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| Chief Executive’s Review |
| Highlights |
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Reinvestment in core brands to support organic growth |
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Approval of numerous major facility upgrades |
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Pharmaceuticals to launch first suite of ARVs in near future |
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| “The review period has been characterised by acquisitive and organic growth, and by divestments, as the company focused on its core businesses.” |
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| Strategic insight |
To place the strategic direction that Tiger Brands has taken over recent years in context, it is appropriate to present a brief overview of the company’s ‘vision’ and how it has evolved.
“Vision 2004” was developed and implemented in 2000, and the first four years of the new millennium had as its objectives, the unlocking of shareholder value, specifically the unbundling of Astral Foods in October 2000 and The Spar Group in October 2004; a share buyback programme with 5,1% of Tiger shares having been repurchased, and the dividend cover being reduced to two times from a level close to three times cover.
Results during this period were driven by innovation as well as acquisitions and disposals in line with the redefined core, being a focus around branded fast-moving consumer goods and pharmaceuticals.
The year 2005 ushered in a new vision – ‘Vision Beyond 2010’. In 2005, the company had an excellent year with strong volume growth and a focus on Continuous Improvement. The South African economic environment was strongly favourable and played an important role in assisting in the growth achieved.
The current review period has been characterised by acquisitive and organic growth, and by divestments, as the company focused on its core businesses. In line with the strategic objective of Tiger Brands to hold, where appropriate, a controlling interest in operations, during the past 12 months we disposed of our interests in Pescanova, Agro-Tech Foods and the barley malting joint venture known as C & T Malt. |
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| Overview of results |
Tiger Brands achieved a pleasing increase of 22% in headline earnings per share for the financial year ended 30 September 2006. This follows increases of 22% and 34% in 2004 and 2005 respectively, after adjusting for Spar which was unbundled in October 2004.
Turnover growth for the full year of 13% was significantly higher than the 9% recorded at the half-year. The higher growth reflects the inclusion of the enlarged deciduous fruit business (Langeberg and Ashton Foods), as well as the turnover of newly acquired ClassiClean and Bromor Foods – the latter for the two months from 1 August 2006. The improved turnover growth also resulted from the price increases implemented in the second half of the year in response to significant cost pressures arising from higher fuel prices, increasing international pricing for commodities, and the depreciation of the rand.
Operating income for the year grew by 16%, translating to an operating margin of 16,1% (2005: 15,7%). The reported rate of growth in operating income is adversely affected by the inclusion, in 2006, of a net charge of R52 million which is reflected under the heading of “Other” in the segmental analysis. This compares with “Other” income of R14 million recorded in the previous year. Adjusting for this, operating income for the year rose by 19%.
The adverse change under “Other” of R66 million relates primarily to a non recurring gain in 2005, and the first time inclusion in 2006 of the IFRS 2 share-based payment expenses associated with the company’s BEE Staff Empowerment transaction concluded in September 2005.
The 16% increase in operating income was driven by strong performances in Milling and Baking, Groceries, Snacks & Treats, DairyBelle and Consumer Healthcare. The subdued performances of both Pharmaceuticals and Hospital Products reflected the impact of regulatory and competitive pressures, as well as the depreciation of the rand. Rice, Value Added Meat Products and Fishing all achieved lower levels of profitability compared to the previous year. Whilst Fishing recorded reduced profits, the results in the second six months reflected a 28% increase in operating income compared to the same period in the previous year. Exports (excluding fishing) showed an improved performance, reflecting the benefits of a weaker rand in the latter part of the year.
Net financing costs for the year decreased by R48 million to R83 million, reflecting the impact of lower average debt levels. Whilst the company generated positive cash flows of R550 million from its divestment activities, the significant cash outflows associated with the company’s Staff Empowerment transaction (R724 million), acquisitions (R1 369 million) and capital expansion and replacement projects (R488 million), saw a net debt level of R934 million at the close of the year compared with the net surplus cash position of R173 million as at 30 September 2005.
Income from associates declined from R72 million in 2005 to R4 million in the year under review. On a normalised basis, excluding items of a non-trading nature in both 2005 and 2006, the contribution from associates showed a decline from R64 million to R47 million. C & T Malt, which was disposed of in September 2006, incurred a loss for the period (after excluding items of a capital nature). This reflected the continued difficult trading conditions being experienced by malting companies worldwide. Empresas Carozzi achieved a modest increase in profits in Chilean peso terms. However, the rand translated results were favourably impacted by the stronger Chilean peso. |
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| Operational performance |
| Considering that the company has performed consistently well over the past four years, another very commendable performance was achieved by the company in 2006. The results should be considered, however, against a favourable economic background for the FMCG side of the business, but a very challenging healthcare environment. |
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| Branded Consumer Goods |
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| Domestic Food |
The Grains division performed very well, despite raw material prices for maize doubling in 2006, and upward pressure on oats and sorghum prices.
The launch of an ‘Instant Ace Maize’ breakfast porridge was very well received by the market, and the successful conversion of the Pietermaritzburg facility to a dedicated wheat mill has improved flour quality and wheat milling capacity.
The Bakeries business benefited from the focus on innovation in the premium end of the bread market, with Albany retaining its number 1 brand position in the branded bread market. The consumer reaction to innovation in the Rice business was very encouraging in an environment of rising international raw material prices.
The Sorghum business continues to show profitable volume growth, particularly through the ‘Morvite’ ready-to-eat (RTE) cereal, and this is expected to continue into the next financial year. Expansion of capacity will be completed early in 2007 and will allow for further growth and innovation. Together with the success achieved with Morvite RTE cereal and Jungle Energy Crunch, Tiger Brands has now secured a significant share of the RTE breakfast cereals market.
The facilities upgrade project of the Jungle plant is well on track for completion in 2007, and an innovation-based strategy will continue to facilitate strong top-line growth in this business. Jungle Oats has performed well to retain market leadership of the hot breakfast cereals market.
The Groceries business has delivered sustained three-year compound growth in sales and profit of 5% and 23% respectively. There were noteworthy performances from Black Cat peanut butter which produced double-digit growth and achieved a record market share. KOO remains the market leader in canned vegetables, fruit and baked beans, with KOO baked beans continuing to increase volumes exponentially. Strong growth in the Tomato Sauce and Canned Vegetable segments contributed to the good results. All Gold Tomato Sauce has successfully retained its market leadership position despite threats from lower priced competitors, both local and international. The pasta manufacturing facility is being replaced in the near future, and the negative volume impact on pasta during the past financial year is anticipated to be corrected in the final quarter of calendar 2007.
For the third consecutive year, there were no prices increases within the Snacks & Treats division. The Sugar Confectionery market continues to be impacted by high levels of imported products, which are estimated to hold a market share of 39%. Imported volumes declined by 8% compared to the previous year. This business performed well over the previous year with results being driven by increased volumes in both the Chocolate and Sweets categories. In the chocolate slabs market, Beacon has shown strong market growth to achieve the number 2 position in the sector. Sugar lines and boxed assortments have also delivered market share growth. With the acquisition of the Nestlé Sugar Confectionery business effective from 1 October 2006, the outlook for Snacks & Treats is favourable, and ongoing cost containment and innovation are expected to continue driving good results.
The Bromor Beverages business was acquired effective 1 August 2006. The acquisition provides the company with a leading position in the non-carbonated Soft Drink category with leading brands such as Oros, Energade, Hall’s, Monis, Roses and Cedar. The company is looking forward to the challenge of the acquisition being bedded down in 2007 and making the anticipated return on the investment.
The Perishables business produced satisfactory results with Enterprise maintaining its market leadership in the Chilled Processed Meats category. Good volume performance in DairyBelle was derived from organic growth and high levels of innovation in the higher-margin value-added sections of the Dairy category.
The Out-of-Home Solutions business, which focuses on the food service and Convenient Meals markets, produced pleasing results. In line with Tiger’s long-term strategy, this market offers a high growth opportunity for the company. Hot Favourites, a Chilled and Frozen Pre-prepared Meal Solutions business was acquired in December 2005 and has shown exceptional growth. |
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| Consumer Healthcare |
All the categories within the Consumer Healthcare business have shown good growth, with noteworthy performances from the Homecare and Babycare categories. The entry of Purity into the Infant Formula market has been well received by consumers. Purity cereals reached its highest market share, with Purity Cream of Maize listed as the number 1 infant cereal in South Africa.
The acquisition of the ClassiClean business was finalised in February 2006 and heralded the company’s entry into a New Product category for the company. The operation has been successfully integrated and Bio-Classic, the flagship brand, has been relaunched with complementary products such as “fabric conditioners” and “prewash” applications.
In the Homecare category, Doom and Airoma have shown good growth over recent months. The introduction of several new products in the Personal Care division has reinforced the group’s reputation for innovation. |
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| Pharmaceuticals |
Adcock Ingram Pharmaceuticals has had a challenging year, impacted by the inability of the company to take price increases in scheduled medicines as a result of ‘single exit pricing’, which was introduced in June 2004. Market share and sales have been affected by low stock levels resulting from capacity constraints at the factories. Although turnover has suffered in this deflationary environment, a focus on Continuous Improvement and cost reduction has produced strong volume growth.
The acquisition and successful integration of the Organon business has positioned Adcock Ingram strongly in the central nervous system and feminine health categories. Raising product awareness has led to increasing market share in the number of prescriptions written by doctors. Adco-Simvastatin is currently generating almost the same number of prescriptions in South Africa as the leading patented cholesterol-lowering brand.
The “Over-the-Counter” business continues to perform well due to its strong portfolio of brands such as Corenza C, Syndol, Alcophyllex, Adco-Dol and Citro Soda. Panado was ranked the top OTC brand in its category in the Sunday Times/ Markinor 2006 brand awareness awards.
The antiretroviral product pipeline is a business highlight within the MCC-accredited research unit, the first of its kind in Africa. The unit is on track to complete the development of all selected first-line antiretroviral generics. These dossiers have been submitted to the MCC and registration is imminent. Adcock Ingram aims to be a key participant in the next South African tender for antiretrovirals in the latter part of 2007, benefiting the organisation in 2008.
The Public sector tender business has shown good growth, with sales volumes increasing by some 30%. |
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| Hospital Products |
The Adcock Ingram business achieved good revenue growth with The Scientific Group, its new empowered subsidiary (owned 74%) which specialises in the supply of laboratory and medical equipment and consumables, having performed extremely well.
The Renal business continued its strong organic growth and maintained market share in an increasingly competitive environment. Good growth was recorded in the Nebulising Solutions category.
To improve the safety of collected donor blood, blood-collection packs have been redesigned and all SANBS blood banks have converted to the new packs.
Product innovation, cost containment and expansion into new sectors through acquisition, will help the Hospital Products business to maintain revenue growth in competitive market conditions. |
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| Fishing |
Operational performance in the Fishing division was satisfactory. Long-term quota allocations have been confirmed bringing more certainty to the industry and facilitating longer-term strategic decision-making. Sea Harvest is well positioned for growth after undergoing a careful review of its operations. The focus will be on improving efficiencies and delivering acceptable profits within the reality of short-term resource problems.
An empowerment transaction concluded in September 2006 has significantly improved Oceana’s black ownership status by transferring 22,4% of the issued share capital of the company to black shareholders. This translates into a 10% shareholding to Brimstone Investments and 12,4% to the Oceana Group Black Employee Share Trust. Tiger’s shareholding is now 44%. |
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| Exports and International |
| With the local currency weakening significantly in the second half of the year, operating income from the export operations reflects an improvement year on year of R27 million after recording a decline of R7 million in the first six months. The successful merger of Tiger’s deciduous fruit interests with those of Ashton Canning, to form Langeberg and Ashton Foods, is a key factor behind this improved business performance. Other exports mainly to the rest of Africa remain a challenge, largely due to logistics issues and the absence of the critical mass and distribution capabilities necessary to build brand equity. The company remains focused on Zambia and Mozambique in the short term. |
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| ‘Beyond 2010’ * |
‘Adding Value to Life’ is our corporate purpose and integral to what we do. We are part of every South African’s every day life. Our brands and services are found at all levels within our society, and it is impossible to imagine any consumer going for any length of time without using at least one of our products.
The Tiger Brands vision extends “Beyond 2010” and is stated as being ‘to be the world’s most admired branded consumer packaged goods and healthcare company in emerging markets’. We are a South African company with South Africa as our base, from where we will expand into other African localities and explore selected international opportunities.
Transformation, Continuous Improvement and Growth are our focal areas aligned to our strategy of achieving profitable top-line growth through local leadership and selective globalisation. |
| * See corporate social responsibility for more information. |
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| Transformation |
The effective date of the company’s black economic empowerment staff ownership transaction was 17 October 2005, whereby 4% of the issued shares were made available to our employees.
The first allocation of shares to black managers was in November 2005, with further allocations to new employees in January and July 2006. The total allocations to the black managers represent approximately 52% of the shares originally acquired by the Black Managers Trust. The intention is to allocate the remaining 48% of the shares over the next three years.
The Thusani Trust has recently finished the criteria and approval process relating to the submission of applications to the Trust. Trustees have formally been appointed to serve on both the Black Managers Trust as well as the Thusani Trust. These boards are fully representative in terms of the demographic profile of the trustees. The funds available to black staff members through the Thusani Trust are expected to be allocated primarily within the context of tertiary education. |
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| BEE Equity Ownership |
| Good progress has been made on implementing phase 2 of the BEE equity ownership plans. Tiger is currently reviewing possible partners through a detailed selection process. The criteria used to assess possible partners have been identified as being ‘broad based’, having a large African component, being able to contribute and add value to the business, as well as having significant female representation. |
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| Human Resources |
As Tiger Brands continues to grow both organically and through acquisition, there are many opportunities for employees to move across categories, functions and industries within the company.
We believe that through our people strategy – based on our core values of Respect, an Action Orientation, Teamwork and Imagination – we will successfully develop our employees by fostering and reinforcing a people-centric high performance culture.
We have 15 unions operating at our various sites where we respect the rights of our employees to participate in organised labour structures. There is a well-established workplace improvement process which underpins our Continuous Improvement strategy and this facilitates communicating strategy, standards and values to the broad spectrum of staff members. This workplace improvement process is implemented in two steps – an initial ‘culture creation’ exercise, followed by the adoption of the 20 Keys methodology. Some 70% of our sites have completed the culture creation process, with 67% of our sites implementing 20 Keys. As the vast majority of our employees are now shareholders, the Tiger Brands share price is tracked at a number of sites to entrench an ownership mindset.
The Tiger Brands Academy, our in-house learning institution, currently has six academies – a manufacturing academy, marketing academy, information systems academy, financial academy, customer academy and leadership academy. A further three will be added in the near future. Each academy has a menu of training programmes that reflects the core competencies of that particular function. This training is aligned to the employee’s personal development plans.
During 2006, a comprehensive wellness programme was piloted. We also rolled out further HIV/Aids awareness sessions and opportunities for voluntary counselling and testing at over 50% of our sites, with the remainder to be completed by the end of 2006. |
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| Continuous Improvement |
Continuous Improvement is about achieving efficiency gains to improve overall business performance.
Tiger has a Continuous Improvement team, comprising the managing executives from various Tiger businesses and selected group functional heads. The committee meets regularly and communicates Continuous Improvement suggestions to the various businesses; identifies possible synergies and projects; drives process coordination and facilitates cross-fertilisation of ideas across the businesses.
Typically, the main thrusts for Continuous Improvement in Tiger have been: |
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Procurement: using our scale to buy cheaper |
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Re-structuring: avoiding unnecessary resources and duplication of resources |
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Value analysis: looking for cost reductions in packaging and raw materials, but still delivering to the consumer’s functional expectations |
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Process engineering: looking for efficiencies in our manufacturing processes |
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Logistics and planning opportunities |
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Continuous Improvement has at its core the need to generate funds in the total value chain to fund and fuel our Growth initiatives.
The Continuous Improvement team is constantly seeking ways in which to encourage our people to think outside their usual constraints, and not only reach our internal business stretch targets, but also seek to achieve personal stretch goals. We believe the art of possibility should be what ultimately motivates Continuous Improvement, and motivates us to consider that there really is no end to what we can do to improve, whether personally or corporately. |
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| Growth |
To achieve profitable top-line Growth we need to maintain our position as number 1 or number 2 in each product category in which we operate. Our Growth will come via acquisitions, new products and new processes, entering new and/or adjacent categories, exports and organic Growth.
We continue to invest in our brands and have made good progress in building a culture of innovation across the broad spectrum of our businesses. In the Snacks & Treats business, innovative products contributed 37% of sales. |
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| 2006 Highlights |
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The merger, in November 2005, of the deciduous fruit canning businesses of the company and of Ashton Canning to form Langeberg and Ashton Foods (Pty) Limited. The merged entity has performed as expected, with its results being bolstered by the effect of the depreciation of the rand, as the vast majority of its production is exported. Tiger has a 66 2 / 3 % shareholding in the merged company. |
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The acquisition, effective 1 October 2005, of a 74% interest in The Scientific Group (Pty) Ltd. This company is involved in bio-technology, imaging, hospital equipment and medical diagnostics. The other shareholder is Brimstone Investment Corporation, a Black-owned listed company. We are pleased to have an important empowerment partner such as Brimstone as a fellow-shareholder who can add value to the success of this acquisition. |
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The Out-of-Home business, which focuses on the catering sector and ready-to-eat meal solutions, acquired the Cape-based Hot Favourites business in the first quarter of the 2006 financial year. This acquisition is in line with the strategy for the Out-of-Home business which operates in a sector that offers significant growth opportunities. The Hot Favourites business has exceeded expectations since being acquired, confirming that the strategy is well-founded. |
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Consistent with the need to extend the company’s consumer brand portfolio, the company acquired the business of ClassiClean with effect from 25 February 2006. This acquisition marked the entry of the company into a new sector, being the fabric care market. A re-branding exercise has recently taken place and the company is confident that the ClassiClean brands will be a solid contributor to profits in the years ahead. |
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The most significant corporate event during the year was the acquisition of the entire issued share capital of Bromor Foods (Pty) Limited with effect from 1 August 2006. This acquisition, at a cost of approximately, R1,16 billion, provides the company with access to the non-carbonated soft drink market through leading brands such as
Oros, Energade, Hall’s, Roses and Monis. This is a category in which Tiger Brands has had, up until now, little meaningful presence and consequently this acquisition now represents an important strategic category in our portfolio of brands. The challenge now is to ensure that the anticipated returns on this investment are achieved. |
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Another important addition to the company’s portfolio of brands was the acquisition of Nestlé’s sugar confectionery business in South Africa. This includes such well-known brands as Jelly Tots and Wilsons. The effective date of the acquisition is 1 October 2006. |
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The entire shareholding in Designer Group Holdings Ltd was acquired effective from 1 October 2006. Designer Group is involved in the manufacture, marketing and distribution of personal care products in South Africa and owns brands such as Protein Feed, Designer Notes, Perfect Touch and Skin Clinic. This makes us a significant participant in the hair care, body care and deodorants categories. |
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Sea Harvest has concluded an agreement to merge Sea Vuna (50% owned) with Vuna Fishing. In terms of the transaction, Sea Harvest will acquire a 50% interest in the merged company. This will increase Sea Harvest’s exposure to the East Coast hake fishery. The acquisition is subject to the approval of the Competition Authorities and a decision in this regard is expected towards the end of the current calendar year. |
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Over the past year we have concentrated on reinvesting in our core brands in order to support organic Growth. The Jungle, Ace, Albany, Maynards, Beacon and Morvite brands have all launched new products in the past year under the core brand names. |
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There have been significant capital expenditure approvals, with a number of major facility upgrades approved by the Tiger Brands board. The Sorghum business is implementing a significant upgrade of its plant to increase ‘Morvite’ capacity; the Germiston Enterprise factory is replacing its pork sausage unit, the Pasta manufacturing facility is being completely replaced and the Pretoria bakery is significantly extending its manufacturing capacity. |
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The Medical Control Council (MCC) is aiming to bring South African manufacturing standards in line with international trends, and to support this initiative, we will be undertaking a significant upgrade of our existing facilities. |
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The Pharmaceutical business is on track to launch its first suite of antiretroviral drugs in the near future. Adcock Ingram aims to be a key participant in the next South African tender for antiretrovirals in the fourth quarter of 2007. |
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Despite a global move towards consolidation and rationalisation of generic manufacturers worldwide, we continue to consider acquisitions, partnerships and offshore opportunities in the Generics Medicines category, as we believe this offers significant potential for growth, even for niche players. |
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| Management |
The Tiger Brands executive management committee has been restructured and strengthened with the addition of functional executives.
There is considerable depth in the broader management team, and ‘Team Tiger’ – the executive team together with the business executive teams – meets regularly in an information-sharing forum. These workshops assist in communicating the strategy and vision of the company to ensure that everyone is aligned and working towards a common goal. |
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| Appreciation |
Roy Smither retired as an executive director of the company with effect from 31 March 2006. I would like to thank Roy for the significant contribution he has made since joining the company in 1998.
Jan van den Berg retired from the Tiger Brands board on 1 June 2006. I have worked with Jan for many years and express my sincere thanks for his valued counsel and commitment.
Richard Dunne was appointed a non-executive director on 1 June 2006. I thank him for his contribution thus far and welcome him as part of the Tiger team.
Noel Doyle, Chief Financial Officer, was appointed as an executive director in June. My congratulations to Noel on his appointment and I appreciate his valued input and support.
Without the continued loyalty and efforts of each and every Tiger person, we would not be able to produce the consistently superior financial results that have distinguished our group over the past years.
Thank you. You all have a special role to play in the future. The journey ‘beyond 2010’ is still in its infancy; every good wish for the year ahead. |
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| Nick Dennis, Chief Executive |
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