FIRST FARMS CORPORATIONS

“I’m afraid we have to make painful choices, gentlemen. We are more seriously affected by this glut than
we had expected. While volumes usually pick up in the last quarter, we anticipate chicken prices to be
depressed until the end of the year. With all our cost hitting the roof, it does not look like we can report
a profit this year.”

The speaker is Ricardo Sarmiento, VP for Finance of First Farm Corporation (FFC). He was talking to Raul
Ramirez, the company’s President and Chief Executive Officer, Alfredo Cruz, Head of Feeds Operations,
and Enrico Marasigan, Head of Poultry Operations.

“Do you have good news for us, Rico?” Raul asked.

“Unfortunately none Raul. I have to agree with Ric. We are producing more chicken than can be absorbed
by the market. Already we downgraded a considerable voume of good hatching eggs to table eggs and
sold these for less than 20% of cost. And since we are delaying the harvest of our chickens, our feed and
supplement requirements have also increased.”

“Our feeds volume has gone down 40% because of this,” interjected Fred Cruz, “because of the increased
requirements of our contract growers. We managed to realize an operating income P75.5 million from
sales of P718 million, though.”

Ric Sarmiento responded. “I am afraid the performance of feeds was not enough to get us out of the red.
Our financing costs are taking a heavy toll on the company. We may have to postpone the construction of
the Laguna and Cebu plants.” Ric was referring to a plan, approved by FFC’s Board of Directors in 1995, to
build chicken dressing plants in Laguna and Cebu.

“I don’t think we’re left with any choice in the matter,” Raul said finally. “But I’m afraid we have to do
much more than that. Capex is not the only one that’s straining our cash flows. The increases in our
working capital requirements have been astronomical in the last three years. We’ve not been very
successful in our processed foods line, for one. And we’re paying 18% for every peso that’s stuck there.”

Rick responded,”I have been thinking of offering a 5% discount to our customers for payments within 10
days. We’ve been running some figures and the department estimates that we’d be able to cut our
average collection time by 20% if we do this.”

“Have we considered asking our suppliers for an extension of our credit terms?” asked Fred. “We’re
currently at –what, 30 days? Would it make a big difference if we pay, say, after 60 or even 90 days? I
would think we have enough clout to be persuasive in this.”

“You’re probably right, Fred,” answered Raul. Turning to Ric, Raul said,”What do you say, Ric? I don’t know
if our 1996 performance is still salvageable but I’d like to think that not all is alost. Can you and your staff
put some thoughts and numbers together for our next Execom meeting?”

Company Background

The First Farms Corporation is a publicly listed Philippine corporation that traces its roots to the 1950’s,
when brothers Francisco, Joselito, and Arturo Evangelista set up a small animal feeds manufacturing plant
with 15 employees in Caloocan. Since then, the company has expanded to other agribusiness products
and set up nationwide facilities. Growth was particularly strong in the 1990s, with revenues rising by more
than 20% per year, and net income and return on equity increasing by about 50% per year. As of 1995,
the corporation’s products and feeds. It was recognized as the Philippines’ leading poultry integrator and
had a workforce of over 1,700 employees. It is also the largest consumer of corn and other feed grains in
the country, a fact which allows it to buy raw materials at a cost lower than most of its major competitors.

The company derives over 60% of its revenues from its chicken business. While 80% of the chicken sales
is to supermarkets and retailers, the company also supplies chicken to the Hotel and Restaurants Industry
(HRI) where margins are approximately 20% higher than chicken sold to retailers. Its major HRI clients
include Kenny Rogers, Andok’s and Baliwag’s chicken outlets. In the past two years, FFC has intensified
efforts to improve its chicken production technology in order to increase the HRI sector’s share of
company sales to 30%. Unfortunately for FFC and the rest of the industry, production inefficiencies in the
country’s corn production result in higher production costs for local chicken producers, effectively barring
them from supplying to the international market. The company’s credit terms are currently at net 30 days.

1995 was a banner year for the corporation, with consolidated sales hitting P5.7 billion, a 44% increase
over the previous year’s performance, and net income up by 89% to P280 million. In this and the previous
year, FFC significantly outpaced forecast industry growth of about 6-7 percent in chicken sales volume, an
achievement management attributed in large part to programs that increased the company’s contract
growing base at the expense of their competitors. FFC also jumped to top slot in chicken volume sales in
1995 with a 27% share of the market. FFC’s 1995 performance was particularly remarkable given that
ousted market leader Marigold Foods reported a net loss for the year, citing the supply glut and high input
and raw materials cost as causes. Marigold’s market share in 1995 was at 17%.

1996 is proving to be a difficult and challenging year, however, with chicken prices dropping to 1993 levels
and production costs climbing by 20% over 1995 levels. Efforts of FFC to reduce the supply glut affecting
the industry resulted in inefficiencies for the company, as feed mills became overburdened with increased
requirements from the company contract growers. Delayed harvest is producing chicken that are harder
to sell because of their increased sized. The company is also forced to lease cold storage facilities to store
frozen chicken. Thus, despite a 36% increase in volumes compared with the same period in 1995, the
company realized a net loss of P183.6 million for the first semester of 1996.

A bright spot for the company is the creditable performance of the feeds division during the first half of
the year. Despite lower volumes, operating profit was positive at slightly more than 10% of sales. The
company’s new aqua feeds line provided 47% of feeds operating income despite contributing just 23% to
total feeds sales. A first in the country, the new product was launched with great success in 1995 as the
only aqua feed that floats, thus guaranteeing fish farmers better feed hygiene and higher aqua farm
productivity.

Feeds accounts for only 30% of FFC’s current business however. Management thus feels the pressure to
improve the margins in the company’s chicken business in order to produce positive bottom line results
for the year.

FINANCIAL STATEMENT: