Integrated Annual Report 2021

Chief executive officer's review

This year Tiger Brands joins a select group of South African companies that have each celebrated their centenary. The company has come a long way since starting out as a small family business in Newtown, Johannesburg, becoming Africa's largest listed manufacturer of FMCG, with trusted brands that form part of every South African's shopping basket. Our longevity reflects the company's resilience and its inherent strengths in building brand loyalty, developing and maintaining manufacturing capacity and ensuring effective route-to-market, all underpinned by the quality of our people.

Noel Doyle
Chief executive officer

Reflecting on our successes during these 100 years, we recognise that we can never be complacent. While historically we have overcome many challenges, the past few years have presented particularly high levels of volatility and uncertainty, with rapidly changing production and consumption patterns and increasing social, economic, and environmental pressures, all of which have been exacerbated by the Covid-19 pandemic.

Our performance in recent years has belied our strong history, and understandably prompted some of our stakeholders to question our ability to deliver the long-awaited turnaround.

The executive team is fully aware of these expectations and we recognise that we have a very small window in which to turn the company around. While I acknowledge that this will be challenging, I remain confident that we will succeed in delivering on our strategic commitments for recovery and growth. In this integrated annual report, we seek to provide our investors and other interested stakeholders with the information needed to make their own informed assessment of our ability to create long-term value.

IMPROVED UNDERLYING PERFORMANCE IN A TOUGH ENVIRONMENT

Our results for the year reflect an improved underlying performance, offset by the costs related to the civil unrest in July and the financial impact of the product recall in the same month. The pre-tax costs associated with the civil unrest amounted to R85 million in stock losses and R16 million in damage to plant and equipment, while the pre-tax cost of the product recall totalled R647 million.

Despite revenue challenges, cost savings and efficiency initiatives were sustained through the year, resulting in positive operating leverage for the full year. Total revenue from continuing operations (excluding the product recall and civil unrest) increased by 5% to R31,2 billion, underpinned by price inflation of 7% and partially offset by an overall volume decrease of 2%. Operating income from continuing operations declined to R2,2 billion from R2,5 billion the previous year, with gross margin and operating margin declining to 28,5% and 7,2%, respectively. Naked margins came under pressure due to the high level of agricultural commodity cost push not being fully recovered. This was mostly offset by a steady improvement in manufacturing efficiencies, resulting in a very slight improvement in overall gross margins (excluding the product recall and civil unrest) to 30,3% from 30,1% in the prior year. Operating income (excluding the product recall and civil unrest) increased 20% to R3,0 billion.

OUR STRATEGIC PRIORITIES: BALANCING SHORT-TERM IMPACT WITH LONG-TERM GROWTH

In last year's report, I outlined our five strategic priorities aimed at improving the performance of our current portfolio and delivering an effective turnaround over the short term, while setting us up for longer-term growth. We have maintained our focus this year on driving initiatives within each of these focus areas.

• We have continued to accelerate the pivot towards consumer and shopper orientation, strengthening our focus on meeting consumers' needs. While mindful of other consumer trends – such as health and nutrition, "snackification", at-home consumption, and the shift to e-commerce – given the constrained consumer environment, our priority focus has been on delivering value to the consumer. Although we have made some progress this year, this has not yet had a material impact on business performance, with many of the initiatives only landing in the last quarter. We should see the positive outcomes of these projects in the next financial year and we have plans for additional initiatives in the value space, as well as in nutrition, snackification and e-commerce
• Optimising our supply chain is a critical enabler of our growth plan. Our predominant focus this year has been on stabilising operational performance in our supply chain and putting in place defined processes to boost productivity and efficiencies and to ensure product quality and food safety. In addition to working towards having world class factories, we are taking steps to deliver organisational, process and technology improvements in our procurement practices and have approved an ambitious logistics transformation programme to be executed over the next three years
• An important area where we have met our targets, has been in reducing costs across all areas of the income statement, with R498 million realised in savings this year. We have entrenched a clear accountability matrix, creating a healthy tension between cost owners and business owners and helping to ensure greater ownership in delivering the targeted savings
• In addition to improving our current performance, we are establishing the right platforms for growth, by optimising our product portfolio, delivering innovation and pursuing a range of customer and channel initiatives to win at the point of purchase. We made good progress this year in expanding our reach in the informal market, have prioritised initiatives to raise our online presence and become the preferred supplier to priority e-commerce partners and are continuing to drive growth in "Hard Discounters". An important success this year has been the implementation of a new trading terms framework, with a revised set of fair and equitable terms that incentivise customer performance aligned with our strategic drivers and new competition law requirements. It has been a tough year across our Exports and International portfolio. While our Chococam business in Cameroon delivered a stellar performance, Exports was disappointing, impacted by reduced Benny (seasoning) sales due to distributor management challenges and under recoveries at our factory following a six-week strike. We are implementing an innovation pipeline to defend and grow our Benny and Jolly Jus (powdered soft drinks) brands, have made progress in undertaking capability training for distributor management, and completed the recruitment of almost all the identified key roles, laying a valuable foundation for our regional growth ambitions
• Delivering on all these objectives is dependent on us having the right culture. Our fifth priority focus is thus on igniting our people to instil an agile performance-based culture where calculated risk taking is encouraged, recognised, and rewarded. Although some significant foundational work has been completed – and our recent "Voice of Tiger" employee engagement initiative reflects some valuable improvements – we recognise that more needs to be done to build the culture and secure the capability levels that will allow us to join the ranks of truly high performing businesses.

I am confident that we have taken valuable lessons from the past year, and that these have informed the actions we are taking to drive further improvements at scale within each of our strategic focus areas. The foundational work completed this year will enable us to drive a more aggressive approach to both organic and inorganic growth.

MAINTAINING OUR STRATEGIC ENABLERS

Delivering on these strategic priorities requires a continued focus on good governance, robust food quality and safety systems, employee health and safety, and stakeholder responsiveness, all areas that we review in more detail in this report. There are three issues that I wish to briefly highlight.

• Food safety and quality is a non-negotiable priority for our business. This year we experienced a significant quality incident, with a production defect discovered in the cans from one of our suppliers, prompting us to recall products in our canned vegetable range. While this amounted to a significant cost to the company, our rapid and decisive response reflects our commitment to minimising any potential impact on public health. We have since taken various steps to further strengthen the quality-assurance processes of suppliers and we are working with them to proactively close any identified gaps. Outside of the product recall, we maintained our FSSC 22000 and HACCP certifications across all our sites and continued to improve performance in respect of our quality KPIs, achieving a 40% reduction in marketplace incidents and a 25% reduction in consumer complaints
• On employee health and safety, I am happy to report zero fatalities this year and an improvement in our lost-time injury frequency rate from 0,34, to 0,31. Despite this positive progress, we have some way to go to fully achieve our safety ambitions. Of particular concern is the continuing rise in route-to-market incidents in the Albany business, with 106 incidents this year. Addressing this issue is a top priority for next year
• We have maintained and expanded our Covid-19 management measures and I remain heartened by the resilience shown in the face of the prolonged stress. In supporting the health and wellbeing of employees, we have shifted our approach from initial protective protocols to proactive screening of employees and the active promotion of vaccination; we have provided additional mental health support this year, including for anxiety and bereavement and managing work-life balance in a remote-work arrangement. Despite our best efforts, I am saddened to report that a further 18 employees died this year after contracting the virus, bringing our total Covid-related loss-of-life to 29 employees. I extend my deepest sympathies to the families of all those who have been severely affected. At a very personal level, I was deeply saddened by the passing of Peter Matlare in March, previous CEO of Tiger Brands, after a long struggle with Covid-19. In my time working with Peter, I came to appreciate his exemplary leadership and personal qualities. Peter always maintained his dignity and decency and never impugned the dignity of those he worked with or attempted to pass the buck. South Africa has lost a great business leader; he is sorely missed.

DELIVERING ON THE SUSTAINABILITY AND ESG AGENDA

For Tiger Brands to flourish in its second century, we need a healthy and vibrant consumer base, an engaged and motivated workforce, a strong economy with robust institutions, and sustainable natural resource flows based on functioning ecosystems.

Protecting and strengthening each of these is as much a financial necessity as a moral imperative. Sustainability is more than simply managing risk and protecting value; it is also about creating value by realising the commercial opportunities associated with creating a more sustainable future. This is the underlying ethos of our sustainable future strategy, which includes ambitious commitments in three focus areas – health and nutrition, enhanced livelihoods, and environmental stewardship – addressing our most significant ESG impacts and highlighting where we can create value in making a meaningful contribution to the UN SDGs.

We have made some important strides this year in each of these areas. Through our launches of new healthy products, nutrition labelling activities and our Eat Well Live Well (EWLW) programme – which this year included the second State of Nutrition in South Africa report – we are enabling consumers to improve their health and wellbeing. We have continued to provide valuable support to black and black-women owned farming and agri-processing enterprises, through our enterprise and supplier development activities, preferential procurement, agriculture aggregator model and ongoing investments in socio-economic development. While our progress in reducing our environmental footprint has been delayed by the pandemic, it is pleasing to see the reductions achieved in energy and water use, the 30% reduction year-on-year in total direct carbon emissions and the progress in developing packaging solutions. We still have a way to go in all these areas and are working to ensure sufficient ownership across our leadership teams to enable us to be a fast follower in those areas where we are not clear leaders.

OUTLOOK

Looking ahead, we anticipate a continuing tough economic climate with sustained pressure on consumer spend. Despite the challenges this year, I believe that the company has made valuable progress in positioning itself for the future and that our strategic approach and revised operating model presents the right foundation to ensure our resilience, enabling us to harness the diversity of our product portfolio, the strength of our heritage brands, the quality of our customer relationships and distribution networks, and the health of our balance sheet to absorb the anticipated future headwinds.

The launch of the Tiger Brands Venture Capital Fund led to the receipt of over 500 expressions of interest. We are in the final stages of making an offer for a business which is closely aligned to our health and nutrition strategy, while a further nine opportunities are being assessed.

APPRECIATION

This has been another tough but ultimately rewarding year, thanks to the dedication and support provided by Tiger's employees and my colleagues on the executive team. I wish to extend my thanks also to the Tiger Brands' board for their advice under the active leadership of our new chairman, Ms Geraldine Fraser-Moleketi. I am confident that together the company's employees and leadership teams will ensure that Tiger Brands successfully executes its strategy for long-term growth and deliver on our purpose of nourishing and nurturing more lives every day.

Noel Doyle
Chief executive officer

18 November 2021