Tiger Brands

Tiger Brands’ results reflect the depressed consumer environment, which deteriorated further in the second half of the year. South Africa slipped into a technical recession during the second quarter of 2018 and the Rand weakened significantly adding to the pressure on consumer spending. At the same time, input costs started to increase significantly. Despite this cost push, the market was characterised by manufacturer restraint on pricing in an attempt to minimise consumer inflation and maximise volumes. In addition, the group’s VAMP division had a material impact on the results following the suspension of operations for the entire second half of the financial year.

The increase in VAT and further increases in the cost of transport and essential services weakened consumer demand in all categories except maize, where increased supply and price deflation stimulated demand. Domestic revenue fell by 9%, with volumes down 5% and price deflation of 4%. The suspension of operations at VAMP contributed 4% to the volume decline. The balance of the volume decline reflected a worse than expected performance in Groceries and Home and Personal Care. This was partially offset by volume and market share growth in Grains. Disappointingly, the positive volume performance in Grains was not reflected in operating income due to category deflation and increases in the cost of essential services resulting in margin pressure. Domestic operating income therefore declined by 28% to R3,0 billion.

The impact of volume declines and pricing pressures on the group’s gross margins was partially offset by another year of record savings in procurement and ongoing supply chain efficiencies. Gross margins declined by 90 basis points (bps) to 32,5%.

Total revenue for the Exports and International businesses declined by 10% to R3,8 billion, whilst operating income reduced by 32% to R270 million. This result was influenced by a positive performance from our African exports, which grew both revenue and profit. The Deciduous Fruit business had a disappointing year, with lower fruit yields and declining volumes, resulting in an operating loss for the year.

During the year, asset impairments of R262 million were accounted for. These were recognised following a detailed evaluation of intangible assets within the Personal Care division, as well as a review of the carrying value of Deli Foods’ operating assets in view of its loss making position.

The abnormal losses of R422 million include the significant impact of the VAMP product recall in the current year of R380 million (net of insurance recoveries).

Income from associates increased by 37% to R731 million, with all associates reporting improved performances in local currency. Particularly strong performances were delivered by Oceana and Carozzi. Oceana benefited from a once-off deferred tax adjustment following the reduction in the Federal Corporate Tax rate from 35% to 21% in the United States, effective 1 January 2018. Tiger Brands’ equity accounted share of this benefit amounted to R79 million for the year.

Net financing costs of R34 million benefited from a reduction in net interest costs of R125 million, due to lower average debt levels. A net foreign exchange gain of R21 million was realised compared to a loss of R30 million in the previous year, due to the weakening of the Rand in the latter part of the year.

The effective tax rate before abnormal items, impairments and income from associates increased to 30,2% from 28,9% largely due to the non-recurrence of investment allowances claimed on qualifying capital projects in 2017.

Headline earnings per share (HEPS) from continuing operations declined by 26% to 1 587 cents (2017: 2 155 cents), while earnings per share (EPS) from continuing operations decreased by 21% to 1 451 cents (2017: 1 848 cents).

HEPS from total operations decreased by 26% to 1 589 cents (2017: 2 161 cents).

EPS from total operations reduced by 24% to 1 458 cents (2017: 1 915 cents).

Excluding VAMP’s trading results and the product recall costs from the current and prior year, HEPS from continuing operations declined by 11% to 1 881 cents (2017: 2 109 cents). Similarly, EPS from continuing operations declined by 2% to 1 760 cents (2017: 1 802 cents).

Grains

Revenue declined by 4% to R12,8 billion, reflecting significant price deflation of 7% while overall volumes grew by 3%. The increase in volumes was not sufficient to offset the impact of margin pressures, with operating income declining by 20% to R1,9 billion. The operating margin reduced to 14,8%. In one of its most challenging years yet, the Grains division managed to maintain overall market share and improved its share in a number of categories, including flour, bread and rice.

Revenue in Milling and Baking decreased by 7%, influenced by price deflation across the entire segment, and particularly in maize (24%). Operating income declined by 17% to R1,5 billion. The wheat-to-bread value chain, which maintained overall volumes for the year, was unable to sustain its first half performance due to market dynamics restricting cost push recovery in the second half.

Other Grains recorded revenue growth of 2% to R3,9 billion, including 9% volume growth. The strong growth in volumes in this segment was driven by an outstanding performance in rice, with Tastic reflecting improved market share. Pasta and noodles also delivered a solid performance. However, the operating income decline of 32% to R342 million reflects the intensity of competition in the main meal carbohydrate segment.

Consumer Brands – Food

Excluding the significant impact of the suspension of the VAMP operations, revenue in Consumer Brands – Food declined by 3%, in line with volume declines, and with virtually no inflation in this segment. Excluding VAMP, operating income declined by 8% to R1,1 billion.

At Groceries, the impact of the volume declines and competitive market pricing, resulted in an operating income decline of 27% to R432 million. Contributing factors were supply constraints in condiments and spreads and the growth of private label on the back of extremely competitive import pricing.

Snacks & Treats’ volumes slowed significantly in the second half, particularly in channels servicing lower income groups. Despite share gains in chocolate slabs and countlines, revenue declined by 4% to R2,1 billion. The lower volumes, coupled with an adverse product mix, resulted in operating income decreasing by 6% to R305 million.

The Beverages business continued to perform strongly throughout FY18, with revenue increasing by 8% and operating income by 48% to R213 million, benefiting from the previous year’s investments in cost containment initiatives and improved factory efficiencies.

VAMP’s performance was severely impacted by the well-publicised closure of its facilities in early March 2018. As a consequence, revenue declined 52% to R1,1 billion, while an operating loss of R252 million was incurred. The cessation of operations at VAMP allowed us to undertake refurbishments at our production facilities and allocate dedicated time for employee training and education, which culminated in the re-opening of our Germiston facility on 12 October 2018. The Clayville abattoir will supply the raw material requirements for the Germiston facility, as well as fresh meat cuts to the market. In addition, it will continue to contract slaughter on behalf of approved pig suppliers. The Enterprise meat canning operation, which is a separate unit on the Polokwane site, re-commenced production on 12 September 2018.

Structural refurbishments have been completed at the Polokwane facility and it is currently being assessed by the Capricorn Municipality. Full production will commence once we have received all the required regulatory approvals.

Home, Personal Care and Baby (HPCB)

The poor performance of HPCB continued through the second half, with overall revenue down by 16% to R2,2 billion. All three categories were affected by price deflation and volume declines. The deleveraging impact of this volume loss was primarily responsible for the 45% reduction in operating income to R341 million.

Revenue in Personal Care declined by 10% to R616 million. An intensely competitive trading environment resulted in operating income decreasing by 53% to R65 million.

Revenue in Baby declined by 10% to R796 million, while operating income fell by 36% to R133 million. This performance was impacted by lower sales volumes, an unfavourable sales mix and the concomitant pressure on factory overhead recoveries. The new baby food pouch line was successfully commissioned in June 2018, contributing to volume growth of 30%.

Despite market share gains in key segments of the Home Care division, lower consumer demand resulted in higher than expected trade stocks going into the peak pest season. This resulted in revenue and operating income declines of 25% and 48%, respectively. Lower production levels had an adverse effect on factory recoveries, while competitor pricing put pressure on margins.

Exports and International

Total revenue for the Exports and International businesses declined by 10% to R3,8 billion, while operating income reduced by 32% to R270 million.

The Deciduous Fruit business was the major contributor to the reduction in operating income. Revenue declined by 20% due to lower volumes and a drop in fruit yields following the severe drought in the Western Cape. An operating loss of R128 million was incurred in the year (2017: R13 million operating income).

The Exports business produced a good performance with revenue increasing by 4% to R1,8 billion. This growth was achieved despite ongoing macro-economic headwinds, including foreign currency shortages, weak consumer demand, as well as regulatory changes in the group’s core markets. Operating income increased by 6% to R290 million.

In an increasingly challenging environment, Chococam recorded 3% growth in revenue in local currency terms. Revenue in Rand terms increased by 7% to R882 million. Operating income increased by 8% in Rand terms to R159 million (4% in local currency), assisted by growth from innovation, tight cost management and favourable procurement positions.

Deli Foods recorded a further operating loss of R51 million, following a reduction in revenue of 61% reflecting ongoing market challenges.

Several cost saving initiatives have been implemented and management changes made in the second half.

Cash generated from operations decreased by 46% to R3,3 billion. Working capital was predominantly impacted by strategic raw material purchases coupled with higher inventory holdings, reflective of challenges with forecasting due to constrained consumer demand. Capital expenditure disbursed during the year amounted to R720 million.

Taking into account the company’s strong balance sheet and the once-off impact of the cessation of operations at VAMP, including the costs of the product recall, a gross final cash dividend of 702 cents per share has been declared for the year ended 30 September 2018. This, together with the interim dividend of 378 cents per share, brings the total dividend for the year to 1 080 cents, which is unchanged from last year.

Shareholders are referred to the accompanying dividend announcement for further details.

In recognition of the company’s low gearing levels and strong cash generating capabilities, the board has decided to change the company’s dividend policy, from a 2x cover (based on HEPS) to 1,75x for the foreseeable future, in the absence of any significant corporate activity.

Ms Swazi Tshabalala resigned as an independent non-executive director on 15 August 2018, following her appointment as vice president of finance and chief financial officer for the African Development Bank. She also stepped down as a member of the Risk and Sustainability Committee.

Ms Gail Klintworth became an independent non-executive director on 16 August 2018. Her knowledge and experience in sustainability matters in our industry are important additions to the skills set of the board, and we look forward to her future contributions.

Mr Rob Nisbet resigned as an independent non-executive director on 7 September 2018. He also stepped down as chairman of the Audit Committee, as well as a member of the Investment and Risk and Sustainability Committees. Ms Emma Mashilwane, a current member of the Audit Committee, replaced Rob as chairman and Mr Mark Bowman joined the committee as an independent non-executive director on 2 November 2018.

Mr Yunus Suleman resigned as independent non-executive director effective 22 November 2018. He also steps down as a member and chairman of the Risk and Sustainability Committee, as well as a member of the Audit and Investment Committees.

The national Listeria crisis was devastating for Tiger Brands as a company, for our people, but most importantly for the affected families.

Our deepest and heartfelt thoughts remains with those who lost their loved ones and who are otherwise affected by this crisis.

Tiger Brands launched the country’s first Centre for Food Safety in collaboration with Stellenbosch University, setting aside R10m for the Centre’s operations. The Centre will conduct food science and food safety research to provide expert opinion and academic support to the industry, and to help government ensure that food safety regulations are based on sound scientific evidence. It will also play a leading role in consumer education on food-related issues.

The Listeria Class Action referred to in the company’s SENS announcement dated 14 August 2018 has not yet been certified.

Following the certification of the claim and the members of the classes, it is anticipated that a quantified claim will be instituted against the company.

The company has product liability insurance cover appropriate for a group of its scale. Coverage has been confirmed by the Insurers, subject to the terms and limits of the policy. The policy will accordingly respond to the claim within its term in the event that the company is held liable.

Notwithstanding the noted challenges in the review period, we believe the approved strategy is compelling and relevant.

During the year, we continued to build a sound foundation for future growth by improving internal processes and enhancing capability and capacity to execute our strategy. New executive leadership has joined our team with the appointment of a chief growth officer for Africa, a new chief marketing officer, chief strategy officer and a new chief human resources officer.

Areas of focus in 2019 will include embedding the new operating model and implementation of the group’s Africa strategy. This compliments the group’s South Africa strategy and supports the local operations, our current Exports business and the operations in Cameroon and Nigeria.

We are confident that the strategy will unlock the full potential of Tiger Brands and create value for all stakeholders.

The company’s investment in associates formed an integral part of the strategic review. To this end, the Tiger Brands board has decided to pursue an unbundling of its entire shareholding in Oceana Group Limited (Oceana). The decision was taken following a review of Oceana's fit with the group’s core business undertakings. The approximate implementation date of the unbundling is April 2019. The detailed terms of the unbundling are expected to be published shortly before the implementation date.

The economic outlook for 2019 remains challenging with no signs of a significant recovery in economic growth or consumer confidence.

We remain committed to the growth of our power brands, with a relentless focus on driving our cost conscious culture and developing a great place to work for all our employees, which we believe will result in superior returns and a beneficial outcome for all our stakeholders.

By order of the board

Bryanston
21 November 2018
Date of release: 22 November 2018

The board has approved and declared a final gross cash dividend of 702 cents per ordinary share in respect of the year ended 30 September 2018.

The dividend will be subject to the dividends tax that was introduced with effect from opening 1 April 2012.

In accordance with paragraphs 11.17(a)(i) to (x) and 11.17(c) of the JSE Listings Requirements the following additional information is disclosed;

• The dividend has been declared out of income reserves;
• The local dividends tax rate is 20% (twenty percent) effective 22 February 2017;
• The gross local dividend amount is 702 cents per ordinary share for shareholders exempt from the dividends tax;
• The net local dividend amount is 561,60 cents per ordinary share for shareholders liable to pay the dividends tax;
• Tiger Brands has 189 818 926 ordinary shares in issue (which includes 10 326 758 treasury shares); and
• Tiger Brands Limited’s income tax reference number is 9325/110/71/7.

Shareholders are advised of the following dates in respect of the final dividend:

Share certificates may not be dematerialised or re-materialised between Wednesday, 9 January 2019 and Friday, 11 January 2019, both days inclusive.

By order of the board

JK Monaisa
Secretary

Bryanston
21 November 2018