Financial review
Cash generated from operations increased by 34% to R4,0 billion. This included an overall improvement in working capital requirements despite the group's conscious decision to increase inventory levels across the portfolio in anticipation of Covid-19 related and other supply chain disruptions.
Deepa Sita
Chief financial officer
Total revenue from continuing operations (excluding the product recall and civil unrest) increased by 5%, underpinned by price inflation of 7%, which was partially offset by an overall volume decrease of 2%. As a result of the costs related to the product recall and civil unrest, operating income from continuing operations1 declined to R2,2 billion from R2,5 billion the previous year, with gross margin and operating margin declining to 28,5% (2020: 30,1%) and 7,2% (2020: 8,3%), respectively. In addition, naked margins came under pressure due to the high level of agricultural commodity cost push not being fully recovered in selling prices. However, this was offset by a steady improvement in manufacturing efficiencies, resulting in a marginal improvement of overall gross margins (excluding the product recall and civil unrest) to 30,3% from 30,1% in the prior year. Operating income1 (excluding the product recall and civil unrest) increased 20% to R3 billion.
The impairment charge in the current period of R154 million relates primarily to property, plant and equipment in the Deciduous Fruit business.
Net financing costs for the year amounted to R54 million (2020: R97 million), benefiting from lower interest rates and lower average debt levels, due primarily to improved debtor collections. A foreign exchange loss of R9 million was recorded due to the significant strengthening of the rand against other major currencies during the year under review. This negatively impacted the translation of foreign currency cash balances, relative to a net foreign exchange profit of R40 million reported last year.
Income from associates decreased by 2% to R346 million despite an improved performance from all three associate companies in local currency. National Foods’ reported outcome, which has been accounted for in line with IAS 29 Financial Reporting in Hyperinflationary Economies was adversely impacted on currency translation. As previously reported, Tiger Brands disposed of its 49% shareholding in UAC Foods effective 1 September 2021. The loss on sale of UAC amounted to R11 million.
The effective tax rate before impairments, non-operational items and income from associates, declined from 32,0% to 29,1%, largely due to an increased benefit in respect of special investment allowances claimed on qualifying capital projects in the current year as well as lower non-tax deductible expenditure.
Earnings per share (EPS) from continuing operations increased by 21% to 1 070 cents (2020: 886 cents), while headline earnings per share (HEPS) from continuing operations declined by 6% to 1 127 cents (2020: 1 196 cents).
EPS from total operations increased by 87% to 1 142 cents (2020: 612 cents), and HEPS from total operations increased by 20% to 1 127 cents (2020: 940 cents).
1 Before impairments and non-operational items
For Tiger Brands to turn the corner and produce the necessary step change in performance – and at most, we have two years to do so – the company will need to build substantially on its recent foundational work in striving to instil a high-performance culture, supported by best-in-class capabilities.
The relatively higher rates of increase in EPS from total and continuing operations, compared to the year-on-year percentage changes in HEPS, are primarily due to the significant impairment charges of R603 million recorded in 2020, all of which related to continuing operations. These impairment charges were excluded from the calculation of HEPS. The increase in HEPS from total operations is primarily due to the losses recorded in Value Added Meat Products (VAMP) in 2020 compared to a small profit in the year ended 30 September 2021. Consistent with the previous year, VAMP has been treated as a discontinued operation. The total after tax profit for the year from discontinued operations amounted to R120 million (2020: R453 million loss). This primarily relates to the release of foreign currency translation reserves following the closure of Deli Foods as well as profit on the sale of trademarks, property, plant and equipment at Deli Foods and VAMP.
SEGMENTAL OPERATING PERFORMANCE
Domestic revenue in the second half was adversely impacted by volume declines across the Grains portfolio, Groceries and Snacks & Treats, compounded by lower overall price inflation relative to the first half. Despite the muted second half growth, Domestic revenue for the year increased by 5% to R27,6 billion, driven by price inflation of 8% which was marginally offset by overall volume declines of 3%. The effective containment of costs together with an improvement in production efficiencies, resulted in positive operating leverage, with Domestic operating income1 (excluding the product recall and civil unrest), increasing by 19% to R2,9 billion.
Total revenue for the Exports and International businesses increased by 7% to R3,6 billion. This was primarily attributable to a strong start to the year as our Exports division resumed trade in Nigeria following resolution of the trademark dispute with a former distributor. The second half, however, proved challenging for Exports, the Deciduous Fruit business, as well as our operation in Cameroon. Operating income for the year reduced by 7% to R96 million as a result of increased losses in Deciduous Fruit.
1 Before impairments and non-operational items
Further details of the performance of our operations are provided in our operational review.
CASH FLOW AND CAPITAL EXPENDITURE
Cash generated from operations increased by 34% to R4,0 billion. This included an overall improvement in working capital requirements despite the group’s conscious decision to increase inventory levels across the portfolio in anticipation of Covid-19 related and other supply chain disruptions. The group ended the year in a strong net cash position of R2,2 billion (2020: R1,8 billion). Total capital expenditure increased 8% to R1,0 billion, with replacement capex amounting to R762 million (2020: R659 million) and the balance relating to expansionary projects.
For the year under review, ROE increased to 12,7% from 9,0% last year. Similarly, ROIC improved to 12,1% from 11,2% relative to the WACC of 12,2% (2020: 12,8%). The year-on-year improvement in both metrics was driven by higher after-tax earnings. RONA decreased to 19,3% from 21,1% due to increased capital expenditure, compounded by the adverse impact of the product recall and civil unrest on operating income. Excluding the cost of the product recall and civil unrest, ROE, ROIC and RONA increased to 16,1%, 15,3% and 25,7%, respectively.
CLASS ACTION UPDATE
As previously reported, the awaited subpoena appeal relating to the request by the company for various third parties to provide epidemiological information required for the Class Action lawsuit was finally heard by the Supreme Court of Appeal on 5 November 2021. Judgment is not expected to be handed down before the end of this calendar year. The parties continue to attend to pre-trial preparations, including discovery in terms of the Rules of the Court.
FINAL ORDINARY DIVIDEND
The board declared a final ordinary dividend of 506 cents per share for the year ended 30 September 2021. This, together with the interim ordinary dividend of 320 cents per share, brings the total dividend for the year to 826 cents. In light of the company’s ungeared balance sheet and strong cash generation, this year’s total dividend was calculated on adjusted headline earnings. Consequently, HEPS was adjusted to exclude the impact of the product recall and the civil unrest, which took place in July this year. The company’s dividend policy of 1,75x cover has therefore been applied to HEPS after the aforementioned adjustments.
Shareholders are referred to the accompanying dividend declaration for further details
OUTLOOK
We expect the constrained consumer environment to negatively impact demand, while global supply chain constraints may spill over into the domestic environment. Against this backdrop, we are encouraged by the meaningful progress made in terms of optimising our supply chain and driving cost saving initiatives, all of which are expected to gain momentum.
Our long operating history and portfolio of strong brands, coupled with our ongoing focus on leveraging continuous improvement opportunities, position us well to deliver an improved overall performance in the year ahead.
APPRECIATION
I wish to thank Noel and my colleagues on the executive committee, the audit committee and the board for their support and guidance during my first year as CFO. I also wish to thank the finance department who continuously strive to deliver best practice and improved disclosure. Finally, thank you to our shareholders for their investment and meaningful engagement.
Deepa Sita
Chief financial officer
18 November 2021