Tiger Brands Limited (TBS) Earnings Call Transcript & Summary

Good morning, again, everybody, and welcome to Tiger Brands' interim results presentation for the 6 months ended 31 March 2021. In terms of the agenda this morning, we'll begin with CEO, Noel Doyle, who will provide an executive summary and an overview of the period under review. CFO, Deepa Sita, will take us through the financial and operational review. And then Noel will conclude the presentation with a strategic update and outlook. We will then open it up to Q&A. As is customary, before we begin, I'd draw you to the forward-looking statements. With that, I hand over to Noel Doyle. Thanks. Noel?

Good morning, everybody, and thank you for taking the time to listen to our version of the last 6 months' trading as well as some indications as to how we see the future going forward. The first sort of piece of information I really want to share with you is the background in terms of the market that we've been operating in for the last 12 months, the last 3 months and how we see that going forward. And on this slide, which is top-end trade data from IRI, you will see that on a 12-month moving perspective, we've actually seen a major volume crunch in the marketplace. And I guess that won't come as a surprise to most people, given what we've been through in the last 12 months. When you look at the 3 months, you will see very much an acceleration of the pressure on margins, although March itself, because we started to see last year some of the pressures that came from buy-ins flow through in terms of higher levels of demand on the supermarket shelves. But essentially, what we've definitely seen, if you look at our results, it's a tale of 2 quarters to a degree, where we certainly saw a very high level of -- or a good level of volume performance in the first 3 months. And then we've seen a combination, we think, of consumer pressure. And we definitely know pressure from our competitors in terms of them reacting to the share gains that we had over that period with incredibly aggressive pricing. So I think it's a combination of reacting to what we've been doing but also reacting to a very challenging environment. We've also tried to set out on the slides for you 2021 versus 2019. So please forgive the error on that one column at the end. That's actually March '19. But you'll see, even when we strip out the potential COVID impact, you can see the kind of pressure that the overall market is under in terms of volume over the last couple of years. If we turn to Tiger's performance within that market, again you will see a good performance in terms of volume on a 12-month moving basis. And over the last 3 months, particularly in the months of February and March, as we've seen that price-led reaction in the market, you will see quite a lot of pressure on volume. So in this period, competitors responded and you don't fully feel the effect of our response to that, which you would see in the 6 months going forward from the end of March. So this really gives you a sense of what's been happening on volume. I think what's also interesting on this slide is that we've seen what I've consider to be merely a dip in the performance of dealer-owned brands in this period. And I think it's a combination of two things. One, empirically, you can see a narrowing of the price gap. So house brands have been driving a higher rate of inflation in most of our categories than the branded offerings. Some of that would be coming from what has happened historically in terms of the depreciation of the rand. So with the stronger rand and some imported house brands potentially having a more competitive positioning, I think we can expect to see that price gap widen a little bit. And some of it is the well-remarked-on consumer behavior in times of strife, if you like, to go for the tried-and-trusted brands. So you will see, in particular, if we look at competitor 1 that we flag there, quite important, because when I skip to the next slide, you'll see the extent to which the volume share gains have come at the expense or as a result of price movement. So moving to the next slide, which really talks to the same data from a value share perspective. You will see that Tiger generally is in the region of the market inflation in terms of what you've seen on volume and value shares. But you'll see there in the last 3 months, some competitors being particularly aggressive at price. So if you look at the volume share gain relative to the value share gain, you can see that, that comes out in terms of price. So we aren't going to be over-reactive in that environment. And it's been quite important for us that we are cautious in our response. But it is quite clear that for volume growth in this economy, you are going to have to look for share gains. And share gains, the major tool that's in play at the moment in the market, is around pricing. So it makes the environment quite challenging, particularly when you look at our trading results. So with the performance that we've had, that has been without an ability to fully recover the raw material, an ingredient portion of our cost push. You'll see our naked margins have actually come under a bit of pressure. Unfortunately, we've had really good performances at the back end of our business, which has helped us maintain the gross margins at the previous levels, notwithstanding the high levels of inflation that we've seen. If you look at the performance from our brands, I'm not going to go through them all, you can see that in the grain space, there's a little bit more pressure. Grains and condiments, I would really call out. But overall, if you look at the greens and the grays there, we would say that we've got to a reasonable position of stability but with some work to do in certain of the brands and in certain of the categories. Looking back, if we go -- because of the March distortion again, if we looked at our performance this March from a total market perspective just for the month, isolating last year's March and going all the way back to 2019, we've been showing around about a 0.6% share gain against 2 years ago. So I think a point of relative stability has been reached over the period of time, although as I've stressed, February and March, we really saw a lot of aggression in terms of price performance. And obviously, it's a major battle for volume out there. So the story for me of the 6 months is really that we're gaining sort of some momentum in a really challenging environment, where we've had a lot of price-led promotional activity. And I guess the other challenge that we've had in this environment is with the currency as strong as it's been, it's really put our Deciduous Fruit under pressure. So whereas we would have been hoping to have managed that business close to a breakeven, at these exchange rates, it looks like it's going to make another significant loss in the year. Across the balance of the portfolio, we're quite pleased with the recovery in Other Grains, the Groceries, the Snacks & Treats, Baby, Exports, and even Chococam, where they had a challenge with the imposition of an excise duty last year. You could say, and it would be true that, certainly in Other Grains, it's off a particularly low base. We've managed to fix the issues that were plaguing us in terms of our market strategy around Rice, probably give ourselves a 60% score there. On Pasta, I'd probably give ourselves an 80% score in terms of having achieved exactly what we plan to do, taking that business out of a loss-making position into a profit-making position. And our International business, whilst we're happy that it is an improved performance outside of Deciduous Fruit, it's not at the level that we'd like to see. And we can see that, particularly in Mozambique, which is a big market for our Davita business, our performance hasn't been quite where it should be. And we have had the benefit of being able to export into Nigeria in this period. And that benefit probably offset by the cost of the strike that we had at Davita, which saw us essentially not make any sales in that business in the month of March. So as I said earlier, tale of 2 quarters, really good volume and reasonable levels of recovery in the first quarter. As the sort of almost I hate to say it, post COVID, because we're facing up to a third wave, but after certainly the first and second wave impact and all of the government interventions financially started to wear out, what we did talk about in November, December around potentially demand coming crashing down, unfortunately, that does seem to be a phenomenon in the marketplace. And so it's been really important for us to deliver against what we've committed in terms of our savings and our efficiencies. So our operational efficiencies in our factories, our productivity is up over 6% on where it was a year ago, if you look across Tiger, with some pretty spectacular gains in efficiencies in some of our individual plants, where the combination of the business teams and some people that we've hired into a center of excellence at the center have really moved the needle. We haven't really felt the full impact of that because there is a little bit of a lag impact. Once you get the machinery working well, then there's a whole lot that needs to follow behind that in terms of how you schedule work, how you manage overtime, et cetera. So we still believe we've got some road to go. And we have one or two plants, where we're still not at the level that we would like to be. We're really happy with the finance team and how they've managed the working capital. We invested heavily in this period in preparing for the third wave in terms of our stock, both raw materials and finished goods. And knowing that we would have that pressure, we really asked the team to pull out all the stops in terms of collecting cash at year-end. And our latest performance was particularly pleasing. And particularly pleasing, again just to be very clear, there was no window-dressing around that balance sheet. And no quid pro quos, you pay us early, we'll pay you or you can pay us later, in that number. It's a genuine result of really good management. And I think what we have managed to do, the preemptive steps that we put in place, particularly the process where we tested everybody, including ourselves here at a head office environment. When people came back from leave post shutdown, post leave, we made sure that we carried out rigorous testing before people went on to site. And as a consequence of that, we detected about 4 -- between 4% and 5% of the test. So about 400, 450 people, we were able to identify has been COVID-positive but completely asymptomatic. And we think that, that process, in particular, together with all of our disciplines, meant that the second wave impact on our business in terms of disruption to supply and in terms of shutdowns, which we had to have in the previous 6 months, we really had very little disruption. So that also helped us in a challenging period. Where there's still work to do and important work in the context of a market where, if you want to grow without innovation, you're actually going to be doing it in a costly fashion because it is going to be ultimately a price-led share growth, is we have been quite successful in eliminating a lot of sort of insignificant innovation projects that were taking a lot of time and resource and weren't moving the needle. Where we still have work to do, however, is having tidied up that pipeline, we still -- I can't sit with you today and say we've got enough meaningful significant innovation opportunities that we can take to market over the next sort of 6 to 12 months. So that's a piece of work that is getting a lot of focus. The private label opportunities have been slower than I anticipated. I think, one, because of our perspective that we aren't going to do very short-term business in that space. And two, again, to be totally frank, it's almost counterculture. So you find, as you push some opportunities through to individual teams, their first response is kind of, "Leave it with us, we're going to fill this capacity with our own brand." There's a, if you like, almost an unwillingness to confront some of the market realities. And that's a cultural issue that again we're making progress on. And I expect to see, when I talk to you in November, that we've overcome some of those issues. In our export markets, we haven't been helped by the COVID environment. But we can't hide behind that. If we're going to be successful, it isn't just about doing what I think we've done over the last sort of couple of years, which is put in place a reasonable set of distributors in our markets. But the management of those distributors is not something that you can do by e-mail or by Teams meeting. And so getting people actually working for Tiger brands, measuring, monitoring and feeding back to the teams here is quite important. So it's taken longer to find the right people. But we have found, for both the Mozambique and the Nigerian markets, people that we're going to have on the ground in that market. And I think that will set us up really well, particularly for good performance in the next year. You all have seen in the SENS announcement that the Deciduous Fruit transaction, we haven't as yet completed one. And we're highlighting that we probably still have quite a road to go. But we are in negotiations around the Deciduous Fruit. The level of losses anticipated this year with the rand sitting where it is obviously adds even more intensity to those discussions. But clearly, with those results, doesn't make it easier to put together a deal that works. But I guess, we have been successful in managing the exit of Enterprise, where the losses were even more significant. So we believe that certainly there is an opportunity for us to conclude a transaction here, albeit with a long road to go. I think the big thing for us at Tiger now is we really, I think, and I'm touching wood as I say it, I think we've managed to stop shooting ourselves in the foot. I think we are getting very good, sustained momentum in terms of the internal issues that we had in terms of our efficiencies, in terms of the cost savings programs, which Deepa will talk to you about. What we really need now is -- I've used that analogy before, now we can kind of stop looking under the hood, close the hood, get into the driving seat and start looking out through the windscreen. That sounds very easy. But for an organization that's been a bit battered and bruised, it's quite a shift to get people to start embracing growth rather than firefighting, to start to get people to actually talk about consumers, talk about customers, talk about new markets, talk about opportunities. And even when they talk about those opportunities, it's been even harder. And it's one of the reasons that we're struggling a little bit to spend the kind of CapEx that we anticipated. Because we have to create a culture where it's okay to fail, where people are prepared take some calculated risks and to be courageous in terms of not just talking about the opportunities, but when it comes to committing money, CapEx, marketing investment behind it, that people are actually prepared to sign their names and say, "I'm going to make this happen." And I guess, as a CEO, as a leader, it is one of the hardest challenges to overcome because of the intangible nature of it. So the things that we've got done so far, to be quite frank, not quite as easy as doing with the blindfold on. But they're very obvious and they're almost mechanistic. As long as you prioritize and you've got the right people behind it, you know you're going to be successful. The next phase of what we have to do to bring the organization back to where we wanted to is really about creating an environment where people aren't afraid to fail and where we are prepared to try things. And it's very clear, if you look at the business we get, we've got the way in which the brand positions and the brand shares have been largely stabilized and the people that have joined us, the people that we've retained and we've got a lot of the raw material for us to do that. So with that, I'm going to hand over to Deepa to take you through what you really came to hear about, which is the numbers, I'm sure.

Thank you very much, Noel. Good morning, everybody. So before we get into the numbers, I'd like to take the opportunity to provide an update on the momentum achieved to date as well as highlight some of the areas that require further effort and as Noel was indicating to some of them earlier. So just in terms of the highlights, while naked margin remains under pressure, with the group not being able to necessarily fully recover the cost push pressures that were seen both on raw material and packaging, we were largely able to offset many of the cost push pressures through cost-saving initiatives as well as supply chain efficiencies, which resulted in us being able to maintain gross margins at 30.6%. Our continuous improvement in cost management projects are on track. And we're pretty confident that we'll be able to achieve the target for the year. As Noel indicated earlier, our working capital remains well managed with debtors in particular being well controlled at the half year. The IT rollout and automation journey is gaining traction with significant focus now being placed on embedding and enhancing the IT operating model. In terms of areas where we need to focus and particularly place some effort going forward, as Noel indicated, despite the concerted effort, the CapEx disbursements at ZAR 381 million remains behind the expectation at half year. While we certainly will place increased focus in terms of trying to close the gap, we do believe that the year-end will end behind the original planned spend. The significant inflation pass-through due to the soft commodity cost push places great pressure on our naked margin and resulting in naked margin compression as well as resulting in some volume pressure. So if we then move on to the next slide and getting to the actual results. So you'll note from the slide that the group delivered an improved performance for the 6 month ended 31 March 2021. This was largely supported by strong revenue growth in the first quarter as Noel indicated. The revenue growth was underpinned by price inflation of 9% and marginally offset by volume decline of 1%. Meaningful volume growth was seen both in the Exports as well as the International businesses. However, this was offset by volume declines in the Domestic business overall. As noted on the previous slide, while naked margins remained under pressure, a steady improvement in the manufacturing efficiencies resulted in overall gross margin for the group remaining flat at the 30.6% mark. We're pleased to advise that the cost-saving and efficiency initiatives gained traction across all the segments, in turn leading to operating leverage. The effective tax rate before abnormal items and income from associates reduced from 30.6% to an amount of 30%. In terms of the income from associates, you'll note that we've seen an increase by 12%. And this was largely driven by the increased volume performance in Carozzi as well as the improved volume and price and product mix coming through from our UAC earnings. Despite increased volume and rigid control in the National Foods business, the business was affected by the hyperinflationary environment which we've seen in Zimbabwe. Moving on to the earnings per share. You'll note that we've seen an increase by 21% to an amount of ZAR 7.41. This was up from the ZAR 6.13 in the prior year. Headline earnings per share from continuing operations increased by 21% to ZAR 7.41, up from ZAR 6.13 in 2019. The relatively higher rate of increase in EPS compared to the equivalent increases in HEPS is primarily driven by the significant impairments that we had to recognize in the prior year amounting to ZAR 557 million. An ordinary interim dividend of ZAR 3.20 per share has been declared and is in line with the group's dividend policy of 1.75 cover based on HEPS. I remind you that no interim dividend was declared in the prior year relating to the uncertainty, given the COVID environment at the time. If we move on to the next slide, what we'll note here is the abnormal profit of ZAR 43 million is attributable to the profit on sale of various non-core brands in our Personal Care division. Net financing costs were well controlled for the period, benefiting from the lower interest rates as well as lower average debt net for the -- net debt for the year, due primarily as a result of the improved debtors collection as I indicated previously. We did see a ForEx loss of ZAR 56 million in comparison to the prior year gain of ZAR 84 million. This loss is primarily due to the significant strengthening of the rand against all major currencies, which have impacted our foreign monetary assets. Income from investments of ZAR 13 million relate to dividends received from our investments in Spar and Oceana through the BEE entities. Discontinued operations include the sale of -- a profit on sale of Deli Foods property, the profit on sale of the Enterprise trademark as well as the release of the Deli FCTR balance into the income statement, which is in line with IAS 21. Moving on to the next slide. As indicated previously, our cost-saving initiatives are backed and tracked and monitored with clear levels of accountability. And these have certainly seen the benefit come through in operating leverage. The business continues to focus on identifying a sustainable pipeline of cost-saving and value creation opportunities while embedding a cost-saving culture across the broader organization. Moving on to the performance at a category level. If we start with Grains, so you'll note Grains revenue increased by 10% to an amount of ZAR 7.5 billion, reflecting an average price inflation of 14%, offset by the volume decline of 4%. Our ability to pass through some of the input cost inflation as well as the cost savings across the segments resulted in operating income increasing by 16% to ZAR 619 million. These results were underpinned by improved performances in Jungle, Rice and Pasta, which had particularly challenging results in the comparative period. I'd like to also just take a note to -- take a moment to just identify the fact that we -- in order to bring the external reporting -- the segmental reporting in line with management reporting, the Baby category results have been disclosed now under Consumer Brands segment. You'll recall that these were previously reflected under Home, Personal Care and Baby in the previous reporting periods. The change has no financial impact on the group. But the prior year results have been restated to reflect the change in the numbers that you see in front of you. Within the Consumer Brands, muted top line performances in Groceries and Beverages were bolstered by increased demand in Snacks & Treats as well as Baby. Out of Home continued to feel the effects of post-lockdown demand dynamics. Overall, revenue in the segment increased by 4%, comprising of price inflation at 6%, offset by volume reduction of 2%. The price increases and significantly improved factory performances were the primary reasons for the operating income increasing by 19% to an amount of ZAR 640 million. In terms of the Home and Personal Care division, overall revenue increased by 6% to an amount of ZAR 1.1 billion. And this was largely due to the sustained performance that we noted in the Home Care category. As Noel mentioned, Exports and International, total revenue for that category increased by 19% to an amount of ZAR 1.8 billion. This was largely driven by improved performances from our exports of powdered soft drinks as well as seasoning and a solid performance from our business in Cameroon. Operating income increased by 58% to ZAR 85 million, albeit after accounting for an operating loss in the Deciduous Fruit business. Moving into each of the categories into a bit more detail, starting with the Grains business. What you'll note is that milling and bakery -- baking increased revenue by 6%. And this was influenced by 12% price inflation as well as an overall volume decline of 6%. The operating income declined by 4% to an amount of ZAR 477 million. The wheat-to-bread value chain was characterized by exceptionally aggressive price-led promotional activity in the second quarter, especially in the formal retail channels, as well as the decline in overall bread consumption and penetration. Maize was adversely impacted by the inability to fully recover underlying raw material inflation as well as an unfavorable product mix. Despite the pleasing recovery in the sorghum-based beverages, the breakfast offering performed poorly, impacted by lower volumes and aggressive category pricing. Other Grains recorded significant recovery, driven primarily by the Rice and Pasta divisions while Jungle achieved a pleasing performance as well. The overall Other Grains segment increased revenue by 21% to an amount of ZAR 2.4 billion. Revenue growth in Rice was underpinned by price inflation as well as strong volume growth in the first quarter. This, together with an improved product mix, resulted in a margin recovery relative to the comparative year. Jungle's performance was premised on continued growth of its core oats offering, while -- which benefited from increased in-home consumption. The higher volumes and lower conversion costs contributed to the overall improvement as well. Although revenue growth in Pasta was modest, a marked improvement in factory performance as well as a significant reduction in material usage variances resulted in the positive operating leverage that we noted in that particular category. If we move to the next slide, looking at Groceries. You'll note that the grocery sales were negatively impacted by competitive trading environment as well as poor seasonal demand. With that being said, however, we noted volume growth ending ahead of market with market share growth in beans, peanut butter, jam as well as spreads. Price inflation for the category was at 6%. And this was partly offset by 4% reduction in volumes. As Noel indicated in his opening remarks, the sunflower oil market saw unprecedented cost increases, which added to the overall cost push pressures that we've noted. Despite this, however, the improved performance in the factories as well as delivering on cost-saving initiatives ahead of the target for the year-to-date contributed towards the improved profitability that we saw in the particular category with operating income increasing by 31% to an amount of ZAR 222 million. The category saw the launch also of KOO pilchards in quarter 2, which has been well received by both the trade as well as consumers. While the launch was being supported by strong in-store and market activation, the momentum has been temporarily interrupted as a result of the global fish shortage that we've noted. Moving on to the Snacks & Treats category. This category increased revenue by an amount of 10% to ZAR 1.2 billion and was largely driven by a recovery in the demand. It translated to a 3% increase in volume, which was particularly as a result of improved mix with higher chocolate volumes coming through. The category also realized price inflation amounting to 7% for the particular area. Operating income increased by 32% to ZAR 136 million as a result of optimum -- of optimal promotional activity as well as improved factory efficiencies, which has benefited from increased volumes. This, however, was partially offset by the impact of COVID-related absenteeisms that we saw in the beginning of quarter 2, resulting in some lost production. Also, just in line with our strategic objective of responding to consumer in enhancing our value proposition, we're pleased to advise that we will optimize pack-sized architecture in the Beacon eggs category. And this was able to achieve affordable price points overall. Moving on to the Beverages category. You'll note Beverages revenue ended flat on the prior year in an amount of ZAR 948 million while operating income increased by 5% to ZAR 175 million. And this was mainly driven by efficiencies coming through in distribution. The back-to-school occasion and Easter festivities contributed towards the overall performance with increased consumption across the core brands as well as packs. Market share gains were driven by momentum in liquid concentrates, which benefited from both the core offerings as well as innovation in that particular area. Quality and supply chain challenges negatively impacted sales on ready-to-drink lines in H1. Looking at the Baby category. We saw volumes across the Baby segment recover well, driven predominantly by strong performances in cereals, pouches as well as the medicinals. However, this was partially offset by jars' performance as well as toiletries, which were particularly hard hit by a lowered -- poor service level agreement -- poor service levels in the area. Revenue increased by 14% to an amount of ZAR 544 million. And this was driven equally by both pricing as well as volume growth during the period. Operating income increased by 21% to ZAR 56 million, benefiting from favorable product mix as well as tight cost control. Purity Junior saw the launch of 3 SKUs in quarter 2. And this also has been well received by both consumers and the trade. Moving on to Home and Personal Care. With Home Care, in particular, revenue increased by 8%, driven by 3% price inflation as well as 5% increase in volume. The strong volume performance was driven by a good start to the pest season as well as an increased demand in hygiene solutions, which were driven by Jeyes. The factory saw improved operating efficiencies as well as in all other categories as a result of increased volumes, in turn delivering year-on-year growth of 15% to -- in the operating income line. Moving to Personal Care. Performance was impacted by low opening stock as well as poor service levels in H1. Consequently, revenue of ZAR 271 million remained flat on the prior year with 2% increase coming through in volume, offset by lower average price realizations in the period. The revenue performance was further impacted by weak consumer demand in the particular area, which was offset in part by successful Ingram's campaign that we had launched. Increased costs and factory under recoveries resulted in an operating loss for this particular area of ZAR 9 million for the period. Moving on to Exports and International. As we indicated previously, Export business grew by 27%, largely as a result of a strong double-digit growth coming through in terms of our resumption of trade in Nigeria as well as 12% price inflation. Operating income of ZAR 51 million reflects a significant year-on-year improvement despite the regrettable industrial action that we noted in our Davita factory, which impacted a portion of the second quarter. This matter was resolved in the month of April. Lower demand as well as customer credit challenges do pose a risk to Export performance in the short term. In terms of our Chococam performance, the revenue increased by 14% to ZAR 532 million. However, in terms of local currency, the revenue actually increased by 3%. So you'll note the revenue certainly saw the benefit come through in terms of favorable exchange rate movements, improved distribution to neighboring countries as well as successful trade and customer activations in the chocolate spread segment as noted in Noel's opening remarks. Operating income increased by 20% in rand terms. And apart from the exchange rate benefit, the improvement in operating income was further assisted by 5% increase in volumes. In addition, I'd just remind you of the excise duty impact that we experienced in the prior year, which affected the gross sales by an amount of ZAR 14 million in the prior year. In terms of our Deciduous Fruit business, that business was negatively impacted by soft post-COVID-19 demand in Asia, our inability to take price increases as well as the ongoing restrictions experienced at the Cape Town harbor. The business recorded a revenue of ZAR 586 million for the period as well as an operating loss of ZAR 52 million in the particular space. Moving on to just some focus in terms of the balance sheet. As Noel indicated, despite tough trading conditions and barring some deliberate decisions, the business delivered a strong working capital performance. While we saw inventory balances increase, this was as a direct consequence as a decision taken to build stock in anticipation of supply chain disruptions from a potential third wave of COVID-19. Creditors days were then impacted in turn as a result of high amounts of imports coming through as well as the timing of certain purchases. As previously indicated, creditors remains a focus area for us. And we are starting to see some good traction come through in this regard. And debtors collection remained well controlled as noted. So in conclusion, I'd like to just take a moment to cover some of the key deliverables that I spoke to at our last results presentation. You'll recall, we called out five particular areas in terms of focus being: cost management; improvement in working capital; looking at more flexible alternative solutions when it comes to ForEx exposures and commodity hedging; continuous improvement and portfolio review in terms of category fit; as well as improved CapEx approvals and execution processes. So you'll see -- you'll note in the slide in front of you, we're tracking well in terms of the first two being systematic cost management as well as improved working capital as we've already spoken to. However, some effort and work still needs to go through in the last three areas. We are, however, pleased to advise that we are starting a pilot in one of the categories in terms of more flexible ForEx hedging as well as commodity hedging. And that has received approval from the Audit Committee Chairman to proceed. Also, work is in progress in order to look at more flexible opportunities in some of the other categories as well. In terms of the category fit, Noel has already given us an update in terms of the LAF disposal evaluation process in terms of alternative options. And we'll also spend some time with our ongoing review in terms of the UAC investment. Accelerated submission of delayed business cases coming through in terms of CapEx will also be another focus area. And also, I'd like to just call out, as indicated, we do anticipate an underspend in terms of the CapEx for the year. An early indication at this point in time amounts to about ZAR 1 billion spend expected compared to the ZAR 1.5 billion that we called at the beginning of the year. So on that note, I'd like to hand over to Noel to do the closing.

Thank you, Deepa. So in closing, first of all, probably one unscripted comment before we get to the final slide that I'll talk to you is really just to say that we are very aware as a management team that these results, while cosmetically they look quite strong, that there is a base effect. But I think it's quite important that if you go back and you look back 2 years that the shortfall that we've got relative to the performance a couple of years ago, there are really a couple of big drivers behind that shortfall. So you really got sort of a significant decline in the bakery contribution to operating profits and the Exports business, most of which comes out of Deciduous Fruit. So again, trying to see through last year's base to the previous year, what makes us feel quite confident going forward is that the businesses in a very tough consumer environment have actually weathered that environment reasonably well across the vast bulk of our portfolio. So it's really Exports, bakeries and, to a lesser extent, I could call out the Snacks & Treats business that relative to 2019 are pulling us down. This last slide that I'm presenting, I changed the heading of this slide last night after quite an engaging and intense Board meeting. One of my NEDs reminded me more than 5 times in the meeting that, "The honeymoon is over, boy." So I thought in that director's honor, I would change the heading. Because we're very conscious that the honeymoon is over. For us as a management team, it's actually been a tough, but it's actually been a fun year. We really enjoyed the last year and starting to see sort of some of the fruits of our labors. However, we're really, really conscious of the fact that it has been, to an extent, a honeymoon period. And COVID, in some ways, may have covered up for a multitude of sins. So we're quite clear about what we've got to do going forward. There are still, despite the work that Deepa has spoken, about around costs and efficiencies. There are still several of our categories where we have yet to fully come to grips with what happens between the premium that we command on the shelf and the operating profit that we generate when we benchmark ourselves, to the extent that we're able to do that, against publicly available information of competitors. So there's still an intense piece of work in progress around sort of examining every line of the income statement in some of our categories. We really would like to conclude the Deciduous Fruit transaction, not just for the benefit of our shareholders, but I think this is a business that's been under certainly a psychological cosh for a number of years. And for our suppliers and our employees, it hasn't been the easiest environment to work in. They've done a phenomenal job in a really challenging environment, particularly with COVID, in this business. But we would like to bring certainty for everybody to the future of this business. I've outlined the market share decline challenges that we're dealing with, so the market decline challenges, the volume pressure in the total market. And so it's quite clear that unless you want to see your margin slide backwards because volume growth, unless you innovate is going to come from pricing. Unless you want to see your results go backward, we really have to refocus and over-index on innovation to reduce that dependency on the price lever. And in our core business, to avoid automatically swinging straight to the pricing lever, we also have to work harder on ensuring that our consumers have a reinforced message as to why our product is so much better than our competitors. And clearly, in terms of the precision with which we communicate and the channels we use, we have to accelerate getting up to speed with the digital environment. I think, as I said earlier, that we can look forward to good growth in F '22 out of our rest of Africa portfolio in the Exports business because we will certainly have that foundation very well laid and set by the end of the year, notwithstanding the current challenges that we see with the economic environment, particularly in Mozambique. Today, we are announcing that we are effectively launching a VC fund. We are, it's fair to say, Johnny-come-latelies to this space. But we are going to catch up fast. And we believe that sort of this will give us access to some potential -- early access to some potential growth opportunities. And we've worked quite hard with some of our nonexecutives who have experience in this space. And we believe that it is something that we're not necessarily going to see the benefit of it in the next year or 2, but it's something that's essential for us to do. We have to find those high-growth, high-potential businesses, get involved with them, but get involved in a way where the massive Tiger doesn't end up smothering the initiative and entrepreneurial zeal of those businesses. And then to do all of the things we need to do in pursuing the growth agenda, it's really that work that we have to do around making sure that we bring people into the organization and that we encourage those who are here to have courage. And that's quite a challenge because ultimately the only time we'll really convince people that it's okay to fail is when somebody does actually put themselves out there and fail. And people can see that they haven't been punished or penalized on failing as a consequence of that. And that courageousness will refer to organic and inorganic growth. And hopefully, we can start to use our balance sheet in terms of the capital expenditure that Deepa has spoken about but in a cautious, careful and considered fashion to drive growth going forward. I just want to reemphasize that you aren't going to see us spend that balance sheet like drunken sailors going forward. Thank you very much.

Thank you, Noel. Thank you, Deepa. We will now move to questions and answers. Are there any questions on the call?

At the moment, we have no questions from the conference call.

Okay. There are quite a few questions that have come through on the chat. So I'll try and group these as best as I can. So we'll start with Vik Sharma from RMB Morgan Stanley. Dear Vik, you've written a bit of an essay here, so just bear with me. Thanks for the opportunity to ask questions. One, the results are testament to cost-cutting initiatives and efficiency gains at TBS. The volume growth still remains a challenge. What are the steps management is taking to shape the top line growth to be volume-positive? And when can we expect to see any evidence of that? I think Noel did cover it in his concluding slide that obviously you can't save yourself into prosperity. Although that will be a key focus area for Tiger Brands going forward, we do need to drive that top line. Noel, I don't know if you want to give a little bit more color.

No. I think the market data that I've shared shows that we have actually gained share in a declining market. So we have been outperforming the market, albeit marginally. And that is a change in momentum for Tiger. The more recent numbers, which we've been very transparent about, is really just the fact that we've seen incredibly aggressive price-led competition. And we're going to be careful not to overreact to that or to underreact to that. With our brands, I can get as much volume as we decide to put into the factories. I'll just destroy margin and potentially category profitability in perpetuity. So it is something that we have to be cautious on. But I would just highlight the fact that we have managed to grow share in particularly challenging markets. And our biggest volume pressures have really come out of the Grains business and out of some of the lower-margin businesses in Grains. So we're working hard on innovation. We're working very hard on being more innovative in how we capture more volume. But there is a macroeconomic environment that if I stood here and said, "We're suddenly going to have a growth spurt," I would just be being unrealistic.

Okay. Thanks, Noel. Milling and baking business has seen lowest operating margin in a while. What is the problem in wheat-to-bread value chain? Does the problem still remain discounting from competitors? How is the competition behaving now in the wake of cost pressures? Are there any price increases being taken?

So yes, so the milling and baking story is also very much a story of the 2 quarters, so -- and even the whole second half of last year. So in the last 6 months, there seem to be -- the 6 months of the last calendar year, there seemed to be quite a bit of stability. So we had a sense that maybe we've reached the bottom. Certainly, from January on, maybe compounded by the impact of the lockdown and the delayed return to school, we've just seen incredibly aggressive pricing. We've lost a significant amount of share in the top-end trade as a result of that. And what we continue to see in that space is that, even where we respond to that, we see competitors who just go straight back to the retailers and undercut further. So our brand can carry comfortably a ZAR 1 a loaf premium, which is quite significant relative to our competitors. And in the category, our brand premium is -- we've held that up quite well over the last 4 years. We took a price increase in the first quarter of last year. The first quarter held onto the price increase and the volume well for the first quarter. And we just saw the competitors -- competitive set become incredibly, incredibly price-aggressive. And so at the moment, it does seem like it's a race towards the bottom in that category. And certainly, we're not seeing any signs of heavy discounting, particularly in the top end, bottoming out anytime soon. It looks as if one specific competitor has decided that the easiest way to get volume and share is through a simple transaction with the top-end retail segment rather than the hard work that it is growing share in the bottom end of the market. And so we're happy with our performance. We're happy with most of our internal metrics in that business. But we do need to watch that price premium carefully. And we do have a -- we are a 30%-plus share, but that doesn't allow us to ignore what's happening in the market. So it is disappointing. And it's the biggest single drag on our earnings relative to where we were 2 years ago as I indicated, very, very challenging space at the moment.

Okay. Vik had one more question on operating income, but there's a related question around bread. Good results. Why do you think bread consumption was down, especially when rice and maize prices have been so high?

So I mean, there's a couple of things. I think it's still all about the relativities and how many rands people have in their pockets. But also, the back-to-school, there's a significant drop-off in bread volume because of the sandwich occasion. So the schools going back later was definitely an impact. But I think it's just relative choice. And we can see -- we can also see that there's an element of down-trading into B brand breads. So if you look at the flour consumption relative to the packaged bread market, where you're reading the top 4 bread manufacturers, there's a slight disconnect there. So there's home baking and then there's obviously supplied to the smaller, more independent bakeries. So there's definitely a consumer buy-down, change in consumer attitude and the back-to-school. I think it's a combination of all of those.

Is it structural? Or do you expect a recovery in those patterns?

Okay. I think until you see recovery in consumer well-being, it's going to continue, unless you get another range of massive price spikes in the alternatives in terms of that level of volume demand. It's definitely the lowest that it's been for many, many, many years.

Okay. And just on Grains again, you mentioned your ability to pass through some input cost inflation. Can you please quantify how much you were able to pass through? Was it 75%, 85%? And is this level sustainable, given the high commodity prices over the short, medium term? We may see some relief from commodity prices, but we can elaborate on that.

Yes. I think that's -- the latter point is true. I think the big shock increases, if you like, have been absorbed by the market. I think if you look at the trend -- and here, one has to take the currency out of the equation because the significant weakening of the currency will change the dynamics. But if you look at maize and wheat pricing in particular and the even sort of global rice pricing, I think there may be some relief coming. In fact, I think you're going to see a swing in the inflation dynamics within our portfolio with significantly lower inflation in Grains going forward and particularly as a result of what we're seeing with oil prices, we're starting to see heavy packaging cost increases and some of the commodities that we buy in the balance of the Consumer Brands business. If you look at sunflower oil following the palm oil trend, we're going to see some more pressure on inflation there. If we look at the amount of price increases that we've been able to pass through or the level of price increase, you're seeing naked margin compression of anything up to 2% in some of the Grains categories relative to the prior year.

Thanks. Now Anthony Geard, Investec. Such refreshing frankness, thanks, and well done. Regarding H2 operating income guidance versus FY '19 base, what is the precise benchmark piece for FY '19?

Well, the benchmark would be the same categories for the same period of time in terms of our operating income. Last year wasn't great. But if you -- those of you who followed us for a while will recall that the second half of the previous year was also not a spectacular performance. And that's why we think that we can deliver growth on both periods.

Irina Schulenburg from Foord Asset Management. Well done on good cost control. OpEx costs adjusted for volumes look like they grew around 4% year-on-year. How do you see H2 versus H1, given recent currency strength? Can you talk about the VC fund? Where did the idea originate? How much capital is going into it? Where are the opportunities targeted, both geographic and/or category?

Okay. I'll take that. So on the VC fund, you had something that certainly we picked up as a global trend in our environmental scans as part of our strategic planning process. You've also seen one of our competitors has a similar concept. So that's really where it's come from. It's been reinforced as a good idea to do by some of our more recent Board members, who have seen it work very successfully in companies that they've worked for. Geographically, it will be predominantly focused on South Africa but not exclusively so. And we're really going to look specifically in the areas in which we operate or in sort of technology that is linked to the areas in where we operate. The initial allocation is not significant. It's less than ZAR 100 million that we're going to sort of commit to this. The real challenge for us is it's less about the money. I don't think finance is an absolute constraint at this stage. It's really having the capability to identify the right opportunities. And in that respect, we will have a dedicated resource. It's not going to be somebody's part-time job. It is something where we're going to invest in that. Sorry, Nikki, the first part of the question?

How do you see H2 versus...

Costs. Look, I think, overall for Tiger, going forward to July, we should be able to maintain the same rate of increase. Post July, a lot of our wage settlements kick in on the 1st of July. I think that we had a high level of engagement and understanding in talking with our union partners and engagement from a top-to-top level, good quality engagement at site level. And so we were able to settle wages at levels between sort of 2.5% and 4%, with one exception, Davita, where we ended up, unfortunately, having to face down industrial action. I think the wage negotiating season that's upon us now is going to be a lot more challenging than it was last year. So I would call that out as a specific area of challenge, potential challenge for us and disruption. And then I think it really -- what will determine where we go is what happens with the currency. I think the currency has cushioned us to a large extent over the last few months from some of the underlying commodity cost increases. And if the currency starts to slip again, then I think you will see inflation increase. And Deepa might want to add to that now.

Okay. Thanks, Noel. We'll move to some finance questions, Deepa. Could you highlight what costs should fall out of the base in H2 this year versus H2 last year from COVID?

Thank you, Nikki. So I think what's important to note is that last year's COVID cost was not necessarily only just PPP -- PPE-related, et cetera. What we did incur is significant amount of factory shutdowns as a result of lockdown, trading restrictions, et cetera. So we will certainly see the benefit, obviously barring further lockdown restrictions coming through from the third wave of COVID. We continue to budget or forecast accordingly for protective gear, potential staff transportation, et cetera, proactive management, antigen testing, et cetera. So we have continued to forecast for that into H2. But provided that we don't have any shutdown of factories, et cetera, and lost production, that would be a significant variance year-on-year.

Okay. Are you considering a special dividend to fix the lazy balance sheet to at least a higher payout ratio? Well, what we've always said is that we would like to keep some powder dry in terms of opportunities that might be presented to us. We have in the past paid a special dividend on the disposal of assets. But we wouldn't want to create an expectation that, that will continue going forward. Obviously, if we don't -- if we are not able to build a pipeline of growth, we will look to return cash to shareholders. Deepa, I don't know if you want to talk more around the dividend policy.

Sure. Yes. So we have a dividend policy of 1.75 cover. We did call out last year, when we declared a special dividend in relation to the disposal, that we certainly don't want to set a precedent. It's too early to call and in fact not actually allowed for us to make that decision now. We would have to look at our year-end results and then make a proposal to the Board for approval. With that being said, like I said, we will continue to apply the dividend policy and then also look at the balance sheet, going-concern liquidity, et cetera, at that point in time. And also, Nikki, as usual, it's certainly subject to us looking at CapEx-required investments or other investments that would warrant us investing cash elsewhere other than in a special dividend.

Okay. On the CapEx investments, a question from Nick Webster at HSBC. On the CapEx investments and reticence to commit that you mentioned, could you help us understand how those decisions are being taken? Are they not being driven at the ExCo level, where you personally have identified areas you would like to expand in? Or is it all decentralized to divisional managers that are not confident enough to exploit potential opportunities?

So I'll take a stab at that and then we'll ask, maybe Noel would like to weigh in. But ultimately, it is a combination of the two. What we're finding is we are driving at an ExCo level in terms of encouraging business cases to be submitted on a timely basis. We are seeing some delays coming through in business cases as a result of, I think Noel spoke about it, in terms of leadership taking some time in terms of being able to commit to numbers to be included in those business cases in terms of what we would calculate return on said investments. With that being said, also there are a few large CapEx investments that are still work in progress. And once we start seeing those come through, for example, in the bakery areas, once we start seeing those come through, you'll see an escalation in the spend. The one thing I do want to just call out is I mentioned disbursements of ZAR 381 million at H1. What's important to note, what's already been contracted though is approximately ZAR 570 million. So there is that spend you can expect to see or those disbursements you can certainly expect to see come through in H2 with the drive of accelerating and trying to close the gap on business cases that have been delayed. But -- so a mixture of the two, certainly pressure coming through from myself, from Noel, the supply chain officer, et cetera, to category leaders to be able to put those numbers together, put some commitment and skin in the game in terms of committing what those returns are going to look like as well as the category leaders driving and backing themselves, like Noel says, not being afraid to fail on calculated estimates, et cetera. So Noel, I don't know if there's anything you'd like to add.

No, I think it's a very valid question that you've asked, Nick. And it is a combination of both. But it would be quite irresponsible of us if we either don't have a management team, and those are the people who really understand the market who have confidence. So if we respect sort of their judgment and they don't have confidence, it would be irresponsible to force our opinions on the shareholders effectively. Or in some cases, it may well be that we look at the management team and we're saying, "We need to find the right people to drive growth in a category where we believe there's growth." But to invest without having all of that in place or having a plan to have that in place wouldn't be responsible. So your comments are very fair. It is a combination of both.

Okay. What are the big changes underway from an IT perspective? This is from Jiten Bechoo at Avior. And what benefits will these bring?

Okay. I'll take that. Thanks for that question, Jiten. So as we indicated at the end of last financial year, we have identified a significant amount of CapEx allocation for the IT space, focusing on digitization, automation, et cetera. We've got the split actually twofold. So one is addressing our infrastructure from an IT perspective. We're putting in a significant investment in terms of the upgrade of our Oracle system end-to-end solution but also a significant amount of CapEx going -- IT CapEx-related going into business projects, automation at plant level, et cetera. We spoke about the need to accelerate the spend. Tiger historically has lagged in the space, resulting in quite a technical debt that we find ourselves. But we're quite keen to ensure that we close the gap between the IT/OT space and make sure all the investment that we're putting into the business will certainly drive efficiencies, et cetera, going through at a plant level. Also, we've invested money in terms of IT security, addressing risks like cybersecurity, et cetera. And you'll see some spend come through in that area with the team working out a strategic process going forward to ensure that we do protect the IT space, the OT space within Tiger Brands. This will also allow -- investment in the space will actually allow, particularly as we continue to invest in our plants with more later versions of plant, kits, et cetera. The IT-OT security will also allow for remote working, remote remediation, troubleshooting, et cetera. So a lot of the investment that's going through will certainly see good return coming back through in efficiencies, et cetera, coming through at plant level at -- with the automation journey.

Okay. Having now -- Shaun Bruyns has got two questions from Mazi Asset Management. Having now had a look at all divisions, are there any further exits anticipated, for example, maize?

So Shaun, nothing in the short term. Maize is a category that isn't a great fit, but extracting maize from an integrated site in an integrated business is quite a challenge. We've had a few conversations around it. It isn't an easy transaction to conclude, given how embedded it is in the whole milling infrastructure. So that's certainly one of our underperforming assets in the portfolio. A value-destructive exit is quite difficult to construct.

And then his second question is around baking capacity. There were a few questions around this. Are we back into a scenario where too much baking capacity has come on stream in the past 5 to 10 years? And would you expect mothballing or closures? And how much capacity do you think is being utilized?

So the latest estimates that we've got, and it is an estimate, would be that capacity utilization for the industry now is sitting at around about 66% and our capacity utilization is in the high 70s. So it does talk to the rate at which the competitors have invested in capacity expansion over the last couple of years. So I think we are in an environment where mothballing would become an option. I know there are certain of the capacity -- new capacity that's coming on stream is being -- is coming on stream with the rationalization of some of the smaller bakeries of some of our competitors. So the new capacity may not necessarily add to the industry overcapacity. And to follow on from that, one of the reasons that we're certainly underspending is that we had certain pretty concrete plans in respect of adding capacity ourselves. It would clearly going to take another careful look at that as we see how things pan out with the current capacity utilization in the industry.

Thank you, Noel. Just two more questions and then we'll wrap it up. Your Slide #5 shows a worrisome deterioration in sector level volumes in the last 3 months. Has this continued into the early part of H2? How does this shape your thinking about H2 volumes?

So it has continued into April, not at the same level as March, more in line with probably the 6-month sort of moving average. And it really shapes our focus on finding alternative ways to get volume growth. Without kind of going down the rabbit hole of price decreases, the need for us to use our balance sheet effectively to find opportunities to create value through either investing in adjacencies or making some acquisitions. That obviously takes some time and the focus on reinforcing with our consumers, why we're worth what they pay for, for the products that we sell. We really do anticipate that the market volume crunch is not going to lift anytime soon.

Okay. The operating income guidance for H2 is clear. Are you confident on cost savings intensifying? And is it safe to say that margins on a year-on-year basis should also improve, H2 over H2 '20 over H2 '19?

Thanks for that question, Nikki. So I'll take the question on costs. Like I said, we're pretty confident in terms of achieving the target that we called out at the back end of last year. Our target for cost saving, both from a continuous improvement point of view as well as just proper diligence from indirect spend, amounts to about ZAR 500 million in terms of savings. Based on the performance that we're seeing come through in factory performance efficiencies as well as just the launch of overall cost-saving culture within the organization, we're pretty confident to achieve that number for the year. Like I said earlier on, the key now though is to develop a sustainable pipeline going forward into FY '22 and beyond and to keep the ideas flowing. We're confident that we'll see the improvement in terms of a year-on-year perspective. In terms of the margin question, I think that's quite a difficult one because I think it's going to be dependent on whether or not we continue to see further cost push pressures coming through in both raw material and packaging and then our ability to be able to pass that through in terms of selling price increases. With that being said, we think the market will be quite tough. So we'll end up absorbing if there is cost coming through -- further cost outside of our forecast. But we're certainly relying -- as we have in H1, we're relying for a continued improvement to come through in factory performances and efficiencies, cost savings to benefit and thereby trying to protect and at least try and retain flat margins overall. So it is going to be dependent on the market. Noel, I don't know if there's anything you'd like to add.

Okay. There are quite a few questions around the VC fund. A media release is being planned. But in summary, it will be launched in June of 2021. And it aims to give food and beverage startups the much needed capital that they require and also accelerate Tiger Brands' involvement in emerging and in existing consumer trends, such as health and nutrition, plant-based foods, convenience and snacking. So as I said, there will be a media release, and I'm happy to field any questions around that going forward. I think that brings us to the end of the presentation. Thank you for your participation. We will be in touch in terms of management access post the results. Investor Relations will be participating in the Avior summit in the early part of June as well as the JSE SA Tomorrow Conference for a day at each, so we will be available to take questions. Thank you again for your time. And again, Investor Relations is available if I've missed any of your questions. But I think we did a pretty good job of addressing everything. Thank you, and goodbye.

Thank you all.