Consumer goods company Tiger Brands’ operating profit for the year ended September 30, declined 11.6% to R3.1-billion, mainly as a result of difficult trading conditions and costs incurred by Dangote Flour Mills of Nigeria (DFM), the company said on Wednesday.

Tiger Brands acquired a controlling interest of 63.35% in DFM in October 2012.

Excluding the R389.2-million operating loss incurred by DFM, the group’s operating profit for the year under review remained flat at R3.5-billion.

Headline earnings a share (Heps), including DFM, declined 3.8% year-on-year to 1 624c, while Heps, excluding DFM, stood at 1 781c – an increase of 5.4% year-on-year.

Further, Triger Brands’ revenue for the period increased 19.1%, assisted by acquisitions that contributed an amount of R2.3-billion. Excluding these acquisitions, revenue grew 8.4% year-on-year to R24.6-billion.

“The challenges facing the global economy have undoubtedly affected Tiger Brands’ sphere of operations. In South Africa, in particular, the difficulties facing the group have been driven largely by the trade-off between the group’s ability to recover cost increases through appropriate pricing, and the pressure on consumers to purchase at acceptable price points,” the company said, adding that the increase in competition through the continued growth in dealer-owned brands and the entry of new competitors, had added to these challenges.

Tiger Brands further said that, while the group had taken some important steps in its strategic journey towards building a sustainable platform for future growth, the results for the financial year were disappointing and reflected a difficult transitionary phase as the group repositioned its domestic business for growth and drove expansion on the rest of the continent. 

Meanwhile, the company pointed out that, while DFM had good assets and a strong market  position, the trading performance had been disappointing and the acquisition had had a dilutive effect on the group’s earnings for the year.

“As with other acquisitions made on the continent, we expect that it will take two to three years to fully align the DFM operations to Tiger Brands’ standards and for the business to deliver acceptable returns. However, the group remains optimistic that this investment in one of the fastest growing economies in sub-Saharan Africa, will meet expectations over the medium term,” it added.

Meanwhile, the company’s net financing costs increased from R138.2-million to R378.8-million as a result of the group's higher borrowing levels, including underlying debt in DFM of R1.5-billion.

Further, during the year, DFM reached an agreement to sell its subsidiary Dangote Agrosacks (DAS) to Dangote Industries for R470.1-million, resulting in a R25.8-million abnormal loss on the remeasurement of the carrying value of DAS's net assets at year end, to fair value.

The proceeds from this sale would assist in reducing the overall debt in DFM, which was currently bearing interest at about 15% a year. It was anticipated that the refinancing of a portion of the remaining debt at DFM at more favourable interest rates would be effected by the end of the current calendar year.

Tiger Brands also announced that its board had decided to declare a final ordinary dividend of 555c a share for the year ended September 30. This dividend, together with the interim dividend of 310c a share, brought the total dividend for the year to 865c a share, which was an increase of 1.8% year-on-year.

BUSINESS SEGMENTS
Tiger Brands stated that the most significant contributor to operating income in its grains segment was the bakery business, which achieved pleasing volume growth in a contracting market.

The flour milling business was also able to grow volumes marginally in a contracting market; however, a combination of aggressive competitor activity and a significant increase in raw material costs resulted in lower margins and profitability.

The maize business lost market share, while the sorghum beverage business was able to sustain satisfactory profitability notwithstanding the increase in raw sorghum costs and a continuation of the long-term declining volume trend in this market.

The rice business achieved strong volume growth with volumes exceeding the levels of 2011, as pricing was adjusted to reflect a more realistic premium to other rice offerings. As a consequence, the business benefited from a much-improved second-half performance relative to the same period last year.

Further, on the back of several successful innovation launches under the Jungle brand, the oats business recorded good volume growth and a satisfactory increase in operating income.

Meanwhile, the groceries business faced tough trading conditions throughout the year, with intense pricing competition, higher input costs and volume pressures having a significant impact on profitability.

The groceries division’s turnover declined 1.7% to R3.7-billion, while operating income fell 33.1% to R361-million owing to volume pressures that arose from widening price differentials relative to aggressive competitor pricing, as well as owing to higher input costs, which could not be fully recovered in the market.

The financial performance for the year was also negatively impacted by one-off costs relating to certain extraordinary stock write-offs, unfavourable manufacturing variances and the effect of industrial relations issues at the Boksburg site, totalling R44.7-million.

The snacks and treats business achieved a solid performance for the year, driven by pleasing volume growth and a positive sales mix, as well as strong operational leverage resulting from manufacturing cost efficiencies, while the beverages business achieved satisfactory volume growth for the year, which was primarily driven by the Oros, Roses and Superjuice brands.

Despite a slowdown in the overall value-added meat products category, the Enterprise business grew in both volume and value terms within its core segments, benefiting from various strategic initiatives implemented in the prior year.

The Out of Home business produced pleasing results for the year, driven by strong Christmas and Easter festive season buy-ins by distributors, increased food hamper business, as well as the take-on of new franchise  and contract catering customers.

The home, personal care and baby business delivered a modest top-line performance, which translated into a slightly lower operating income for the year.

Further, the company’s export business enjoyed another successful year on the back of several consecutive years of sustained growth. Strong volume growth was achieved although margins were compressed slightly as a result of the need to maintain relative price points in key markets.

“The Export division continues to play a strong feeder and development role for our chosen categories and brands as it successfully drives market penetration in existing and new geographies,” Tiger Brands said.

OUTLOOK
Tiger Brands noted that trading conditions were expected to remain challenging for the foreseeable future, with the ongoing weakness in the domestic economy continuing to affect consumers’ spending ability.

“In this environment, competition is expected to further intensify. Margin pressures are likely to persist owing to volatile commodity prices, fluctuating exchange rates and rising energy costs. The continued growth of the value sector in the domestic market is likely to exert further pressure on premium brands. 

“Notwithstanding these challenges, the group is well positioned to compete more effectively as a result of the various strategic initiatives currently being implemented. The brand preference for Tiger Brands’ products remains high and will be strengthened through increased brand investment and innovation,” the company stated.