Below is the transcript of a CNBC interview with Jaime Augusto Zobel de Ayala, Chairman and CEO, Ayala Corporation. The interview played out in CNBC’s latest episode of Managing Asia on 29 May 2020, 5.30PM SG/HK (in APAC). If you choose to use anything, please attribute to CNBC and Christine Tan.
Christine Tan (CT): As one of the oldest and largest conglomerates in the Philippines, how would you describe the scale of disruption you’re seeing from the pandemic in all your years of doing business in the Philippines? Have you seen anything like it?
Jamie Augusto Zobel de Ayala (JAZA): While this has been one of the more unusual situations we’ve had. I don’t think I’ve seen anything like it. We’ve had a series of crises in the past. The 1997 Asian crisis was difficult. The 2008 crisis became more global. But this is a situation where you have almost zero revenues for a period of time. We’ve had a hard quarantine in the Philippines, I think rightly so, to try to stem the pandemic and really take care of people’s health. The Government correctly went for a hard quarantine situation, but that meant the economy grinding to a halt. I don’t think I’ve ever been in a situation like that. Some people have equated it to the world wars in many ways. But even then, there was economic activity. There’s zero at this point in time. So, very unusual and no playbook to go by.
CT: Immediately after the implementation of ECQ or Enhanced Community Quarantine in the Philippines, you unveiled a ₱6.5 billion response package. Was it simply to help your staff tide through this period, to give them the financial security that they needed?
JAZA: When you have a moment like this, we reflected on it as a group of economic managers and said, the first thing people become very insecure about is their job. So, we decided right upfront to basically launch a support fund and assure the employees across our group that there will be no layoffs upfront.
We would be holding on to their jobs while the quarantine took place, so that was a fairly substantial support. I think unprecedented certainly in the Philippines. Then, we moved on to the eco-system that surrounded us – the people who rent from us, the people who bank with us. We extended financial help as well to that community, that led to about ₱6.5 billion worth of support. Of course, beyond that, there was also a lot of help of a non-profit kind just to help out on many different fronts.
CT: I want to talk about the wider SME community and micro-enterprises which received your assistance. What were some other needs of these smaller businesses that you addressed to help them tide over the difficult period?
JAZA: Well, we have about 20,000 small- and medium-sized businesses that surround our group. We also have about a million micro enterprises one way or another. To a certain extent, one has to align oneself to their own situation. They have no revenues coming in. They’ve grounded to a halt. We have no right to expect any revenues coming from them in a time like that. So, we basically adjusted ourselves to their situation and moved down with them. So, essentially at the bank, we opted to not have any interest payments during this period of time. In our malls, there’d be no rental during this period of time. In our telecom facility, we allowed people to push their bills out. In other words, we just put ourselves in everybody else’s position and said, we all have to adjust accordingly. I think all of this was well received, obviously, and that with the help we’re giving to employees, set a tone of trust in the communities that were important to us.
CT: You were also involved in a mammoth task of transforming the World Trade Centre into a 500-bed quarantine facility within two weeks. What did the mammoth task entail and how much work was involved?
JAZA: Well, actually, that was a request by the Government. I think this has been an interesting period where the private and public sectors have come together to solve needs. We got a call from one of the government agencies and said that they had the World Trade Centre that was made available to them by a private sector group but they needed to convert it. Within a week and a half, we were able to turn it into a 500-bed facility. A lot of the Group contributed to this. But of course, we have very strong skills in project management and construction, but also our telecom facilities. From our bank, many people came in to help out. Within about 10 days, we were able to convert it into that. The Government was preparing for the return of many overseas workers who needed to be tested. This was just a great way of coming hand-in-hand with the public sector – the executive side of Government and helping them address their needs at that point in time. We also helped out the Red Cross Centre in the Philippines. We’ve got a number of projects like that. It has been fascinating to see the public and the private come together. Of course, we’re delighted to be helpful in that respect.
CT: We understand that Luzon and some of the other major cities in the Philippines have now come out of ECQ (Enhanced Community Quarantine) or strict quarantine. What health protocols have you put in place to slowly bring back your workforce to restart your operations?
JAZA: Well, that has been an important component. I have spent a lot of time talking to investors these days who want to know what’s happening on the ground. I’ve told them for the first time in our lives, we’ve had to change our whole planning cycle from a long distance one – one where we looked four years or five years ahead to one where we’re looking six months ahead. The first order of the day is really to get our workers back in at the end of the quarantine period. So, we’ve been spending a lot of time really trying to focus on – how do we get our workers and our employees and our executive teams back on the front lines, servicing their clients and servicing our consumers in a way that is safe for them and productive at the same time. We’re lucky we have a health group within our group. Our human resource group have worked hand-in-hand together with our health group to set protocols for testing. We’ve actually ended up investing in our own rapid test equipment and also our PCR equipment for full testing. We’ve followed a set of protocols to basically start taking all our frontline officers through those protocols and getting them to feel safe – check who’s healthy, who needs help – to really control our lives as much as possible. We actually invested in the equipment itself. We tied up with accredited hospital institutions and research institutions. We bought equipment, placed them there, and then followed the appropriate protocols to go through a testing procedure for employees. That has made them feel a lot better about their return to work; then once at work, different protocols are in place. For example, our manufacturing facility down south, they’re only allowed to work if people lived in the facility to prevent the spread of any kind of contamination. So, we’ve had to build bunk beds. We’ve had to build facilities there. Construction teams are being allowed to go out. But again, they have to live in premises. So, we’re trying to be as flexible as possible to the requirements of the Government and the health department of the employees. It means a whole different way of having to do things. We’re changing the way we do things, but I think flexibility is key in a time like this.
CT: In the foreseeable future, the new normal – less than 50 percent of your workforce will now continue to work from home?
JAZA: Very hard to tell right now. It’s basically maybe about 50 percent or maybe even a little bit more at this point in time. It’s hard to tell. We’re just evolving slowly. We will have to see what the different needs are. We’re in the process of testing. I think we’ve tested about 7,500 people. We have a workforce of about 58,000 formal employees, but then again, we have a lot of contractual employees. Our construction firm, for example, gives employment to about 75,000 people. When quarantine started, there were many out of a job. We’re now having to find the process and getting them into bunk beds and living within the confines of the construction project itself. You cannot do that overnight. We’re trying to bring them back in slowly. Hard to tell what the exact numbers will be – maybe about 60 percent will stay at home for the moment and 40 percent will go online. But we will have to see as that evolves. Right now, for example, our Bank of the Philippine Islands will be testing all their employees. They want to test the ball and then if the tests come out positive, where we are able to handle anyone who has an illness, maybe a bigger percentage will be able to enter the offices, but even the offices will change. Spacing will change. And so, chances are many will stay at home maybe through the end of the year.
CT: 58,000 people working for you at Ayala, have you had to deal with any infections in the workplace?
JAZA: Yes, there are percentages. It’s a small percentage. Luckily for us, some companies have had people with COVID-19. So, we followed the protocol of getting them to the right health facilities to take care of their needs. The numbers have not been large. But then again, we’ve just started the testing process now. So, time will tell over the next couple of weeks what it would be like. But so far, the numbers have been very, very small within the Ayala Group, luckily for us.
CT: As a conglomerate, you have businesses that cover many aspects and industries such as real estate, utilities, banks, telecoms and healthcare. What are some of the units within your business areas that are suffering the most, that are hurting the most from this pandemic?
JAZA: Well, it’s a mixed bag. I think the ones where the cash flow and the business keep running are the utilities and energy group, our water group, our telecommunications group. Obviously, those continue to run. People need those on a daily basis. And to a certain extent, there’s been some fluctuations in the revenue flows, but those services are needed. We’re doing our best to put frontline workers in a way that can support those businesses that are a requirement for people’s everyday lives. Some of the more volatile ones, for example, would be our real estate group, traditionally a very strong component of our group. Some sales are still coming in, but of course, the malls have been shut for quite a while. Anything that involved the movement of people and buying and selling obviously were shut down, have been shut down for a couple of months. Surprisingly, people are still buying products. The real estate sales component continues to flow, but we’re probably down to about 30 percent of the normal revenues that we would have for this first period of time. Our Q1 results, of course, were down. On the banking side, the business continues to go relatively well, as of now, but we’ve had to take provisions up. We deal with a lot of businesses in the corporate sector, and in the medium-sized industry sector, it’s only prudent that we take our provisions up. So, their net income also fell by a certain percentage point in the first part of the year. To a certain extent, those are the ones that have been affected. We do have an international manufacturing arm with a global footprint. The supply chains have been severely disrupted. It’s been a difficult period for them. But our health care group obviously is very much in need and doing well. So, different companies have been affected in different ways.
CT: So, it’s a mixed bag. Your main real estate unit, Ayala Land is really cutting expenditure, putting off launches this year. What else are you doing within the group to conserve cash in this period?
JAZA: Yes, you’re absolutely correct with respect to Ayala Land. Our country, if you look back a year at the end of 2019, we’ve had a BBB plus rating. The country has had a low interest rate environment. We’ve been one of the fastest growing countries in Southeast Asia coming into 2020, before this hit. So, our planning for real estate projects was fairly large and numerous. We’ve cut back on all new projects. We’ve just had to stop all those. We will complete anything that we’re working on right now. But all future projects are on hold right now. That’s our best way of, I guess, adjusting to the cash situation. The balance sheet to Ayala Land luckily is strong as it is in Ayala Corp. In both companies, we will have about $500 million worth of cash up front. Of course, we have many lines with existing banks. Luckily, liquidity is good in the system, so we have no problems financing. But we’ve had to cut back. In the case of many of our other companies, all our capital expenditures have had to tighten. In the telecom side, we actually weren’t physically able to continue our rollout of telecommunication equipment. Now, it will start again. Chances are we will stay pretty much on schedule on the telecom side. But on the real estate, we’ve really stopped all new projects for the moment.
CT: When you look at the number of COVID 19 infections in the Philippines itself, do you think the worst is over for the country? How long more do you see the Philippines staying in this period of uncertainty?
JAZA: Well, I think that hard quarantine that we’ve had has been very helpful on the health side. There have been about 13,000 individuals who’ve been identified with some form of COVID or the other, and we’ve had about 800-900 deaths in the country. The graph seemed to be levelling out at this point in time. All things considered, the Philippines has not seen too bad a situation. But as we begin to open up the economy, I think we should all be very, very careful. Listen to our health officials and be very careful about how we interact coming out of this.
CT: From where you sit in the Philippines, as an economy, do you think the country can avoid a recession?
JAZA: I think it might be hard. We came up, as I said, from a very strong 2019, a very strong balance sheet. We’re lucky that the Government has the wherewithal in the balance sheet to support. Our monetary authorities and our fiscal authorities have done a great job in beginning the process of giving support. Our Central Bank acted very quickly to give liquidity and that liquidity is very apparent. The banks are doing well. And on the fiscal side, it’s been a little trickier for the executive side of Government. They had to get Congressional approval to rebalance the budget. That has taken place. The Congress has been very accommodating and they’re now beginning to use economic stimulus to give support to the demand side. A lot of people were out of work, particularly day laborers, so that process is starting and that’s taken a little bit of time. It’s not easy when you have to balance all these elements of government. Chances are we will probably have a decline of between two or three percent, if not more, in our economy. I think we just must expect that. I don’t think we can expect to grow certainly, it’s going to be a very difficult time. So, yes, there will probably be the first time in very recent history that we will see a decline in in growth rates in our country. We will move to a recession, I believe, and I think there’s just no way around it. This is the time to use the country’s balance sheet and then rekindle the economy in any way we can, both through monetary and fiscal means. I think our Government seems to be dedicating, as of today, 7 percent of GDP to stimulate the economy, and we’re very much for that. And I think both arms of Government, both the monetary side and the fiscal, are doing their best to see what they can do. Our Congress as well is coming up with a new stimulus bill where again the business community is very supportive of it because you can open up the economy, but then if there’s nothing on the demand side as people’s savings are taken out, then you won’t have an economy that restarts. So, it’s not just about opening an economy. It’s really getting cash again in people’s hands and getting the demand side to pick up. That’s I think, what scares me the most at this point in time. And I think an economic stimulus from the Government would help kickstart that.
CT: Can you try to see through the uncertainty for me? Because in 2019 Ayala as a group pulled in net income of ₱35 billion, what will fiscal 2020 look like for Ayala?
JAZA: Well, we grew by about 11 percent last year, which was great. Chances are, of course, that we will not grow to that extent. It will be below that number and we’ll be in positive territory for sure. As I pointed out, some businesses will go through some difficulty and others will continue to do well. But, you know, we have a very solid balance sheet. We’re very liquid. The key is to stay safe. This is a marathon run. To be able to ride this out, use cash from the groups that can produce cash and support the companies that are going through a dry period and really last this out. There is just no way around it. I think to aim for growth at a time like this would be foolish. Key is to keep your balance sheet safe, stay liquid, and really keep your employees safe and productive. If we can ride this out, then I think you’re already winning. The growth will happen again. This is a country with a strong consuming population, a solid set of fundamentals in our balance sheet, it is just a matter of riding out a difficult time.
CT: Your efforts to help the wider Filipino community has not gone unnoticed by President Duterte. Are you surprised you got an apology from the President himself over some comments he made against you and the Pangilinans over some water concession contracts?
JAZA: Well, I think what’s important – I think I mentioned it at the beginning, this has been a time when the public and private sector have to come together. Everybody is in this together. We have gone out of our way earlier on, as we would have under normal circumstances in participating and helping the public sector out. I think on the first day of the crisis, when we went into hard quarantine, my brother and I, together with about 20 to 25 large business groups, raised about ₱1.5-₱1.7 billion to start a whole feeding program for a lot of the day laborers in the city of Manila. We’ve moved on to other partnerships between the public and private sector. I like to think that the President and of course, the executive side of Government, have been appreciative of the efforts, not just about ourselves, but I think many private sector groups and their commitment to helping out at a time like this. This whole issue of private public partnerships has created a new sense of unity, a new sense of goodwill. I think it is underestimated how important it is that we all work in unison at a time like this to be able to ride this out together. All of us have a role to play. I guess that has not gone unnoticed and it’s appreciated. And of course, we appreciate it too. This is a time when we all have to work hand-in-hand and if that spirit can continue, there’s plenty we can all do together.
CT: How did you respond to the President’s apology?
JAZA: Of course, we wrote him a letter thanking him and said that we’re here, as we always have been, to help the country in any way we can. We sent the formal letter – my brother and I – I think it was very much appreciated and then, life moved on. We continued to discuss, I guess, our water contract that’s moved along well. The process is going well, and that’s the spirit, I guess, of commonality right now between the public and private sector and a spirit of goodwill. That is the way it should be in the time of crisis.
CT: The bulk of your operations are still in the Philippines, but late last year, you spent something like $230 million in Myanmar. Your overseas ambitions, your overseas investments, are they now on hold?
JAZA: Well, they’re not on hold in the sense that they’re all continuing. It’s, of course, we’ve had to contact each other and our partners online. Nothing beats, of course, traveling, seeing and feeling things on the ground. It’s just impossible to do that now. We do have operations in Myanmar. We made an investment in the Yoma group. We’re a great believer that Myanmar will be an exciting place to develop in many ways. It reminds us of the Philippines of 20 years ago and the kind of growth path that it will go through. So, I think we’ve tied up with a group with the touch point in many businesses, so we’re excited about doing business with the Pun family. But we’ve also got some renewable energy projects in Vietnam, they’re doing extremely well. The projects have been finished. They’re going online and doing very well as we speak. We have water facilities as well. In Vietnam, we’re looking at new energy projects around Southeast Asia. These developmental projects continue to evolve. If people can go and continue the engineering work, they will do that. It’s hard for us, of course, to travel at this point in time, but technology allows us to communicate in whole new ways, and these projects continue.
CT: When you look at the uncertainty of how to steer the company through the last couple of months, as CEO and Chairman of Ayala Corp., were there any lessons learned dealing with a pandemic?
JAZA: Well, there are plenty of lessons, although this is a bigger black swan, as you could expect. There are some traditional lessons, whether it’s a pandemic or any other problem. You know, climate change has also changed many patterns as well. We’re in the ring of fire in the Philippines – we’ve got earthquakes and typhoons on a regular basis. We’ve traditionally prepared for those, but not really for a health problem. Essentially, keeping a reserve in your balance sheet for the unexpected is always important. We’ve had almost two decades of great growth in our country. It’s very tempting to just lever up and go full throttle. I think we’ve realized that there always has to be something in reserve for the black swans that hit us. So, balance sheet-related issues, liquidity-related issues are always important and not stretching yourself too far. I think the second issue which has really come in very nicely – about five years ago, we started a whole process of digitizing and digitalizing. Our telecom and our banking unit for example have been at the forefront of this, but all of our other companies as well have been digitizing everything they do. It has been a five-year project that I’ve led personally and pushed hard on. It’s just amazing how that has come to be so helpful at a time like this. The online banking that’s taken place in the bank in the first quarter is in terms of volume is equivalent to everything that we did last year. In the case of Globe Telecom, we have a joint venture with Ant Financial for a payment digital payment system that that is growing at a very steep graph and doing extremely well. I think it’s one of the most downloaded apps in the app stores at this point in time. Between the bank and the telco company, this whole digitization changing nature of the way people pay is transforming consumer habits, and luckily, we’ve had a chance to be at the forefront of that. And always being ready for the unexpected, being able to work from home. Luckily, we’ve set up some systems in place that have made it easy for people to work from home. But of course, you also get hit by the negatives. Human interaction has become much more difficult, getting things done and getting people to the frontline to operate servers, mechanical equipment and many other things, of course, will become much more difficult. I guess those would be the learnings. Many things you just have to learn on the fly.
CT: You’re the Chairman and CEO. Your brother Fernando is the President. What sort of leadership will the Ayalas provide the group and its employees, to steer the company through this crisis?
JAZA: Well, it’s been an interesting situation. Both my brother and I started when the hard quarantine came. We actually started to meet with all our group executives – maybe we’re a group about 12 to 15 at any point in time, depending on who we invite in. We met daily at 4:30 every afternoon. We’d have a Zoom call, all come together and communicate. So, communication has gotten much more intense. It has to be that way in a crisis. My brother and I have been very involved together in communicating and trying to understand what’s happening on the ground. The first couple of weeks, of course, were difficult. We really couldn’t tell how things would go, how revenues would start to change. But what’s been phenomenal about that intensity of communication is this ability that we have as a multi-business group to help each other out. Not a day doesn’t go by where one executive is not helping the other. We’re doing joint ventures together. We’re investing together. We’re re-planning the structure of the company together. We’re doing this as a team. In the past, we’d worked a little bit independently, but this has brought us all together and there’s a sense of camaraderie, which has been great. I have weekly town hall meetings electronically. I share what’s happening in the group with them. I give them ideas. We talk about health-related issues. We communicate both in a relaxed and formal way. Communication is up to a whole different level in this crisis.
CT: And finally, how do you see Ayala Group re-emerging from this crisis?
JAZA: From a growth point of view, we just have to write this year off. What’s important is really to come out of this crisis as a strong company, as a healthy company and as a productive company. I mentioned that from a balance sheet point of view, all our companies are in good territory. I think we just have to take what’s going to be a very difficult year and just swallow it. What’s important is to get our employees back out, providing services that the consuming public need in one way or another in a safe and productive way. That is our focus right now. We’re all in this together. We’ve got to ride this out together. There will be a bright future.
CT: Mr. Zobel, thank you so much for sharing your insights with us. Please stay safe and well during this time.
JAZA: Thank you so much, Christine. Thanks also for the opportunity.
END
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