Tiger Brands Limited (TBS) Earnings Call Transcript & Summary

Good day, ladies and gentlemen, and welcome to the Tiger Brands investor conference call. [Operator Instructions] Please note that this conference is being recorded. I'd like to hand the conference over to Mr. Noel Doyle. Please go ahead.

Good afternoon, everybody, and thank you for taking the time to tune in to this call. The way that we would like to sort of deal with the call is while I take the liberty of just making a few introductory comments, I'll try to give you some context to the first 6 months trading in terms of the indications given in the trading statement and also try and sort of position that relative to a sense of expectations for the second half. After that, I'm quite happy to take questions. I hope that you will appreciate that 7 or 8 days into the job, there's a lot of internal communication that needs to take place before I can talk in a lot of specifics. So some of it sounds like vague generalities, I apologize for that. But as soon as we're in a position to talk specifics and make enumerated commitments, I promise that we will do that. So perhaps, it is important to give you context to that trading statement and to the significant decline in earnings that it indicates. And I really want to give you a sense that from an operating profit perspective in a region of 80% of the decline is coming from the 4 categories that we specifically made reference to. And those 4 categories are: bakeries, pasta and rice, groceries and the export business, and I'll talk to those in a little bit more detail in terms of the anticipated performance for the first 6 months. I think it's also important, again, for context to give you a sense that we certainly have been seeing, over the last 6 weeks, some top line growth. So we've indicated effectively inflation and volume canceling each other out in the first 3 months trading. I'm fairly pleased to say that whilst not at the level of our expectations, we have seen positive top line growth in January and so far in February on a kind of like-with-like, day-by-day we are seeing sort of a positive year-on-year top line growth. Also, it is important, given the depth of the decline that we're anticipating in the trading statement, perhaps to just make it clear that, that isn't the trajectory that we anticipate continuing for the remainder of the year. So when one looks at the performance and in particular of the bakery business and the pasta and rice business, what we're really seeing is a continuation of the performance against a base that had been effectively reset in the second 6 months of last year. So we don't think that, that base is in serious risk in the second 6 months, and you're effectively seeing almost an annualization of the challenges that we saw in the second month in the market for those 2 categories. And that will be quite an important factor for you in assessing our performance for the second half and beyond. If I go specifically to the challenges in those 4 categories. So in Bakeries, we did have a very small, very low single-digit volume decline, but a remainder -- a remaining competitive environment in terms of the absence of any significant movement in terms of price increases in the marketplace. And in fact, we saw some further discounting in the second -- in the first 3 months of the year. We are seeing some indications now that given the sort of mounting sort of cost pressures within the business, not necessarily in the raw materials but below that line, we are seeing some indications that we'll see prices move modestly upwards over the next few months. Pasta is -- and rice, they remain quite challenging. Pasta is a slightly different dynamic to rice. I would say, there, it's an ongoing challenge to get to the right price point relative to the house brands, and I think that, that is something that is likely to be with us for a while. We are obviously doing some work on trying to reengineering our own supply chain in that space. But it's probably not a business where we're going to see a dramatic recovery in the short term. And in rice, we're really seeing sort of a continuation of sort of pricing pressure in that marketplace in the competitive set. It's also fair to say that having -- we did make an attempt to move pricing upwards in this quarter, and it was an attempt that failed pretty dismally. So we ended up with a customer base. I'm sure about pricing, and therefore, we neither got price nor volume in this past quarter, something that we already did going forward. Groceries, we spoke in the trading statement about this quarter that we're in now being challenging. I think we were lapping in the first quarter a performance that we indicated was suboptimal last year due to supply issues. And I think what we're really seeing is kind of almost a base category challenge again in terms of the level of the sort of price competition, coupled with pressure on consumers in certain of the categories. The exports business, which is the fourth business that we're calling out. Essentially, we've had negligible sales into Nigeria for this 6-month period, and that's really as a result of an ongoing legal dispute with our previous distributor around the ownership of trademarks. We've got pretty clear and concrete legal advice that, that case has no merit. However, we are caught up in a sort of court mechanisms, NASDAQ tribunal and High Court delays. The next court hearing will be the 16th of March. And assuming that we are successful, we should see a better second half. Although in my opening comments around the second half, I have assumed that we wouldn't have a correction in the second half in terms of my expectations for the second half. So those are big businesses facing sort of significant headwinds. And I think if we look forward, barring sort of a very sort of serious deterioration in the local domestic economic environment, I think we're probably pretty close to the lowest sort of base case in each of those businesses, which we saw in the second half of last year. And that's why I wouldn't anticipate the second half us seeing the significant declines in operating profit that we are anticipating to see and that we have already seen in the case of 3 of them for the first quarter. Our other businesses, again, in the balance of the portfolio, as I said, those 4 businesses are really 80% of our problems from an EBIT range perspective. We're quite pleased with the performance in this environment of our Snacks, Treats and Beverage business and our Home Care business. We had a bit of a challenging start to the year in Baby. You know how you would have seen us slow down a little bit towards the end of last year. Challenging start to the year, but we're really recovering. Very good momentum in that business. And I think we expect to see a good performance in that business for the second half of the year. That really kind of gives you some insight into those numbers. I hope what I'm trying to convey is that it isn't chaos or all fall down in every single category, but we do have big challenges in those 4 categories that I've spoken about that need to be addressed, but aren't necessarily going to be a short term as in an F '20 cure. I think we will be helped in the second half also by the lower base. And there are certain areas of our business, for example, in the exports business where we did no business in Mozambique last year. And our performance in Mozambique for the first 6 months of the year has been actually very, very encouraging. And we really believe in those bigger businesses. We probably got to the base. In terms of -- you know what, I'm going to be focusing on sort of in the short and medium term, and short and medium term for me is through to the end of this financial year. We are going to make some internal changes around sort of our alignment, and in particular, our focus on when we prioritized the resource that we've put into the organization over the last couple of years to ensure that we're actually driving some short-term results, particularly in the supply chain where several of our factories are not performing at the level of productivity that we would expect and where those are areas where we believe we can sort of swing the performance quite quickly with the right level of focus. And clearly, speed of execution, intensity of execution in this environment has to be a key consideration. I believe that, by and large, we've got the right people. We haven't always got the right people in the right places in the organization, and I'm happy in taking questions to deal with some of the specifics on that. And with that, I'm happy to take any questions that you might have.

[Operator Instructions] The first question comes from Pratish Soni of Avior Capital Markets.

I just want to ask you a couple of questions. Just one -- at least the first one would be whether or not procurement issues in rice, be it cost or quality related, have been resolved. And could it possibly or potentially be positive for Grains margins in the second half of FY '20?

I think it's -- in terms of cost, we are doing some further work in that space. That's one area where I wouldn't be in a position to say we can definitely improve significantly, but we did have some quality issues in the second half of last year, which are not recurring, which we appear to have had -- got a good handle on. And I would expect that those would contribute to an improved -- slightly improved performance in the second 6 months. But that's probably not -- it's not really material relative to the gap in the overall category. And if you've been watching the international rice markets, you will have seen that the gap between Thai rice and Indian rice has opened up very significantly over the last 2 or 3 weeks as a consequence of the drought in Thailand. So that remains a kind of a black spot on the horizon. But for all Thai rice packers, the dynamic should be the same. I don't think we have a particularly low or particularly short position.

I just have 2 quick questions on bread, if you didn't answer me. In your opinion, are overall market shares stable in bread at a national level? And if not, which particular provinces have market share maybe changed?

So the immediate pressure -- but I did indicate that we had lost on low single-digit volumes. The greatest pressure that we're experiencing is in [ cutting ], and it's in the informal trade. So we seem to be managing more or less to hold our position in the top end. It comes at a cost. So the biggest challenges are in the inland region. And we are starting to see a little bit of activity. One of our competitors in the Western Cape had their own internal challenges, and they're attempting to recover, although we're not seeing them be hugely aggressive at this stage in terms of onward discounting in order to sort of recover some of the share they've lost in that area. I would say the market seems to have -- the bread market seems to have settled a bit. As I said, the first sort of 3 or 4 months of this financial year, more or less in line with what we experienced in the last 6 months. And there are indications that pricing may move upwards over the next few months.

The next question comes from Paul Steegers of Bank of America.

Just your guidance for the second half, how confident are you on this? I mean I appreciate this is a base effect given the second half of last year was bad. But I mean, with no sales growth and clearly competitive pressures, input cost pressures, conversion cost pressures, et cetera, is your sort of stability on operating profit in the second half year-on-year, that sort of guidance I'm hearing, is that doable really? Or does that assume quite a big pickup in sales growth in the second half?

No. I think if we're to sort of look at what we've seen for the last 6 weeks and have no recurrence of some of the issues and challenges that we had in the second 6 months of last year, bakery strike, et cetera, I think our ability to sort of -- and I must be careful of not being seen to give a forecast, but I would be disappointed if we're not able to at least match the prior year's operating income performance.

In the second half. Okay. And then one last question, yes, on VAMP. Obviously, you've got bidders, but there's no certainty that you'll sell it, although you're still clearly hopeful. Why did the bidders ask for an extension? What are the sort of potential bottlenecks there? And how confident are you that you'll be able to conclude some kind of disposal in the current financial year? And then maybe just some color on how VAMP is performing in terms of volume, sales and losses?

Yes. Sure. So as far as the transaction itself is concerned, I think one of the reasons for the delay is that we kind of got to a point at the sort of holiday breakup period, and where -- from our perspective, we had to be careful of not trying to push too hard and ending up particularly losing a transaction. I think we are feeling fairly confident. We have made significant progress with respect to a disposal, and we are -- I think the word would be hopeful that we will conclude a transaction. And if we are going to do a transaction, we'll be in a position certainly to talk about it by the time we publish mid-year numbers. So nothing is done until the ink is dry on the agreements, but we have made good progress. And I would say that we're in a position now where it's not a possibility of us being able to conclude something, but it's probably a probability. We're not at 80% yet, but we're well above a 50% chance of concluding a deal. I'm really quite hopeful that we'll get that done.

Performance in VAMP?

In terms of the VAMP performance, so we have seen an improvement, but it's kind of -- it's slow in terms of the improvement in our operating performance relative to the prior year. We -- apart from one particular customer where there's been quite a lot of change in terms of that category management, we've been happy with the work that we've done at a customer level, but it's still a significant drain on our operating performance in the 6-month period that we're talking about.

That's very useful. Then my last bit was just in your potential stable profits year-on-year in the second half of the group, does that assume VAMP losses are gone? Or are you still assuming sort of run rate losses that you saw in the second half there last year as well?

I think we -- I'm talking VAMP included for both periods prior and ...

Okay. So that would assume, obviously, either VAMP losses get much better or you do profit growth in the other divisions to offset.

Yes. And as I said, the improvement in the VAMP operating profit is a slow burn. So I'm not assuming -- in that guidance, I'm not assuming a dramatic change in the operating profitability or a reduction -- a dramatic reduction in losses in the second period. I'm assuming some, but it's not a major contributor to that sort of confidence level around the second half.

The next question comes from [ Jacque Kanwadri ] of Peregrine Capital.

Just, I mean, maybe a bit of a difficult question to answer, but I'm trying to assess how difficult the market is in your space presently because I guess we've seen quite tough results from all the food producers. So if you had to say the underperformance versus plan or budget, if you attribute that to, let's say, a tough comparative, a difficult market, low demand, aggressive competitors versus more execution issues, perhaps strategic mistakes and goals, could you give me maybe a rough split between how those 2 variables are kind of causing the underperformance at present?

Yes. I would say it's 2/3 market challenges, 1/3 on goals. Okay. Or when we say on goals, it's not necessarily things that we've totally screwed up, but it's things that we know we can actually do much better on. So I think in this quarter, other than sort of our sort of failed attempt and maybe rather confused attempt -- rather market confusing attempts to move pricing in the rice market, other than that, I don't think that we've got any obvious on goals.

The next question comes from Vikhyat Sharma of Morgan Stanley.

Noel, thanks for the update. I mean I think more from a perspective, you have confidence in terms of your second half guidance, and I, again, kind of come back to the question which are probably asked at the full year results. So the environment doesn't seem to be improving, right, even in your base case, right? The macro doesn't seem to be improving. I think the big question here is, is there a cost reset that should be done over the short term or medium term, right? You've talked about this factory underperformance and how the productivity has been low, right? I mean is there kind of a reconfiguration that is required then outside of VAMP to think about this margin? Because, I mean, I think, right now, it almost seems like [ that, again, ] we are kind of adjusting to the environment. And potentially, what I'm trying to say is maybe there is some big changes required by the VAMP.

I think, again, please bear in mind my introductory comments in terms of making sure that I communicate appropriately internally before I communicate specifics externally. But you wouldn't have to be a rocket scientist internally or externally to see that Tiger Brands will have to do something more significant than it's ever done before on costs if we are to improve our operating performance, and that is very much our focus. But it's not just about the costs, we really have to make sure that the resource that we have is prioritized in the right place. So if I can just -- if you'll indulge me for a minute or 2, I can give you an example of that. So we have some challenges currently in our pasta factory, and our best resource in terms of pasta processing expertise has been sitting in the center of excellence in our business, working across businesses on manufacturing excellence programs. And that's where we're going to have to recalibrate. We know that, that individual can make a significant impact in the pasta category over the next 6 months if he dedicates all or most of his time to that category. And it's those kind of strings that we need to pull. We need to get our priorities corrected. We need to make sure that we've got the right jockeys on the right horses.

The next question comes from [indiscernible] of Nedbank.

Just like you highlighted a bit on your Nigeria business that there were sales regarding the devaluation, so negligible. I just wanted to know like the contribution of those sales today and the contribution of the exports segment of your -- for business, like is that a significant number or looking at just negligible sales for the whole group?

No, it's a significant number. The impact of that -- without having the exact sales number at my fingertips, but I can tell you the impact of that on profitability in our first half is comparable to the impact I've been talking about in rice. It's quite significant to our business, the lost sales and the EBIT contribution because they come at a reasonably high margin and it does flow down into the bottom line.

The next question comes from Muneer Ahmed of Prescient Securities.

My question is with regards to the Bread division. I think over the last couple of years, there's obviously been some market share losses because you priced yourself at a premium to some of your competitors. So with that manifesting itself again, does that mean you're going to really look at that strategy when competitors start to push the prices this year, that perhaps you'll keep it consistent just to gain back some of that market share?

I think we will try and be pragmatic in our response. It's not a defend market share at all costs or defend margin at all costs. We'll try and get that balance right. And what I think we probably need to be is a bit more aggressive in growing our own footprint. So we've kind of stood still while others have expanded their footprint in our areas or areas where we were dominant.

I guess the question comes from because previously, you always guys answer, well, you're chasing value share as opposed to market share. But obviously, value share -- market share is a function of value share. So just trying to figure out where you're thinking is around there because, I mean, if you continue to lose say it's 1% per year, over the long term, obviously, that becomes a lot more significant than -- and damaging to the business. So yes, and then they use more...

Yes. I mean it's such a live and volatile environment. There's no one clear part. And even within provincial areas, the dynamic is very different. So we're going to try and get that balance right between the 2. We do understand that perpetual sort of even if it's a slow decline in market share is something that will damage the brand significantly. And I guess that's something that we've seen in rice, and we should take that a little bit to heart.

The next question comes from Londiwe Buthelezi of Fin24.

I just want to -- any -- you spoke about indications that prices may rise in the foreseeable future or in the near future. But looking at what you experienced when you tried to do the same with pasta prices, you mentioned that it was something you tried, and the volume sacrifice that resulted because of that. I just want to get a sense of which categories you think you can hopefully be able to rise prices without affecting volumes where you're confident it can't happen. And also, my second question relates to -- I know there's price pressure on consumers, but food is that one item that we don't expect that people will cut back much on. And so I want to understand, is it -- are you losing the market share to house brands? Or is it just price sensitivity across the sector? Is it specifically on branded products because that's what you have all?