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Edited Transcript of TBS.J earnings conference call or presentation 25-May-20 8:00am GMT

Half Year 2020 Tiger Brands Ltd Earnings Call

Sandton Jun 5, 2020 (Thomson StreetEvents) -- Edited Transcript of Tiger Brands Ltd earnings conference call or presentation Monday, May 25, 2020 at 8:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Nikki Catrakilis-Wagner

Tiger Brands Limited - IR Director

* Noel Patrick Doyle

Tiger Brands Limited - CEO & Executive Director

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Conference Call Participants

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* Myuran Rajaratnam

Metal Industries Benefit Funds Administrators - Analyst & Portfolio Manager

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Presentation

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Nikki Catrakilis-Wagner, Tiger Brands Limited - IR Director [1]

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Good morning, ladies and gentlemen, thank you for joining us for Tiger Brands' Unaudited Group Results for the 6 months ended 31 March 2020. As per usual, we will be taking you through the presentation. CEO Noel Doyle will present the results, the financial and operational results today as well as the outlook. So the agenda is pretty much the same as always.

And before we begin, I just want to draw your attention to the forward-looking statements. Once Noel has presented the results, we will then move into Q&A. Thank you.

With that, I will hand over to Noel.

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Noel Patrick Doyle, Tiger Brands Limited - CEO & Executive Director [2]

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Good morning, everybody. Thank you very much for your time this morning. We're presenting a set of numbers that broadly is within the range in terms of headline earnings per share as to what was guided from our trading statement. Two specific call-outs that were not envisaged at the time that, that trading statement was issued: first of all, the settlement agreement, in respect of brand rights with our former distributor in Nigeria; and secondly, a significant gain on foreign-denominated cash resources. The net effect of that was a negative -- just over a negative 1% on the earnings that we reported. But just important to call that out, and I'll come back to that settlement, in particular, a little bit later.

I think what we see when you look at the numbers, I suppose, the feature -- key feature is continued pressure on volume, and broadly speaking, a challenge to hold on to market share and recover cost push. It's quite clear that pre the COVID environment, the business was already challenged in terms of its ability to grow volume and sustain premiums.

And that will place a key focus for us going forward in getting to the correct price points that will allow us to grow at or above market share. To do that clearly requires some significant cost reengineering. So the result, in terms of our operating income, down 29%, it's incredibly disappointing result. And the HEPS, down 35%, as you've seen, but in line with guidance.

If we look at sort of the key features, and I'll talk about some of the specific category differentiations, but essentially, the problem revolves around pricing and pricing recoveries in a market, which is already quite challenging from a consumer perspective. Without the volume, you end up with under recoveries, and it can become a vicious circle in terms of the cost issues. What we've seen continue, and it was something that we would have anticipated, is the level of promotional intensity and the level of volume that's sold across the entire market on pricing platform, and deep-cut promotions continued at the same level as previous.

We had specific volume challenges in certain of our categories. Maize, where it's proving quite difficult for us to get above the breakeven point in maize as that market becomes increasingly commoditized. Sorghum and maize-based cereals materials, particularly from a sorghum perspective relative to other raw materials, it's become quite an expensive commodity, and that portfolio serves the bottom end of the market, so quite a challenge there. And on rice, I'll cover that in a little bit more detail.

Snacks and treats, again, before the impact of COVID, maybe a small impact for the last couple of weeks as consumer spend was diverted towards more essential foods. But we were seeing some challenges there, and that's linked to price competitiveness we saw, particularly in chocolate, aggressive responses to our price positioning, which put us under pressure in the period.

And exports, pretty good performance out of the Mozambican market, but offset by our inability to export for this period into the Nigerian market, and we'll cover that in more detail. By and large then, the issue is external, but an external issue that we have to address. And it's about hitting the right price points that allow us to get to the right level of volume, and that comes back to our cost positioning in the market. But there were a couple of internal issues where we could have sold more if we hadn't had those issues and those were really primarily the biggest impacts in pasta and the condiments ingredients. No attempt on our part to hide behind COVID-19 as a rationale for these set of results. As I say, we've come out where we guided.

We did see some progress in terms of our market shares in the month of February and March. Those gains in market shares, however, in March, in particular, were amplified by the weighting of the market towards essential foods and the weighting of Tiger towards essential foods. And so for the month of March, we certainly sold a lot of volume but at very low margins, particularly when you look at our rice and our wheat business. And I'll talk to the rice and wheat business, and the impact of pricing regulations on those as we go forward.

So the highlights, such as there are good performance in terms of the top line from VAMP, which drove the recoverability. I've covered them, and I'm not going to dwell on it. Our inability to get fair share of volume at the pricing that we sought based off our cost base. Impairments relating to the exports in international were not necessarily anticipated at the time of the initial trading statement. And really, those come from 2 factors: one, a significant increase in the WACC, against which the cash flows are discounted. But essentially, we've had to look particularly when we talk about our -- the Nigerian market and where the oil price is, the possibility of a devaluation or a significant inflation in that market, the potential impact of COVID-19. And on a combined basis, we've made an assessment that we can expect from our own experiences, if you go back to the last devaluation in Nigeria, we can expect quite a challenge and a step down in terms of performance, particularly if one looks at the history of UAC in that time period. So we've taken a view on that.

And as regards our Deciduous Fruit business. The Far East market has been significantly impacted by both COVID-19, but also by a change in the dynamic in terms of duties between the European Union and the U.S., which has made the Chinese market more attractive for Greek producers, and brought even more competition into a market that was already heavily traded in a category that globally is in decline.

IFRS 16 really had a pretty negligible impact. And most of what you see in terms of the balance sheet debt comes from our leasing arrangements in respect of Albany's vehicle fleet.

Cash generation, pretty good. We've had really good cash collections at March, and that continued into our April month end. We were -- to be totally transparent, we did get a benefit that flowed from the big run on stock, particularly rice, wheat and pasta towards the end of the year. That helped our stock position, and you can see that in the stock days, but that doesn't take away from what we believe was a fairly good level of working capital management.

On the interim dividend. Just to be as clear as I can, the view that was taken by the Board in passing up on the interim dividend was that whilst we are in a cash positive position, with significant facilities available to us, that globally, the world's in such a state of flux. And in South Africa, we still have yet to see the full impact as infection rates increase throughout the population. And the view that was taken is let's be prudent, let's review the position at year-end. And at year-end, all things being equal and based on where we sit today, we would make out that dividend in line with our dividend policy. So we would declare a final dividend based on our 1.75x cover for the full year's earnings.

I'll skip over this slide, which is just a set of facts. Nikki, if you don't mind moving us on. Within the income statement, just a couple of things to call out. Specifically, the impairments, I'll cover in a little bit more detail. The abnormal items is really the settlement of the dispute, a provision for the settlement of the dispute in Nigeria, offset by a capital gain on a warehouse that was surplus to our requirements. And in the net finance and investment income, you see, there's a significant benefit there that flows through from that ForEx revaluation on our foreign-denominated cash, which we've indicated previously.

The impairments. I think I've covered that in a fair amount of detail. It really is about looking at the long-term prospects of those 2 markets. And in Personal Care, we've just assessed some of the tail-end brands in the Personal Care business, and that is something which we intend to address in terms of cutting the tail and either selling or licensing those brands in the second half of the year.

I don't think there's anything further to highlight to you of this slide, except perhaps to say that there may be a sense that a new CEO comes into the position and he decides to clean house. Just want to give you the assurance that, that isn't the case. These are impairments that, having been considered by the Audit Committee and the Board, are valid given our view of the circumstances going forward.

If you look at the performance of our associates. I think in the environment in which we operate globally, not a bad performance, particularly out of Carozzi, but it has been impacted by the weakness of the Chilean peso against the rand. And also, it's worth calling out that the National Foods business, operating in probably the most challenging environment of any of our associates, has actually managed to hold its own relative to the prior year.

Volumes on the next slide really illustrates the challenges that the business face and needs to confront and address head on as we move forward. And that is the inability to get both volume and pricing growth in a consumer market that is likely to be even more stretched and strained as we go forward. And that volume loss, significant volume loss in exports is really the fact that we weren't able to trade in Nigeria for the first 6 months of the year.

The -- at the time of the trading update, we kind of highlighted where we had specific issues. Probably the issue that wasn't called out at that stage was in the Groceries business where we've had a pretty disappointing performance in terms of our February and March results, notwithstanding the sell-out that was taking place ahead of COVID. And our Snacks & Treats business really slowed down significantly in the month of March as people diverted spend, although we were already seeing challenges in the month of January and February in terms of our price positioning, particularly in the chocolate category.

CapEx, I've been asked quite a few questions around CapEx, and whether or not as part of the mitigation of the impact of COVID-19, whether or not Tiger is going to do a significant slashing of its CapEx projections. That isn't the case. We're obviously -- we're careful with what we spend. What we're actually seeing in terms of CapEx is delays in projects as a consequence of the shutdowns that took place in Europe where a lot of the equipment is sourced. We spent ZAR 500 million so far this year. We expect to spend close on another ZAR 500 million next year. And the guidance for 2021 is still in the region of ZAR 1.5 billion. And we called out how we've allocated or how we would allocate that spend in terms of the spend so far this year.

If I turn to the segmental issues. The Grains business, you've really got sort of 2 big stories within Grains. The first one specifically is within the wheat-to-bread value chain, where I really believe in terms of market share performance and brand strength, we don't have a significant weakness. This is really a category competitive dynamic issue. We haven't seen price increases of any significance in this market for the last 2.5 years. One of the impacts I'll call out later is the fact that there was a price increase which we were quite confident about it becoming effective and holding on to it at the end of March, which was superseded by regulations published by the DTI in the middle of March. So that business, we think, is performing quite well, is competitive from a cost perspective against all the benchmarking that we've been able to do, but is really operating in a category where the competitive dynamic does not allow for price increases. Yes, I think we've done reasonably well to more or less hold on to share in that area.

In rice, we struggle to get the right price points in rice, had a major volume hemorrhage in the first quarter as a result of being aggressive in terms of pricing. And then, we were probably a little bit too passive in pricing in the second quarter, which meant that we deferred a price increase that was required as a result of what was happening with the rand until the 1st of April, and again, that got caught in the net of the pricing regulations. What is quite clear though when it has come to rice is that there is still significant scope for us to go after reengineering the cost model, both in terms of our procurement and in terms of local versus international packing and in terms of where we have the rice delivered. Some of our competitors are on a different model, delivering to several ports directly, and then direct to customers. We still have a model where we're delivering into one point of packing and where virtually everything is packed locally.

Pasta, we had some serious problems at our pasta plant in Isando, particularly in January and February. Throughput is up significantly in that space, but still some issues. And we've got a major piece of CapEx planned for the next couple of months, which should give us consistent supply for the remainder of the year.

Jungle and sorghum cereals, there's been significant cost push. Not a great crop in SA, high volume of oats imported and sorghum -- and sorghum's pricing relative to maize is out of sync relative to that target market. So again, challenges in cost recovery for the consumers.

And you can see where we've attempted to move on pricing. You see an almost immediate response from the consumer in terms of them sort of choosing to switch out of our brands, and that's reflected in some of the market shares that you see. Rice, in particular, a really terrible first quarter. Much better shares for the second portion of the 6 months, but shares that we gained at an operating loss in that period.

In consumer foods, again, a challenging performance with some volume declines in our Grocery business, offset with some pricing. But overall, this is one of the businesses that requires the largest amount of effort and has received -- been receiving priority. And I'll talk to it a little bit later in terms of cost initiatives as we go forward. Despite that disappointing performance, you can see, certainly in the top end, the market shares have remained reasonably robust. But market share is, without rands, in terms of profitability, not really satisfactory.

Snacks, Treats and Beverages. Snacks & Treats, I think I've covered before. We found ourselves high-priced, particularly in chocolate, and we've seen the category come under pressure. It is discretionary spend. We need to reconfigure for the spend that is available. This is one of the categories where you're seeing a very different shopping pattern. So people are shopping a lot less, a lot less interaction in convenience stores. And therefore, you need to provide offerings here in multipacks or larger packs as opposed to the single packs. And we've moved a little bit too slowly in that respect.

Our Beverage business, the benefits of prior year and the strength of the brands flowing through there. Some investment ahead of the curve. In terms of marketing spend, we'll see some of that pull back in the second half of the year. But the Beverage business posted a solid growth in operating profit before marketing. And you can see that performance reflected in the market share stats.

VAMP, we've been very pleased within the categories or subcategories where we've decided to participate, with the level of top line growth. It remains an extremely competitive category. Our path to getting this business back to profitability impacted by nonparticipation in the deli segment, which we've discussed previously. As far as the transaction around VAMP is concerned, we took a view that, notwithstanding the fact that we are still involved and hopeful of concluding a deal on the exit of this business that would have the impact of preserving all of the jobs in the business, from an accounting perspective, in terms of the high level of probability required to classify this operation as a discontinued operation, we haven't crossed that hurdle yet. The negotiations have been intense and are still ongoing. And as I said, we're still hopeful that we may conclude a deal in the next couple of weeks on this business.

Our Home, Personal & Baby business. Home Care, we were able to take inflation in the market, managed to perform well in terms of our market share. So it's a very good performance. Personal Care remains an incredibly competitive space. As I said, our plans are to trim our category participation and to take some of our tail brands that may have value to other players and either license or sell those off in the second 6 months of the year.

Turning to Exports and International. I think I've covered the sort of impact of the disputes with our previous distributor. Our view, in respect of ownership of those brands, has not changed from that, that was communicated previously. However, once wrapped up in extensive litigation, the time lines were stretching out ahead of us in terms of following the processes in Nigeria, and we've just taken a pragmatic decision around reaching an early settlement of this issue. One, to preserve the long-term value of the brands; and two, to get us trading again. The settlements that we've made is less than 1 year's profitability out of this business. And we faced the possibility of being tied up in litigation for a number of years, and that explains the decision to make that settlement.

Our business in Cameroon continued to perform quite well. As those of you who know the market well will know that it's been a market with virtually no inflation over the last 4 to 5 years. The government has found itself under some serious fiscal constraints and from the 1st of January, introduced an excise tax very similar to the LGST of 5% on turnover. That essentially, in terms of a pass-through, would be a 5% increase in inflation into a market that's already challenged. That cost of ZAR 14 million was absorbed by the business in the first quarter, and we're starting to pass that through into the balance of the financial year. And we'll see what impact that has on volume, but it is likely to create some challenges for the Cameroon business, Chococam, going forward.

Deciduous Fruits. We've sort of covered a little bit in terms of the longer-term outlook around that business. But in the short term, we saw serious port blockages in the Far East, which was the first area hit by the COVID crisis. That meant that we had to divert some of our products that would have been earmarked for that market to the less profitable markets in the U.S. and in the U.K. So having posted such an extremely disappointing set of results, the questions that I would guess are going to be directed is, given what's likely to be an even more challenging environment going forward, what is the plan?

So I think, first of all, from a business perspective, our expectation is definitely that, for the next 18 months at least, we're going to see a significant deep economic downturn, probably the most severe recession that we've seen certainly in my lifetime. And that's going to be compounded by the impact on the economy and on our business of a weaker rand, in terms of imported products and import parity-driven pricing dynamics. Our core sort of market in the mid-LSMs is definitely going to be impacted by increased levels of unemployment with the impact that, that has on consumable income. And we're going to certainly see some changes in consumer behavior.

As we go forward and we release down into Level 1 and beyond in terms of the lockdowns, what we're going to see is the -- some of the benefits in inverted commerce that we've had in April and May of limited routes for consumer spend, essentially, consumers have had very little choice of where they spend the money, and therefore, the food sector has certainly gained from that. As markets open up, we're likely to see less funds, consumer funds dispersed across a broader range of categories, and that's definitely going to be a challenge. And it's going to place an absolute emphasis on value propositions, which will be a challenge for us as Tiger, and we hope that we -- not hope, we intend to respond to that appropriately.

There are some upsides to the environment that we find ourselves in. Certainly, the -- even in terms of the lockdown, but consumer behavior beyond the lockdown, I think the quantum of in-home consumption is likely to be higher, and that's generally good for our brands. We are expecting our first shipments into Nigeria in the month of June. And given where the rand is sitting currently, if it sustains itself, your local production is likely to be more competitive against international imports. And I do think that it will provide some opportunities, particularly for us in certain categories, to go after the efficiencies that might come from participating in the private label sector. And this is something that we are exploring with customers, not to do something opportunistically, but where it makes sense in terms of our category dynamics and our capacity and it makes sense for our customers that we can do something on a sustainable basis. We will be exploring that with our customers.

Risk factors other than the broader macro is that you get a serious second wave globally. And that puts some pressure in terms of export bans and pressure on port facilities in terms of import procurement. The National Disaster Pricing Regulation has had a major impact on us since it was introduced. And I'm going to cover that in a little bit more detail and the extent to which that is -- that period is extended will be a challenge for us going forward. And of course, our primary objective in continuing to operate is to look after sort of the men and women who kept our factories running and kept the shops full for the last 3 months. And that does not come without cost.

And I don't anticipate that for the remainder of the calendar year, we're going to be in a position to reduce any of those costs. We also will have the phenomenon. I think the President discussed it last night, that there is worse to come in terms of infection rates. I think with the best protocols in place, it's inevitable that we will see infections in some of our sites that will require closure and disruption to the supply chain. We worked hard to build stock, but there are certain categories where stock build hasn't been possible. And in those categories, any significant disruption is likely to have an impact on sales out and productivity.

The COVID-19-related costs are likely to be significant. I tried to give you a sense of these costs and to emphasize that these costs do not include the costs of any disruption in terms of the requirement to close facilities going forward. In the month of April, we were not producing in terms of the regulations in our Home Care factory and in our malt and beer part of business at King Foods, and the last contribution of that is set out clearly. In May, we received the go-ahead to produce and sell in our Home Care range, and therefore, that loss declined significantly.

On pricing. There will be the cynics amongst you who may say that ZAR 357 million is an opportunity cost. It's a price increase that perhaps you thought you'd implement that you might not get, given what you've seen in the previous 3 months, in terms of the challenge in reflecting in getting price. The vast majority of the pricing that we've highlighted as being a constraint imposed by the regulation really relates to bread, where we were quite confident of getting an average price increase through of about 5%, effective at the end of March.

And we need it and had agreed with our customers a price increase of our rice business to take us out of an operating loss into a profitable position going forward. The balance relates to annual price increases anticipated, to be taken mostly in the Groceries business. So you may debate the validity of that total number. But I'm quite confident that between ZAR 200 million and ZAR 250 million of it in rice and bread were increases that the entire category dynamic meant would actually stick in the marketplace.

We've also incurred costs related to additional supervision, additional PPE in the plants, additional staff transport. We're providing staff transport that's under our control in terms of the passenger loading and in terms of the sanitization regime. And of course, so far to the end of May, in responding to the social needs, we have ramped up our social investment by ZAR 13 million, with a number for the remainder of the year yet to be determined.

So the impact for the second 6 months, assuming the pricing regulations apply for the entire period, we anticipate to be somewhere north of ZAR 500 million. And again, I just want to emphasize, that excludes the cost of any future disruption, which is difficult to predict.

In addressing the challenges that we face, there is no one-size-fits-all solution for Tiger. And the approach that we've been taking, both in terms of how we structure to deal with the challenges that we face as well as the focus that we bring, means that we are looking at the category dynamics in each individual category, and trying to address those specific issues with as great a degree of speed as we possibly can.

And what I've set out in the next couple of pages really gives you a sense of what the drivers need to be for us over the next sort of 6 to 18 months, but particularly the next 6 months, in terms of rebasing our cost base in order to get to a premium that is going to be sustainable in what is going to be an ever more challenging market. Well, I'm happy to, in the Q&A, sort of respond to those specific issues.

So really, we're just addressing this based on the categories with the biggest challenges in a methodical, very category-specific dynamic. There are some overarching themes. But even those themes have very definitive and clear subsets in the individual business. And therefore, in terms of some of the restructuring that we're doing, we are changing some of the lines of accountability that I believe may have been blurred as we moved towards a matrix, that we can have very clear lines of accountability in terms of the day-to-day execution within the business.

Key areas where we are going to get efficiencies, like our logistics, like our procurement and key areas around compliance, in the areas of food, safety, financial controls, areas where we have to and we've highlighted the need for a proper capital allocation model like our innovation funnels. We're preserving our investment in those spaces and we're preserving the sort of central control. But we're trying to free up the category teams to push for fast execution of the sort of key themes that we've identified previously.

The business model, quite clearly in this environment, has to work from the appropriate selling price down. And we have to keep focusing and keep reengineering until we find a business model with costs that allow us to sustain market share growth at the right price points.

In terms of what you can expect to see delivered by the end of the financial year. I think you will see in the next couple of months, the completion of the structural alignment internally. We've already started down the road in terms of cost savings. So between our corporate office and 2 of the key challenged categories, we anticipate annualized savings and actually having those implemented in the last quarter of ZAR 250 million. Getting into the level of detail required and getting to sites has been an issue, but we are working through the most challenged categories. Methodically, we will have completed that work in its entirety by the end of the year.

Concluding the VAMP exit. Quite confident that we will not be operating in the VAMP business by the end of this year. We have announced, after many years of challenges and volatility in the Deciduous Fruit business, that we don't believe we are necessarily the best owner for this business, and we've started a process to explore taking Deciduous Fruit out of our category. And we've also started a process within our Personal Care business to rationalize the expensive tail in terms of those brands.

So ladies and gentlemen, thank you for hearing me out. It's certainly not a pretty story that I'm telling you. But I am confident that we have some very specific plans already in place and that we are starting to create some momentum to drive a better performance, a better underlying performance as we go forward.

For the -- in the very short term, that ZAR 500 million COVID costs is a real millstone that we will have to deal with and is definitely going to have a significant impact on our earnings for the full year.

If I can hand over to Nikki, I think you'll moderate the questions.

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Questions and Answers

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Nikki Catrakilis-Wagner, Tiger Brands Limited - IR Director [1]

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Yes. Are there any questions on the conference call?

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Operator [2]

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Yes. The first question comes from Myuran Raj from MIBFA.

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Myuran Rajaratnam, Metal Industries Benefit Funds Administrators - Analyst & Portfolio Manager [3]

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I've got 2, if I may. So the first one is you said that leading into the lockdown, before your period end, you said you saw [some bell] sales because of people stocking up. But you guided in February, before you knew there is going to be a lockdown, a certain range, right? And you had a budget. And it looks like even with the benefit of the lockdown, you've underperformed. You've come at the bottom end of the budget. Can you give us -- now is this what happened? Or is there something I'm missing? Can you explain this a little bit more perhaps? I have one more question.

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Noel Patrick Doyle, Tiger Brands Limited - CEO & Executive Director [4]

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Yes. So in response to that question, I think what we saw in that second 6 weeks in March, we saw an increase in volumes in rice, pasta and maize and wheat, particularly wheat and rice. And those are categories where we make extremely low margins. At the same time, we saw a pretty significant slowdown in Snacks & Treats, Beverages where there seemed to be a bias in terms of sales out towards carbonated beverages as opposed to concentrate. And in the Personal Care and Home Care business, they slowed down. So we had a lower rate of sale in higher-margin businesses and a much higher rate of sale in very low-margin businesses.

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Myuran Rajaratnam, Metal Industries Benefit Funds Administrators - Analyst & Portfolio Manager [5]

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Great. The second question is sort of an overarching question. Recently, I was looking at the kind of presentation that you explained to us that in the South African market, similar to sort of global markets, the price premium that food producers get for the brand leader that you get is shrinking and it's shrinking all the time, right? And this is true overseas and in South Africa. I mean -- and you can see that in your Fruits business as well as your Grains business. I mean even just specifically on the Grains business, it was pointed out to us that the family is fixed. Quality metrics that people -- consumer looks for in bread, softness, tastiness and so on.

And it appears that not just the brand premium is coming down, but the competition has caught up with Tiger Brands. And in fact, some of your peers are actually outdoing you in consumer taste tests on these attributes. So just a general question, and Noel, if you don't mind, is the brand premium coming down? Is the value -- is this something that's going to be a constant feature? And therefore, is this just now all that's left for you to pull is the cost lever so that you can actually be reasonably profitable?

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Noel Patrick Doyle, Tiger Brands Limited - CEO & Executive Director [6]

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So I think the point that you raised around brand premiums is certainly prevalent and probably more pronounced in basic foods like bread and rice and pasta. And we recognize that, and you can see it in our numbers. As you attempt to sort of inflate pricing, you can see that there's a switch off in terms of volume. And that's why getting the cost base right to allow us to narrow that price premium in those categories is important. And it's particularly important in the short term because the other levers to pull are really about what you put into the market that is different and how you modify sort of consumer perception of value on existing product ranges in terms of price points.

So on price points and different pack formats, I think we can make some progress on that in the short term. The real innovation, having kind of done a regroup around our innovation, that takes a little bit longer. So in the short term, when I say the short term, in the next sort of 12 months, the focus has to be on taking out cost because of that dynamic, which we don't see changing dramatically.

And to be honest, it is likely to intensify, given the kind of post-lockdown health of the consumer and the higher levels of unemployment. So you are right. In the short term, the biggest lever has to be reengineering our cost, both for the volumes that we're getting. And cost is not just our operating expenses. We'd have to revisit all of our procurement models. We're going to have to revisit all of our formulations as well.

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Myuran Rajaratnam, Metal Industries Benefit Funds Administrators - Analyst & Portfolio Manager [7]

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And just a clarification before I leave you. You mentioned a figure of ZAR 250 million savings from property and other related cost-cutting. Is that sort of a quarterly number or an annual number? Can you expand a little bit more?

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Noel Patrick Doyle, Tiger Brands Limited - CEO & Executive Director [8]

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Yes. That's the annualized number that we have identified and which we will start to put into execution right now, only in respect of the corporate office and 2 of the categories in which we operate. So what we've been doing whilst managing through the COVID crisis is tackling sort of the areas where we thought there was the greatest level of opportunity or risk. And we have got plans that I'm very comfortable to stand behind for 2 categories plus the corporate office that will deal -- that will deliver annualized savings just for those areas of ZAR 250 million.

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Nikki Catrakilis-Wagner, Tiger Brands Limited - IR Director [9]

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Okay. There are a few questions. Is there another question on the call?

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Operator [10]

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No. We have no further questions.

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Nikki Catrakilis-Wagner, Tiger Brands Limited - IR Director [11]

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Okay. This question is from [Michael Klopper]. "How do you assess the success of promotions, that is volume increases there in goal? Do you seek the maximum rand EBITDA from the promotion?"

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Noel Patrick Doyle, Tiger Brands Limited - CEO & Executive Director [12]

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So each promotion will have a different objective, depending on the category that's being promoted, depending on whether we are responding to a perception of brand weakness or whether we're launching a new concept. But the overriding requirement is that a promotion gives us better rand EBITDA. So if we looked across the wide range in terms of promotional evaluation, we look to do promotions that make us more rands. And we are starting to be more judicious about which promotions we engage in. And having some robust discussions with some of our retailers or based on empirical evidence, we are not participating in promotional activity, which doesn't give a payback.

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Nikki Catrakilis-Wagner, Tiger Brands Limited - IR Director [13]

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Okay. The second question is from Stephen Hurwitz from 36ONE. "Why is Tiger Brands unable to put through pricing increases in bread? Don't the pricing regulations prohibit you from increasing margins, not from putting through price increases to recover input costs?"

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Noel Patrick Doyle, Tiger Brands Limited - CEO & Executive Director [14]

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So specifically to bread. So if I can just step back. So the regulations allow you to put through price increases for costs -- for cost push that you have after the reference period and after the dates of the regulations, which was the 15th or 16th of March. In the case of bread, the price increase that we were seeking to put through was a price increase not linked to cost push now but to historical cost push.

And therefore, putting through that price increase would have had the impact of correcting both gross and operating margins. And the guidance that we've received when we've looked for clarification is that, if you increase your gross margins or your operating margins, without there being a specific cost push post the date of the regulations, that you would be in breach of the regulations. So what we've been able to do successfully is to put through cost push-linked price increases in both rice and wheat.

In May, we've got some more increases in those categories going through in June, and probably one in pasta. But all they do is allow you to hold your margins at the level that they were at previously. The reference period for us being December of '19 and January, February, they're 2 of our poorest months. So for example, in that reference period, we actually lost money in rice. The price increase that we were due to put through in rice on the 1st of April was to correct those losses. And the impact of not being able to put through that price increase, which was not driven by raw material cost push, is almost ZAR 100 million for the second 6 months of the year, even though we've been able to recover a subsequent cost push.

The ComCom have also guided very clearly that if you end up with leverage as a result of volume, the benefits of that leverage have to be offset against any raw material cost push that you seek to push through. So effectively, the impact of the regulations is to freeze your profitability and your margins at the level of the reference period, which is the 3 months ending February 2020.

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Nikki Catrakilis-Wagner, Tiger Brands Limited - IR Director [15]

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The next question is from Muneer Ahmed. "Are you able to give some guidance on when you expect VAMP deal to close? And can we expect the second half losses to be the same as the first half? Has sourcing of raw materials been impacted by global lockdowns?"

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Noel Patrick Doyle, Tiger Brands Limited - CEO & Executive Director [16]

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Okay. I'll take the second question first. By and large, we've been successful in keeping a consistent supply chain through this period. It's been tight in certain of our categories, but that's been more demand-related than supply-related. There are certain isolated instances where, for very specific parts or components or ingredients, we've had some delays. But I think that's not been a major disruption in terms of our ability to supply so far. It is something that we have to watch quite carefully. And what we would be more concerned about is port congestion, particularly if you end up with port closure as a result of high infection rates that might occur at the port itself. So that is an issue.

As regards to VAMP, we are sort of deep in negotiations with the parties who have expressed an interest. I'm still hopeful that within the next weeks rather than months, we will reach a conclusion, a successful conclusion to the deal. But as I said, we are not at a position yet where I could express that as a high probability. Losses in the second 6 months, likely to be slightly less than in the first 6 months. And as I say, we do intend to ensure that we go into the next financial year without carrying those losses.

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Nikki Catrakilis-Wagner, Tiger Brands Limited - IR Director [17]

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Okay. The next question is from [David Aboroltza]. "In the April trading statement, you stated that a 5% depreciation of the rand from your budgeted level of ZAR 15.50 amounts to an annualized impact of ZAR 600 million increase in costs. Does this still hold true for the second half of the year now that you're reengineering your cost base? Or will TBS rely on cost recovery to make up for the rand depreciation?"

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Noel Patrick Doyle, Tiger Brands Limited - CEO & Executive Director [18]

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So that dynamic and those sensitivities will still apply. We're still living off the benefit of some procurement positions. So the full impact is only likely to be felt in the first quarter of the new financial year. There's a limited amount of work that we can do in terms of changing that base cost base. So I would say the majority of that rand exposure is still an issue that will have to be recovered in the marketplace.

I suppose the cold comfort is it is likely to be cost pressure that will be born right across the segment and across our competitors. And the sustainability of not recovering it from an overall category perspective must be quite limited given the operating margins that a lot of our competitors operate at, which are lower than ours.

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Nikki Catrakilis-Wagner, Tiger Brands Limited - IR Director [19]

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The next question is from Kgosi Rahube. "Panic buying, are you seeing a slowdown in staple categories or sales even out between pantry loading?" And the second question, "What are some of the challenges that you're facing on the disposal of VAMP?"

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Noel Patrick Doyle, Tiger Brands Limited - CEO & Executive Director [20]

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So we've certainly seen a slowdown, but we're still seeing quite positive volumes out of the sort of base carbohydrates, essential carbohydrates. And some of that may be coming from the fact that effectively because of the pricing regulation and the base period, we've been locked into a very competitive pricing position, but there definitely is, and we expect further slowdown in that growth. Sort of very strong growth, which I think I shared previously in sort of the month to middle April, slowing somewhat, but still a reasonably robust performance in the month of May.

With regards to VAMP, the complexities of dealing with multiple interrelated parties is part of the complexities of doing the deal, as is, quite frankly, attempting to sell a loss-making business into quite a challenging macroeconomic environment.

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Nikki Catrakilis-Wagner, Tiger Brands Limited - IR Director [21]

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The next question is from Nick Webster. "You have always said that at no point would you consider private label. What has changed? In what categories and possible timing?"

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Noel Patrick Doyle, Tiger Brands Limited - CEO & Executive Director [22]

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So what's changed? I think, first of all, in terms of private label, we've certainly said it's not a priority. And in certain categories, like the VAMP business, we do significant private label business. But there is definitely a change in focus. We have to accept the reality of where we are and the fact that private label is going to grow. We have got volume-hungry facilities, and private label can allow us to reduce unit costs for our branded offerings as well as put us in a competitive position relative to other players in the category.

There are more opportunities now potentially with the weaker rand given that supposition that's likely to be sustained. At this stage, we're not commenting on the specific categories. But we should be in a position within the next month or so to give more clarity after we've concluded discussions with some of our retailing partners.

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Nikki Catrakilis-Wagner, Tiger Brands Limited - IR Director [23]

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There are no further questions. A lot of them have been covered by previous questions, and I'll revert back to the other more detailed questions. Thank you for joining us. And you're welcome to follow up with me if you have additional questions. Thank you.

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Noel Patrick Doyle, Tiger Brands Limited - CEO & Executive Director [24]

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Thank you.