial Liabilities Notes payable 5,418,045 5,418,045 4,987,929 4,987,929 Trade payables and other current liabilities (excluding derivative liabilities) 11,446,544 11,446,544 10,990,164 10,990,164 Derivative liabilities (included under Trade payables and other current liabilities account in the consolidated statements of financial position) ,713 28,713 Long-term debt (including current maturities) - net of debt issue costs 4,662,690 4,700,416 4,671,449 4,703,740 Other noncurrent liabilities (excluding retirement liability) ,466 1,466

37 The following methods and assumptions are used to estimate the fair value of each class of financial instruments: Cash and Cash Equivalents and Trade and Other Receivables. The carrying amounts of cash and cash equivalents and receivables approximate fair values primarily due to the relatively short-term maturities of these financial instruments. Derivatives. The fair values of forward exchange contracts are calculated by reference to current forward exchange rates. In the case of freestanding commodity derivatives, the fair values are determined based on quoted prices obtained from their respective active markets. Fair values for stand-alone derivative instruments that are not quoted from an active market and for embedded derivatives are based on valuation models used for similar instruments using both observable and non-observable inputs. AFS Financial Assets. The fair values of publicly traded instruments and similar investments are based on quoted market prices in an active market. For debt instruments with no quoted market prices, a reasonable estimate of their fair values is calculated based on the expected cash flows from the instruments discounted using the applicable discount rates of comparable instruments quoted in active markets. Unquoted equity securities are carried at cost less impairment. Notes Payable and Trade Payables and Other Current Liabilities. The carrying amounts of notes payable and trade payables and other current liabilities approximate fair values due to the relatively short-term maturities of these financial instruments. Long-term Debt and Other Noncurrent Liabilities. The fair value of interest-bearing fixed-rate loans is based on the discounted value of expected future cash flows using the applicable market rates for similar types of instruments as at reporting date. As at June 30, 2012 and December 31, 2011, discount rates used range from 2.43% to 4.28% and 1.74% to 4.79%, respectively. The carrying amounts of floating rate loans with quarterly interest rate repricing approximate their fair values. Derivative Financial Instruments The Group s derivative financial instruments according to the type of financial risk being managed and the details of freestanding and embedded derivative financial instruments are discussed below. The Group, through SMC, enters into various commodity derivative contracts to manage its exposure on commodity price risk. The portfolio is a mixture of instruments including futures and options. Derivative Instruments Accounted for as Hedges Freestanding Derivatives For the purpose of hedge accounting, hedges are classified as either: a) fair value hedges when hedging the exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment (except for foreign currency risk); b) cash flow hedges when hedging exposure to variability in cash flows that is either attributable to a particular risk associated with a recognized asset or liability or a highly probable forecast transaction or the foreign currency risk in an unrecognized firm commitment; or c) hedges of a net investment in foreign operations. At the inception of a hedge relationship, the Group formally designates and documents the hedge relationship to which the Group wishes to apply hedge accounting and the risk management objective and strategy for undertaking the hedge. The documentation includes identification of the hedging instrument, the hedged item or transaction, the nature of the risk being hedged and how the entity will assess the hedging instrument s effectiveness in offsetting the exposure to changes in the hedged item s fair value or cash flows attributable to the hedged risk. Such hedges are expected to be highly effective in achieving offsetting changes in fair value or cash flows and are assessed on an ongoing basis to determine that they actually have been highly effective throughout the financial reporting periods for which they were designated.

38 Fair Value Hedge. Derivatives classified as fair value hedges are carried at fair value with corresponding change in fair value recognized in profit or loss. The carrying amount of the hedged asset or liability is also adjusted for changes in fair value attributable to the hedged item and the gain or loss associated with that remeasurement is also recognized in profit or loss. When the hedge ceases to be highly effective, hedge accounting is discontinued and the adjustment to the carrying amount of a hedged financial instrument is amortized immediately. The Group discontinues fair value hedge accounting if the hedging instrument expires, is sold, terminated or exercised, the hedge no longer meets the criteria for hedge accounting or the Group revokes the designation. As at June 30, 2012, March 31, 2012 and December 31, 2011, the Group has no outstanding derivatives accounted for as fair value hedges. Cash Flow Hedge. Changes in the fair value of a hedging instrument that qualifies as a highly effective cash flow hedge are recognized in other comprehensive income and presented under the CTA - Hedging reserve account in the consolidated statements of changes in equity. The ineffective portion is immediately recognized in profit or loss. If the hedged cash flow results in the recognition of an asset or a liability, all gains or losses previously recognized directly in equity are transferred from equity and included in the initial measurement of the cost or carrying amount of the asset or liability. Otherwise, for all other cash flow hedges, gains or losses initially recognized in equity are transferred from equity to profit or loss in the same period or periods during which the hedged forecasted transaction or recognized asset or liability affects profit or loss. When the hedge ceases to be highly effective, hedge accounting is discontinued prospectively. The cumulative gain or loss on the hedging instrument that has been reported directly in equity is retained in equity until the forecasted transaction occurs. When the forecasted transaction is no longer expected to occur, any net cumulative gain or loss previously reported in equity is recognized in profit or loss. As at June 30, 2012, March 31, 2012 and December 31, 2011, the Group has no outstanding derivatives accounted for as cash flow hedges. Net Investment Hedge. As at June 30, 2012, March 31, 2012 and December 31, 2011, the Group has no hedge of a net investment in a foreign operation. Other Derivative Instruments Not Designated as Hedges The Group enters into certain derivatives as economic hedges of certain underlying exposures. These include freestanding commodity options and embedded currency forwards which are not designated as accounting hedges. Changes in fair value of these instruments are accounted for directly in profit or loss. Details are as follows: Freestanding Derivatives Freestanding derivatives consist of various commodity options entered into by SMC on behalf of the Group. The Group has outstanding bought and sold options covering its wheat requirements with notional quantities as at June 30, 2012, March 31, 2012 and December 31, 2011 of 103,963, 99,337 and 47,083 metric tons, respectively. These options can be exercised at various calculation dates in 2012 with specified quantities on each calculation date. As at June 30, 2012, March 31, 2012 and December 31, 2011, the net positive (negative) fair value of these options amounted to P58.6 million, P18.7 million and (P5.2 million), respectively.

39 As at March 31, 2012 and December 31, 2011, the Group has outstanding bought and sold options covering its soybean meal requirements with notional quantity of 5,625 and 7,439 metric tons, respectively. These options can be exercised at various dates in 2012 with specified quantities on each calculation date. As at March 31, 2012 and December 31, 2011, the positive (negative) fair value of these options amounted to P5.7 million and (P5.5 million), respectively. The Group has no outstanding options on the purchase of soybean meal as at June 30, Embedded Derivatives The Group assesses whether embedded derivatives are required to be separated from host contracts when the Group becomes a party to the contract. An embedded derivative is separated from the host contract and accounted for as a derivative if all of the following conditions are met: a) the economic characteristics and risks of the embedded derivative are not closely related to the economic characteristics and risks of the host contract; b) a separate instrument with the same terms as the embedded derivative would meet the definition of a derivative; and c) the hybrid or combined instrument is not recognized at FVPL. Reassessment only occurs if there is a change in the terms of the contract that significantly modifies the cash flows that would otherwise be required. The Group s embedded derivatives include currency forwards embedded in non-financial contracts. As at June 30, 2012, March 31, 2012 and December 31, 2011, the total outstanding notional amount of such embedded currency forwards amounted to US$46.8 million, US$48.4 million and US$59.9 million, respectively. These nonfinancial contracts consist mainly of foreign currency-denominated purchase orders, sales agreements and capital expenditures. The embedded forwards are not clearly and closely related to their respective host contracts. As at June 30, 2012, March 31, 2012 and December 31, 2011, the net positive fair value of these embedded currency forwards amounted to P50.1 million, P39.3 million and P13.7 million, respectively. For the periods ended June 30, 2012 and 2011 and March 31, 2012 and 2011, the Group recognized mark-to-market gains (losses) from freestanding and embedded derivatives amounting to P146.1 million, (P70.3 million), P87.5 million and P16.4 million, respectively. Fair Value Hierarchy Financial assets and financial liabilities measured at fair value in the consolidated statements of financial position are categorized in accordance with the fair value hierarchy. This hierarchy groups financial assets and financial liabilities into three levels based on the significance of inputs used in measuring the fair value of the financial assets and financial liabilities. The table below analyzes financial instruments carried at fair value, by valuation method as at June 30, 2012 and December 31, The different levels have been defined as follows: Level 1 : quoted prices (unadjusted) in active markets for identical assets or liabilities; Level 2 : inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly; and Level 3 : inputs for the asset or liability that are not based on observable market data. June 30, 2012 Level 1 Level 2 Total Financial Assets Derivative assets P P109,350 P109,350 AFS financial assets 249,258 1, ,164 Financial Liabilities Derivative liabilities

40 December 31, 2011 Level 1 Level 2 Total Financial Assets Derivative assets P2,107 P29,762 P31,869 AFS financial assets 6,530 2,376 8,906 Financial Liabilities Derivative liabilities 10,309 18,404 28,713 As at June 30, 2012 and December 31, 2011, the Group has no financial instruments valued based on Level 3. During the period, there were no transfers between Level 1 and Level 2 fair value measurements, and no transfers into and out of Level 3 fair value measurements. 10. Other Matters a. On August 10, 2012, the Company s BOD declared cash dividends to all preferred and common shareholders of record as at August 29, 2012 amounting to P20.00 and P1.20 per share, respectively, payable on September 3, b. There were no unusual items as to nature and amount affecting assets, liabilities, equity, net income or cash flows, except those stated in Management s Discussion and Analysis of Financial Position and Financial Performance. c. There were no material changes in estimates of amounts reported in prior interim periods of the current year or changes in estimates of amounts reported in prior financial years. d. There were no known trends, demands, commitments, events or uncertainties that will have a material impact on the Group s liquidity. e. There were no known trends, events or uncertainties that have had or that are reasonably expected to have a favorable or unfavorable impact on net sales or revenues or income from continuing operations. f. There were no known events that will trigger direct or contingent financial obligation that is material to the Group, including any default or acceleration of an obligation and there were no changes in contingent liabilities and contingent assets since the last annual consolidated statements of financial position date, except for Note 35 (b) of the 2011 Audited Consolidated Financial Statements that remain outstanding as at June 30, No material contingencies and any other events or transactions exist that are material to an understanding of the current interim period. g. There were no material off-statements of financial position transactions, arrangements, obligations (including contingent obligations), and other relationship of the Group with unconsolidated entities or other persons created during the reporting period, except for the outstanding derivative transactions entered by the Group as at and for the period ended June 30, h. Except for the Processed Meats, Dairy, Poultry and Fresh Meats businesses which consistently generate higher revenues during the Christmas holiday season, the effects of seasonality or cyclicality on the interim operations of the Company s other businesses are not material. i. The Group s material commitments for capital expenditure projects have been approved during the current year but are still ongoing and not yet completed as at end of June 30, These consist of construction, acquisition, upgrade or repair of fixed assets needed for normal operations of the businesses. The said projects will be carried forward to the next quarter until its completion. The fund to be used for these projects will come from available cash and short-term loans.

41 Annex B MANAGEMENT S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION AND FINANCIAL PERFORMANCE INTRODUCTION The following discussion should be read in conjunction with the attached unaudited consolidated financial statements of San Miguel Pure Foods Company, Inc. ( SMPFC or the Company ) and its subsidiaries (collectively referred to as the Group ) as at and for the period ended June 30, 2012 (with comparative figures as at December 31, 2011 and for the period ended June 30, 2011). All necessary adjustments to present fairly the consolidated financial position, financial performance and cash flows of the Group as at June 30, 2012, and for all the other periods presented, have been made. Certain information and footnote disclosures normally included in the audited consolidated financial statements prepared in accordance with the Philippine Financial Reporting Standards have been omitted. I. FINANCIAL PERFORMANCE 2012 vs 2011 SMPFC ended the first semester with consolidated revenues reaching P45.3 billion, a 7% increase from the previous period. Higher sales volume as a result of effective sales and marketing activities, new product introductions and improved distribution network, as well as better selling prices in almost all businesses, were the revenue growth drivers. Cost of sales, on the other hand, increased by 11% mainly due to high costs of major raw materials, particularly in the Company s Feeds, Poultry, Fresh Meats and Flour businesses, and low supply of other raw materials. The double-digit growth in cost of sales outpaced the increase in the Group s sales turnover, thus, translating to a gross profit 8% lower than the first semester of Selling and administrative expenses went up by 10% due to higher distribution and transportation costs with the surge in fuel prices, increased rental, warehousing and third party services costs, and higher advertising and promotions spending on brand-building activities. The increase in product development costs, in line with the Group s thrust to come up with breakthrough product concepts, likewise contributed to higher than last year s selling and administrative expenses. The substantial increase in interest rates on a foreign subsidiary s short-term bank borrowings, combined with higher monthly average level of domestic borrowings for working capital requirements of certain subsidiaries, resulted in a 17% surge in interest expense and other financing charges versus prior year s level. Interest income was lower in 2012 as last year s income included interest earned from short-term placements of net proceeds from San Miguel Foods, Inc. s (SMFI) issuance of P4.5 billion term notes in December 2010 and SMPFC s P15.0 billion worth of preferred shares offering in March These funds were subsequently used to fully settle the remaining balance of the Vietnam food business acquisition and purchase of Manila Electric Company s (Meralco) shares from San Miguel Corporation (SMC) in May and August 2011, respectively.

42 Equity in net earnings of an associate represents SMPFC s share in Meralco s net income relative to the purchase of Meralco shares in August Gain (loss) on sale of property and equipment contrasted that of last year on account of the gain realized from the disposal of certain equipment during the first semester of 2012 versus the loss incurred from the rationalization of SMFI s food shop outlets for the same period in Other income (charges) - net likewise contrasted that of 2011 mainly due to mark-to-market gains recognized from the Group s embedded third currency transactions brought about by the favorable foreign exchange rates and better market price of wheat options in the first six months of SMPFC s second quarter performance was a remarkable improvement from the weak first quarter results, as the Company saw its profits doubling in the second quarter. The softening of raw materials, improved production efficiencies, and better supply-demand environment in hog meat and chicken, contributed to the Group s rebound going into the second quarter of However, compared to last year, raw material prices remained high and supply of other raw materials continued to be low, driving up production costs. Combined with increases in operating and financing costs, these affected the Group s year-to-date profitability resulting in lower than last year s income before income tax, income tax expense and net income. Net income attributable to equity holders of the Parent Company and to non-controlling interests similarly dropped due to the decline in profit of certain subsidiaries where SMPFC and non-controlling stockholders hold stake. Business Highlights: Agro-Industrial SMFI s Feeds business posted 10% revenue growth due to better selling prices and the 6% increase in volume, mainly driven by the gamefowl, broiler, and layer feed segments. However, high raw materials and production costs, as well as high operating expenses, particularly advertising and promotion to support various marketing initiatives, prevented the business from exceeding last year s operating income. SMFI s combined Poultry and Fresh Meats business registered 7% and 8% increases in volume and revenue, respectively. Operating income, however, was lower versus same period last year mainly on account of higher feed cost resulting in hog and broiler costs growing by 8% and 1%, respectively. In addition, the proliferation of lower-priced imported frozen meats in the market resulted in industry-wide decline in selling prices, thus, affecting the performance of the Fresh Meats business. Value-Added The Purefoods-Hormel Company, Inc. s (PF-Hormel) Value-Added or Processed Meats business posted volume and revenue growths of 16% and 17%, respectively, due to the favorable performances of its core brands led by Tender Juicy, Purefoods Star Hotdog, Nuggets and Purefoods Corned Beef. The improvements in sales and operating efficiencies of the business resulted in better margins as operating profit grew double-digit versus the same period in Milling Notwithstanding the competitive presence of lower-priced imported flour and the sluggish demand following a market slowdown in anticipation of a flour price rollback, the Company s Flour business under San Miguel Mills, Inc. (SMMI) managed to register a modest 2% growth, both in volume and revenue. Higher wheat prices, however, resulted in increased production costs, thus, preventing the business to

43 match last year s operating income for the same period. Dairy and Others The Company s Dairy, Fats and Oils business under Magnolia Inc. (Magnolia) posted a 3% increase in revenue versus 2011 level on account of better selling prices and higher volume of butter, cheese, milk and ice cream. Combined with improvements in raw material prices, Magnolia registered higher operating income versus same period in San Miguel Super Coffeemix Co. Inc. s (SMSCCI) volume and revenue grew by 26% and 22%, respectively, on account of the improved sales in the general trade. On the other hand, the increased level of advertising and promotions spending for brand-building activities tempered the growth in operating income vs 2010 Amidst escalating raw material costs, SMPFC sustained its growth momentum, registering double-digit revenue and net income after tax increases at the end of the first semester of The encouraging results were primarily due to the commendable performances of its Flour, Value-Added Meats, Fresh Meats and Coffee businesses. Consolidated revenues for the six-month period reached P42.3 billion, a 14% year-on-year increase. Higher volumes from most of the businesses, combined with favorable selling prices, as well as the consolidation of San Miguel Hormel (Vn) Co., Ltd. (SMHVN) in August 2010, were the revenue growth drivers. On the other hand, cost of sales rose by 17% mainly due to the increasing costs of major raw materials of the Company s Feeds, Poultry, Flour, Value-Added Meats and Dairy, Fats and Oil businesses, and the consolidation of SMHVN. The growth in the Group s sales turnover and continuous operational efficiency improvements, which partly cushioned the impact of higher raw materials, translated into gross profit improvement, thus, the 6% increase versus same period in Interest expense and other financing charges grew by 44% on account of SMFI s issuance of a five-year peso-denominated fixed rate and floating rate notes in December 2010 and the consolidation of SMHVN. Interest income increased significantly as the remaining proceeds from SMPFC s issuance of preferred shares in March 2011 and the balance from SMFI s issuance of term notes were held in temporary cash investments during the first semester of The continuous rationalization of existing food shop outlets of SMFI resulted in gain (loss) on sale of property and equipment contrasting that of Other charges - net, which is presented net of other income in the consolidated statements of income, rose by 94% due to higher unrealized mark-to-market loss on derivatives brought about by the increase in cost and volume of wheat options. The solid overall performance of the Group resulted in income before income tax and net income growing by 11% and 15%, respectively, versus same period in Net income attributable to equity holders of the Parent Company is higher versus 2010 level due to better combined performances of subsidiaries where SMPFC holds significant ownership. Profit recorded by subsidiaries where non-controlling stockholders hold stake likewise improved, thus, the increase in net income attributable to non-controlling interests.

44 Business Highlights: Agro-Industrial Despite a contraction in the backyard hog industry, SMFI s Feeds business registered commercial sales volume and revenue growth of 2% and 9%, respectively, on account of better selling prices and various selling and marketing programs implemented. However, the increasing raw materials and production costs, as well as higher operating expenses, particularly advertising and promotion to support various marketing programs, prevented the business from matching 2010 operating income level. The combined Poultry business of SMFI and Fresh Meats business of then Monterey Foods Corporation (Monterey) that was merged with SMFI in September 2010, posted 10% increase both in terms of volume and revenue. The total Poultry and Fresh Meats businesses operating income, however, was lower versus same period in 2010 mainly on account of higher feed costs. The Poultry business alone recorded 9% and 8% increases in volume and revenue, respectively, due to improved supply availability. Operating income, however, was below 2010 level largely due to higher broiler costs. The Fresh Meats business, on the other hand, achieved 14% growth in revenue on account of the 18% increase in volume driven by supermarket and neighborhood meatshops. Notwithstanding the higher cost of marketable hogs brought about by the increase in feed costs, the continuous drive to improve production efficiencies and reduce costs enabled the Fresh Meats business to achieve profit improvement over the same period in Value-Added Although the Value-Added or Processed Meats business under PF-Hormel registered shortfall in terms of volume and revenue versus 2010, product mix optimization and improvement in margins helped the business achieve double-digit growth in operating profit. Milling The Company s Flour business under SMMI registered a 20% increase in revenue due to better selling prices and 4% volume growth, as the business continued to make headway in the institutional customers segment. This drove the operating income of the business to surpass 2010 level in spite of the increasing wheat and freight costs. Dairy & Others Revenue of the Dairy, Fats and Oils business under Magnolia was 22% higher than same period in 2010 on account of strong volume across most product categories. However, the escalation in costs of major raw materials, which started in the last quarter of 2010, affected the business profitability. On the other hand, Magnolia s Ice Cream business posted 20% and 24% growth in volume and revenue, respectively. SMSCCI volume and revenue grew by 33% and 26%, respectively, on account of the improved sales in the general trade. Operating performance likewise registered growth versus 2010 level. II. FINANCIAL POSITION SMPFC s overall financial position remained stable with current ratio and debt to equity ratio as at June 30, 2012 recorded at 1.85:1 and 0.55:1, respectively.

45 Analysis of Financial Position Accounts Unaudited Financial Position as at June 30, 2012 vs Audited December 31, 2011 Cash and cash equivalents decreased by 13% as funds were used to partly finance the group s capital expenditures and working capital requirements. Trade and other receivables - net declined by 12% as peak season sales made in December 2011 were collected during the first quarter of Proceeds from these collections were used to finance purposive corn buying, seasonal build-up of meat materials and advanced production of certain products in order to take advantage of breaks in raw material costs, thus, the 10% increase in inventory. Current biological assets grew by 6% due to higher feed costs and increase in volume of growing poultry livestock and hogs in anticipation of demand surge in the second half of the year. The increase in derivative assets is attributed to the favorable peso to dollar exchange rate at valuation date and better market price of wheat options. Prepaid expenses and other current assets grew by 5% mainly due to the increase in the level of creditable withholding taxes for application against future tax liabilities. Investment properties - net went up by 25% due to additional foreclosed properties during the period. Property, plant and equipment - net rose by 9% mainly due to fixed asset acquisitions and as the Group pursued its expansion projects. The increase in other noncurrent assets was due to the declaration of property dividend by an associate. Notes payable grew by 9% due to short-term borrowings made to finance capital expenditures and working capital requirements. Income tax payable decreased versus year-end 2011 level on account of the decline in taxable income of certain subsidiaries. The 9% increase in deferred tax liabilities resulted from a subsidiary s recognition of unrealized gains from valuation of wheat options. Other noncurrent liabilities went up by 54% due to the subsidiaries set up of pension expense for the first half of The increment in cumulative translation adjustments is primarily due to the translation of a foreign subsidiary s net assets. Retained earnings grew by 5% on account of the income in the first half of Profit recorded by subsidiaries where non-controlling stockholders hold stake likewise improved, thus, the increase in net income attributable to non-controlling interests. The cash dividend declaration by a subsidiary where non-controlling stockholders hold stake resulted in a 13% decline in the balance of non-controlling interests. Unaudited Financial Position as at June 30, 2011 vs Audited December 31, 2010 Cash and cash equivalents increased significantly as the remaining proceeds from the issuance of preferred shares and term notes by SMPFC and SMFI, respectively, were temporarily invested in shortterm placements by the end of the first semester of 2011.

46 Trade and other receivables - net decreased by 12% as peak season sales made in December 2010 were collected during the first quarter of Inventories - net grew by 13% mainly due to the increase in costs of most of the major raw materials used by SMFI s Poultry, Fresh Meats and Feeds businesses, SMMI, Magnolia and PF-Hormel. Current biological assets grew by 16% due to the increase in volume of growing poultry livestock and hogs coupled with higher feed costs. The 60% decrease in derivative assets is largely due to the lower market price of wheat options and the closure of outstanding purchase orders that are to be settled with third currencies, further deliveries of which are no longer expected. Investment properties - net went up by 18% due to additional foreclosed properties in the first half of The 18% surge in noncurrent biological assets was due to the increase in volume of breeding stock coupled with higher feed costs. The reversal of certain deferred tax benefit provisions in the first semester of 2011 resulted in a 22% decrease in deferred tax assets. Notes payable increased by 8% due to short-term borrowings made to finance working capital requirements. SMPFC s full settlement of the remaining balance of the Brands and Vietnam food business acquisitions from SMC, and the payments made by the Group to suppliers resulted in the 32% decline in trade payables and other current liabilities. Income tax payable increased versus year-end 2010 level on account of the improved performance of subsidiaries in the first semester of 2011 resulting in higher income tax liability. A subsidiary s recognition of realized gain from insurance claim resulted in the 40% drop in deferred tax liabilities. Other noncurrent liabilities increased due to the subsidiaries set up of pension expense for the first semester of Capital stock rose by 9% due to the issuance of 15,000,000 preferred shares with par value of P10.00 per share in March The increase in additional paid-in capital represents the difference between the offer price and par value of the preferred shares issued by SMPFC, net of transaction costs. The 5% increment in cumulative translation adjustments is primarily due to foreign currency translation difference. Retained earnings grew by 10% on account of the income in the first half of 2011.

47 III. SOURCES AND USES OF CASH A brief summary of cash flow movements is shown below: June 30 (In millions) Net cash flows provided by operating activities P 2,192.9 P 1,000.3 Net cash flows used in investing activities (1,853.9) (4,611.8) Net cash flows provided by (used in) financing activities (952.2) 14,298.5 Net cash flows provided by operations basically consist of income for the period and changes in non-cash current assets, certain current liabilities and others. Net cash flows used in investing activities include the following: June 30 (In millions) Acquisitions of property, plant and equipment Acquisition of a subsidiary net of cash received Acquisition of intangible assets Additional investment in subsidiary Dividend received from associate Proceeds from sale of property and equipment Increase in noncurrent biological assets, other noncurrent assets and other noncurrent liabilities (P 1,082.0) (357.7) (689.8) (P 246.8) - (2,883.8) (720.6) -.3 (760.9) The net cash flows provided by (used in) financing activities consist of the net availments of short-term loans, proceeds from the issuance of preferred shares, payment of long-term debt and payment of dividends to shareholders. The effect of exchange rate changes on cash and cash equivalents amounted to (P7.0 million) and (P1.0 million) in June 30, 2012 and 2011, respectively.

48 IV. KEY PERFORMANCE INDICATORS The following are the major performance measures that the Group uses. Analyses are employed by comparisons and measurements based on the financial data of the periods indicated below. KPI June 2012 December 2011 Liquidity: Current Ratio SOlvency: Debt to Equity Ratio Asset to Equity Ratio Profitability: Return on Average Equity 10.21% 15.70% Attributable to Equity Holders of the Parent Company Interest Rate Coverage Ratio KPI Period Ended June 2012 Period Ended June 2011 Operating Efficiency: Volume Growth 5.76% 9.68% Revenue Growth 7.18% 14.28% Operating Margin 4.11% 7.09% The manner by which the Group calculates KPI the above indicators is as follows: Formula Current Ratio Current Assets Current Liabilities Debt to Equity Ratio Total Liabilities (Current + Noncurrent) Non-controlling Interests + Equity Asset to Equity Ratio Total Assets (Current + Noncurrent) Non-controlling Interests + Equity Return on Average Equity Attributable to Net Income Attributable to Equity Holders of the Parent Company* Equity Holders of the Average Equity Attributable to Equity Holders of the Parent Company= Parent Company Interest Rate Earnings Before Interests, Taxes, Depreciation and Amortization Coverage Ratio Interest Expense and Other FinanCing Charges Volume Growth (Sum of all Businesses' Revenue at Prior Period Prices I Prior period Net Sales 1-1 Revenue Growth Current period Net sales] Prior Period Net Sales -1 Operating Margin Income from Operating Activities Net Sales * annualized for quarterly reporting; excluding cash dividends paid to preferred shareholders ** excluding preferred capital stock and related additional paid-in capital [