Commentary

Group turnover increased by 11% to R30,1 billion, underpinned by 4% volume growth and below inflationary pricing of 5%. Currency movements added a further 2% growth to turnover. Operating income increased by 15% to R3,6 billion, with the group’s overall operating margin improving from 11,4% to 11,8%.

The domestic businesses grew operating income by 7% to R3,3 billion. Whilst this performance was negatively affected by a 9% decline in the Home Care, Personal Care and Baby (“HPCB”) business, operating income from the domestic food businesses increased by 12% to R2,9 billion.

The Exports and International businesses, excluding Nigeria, continued to reflect pleasing growth, increasing turnover by 16% to R4,6 billion and operating income by 20% to R691 million.

Significant progress has been made in addressing the challenges in DFM and, as a result, the net reported loss before interest and tax for the Nigerian businesses improved by 27% to R282 million (2013: R384 million). As indicated at the half year, DFM has now conducted a review of the utilisation levels of its assets and, based on current market realities, has decided to impair certain of these manufacturing assets. The related impairment, amounting to R105 million, is in addition to the R849 million impairment of goodwill and other intangibles recognised at the half year. Tiger Brands remains committed to the Nigerian market and will continue to fix and optimise the DFM business, whilst investing into adjacent categories that are expected to deliver long-term profitable growth.

The group continues to make steady progress in executing against its long-term strategic objectives. Over the last few years, the group has directed its focus to regaining market share in its core domestic businesses through investment in its brands and increased levels of innovation. This remains a key objective even though total market volumes have been impacted by the ongoing financial pressure being experienced by consumers.

The group has retained its leading brand positions in all of the key categories in which it participates, through a strong focus on price and volume management, supported by increased marketing and brand-building activities. Good progress has been made in regaining volume shares in what continues to be a highly competitive domestic trading environment. In 2014, domestic volume growth of 4% was achieved.

Improved operational efficiencies and various cost saving initiatives have supported the increased investment in marketing and brand building, and have also mitigated the effect of above-inflationary increases in raw material, labour and other input costs that were experienced in 2014. Input cost pressures were exacerbated by the weak rand, contributing to a decline in the overall domestic operating margin from 14,9% to 14,5%. Margins were also affected by consumer down-trading, which has resulted in manufacturers competing more intensely on pricing.

Increased focus is being given to the company’s HPCB business, which underperformed in the year under review, recording a 9% year-on-year decline in operating income. This decline was largely driven by intense competition, particularly in the home care and personal care segments. Whilst volumes grew in certain niche categories, operating margins were negatively affected by increased value offerings and aggressive competitor activity. The group continues to invest in its innovation capability and will increase the level of marketing support for core brands in order to drive long-term sustainable growth in these categories.

International operations

International expansion into the balance of the African continent remains core to Tiger Brands’ growth strategy and, as such, the group will continue to invest in its international businesses. The existing businesses in Nigeria remain a key focus area, with the priority being to fix and grow these businesses.

Although the short-term challenges relating to DFM persist, there are encouraging signs of improvement as remedial actions to improve product quality, reduce the fixed cost base and drive top-line growth start to bear fruit. These initiatives are expected to have a meaningful impact on the future financial performance of DFM and include changes implemented to strengthen the management team and to facilitate better alignment with the domestic Grains business. The business case for DFM’s entry into adjacent and related categories is expected to be finalised early in the 2015 financial year.

Prospects for growth in the rest of Africa remain promising. Consumers are seeking aspirational brands and increased variety, but the reality of low disposable income levels places limitations on consumer spending. In this environment, product format, pack size and price points remain key to achieving success. Tiger Brands continues to believe that expansion into the balance of the continent will be a significant growth vector in the medium to long term.

After accounting for net financing costs of R403 million, abnormal charges of R1,1 billion and associate income of R597 million, profit before tax amounted to
R2,7 billion (2013: R3,2 billion). This represents a 17% decline on the prior year. The abnormal charges largely relate to asset impairments amounting to
R954 million, which were recognised in relation to the group’s investment in DFM.

The group also recognised further impairments of R68 million relating to the Deli Foods acquisition goodwill as well as certain non-core domestic trademarks. In addition, certain domestic assets were derecognised, having been deemed surplus to requirements following a review of the group’s manufacturing architecture.

Net financing costs of R403 million have increased by 6% relative to the prior year due to higher domestic borrowing rates. In addition, the average level of debt in DFM increased due to its ongoing losses. The refinancing of DFM’s debt structure is still under consideration.

Income from associate companies increased by 16% to R597 million (2013: R515 million), reflecting strong growth in particular from Oceana Fishing (share of earnings up by 13% to R282 million) and National Foods Holdings (up 88% to R72 million). The growth in earnings from Empresas Carozzi and UAC Foods was more muted, up 7% to R199 million and 6% to R44 million respectively.

The group’s income tax expense of R832 million (2013: R837 million) represents a 28,1% (2013: 30,6%) effective rate of tax on total profits before abnormal items and associates’ income. The marginally lower tax rate was primarily due to special investment allowances claimed in respect of qualifying capital projects completed during the year as well as a prior adjustment in respect of deferred tax.

As a result of the minority shareholders sharing in the losses of DFM, non-controlling interests amounted to a credit of R127 million (2013: R119 million). Net profit after tax from continuing operations declined by 22% to R1,9 billion, mainly as a result of the abnormal items referred to above.

As previously reported, the group sold its interest in DFM’s packaging subsidiary, Dangote Agrosacks, in December 2013. The profit contribution from Dangote Agrosacks for both the 2013 and 2014 financial years has been disclosed as arising from a discontinued operation. Including the profit contribution from Dangote Agrosacks of R30 million (2013: R61million), profits attributable to ordinary shareholders decreased by 22% to R2,0 billion and earnings per share from total operations also declined by 22% to 1 262 cents (2013: 1 613 cents).

Headline earnings per share from continuing operations increased by 15% to 1 804 cents (2013: 1 574 cents) after adjusting for the above-mentioned impairments and certain other capital items. Including discontinued operations, headline earnings per share from total operations increased by 11% to 1 816 cents (2013: 1 629 cents).

Financial position

The group continues to manage its capital expenditure prudently, focusing on return on capital whilst ensuring adequate investment in the maintenance and replacement of assets to sustain optimal operational efficiency and capability as well as building capacity for growth. During the year, the net book value of the group’s investment in property, plant and equipment increased to R5,9 billion (2013: R5,5 billion). Capital expenditure of R983 million exceeded the total depreciation charge of R679 million.

The group continues to maintain a strong balance sheet, with ordinary shareholder funds of R13,2 billion (2013: R12,8 billion). Net debt improved from R4,5 billion in 2013 to R3,5 billion as at 30 September 2014. The net debt to EBITDA ratio improved to 0,8 times (2013: 1,2 times).

Cash flow

The group once again demonstrated its strong cash-generating capability, improving operating cash flows by 6% to R4,2 billion. Working capital continues to be well managed, with the increase in debtors largely attributable to higher sales achieved in the month of September 2014. Cash generated from operations was applied to fund the group’s tax obligations of R967 million, dividends of R1,5 billion and capital expenditure of R983 million. In addition, the group repaid borrowings of R1,1 billion.

DFM sold its interest in Dangote Agrosacks for a consideration of R497 million less cash of R1 million held by the business at disposal. Tiger Brands also acquired an additional 2,3% interest in DFM for R74 million as part of the mandatory offer to DFM minority shareholders following the initial acquisition of the group’s interest in DFM in October 2012.

Free cash flow of R2,1 billion (cash available from operations after accounting for capital expenditure) marginally exceeded the group’s attributable profit after tax of R2,0 billion.

By order of the Board

Sandton
18 November 2014

The Board has approved and declared a final dividend of 611 cents per ordinary share (gross) in respect of the year ended 30 September 2014.

The dividend will be subject to the Dividends Tax that was introduced with effect from 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:

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

By order of the Board

IWM Isdale
Secretary

Sandton
18 November 2014