Tiger Brands: publishes group results for 2007

Sandton / ZA. (tb) Tiger Brands Limited posted its group results and declaration of capital reduction and final dividend for the year ended 30 September 2007. The company achieved headline earnings per share («HEPS») of 1’283,0 cents for the twelve months ended 30 September 2007, which is an increase of six percent on that achieved in the prior year. Earnings per share («EPS») declined by three percent to 1’425,7 cents per share.

Headline earnings for the year ended 30 September 2007 have been adversely impacted by the inclusion of the cost of the settlement reached with the Competition Commission as a consequence of contraventions of the Competition Act in the Company´s baking and milling businesses, and by the provision for the estimated costs associated with the planned unbundling of the Company´s Healthcare Interests. Excluding the effect of these two items, headline earnings per share reflects a 15 percent improvement to 1’382,9 cents, compared to that achieved in the prior year.

The difference between the percentage change in HEPS and EPS is due to the inclusion in 2006, in attributable earnings, of net abnormal profits of some 466,0 million ZAR (South African Rand), primarily relating to the disposal of various offshore investments. In 2007, net abnormal profits which have been included in attributable earnings, but excluded for HEPS purposes, are at a significantly lower level of some 269,0 million ZAR. These profits primarily comprise the gain on disposal of the Company´s dairy business, less the costs of impairment of licence rights previously capitalised.

Settlement with Competition Commission

As published, an agreement was reached with the Competition Commission relating to contraventions of the Competition Act by the Company´s baking and milling operations. In terms of this agreement, the Company has agreed to pay an administrative penalty of 98,8 million ZAR. The agreement is required to be referred to the Competition Tribunal in terms of the Competition Act. The amount of 98,8 million ZAR has been fully provided for and disclosed under abnormal items in 2007.

The Company immediately initiated an independent investigation when the matter was first brought to its attention in February 2007. The findings of the investigation were fully disclosed to the Competition Commission as soon as they became known. The investigation revealed evidence of interactions between a number of Tiger´s employees and some of its competitors, which amounted to contraventions of the Competition Act. Following the results of the investigation, the Company proactively engaged with the Commission in resolving the matter. An independent firm of economists, Econometrix, found no evidence of abnormal pricing to customers as a consequence of the discussions that had taken place with some competitors. The Company sincerely regrets that this has taken place.

Overview of results

On 06 November 2007, the Company announced its intention to unbundle its Healthcare Interests. The process is expected to be completed by 31 March 2008. As a consequence of this decision, and in terms of IFRS 5, the results of the Healthcare Interests are required to be disclosed as a discontinued operation in the Group income statement, whilst the related assets and liabilities are classified in the Group balance sheet as assets and liabilities held for sale. Similarly, the results of the dairy business, which was disposed of with effect from 01 May 2007, have also been disclosed as a discontinued operation in the Group income statement. Reference in the commentary below to continuing operations relates only to the Company´s FMCG business.

Turnover growth from continuing operations for the year of 28 percent is slightly lower than the 33 percent recorded at the half year. This decline reflects some slowing down in the rate of raw material cost increases in the Maize milling business, as well as the impact of the inclusion of two months of turnover for Bromor Foods in the prior year (Bromor Foods was acquired effective 01 August 2006). In addition, the strong growth in export turnover recorded in the first half of 2007, due to an improvement in product shipment rates relative to the first half of 2006, has resulted in export turnover in the second half of 2007 representing a smaller proportion of the total full year figure than it did in 2006. The operating profit margin from continuing operations of 13,9 percent (2006: 12,4 percent) is consistent with that recorded for the six months to 31 March 2007.

As was anticipated at the half year, the strong full year growth in operating income of 43 percent is lower than the 61 percent reported in the first half. This is due to the recoveries in the second half of 2006 in the performances of Maize, Fishing and Exports. Whilst favourably impacted by the acquisitions of Bromor Foods, The Designer Group and the Nestle sugar confectionery business, the results of the FMCG business reflect very strong levels of organic growth, particularly in Grains, Groceries, Snacks + Treats and a sustained improvement in Fishing and Exports.

Abnormal items have reduced by 271,5 million ZAR compared to the prior year, resulting in a net abnormal profit of 203,6 million ZAR in 2007. The prior year largely consisted of a net profit on disposal of certain offshore investments, and a credit arising from impairment reversals. The current year composition predominantly reflects the profit on disposal of the Company´s dairy business of 302,5 million ZAR and the release to income of 26,6 million ZAR relating to a fair value adjustment of the Company´s obligations in respect of the Sea Harvest put option. This was partially offset by the settlement in favour of the Competition Authorities of 98,8 million ZAR and the estimated costs relating to the unbundling of the Company´s Healthcare interests of 58,4 million ZAR.

Net financing costs from continuing operations increased by 62,5 million ZAR to 77,9 million ZAR, reflecting the significant recent acquisition activity, the increased capital expenditure levels over the past two years and higher levels of working capital throughout the past twelve months. The increase in working capital levels was primarily due to higher raw material costs and a planned increase in stock holdings to meet demand. Notwithstanding the significant increase in financing costs, net interest cover from continuing operations remained at a healthy level of 29,3 times (2006: 104,2 times) The increased share of income attributable to minorities is indicative of the improved levels of profitability in both the Fishing and Deciduous Fruit businesses.

The sharp increase of 52,7 million ZAR in the contribution from associates is distorted by the capital losses of 42,1 million ZAR incurred in the previous year, which related to C+T Malt. Excluding these capital items, income from associates increased from 46,5 million ZAR last year to 57,1 million ZAR in the year under review. This improvement reflects the non-recurrence of trading losses at C+T Malt (the Group´s interest in C+T Malt was disposed of in September 2006) and an improved contribution from Chilean based Empresas Carozzi.

The increase in the taxation charge of 52 percent is significantly higher than the rate of increase in profit before taxation of 19 percent. This is largely due to the impact of abnormal items which decreased from a net abnormal profit of 475,1 million ZAR in 2006 to a profit of 203,6 million ZAR in 2007. The bulk of these abnormal items, in both years, have no tax effect.

Discontinued operations comprise the profit after tax attributable to the dairy business, determined from the commencement of the 2007 financial year to the date of its disposal on 01 May 2007, as well as the profit attributable to the Company´s Healthcare interests, for the full year ended 30 September 2007.

Review of operations (only FMCG)

There were some very strong performances in FMCG, where the levels of underlying consumer demand remained broadly in line with that experienced in the first six months of the financial year. The trend of increasing cost push inflation, which was largely contained to the Grains business in the first half of the year, has now extended to all categories as the full inflationary impact of increasing raw material, labour and distribution costs has resulted in price increases in some categories for the first time in three years. «Domestic Food» increased turnover and operating income by 29 percent and 33 percent respectively. Excluding the impact of the acquisitions of Bromor and the Nestle sugar confectionery business, turnover reflected an increase of 16 percent and operating income an increase of 22 percent.

Within the Grains segment, the growth in operating income was largely due to an exceptional performance in Maize, arising from the supply/demand dynamics of April 2007´s poor local crop, an improved year at Albany, where market share gains were made in a fast growing market segment, and a solid contribution from Rice which sustained its positive first half performance. The Oats category returned to profitability in the second half of the year following the completion of the major capital upgrade to its manufacturing facility in Maitland. The results from Sorghum beverages were disappointing with both volumes and margins coming under pressure.

The Groceries business recorded a 23 percent improvement in operating income off a 15 percent increase in turnover. A relentless focus on production efficiencies and cost containment, helped to maintain the customer value proposition of the key Koo and All Gold brands in the face of considerable input cost pressures. The baked beans and tomato sauce categories were major contributors to the growth achieved. As reported at the half year, Pasta supply remained constrained pending the commissioning of a new plant at the end of November 2007. Notwithstanding supply constraints, Pasta profitability improved. This was driven by the improved performance of the Fatti´s + Moni´s brand, which benefited from the non-recurrence of major plant maintenance costs incurred in the prior year and the resultant importation of expensive finished product over that period. Boosted by the successful integration of the Nestle sugar confectionery business, Snacks + Treats grew operating income by 54 percent off an increase in turnover of 25 percent. Organic growth remained strong. Assisted by the strong performances of the Beacon, Maynards, Mmmallows and Jungle brands, confectionery turnover, excluding the impact of the acquisition, rose by 16 percent.

The Beverages business enjoyed continued market share gains together with double digit volume growth. This has reinforced the market leading positions of brands such as Energade, Oros, Hall´s and Roses. Results were negatively affected by once-off restructuring costs of 12,0 million ZAR and by the impact of a five week industrial strike at its manufacturing facilities in May 2007. The results from Value Added Meat Products were disappointing, with operating income declining by 19 percent despite an increase in turnover of twelve percent. With a general surplus of manufacturing capacity in the industry, the division was unable to recover the very significant raw material cost increases experienced during the course of the year. The Out of Home business recorded a decrease of 20 percent in operating income despite increasing turnover by five percent. In addition to the supply constraints in Oats and Pasta referred to at the half year, there were significant start up costs associated with the establishment of a Hot Favourites pre-prepared meal facility in Gauteng.

Consumer Healthcare saw operating income grow by 47 percent, with turnover increasing by 42 percent. Excluding the impact of the Designer Group acquisition, which was earnings enhancing in its first year, operating income and turnover grew by 21 percent and 17 percent respectively. In addition to the good contribution from the Designer Group acquisition, Personal Care benefited from the revitalisation of its key Ingram´s, Dolly Varden and Lemon Lite brands. Babycare continued its strong growth momentum, with its market leading positions enhanced by the installation of additional cereals capacity. Homecare, which posted a modest growth of seven percent in operating income, was negatively affected by the poor pest season where brands such as Doom, Dyrange and Fastkill were impacted by a very dry Summer. ClassiClean, which was acquired in 2006, has been successfully integrated into the Consumer Healthcare business. It performed in line with expectations.

Exports achieved a very significant improvement on the prior year, with operating income increasing by 69,1 million ZAR to 104,2 million ZAR. FMCG exports benefited from the addition of Beverages to its portfolio following the Bromor Foods acquisition, and from a narrower country focus, with Mozambique being a major contributor to growth. However, the primary contributor to both absolute profitability and growth was Langeberg + Ashton Foods, the Deciduous Fruit business, where profits were enhanced by a better peach crop, firmer international pricing, and the benefits of a weaker Rand – particularly in the first six months of the year.

Read more: For the topics «Fishing», «Other», «Disposal of Dairybelle business», «Healthcare», «Unbundling of healthcare interests», «Final capital reduction out of share premium and final dividend», «Outlook» (…) Tiger Brands published a detailed poster (2 pages | 2’243KB). In addition a detailed investor presentation (66 pages | 2’407KB) may be better to read.