Overview

In a year that has been catastrophic for many businesses in South Africa, Tiger Brands has been in the fortunate position of playing a pivotal role in ensuring food supply during the initial lockdown periods. This allowed the company to support the livelihoods of its employees even when sites were temporarily closed in line with lockdown regulations. This resulted in strong cash flow generation further supporting the company’s healthy balance sheet and allowing management to focus on operational execution.

Notwithstanding this, the results for the year have been disappointing, reflecting the challenges faced by the company in maintaining margins in what was an already difficult consumer environment before the onset of the Covid-19 pandemic.

The second half of the year was affected by the closure of non-essential facilities in Home Care and Sorghum beverages, the cost of complying with the Consumer and Customer Protection and National Disaster Regulations (pricing regulations) as well as the cost of health and safety measures. Furthermore, supply chain efficiencies were adversely impacted by temporary disruptions from Covid-19 infections at site level and within the supply chain.

Lockdown measures created favourable tailwinds from a volume perspective in certain businesses including, Wheat, Milling, Bread, oat-based Breakfast offerings (Jungle), Pasta and Groceries. However, there were corresponding headwinds in terms of consumer demand in Snacks & Treats, Beverages, Out of Home and Baby. A dispute with a former distributor in Nigeria continued to adversely impact the performance of Exports. These developments had a negative effect on profitability from continuing operations in the second half. However, enhanced efficiencies, cost reduction measures as well as the revised operating model resulted in a significantly lower year-on-year decline compared with the year-on-year decline reported in the first half.

As previously reported, Deli Foods and VAMP have been treated as discontinued operations with the comparative information restated accordingly. The acquisition of the abattoir business at Olifantsfontein by Molare Proprietary Limited became effective on 28 September 2020, whilst the disposal of the VAMP processing facilities was successfully concluded post year end.

Revenue from continuing operations increased by 4%, underpinned by price inflation of 6%, driven largely by currency weakness for most of the year, partially offset by an overall volume decrease of 2%. A decline in volumes in certain categories, coupled with the inability to fully recover significant raw material cost push, placed gross margins under pressure, resulting in group operating income declining by 18% to R2,6 billion (2019: R3,2 billion).

Income from associates decreased by 5% to R352 million. A strong underlying performance from Carozzi as well as a commendable performance from National Foods in a very difficult economic climate, which has been accounted for in line with IAS 29 Financial Reporting in Hyperinflationary Economies, was partly offset by weak results from UAC Foods. In addition, income from associates last year included three months’ earnings from Oceana which was unbundled in April 2019.

Net financing costs for the year increased by R96 million. The reclassification of operating leases into short- and long-term lease liabilities in accordance with IFRS 16 accounted for R28 million of this increase, whilst higher average debt levels during the year had a further R31 million impact.

The effective tax rate before abnormal items, impairments and income from associates, increased from 29,5% to 31,0%, largely due to the lower pre-tax profit before abnormal items, impairments and income from associate companies, and a reduced benefit in respect of special investment allowances claimed on qualifying capital projects in the current year.

Earnings per share (EPS) from continuing operations decreased by 66% to 886 cents (2019: 2 617 cents), principally due to the fact that earnings in the previous financial year benefited from the fair value gain relating to the unbundling of the company’s interest in Oceana, including the capital profit realised on the disposal of the company’s residual shareholding in Oceana. Headline earnings per share (HEPS) from continuing operations declined by 23% to 1 196 cents (2019: 1 556 cents). The lower rate of decrease in HEPS relative to the rate of decrease in EPS, is mainly due to the exclusion in the prior year of the aforesaid capital surplus as well as the impairment costs in both 2019 (R213 million) and 2020 (R547 million) from the calculation of headline earnings.

EPS from total operations decreased by 74% to 612 cents (2019: 2 333 cents), whilst HEPS from total operations decreased by 29% to 940 cents (2019: 1 322 cents). The total after tax loss for the period from discontinued operations amounted to R453 million (2019: R470 million).

Segmental operating performance

Domestic revenue increased by 4% to R26,4 billion underpinned by price inflation of 6%, less the impact of an overall volume decline of 2%. Solid revenue performances were delivered by Milling, the oat-based Breakfast segment (Jungle), Groceries and Home Care. This was countered by soft performances from Rice, Snacks & Treats, Out of Home and Baby Nutrition, primarily due to the impact of lockdown measures on demand. This, together with the impact of higher raw material input costs as well as additional Covid-19 related costs, led to a decline in operating income to R2,6 billion (2019: R3,0 billion).

Grains

Revenue increased by 5% to R13,9 billion, reflecting price inflation of 8%, whilst overall volumes declined by 3%. Price increases realised were insufficient to offset the impact of significantly higher raw material input costs, resulting in operating income declining by 14% to R1,2 billion and the operating margin compressing to 8,9% from 10,9% in the prior year.

After a challenging start to the year, Milling and Baking enjoyed a reasonable recovery in the second half, driven predominantly by Maize, Bakeries and Sorghum-based products. Revenue from Milling and Baking increased by 5%, reflecting an overall volume decline of 3%. The volume decline was driven by Sorghum and Maize. Operating income declined by 10% to R1,1 billion.

Despite the second half recovery, adverse category dynamics as well as constrained pricing amid volatile underlying raw material prices, resulted in a sub-optimal operating profit performance from Maize for the year. Bakeries continued to experience year-on-year margin compression driven by marginal volume losses, with the operating environment not allowing for the full recovery of cost increases. Sorghum-based products experienced a particularly difficult period, largely due to the impact of restrictions imposed during the lockdown period.

Following a tough start to the year, Other Grains experienced a meaningful recovery in the second half, driven primarily by Jungle and Pasta. The second half recovery resulted in year-on-year revenue for the overall segment increasing by 5% to R4,0 billion, comprising price inflation of 7% and an overall volume decline of 2%. Volume declines were largely driven by Rice due to above-inflationary price increases caused by significantly higher costs of imported raw materials. Pasta volumes, on the other hand, benefited in the second half from increased at-home consumption, supported by a marked improvement in factory performance. Similarly, increased demand in the breakfast category resulted in an improved overall performance from Jungle.

Increased promotional activity in the Rice category at the start of the year coupled with pricing regulation constraints, was the primary reason for operating income in Other Grains declining by 43% to R114 million.

Consumer Brands – Food

In Consumer Brands – Food, an improved top-line performance in Groceries was partially offset by the impact of reduced demand in Snacks & Treats, Beverages and Out of Home. Overall revenue grew by 3% in line with price inflation of 3%, whilst total volumes remained unchanged. The subdued revenue growth together with above-inflation cost increases, resulted in negative operating leverage with operating income declining by 20% to R829 million (2019: R1,0 billion).

Groceries’ revenue increased by 9%, supported by volume growth of 4% and 5% price inflation. Despite pricing constraints and supply chain challenges in the first half, profitability improved with operating income increasing by 9% to R354 million. This performance was assisted by a favourable sales mix, optimal promotional activity and rigid cost control.

Despite a recovery in demand in the second half, particularly in the last quarter, revenue in the Snacks & Treats category decreased by 5% to R2,1 billion, driven primarily by a volume decline of 6%. Demand was adversely impacted across all segments during the various lockdown stages as spending was diverted to essential items and the decline in shopping occasions reduced the opportunity for impulse purchases. Operating income declined by 46% to R170 million as a result of lower volumes, factory under-recoveries and higher expenses due to Covid-19 related costs.

Similarly, the Beverages business was impacted by Covid-19 restrictions in the second half, with year-on-year revenue marginally up following reasonable growth in the first half. Operating income fell by 20% to R238 million due to an unfavourable product mix as well as higher conversion and distribution costs.

Home, Personal Care and Baby (HPCB)

Overall revenue in HPCB increased by 5% to R2,8 billion due to a sustained strong performance from Home Care.

The strong volume uplift in Home Care was attributable to increased demand and effective in-store execution. Revenue for the year increased by 12%. However, the business was adversely affected by trading restrictions which were introduced in the early stages of the lockdown, which depressed the overall growth in operating income to an increase of only 5% when compared to the prior year.

Personal Care enjoyed a strong overall recovery in the second half, driven by a well-executed Ingram’s winter campaign. Revenue for the full year increased by 3% to R661 million on the back of 7% price inflation and a volume reduction of 4%. A weak first half together with Covid-19 related cost pressures in the second half, resulted in lower profitability with operating income declining by 11% to R79 million.

Volumes across the Baby Care segment were affected by adverse demand dynamics during the various lockdown stages, with revenue declining marginally to R975 million. Operating income fell sharply to R111 million (2019: R151 million) as a result of the lower sales volumes combined with overhead under-recoveries and additional Covid-19 related costs.

Exports and International

Total revenue for the Exports and International businesses increased by 4% to R3,4 billion. This was driven by an improved second half performance from our business in Cameroon as well as a better second half in Exports. Operating income, however, reduced by 51% to R104 million.

The performance of the Exports segment was negatively affected by the trademark dispute with a former distributor in Nigeria. The subsequent resolution of the dispute has resulted in the resumption of sales into Nigeria, which has provided positive momentum going into the new financial year. In addition, a rebound of our export volumes into Mozambique driven by improved execution, is evident after several years of underperformance.

Revenue in the Deciduous Fruit (LAF) business was largely unchanged due to an improved second half performance. Despite the recovery in revenue, the business recorded an operating loss of R78 million (2019: R8 million loss) due to the negative effects of lockdown restrictions on certain export markets in the first half as well as unfavourable forward cover positions in respect of exports.

Chococam’s performance during the year was muted. A 7% decline in revenue in local currency terms was a consequence of lower volumes in a challenging macroeconomic environment as well as the impact of fiscal initiatives, compounded by the effect of the Covid-19 pandemic. Revenue in rand terms increased by 4% to R942 million. Operating income decreased by 14% in rand terms to R149 million (23% reduction in local currency), due to significant raw material cost push, the effect of lower volume throughput on factory overhead recoveries and a 5% excise tax on gross sales introduced earlier in the year.

Exit from Deciduous Fruit (LAF)

Further to the announcement made on 21 August 2020 regarding the company’s intention to exit its Deciduous Fruit business, shareholders are advised that Tiger Brands is in the process of evaluating a number of proposals which have been received. The company will issue further communication as and when appropriate.

Cash flow and capital expenditure

Cash generated from operations declined by 15% to R3,0 billion, in line with the decline in cash operating profit. With the FY20 interim dividend withheld and a special dividend paid in the prior year, net cash inflow from operating activities increased to R1,6 billion (2019: R617 million). Although overall capital expenditure levels declined by 15% to R937 million, replacement capex increased 10% to R659 million. The group ended the year in a net cash position of R1,8 billion compared with a net cash position of R1,2 billion in the previous year.

Ordinary and special dividend

An ordinary final dividend of 537 cents per share has been declared for the year ended 30 September 2020. The total ordinary dividend for the year of 537 cents per share aligns the distribution with Tiger Brands’ dividend policy of 1,75x cover based on full year headline earnings per share.

Given the company’s healthy balance sheet and the fact that there are no imminent acquisition opportunities or exceptional capex requirements, the company has also 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 payment of the special dividend is subject to South African Reserve Bank approval.

The special dividend, together with the gross final cash dividend, brings the total distribution for the year to 670 cents per share (2019: 1 061 cents per share).

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

Changes in directorate

There have been several changes to the board and to the executive team during the year. After 13 years of service on the board, Dr Khotso Mokhele will be stepping down as chairman of the board, effective 31 December 2020. Ms Geraldine Fraser-Moleketi has been appointed independent non-executive director and chairman designate with effect from 1 September 2020 and will assume the role of chairman from 1 January 2021.

Two additional appointments were made this year, with Ian Burton and Olivier Weber joining the board with effect from 3 August 2020. This follows the resignation of Mr Monwabisi Fandeso in February 2020. Together, their extensive FMCG knowledge, global experience and important skills in digitalisation and innovation will significantly enhance the board’s mix of skills.

At an executive level, following the retirement of Lawrence Mac Dougall as CEO at the end of January 2020, Noel Doyle (previously the group’s CFO) was appointed as the new CEO with effect from 1 February 2020. Deepa Sita joined the executive team and the board as CFO with effect from 1 October 2020.

Class Action update

In August this year, Tiger Brands reached agreement to sell the VAMP business in two separate transactions. These disposals do not impact on any potential liability in respect of the ongoing Listeriosis Class Action.

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 the 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. 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 and equitable resolution of the Class Action litigation.

Covid-19

Tiger Brands’ response to the Covid-19 pandemic ensured the availability of our products, the safety of our employees, and increased food support to communities most in need.

Tiger Brands developed and implemented response protocols to ensure product safety, worked with suppliers, logistics and customers to limit disruptions, and provided effective communication to address concerns around food security. These efforts were accompanied by a strengthened focus on our numerous community food and nutrition programmes for families, school children and frontline healthcare workers and hospitals. We acted rapidly to protect the safety and wellbeing of employees, prioritising remote working where possible, introducing health screening and testing for staff at essential services sites, as well as numerous other measures to ensure employee wellbeing. Regrettably 11 employees died after contracting the virus. We extend our deepest sympathies to the families of all those who have been severely affected.

Although the rate of infection has slowed in South Africa, recent developments in Europe and elsewhere suggest the potential for a second wave. As a result, we will continue to prioritise the wellbeing of our employees and communities while honouring our societal purpose of nourishing and nurturing more lives every day.

Outlook

Looking ahead, it is likely that the current significant economic downturn will persist over the near and medium term. The anticipated volatility of the rand and increasing levels of unemployment will negatively impact both the supply and demand dynamics of our business. The continuing pressure on consumer disposable income highlights the need for an enhanced focus on value offerings as well as cost reduction initiatives and operating efficiencies.

Despite the challenging environment, the reconfiguration of our operating model, clear plans to compete effectively in a value economy as well as the successful execution of key strategic initiatives should position the group favourably to reverse the trend of declining profitability from continuing operations.

Bryanston
19 November 2020

Date of release: 20 November 2020

Declaration of final dividend and special dividend

The board has approved and declared a final ordinary dividend (ordinary dividend) and a special dividend for the year ended 30 September 2020, as follows:

Payment of the special dividend is subject to South African Reserve Bank (SARB) approval.

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 ordinary and special dividends have been declared out of income reserves
• The local Dividends Tax rate is 20% (twenty percent) effective 22 February 2017
• The gross total dividend amount of 670 cents per ordinary share will be paid to shareholders who are exempt from the Dividend Tax
• The net total dividend amount of 536,00000 cents per ordinary share will be paid to shareholders who are liable for Dividend Tax
• Tiger Brands has 189 818 926 ordinary shares in issue (which includes 10 326 758 treasury shares)
• Tiger Brands Limited’s income tax reference number is 9325/110/71/7.

Shareholders are advised of the following dates in respect of the ordinary and special dividends:

Share certificates may not be dematerialised or re-materialised between Wednesday, 13 January 2021 and Friday, 15 January 2021, both days inclusive.

By order of the board
JK Monaisa
Company secretary

Bryanston
19 November 2020