COMMENTARY

OVERVIEW

The Group’s overall performance reflects the difficult trading environment and the challenges faced, particularly within Grains, Groceries, Value Added Meat Products (VAMP) and Exports.

As previously reported, operations at Deli Foods in Nigeria were terminated in October 2019. As such, Deli Foods has been treated as a discontinued operation in these results, with the comparative information restated accordingly.

With regards to the VAMP business, it is noted that the Company has received offers from two parties for the acquisition of separate parts of the business as going concerns. Each of the two agreements is subject to an inter‑conditionality clause, such that each agreement is subject to the other becoming unconditional in all respects. As a number of key terms and conditions remain to be negotiated, it is appropriate to treat VAMP as a continuing operation in the current period. On conclusion of the respective Sale and Purchase Agreements, the Company will provide an update incorporating the financial impact of the disposals as well as the key conditions precedent to the successful conclusion of the overall transaction.

Group revenue from continuing operations increased by 2% to R15,7 billion, with price inflation of 4% offset by an overall volume decline of 2%. Gross profit margins were impacted by lower volumes as well as raw material and conversion costs rising ahead of inflation, with the consolidated gross profit margin declining from 31,4% to 29,4%. In addition, marketing expenses increased by 9% over the period to R528 million, in line with the strategy to enhance brand health and drive consumption. The continuing losses incurred by VAMP, although showing a 14% improvement on the prior year, further impacted profitability. Group operating income before IFRS 2 charges, impairments and abnormal items decreased by 29% to R1,1 billion, whilst the operating profit margin decreased from 10,2% to 7,0%. Excluding VAMP, operating income before IFRS 2 charges, impairments and abnormal items declined by 27% to R1,4 billion, whilst the operating profit margin decreased to 8,9% from 12,3%.

Domestic revenue was 3% higher at R14,2 billion, driven by price inflation of 4% and offset by an overall volume decline of 1%. Excluding VAMP, all categories recorded selling price inflation, which resulted in volume declines across the portfolio, except in Flour, Bakeries, Beverages and Home Care. However, the price inflation was not sufficient to fully recover cost increases. This, coupled with the resultant decline in volumes, led to negative operating leverage.

Revenue from Exports and International declined by 4% to R1,6 billion primarily due to the trademark dispute with a former distributor in Nigeria, as well as slightly lower sales in the Deciduous Fruit business.

Based on the fact that an agreement in principle has been reached with the former distributor in Nigeria, a settlement amount of R71 million has been provided for in abnormal items. This was partially offset by a capital profit of R43 million arising from the disposal of a property, which is also reflected as an abnormal item.

During the current period, impairments amounting to R557 million (2019: R106 million) relating to intangible assets, plant and equipment, as well as the investment in associates, were recorded. The impairments in respect of intangible assets relate to certain Personal Care brands and Davita (powdered soft drinks and seasoning), and amount to R36 million and R250 million respectively, whilst plant and equipment to the value of R197 million has been impaired in the Deciduous Fruit business. In addition, an impairment of R75 million has been taken against the carrying value of the investment in Nigerian associate, UAC Foods. These impairments arose as a result of the continual assessment of risks associated with these businesses amid ongoing trading difficulties in key markets including deteriorating macro‑economic prospects, which have been exacerbated by Covid‑19 led economic challenges as well as adverse category dynamics.

Net interest paid of R80 million (2019: R12 million) includes an amount of R21 million relating to the adoption of IFRS 16 Leases, the impairment of dividends and interest receivable from associate company, National Foods Holdings in Zimbabwe, of R11 million and interest on higher average debt levels during the period, driven by the funding of higher stock levels in the first quarter. The increase in interest paid is offset by net foreign exchange gains of R84 million (2019: R8 million loss), resulting from USD‑denominated cash balances benefiting significantly from the recent depreciation of the rand.

Income from associates decreased by 21% to R158 million. The decline in income from associates reflects no contribution from Oceana in the current period, whereas, the previous period included two months of earnings amounting to R31 million. In respect of Carozzi, an improved underlying performance was more than offset by the effect of the depreciation of the Chilean peso against the rand.

The Group has adopted IFRS 16 Leases on a modified retrospective basis. The adoption of this standard has had a minimal impact on the results for the current period. The main impact on the statement of comprehensive income has been an increase of R17 million in operating income offset by higher finance costs of R21 million resulting in a net decline of R4 million in profit before tax.

Profit before tax from continuing operations declined by 65% to R673 million.

Earnings per share (EPS) from continuing operations decreased by 75% to 221 cents (2019: 875 cents), whilst EPS from total operations decreased by 76% to 210 cents (2019: 864 cents). EPS was impacted by a significantly higher impairment charge in the current period, whilst earnings in the previous period benefited from the abnormal after‑tax capital profit of R282 million arising from the sale of Oceana shares to Brimstone.

Headline earnings per share (HEPS) from continuing operations was down 35% to 501 cents (2019: 773 cents), driven primarily by the lower level of operating income. Excluding VAMP, HEPS from continuing operations declined by 30% to 611 cents (2019: 872 cents). HEPS from total operations decreased by 36% to 489 cents (2019: 762 cents).

OPERATING PERFORMANCE

Grains

Revenue in the Grains division increased marginally to R6,8 billion, whilst operating income decreased by 33% to R532 million.

Milling and Baking’s revenue increased by 5%, driven by an average selling price increase of 5% across the segment. Operating income declined by 22% to R497 million, driven primarily by Bakeries and Maize. The wheat‑to‑bread value chain continues to be impacted by the inability to fully recover cost push, high levels of promotional activity and low volume growth. The Maize category was adversely affected by volatile raw material pricing, physical supply constraints and increased competition.

Other Grains revenue declined by 6% to R2,0 billion, driven primarily by lower volumes in Rice. Rice and Pasta were affected by intense competitive activity, however, they benefited from improved demand in March 2020. Although sales of Jungle Oats benefited from new packaging, increased advertising and improved in‑store presence, this was not adequate to offset the challenges faced in Rice and Pasta. Operating income decreased by 77% to R35 million, due to the lower volumes as well as higher raw material and conversion costs across the board. The results were further affected by increased levels of marketing investment and depreciation charges on the new Oat mill.

Consumer Brands – Food

Consumer Brands – Food recorded higher levels of revenue at R5,9 billion (2019: R5,6 billion), benefiting from significant revenue growth in VAMP as well as marginal increases achieved in Groceries, Beverages and Out of Home. This improvement was partly offset by lower revenue at Snacks & Treats. Total operating income fell by 29% to R237 million. The percentage reduction in operating income was aggravated by VAMP’s continued operating losses. Excluding VAMP, operating income declined by 22% to R492 million.

Groceries revenue increased marginally to R3,0 billion. This was underpinned by price inflation of 3% on an overall volume decline of 2%. This result reflects the highly competitive trading environment with consumers shopping predominantly on promotion. The performance was further impacted by supply constraints in tomato sauce. Pre‑National Lockdown‑related volume increases in March 2020 had a marginal impact on the overall performance for the period under review. Despite all product segments recording selling price inflation, this was not sufficient to fully recover cost increases, resulting in negative operating leverage. Consequently, operating income declined by 27% to R170 million.

Revenue in Snacks & Treats fell by 8% to R1,1 billion, resulting from volume reductions of 10% less price inflation of 2%. The decline in volume was driven primarily by increased competitive activity, particularly in chocolate, exacerbated by low demand in March as orders were diverted to carbohydrate staples ahead of the National Lockdown. Operating income declined by 39% to R103 million as a result of lower volumes, factory under‑recoveries and higher logistics costs, particularly related to storage.

Revenue in VAMP increased from R213 million in the prior corresponding period to R525 million in the current period. This increase was as a result of normalised distribution and on‑shelf availability since re‑entering the category over a year ago. Although the significant volume recovery helped reduce operating losses by 14% to R256 million, the inability to recover higher than expected input costs, including the increased cost of utilities, continues to adversely impact this business’ recovery to break‑even.

The Beverages business grew revenue by 4% to R945 million, recording volume growth of 2% and price inflation of 2%. Volume growth was driven by the successful launch of innovations as well as satisfactory performances from core offerings within Oros (liquid concentrates). Operating income declined by 6% to R167 million due to increased marketing investment in support of the newly launched innovations.

Home, Personal Care and Baby (HPCB)

HPCB’s total revenue increased by 4% to R1,5 billion, benefiting from a strong performance by the Home Care category. Home Care volumes were negatively impacted in the month of March as consumption diverted to consumer staples ahead of the National Lockdown. Operating income declined by 4% to R283 million.

Revenue in the Personal Care category decreased by 11% to R270 million. This was attributable to a significant decline in sales volumes. Volume declines were experienced across all segments due to price inflation ahead of the market in an intensely competitive sector. Operating income declined by 61% to R11 million due to the lower volumes, increased logistics costs, higher marketing investment and factory under‑recoveries.

Baby Care’s revenue was flat at R475 million, with price inflation of 5% offset by volume declines of 5%. Volumes were adversely impacted by factory inefficiencies in the first quarter as well as constraints in the supply of pouch packaging. Operating income decreased by 32% to R46 million as a result of higher conversion costs, overhead under‑recoveries and increased marketing investment.

The Home Care category sustained its strong performance, underpinned by pesticides. Revenue increased by 14% to R767 million, driven primarily by price inflation of 12%. Operating income increased by 14% to R227 million. This was assisted by a favourable product mix, whilst higher production volumes had a positive effect on factory recoveries.

Exports and International

Exports and International was negatively affected by the trademark dispute with a former distributor in Nigeria, resulting in virtually no sales to Nigeria for the period. The performance of Exports was further impacted by lower demand in other export markets on the Continent, as well as the effect of Covid‑19 Lockdown measures which prevented access to certain export markets by the Deciduous Fruit business.

With regards to the trademark dispute in Nigeria, an agreement in principle has been reached with the former distributor. As such, a settlement amount of R71 million has been provided for in these results and included in abnormal items.

Total revenue for the Exports and International businesses declined by 4% to R1,6 billion, whilst operating income fell by 64%.

Chococam’s performance was affected by tough trading conditions as a result of political and social instability in the region. As a result, revenue growth of 1% was behind the historical performance of this business. Marginal volume growth was achieved, which was offset by the effects of price deflation across most categories. Operating income reduced by 16% to R71 million, due to a newly introduced excise tax on gross sales of 5%, effective from January 2020 and implemented in April 2020. Consequently, the duty, which amounted to R14 million for the period under review, could not be recovered from customers. Recovery of this tax from April onwards will have an inflationary effect which is likely to impact future demand.

Revenue in the Deciduous Fruit business declined by 6% to R576 million because of lower sales to China following the closure of foreign ports due to Covid‑19 Lockdown measures. The business reported an operating loss of R21 million (2019: R12 million loss). Given the structural category dynamics which have evolved over a prolonged period, it is unlikely that the Deciduous Fruit business will generate the requisite rate of return for Tiger Brands. To this end, the Company will commence engagement with relevant stakeholders regarding the future of the business and will provide an update when it is appropriate to do so.

CASH FLOW AND CAPITAL EXPENDITURE

Cash generated from operations increased by 8% to R1,5 billion (2019: R1,4 billion). This improvement was largely the result of a significant reduction in the investment in working capital from R516 million in the corresponding period last year to R13 million in the period under review. This resulted in a net cash position of R978 million as at 31 March 2020 (2019: R777 million). Capital expenditure incurred during the period amounted to R479 million (2019: R361 million).

INTERIM DIVIDEND

The Board of Directors has decided not to declare an interim dividend. The Board considers this to be prudent given the short‑term uncertainty related to the Covid‑19 Lockdown measures. Depending on the Group’s trading performance for the full financial year and the financial outlook at that time, a dividend will be re‑considered at year end in line with the Group’s dividend policy of 1,75 times cover (based on HEPS).

CLASS ACTION UPDATE

As previously reported, the High Court was scheduled to hear applications of those third parties who declined to disclose information in their possession in terms of previously issued subpoenas by the Company. These proceedings were concluded on Friday, 15 May 2020. Judgment is expected to be handed down within the next few weeks.

COVID‑19

As previously reported, most of Tiger Brands’ manufacturing and distribution sites were classified as essential services and have continued to operate during the Lockdown period. However, certain facilities and offices were closed in line with regulatory requirements or demand dynamics. To ensure the health and safety of our employees, a number of measures have been implemented, including private transport for staff, staggered shifts where possible to ensure safe working conditions and increased health screening and awareness across the Group. All affected facilities, which were temporarily closed, have resumed operations except for sorghum‑based beverages which remains closed in terms of the regulations.

We acknowledge the exceptional contribution by our employees who have selflessly contributed to ensuring food security during the Lockdown period.

Furthermore, to demonstrate our commitment in overcoming this crisis, our food‑based social interventions include continuing with the current Family Food Programme to support around 30 000 individuals with meals every day; expanding the current School Nutrition Programme with the Department of Basic Education to provide meals to communities during the Lockdown period where these would have ordinarily been facilitated directly through the Tiger Brands Foundation’s In‑school Breakfast Programme; and the continuation of the University Food Programme despite the institutions being closed. The latter programme currently feeds around 4 500 university students at five universities across eight campuses in South Africa. In addition, we are supporting Food Forward with food items on a weekly basis to distribute food parcels across the country to communities in need. To assist with Covid‑19 relief initiatives, the Executive Committee and Board of Directors have agreed to forfeit up to 30% of their salaries and fees for a total period of three months during the duration of the Lockdown.

OUTLOOK

The pace at which we move through the various Lockdown phases to fully re‑opening the economy remains uncertain, whilst the impact on consumers, unemployment and disposable incomes is likely to be dire. We anticipate that demand patterns will change and are preparing for significant changes in consumption and shopping behaviour as we move out of the acute phase of the National Disaster period and into, what is likely to be, a deep and prolonged recession.

As existing procurement positions are depleted, the second half will be impacted by significant cost push due to rand weakness, global supply chain disruptions and additional costs incurred during the Lockdown period. These costs, together with the effect of Government regulations on pricing during the National Disaster period, may have an impact in excess of R500 million on profitability.

Our immediate focus is to ensure the ongoing safety of our employees whose commitment during this period has been truly inspirational. We are prioritising the building of adequate stock cover to cater for the possibility of potential disruptions to the supply chain and ensure the consistent availability of our products.

In the short to medium term, cognisant of a constrained consumer, we will prioritise innovation towards value offerings, whilst re‑engineering our business to optimise costs and improve efficiencies.

By order of the Board

Bryanston

22 May 2020

Date of release: 25 May 2020