Chairman’s review

Chairman

Khotso Mokhele
Chairman

Read more about our response to Covid-19 in our Sustainability report

This has been a profoundly unsettling year for all of us – as individuals, families, communities and employees. The social and economic disruption caused by the Covid-19 pandemic came on top of an already very fragile economy and social fabric in South Africa, presenting significant further challenges for consumers, retailers and businesses more broadly. Tiger Brands’ performance this year reflects the impact of these challenges and underscores the need for a rapid and radical turnaround to restore the company’s legacy; its response to the pandemic and more positive performance towards the year-end give cause for optimism.

Prior to the pandemic, consumer spending in South Africa was already severely constrained by falling GDP and low wage growth, high unemployment and debt levels and increasing costs, resulting in consumers buying and spending less, and shopping smarter. This reduced consumer spend was accompanied by rising input costs and increased competition, placing sustained pressure on volumes, market share and margins. The response measures to the pandemic added to these challenges, prompting an unprecedented downturn in economic activity, pushing up input and operating costs due to rand weakness and disruption in supply chains caused by Covid-19. Although Tiger Brands has benefited from being classified as an essential service and from the increase in at-home consumption, a combination of regulatory and market pressures constrained the ability to recover costs.

This tough operating context contributed to another year of disappointing results, with group operating income and HEPS from continuing operations down 18% and 23%, respectively. Following the board’s decision to withhold an interim dividend given the very uncertain outlook at the time, an ordinary final dividend of 537 cents per share was declared for the year ended 30 September 2020 in line with the dividend policy of 1,75x cover. In addition to the above, the company declared a special dividend of 133 cents per share as a result of the once-off proceeds received from the disposal of its VAMP business. The special dividend, together with the gross final cash dividend, brings the total distribution for the year to 670 cents per share.

This year’s disappointing performance understandably has added increased pressure on the company leadership team to demonstrate its ability to turn things around, and to deliver a sufficiently convincing performance over the short term, without compromising longer-term growth. Notwithstanding this year’s numbers, I believe that the various changes introduced in the last two years, and the progress made this year in embedding these changes, provides a solid foundation for this turnaround.

Tiger’s response to the Covid-19 pandemic

The Tiger Brands’ board and leadership team have devoted considerable time and effort this year to ensuring an effective response to the Covid-19 pandemic. I would like to commend the employees and leadership team for pulling together quickly and effectively in ensuring employee safety, maintaining a secure supply of food, and supporting affected communities with the provision of food hampers. Numerous measures were taken to protect the safety and wellbeing of employees during the lockdown, both for those working in our essential service factories, and those working remotely from home. The company introduced customised screening, testing, self-isolation and re-integration protocols, enhanced existing sanitation practices, staggered shifts where feasible, ensured active employee engagement, and provided private transport and a special incentive for essential workers during the lockdown period. The employee response has been phenomenal, collectively ensuring that the company played a critical role in maintaining the country’s food security during the lockdown. It is particularly saddening to report that 11 employees died as a result of contracting the virus. I extend my heartfelt condolences to all the affected families.

In response to the severe socio-economic impact of the lockdown on more vulnerable communities, Tiger Brands enhanced its community food and nutrition programmes during the pandemic, donating an additional 12 000 food relief hampers to augment its existing monthly donations, and extending this beyond communities, students and scholars to include frontline healthcare workers and hospitals.

To contribute to the company’s relief initiatives, the board of directors and executive committee together agreed to forfeit up to 30% of salaries and fees for three months, raising R3,5 million for the salary sacrifice initiative that supported various specific projects proposed by employees.

Maintaining a strong focus on food safety

In addition to ensuring regular food supply over the lockdown period, we further strengthened our focus on food quality and safety. Following the tragic listeriosis incident in February 2018, the board has recognised the need to drive and sustain a significant improvement in Tiger Brands’ central oversight of food safety and quality, and to enhance the quality of risk reporting to the board and its committees. As I mentioned in previous reports, food safety is now a standing agenda item for the risk and sustainability committee, supported by clear reporting lines and regular internal assessments and data management processes that are aligned with the Global Food Safety Initiative (GFSI). Last year we introduced an integrated short-term incentive scorecard – applicable to executive directors – that includes specific provision for food quality as a key performance indicator.

The company made further progress this year in embedding a strong quality culture across its sites and among its suppliers and third-party manufacturing partners. Quarterly self-assessments were conducted at all manufacturing facilities against the GFSI tool; these facilities were also externally audited and maintained certification against the globally recognised FSSC22000 and HACCP system. All warehouse facilities have also been externally audited in preparation for certification next year. It is pleasing to see that the company’s quality performance has continued to improve, with a 5% reduction in consumer and customer complaints, a 25% reduction in marketplace incidents and zero public recalls.

Update on the listeriosis Class Action lawsuit

In August this year Tiger Brands reached agreement to sell the value-added meat processing business to two separate groups of bidders. The business had been earmarked for sale prior to being affected by the 2018 listeriosis outbreak. The sale and disposal process in no way affects Tiger Brands’ commitment to following due process as part of the ongoing listeriosis Class Action litigation, and to ensuring that an equitable resolution of the litigation is reached expeditiously.

In June 2020 the Gauteng Division of the High Court ruled in favour of Tiger Brands, compelling third parties to provide epidemiological information required for the Class Action lawsuit. All the third parties who applied for leave to appeal against the High Court order were granted leave to appeal to the Supreme Court of Appeal (SCA) on 15 September 2020. It is expected that the SCA will likely hear the appeal during 2021. Only one third party did not apply for leave to appeal.

The company has been dealing with ongoing requests from the plaintiffs’ legal representative to provide documentation around the food safety systems at its Polokwane factory. This remains the subject of ongoing pre-trial proceedings in respect of which the company’s legal defence team has engaged and continues to engage with the plaintiffs’ attorney as part of the discovery process. As an affected party, Tiger Brands is committed to abiding by the legal process to ensure that a resolution of the matter is reached in the shortest possible time in the interest of all parties, particularly the victims of listeriosis. The company, in cooperation with its legal representatives, is continuing with its efforts to expedite the process to ensure a speedy resolution of the Class Action.

Progressing on its growth strategy

In September this year, the board spent two days with the executive team to reflect on its performance over the year and review the company’s strategic roadmap. The strategic framework remains much the same as the five-year growth strategy agreed last year, with four clear strategic focus areas: Drive Growth, Be Efficient, Great People and Sustainable Future.

As is reviewed throughout this report, the company has made some solid progress against each of these commitments. It has rationalised elements of its portfolio, introduced significant changes to improve its innovations processes and capabilities, launched various value-driven innovations and new healthy product lines, and delivered growth in both existing and new distribution channels. It has introduced a more systemic approach to unlocking savings and efficiencies across the business, with much clearer lines of accountability, delivering savings this year of ~R470 million. A new capex approval process was also initiated this year, and some significant capital investments were approved to increase capacity, enhance efficiency and deliver new innovation opportunities. Despite some of the challenges under the pandemic, progress has been made in instilling and embedding a much stronger culture of accountability that encourages customer-led innovation, underpinned by an explicit commitment to delivering broader societal value in the areas of health and nutrition, enhanced livelihoods and environmental stewardship.

Given Tiger Brands’ recent run of disappointing performance – and recognising the increased pressure from stakeholders to provide compelling evidence of an ability to deliver a turnaround – the board has approved a revised operating model and a clear set of immediate priorities aimed at delivering visible results over the short term, while laying the foundation for longer-term growth. These priorities are presented by Noel Doyle in his CEO review, and I believe that, together with the revised operating model and refreshed leadership team, they provide good cause for optimism.

Changes in the leadership team

We have seen several important changes this year in Tiger Brands’ leadership, both within the board and executive team. As was announced in August 2020, after 13 years on the board and almost four years as chairman, I shall be stepping down with effect from 31 December 2020. To facilitate a smooth handover, I am pleased to report that with effect from 1 September 2020, Ms Geraldine Fraser-Moleketi took on the role of independent non-executive director and chairman designate and will assume the role of chairman from 1 January 2021. Ms. Fraser-Moleketi currently serves as lead independent director of Exxaro, non-executive director of Standard Bank Group and Standard Bank South Africa,and Chancellor of the Nelson Mandela University. She also serves in a leadership capacity on various intergovernmental bodies, and previously held various cabinet positions under former Presidents Nelson Mandela and Thabo Mbeki. With her extensive local and global leadership experience in business and government, she brings a hugely valuable combination of skills, experience and independent perspective to drive accountability and help steer the company on its new growth path.

We made two additional board appointments this year, with Ian Burton and Olivier Weber both joining the board with effect from August 2020. This follows the resignation of Mr Monwabisi Fandeso in February 2020. Ian Burton is a seasoned FMCG business leader with a track record of executing business turnaround strategies, including most recently for Mars Wrigley in the Asia Pacific and China regions; he brings extensive global experience and valuable insights on using digital innovation to drive business growth. Olivier Weber has had a 30-year career in the food and beverage sector, with various management roles including leading the PepsiCo Food businesses in Latin America before pursuing entrepreneurial interests; he currently runs his own snacks business in the USA and Mexico. Together their extensive FMCG knowledge, global experience and important skills in digitalisation and innovation will significantly enhance the board´s deliberations and inform the group’s strategic direction.

We have also seen some important changes at an executive level. Following the retirement of Lawrence Mac Dougall, and the appointment of former CFO Noel Doyle as CEO in February 2020, Deepa Sita joined the executive team and board as CFO from October 2020. Ms Sita was previously vice president: integration and strategy for Massmart Wholesale, and before that interim CEO for the Masscash division. Ms Pamela Padayachee served as acting CFO in the interim period from February 2020. Within the executive committee, we are also pleased to welcome Trevor Sanderson as the company’s chief supply chain officer with effect from February 2020, and Joe Ralebepa as chief legal officer from January 2020. Trevor has over 27 years of experience in supply chain and manufacturing leadership, with roles at Unilever, SAB Miller and AB-InBev, both locally and across Africa. Joe joined the company from the Massmart Group where he served in the role of group legal executive, general counsel and company secretary, and previously held executive legal roles at British American Tobacco South Africa and Coca-Cola Africa.

These are significant changes in Tiger Brands’ leadership, and I am confident that they will make an important contribution to delivering the step-change in performance that many of our stakeholders are expecting.

Ensuring good governance

To maintain accountability on the board’s performance, we undertook an internal self-assessment in which each board member rated the board’s performance on a range of criteria. The feedback was frank and constructive. While the overall rating was consistently good, some important opportunities for improvement were identified. The quality of the board discussion on substantive strategic issues is seen to have improved significantly in the past two years; this has been aided more recently by new board appointments, although was seen to be slightly constrained by the immediate challenges presented by the Covid-19 pandemic. The recent appointment of the new CEO was welcomed, seen as bringing improved levels of openness, frankness and transparency, and provide a good indication of the beginning of stabilising the business. It was emphasised, however, that for this turnaround to be fulfilled, the board will need to be less tolerant of any instances of underperformance and strengthen its driving accountability on the effective execution of solutions. Given recent changes in the sector overall as well as the increasing impact of issues such as climate change, water security, and supply chain resilience, it was suggested that the board needs to carefully consider the skills required for a future fit business, while ensuring an appropriate age and generational mix. This will be important if Tiger Brands is to truly become an African leader that delivers on its purpose and nurtures and nourishes the continent.

Appreciation

My last full year as chairman of the board has been one of the most challenging of my 13 years as a non-executive director on the Tiger Brands board. It has been an incredible privilege serving on the board, and I have learned a huge amount from the many members of the Tiger Brands team that I have engaged with over the years. I wish to thank all my colleagues on the board for their valuable support and insight in fulfilling our governance responsibilities, and all those on the Tiger Brands executive committee and the employees who have shown incredible dedication in striving to deliver value in this particularly trying environment. Looking to the future, I am confident that under the leadership of Ms Fraser-Moleketi and Noel Doyle, Tiger Brands will successfully execute its strategy for long-term growth and deliver on its purpose of nourishing and nurturing more lives every day.

Khotso Mokhele
Chairman

19 November 2020