Tiger Brands: Unaudited Group Results for H1/2014

Johannesburg / ZA. (tbl) Notwithstanding the tough trading conditions that continue to prevail in the domestic market, the group is making steady progress in implementing key strategic initiatives aimed at regaining market shares and further strengthening its core brands – Tiger Brands Limited said in its statement reflecting the «unaudited group results for the six months ended 31 March 2014».

South Africa´s largest food and branded consumer-goods company experienced significant cost inflation in its domestic businesses in the current period, partly due to the rapid decline in the South African Rand (ZAR) exchange rate. This was not fully recovered in pricing and negatively impacted on margins, especially in the first quarter. Pricing has since been adjusted to restore margins and improve profitability; however, the group continues to partially absorb cost increases in a number of categories, mitigating the impact, where possible, through cost reduction initiatives and improved efficiencies. With the exception of Dangote Flour Mills, the International businesses, including Exports, have continued to deliver pleasing growth.

Dangote Flour Mills (DFM)

Tiger Brands is focusing its attention on enhancing the long-term prospects of its investment in DFM. In this regard, the Board of Tiger Brands continues to believe that Nigeria is central to the group´s long-term expansionary ambitions. Short- to medium-term action plans are being implemented to turn around the performance of the business. These include reducing DFM´s fixed cost base, mothballing of mills where appropriate, and rebuilding the brand equity of its product basket, which has suffered from quality issues and internal inefficiencies.

In addition to the above, Tiger Brands, together with DFM, is in the process of evaluating a number of key strategic initiatives aimed at rapidly expanding the business into more sustainable, value-added categories. At this stage, there is still a significant amount of work that needs to be completed to properly evaluate these new category opportunities which, if they prove viable, should enhance margins and improve the capacity utilisation of the existing DFM assets.

Given the current under-performance of DFM and the excess milling capacity that continues to increase in the Nigerian flour market, it was considered appropriate to carry out a review of the carrying value of the Company´s investment in DFM. As it is not possible, at this stage, to accurately assess with any degree of certainty, the potential impact that the aforementioned category initiatives could have, a decision has been taken to impair the full carrying value of the goodwill and intangible assets relating to the investment. The value of the impairment, amounting to 849 million ZAR, has been included as an abnormal item in the group income statement for the period under review.

The carrying value of the Company´s investment in DFM will be re-evaluated at the end of the financial year. At that time, the Company will be able to assess the impact of the recent actions that would have been implemented, as well as the results of its review of the new category opportunities in DFM.

Financial Review

Turnover from continuing operations for the six months ended 31 March 2014, which amounted to 14,9 billion ZAR, was eleven percent higher than the corresponding figure in the prior year. The Dangote AgroSacks business, which was disposed of by DFM in December 2013, for a consideration of Naira 7,5 billion (497 million ZAR), has been accounted for as a discontinued operation for the period up until its disposal. This is consistent with the accounting treatment adopted in the financial year ended 30 September 2013.

The group´s overall gross margin declined by 0,9 percent to 30,9 percent, negatively influenced by the inflationary effects of the weak South African Rand on input costs, which were not fully recovered in pricing in the South African operations. The operating margin declined by 0,2 percent to 11,5 percent, benefiting from a 3,1 million ZAR IFRS-2 share-based payment credit compared to a charge of 93,8 million ZAR in the corresponding prior period.

Turnover for the domestic businesses of 11,2 billion ZAR showed an improvement of eight percent, whereas the Export and International businesses, including Nigeria, grew turnover by 20 percent to 3,7 billion ZAR, benefiting to an extent from the weaker Rand.

Domestic sales volumes increased by four percent, with selling price increases generally in line with or below inflationary levels. Sales volumes achieved by the Export and International businesses (excluding Nigeria) were strong, but this was offset by pressure on volumes at DFM, primarily due to intense competitor activity.

The operational performance in the first half was mixed, with the Grains division achieving pleasing growth especially within the MillBake and the Breakfast categories. The domestic performance was weighed down by a weaker result in the Maize, Groceries and HPCB businesses. Realisations in the Groceries business were maintained in the first quarter in order to stimulate volume recovery. This objective was successfully achieved with strong volume growth and improved market shares recorded in the quarter. However, rising input costs resulted in significant margin erosion, which should ease over the balance of the year, as pricing is adjusted to partially absorb the higher costs. The Homecare and Personal care businesses continue to face stiff competition in the market as competitors increase their promotional activity. Plans are underway to drive innovation more aggressively in these categories and to refocus on core brands.

The strategic cost saving projects that commenced in the previous year remain on track, with the relocation of the tomato paste plant to Musina as well as the consolidation of the beverage facilities at Roodekop having been successfully completed. Initial supply constraints were experienced in the Beverage business; however, these have now been largely resolved. The standardisation and roll-out of various IT systems across the group are scheduled for completion in the second half of 2015.

The Export and International businesses outside Nigeria continue to show strong growth, benefiting to some extent from the South African Rand´s relative weakness. Trading conditions in the Nigerian market remain challenging and DFM has continued to sustain operating losses in the period, primarily because of on-going top-line pressures. In addition, the impact of significant price discounting in a market that has over-capacity continues to place pressure on margins. As indicated above, the turnaround in the performance of DFM over the medium term remains a key objective, which is receiving focused management attention.

Operating income for the period of 1,7 billion ZAR is nine percent higher than in the corresponding prior period.

Net financing costs increased as a result of higher average debt levels whilst the overall effective tax rate benefited from special incentive allowances granted in respect of qualifying capital projects.

Income from associate companies grew by four percent to 266 million ZAR, with good performances recorded by Oceana, UAC Foods and National Foods Holdings. However, the share of profits from Empresas Carozzi was well below the previous year. This was primarily due to increased market competition and crop failure in the domestic deciduous fruit market, which affected the supply of certain key products.

As outlined above, the group has impaired the full carrying value of the goodwill and intangible assets relating to its investment in DFM. Excluding this impairment, earnings per share from continuing operations increased by nine percent to 8,77 ZAR per share, whilst headline earnings per share from continuing operations increased by seven percent to 8,56 ZAR. After taking the impairment into account, earnings per share from continuing operations declined by 53 percent to 3,76 ZAR. The impairment has had no effect on headline earnings from continuing operations, which remain unchanged at 8,56 ZAR per share.

Interim Dividend

The Company has declared an interim dividend of 3,29 ZAR per share for the half year ended 31 March 2014, which represents an increase of six percent compared to the 2013 interim dividend of 3,10 ZAR per share.

Outlook

The Board remains confident that the group´s strategies are appropriate for the businesses and will ultimately deliver the desired outcomes.

Trading conditions in the domestic market continue to be challenging, with ongoing volume pressures resulting from continued constraints on consumer spending and rising inflation. This is exacerbated by a highly competitive landscape with limited volume growth in many FMCG categories. Margin pressures should ease over the balance of the year as pricing is adjusted to partly offset the higher input costs. However, this could negatively affect volumes.

The improvement in the performance of DFM remains a key priority for the group and the action plans being implemented are aimed at reducing the rate of losses being sustained by the business over the balance of the financial year. Exports and the remainder of the International businesses are expected to continue to deliver strong growth, albeit at a slower pace given the recent strengthening of the Rand exchange rate.

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