“Turnover from continuing operations rose by 13% to R16,5 billion with operating income increasing by 16% to R2,7 billion.”
Financial results
In accordance with the Listing Requirements of the JSE Limited, Tiger Brands Limited has adopted International Financial Reporting Standards (IFRS) with effect from 1 October 2005. The date of first transition to IFRS is 1 October 2004 and, consequently, comparative information for the year ended 30 September 2005, which was originally reported in accordance with South African Statements of Generally Accepted Accounting Practice (SA GAAP), has been restated in accordance with IFRS and IFRIC interpretations.
The group’s transitional elections in terms of IFRS 1 (First-time adoption of International Financial Reporting Standards) are set out in note 1 to the notes to the annual financial statements. The disclosures required by IFRS 1, showing the effects of the changes in accounting policies from SA GAAP to IFRS, which are not material, are presented under the heading “Reconciliation of SA GAAP to IFRS” in note 3 to the notes to the annual financial statements.
Headline earnings for the year ended 30 September 2006 of R1 883,3 million reflected an increase of 16% compared to the previous year. At the headline earnings per share level, this translates to an increase of 22% as a result of a net reduction of 5% in the weighted average number of shares in issue.
During the year under review, a total number of 1 387 355 shares were issued pursuant to options being exercised in terms of the Tiger Brands (1985) Share Option Scheme. This increase in share capital was more than offset by the impact of the Staff Empowerment transaction which was implemented during October 2005. In terms of this transaction, the Black Managers Trust and Thusani Empowerment Investment Holdings (Pty) Ltd are consolidated as special purpose entities in terms of SIC12. As such, the shares in the company acquired by these two entities (5 896 183 shares in aggregate) are accounted for as treasury shares, thereby leading to a reduction in the weighted average number of shares in issue for the purpose of calculating headline earnings per share and basic earnings per share.
Apart from the empowerment shares referred to above, the total number of treasury shares held by Tiger Food Brands Limited (a wholly-owned subsidiary of the company) remained unchanged at 8 589 328 shares, with no further shares being repurchased during the year. The treasury shares and empowerment shares, together, account for 8,5% of the company’s total issued share capital.
Earnings per share showed an increase of 56%, significantly higher than the rate of improvement in headline earnings per share. The disparity between the growth in “headline earnings per share” and “earnings per share” is due to the inclusion, in attributable earnings, of net abnormal profits of R466 million in 2006 compared to a net abnormal charge of R107 million in the previous year. The large majority of these abnormal amounts, being items of a non-trading nature, have been excluded for the purposes of determining headline earnings per share. The abnormal profits in 2006 arose mainly from the disposal of the company’s interests in the Spanish fishing company Pescanova, the Indian edible oils company Agro-Tech Foods, as well as the recent sale of its 50% interest in the international malt joint venture
C & T Malt. These divestments are in line with the Company’s strategic objective of, where appropriate, owning the majority of the shares in and exercising management control over its businesses, and focusing on branded fast-moving consumer goods and healthcare products.
Turnover from continuing operations rose by 13% to R16,5 billion with operating income increasing by 16% to R2,7 billion. Excluding acquisitions, turnover and operating income grew by 9% and 13% respectively. Apart from the impact of acquisitions, turnover benefited from 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. The improvement in the operating margin to 16,1% (2005: 15,7%) was largely due to organic volume growth and increased operating efficiencies.
Net financing costs for the year decreased by R48 million to R83 million, reflecting the impact of the group’s strong cash generating capabilities. Notwithstanding the high level of investment activity during the year, net borrowing levels were, on average, lower than the previous year.
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 from both periods, the contribution from associates reflected a decline from R64 million to R47 million. This was primarily due to a poor performance from C & T Malt which incurred a loss for the year compared to a trading profit in 2005. The company’s 50% stake in C & T Malt was disposed of in September 2006.
Cash flow performance
Cash operating profit increased by 14% from R2,7 billion to R3,0 billion. However, cash available from operations of R1,8 billion was more or less unchanged from the previous year as a result of higher working capital and tax outflows. The higher working capital investment is largely due to the increased levels of working capital in the deciduous fruit business following the merger with Ashton Canning.
After allowing for dividends and investing activities, there was a net cash outflow, before financing activities, of R0,4 billion compared to a net cash inflow of R1,9 billion in the previous year. This was primarily due to a net cash outflow from investing activities of R1,3 billion in 2006 versus a net cash inflow from investing activities of R0,8 billion in 2005. Whilst the group generated positive cash flows of R0,6 billion from its international disposals, acquisitions and capital expenditure accounted for R1,4 billion and R0,5 billion respectively.
The group closed the year with net borrowings of R934 million compared to being in a net surplus cash position of R173 million as at 30 September 2005.
Changes to comparative figures
In accordance with Circular 09/06 issued by SAICA in May 2006, turnover has been restated net of settlement discounts allowed and cost of sales net of settlement discounts received.
Turnover and certain expenses have been restated for the Consumer Healthcare, Pharmaceuticals and Hospital Products businesses to ensure consistent and appropriate treatment across the group in respect of certain marketing and distribution allowances. In addition, the results of the Export division have been restated to exclude foreign currency translation profits and losses which are now included under the heading Other in the segmental contribution statement.
The above changes have had no effect on the company’s reported earnings in 2005. The changes, however, resulted in a decrease in turnover and expenses of R312 million in 2005.
The above changes to comparative figures are in addition to the various restatements necessitated by the group’s conversion to IFRS with effect from 1 October 2005.
Key financial ratios
The key ratios for the group are outlined below:
2006
2005
2004*
Profitability and asset management
Operating margin (%) – continuing operations
16,1
15,7
13,9
Net asset turn (times)
4,0
4,6
4,0
Return on average net assets (13-month average) (%)
65
72
55
Working capital per R1 turnover (cents)
11,1
11,9
11,3
Financing and liquidity
Net debt/(cash) to equity (%)
20
(5)
30
Net interest cover (times)
22,2
13,7
8,9
Current ratio (:1)
1,5
1,4
1,3
Total liabilities to total shareholders’ funds (%)
106
144
164
Cash flow to net liabilities (%)
41
51
50
* Pro forma excluding Spar
The decline in the return on average net assets (RONA) in 2006 is reflective of the lower net asset turn, partly offset by the further improvement in the operating margin. The reduced net asset turn can largely be ascribed to the significant investments made during the year on acquisitions (R1,4 billion) and the high levels of capital expenditure (R488 million).
Notwithstanding the fact that the group moved from being in a net surplus cash position to a net borrowing position at the end of 2006, there was a further improvement in the interest cover ratio to 22,2 times. This reflects the group’s strong cash generating capability.
The decline in the ratio of “cash flow to net liabilities” was primarily due to the increased level of funding required as a result of the group’s significant investment activities during the year, the inclusion of Bromor’s results for only two months (i.e. from 1 August 2006, being the effective date of acquisition) and cash available from operations reflecting a more or less unchanged position compared to the previous year (see comments under Cash Flow Performance).
The debt maturity profile of long-term borrowings requires repayment of R177,8 million in 2007 (refer note 34.5 to the annual financial statements). This will be funded out of existing cash resources.
Inflation
Details of the group’s performance after adjusting for the cumulative effects of inflation are outlined in Effects of Changing Prices. The effect of inflation is constantly monitored and built into future plans in order to meet the group’s long-term objective of creating shareholder wealth in real terms.