INTEGRATED REPORT

Transcription

1 INTEGRATED REPORT

2 CONTENTS 2 Realising potential through business viability 4 About this report 6 Group at a glance YEAR AT A GLANCE Global food and beverage consumer context and trends 18 Realising potential through value creation 30 Realising potential through strategy implementation 38 Chairman s report 40 Chief executive officer s report 44 Financial review REALISING POTENTIAL 50 OPERATIONAL REPORTS 50 Operational report: Essential Foods 54 Operational report: Groceries 62 Operational report: International 70 SUSTAINABILITY REPORT 72 Sustainability themes, goals and enablers 85 Corporate social investment 88 B-BBEE 88 Communication and stakeholders 94 Enterprise development 95 Environment CORPORATE GOVERNANCE Board of directors and executive leadership team 118 Compliance 126 Risk report 134 IT governance report 136 Remuneration report 151 Value-added statement 152 Summary consolidated financial statements Over the past four years, Pioneer Foods created an exceptional platform for growth. The anomalous challenges of the past year interrupted our stride compared to the momentum gained previously. However, significant potential remains to create value through our six strategic themes. PM Roux, Chief Executive Officer GREYMATTER & FINCH #

3 REALISING POTENTIAL THROUGH BUSINESS VIABILITY Pioneer Foods is one of the major contributors to food security and nutrition in South Africa. Through our business activities, we offer consumers a choice of food and beverage products that we produce as responsibly and cost-effectively as possible, in collaboration with a network of producers and suppliers. Through our networks, we are able to create and optimise opportunities to generate shared value, and deliver positive and sustainable outcomes for all involved. To ensure that we can continue to do this, while we grow our ability to serve different markets, we are impelled to increase long-term shareholder and social value as we decrease our use of materials and their possible negative impact on society and the environment. We actively manage the trade-offs between economic viability and social and environmental responsibility. This integrated report will provide insight into our shared value creation through commercial and noncommercial activities all of which are aimed at realising sustainable food security. On the commercial side, we source, process, package and market our products through a range of power brands. Our non-commercial activities support projects such as feeding schemes, and education and health initiatives that empower communities to participate in securing their own food for the future. Pioneer Foods approach to shared value When we as a Group are the best we can be, we know that we have created the best possible value for the communities within which we operate and sell our products. We do not measure this purely in financial terms. Profitability is important, but it is equally important that, through our business activities, we make progress in addressing uniquely South African social and environmental challenges. The six capitals provide an effective mechanism to test our assumptions about shared value. They spur us on to analyse the way our business uses, transforms, renews, creates or destroys the resources offered by the capitals. If it is not approached from a responsible, long-term point of view, it has the capacity to decrease shared value. This integrated report includes a chapter on Pioneer Foods business model, which explains the six capitals and how these inform our strategy. The outcome of our business model is shaped by stakeholder expectations, as well as an evolving business approach that started with philanthropy and moved towards corporate social responsibility. For Pioneer Foods, the test today is how much shared value we create. We have included four examples of initiatives where Pioneer Foods applied the principle of shared value in selecting and investing in community projects. We focus on the individual as much as on the collective. You can read more about our approach in the account of Loyiso Mbete s journey towards owning a profitable business, school children receiving the essential nutrition to help them learn, the safe space created at the Mbekweni Youth Centre for young people in a township, and our support of new farmers in Napier. When attempting to quantify the impact of these initiatives, it is necessary to measure our success over time. Social value often accumulates along a different timeline to economic value. Pioneer Foods further requires that shared value initiatives be of such a scale that they have a noticeable financial impact on the value network. One of our other challenges in creating shared value lies in the extent to which primary agricultural production falls beyond the boundaries of our operations. By involving suppliers in planning, and engaging with stakeholders like government on enablers such as tariffs and legislation, we extend our influence on and participation in the shared value creation process as far as possible. Shared value creates business viability. This is achieved by realising the long-term potential of the Group an undertaking that informs the core theme of this report. Shared value highlights SHAREHOLDER VALUE OF R1.5 BILLION created over the past three years through the distribution of dividends, lowering the dividend cover and through the 99% capital appreciation in the share price R1.9 BILLION INFRASTRUCTURE INVESTMENTS OF to build and optimise production and distribution facilities over the past three years delivered 8% more capacity R34.1 MILLION COMMUNITY BENEFICIARIES RECEIVED over the past three years through our support of corporate social investment ( CSI ) projects contributing to the general health and well-being of society THE PIONEER FOODS EDUCATION AND COMMUNITY TRUST ( PFECT ) SPENT R12.1 MILLION on community and education-related programmes since its establishment in 2012 ENERGY-EFFICIENCY AND OPTIMISATION PROJECTS DELIVERED SAVINGS OF R66.7 MILLION over the past three years R443 MILLION value created for more than beneficiaries of the Phase I Broad-Based Black Economic Empowerment ( B-BBEE ) scheme launched in PIONEER FOODS 3

4 ABOUT THIS REPORT Scope and boundary This integrated report covers the South African and international operations of the Pioneer Food Group Ltd ( Pioneer Foods ) or ( the Group ) for the financial year from 1 October 2015 to 30 September The integrated report ( report ) addresses financial and non-financial information to enable stakeholders to make an informed decision about the Group s performance during the past financial year and about our future strategies to realise potential. The report covers the three operational divisions, including South African and international operations, and consists of: 1 Essential Foods, which manufactures wheat and maize products and pasta, packs rice, beans and other dried vegetables, and has large bakery operations. 2 Groceries, 3 International, which produces breakfast cereals, rusks, cake mixes, baking aids, dried fruit products, nuts, sweet and savoury spreads, ready-to-eat salads, long-life fruit juices, fruit concentrate mixtures and dairy fruit blends. which comprises a fruit juice and industrial dried fruit export business, in-country breakfast cereals and fruit snacking operations in the United Kingdom, as well as bakery operations in Nigeria and milling and distribution joint ventures in Namibia and Botswana. The results of the equity-accounted joint venture investments based in South Africa, Nigeria, Botswana and Namibia do not form part of the International segmental results. These investments include: Heinz Foods SA (49.9%) Bowman Ingredients (SA) (50%) Bokomo Namibia (50%) Bokomo Botswana (50%) Food Concepts Pioneer, Nigeria (50.1%) Alpen Food Company South Africa (50%) Amigear Ventures, Botswana (49%) Future Life Health Products (50%) The structure of this report is predominantly the same as in the previous year and the content remains inclusive of the financial performance, social and environmental initiatives and governance structures that support Pioneer Foods in its ability to create value in the short, medium and long term. International operations contribute 15% to revenue; therefore, the reporting emphasis is on South Africa. Non-financial indicators relate to wholly owned South African operations, unless specifically indicated otherwise. Reporting approach This report considers international and South African reporting guidelines and best practices, including: The revised King Code on Governance Principles for South Africa ( King III ) The JSE Listings Requirements International Financial Reporting Standards ( IFRS ) The Companies Act, Act 71 of 2008, as amended The Department of Trade and Industry s (dti s) B-BBEE Codes of Good Practice International Integrated Reporting Council ( IIRC ) <IR> Framework The Group also determined content by applying the principle of materiality. The risk process, which involved an executive review and the recent implementation of a risk management tool, formed the basis of the process, which is integrated within all divisions and functions. It provided the Group with a strategic view of the external environment and associated opportunities and risks. All matters that substantively affect Pioneer Foods ability to create shared value are addressed in this report. The summary consolidated financial statements for the financial year can be found on page 152. The integrated report and a complete set of annual financial statements are available on the Group s corporate website at The integrated report can be requested in print format from the company secretary, Jay-Ann Jacobs (Jay-Ann.Jacobs@pioneerfoods.co.za). Assurance Pioneer Foods follows a combined assurance model to optimise the assurance coverage obtained from management, internal and external assurance providers. This entails three levels of internal and external assurance, with details of accountabilities set out in the risk report on page 126. The financial statements included in this report were independently audited by PricewaterhouseCoopers Inc. An assurance statement by Ernst & Young Inc. (EY) that relates to selected non-financial data is available on the Pioneer Foods website at The KPIs included in the scope of EY's assurance are indicated with an LA in the report. Pioneer Foods B-BBEE verification by Empowerdex is also available on the website at The Group adheres to a range of health and safety standards, which provide further external verification and are listed on page 74 of the sustainability report. Navigational icons The following icons have been applied throughout the report to improve usability and to highlight the integration between the relevant elements of the report: Pioneer Foods website: Page reference Forward-looking statements All statements other than those of historical facts included in this report are forward-looking statements. Where the Group expresses or implies an expectation or belief as to future events or results, such expectation or belief is expressed in good faith and believed to have a reasonable basis. However, forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results to differ materially from future results expressed, projected or implied by such forward-looking statements. Such risks include, but are not limited to, commodity price volatility, currency fluctuations, increased production costs, political and operational risks in the countries in which the Group operates, governmental regulation and judicial outcomes. Pioneer Foods gives no guarantees or warranties that any of the future events, expectations or results referred to in the forward-looking statements will happen or materialise. Furthermore, the Group is under no obligation to release publicly any revisions to forward-looking statements reflecting events and circumstances after the date of this report, or to reflect the occurrence of unanticipated events, except as may be required under applicable securities laws. Board approval The Board, assisted by the audit committee, is responsible for the integrity and completeness of this report. The Board reviewed the 2016 integrated report on 17 November 2016 and is satisfied that it is a fair and accurate representation of the Group s performance and prospects. 4 PIONEER FOODS 5

5 GROUP AT A GLANCE Pioneer Foods is the second largest listed fast-moving consumer goods ( FMCG ) company in South Africa with a market cap of R40.4 billion at 30 September 2016, producing and distributing a range of branded food and beverage products. Pioneer Foods was established in 1997 and listed on the Johannesburg Stock Exchange ( JSE ) in It has three main divisions: DIVISIONAL CONTRIBUTION ESSENTIAL FOODS manufactures wheat and maize products and pasta. The division packs rice, beans and other dried vegetables; and has large bakery operations. GROCERIES produces breakfast cereals, rusks, cake mixes, baking aids, dried fruit products, nuts, sweet and savoury spreads, ready-toeat salads, long-life fruit juices, fruit concentrate mixtures, ice teas and dairy fruit blends. INTERNATIONAL comprises a wellestablished fruit juice and industrial dried fruit export business with a footprint across Africa, Europe, North America, Asia and the Middle East. Furthermore, the division manages in-country breakfast cereals and fruit snacking operations in the United Kingdom, as well as joint venture bakery operations in Nigeria and milling and distribution joint ventures in Namibia and Botswana. The Group operates mainly in South Africa, providing wholesale, retail and informal trade customers with products of a high standard. Pioneer Foods exports to more than 60 countries across the globe. The Group operates a number of world-class facilities, producing a range of products that includes some of the most recognisable and best-loved brand names in South Africa, such as the following power brands: Ceres, Liqui-Fruit, Safari, Sasko, Spekko, Bokomo, Weet-Bix and White Star. Many of these brands maintain leading positions in their respective market categories: Market position (value) 1 2 WHITE STAR Essential Foods (Maize meal) CERES* Groceries (Long-life fruit juices) REVENUE OPERATING PROFIT OPERATING MARGIN R12.9 BILLION R1 249 MILLION R4.7 BILLION R542 MILLION R3.0 BILLION R484 MILLION 9.7% 11.5% 15.9% WEET-BIX Groceries (Breakfast cereal) LIQUI-FRUIT Groceries (Long-life fruit juices) SAFARI International (Dried fruit) BOKOMO Groceries (Breakfast cereal) * Ceres is also a significant global brand. SASKO Essential Foods (Bread and wheaten flour) SPEKKO Essential Foods (Rice) 6 PIONEER FOODS 7

6 GROUP AT A GLANCE CONTINUED 2016 HIGHLIGHTS +10% REVENUE FROM CONTINUING OPERATIONS: R20.6 BILLION 2015: R18.7 billion +7% HEADLINE EARNINGS*: R1.64 BILLION 2015: R1.53 billion * Adjusted for the impact of the Phase I B-BBEE transaction COMMERCIAL HIGHLIGHTS Execution of fixed capital investments: Epping bakery upgrade Aeroton bakery upgrade Weet-Bix new production line Instant maize porridge capacity upgrade Record raisin profitability Peterborough facility move and upgrade Groceries margin expansion Acquisition of 100% in Streamfoods in the UK for R165 million, expanding the UK exposure to the fruit snacking category Acquisition of a 50% equity interest in Future Life for R200 million, effective 1 Dec 2015 Rice market share and profitability Bakeries sustained progress 8 PIONEER FOODS +6% OPERATING PROFIT* FROM CONTINUING OPERATIONS: R2.27 BILLION 2015: R2.15 billion * Adjusted for the impact of the Phase I B-BBEE transaction and items of a capital nature +10% TOTAL DIVIDEND PER SHARE: 365 CENTS 2015: 332 cents SUSTAINABILITY HIGHLIGHTS Estimated R34.4 million saved due to overall energy-saving projects (improved from R11.7 million in 2015) CDP, formerly the Carbon Disclosure Project, score of 100 Band B (improved from Band C in 2015) R69 million of value created for beneficiaries of the Phase I B-BBEE scheme in 2016 The Pioneer Foods breakfast programme provided daily nutrition to more than primary school children The installation of large, commercial solar systems at five Pioneer Foods manufacturing facilities with a combined size of 2.5 MWp Pioneer Foods was included in the FTSE/JSE Responsible Investment Index R10 million committed to the private-sectorled South African SME Fund to support smaller enterprises that have a high impact on job creation Pioneer Foods ability to realise the potential of its brands is confirmed by the recognition received through a range of customer, industry and packaging awards. During the past year, we achieved the following: Liqui-Fruit won three awards at the 2015 Flexographic Technical Association of South Africa ( FTASA ) Print Excellence Awards for its packaging. Every year the Sunday Times Top Brands celebrates South Africa s best known and loved brands. Weet-Bix claimed first place in the cereal category at the 2016 awards, with Bokomo Corn Flakes in fifth place and ProNutro in tenth place. White Star was awarded South Africa s top maize meal brand for the fifth year in a row, while Sasko received fourth place in the essential foods consumer category. Lastly, Liqui-Fruit received a third place in the fruit-based drinks category. Bokomo, ProNutro Toddlers and Moir s instant custard and dessert all received Ask Africa KASI Star Brands Awards for brands that are used most loyally by South Africa s township consumers. Moir s jelly and ProNutro both received Ask Africa Youth Brand Awards. The Marmite Battle of the Spreads campaign won a range of awards, including an African Crystal Award, 2015 Assegai Award, Nkosi Award, Black Spear, 2015 New Generation Award, 2015 AMASA Award and a 2016 Bookmark Award. 9

7 GROUP AT A GLANCE CONTINUED The growing international business =21% of operating profit Divisional profiles North America UK Germany Switzerland Pioneer Foods is the second largest listed FMCG company in South Africa, producing and distributing a range of branded food and beverage products. The Group operates mainly in South Africa, providing wholesale, retail and informal trade customers with products of a consistently high standard. Pioneer Foods exports to more than 60 countries across the globe. Number of permanent employees SOUTH AFRICAN OPERATIONS LA Algeria Nigeria Ghana Mozambique Zimbabwe Botswana Namibia Mauritius Democratic Republic of Congo South Africa INTERNATIONAL OPERATIONS 340 China South Korea Philippines Japan PRODUCTION FOOTPRINT PRODUCT CATEGORIES ESSENTIAL FOODS GROCERIES INTERNATIONAL SOUTH AFRICA 5 wheat mills in Bethlehem, Durban, Krugersdorp, Malmesbury and Port Elizabeth 3 maize mills in Aliwal North, Estcourt and Klerksdorp 2 rice and legume plants in Cape Town and Durban 1 pasta plant in Malmesbury 14 bakeries in Aeroton, Bloemfontein, Brits, Cape Town (Epping and Claremont), Krugersdorp, Ladysmith, Mokopane, Olifantsfontein, Port Elizabeth, Polokwane, Shakaskraal, Tubatse and Worcester Wheat flour Maize meal Rice Bread Pasta Beans and legumes SOUTH AFRICA 4 beverage plants in Bloemfontein, Ceres (2), and Wadeville 4 cereal facilities in Atlantis, Clayville, Epping and Wadeville 1 snacks and treats plant in Pietermaritzburg 5 accompaniments and baking facilities in Bonnievale, Johannesburg, Malmesbury, Ndabeni and Saldanha Breakfast cereals Dried fruit Baking aids Desserts Meals and salads Spreads Base flavours Nuts Snack bars Rusks Long-life juices Sparkling juices Carbonated soft drinks Ice teas Dilutables SOUTH AFRICA 2 dried fruit operations in Upington and Worcester UNITED KINGDOM 2 breakfast cereals operations in Peterborough and Wellingborough 1 fruit snacking operation in Wisbech NIGERIA 3 bakeries in Abuja, Ibadan and Lagos BOTSWANA AND NAMIBIA 2 wheat and maize mills in Gaborone and Windhoek Long-life juices Dried fruit Kids fruit snacking Breakfast cereals Baking ingredients Maize meal Wheat flour 10 PIONEER FOODS 11

8 GROUP AT A GLANCE CONTINUED ESSENTIAL FOODS GROCERIES INTERNATIONAL POWER BRANDS Sasko Spekko White Star Bokomo Weet-Bix Safari Liqui-Fruit Ceres Bokomo Ceres Safari White Star Liqui-Fruit OTHER BRANDS Select Rice Nice Rice Blue Bird Maize Meal Champion Samp Pasta Grande Imbo Crossbow ProNutro Moir s Marmite Bovril Redro Peck s Anchovette Werda Smash Maizena Fruitree Wild Island Daly s Fruitree Champion Moir s Fruit Bowl (UK) Divisional comparatives Revenue % change ESSENTIAL FOODS R12.9 billion R11.3 billion 14.2 GROCERIES R4.7 billion R4.8 billion* (2.1) INTERNATIONAL R3.0 billion R2.6 billion 15.4 Operating profit % change ESSENTIAL FOODS R1 249 million R1 278 million (2.3) GROCERIES R542 million R435 million 24.6 INTERNATIONAL R484 million R445 million 8.8 * Comparative includes revenue for biscuits, Pepsi and Maitland Vinegar 12 PIONEER FOODS 13

9 2016 Value Creation Challenges Political instability Volatile rand Significant wheat duty Drought impact on maize and other crops Currency devaluation in African countries Constrained consumer spending Low GDP growth ACTUAL SHARE PRICE PERFORMANCE (RANDS) MARKET CAPITALISATION (R BN) RETURN ON AVERAGE SHAREHOLDERS FUNDS (%)* REVENUE (R BN) % * 2013* 2014* HEADLINE EARNINGS PER SHARE (CENTS)* RETURN ON AVERAGE NET ASSETS (%)* * Adjusted for the annual impact of the Phase I and in 2012 the once-off impact of the Phase II B-BBEE transactions and items of a capital nature OPERATING PROFIT CONTINUING OPERATIONS (R M)* % * Excluding Quantum Foods * Adjusted for the annual impact of the Phase I and in 2012 the once-off impact of the Phase II B-BBEE transactions * Adjusted for the annual impact of the Phase I and in 2012 the once-off impact of the Phase II B-BBEE transactions * Adjusted for the annual impact of the Phase I and in 2012 the once-off impact of the Phase II B-BBEE transactions and items of a capital nature 14 PIONEER FOODS 15

10 GLOBAL FOOD AND BEVERAGE CONSUMER CONTEXT AND TRENDS Current consumer trends, globally and locally, can broadly be grouped under two main themes: growing consumer caution and concerns about health. Consumer caution The rise of the cautious consumer has been clear for some time, but mercurial consumption now seems the norm. Consumers shopping, brand and category repertoires continue to grow as critical, cash-strapped shoppers seek out favourite brands at best prices, but will also shift loyalties and proactively trial new things. Traditional ideas about brand loyalty are being tested like never before. This trend also continues to blur traditional market segmentation models, as consumers become harder to categorise. It is not uncommon now for the same shoppers, however financially constrained, to shop at premium and aspirational stores as well as cheaper outlets on the same shopping trip. Consumers confidence in being able to choose and decide what is right and best is deepening, fuelled by connectivity and access to information. A related point globally, and to a lesser extent in South Africa, is the growing importance of the millennial consumer that breaks many stereotypes regarding expected behaviour of young people. They seek variety, are highly sceptical, are less brand loyal and are 100% online all the time. And they desire immediate responses to everything. The cautious consumer in 2016 has also become a demanding one. Health concerns The second major theme this year has been the normalisation of health concerns, specifically when it comes to food. Consumers are increasingly concerned about the health benefits of the food they consume. A demand for transparency and origin typifies the scrutinisation of labels and ingredients and online searches and, generally Big Food companies have not been responsive enough. At the same time, a desire for authenticity has made processed seem somehow bad or unhealthy. This scepticism can be described as factory fear, reflected in a wariness of what s inside products. Consequently, mothers and providers have becoming increasingly protective, and governments have obliged by promulgating stricter legislation in attempts to remove suspect ingredients, forcing food companies to comply with higher standards, including the challenge of demystifying labels. Rising consumer protection legislation across the developed world has been followed by the same trend in emerging economies, but often without sufficient thought as to the effects of these interventions on affordability. Pioneer Foods has been instrumental, together with the rest of the industry players, insofar as developing and implementing innovative initiatives to complement and enhance the Department of Health s ( DoH s ) mandate and in particular, DoH s Healthy Food Option Initiative which was coordinated under the auspices of the Consumer Goods Counsel SA s Food Safety Initiative (the FSI). The latter included, among others: Product reformulation i.e. by reducing sugar content in specific product categories Package sizes (smaller product offerings) Front of pack nutritional labelling Brands with purpose In response to both these global themes, many global brands are now embracing social issues as part of their brand s purpose. Large food companies collaborating with local non-governmental organisations ( NGOs ) to improve economic conditions and the environment, or minimising CO 2 output and water usage, have become more mainstream. Changes in the value network The shared value business model is gaining global traction. According to the United States Department of Agriculture, in its study Food Value Chains: Creating Shared Value to Enhance Marketing Success, the model is characterised by a commitment to transparency, collaborative planning and the exchange of market intelligence among supply chain partners (which is similar to the evolving customer model with retailers mentioned above). The model has the potential to deliver solutions that yield tangible benefits to each participant in the system. External factors that have contributed to the rise of food value chain enterprises include refined customer segmentation, escalating demand for specialised, highly differentiated food products, and the increasing appeal of food items that are produced in accordance with responsible social or environmental standards. One of the emerging challenges in the shared value model is how ethics-based operating principles are defined and maintained in a food value chain, and how these principles are communicated successfully to buyers and consumers. This also highlights the fact that a shared value business model requires shared leadership and succession-planning strategies within value-chain partnerships to be successful over the long term. Read more about Pioneer Foods response to the evolving context and trends in the next section, and in the chief executive officer s report from page PIONEER FOODS 17

11 REALISING POTENTIAL THROUGH VALUE CREATION Pioneer Foods relies on all six capitals as input into its business model. Our business model enables our value creation network, supported by current and future business viability plans, to position the Group as the leading South African FMCG company with a strong African footprint and globally recognised scale. In terms of JSE market capitalisation, Pioneer Foods is currently the second largest FMCG company among the South African food producers, which includes Tiger Brands, AVI and RCL. The Group s size and scale positions it as a significant player with the ability to have a major impact on stakeholders in terms of availability of food and employment, and as a buyer in the agricultural sector. Its power brands hold leading market share positions, which translate into millions of consumer purchase decisions, tons of produce and litres of beverages. Pioneer Foods customers comprise formal and informal food retail. The bargaining power in South Africa resides with formal retailers, who have a high concentration of buying power. The informal (local and traditional) market is active and growing, and predominantly served through wholesalers. The informal market is growing at a slower pace than formal retail, where competition between the four major groups Woolworths, Shoprite, Pick n Pay and Spar results in continued improvement in outbound logistics and optimised store formats. There is an opportunity for food producers to start distributing directly to the informal market. In the UK, Pioneer Foods is well positioned in the breakfast cereal category as a private label manufacturer and supplier to the larger UK retail chains. Streamfoods, with Fruit Bowl as the leading brand, is a new addition. Read more about consumer trends affecting the Group s business model on page 17. Pioneer Foods business model is further premised on the concept of the One Pioneer parenting advantage through the centralisation of select functional capabilities. Over the past three years, the Group created: a shared service centre (consisting of human resources ( HR ), finance and sales administration); outsourced information technology ( IT ); established a centralised logistics services centre; and made progress in the centralisation of the procurement function. The divisional restructuring to support this operating model was completed in 2015, with the creation of the International division. The adjusted operating model resulted in cost savings through improved efficiency and optimisation of capacity, and extended Pioneer Foods reach into global markets. 18 PIONEER FOODS 19

12 REALISING POTENTIAL THROUGH VALUE CREATION CONTINUED The following diagram illustrates Pioneer Foods distinctive capabilities and how these ensure coherent value creation: Performance anatomy Emphasis on leadership visibility Culture and ethos of urgency, high performance and continuous improvement Ability to focus on and manage critical relationships Strength in soft commodity procurement Deeply entrenched cost and efficiency mantra DISTINCTIVE CAPABILITIES Sustainable big shareholder positions Track record of being able to maintain momentum Agility and ability to make quick decisions Performance anatomy Clarity of articulated corporate plan and outcomes driven approach The strategy is supported by a strong Pioneer Foods brand positioning. The infographic below shows the integration between the brand essence and consumer insights. Integrity, empowerment, passion The Pioneer looks for new opportunities and possibilities to find a better way I can experience a better life; live life better Helps me and my family to realise our potential Values and personality Benefiit ESSENCE Realising potential Reason to believe CONSUMER INSIGHT I want to make the most of this life. I want to live a better life and to live life better. Discriminator Long track record of firsts in South Africa Many awards that acknowledge this Pioneering history Legacy of 100 years in food The Group s value creation activities are focused by the six strategic themes, which are explained in detail on page 31. OUR PEOPLE Consumers: moms and kids Staff Stakeholders Investors COMPETITIVE SPACE Other beverage and food companies SHAPE A WINNING CORPORATE PORTFOLIO FOCUS ON BUILDING OUR POWER BRANDS EMBED STRATEGIC CUSTOMER MANAGEMENT RESET THE COST BASE AND STEP UP PRODUCTIVITY BUILD HIGH- PERFORMING TEAMS ADOPT SUSTAINABILITY BEST PRACTICES IN ALL WE DO MISSION We believe in nourishing lives with trusted, well-loved brands, empowering families to get more out of life. 20 PIONEER FOODS 21

13 REALISING POTENTIAL THROUGH VALUE CREATION CONTINUED Pioneer Foods has to ensure the future availability, conservation and regeneration of all the capitals used in its business activities. Realising potential through the six capitals The Group s governance processes and sustainability initiatives, combined with its six strategic themes, support the intent to ensure business viability over the long term and to create value for stakeholders. The following section explains how the Group uses, applies and transforms the capitals to create value. Read more in the sustainability report from page 70 and the governance report from page 106. Financial capital Pioneer Foods generates financial capital through revenue earned from sales of a diversified basket of products spread over several geographies and markets (urban and rural). These societal needs define our markets and enable our financial value creation. The Group is highly cash generative and has sufficient debt capacity to enable Pioneer Foods to invest in growth: organically and acquisitively. The Group also uses financial capital in its continuous long-term capital expenditure programme, which positions it well to take advantage of future market growth opportunities. Read more in the financial review from page 44 and in the annual financial statements. Human capital The Group s (South African operations) LA permanent employees provide physical and intellectual input into Pioneer Foods business activities. Through their individual and combined competency, they are able to implement the Group s strategy and create a competitive advantage. Pioneer Foods consumer and customer orientation requires a high-performance culture and effective leadership. This culture is reinforced through sound performance management practices and recognition. The annual gala event, Pioneer Foods Excellence Awards, recognises and celebrates individual excellence, value ambassadors and community champions. Management s agility, experience, intellect, energy and drive constitute some of the Group s key competencies. Skills shortages in human capital are one of Pioneer Foods strategic risks. This is mitigated through targeted recruitment and an annual investment of R24.6 million in training and bursaries. Structural skills scarcity in technology and logistics is addressed through graduate placement programmes and apprenticeships. The Group s human capital profile continues to transform to reflect the society within which it operates, in line with its B-BBEE strategy and targets. Read more about human capital in the sustainability report on page 77. The Group s (South African operations) LA permanent employees provide physical and intellectual input into Pioneer Foods business activities. Manufactured capital Pioneer Foods operates mills, bakeries, processing and packaging plants in South Africa, the UK and Nigeria. In South Africa, it has a significant national distribution fleet. The location of facilities and warehouses creates a significant competitive advantage as it combines proximity to main markets with coastal infrastructure. This creates the ability to deal effectively with imports, storage and distribution as the Group s procurement adapts to supply cycles, especially in commodities. The Group continuously optimises its manufactured capital through relocation, upgrades and further capital investment to ensure it maintains a lean, efficient organisation with high capital efficiency. The FSSC Food Safety System Certification has been adopted for application at all manufacturing sites to ensure compliance with food safety requirements. Manufactured capital will be further optimised through a standardised world-class preventative maintenance system at all manufacturing sites, and the setting of overall equipment effectiveness improvement targets. Continuous improvement is supported by training in world-class manufacturing principles at the Pioneer Foods Manufacturing Academy, and enhanced by outsourced technical training. Read more about the optimisation of manufactured capital in the chief executive officer s report on page PIONEER FOODS 23

14 REALISING POTENTIAL THROUGH VALUE CREATION CONTINUED Intellectual capital Pioneer Foods intellectual capital input is rooted in its diversified portfolio of brands and ability to innovate competitively. The Pioneer Foods portfolio includes some of the most recognisable and best loved brand names in South Africa. A significant number of the Group s brands are either number one or two in their respective market categories. The ability to increase intellectual capital relies on the effectiveness of Pioneer Foods recruitment capability and the quality of people the Group is able to attract. Differentiating themes in the Group s attraction plan include rewarding excellence, high-performance teams and a rapidly evolving Group, summarised in the Employee Value Proposition ( EVP ): If you have passion for results, excellence, quality, growth and development; and take pride in the work you do, then Pioneer Foods is your destination of choice. The EVP informs branded recruitment actions measured by a Talent Brand Index ( TBI ). Pioneer Foods has more than doubled its TBI from 10% to 24% in Innovation includes product engineering capabilities and the ability to apply market research and consumer need states to develop products, range extensions and new packaging. This is strengthened by the application of technology in its production facilities and the recent implementation of integrated demand planning to optimise the planning process and opportunities identified across customers, channels, markets and brands. The Group s systems capability is continuously evolving through SAP. Read more about intellectual capital in the governance report on page 106. Social and relationship capital Pioneer Foods network of stakeholder relationships includes engaging with government on a number of levels, contracting with customers, interacting with consumers through brand activation, and developing suppliers. Supplier and enterprise development is a focus area in terms of B-BBEE, with Pioneer Foods contribution predominantly in primary agriculture projects and logistics. While these projects grow to achieve scale, Pioneer Foods continues to expand its formal network of suppliers, creating a shared platform for growth. The Group created significant social and relationship value through its Phase I B-BBEE scheme, launched in 2006, which benefited more than employees. The scheme has generated R443 million in pre-tax value for employees since inception. The main purpose of the scheme was to broaden and increase direct black ownership and economic participation by employees of the Group. A further aspect of social and relationship capital takes the form of PFECT as an empowerment trust that supports community and education-related programmes through dividends and CSI contributions from Pioneer Foods. Read more about social and relationship capital and PFECT in the sustainability report from page 87. Natural capital Natural capital in the form of raw material and packaging is the most significant input into the business, as all business activities support the conversion and packaging of these materials into branded food and beverage products. Wheat, other grains and fruit concentrates form the majority of raw materials, with smaller volumes of fruit, rice, beans and legumes also being sourced. The Group uses water and energy as inputs in its processing facilities, and fuel for its distribution fleet. Natural capital inputs were at risk in 2016, especially in terms of inputs such as wheat, maize and fruit juice concentrate, which are scarce due to the current severe drought in South Africa. This resulted in higher input costs due to imports, which are, in turn, affected by the weak currency and import tariffs. Continuous improvement in the conversion of raw materials is a production priority governed by an integrated management system and sophisticated demand planning. Investment in research and development ensures that the Group supports the long-term availability of raw material given climate change, consumer consumption trends, and technological factors that can impact future supply. The sustainable use of non-renewable resources will ensure a competitive advantage for the Group through efficiencies and will mitigate against future risk. In 2016, the Group saved tco 2 e from various energy-saving projects and m 3 in the first year of its water-saving programme. These savings equate to R34.4 million. Read more about natural capital in the sustainability report from page 95. Realising potential through commercial and non-commercial value creation Pioneer Foods creates value from its core business activities of strategic sourcing, production, distribution, marketing and selling of a diverse range of food and beverage products in collaboration with a network of producers, business partners and service providers. The infographic on the next page summarises the implementation of Pioneer Foods strategy by considering and testing all decisions against the twin objectives of strengthening brand positions and expanding margins, thereby creating shared value for the Group and its stakeholders. All strategic options and decisions to achieve growth are tested against these objectives, which are supported by a clear understanding of success drivers for delivery. Strategic risks are considered continuously also for the opportunities they may create. The infographic on page 21 illustrates how Pioneer Foods commercial activities are shaped by our operating context and customers to deliver positive, long-term financial results, while our non-commercial activities are shaped by our viability initiatives and stakeholder relationships. 24 PIONEER FOODS 25

15 REALISING POTENTIAL THROUGH VALUE CREATION CONTINUED Realising potential through strategy TWIN OBJECTIVES STRENGTHENING BRAND POSITIONS EXPANDING MARGINS Market position Innovation Cost management Increasing volumes A significant number of the Group s brands are either number one or two in their respective market categories, with the further potential to strengthen the equity of the power brands. Read more about our brand market positions and awards on page 7, page 9 and page 12. Continuous innovations include range extensions, new products, packaging upgrades and relaunches based on market, consumer and product portfolio segmentation to ensure the full commercial opportunity for each is realised. Innovation is also informed by consumer health and nutrition trends and opportunities. Read more about innovation in the operational reports from page 50. The Group s cost containment and efficiency ethos enable its ability to deliver operating leverage. Most notable cost reductions were from the containment of conversion costs and outbound logistics. Read more about cost management in the financial review on page 44 and operational reports from page 50. The Group s ability to generate profitable top-line growth through volume increases requires investment in capacity to meet future demand, brand and marketing support, and the ability to understand changing consumer need states. Volume growth is further supported by strategic customer management and accurate demand planning. Read more about volume performance per product category in the operational reports from page 50. SUCCESS DRIVERS TO DATE: CULTURAL EVOLUTION PORTFOLIO OPTIMISATION RELENTLESS FOCUS ON VALUE DRIVERS LEADERSHIP NEW BUSINESS OPERATING MODEL 26 PIONEER FOODS 27

16 REALISING POTENTIAL THROUGH VALUE CREATION CONTINUED Read more HEART OF KAYAMANDI page 98 SUPPORTING NEW FARMERS page 100 MBEKWENI YOUTH CENTRE page 102 BREAKFAST PROGRAMME page 104 COMMERCIAL ACTIVITIES The Group s commercial activities include the sourcing, processing, packaging, distribution and marketing of food and beverage products through a range of power brands to formal and informal retail customers. FIVE YEAR HEADLINE EARNINGS* R M OPERATING CONTEXT AND CUSTOMERS Retailers and consumer goods companies are searching for more ways to benefit from growth opportunities together. The promise of margin improvements and cost cutting from supply chain efficiencies encourages efforts to share customer data and insights. Pioneer Foods collaborates with a network of producers, business partners and service providers to leverage scale and streamline its operations. SUSTAINABILITY AND RELATIONSHIPS Global brands are increasingly embracing social and environmental issues to ensure sustainable value creation. Consumer goods companies are forcing stronger alliances with public health organisations and research institutions, while expanding their engagement with government on policy issues. Pioneer Foods invests in building stakeholder networks to increase social and relationship capital. NON-COMMERCIAL ACTIVITIES Through its partnerships, the Group is involved in various community projects in education, the environment and food security. These projects focus on vulnerable groups, such as women, youth and children, primarily in township and rural communities. The Group also invests in feeding schemes. FIVE YEAR OPERATING PROFIT* R M ** ** HOW WE DO BUSINESS INPUT AND OUTPUT OUTCOMES ** ** ** * Adjusted 0 for impact 460of Phase I 920 and II B-BBEE 1380 equity transactions 1840and items 2300 of a capital nature ** Continuing operations only The Group depends on all six capitals as the stores of value through which Pioneer Foods creates products and services. The Group s activities result in an increase, decrease or transformation of the capitals, with the most significant impact on natural capital as raw material is converted into food and beverage products. The availability, quality and affordability of the capitals are managed with a long-term investment view and due consideration of agricultural cycles, the impact of climate change and shifting consumer patterns. Read more about how we use and transform the six capitals from page 23. Read more about our products and brands in the divisional profiles on pages 6, 11 and 12 and the operational reports from page 50. Commercial opportunities are created to deal with physical waste, and the product recovery process is governed responsibly. Waste through nonefficiency is addressed in all operations as a leading budget indicator. Pioneer Foods is one of the major contributors to food security and nutrition in South Africa. Through our business activities, we offer consumers a choice of food and beverage products that we produce as responsibly and cost-effectively as possible, in collaboration with a network of producers and suppliers. 28 PIONEER FOODS 29

17 REALISING POTENTIAL THROUGH STRATEGY IMPLEMENTATION The Pioneer Foods Board reviewed the Group strategy after evaluating the progress made to The Board considered global and local food and beverage trends as important considerations for the strategy to The strategy was revised and strengthened under the banner of Towards 2020 Create The Future. In driving a growth agenda to 2018, the Group remains committed to the six strategic themes, while considering and measuring our impact on the environment and people. VISION To be the leading South African FMCG company with a strong African footprint and globally recognised scale. The different elements of the vision statement are measured and defined according to the following: The main strategic focus areas are: Shape a winning corporate portfolio Grow Groceries faster than Essential Foods Grow International faster than the South African business growth Obtain leadership positions in six of seven power brands Secure acquisitions Rationalise stock keeping units Presence in selective private labels Maintain bakeries momentum Strengthen the Groceries portfolio mix LEADING FMCG STRONG AFRICAN FOOTPRINT Financial indicators: return on invested capital, return on equity, earnings before interest and tax and earnings per share Market share Top 40 index Employer of choice Mainstream food and beverage branded goods Selective private label Strategic alliance with global brands (with equity participation) All big African markets Focus on building our power brands Deliver integrated demand management Ensure investment rate is maintained on a cents per unit level Capitalise on digital marketing Maintain media efficiency Achieve an innovation step-change Ensure a fastidious focus on brand health metrics Implement consolidated trading terms position Build human capital capability GLOBALLY RECOGNISED SCALE Highly focused and relevant global expansion Global acquisitions where appropriate Embed strategic customer management The growth agenda will be driven by three strategic vectors: OPTIMISE STEP-CHANGE TRANSFORM Reset the cost base and step up productivity Obtain a lean efficient organisation Achieve world class benchmarking in: Manufacturing Procurement Shared service centres Logistics Contain energy costs Contain employee costs Continuing with business as usual... but doing it better Implementing step-change performance enhancements Driving a fundamental transformation of the shape and size of the business Embed optimised and effective operating model Ensure engaged and cohesive talent Transform and deepen talent bench strength Further entrench the performance culture and values Incremental increase in market share (Power Brands) Leverage new product development capabilities Channel and geographic expansion through penetration focus/local and traditional Cost savings and efficiency focus Trade term strategy Sales and operational planning (S&OP) enhancements Procurement Strategic Service Centre Weet-Bix market share Bakery capital investment roll-out Alpen performance Heinz performance Africa in-country beverage production Bolt-on acquisitions UK focus Distribution evolution IT step-change (ERP agility) Network optimisation and manufacturing architecture Acquire a medium-sized local or offshore company Build highperforming teams Adopt sustainability best practices in all we do Reduce both direct and indirect energy usage Reduce water usage Reduce waste removal expenditure Increase our enterprise supplier development and corporate social investment contributions 30 PIONEER FOODS 31

18 REALISING POTENTIAL THROUGH STRATEGY IMPLEMENTATION CONTINUED Group five-year financial review 2016 R'm 2015 R'm 2014 R m 2013 R m 2012* R m Consolidated statement of comprehensive income Revenue Profit before items of a capital nature and income tax Before adjustments Broad-based employee share incentive scheme share-based payment charge 22.9 (306.8) (187.3) (145.9) 35.6 Broad-based employee share incentive scheme hedge 21.9 Once-off share-based payment charge on B-BBEE equity transaction (160.7) Items of a capital nature 21.3 (75.9) (123.0) (220.2) (5.4) Income tax expense (629.0) (606.3) (451.9) (210.6) (311.9) Profit for the year Attributable to: Owners of the parent Non-controlling interest Operating profit before items of a capital nature Headline earnings for the year Consolidated statement of financial position Property, plant and equipment, intangible assets and biological assets Deferred income tax Investments in and loans to associates and joint ventures Non-current trade receivables and available-for-sale financial assets Non-current derivative financial instruments Current assets Total assets Capital and reserves attributable to owners of the parent Non-controlling interest Total equity Non-current borrowings Provisions, non-current derivative financial instruments and share-based payment liability Deferred income tax Current liabilities, excluding accruals for Competition Commission penalties and forward contracts on own equity Current liability accrual for Competition Commission penalties Current liability accrual for forward contracts on own equity Total equity and liabilities Note: * Not restated for the impact of IFRS 11 Joint Arrangements and IAS 19 (revised) Employee Benefits R'm 2015 R'm 2014 R m 2013 R m 2012* R m Consolidated statement of cash flows Net cash profit from operating activities Working capital changes (774.5) (546.4) (266.2) Accrual for Competition Commission penalties paid (216.7) (216.7) Cash effect from hedging activities (174.6) 16.2 (7.8) 22.7 (32.2) Settlement of share-based payment liability** (69.2) (189.4) (75.0) (32.7) (31.0) Cash effect of forward purchase contracts related to share-based payments 25.2 Income tax paid (451.1) (475.5) (386.4) (233.1) (257.7) Net cash flow from operating activities* Net cash flow from investment activities** (982.9) (422.7) (392.7) ( ) (753.0) Net cash surplus/(deficit) (123.9) (41.9) Net cash flow from financing activities ( ) (414.1) (347.0) (167.5) 75.6 Net cash, cash equivalents and bank overdrafts on unbundling of Quantum Foods (105.6) Net cash and short-term borrowings from business combination and disposal of subsidiary (11.3) Effect of exchange rate changes on cash and cash equivalents (7.1) Net (decrease)/increase in cash, cash equivalents and bank overdrafts (971.2) (291.4) 22.4 Notes: * Not restated for the impact of IFRS 11 Joint Arrangements and IAS 19 (revised) Employee Benefits. ** Cash payments to employees under the BEE Phase I employee share scheme was reclassified from financing activities to net cash flow from operating activities for 2012 to R'm 2015 R'm 2014 R m 2013 R m 2012* R m Segments** Revenue Essential Foods Quantum Foods Groceries: International Less: Internal revenue (248.5) (298.0) Note: * Not restated for the impact of IFRS 11 Joint Arrangements and IAS 19 (revised) Employee Benefits. ** Segment revenue and segment results were restated to consolidate the Groceries: Cereals and other and Groceries: Beverages segments into a single Groceries segment. 32 PIONEER FOODS 33

19 REALISING POTENTIAL THROUGH STRATEGY IMPLEMENTATION CONTINUED Group five-year financial review (continued) 34 PIONEER FOODS 2016 R'm 2015 R'm 2014 R m 2013 R m 2012* R m Segments** (continued) Operating profit before items of a capital nature Essential Foods Quantum Foods 21.6 (18.9) (42.3) Groceries International Other (2.1) (4.8) 10.3 (154.3) (89.5) Adjusted operating profit before items of a capital nature Once-off share-based payment charge on B-BBEE equity transaction (160.7) Reversal of depreciation charge in Quantum Foods legal entities (asset held for sale) 54.7 Share-based payment charge on Phase I B-BBEE transaction 22.9 (306.8) (187.3) (145.9) 35.6 Phase I B-BBEE transaction hedge 21.9 Operating profit before items of a capital nature Depreciation and amortisation Essential Foods Quantum Foods Groceries International Other Profitability (%) Revenue growth 9.9 (11.9) Operating profit margin (Note 1) Operating profit margin (Note 2) Effective tax rate Return on average net assets (Note 1) Return on average net assets (Note 2) Return on average shareholders funds (Note 1) Return on average shareholders funds (Note 2) Liquidity and solvency Net debt to equity ratio (%) Current ratio (times) Acid test ratio (times) Cash profit interest cover (times) Net interest cover (times) Dividend cover (times) Notes: 1. Calculated after the once-off share-based payment charge on the Phase II B-BBEE equity transaction (only 2012), the annual share-based payment charge on the Phase I B-BBEE equity transaction and, for 2016, the impact of the Phase I B-BBEE equity transaction hedge. 2. Calculated before the once-off share-based payment charge on the Phase II B-BBEE equity transaction (only 2012), the annual share-based payment charge on the Phase I B-BBEE equity transaction and, for 2016, the impact of the Phase I B-BBEE equity transaction hedge. * Not restated for the impact of IFRS 11 Joint Arrangements and IAS 19 (revised) Employee Benefits. ** Refer to note on previous page for further detail on restatement of prior year segments R'm 2015 R'm 2014 R m 2013 R m 2012* R m Performance per share (cents) Earnings Headline earnings (Note 1) Headline earnings (Note 2) Dividend Net asset value Productivity Revenue to net asset cover (times) Revenue per employee (R 000) Net assets per employee (R 000) Number of permanent employees Share trading statistics Price per share (cents): At year-end High Low Net number of issued shares ( 000): Total number of issued shares Number of treasury shares share incentive trust (48) (730) (1 110) (1 422) (2 545) Number of treasury shares subsidiary (17 982) (17 982) (17 982) (17 982) (17 982) Number of treasury shares participants to B-BBEE equity transaction (18 092) (18 092) (18 092) (18 092) (18 092) Number of treasury shares BEE Trust (10 745) (10 745) (10 600) (10 600) (10 600) Market capitalisation (R 000) Dividend yield (%) Headline earnings yield (%) (Note 1) Headline earnings yield (%) (Note 2) Earnings yield (%) Price earnings ratio (times) (Note 1) Price earnings ratio (times) (Note 2) Notes: 1. Calculated after the once-off share-based payment charge on the Phase II B-BBEE equity transaction (only 2012), the annual share-based payment charge on the Phase I B-BBEE equity transaction and, for 2016, the impact of the Phase I B-BBEE equity transaction hedge. 2. Calculated before the once-off share-based payment charge on the Phase II B-BBEE equity transaction (only 2012), the annual share-based payment charge on the Phase I B-BBEE equity transaction and, for 2016, the impact of the Phase I B-BBEE equity transaction hedge. * Not restated for the impact of IFRS 11 Joint Arrangements and IAS 19 (revised) Employee Benefits. 35

20 REALISING POTENTIAL THROUGH STRATEGY IMPLEMENTATION CONTINUED Definitions Acid test ratio Cash profit interest cover Ratio of current assets, less inventories and current biological assets, to current liabilities. Net cash profit from operating activities, plus dividends received, divided by net interest. Net asset value per share Capital and reserves attributable to owners of the parent divided by the total number of issued ordinary shares, excluding treasury shares held by a subsidiary, treasury shares held by the share incentive trust, treasury shares held by the participants in the B-BBEE equity transaction and treasury shares held by the Pioneer Foods Broad-Based BEE Trust. Current ratio Ratio of current assets to current liabilities. Net debt to equity ratio Borrowings, net of cash and cash equivalents, as a percentage of capital and reserves attributable to owners of the parent. Dividend cover Headline earnings for the year adjusted for the annual IFRS 2 share-based payment charge on the Phase I B-BBEE transaction and, for 2016, the impact of the Phase I B-BBEE equity transaction hedge and, for 2012, the once-off IFRS 2 share-based payment charge on the Phase II B-BBEE equity transaction, divided by total dividends declared (including dividends on class A ordinary shares). Net interest cover Operating profit margin Operating profit, before items of a capital nature, plus dividends received, divided by net interest. Operating profit, before items of a capital nature, as a percentage of revenue. Dividend yield Dividend per ordinary share divided by the market price per ordinary share at year-end. Ordinary share(s) For the purposes of all the above definitions, ordinary share(s) excludes class A ordinary shares. Earnings yield Earnings per ordinary share divided by the market price per ordinary share at year-end. Price earnings ratio Market price per ordinary share at year-end in relation to headline earnings per ordinary share. Effective tax rate Headline earnings yield Impact of Phase I B-BBEE transaction Income tax expense included in profit or loss as a percentage of profit before income tax. Headline earnings per ordinary share divided by the market price per ordinary share at year-end. Annual cash-settled IFRS 2 share-based payment charge on class A ordinary shares issued to employees in terms of a broad-based employee share scheme. Return on average net assets Operating profit, before items of a capital nature, as a percentage of total assets, excluding any investment in and loans to joint ventures, investments in associates, available-for-sale financial assets, non-current trade and other receivables, cash and cash equivalents, current income tax assets and deferred income tax assets, reduced by trade and other payables, provisions for other liabilities and charges, derivative financial instruments, accruals for Competition Commission penalties, accrual for forward purchase contract on own equity and share-based payment liabilities. The average is based on the carrying values as at the beginning and end of the year. Impact of Phase II B-BBEE transaction Market capitalisation Once-off non-cash-flow IFRS 2 share-based payment charge on ordinary shares in terms of a B-BBEE equity transaction. Market price per ordinary share at year-end multiplied by the total number of issued ordinary shares. Return on average shareholders funds Revenue per employee Headline earnings as a percentage of average capital and reserves attributable to owners of the parent, as determined at the beginning and end of the year. Revenue divided by permanent employees at year-end. Net assets per employee Capital and reserves attributable to owners of the parent divided by permanent employees at year-end. Revenue to net asset cover Revenue divided by net assets. 36 PIONEER FOODS 37

21 CHAIRMAN S REPORT In the broader local economy, the Group experienced the effects of continued socio-political instability and the paradoxical tension between uncertainty of leadership and policy, and confidence in a robust financial system. In the global context, instability in all arenas political, economic and social, among others is resulting in economic contraction, with subsequent job losses and the diminishment of free-flow capital for individuals. New focus needs to be placed on innovation-led development and growth particularly amid the current contextual uncertainties. The private sector and government need to work together to grow the economy collectively. We need to create the right kind of ecosystem, which is enabled by thinking and doing things differently, where we work together to be part of the process of creating shared value. Pioneer Foods has shown resilience in a year of turmoil and challenges from all possible directions. The Group s position in the food value chain is critical for providing stability, but at times our position was rendered tenuous by the strategic options that were available. ZL Combi, Chairman We believe that 2017 could potentially be more intense and pose even deeper challenges for South Africa. Our country has one of the slowest growing of all the major economies in sub-saharan Africa. With increasing currency vulnerability, business runs the risk of occupying a position of debilitating indecision, postponing investments that are critical to initiate a turnaround. The delicate balance mentioned above must be considered carefully in directing future strategy. Despite these difficulties, I am proud to say that Pioneer Foods continued to make steady, deliberate progress to deliver on its vision, with appropriate fixed capital investments to enable this. Our power brands in the food and beverage categories retained their leading positions, indicating that consumers remain loyal, despite their rapidly decreasing spending capacity. These brands, especially in the staple foods segment, deliver health and nutritional value to consumers in poorer urban and rural household markets. We continued to deliver organic growth while exploring acquisitions. Efforts to optimise efficiency, to reduce costs and to ensure that the Group has the available capacity for long-term growth remain at the top of management s agenda. We are acutely aware that a long-term investment horizon should be our focus, and that our commitment to realising potential is vital to the future viability of the Group. This year saw changes to the composition of the Board. Thys du Toit stepped down on 12 February 2016 to pursue other interests, and Lambert Retief resigned as director on 12 July 2016 due to health reasons. We value their contribution and commitment to Pioneer Foods. After year-end, financial director Cindy Hess, resigned. Four new directors were appointed: Sango Ntsaluba, Norman Thomson and Lindiwe Mthimunye-Bakoro as independent non-executive directors, and Piet Mouton as non-executive director. The new directors have already contributed fresh, challenging perspectives to our strategic and governance conversations. We split the audit and risk committees, and reviewed the remuneration policy and phantom share scheme after consultation with investors and shareholders was also a year in which we initiated several independent reviews of our governance structures and charters regarding matters ranging from Board-member independence to Group compliance. The Board takes its role of ethical leadership seriously and supports management in every aspect of stakeholder value creation. Our brands especially in the staple foods segment, deliver health and nutritional value to consumers in poorer urban and rural household markets. We were pleased with Pioneer Foods contribution to food security and education in a wide variety of regions and communities. This showcases a Group that is cognisant of and responsive to socio-economic realities in South Africa as a way to create value. We are also proud of the fact that Pioneer Foods retained its level 4 B-BBEE status according to the agricultural sector scorecard. At the end of the financial year, the Group made its first payment towards a R10 million contribution to the newly established national SME Fund, with government to match our contribution. It forms part of our efforts to join business peers and government in accelerating job creation through enterprise development. Pioneer Foods executive team, our management and employees showed their mettle in this very difficult year. They remained focused, resilient and tenacious under the energising leadership of Phil Roux. Through their efforts and the support of a committed and experienced Board, we continue to realise the potential of our business so that we may reward our suppliers, customers, consumers and other stakeholders. ZL Combi Chairman 38 PIONEER FOODS 39

22 CHIEF EXECUTIVE OFFICER S REPORT Revenue increased by 10% to R20.6 billion (2015: R18.7 billion) and operating profit ended 6% higher than the previous year. Pioneer Foods was able to deliver credible results notwithstanding the impact of exigent circumstances which had a material bearing on the country, industry and the consumer. These developments include: A global economy showing pedestrian growth Growth on the African continent slowing dramatically as oil prices fall and currencies devalue Over the past four years, Pioneer Foods created an exceptional platform for growth. The anomalous challenges of the past year interrupted our stride compared to the momentum gained previously. However, significant potential remains to create value through our six strategic themes. Increasing legislative focus on health and wellness The burgeoning influence of digital technology The impairment of the South African incorporated brand, leading to limited growth, currency weakness and concomitant cost pressure, weak consumer demand, political instability and consequent credibility loss The crippling drought PM Roux, Chief Executive Officer Exponential increase in the wheat import duty Despite continuing high levels of uncertainty in the external environment, Pioneer Foods has been sustaining value creation for shareholders if we consider the following four-year summary: The drivers that have delivered success to date include a continued focus on optimising the portfolio, implementing a new business operating model and developing a leadership team to inspire a cultural evolution towards high performance. Strategy implementation Pioneer Foods six strategic themes set the tone in 2013 towards targets set for Four years into the journey, 2016 provided an important inflection point, especially given dramatic external shifts in some of the initial assumptions. Following a review of the external context and operating environment, key trends in consumer goods, an evolving competitive landscape and retail shifts, the Board endorsed the corporate strategy, Towards 2020 Create the future. Critical growth vectors are: Share gaining and growth strategies Innovation Joint ventures Mergers and acquisitions Four-year CAGR (%) REVENUE (R M) ** REVENUE, EXCLUDING EXITED BUSINESS (R M) OPERATING PROFIT* (R M) EBIT MARGIN* (%) RONA* (%) ROE* (%) ECONOMIC PROFIT* (R M) MARKET CAP (R M) * Calculated before the share-based payment gains/charges on the B-BBEE equity transactions and, in 2012, also for the reversal of a depreciation charge on an asset held for sale. ** Marginal revenue growth due to the unbundling of Quantum Foods, the exit from Pepsi and biscuits, and the disposal of Maitland Vinegar. These vectors are underpinned by a granular range of self-help opportunities that still reside within the scope of the strategic themes. We continue to adjust our operating model to take advantage of the One Pioneer parenting benefits. This has included contemporising our business approach towards pragmatic sophistication our mantra for how things should be done. While we continue to refine the operating model, it has entered a cycle of repeatability where we can measure comparable efficiencies and start applying even finer filters for improvements. If a single strategic imperative could be isolated in terms of importance and shareholder value creation, then portfolio optimisation takes centre stage. This includes decreasing our exposure to Essential Foods and further diversifying and strengthening other elements of the portfolio. The most constructive way to achieve this is through judicious acquisitions. We have been casting our nets wide in exploring acquisitive opportunities, but remain selective in pursuing specific options. 40 PIONEER FOODS 41

23 CHIEF EXECUTIVE OFFICER S REPORT CONTINUED The key resource that enables us to realise our strategy is people. As announced on SENS on 16 November 2016, Pioneer Foods entered into an agreement to acquire a 49.89% shareholding in Weetabix East Africa Ltd. The agreement is subject to Kenyan regulatory approval. As part of a future-oriented capital investment programme, we continue to create capacity and to consolidate manufacturing architecture, where appropriate. Local investment in additional capacity during 2016 included the Aeroton bakery expansion, the installation of the additional Weet-Bix line and the Epping bakery upgrade. Total capital expenditure for 2016 was R809 million compared to R652 million in Read more about these in the financial review from page 44. Realising potential, creating business viability and shared value The key resource that enables us to realise our strategy is people. Our investment in human capital relates firstly to commercial activities, where we focus on employee engagement, improving the employee value proposition, training and talent development. Our long-term viability further depends on the Group s ability to effect transformation of its business in terms of all the B-BBEE scorecard elements. We are making good progress, especially in the appointment of employment equity candidates. Outlook The outlook remains challenging for South Africa. Political and currency stability are essential to restore confidence and stimulate growth in the economy. Pioneer Foods is not immune to this instability. Strategic fixed capital investments, however come on stream in the new calendar year, brand strategies are robust, and a cost culture is well embedded within the business which, taken together, will buffer these and other unforeseen discontinuities. The difficult maize and raisin crop conditions will hamper performance in the first half. We remain confident that Pioneer Foods can sustain the momentum of profitable top-line growth for the full year. We are optimistic about recent acquisitions and will continue to deploy capital efficiently to secure long-term growth for the Group and our shareholders. Headroom remains for shareholder value creation in four focus areas: Entrenching our power brand positions Accelerating a winning, diversified portfolio Sustaining a lean, efficient organisation Ensuring capital efficiency PM Roux Chief Executive Officer 42 PIONEER FOODS 43

24 FINANCIAL REVIEW The Group delivered solid results for the year ended 30 September 2016, despite the depressed environment resulting from poor consumer confidence, low growth, an unprecedented South African drought and wheat tariff hike, and extreme exchange rate volatility. The following features underpinned performance: Drivers Pleasing brand performance (volume growth and share gain) in most categories Exceptional fruit export results Continued cost management and efficiency extraction Nigerian bakery business transformation on track Higher growth and efficiency capital expenditure levels Phase I B-BBEE scheme hedge Groceries margin expansion Sustained bakery momentum Joint venture performance Acquisition of Streamfoods in the UK Relocation of the Bokomo Foods UK facility Financial performance Inhibitors Local white maize crop shortage Significant raw material cost inflation and rand volatility Exponential increases in the wheat import tariff Contraction in the African export business amid challenging macro-economic conditions Increased working capital investment Weak consumer environment Continuing operations excluding the Phase I B-BBEE share-based payment (the adjusted basis). Revenue increased by 10% to R20.6 billion (12% excluding Pepsi, biscuits and Maitland Vinegar) for the year under review. Revenue analysis by region (R m) % change South Africa Africa Rest of world Group revenue The Group gross profit margin contracted from 31.9% to 29.5%, while the operating profit margin (before items of a capital nature) declined by 0.5 percentage points to 11.0% during the year under review. Operating profit, before items of a capital nature, and adjusted as per above, increased by 6% to R2 273 million (2015: R2 153 million). The Pioneer Foods portfolio managed to deliver operating profit growth of 6% to R2.3 billion despite the weighting of the Essential Foods segment, which showed a 2% contraction in operating profit as it struggled to absorb significant raw material cost inflation as a result of the drought, wheat import tariff increase and exchange rate weakness. The increase in net interest costs resulted from lower excess cash levels and increased utilisation of short-term facilities. Consequently, headline earnings on an adjusted basis increased by 6% to 883 cents per share. Diluted headline earnings on the above basis increased by 7% per share as a result of a 0.3% decrease in the diluted weighted average number of shares. Essential Foods Essential Foods was impacted by raw material inflation on maize and wheat due to the duty structure, drought and R/$ exchange rate volatility. The division s profitability contracted by 2% and the operating margin by 160 basis points, which is a creditable performance under the circumstances. The maize category showed demand resilience in that volume was regained in the second half, ending the year down 5% relative to the 14% contraction at the half year. White Star also achieved category leadership recognition and accolades, thereby maintaining its top position in the maize category. External wheat flour sales came under pressure due to severe cost push. However, bakeries continued to make progress along its strategic revitalisation journey, generating positive operating leverage. Bread volumes increased modestly despite capacity constraints. The Sasko brand also achieved accolades in support of its number two position in bread. Bakery capital investment initiatives remain firmly on track to sustain volume and profit growth. Rice and legume volume growth was positive and profitable. Weet-Bix continues to maintain phenomenal brand stature and leadership, being South Africa s leading cereal brand by market share. Groceries The Groceries division increased volume by 2% (excluding Pepsi, biscuits and Maitland Vinegar) and operating profit by 25% while expanding operating margins by 240 basis points. The division had to contend with significant raw material inflation in the second half of the financial year due to currency movements and instances of crop shortages as a result of adverse climatic conditions. Competition within the long-life juice category remained intense. Industrial action at Wadeville was consequent to a reorganisation of the manufacturing architecture as part of an ongoing programme to enhance efficiencies and further reduce fixed costs. The imposition of the proposed sugar tax on long-life juice remains uncertain. Exciting innovation in the form of Liqui-Fruit Sparkling, was launched to further bolster the product portfolio. Breakfast cereals delivered a stellar performance. A particular focus on brand architecture, pack designs and brand communication will further enhance Bokomo as the undisputed category leader. Weet-Bix continues to maintain phenomenal brand stature and leadership, being South Africa s leading cereal brand by market share. Capacity expansion plans will come to fruition early in the 2017 financial year, which bodes well for growth. Future Life achieved its acquisition hurdle rates and successfully introduced new product innovations. A full innovation pipeline will sustain growth momentum. 44 PIONEER FOODS 45

25 FINANCIAL REVIEW CONTINUED International The International division had to contend with a disruptive year given the refurbishment and move of the UK Peterborough operations, as well as the impact of currency devaluation on the African continent. The consequent impact on consumer demand impeded year-on-year profit growth. Operating profit increased by 9% with the operating margin contracting by 110 basis points. Focused efforts resulted in FCPL in Nigeria turning profitable. The integration of the UK acquisition, Streamfoods, is also progressing well. The vine fruit exports delivered an exceptional performance. Revenue analysis by segment (R m) % change Essential Foods Groceries * International Continuing operations * 7.5% up excluding revenue from exited businesses (biscuits, Pepsi and Maitland Vinegar) from the comparatives. Operating profit analysis by segment (R m) % change Essential Foods Groceries International Other (2) (5) 60.0 Continuing operations* * Before items of a capital nature and adjusted for the impact of the Phase I B-BBEE transaction. Operating margin by segment Essential Foods Groceries International Group continuing operations % The summarised operating profit above demonstrates each segment s contribution to the overall results. Further detail is provided in the operational reports on pages 50 to % Total Group earnings Total Group headline earnings per share, on an adjusted basis, increased by 6% to 883 cents per share (2015: 832 cents per share). Earnings for the Group in total, on an adjusted basis, increased by 12% to 904 cents per share (2015: 807 cents per share). Group headline earnings and total earnings include the following: Pleasing growth in equity-accounted earnings from joint ventures (Bokomo Namibia, Bokomo Botswana, Bowmans and Future Life) R23 million share-based payment gain on the cash-settled 2006 Phase I B-BBEE scheme R22 million gain on the hedge of the 2006 Phase I B-BBEE scheme Increased net interest charges Group total earnings were negatively impacted by R23 million (2015: R51 million) due to the impairment of Quantum Foods shares held by the 2012 Phase II B-BBEE scheme special purpose vehicles ( SPVs ). The 2006 Phase I B-BBEE transaction, benefiting more than employees, is a cash-settled scheme. The number of participants, since inception, has declined to as at 30 September 2016 (2015: 2 579) as a result of general employee turnover. The pre-tax value paid to such beneficiaries amounted to R443 million since its inception in The outstanding obligation is remeasured to fair value taking into account the Pioneer Foods share price at each reporting date. For the year under review, the share price decreased by 11% from R to R173.87, resulting in an income of R23 million. In 2015, the share price increased by 66%, from R to R195.76, resulting in a charge of R307 million % change Total earnings (R m) Earnings per share (cents) Items of a capital nature (after tax) (R m) (14) 97 Headline earnings (R m) Headline earnings per share (cents) Adjusted for after-tax effect of the Phase I B-BBEE transaction (R m) (39) 307 Adjusted headline earnings (R m) Adjusted HEPS (cents) Income from investments increased to R47 million (2015: R39 million), as a result of enhanced cash levels during the earlier part of the financial year. Profit before tax amounted to R2 319 million (2015: R1 766 million) after financing costs of R167 million (2015: R142 million) and income from joint ventures and associates of R100 million (2015: R71 million). Adjusted headline earnings per share from continuing operations, before the Phase I B-BBEE share-based payment charge and hedge, increased by 6% to 883 cents per share (2015: 832 cents per share). Earnings from continuing operations, on an adjusted basis, increased by 9% to 904 cents per share (2015: 831 cents per share). During the year, the Group hedged its Phase I B-BBEE cash-settled liability. This has resulted in a realised fair value gain of R1.1 million and a mark to market gain of R20.8 million, both amounts before tax. Please refer to the annual financial statements for further detail. 46 PIONEER FOODS 47

26 FINANCIAL REVIEW CONTINUED Financial position Capital expenditure investment for the year amounted to R809 million (2015: R652 million) and included R383 million in capital commitments carried forward from the previous financial year. Capital expenditure (R m) Expansion Replacement Total Significant projects undertaken during the year included the Aeroton bakery expansion, the installation of an additional Weet-Bix line and the Epping bakery upgrade. During the year, the Board committed to the expansion of the Aeroton bakery in Gauteng, the White Star Instant plant and the Weet-Bix expansion project. These are the major components of the R737 million in capital commitments carried forward to the 2017 financial year. The balance of the capital expenditure included general asset care. Return on average net assets (%) Essential Foods Groceries and International Continuing operations The solid financial performance, and the astute capital expenditure investment, translated into continued stable returns. Debt and financing facilities Debt and financing facilities continuing operations (R m) % change Third-party debt relating to the 2012 Phase II B-BBEE transaction partners Own debt Total debt Less: Cash Net debt Net debt excluding third-party debt 501 (97) Net debt to equity ratio (%) excluding third-party debt 6% (1%) EBITDA* Net debt-to-ebitda ratio (%) excluding third-party debt 19% (4%) * Before items of a capital nature and adjusted for the impact of the Phase I B-BBEE transaction. The Group is satisfied that the existing pre-approved syndicated funding and healthy cash generated from normal operating activities will meet working capital requirements and future expansion plans. Statement of cash flows Cash flow analysis (R m) % change Net cash from operating activities Change in working capital (775) (546) Inventory (490) (268) Debtors (49) (289) Creditors (240) 12 Other 4 (1) Cash effect from commodity hedging (174) 16 Cash generated from operations (13) Net cash from operating activities of R2 668 million (2015: R2 512 million, including discontinued operations) improved by 6% on the prior year. Working capital investment for the year under review increased to 17% of revenue (2015: 14%). The increase was mainly due to price inflation in raw materials, also resulting in increased finished product inventories. Working capital continues to be managed optimally. Proceeds on the sale of property, plant and equipment of R69 million (2015: R176 million) mainly included the disposal proceeds on the Bella Rosa office building (R22 million) and bakery fleet vehicles (R25 million). On 1 October 2015, all conditions precedent to the disposal of the Group s interest in Maitland Vinegar Works (Pty) Ltd were met. The profit on this disposal amounted to R24 million. At 30 September 2015, the assets and liabilities relating to this interest were presented as assets held for sale. On 9 November 2015, the Competition Tribunal of South Africa granted approval for the conditional acquisition of a 50% shareholding in Future Life on 1 December 2015 for R200 million. The business is performing according to plan. The Group also acquired 100% of the UK-based Streamfoods Ltd, a fruit snacking enterprise for R165 million on 29 July 2016, through its Bokomo Foods (UK) Ltd legal entity. Dividend A final dividend of 260 cents per share has been declared for the year ended 30 September 2016 (2015: 237 cents per share). The total dividend for the year is therefore 365 cents per share (2015: 332 cents per share). The total amount of the dividend for the year is approximately R817 million (2015: R744 million) and is based on a dividend cover of 2.0 times (2015: 2.2 times). This is calculated as adjusted headline earnings for the year divided by the total dividend for the year, inclusive of treasury shares. During the year, the Group settled R400 million in term funding, which became due in September Net interest-bearing debt, excluding third-party debt related to the Phase II B-BBEE transaction partners, increased by R598 million to a net borrowing position of R501 million or a net debt to equity ratio of 6% (2015: -1%). The Group s net debt to EBITDA ratio, on an adjusted basis, is 19% (2015: -4%). 48 PIONEER FOODS 49

27 OPERATIONAL REPORT: ESSENTIAL FOODS Essential Foods is a leading manufacturer of essential and value-added foods in South Africa and comprises two operating divisions: Production footprint Limpopo WHEAT OTHER GRAINS wheat milling, bakeries and pasta maize milling, rice and dried vegetables North West Gauteng Free State KwaZulu-Natal Pioneer Foods has been milling wheat into high-quality flour for more than 60 years, and baking bread for even longer. Sasko is the division s core brand, and can be found in millions of South African homes each day. Business environment (2016) Volatility in external dynamics affected performance during the year. Exchange rate devaluation, a local white maize crop failure and continued increases in import duty on wheat resulted in significant category inflation that impaired demand at an industry level for material stretches of the trading period. It remains encouraging that overall volume growth was achieved in key product categories such as bread, rice, pasta and legumes. The maize category suffered most from an extraordinary set of challenges in The continuing drought of recent years impacted especially the availability of white maize, resulting in significant final product inflation. For the first time in many years, South Africa had to import white maize for local consumption. The convenience and relative cost-effectiveness of bread as a staple food continued to support volume growth in an increasingly competitive environment. There is no clear evidence that consumer choice or behaviour is influencing category or product pack size shifts. These shifts appear rather to be driven by customer promotional support. Bread volume growth remains encouraging, though muted, as is the positive volume expansion in the rice, pasta and legume categories. Wheat volume growth was impaired year on year given base effects, which included the loss of material industrial volumes. The decline in maize meal volumes sold was to be expected given the shock of significant inflation, although the negative volume trend was arrested in the second half. Performance overview Revenue increased by 13% to R12.9 billion, while operating profit decreased by 2% to R1.2 billion, resulting in an operating profit margin of 9.7% (2015: 11.3%). Performance was significantly impacted by the decline in maize volumes sold, as well as constrained performance in the wheat category. The White Star maize meal brand, nevertheless strengthened its leadership position. The bakery business continued to achieve volume growth, though muted given the major capital expenditure intervention in the Western Cape which disrupted performance. This intervention resulted in production capacity constraints that affected the business s ability to compete effectively. The rice business continued to deliver satisfactory volume growth, but profitability in this product category can be improved. The pasta and legumes businesses achieved sound volume growth. Western Cape Financial performance 2015/16 financial year Revenue Operating profit Eastern Cape Operating profit margin Capital spend R12 855m R1 249m 9.7% R459m +13.4% -2.3% 2015: R11 335m 2015: R1 278m 2015: 11.3% 2015: R447m 50 PIONEER FOODS 51

28 OPERATIONAL REPORT: ESSENTIAL FOODS CONTINUED Product categories Category Wheaten flour products A large portion of flour produced is transferred to the Group s bread bakeries and pasta plant, and the remainder contributes to a variety of branded and industrial flour products under the Sasko brand. Maize products Maize is manufactured into a variety of staple foods, including maize meal, samp, maize flour and instant porridge, with White Star super maize meal as the flagship brand. Rice The Group imports rice products to South Africa, which it markets through its extensive distribution footprint, with Spekko as the flagship brand. Bread The Group supplies fresh bread to the South African market through more than delivery points every day. Pasta A range of wheat-based pasta products are manufactured using local and imported ingredients. Beans and legumes The Group is a major supplier of South Africa s branded beans and legumes. Price change Volume change Performance 12% -1% Competitiveness in the external flour market increased due to additional industry capacity deployed by new entrants. In addition, the raw material inflation driven by the increased import duty on wheat caused additional headwinds. However, overall category profitability remained satisfactory. 36% -5% Volume growth was impaired by significant raw material inflation given a very poor local white maize crop, the devaluation of the rand and the need to import maize for the first time in many years. Although profitability decreased year on year, the category remains attractive. 9% 2% The Spekko brand continued to make inroads into the market through wider and deeper distribution, bolstered by effective marketing support. Category profitability continued to improve. 9% 1% Despite muted volume growth, value extraction across a range of internal opportunities resulted in an improvement in overall profitability. 6% 5% The pasta business posted sound volume growth, but was impaired by the impact of the local wheat import duty and imports. 10% 7% The legumes business posted sound results on the back of positive volume growth. Sustainability progress Electricity consumption remains a focus area for the division due to high usage, especially at mills. Efficiencies and opportunities to explore alternative energy sources are investigated and developed in association with Energy Partners. The most significant investment in creating shared value for the division and its stakeholders was the installation of solar power systems at the Klerksdorp mill earlier this year. This forms part of Pioneer Foods commitment to reduce its carbon footprint. The Klerksdorp mill is the second largest contributor of solar energy in the Group, potentially generating 752 kw per year. Essential Foods continues to apply responsible nutrition and food safety. The division met the sodium (salt) reduction targets for 2016, and is on track to meet the 2019 requirements as set out in the Department of Health s ( DoH s ) foodstuffs regulations. All product information, including genetically modified organisms ( GMO ), is disclosed responsibly on product labels. Read more in the GMO policy on the website and in the sustainability section on page 91. Innovation Future Life launched a new low-gi, high-protein, GMO-free Smart Bread in white and brown variants during the year. White Star instant maize was launched on a regional basis in anticipation of additional production capacity coming on stream in the new financial year. Outlook It is expected that current muted trading conditions will prevail into the new year given uncertain and constrained economic factors in South Africa and the consequent negative impact on consumers discretionary spend. Although there are indications of improved agricultural conditions for the new maize crop, the current shortage of white maize will define trading conditions well into the new financial year, as the new local crop will only be available from April The aforementioned will significantly reduce profitability of maize in the first half of the 2016/17 financial year. Material participation in these relatively large and complementary staple food categories will be leveraged further through strategic capital allocation to provide for long-term sustainable growth. The Aeroton bakery project will come on stream in 2017, in support of the longer-term initiative to extract further value from the wheat-to-bread value chain, with a full-year benefit from the Epping bakery investment. Brands White Star Sasko Spekko Select Rice Nice Rice Blue Bird Champion Pasta Grande Imbo Crossbow Revenue contribution 84% Baking and milling 16% Other grains 52 PIONEER FOODS 53

29 OPERATIONAL REPORT: GROCERIES The Groceries division manufactures, markets and sells a range of food and beverage products in the local market, of which cereals and long-life juices are the primary categories. Production footprint CEREALS BEVERAGES SNACKS, TREATS, ACCOMPANIMENTS AND BAKING Gauteng Free State KwaZulu-Natal We are renowned for our high-quality, market-leading beverage brands Liqui-Fruit, Ceres and Fruitree. Our products offer consumers a wide range of basic flavours, as well as exotic fruit juice blends, in a variety of packaging configurations. The brand portfolio has captured more than 50% market share of the long-life fruit juice category in South Africa. The cereals product range includes Bokomo Weet-Bix, South Africa s best-selling breakfast cereal. Together with our other household brands, such as Nature s Source, Bokomo and ProNutro, it helps millions of South Africans to start every day. Business environment The year was characterised by major inflationary effects due to drought in South Africa and other parts of the world where raw materials are sourced. Depreciation of the exchange rate further amplified the inflationary effect. The former affected the availability and cost of maize, wheat, sugar and fruit juice concentrate, whereas the exchange rate further negatively impacted cost, as all these raw materials are subject to dollar-based pricing. Competition within the long-life juice category in particular, remained intense. Imports from the East gained material market share which brought a new dimension to the long-life juice category. Although the lower to middle-lsm consumer segment in South Africa is expanding, economic factors continue to place pressure on consumers disposable income. Breakfast cereals delivered exceptional growth towards the end of the year as consumers adapted to higher price points following major grain inflation. Performance overview Revenue for the Groceries division (excluding biscuits, Pepsi and Maitland Vinegar from the comparative period) increased by 7% to R4.7 billion, while operating profit increased by 25% to R542 million, resulting in an operating profit margin of 11.5% (2015: 9.1%). Groceries volumes, excluding biscuits, Pepsi and Maitland Vinegar from the comparative period, increased by 2.1% Western Cape Financial performance 2015/16 financial year Revenue Operating profit Operating profit margin Capital spend R4 695m R542m 11.5% R210m -2.1%* +24.6% 2015: R4 797m 2015: R435m 2015: 9.1% 2015: R109m * Increased by 7%, excluding the exited businesses (Pepsi, biscuits and Maitland Vinegar) from the comparatives. 54 PIONEER FOODS 55

30 OPERATIONAL REPORT: GROCERIES CONTINUED The expanded operating profit margin was the result of price inflation, volume growth, the exit of underperforming categories and successful fixed cost reduction initiatives. Core cereal brands were extremely resilient in a competitive environment. Growth was stimulated by well-positioned product offerings aimed at value conscious consumers. Weet-Bix and ProNutro were the star performers. A particular focus on brand architecture, pack designs and brand communication will further enhance Bokomo as the undisputed category leader. Beverages performed well in the first semester, but came under pressure during the winter months, mainly due to raw material and packaging inflation. The long-life juice category showed solid growth due to a very hot summer and an increase in marketing activity. However, margins came under pressure following exceptional juice concentrate inflation as a result of reduced fruit crops in South Africa and abroad. This was exacerbated by significant cost increases for packaging following the depreciation of the rand. Expansion into adjacent subcategories should position the portfolio well for future growth. The spreads category contributed positively by virtue of stringent cost controls throughout the value chain, as well as volume growth on Marmite and Bovril in particular. Baking aids, desserts, meals and salads had mixed results, with baking aids and salads showing positive volume growth. The snacks and treats category delivered strong operating profit growth as a result of Safari market activations, operational efficiencies and the disinvestment from biscuits. Product categories Category Price change Volume change Performance Breakfast cereals The business produces a range of leading cereal brands, including Weet-Bix, Nature s Source, ProNutro and Bokomo. 9.1% 3.3% Volumes were under pressure during the first half of the financial year following two price increases (October and March), but picked up significantly towards the end of the period. Weet-Bix delivered an exceptional performance with high single-digit volume growth. Corn Flakes profitability disappointed despite volumes being in line with expectations. The cereals business gained a significant new private-label client, which will drive growth going forward. 56 PIONEER FOODS 57

31 OPERATIONAL REPORT: GROCERIES CONTINUED Category Price change Volume change Performance Category Price change Volume change Performance Dried fruit and nut products Dried fruit and nut products are produced and marketed to retail, industrial and catering sectors. The Safari brand is a leading brand in the South African market. Desserts and baking aids A variety of value-added dessert products, including jelly, instant pudding, cake mixes and baking aids, form part of the Moir s branded range. Fruit juice The business produces a range of long-life fruit juice products, catering to the still and sparkling markets. Liqui-Fruit, Ceres and Fruitree brands form the bulk of products. Dilutables A range of dairy-based and fruit-based concentrate mixes are produced and marketed. 7.3% -5.3% High inflation led to an overall category decline, with Pioneer Foods Groceries nevertheless gaining some market share. Safari remains the strong leading brand in the local market. 2.9% 0.2% Performance of the desserts category was under pressure due to material input cost inflation in sugar and corn starch that resulted in higher prices and lower volumes. This was exacerbated by growth in ready-to-eat custard offerings and the concomitant decline in demand for custard powder. Baking aids performed well with growth across all categories. 4.8% 3.1% The fruit juice category experienced its first inflationary wave following the drought and exchange rate impact, but is facing a second cost increase wave due to shortages in grape, guava and orange concentrates. Beverage volumes increased only marginally following a difficult second half of the year with growing competition from imported products. 2.0% 0.1% The dilutables category faced higher input costs related to sugar and concentrates as is the case with fruit juice. However, the flagship brand, Wild Island, performed well and delivered significant increases in volume following higher below-the-line marketing investment. Ice tea Lipton ice tea is a leader in the ice tea category and is bottled by Ceres Beverages by agreement with the Pepsi Lipton International joint venture. Sustainability progress Water is becoming a major focus for the division, especially in the beverage plants, where improved efficiency in water usage is critical. In Ceres, boreholes provide supplementary water. The Wadeville plant is challenged by a 15% savings target implemented by the City of Johannesburg from September. A water effluent treatment plant was installed in Wadeville during the year. A joint initiative with an external service provider enabled the division to improve cost-efficiency of boilers, reduce electricity consumption, instigated energy tariff reviews and created energyconsumption awareness among employees. As previously reported, the Ceres beverage facility has uninterrupted power supply units. Similar technology has now been implemented at Wadeville. Solar panels with a capacity of 2.5 MWp have been installed at the Clayville plant to supplement electricity supplied by Eskom. Food safety remains a focus area. During the year, the business responded to regulations regarding salt levels and complies with these. The promulgation of further regulations related to salt and sugar levels is expected in the medium term. Pioneer Foods participates in industry initiatives through the Consumer Goods Council of South Africa ( CGCSA ) and relevant industry bodies to encourage selfregulation rather than government-led restrictions. Read more in the sustainability report from page % 2.6% The ice tea category remains buoyant. The division gained market share with the market-leading brand Lipton. Good growth during a hot summer period slowed significantly towards the end of the year. The category is expected to show growth over the longer term. Innovation Innovation activity was dominated by brand extensions and new packaging. The launch of Liqui-Fruit sparkling at the end of the financial year constituted a very competitive new offering in the carbonated fruit juice segment. Brand range extensions and relaunches include: Nature s Source muesli relaunched in a resealable pack Range extensions: Otees Birdy Berry Liqui-Fruit Red Grape and Coconut Water Bokomo rusks in Cranberry Weet-Bix flavour Ceres launched a new low-gi, sugar defence, juice and purified water range Lipton Ice Tea Mojito and Strawberry Daiquiri Virgin Cocktail flavours launched for summer Safari launched Just Fruity Animals snack in animal shapes Werda salads brand migrated to Safari Safari snack bars (Original as well as Nut, Seed and Cranberry flavours) launched as new products New packaging includes: Liqui-Fruit Sparkling 275 ml slim can Fruitree Nectar 330 ml can ProNutro relaunch of range and refreshed packaging Ceres launched new flavours and fruit cells packaging New Bokomo Oats packaging Spekko rejuvenated packaging for their speciality range 58 PIONEER FOODS 59

32 OPERATIONAL REPORT: GROCERIES CONTINUED Outlook Trading conditions is expected to remain challenging. The Groceries division has further opportunities to unlock value: Optimising its manufacturing footprint Commissioning Weet-Bix and long-life fruit juice capital projects Further logistics optimisation Sustained brand focus and investment Deepened innovation focus Rationalisation of the portfolio where appropriate The additional Weet-Bix line at the Atlantis plant will be operational by January 2017, and will alleviate significant capacity constraints. Further efficiency enhancements in the beverage plants are also under way. The introduction of a sugar tax is the most significant risk for the division in the short term, and could have a material cost impact on the business. The exact effect on the division is still uncertain, as it is not yet known which product types will be excluded from the tax. Potentially effective 1 April 2017, the tax is applicable to all beverages with added calorific sweeteners. This could, potentially, affect between 45% and 95% of Pioneer Foods beverage revenue. The tax may result in sugar being four times more expensive than today. The reformulation of beverages and other mitigating actions are in process, and negotiations to exclude 100% fruit juices continue. In conclusion, the portfolio remains well-balanced and optimally capitalised, positioning Pioneer Foods Groceries for future growth. The beverage category is likely to experience volume and margin pressure due to fruit raw material cost push. Brands Weet-Bix Safari Bokomo ProNutro Moir s Marmite Bovril Redro Peck s Anchovette Werda Smash Maizena Liqui-Fruit Ceres Fruitree Wild Island Daly s Revenue contribution 48% Beverages 29% Cereals 23% Snacks, Treats, Accompaniments and Baking 60 PIONEER FOODS 61

33 OPERATIONAL REPORT: INTERNATIONAL The International division is well positioned to leverage the Pioneer Foods product basket into strategic global markets. North America UK Germany Switzerland South Korea China Japan AFRICA REST OF THE WORLD Algeria Nigeria Democratic Republic of Congo Ghana Mozambique Zimbabwe Botswana Mauritius Philippines Namibia With local operations in the UK that boast one of the best granola facilities in Europe and the recent acquisition of Streamfoods, one of the market-leading brands in fruit snacking in the UK, Pioneer Foods has the ideal springboard for Western European expansion. The acquisition into the Nigerian joint venture, Food Concepts Pioneer Ltd ( FCPL ) has established a base for Pioneer Foods in West Africa. In addition to these in-country operations, Pioneer Foods has a 50% stake in joint ventures in Namibia (Bokomo Namibia) and Botswana (Bokomo Botswana). These operations focus on milling wheat and maize, as well as the distribution of the broader Pioneer Foods product basket. The division exports to more than 60 countries through local strategic partners and brand custodians. Our product portfolio includes dried fruit, beverages, maize meal and breakfast cereal products. The routes to market and brand development within these countries are at different stages of maturity and offer great potential for growth, particularly in Africa and Asia. The export of dried fruit into Western Europe and North America is well established with long-term strategic partners. There is opportunity to drive a broader value-added fruit portfolio, presenting a new growth vector. Business environment Global growth continues to stagnate or decline, compounded by substantial volatility in financial markets, while the vagaries of the Agri-sector affected crop size and quality. Most African markets were under pressure this year. This was particularly evident in the key Southern African Development Community ( SADC ) markets of Mozambique, Zambia, Angola, the Democratic Republic of Congo and Tanzania. This complicated the management of price, volume and margin relationships, but was also influenced by volatile currencies within export markets. Performance overview International delivered reasonable year-on-year results, notwithstanding the volatile operating conditions, with revenue increasing by 17% and operating profit by 9%. The year was characterised by increasing volumes in fruit and cereals, while beverage volumes declined. Beverage export volumes and pricing were under pressure, particularly on the African continent, due to softening currencies. Profitability was tempered by a combination of fluctuating exchange rates across more than 60 markets, sales mix changes, reduced margins Financial performance 2015/16 financial year Revenue Operating profit Operating profit margin Capital spend R3 050m R484m 15.9% R131m +16.6% +8.8% 2015: R2 616m 2015: R445m 2015: 17.0% 2015: R41m 62 PIONEER FOODS 63

34 OPERATIONAL REPORT: INTERNATIONAL CONTINUED and increased costs related to production. In the UK, the investment in the new cereal facility in Peterborough negatively impacted first-half operating profit, but plant improvements and volume growth combined with the ability to meet increased demand are already delivering benefits. The acquisition of Streamfoods in August and the devaluation of the rand further benefited the consolidated results of Bokomo Foods UK. Channel performance Category Volume change A focus area for the year was rectifying and optimising the current operations of FCPL in Nigeria. The volumes sold trended upwards during the year and, despite the high-inflationary environment, losses have stabilised and the company recorded an operating profit during the last quarter. The International division s in-country operations continue to enable the proper management of route to market and channel penetration, as well as growing its brand and product portfolio. Performance Exports Beverages -5% Macroeconomic factors in Africa remain depressed, impacting consumption of premium products. Consumers continued to trade down to more affordable product propositions. Hence the focus was on establishing and growing brands such as Fruitree and Caribbean. This assisted in maintaining category volume shares. Margin erosion was evident from the reduced contribution of the premium brand Ceres. Exports Groceries 9% Foods (Essentials and Groceries) delivered solid volume increases. Pricing came under pressure due Exports Essentials 67% to currency volatility. There was a concerted effort to invest in building market share. Exports Fruit 10% Fruit performed well on the back of a good 2015 crop. Global dollar pricing and a weaker rand in the first half benefited the business. The poor 2016 vine fruit harvest will, however affect volumes in the first half of Bokomo Foods UK 8% Despite the 8% increase in volumes sold, Bokomo Foods UK s earnings were under pressure as the business contended with the move of the Peterborough facility. As a result, storage, logistics and overtime costs were at abnormally high levels. The new facility has been described by customers as one of the best muesli and granola facilities in Western Europe. This position was corrected in the second half of the year. Innovation The innovation focus during 2016 was to drive market penetration of products launched during the previous financial year. Solid performance was achieved from the following lines: Ceres Sparkling 275 ml cans (three new flavours) Fruitree Nectars 1 litre carton and 350 ml glass (new flavour) Fruitree Squash 2 litre New launches for 2016 included: Fruitree Fruit Drinks 500 ml PET (four flavours), produced in Kenya and distributed in Mozambique Bokomo Corn Flakes dedicated African packaging across 500 g, 750 g and 1 kg pack sizes Bokomo Corn Flakes 250 g pillow pack Outlook International s growth plans for the next three years have four focus areas: Beverages and Foods: Brand and product portfolio strategies will be at the forefront of management s critical focus areas to ensure performance is maintained against the backdrop of volatile currencies and consumer markets. Fruit products: The strategy will focus on securing the required raw material as well as significantly investing in innovation for value-added fruit products. UK: Continued focus will be on innovation of breakfast cereal products to maintain the position as one of the leading private label suppliers. The acquisition of the Fruit Bowl brand allows the business to leverage its exposure to the private label business and enter the branded fruit snacking category. The integration of this new acquisition will be the focus area for management to ensure synergies are realised. Acquisitions: Growing Pioneer Foods s international footprint through the acquisition of recognised brand offerings. The following risks remain relevant: Key African markets, including Zimbabwe, Mozambique and Zambia, remain depressed. The smaller and costlier 2016 vine fruit crop will result in reduced volumes and profitability in the first half of the 2017 financial year. Beverage markets, particularly in Asia, remain difficult to predict and are adversely affected by complex import legislation and product specifications, trade barriers and volatile socio-economic conditions. Optimal credit management and investment are important measures in the preservation and development of markets. In Africa, the division is driving SADC market penetration of foods and beverages through step changes in route-to-market development. We are developing Pioneer Foods brands in other markets, particularly Vietnam and the Philippines, through improved strategic engagement and deepened distribution. Growth in fruit will be achieved through the development of strategic customer relations, improved sourcing risk mitigation and by exploring format and product expansion opportunities. Further opportunities will be leveraged from the recent Streamfoods acquisition. In the UK, the division will drive cost savings through the Peterborough facility, while leveraging retailer relationships and exploring European expansion. International remains on track to deliver profitable growth. 64 PIONEER FOODS 65

35 OPERATIONAL REPORT: INTERNATIONAL CONTINUED Brands Revenue contribution Joint ventures Ceres Safari Fruitree Liqui-Fruit Moir s Bokomo White Star Champion Fruit Bowl (UK) 27% Africa 35% Rest of the world 38% United Kingdom Alpen Food Company South Africa (Pty) Ltd Profile The Alpen Food Company is a joint venture with Weetabix Ltd in the UK, manufacturers and distributors of well-known and leading cereal brands. Alpen Food Company SA uses identical technologies and product recipes as in the UK at its production facility in Cape Town to produce their range of Alpen mueslis and Nutrific wheat biscuits. Performance A decline in sales volume compared to the previous year negatively impacted performance, which was further exacerbated by a lack of UK imports. In the previous year, a portion of sales were imported. Growth was further restrained by limited production capacity. Prospects 50% The installation of a new line gears the business for growth. It will offer a step change in the capability of the plant and processes. A commercial plan is in place to cater for the expected increase in production volume. This should positively impact results in the next financial year. Heinz Foods SA (Pty) Ltd Profile Through a joint venture with Kraft Heinz in the US, Heinz Foods SA markets the Heinz range of ketchups, soups, noodles and baked beans in the local market. This includes the Wellington s range of sauces and condiments. The John West range offers canned seafood products, and the frozen, prepared-meal market is targeted with the Today and Mama s ranges of meals, pies and pastries. Performance Revenue growth was driven by excellent growth in baked beans, tomato sauce and tuna. Wellington s tomato sauce achieved its highest value market share yet. Profits decreased due to higher development and advertising spend, as well as higher commodity and logistics costs. Prospects 49.9% A new Kraft portfolio will be launched that will assist in accelerating growth. There will also be a strong focus on driving supply chain savings, particularly in procurement and logistics. Bowman Ingredients (SA) (Pty) Ltd Profile Bowman Ingredients (SA) is a joint venture with the UK-based Jas Bowman & Sons Ltd and specialises in making batters, breadcrumbs and food coatings. Many of the products are tailored to meet the requirements of South African manufacturers and end consumers. Performance Revenue growth and profitability were exceptional, aided by a beneficial flour price. Operating costs were controlled tightly. There was notable growth in value-added chicken coatings across the market. Prospects 50% There is still room for organic growth by optimising Bowman s areas of expertise and capability, and maximising growth in exports. A focus area for the next year will be the preparation for the investment in new capacity in 2017/18. Future Life Health Products (Pty) Ltd Profile The Future Life joint venture provides an opportunity for combined expertise to leverage functional foods in the food and beverage segments. Benefits include the opportunity to explore categories outside the partners respective manufacturing capabilities and traditional markets. Performance The joint venture delivered a pleasing performance relative to the acquisition hurdle rates. Prospects 50% Future Life Smart Bread will contribute positively. A unique bran flakes offering with innovative packaging, which includes probiotic sachets, was also introduced. Exciting innovation prospects will support future growth. 66 PIONEER FOODS 67

36 OPERATIONAL REPORT: INTERNATIONAL CONTINUED REALISING POTENTIAL THROUGH OUR BRANDS Bokomo Botswana (Pty) Ltd Profile This is a partnership with an established business, PF Brink (Pty) Ltd, and consists of an egg and broiler production and sales operation, as well as the production and selling of wheaten flour and maize meal. The business also packs sugar. Bokomo Botswana distributes Pioneer Foods products in the region. Performance Excellent revenue and profit growth was achieved despite a decline in maize volumes. First steps in a plant upgrade were initiated with sugar and flour packing automation, finished product bulk bins and two additional grain silos being built. Prospects Additional capacity will be available with the completion of the plant upgrades. The business will further benefit from improved routing and stock replenishment initiatives supported by productivity improvement projects across all disciplines. Bokomo Foods Namibia (Pty) Ltd Profile Based in Windhoek, Bokomo Namibia focuses on wheaten flour and maize meal production and distributes a wide range of the Group s products in the region. It operates a wheat and maize mill. Performance Good performance was driven by strong volume growth and market share gains in wheat. The business was further able to source raw material competitively through the duty-free wheat allocation for Namibia. The laying business was disposed of and handed over at the end of July 2016, which concluded the brand portfolio optimisation. Prospects 50% 50% The priorities for the next year include resetting the cost base by improving operational execution and daily controls. A warehouse expansion project will be finalised to ensure warehouse and distribution capacity is aligned with long-term goals. Food Concepts Pioneer Ltd Profile Food Concepts Pioneer Ltd is a baked goods company in Nigeria. With its primary focus on bread, the company owns the well-established Butterfield brand, which is distributed in key markets in the country from its bakeries in Lagos, Abuja and Ibadan. Prior to the Pioneer Foods acquisition, the company expanded into the active sausage rolls category with the launch of YumYum. Future growth opportunities exist to expand the Pioneer Foods product basket into Nigeria through Food Concepts Pioneer. Performance Good sales volume growth of YumYum sausage rolls and bread continued despite tough operating conditions as a result of depressed oil prices. The high-inflationary environment caused significant raw material price volatility, while sales price increases were supported by bread-quality enhancements. Prospects 50.1% Volume growth and cost control measures are expected to continue driving profitability in bread. Available capacity in the YumYum plant will be allocated to the production of new products. There will be a focus on reducing distribution costs through the expansion of the YumYum distributor network in Lagos. 68 PIONEER FOODS 69

37 SUSTAINABILITY REPORT Shared value creation means we are creating new products and markets, finding new opportunities for development and efficiency in our value chain, and expanding the networks of stakeholders involved. We have brought value to communities with high unemployment, low nutrition and little hope. Through our business model, we create shared value by addressing societal needs, such as food security and optimal nutrition. Realising sustainability potential through shared value The goal of Pioneer Foods social and environmental initiatives is to increase long-term shareholder and social value, while decreasing the Group s use of materials and reducing negative impacts on the environment and society. The Group actively manages the trade-offs between economic viability and social and environmental responsibility. Pioneer Foods aligns its sustainability approach to the business strategy. Four sustainability goals support the six strategic business themes (see page 72), with a further six enablers constituting the shortterm interventions to support the achievement of these goals. This section is structured according to these goals and enablers, with performance commentary provided for the past financial year. Governance of sustainability Sustainability is governed by the social and ethics committee ( SEC ), which monitors shared value creation on behalf of the Board. Monthly reports, based on the sustainability goals and enablers and prepared by the divisions, are presented to the executive committee, followed by quarterly reports to the SEC. The reported data is collected and measured against key performance indicators ( KPIs ). Read more in the SEC report in the governance report on page PIONEER FOODS 71

38 SUSTAINABILITY REPORT CONTINUED Six strategic business themes Sustainability reporting Sustainability KPIs are captured in a monthly dashboard which maps the road to Desired outcomes are defined according to goals, measurements and targets. Targets include, for example, the number of breakfasts provided to primary school learners on a daily basis, the number of bursaries awarded and energy-reduction measurements. Social and ethics Board committee SHAPE A WINNING CORPORATE PORTFOLIO FOCUS ON BUILDING OUR POWER BRANDS EMBED STRATEGIC CUSTOMER MANAGEMENT RESET THE COST BASE AND STEP UP PRODUCTIVITY BUILD HIGH- PERFORMING TEAMS ADOPT SUSTAINABILITY BEST PRACTICES IN ALL WE DO BOARD OF DIRECTORS SUPPORTED BY Sustainability owners and data collectors (including divisions and Group) Executive committee Four sustainability goals External governance, social, environmental and economic impacts GOVERNANCE ECONOMIC SOCIAL ENVIRONMENT The following table provides a summary of the sustainability goals and their supporting objectives, which determine the major components of this report: EMBED SUSTAINABILITY IN BUSINESS PRACTICE CORPORATE SOCIAL INVESTMENT PIONEER FOODS EDUCATION AND COMMUNITY TRUST CREATE ECONOMIC VALUE ENSURE SOCIAL LICENCE TO OPERATE Six sustainability enablers TRANSFOR- MATION SUPPORTED BY COMMUNI- CATION ENTERPRISE AND SUPPLIER DEVELOPMENT MANAGE AND MINIMISE ENVIRONMENTAL IMPACTS ENVIRON- MENTAL INITIATIVES Sustainability goals Embed sustainability in business practice Create economic value Ensure social licence to operate Manage and minimise environmental impact Supporting objectives Achieve excellence in governance Actively manage sustainability opportunities and risks Active communication and stakeholder engagement Create economic growth while ensuring sustainability Deliver continuous cost reduction through sustainability-based resource efficiency Ensure growth and development of employees Transform to reflect the composition of the society in which Pioneer Foods operates Support development of sustainable and competitive communities Contribute to the general health and well-being of society Ensure a safe and healthy workforce Minimise the impact of Pioneer Foods activities on the environment Build resilience to environmental changes throughout Pioneer Foods value chain 72 PIONEER FOODS 73

39 SUSTAINABILITY REPORT CONTINUED Assurance and compliance As set out in the assurance section on pages 132 and 133, Pioneer Foods follows a combined assurance approach. External verification of non-financial information includes limited assurance obtained from EY on the following KPIs (indicated with an LA in the report): Lost time injury frequency rate ( LTIFR ) Fatalities Number of permanent employees Permanent employee turnover Scope 1 carbon emissions Scope 2 carbon emissions Water consumption The EY assurance statement, including a breakdown of the basis for measurement of each indicator, is available on the Pioneer Foods website at Regular external audits ensure that Group facilities maintain certification of compliance and align with best practice. The business subscribes to the following health and safety standards: HACCP (Hazard analysis and critical control points) ISO (Environmental management) ISO 9001 (Quality management) selected elements ISO (Food safety management) Essential Foods only OHSAS (Occupational health and safety) NOSA Integrated Five Star SHE System (National Occupational Safety Association) Groceries/ International only FSSC (Food safety system certificate) BRC Essential Foods only AIB Essential Foods only NRCS certification fish paste only NRCS e-mark audit SANBWA Ceres spring water only GSFI (Food safety management) Essential Foods only The following were included in the design of the integrated management system ( IMS ): ISO Customer satisfaction Guidelines for complaints handling in organisations ISO Guidelines for quality management system documentation ISO Risk management Principles and guidelines ISO Managing for sustained success of organisations SANS Risk management Risk assessment techniques Pioneer Foods received no material environmental, health or safety fines during the year. Read more about the Group s approach to regulatory compliance from page 118 to 122. Sustainability goals: progress for 2016 GOVERNANCE 1 Achieve excellence in governance Embed sustainability in business practice 1 Achieve excellence in governance Governance creates value through structured and formal systems, which fully integrate sound governance principles into all aspects of the business. Pioneer Foods is committed to excellence in governance as a key enabler for the successful implementation of its strategy. Read more in the governance report on page Actively manage sustainability opportunities and risks The effective management of social and environmental risks can create shared value, which includes improved business performance through cost savings and higher efficiency. Similarly, social and environmental opportunities could lead to growth through innovation and the development of new markets. Pioneer Foods manages these through its governance structures and by setting performance targets for selected sustainability KPIs. Read more about the genetically modified organism ( GMO ) policy on the Pioneer Foods website at Read more about the risk management process in the risk report on page Actively manage sustainability opportunities and risks 3 Active communication and stakeholder engagement 3 Active communication and stakeholder engagement The Group recognises that it affects a wide range of stakeholders through its business activities and therefore aims to address their needs, interests, expectations and issues through a structured stakeholder engagement approach. Read more about active communication and stakeholder engagement activities on page 88 under enablers. Consumer care management Pioneer Foods has a robust consumer care management system, which reports on and responds to consumer complaints, requests and compliments in a timeous and legally compliant way. As this requires specific systems and skills, the day-to-day consumer care management function is outsourced to an industry-recognised service provider. Pioneer Foods retains overall responsibility for consumer care and the associated reputational risk. Group procedures are implemented through a comprehensive service-level agreement. Pioneer Foods is also a committed participating member of the Consumer Goods and Services Ombud ( CGSO ), which provides a mechanism to safeguard the interests of consumers. 74 PIONEER FOODS 75

40 SUSTAINABILITY REPORT CONTINUED ECONOMIC 1 Create economic value Create economic growth while ensuring sustainability As a good corporate citizen, Pioneer Foods considers the necessary trade-offs between the six capitals in its efforts to achieve sustainable growth. Read more about these trade-offs in the business model on page 23 and about economic growth in the chief executive officer s report and financial review on pages 40 and Deliver continuous cost reduction through sustainability-based resource efficiency Transport and logistics The bakeries business unit embarked on a project in 2014 to replace its entire outbound logistics fleet. The saving in terms of fuel efficiency due to the fleet replacement is compelling. 1 2 Create economic growth while ensuring sustainability Deliver continuous cost reduction through sustainability-based resource efficiency Carbon tax The South African draft Carbon Tax Bill and draft Carbon Offset regulations were released for public comment at the end of Pioneer Foods engaged with National Treasury through the Consumer Goods Council ( CGCSA ) and participation in stakeholder workshops with Treasury and the Department of Energy. The Group is establishing its exposure in terms of the carbon tax using the 2015 paper as a guideline. SOCIAL 1 Ensure social licence to operate Ensure growth and development of employees Transform to reflect the demographics of the society in which Pioneer Foods operates Support development of sustainable and competitive communities Contribute to the general health and well-being of society Ensure a safe and healthy workforce Ensure growth and development of employees To build a high-performance team that can deliver on Pioneer Foods vision, the growth and development of the Group s LA employees is critical. The investment in human capital development for 2016 amounted to R24.6 million and created a higher skilled workforce, larger pools of potential candidates and improved understanding of the behaviours associated with a high-performance culture. Organisational development Pioneer Food s organisational design and associated culture is continuously aligned to the Group s strategic themes. A mature model is able to realise potential through cost savings, efficiency and synergy while embedding new competencies for the Group. The following changes to the operating model were implemented and are at different stages of maturity: Marketing and strategy Addition of centralised marketing analytics and insights role Consolidation of the CSI, enterprise supplier development, Group communication and sustainability roles into a new stakeholder and sustainability department Supply chain Separation of logistics and demand planning roles Centralisation of demand planning across businesses Operations Re-structuring of Groceries management to consolidate manufacturing and supply chain, and to focus category management Leadership and governance Separation of audit and risk into separate committees In 2016, the focus on high-performing teams continued to be built on exceptional talent, which required a comprehensive talent management approach to manage and mitigate people risk. The Group adopted a new talent management vision: To accelerate talent placement to drive critical organisational outcomes, supported by the following key focus areas: Organisation capability / talent alignment Insight-driven talent decisions Accelerated exposure Aggregated development Good succession of talent is being developed at executive and management level and operating model priorities have been resourced. The depth of technical skills remains a risk, mitigated in part by apprenticeships and graduate internship programmes. The following are integral to the Group s highperformance culture: Customer orientation and identity Employee levels of engagement The extent of performance management implementation The celebration of successes 76 PIONEER FOODS 77

41 SUSTAINABILITY REPORT CONTINUED Excellence Awards The Group s high-performance culture is reinforced at the annual gala event, Pioneer Foods Excellence Awards, where individual excellence, ambassadors and community champions are recognised and celebrated. In 2016, nominations were received (2015: 1 871). The awards recognise the following: Individual Excellence Award: An employee that adds value to the business that affects or contributes to the overall bottom line. This employee is innovative and shows great initiative in his/her area of responsibility. Ambassador Award: This employee is a true Pioneer Foods ambassador. This individual embodies the Pioneer Foods values, and it is evident in his/her interaction with others and the quality of work delivered. Community Champion Award: An employee recognised for community involvement is acknowledged for his/her noteworthy contribution to his/her local community or area of influence. Pioneer Foods learning academy Leadership development remains a key part of the Group s talent retention plan and is offered through two formal programmes the Advanced Leadership Development Programme ( ALDP ) and the Foundational Leadership Development Programme ( FLDP ). The number of FLDP and ALDP candidates for 2016 decreased slightly compared to the previous year: a total of 45 employees (2015: 61) were enrolled in the two leadership programmes offered by the academy. Of the total participants, 91% and 62% respectively were black participants in the FLDP and ALDP, and 36% and 23% respectively were female participants in the FLDP and ALDP. Pioneer Foods focus on customer orientation was initiated with an assessment against integrated demand management best practice competencies and feedback to all marketing and sales employees. The competencies were further entrenched through multidisciplinary workshops across businesses, focusing on consumer insights, business model impact and action planning. This work formed the foundation of the Marketing Academy blueprint. The aim of the marketing programme is to entrench deep brand management competence and to embed sound brand-building methodologies. The academy aims to upskill managers in both marketing best practice fundamentals and the latest thinking around processes and approaches. Subsequently, this resulted in the Pioneer Foods Marketing Leadership Development Programme ( MLDP ). The Pioneer Foods Active Manufacturing Academy had 16 graduates in the 2015/16 period, during which they completed a certified course in Manufacturing Excellence, with most of the modules based on world-class manufacturing principles. NUMBER OF SKILLS DEVELOPMENT PARTICIPANTS for permanent employees in wholly owned South African operations Bursars Apprenticeships Graduate programmes Skills pipeline The Group invested in future skills by way of the following: 19 apprenticeships (2015: 21) 2 extended graduate programmes (2015: 9) 126 employee bursaries (2015: 53) 258 learnerships (2015: 207) 33 adult basic education and training ( ABET ) students 320 skills programmes Total skills development spend for 2016 was R24.6 million (2015: R24 million) of which 85% (2015: 73%) was spent on black employees and 2% on black females (2015: 20%). This created shared value for employees who enhanced their career opportunities and increased their earnings ability while Pioneer Foods benefited from an enlarged skills pool with a selection of employment equity candidates. Going forward, there will be a targeted drive towards training and talent management of black females PIONEER FOODS 79

42 SUSTAINABILITY REPORT CONTINUED 2 4 Transform to reflect the demographics of the society within which Pioneer Foods operates As a good corporate citizen with a strong South African base, Pioneer Foods is committed to transformation and ensuring that employment demographics reflect the society within which we operate. This creates shared value for the business and government s national transformation agenda. Read more about transformation at Pioneer Foods on page 87 under enablers. 3 Support development of sustainable and competitive communities Contributing to the empowerment of communities ensures that Pioneer Foods creates consumers of the future and supports government s national development goals. Pioneer Foods developed an integrated and sustainable enterprise and community development model that integrates and addresses the combined potential impact of the Pioneer Foods Education and Community trust. Read more about community initiatives on page 85 under CSI enablers. Contribute to the general health and well-being of society Health is one of Pioneer Foods development focus areas in allocating resources to communities. As a food and beverage manufacturer, the Group is a key provider of brands that contribute to health and well-being. Product innovation at Pioneer Foods is aligned to the sustainability agenda and supports the principles of nutritious and healthier food and beverage choices for consumers. Read more about Pioneer Foods social impact on page 85 under sustainability enablers. Read more about innovation and new product development in the operational reports from page Ensure a safe and healthy workforce Health and safety The health and safety of employees is important for Pioneer Foods in building a high-performance culture. Employees are provided with training to support and enable optimal performance of duties at a functional level. In the current year, LTIFR was 2.48 LA (2015: 2.54). During the year, four LA Pioneer Foods employees, one of which is a labour broker employee, lost their lives while on duty at Brito s bakery in Port Elizabeth and Ladysmith bakery in KwaZulu-Natal. Pioneer Foods offers its condolences to the families of Mr Duane Brandon Kinners, Mr Mlungisi S bonelo Zondi, Mr Zolile Lawrence Koba and Mr Dathini Mdudo. Labour union engagement The Group supports employee rights to collective bargaining. Employees are free to associate with the labour union of their choice to negotiate the terms of their employment. Total union membership for 2016 was approximately 80% (2015: 79%) of the bargaining unit and approximately 65% (2015: 58%) of permanent employees. Two divisions experienced incidents of industrial action which resulted in the following operational impact: Essential Foods: Estcourt bakery depot eight days Ladysmith bakery one day in solidarity with Estcourt Groceries: Wadeville ProNutro three days Atlantis Weet-Bix five days The issues that gave rise to the strikes were related to salary negotiations and a refusal to clock, and were all resolved. UNION MEMBERSHIP: % OF PERMANENT EMPLOYEES IN WHOLLY OWNED SOUTH AFRICAN OPERATIONS PIONEER FOODS 81

43 SUSTAINABILITY REPORT CONTINUED Manage and minimise environmental impact ENVIRONMENTAL 1 Minimise the impact of Pioneer Foods activities on the environment 2 Build resilience to environmental changes throughout Pioneer Foods value chain 1 2 Minimise the impact of Pioneer Foods activities on the environment Natural capital is one of the main inputs into Pioneer Foods business model and has to be managed responsibly to ensure sustainability, especially in supporting food security. Read more about environmental mitigation actions on page 95 under enablers. Build resilience to environmental changes throughout Pioneer Foods value chain CDP (formerly the Carbon Disclosure Project ) CDP is a voluntary questionnaire that aims to assist companies in disclosing how they are managing their carbon, forest, water and supply-chain-related risks and opportunities. The methodology provides a score which assesses Pioneer Foods progress towards environmental stewardship. It assesses the Group s awareness of climate change issues, management methods and progress towards action taken on climate change. The Group s score in 2016 was a Band B. This is an improvement from Band C in CDP Water Pioneer Foods provided a comprehensive disclosure on water issues. Greater investigation of how water issues relate to the business specifically will allow appropriate management actions to be taken. Pioneer Foods water score for 2016 was maintained at C. CDP Carbon Scores run from A (highest) to D- (lowest) CDP Water Scores run from A (highest) to D- (lowest) Leadership A Management Awareness Disclosure Pioneer Foods 2016 carbon score B B- Pioneer Foods 2015 carbon score C C- D D- Leadership A Management Awareness Disclosure B B- Pioneer Foods 2016 and 2015 water score C C- D D- Failure to respond F Failure to respond F 82 PIONEER FOODS 83

44 SUSTAINABILITY REPORT CONTINUED Six sustainability enablers Corporate social investment CORPORATE SOCIAL INVESTMENT PFECT TRANSFOR- MATION COMMUNI- CATION ENTERPRISE AND SUPPLIER DEVELOPMENT ENVIRON- MENTAL INITIATIVES The Group s CSI activities aim to address the key causes of social challenges, such as underdevelopment, hunger, poverty and limited economic participation. Through its partnerships, the Group is involved in various community projects in education, the environment and food security. These projects focus on vulnerable groups, such as women, youth and children, primarily in townships and rural communities. The Group also invests in feeding schemes. Pioneer Foods distributed approximately R9.3 million to beneficiaries during the year (2015: R13.5 million) via its CSI projects (excluding contributions from PFECT). Sustainability enablers: progress for 2016 Focus area Beneficiaries Description Initiative 2016 contribution Education Mbekweni Youth Centre (MYC) PFECT supports the running of MYC which targets in-school and out-of-school youth. The initiatives include improvement of academic performance, life skills, health, wellness and sport, and youth economic development. PFECT R2.3 million PFECT bursary programme The bursaries support disadvantaged black students in high school and tertiary institutions. The tertiary students are studying in the fields of food science, accounting, engineering and marketing. Pioneer Foods has provided in-service training for some of the engineering students over the years. In 2016, approximately 36 students were bursary recipients in this programme. PFECT R3.1 million MOT-SA PFECT supports the MOT-SA life skills training programmes which target youth in high school and at college. PFECT R Paarl Youth Initiative PFECT supports the youth development programme which runs camps, workshops and support initiatives for youth in the Paarl area. PFECT R Food security School Breakfast Nutrition Programme Pioneer Foods feeds children in five provinces daily through its School Breakfast Nutrition Programme launched in The programme, which is currently active in 25 schools in the Western Cape, Northern Cape, North West, Limpopo and Free State, provides breakfast in addition to the lunch provided by the Department of Basic Education s National School Nutrition Programme ( NSNP ). Pioneer Foods CSI R7.3 million 84 PIONEER FOODS 85

45 SUSTAINABILITY REPORT CONTINUED Focus area Beneficiaries Description Initiative 2016 contribution Food security (continued) The African Children s Feeding Scheme ( ACFS ) Stellenbosch Community Development Programme ( SCDP ) trading as Love to Give Pioneer Foods partnered with ACFS to improve the quality of life for those hardest hit by poverty and subsequent malnutrition in particular, orphans and vulnerable children, child-headed households and those in the care of elderly grandmothers. More than children benefited from the milk contribution by Pioneer Foods to support 13 feeding centres in Soweto, Kagiso and Tshepisong in the West Rand, and Alexandra, Thembisa, Kwa-Thema and Tsakane in the East Rand. SCDP provides children in Kayamandi with a meal every school day and most school holidays. Pioneer Foods contributes to the provision of the meals and the running expenses of the programme. Pioneer Foods CSI Pioneer Foods CSI R R Pioneer Foods Education and Community Trust ( PFECT ) PFECT was established in 2012 as part of the Group s Phase II B-BBEE initiative (the BEE Trust). Its activities are funded by dividends from the Pioneer Foods shares held by the BEE Trust. Its mandate includes support of community and education-related programmes. In the past financial year, R7.1 million was spent in this regard (2015: R3.3 million). The combined Pioneer Foods and PFECT social contribution for 2016 was R16.4 million. Transformation Total permanent employee numbers reduced by 7% to LA at 30 September Of this, 98% are permanent and 2% contracted employees. In addition to the permanent employees, the Group contracts approximately casual employees. Employee turnover decreased to 897 permanent employees at a rate of 10.77% LA. Designated employees per level 2016 % Top management Senior management Middle management Other % 2014 % 2013 % Community projects Love to Give sustainability livelihoods initiative PFECT supports this initiative, which mainly assists mothers and youth in the Kayamandi township with small loans and grants to start small-scale businesses, such as dressmaking, selling cooked food, providing crèches, catering, etc. PFECT R Brothers for All This youth programme in the Langa township targets unemployed youth and ex-offenders and provides them with high-value technological skills, including coding. The programme also assists them in finding job opportunities in IT companies. PFECT R Responsible Me Programme This intervention provides HIV and Aids training to high school learners, educators and parents in KwaZulu-Natal, where there is high prevalence of teenage pregnancy and HIV/Aids. PFECT R PIONEER FOODS 87

46 SUSTAINABILITY REPORT CONTINUED B-BBEE The revised B-BBEE Codes of Good Practice ( revised codes ) came into effect on 1 October 2015 after a 12-month transition period. This period allowed Pioneer Foods to examine its existing strategy and targets and to refine these in alignment with government s vision to increase the participation of black people in the economy. Compliance levels have been redefined and the new 40% hurdle rates on the priority elements (ownership, skills development and enterprise and supplier development) resulted in more attention to and innovative thinking in the planning of these elements. An immediate priority will be to ensure progress in the medium term on enterprise and supplier development. For the 2016 financial year, the Group was rated according to the agricultural sector ( AgriBEE ) scorecard and retained a level 4 status as outlined below: B-BBEE element Weighting (AgriBEE codes) 2016 Audited score (AgriBEE codes) 2015 Audited score (AgriBEE codes) Ownership Management control Employment equity Skills development Preferential procurement Enterprise development Socio-economic development Total Level 4 4 Actions that contributed to changes in the scorecard include: Positive impacts: Positive progress in senior management due to internal promotions and external recruitment of black talent. Good progress with the roll-out of the leadership programme for skilled and unskilled participants. Positive progress with the verification of B-BBEE suppliers. Negative impacts: A high turnover of black talent. Communication Pioneer Foods recognises that effective stakeholder engagement is the basis for good corporate governance and is committed to the stakeholder-inclusive approach recommended by King III. The Pioneer Foods brand and communications team carries the accountability for all marketing and messaging to Group stakeholders. The Group s approach is guided by a stakeholder relations policy, which recognises that social, economic and environmental interests are integral to the success of the business creating shared value. Extensive media monitoring is conducted on an ongoing basis to assist with managing reputational risk. Details of the Group s key stakeholders, their touchpoints and how value is created are shown in the table below: Stakeholders Touchpoints Value creation Shareholders and investors Customers and consumers Employees Communities Pioneer Foods facilitates regular engagement and consistent communication with shareholders, investors and analysts. This includes the annual general meeting ( AGM ), distribution of information via the website including financial, brand, governance, social, ethics and sustainability matters as well as press releases and SENS announcements, investor relations briefings and on-site visits to help facilitate an understanding of the scope of the Group s operations. Further investor presentations are held with interim and annual results. Pioneer Foods values open and transparent communication with its customers and consumers through forums, one-on-one interaction, advertising, corporate and brand websites, social media platforms, the customer care centre and shopper marketing. Pioneer Foods has LA full-time employees located across South Africa. Employee-related focus areas include remuneration, training and safety initiatives. Engagement platforms include intranet, and desktop screensavers, newsletters, surveys, face-to-face briefings, management presentations, conferences, forums, performance appraisals and bulletin boards. Read more about employee initiatives on page 77. Read more about our remuneration on page 136. Pioneer Foods is committed to invest in the communities within which we operate through various socio-economic development programmes and the activities of PFECT. Read more about our CSI activities from page 85. Pioneer Foods is committed to help investors make informed decisions and to secure the investment case among existing and potential shareholders. The Group strategy sets targets and a clear roadmap to improve the Group s financial performance. Pioneer Foods is dedicated to create value for shareholders by generating financial returns on investment, delivering results comparative to its peers, as well as delivering capital growth. The Group values the trust consumers place in its products and brands. This is noticeable through its investment in and efforts to deepen business knowledge and understanding of customers and consumers to ensure strategic collaboration at all levels. Pioneer Foods employees are our most valuable asset. We create value through job opportunities, remuneration, career opportunities and the improvement of skills. Short- and long-term incentive schemes have been competitively benchmarked to ensure fair practices and retention. The annual engagement survey measures and guides business on employee-related priorities. As a responsible corporate citizen, Pioneer Foods is committed to empower communities through feeding schemes, educational and health initiatives that enable them to participate in securing their own food for the future. 88 PIONEER FOODS 89

47 SUSTAINABILITY REPORT CONTINUED Stakeholders Touchpoints Value creation Government and regulators Suppliers Business partners Media The Group monitors its regulatory landscape for relevant parliamentary meetings on an ongoing basis to ensure the relevant business representation. Comments on proposed legislation are continuously submitted, with further interaction through industry bodies. Pioneer Foods suppliers comprise local and international raw material, packaging and manufacturing service providers. They are selected according to reliability of supply, range of products, quality, responsible sourcing practices and pricing. Engagement with suppliers is predominantly on a transactional and planning level, e.g. meetings and visits, supplier audits and daily interaction with senior operational and procurement staff. Read more about our supplier code of conduct on Pioneer Foods continues to shape its corporate portfolio through strategic partnerships. Engagement is on an ad hoc basis and predominantly at executive management level. This stakeholder group includes journalists, editors and publishers from various media houses and publications across South Africa. Media enquiries are fielded via , telephone or face-to-face meetings on a regular basis. As a proudly South African organisation, Pioneer Foods is committed to address pertinent industry issues alongside government to bring about resolutions that will benefit the industry and the economy. Local and international supplier relationships are of critical importance to the continued success of Pioneer Foods and they are engaged in an ethical manner. As one of the most significant buyers of raw material from the local agricultural industry, the Group supports and grows supplier relationships by providing a competitive market for raw materials and services. The Group is committed to strategic partnerships to create value by driving strategy, addressing key sustainability issues and focusing on product expansion and growth. Pioneer Foods endeavours to respond to media questions and enquiries effectively, accurately and timeously to help promote public understanding of the business and the issues that the Group faces. The table below provides a summary of notable operational and product responsibility events for the year and how Pioneer Foods is responding: Key event Stakeholder concerns Company response and outcomes GMO GMOs are a growing global consumer issue. The debate features advocates of the technology against those who maintain that the environmental and other impacts of GMOs remain unproven. Some active opponents of GMOs have shifted their focus to investigate potential dangers of pesticides and herbicides. Glyphosate is a broadspectrum herbicide and the main chemical ingredient in the most common herbicides used on GMOs and other crops. Food labelling regulations contain requirements that all products comprising more than the permitted genetically modified ingredients be clearly labelled for the benefit of the consumer. Consumers expect to be able to make an informed choice about their nutrition and trust that labelling of the food they buy in stores is thorough. In addition, the use of GMOs as well as glyphosate, attracts frequent local and international consumer attention on the basis of potential health risks to humans and its possible negative impacts on the environment. The Group understands concerns pertaining to the use of GMOs and glyphosate and have thus undertaken to conduct glyphosate residual tests on all applicable products on an ongoing basis. The primary objective is to offer all consumers competitively priced products of the highest quality and safety. Pioneer Foods adheres to all applicable food manufacturing regulations and legal requirements, and subscribes to the protection of consumer rights as governed by the Consumer Protection Act, Act 68 of The Group complies with legal requirements of the Department of Health in respect of public health issues, inclusive of maximum residue levels. The comprehensive labelling on all packaging is clear, accurate, and allows consumers to determine easily the GMO status of any product. Pioneer Foods is committed to open and transparent communication and continues to engage with consumers to empower them to make their own informed decisions for a healthy lifestyle. Industry and business associations Pioneer Foods is a participant in and a member of key industry and business associations through relevant forums, meetings and forum submissions. The Group prioritises its engagement with key industry and business associations which influence and impact societal as well as corporate sustainability. 90 PIONEER FOODS 91

48 SUSTAINABILITY REPORT CONTINUED Key event Stakeholder concerns Company response and outcomes Key event Stakeholder concerns Company response and outcomes Price increases Drought in South Africa The price of bread and other essential foods remains a highly debated issue among consumers, the media, bread manufacturers and their supply chain. Sugar tax Following the announcement by National Treasury of the introduction of a sugar tax in South Africa, a policy paper with a 20% tax on sugar-sweetened beverages was published. Considering Pioneer Foods history with regard to pricing, the issue is always met with suspicion and frustration from consumers and customers, the media and/or community forums. The debate about whether the sugar tax will achieve its intended purpose, as outlined by the DoH, continues between consumer and industry bodies, health experts and the public and private sector. Media enquiries extended to Pioneer Foods with regard to increases in the price of bread are met with thoughtful consideration. A statement of operational and economic factors impacting the bread price was submitted in a swift and adequate response. Pioneer Foods is committed to engage with government, industry and other relevant stakeholders to identify the most appropriate strategy to address effectively the obesity epidemic. The Group continues to support government s intent of enhancing the national health objectives, wellness and consumer protection. South Africa experienced its worst drought in 30 years. Healthy food options industry initiatives The healthy food options industry initiative is a joint government-industry partnership to mitigate the rise of non-communicable diseases in South Africa. The most severe impact, other than dwindling water supplies, is the effect on staple crops and, inevitably, commercial crops. NCDs are estimated to account for 40% of all deaths in South Africa at present. Globally deaths are projected to increase by 17% in the next 10 years, with the greatest increase expected in Africa. A collaborative effort between stakeholders is crucial in developing intervention strategies and reducing the disease burden. Amid the drought, Pioneer Foods is committed to responsible pricing and trading to ensure the availability of products on a sustainable basis. As a responsible corporate citizen that values the trust consumers place in our products, Pioneer Foods is collaborating with government to form part of the healthy food options industry initiatives pioneered by the DoH. Pioneer Foods is committed to open, transparent communication and will continue to engage the DoH. The Group will update consumers on any changes to products to empower them to make informed decisions for a healthy lifestyle. Carbon tax In April 2015, the Davis Tax Commission made a call to stakeholders for comments on the proposed carbon tax. In discussion with Treasury, they have indicated their intent to implement the tax from Opinions vary on the pricing of environmental externalities. Some major emitters argue that it will have a severe impact on their business, while others contend that it is a positive step in the right direction and will reduce the country s dependence on fossil fuels. The Group submitted its comments on the revised tax bill to the Davis Tax Commission and is awaiting the publication of the final legislative paper in National waste pricing strategy The Minister of Environmental Affairs published a notice for certain industries to prepare and submit Waste Management Plans. The Bill provides for a pricing strategy for waste management charges (with a wide range of potential economic instruments along the product-waste value chain) and mechanisms to oversee the disbursement of revenue collected from waste management charges. Pioneer Foods is engaging with the department through the CGCSA on how best to implement the changes envisioned by government without vastly negative consequences for the industry. Salt reduction legislation The DoH enforced new legislation to drastically reduce salt intake of consumers under the Foodstuffs, Cosmetics and Disinfectants Act, Act 54 of The new regulations, gazetted in 2013, became effective in June 2016 and will reduce salt in bread, butter, margarine, snacks, breakfast cereals and processed meats. The new regulations aim to reduce non-communicable diseases ( NCDs ), such as hypertension and strokes, which have been on the increase. Pioneer Foods started working towards the salt reduction objectives more than two years ago. Reductions were implemented gradually to allow consumers palates to adjust. All breakfast cereals and bread products produced today are compliant with the 2016 sodium targets, which were effective 30 June. Many of the related products are already compliant with the 2019 targets. 92 PIONEER FOODS 93

49 SUSTAINABILITY REPORT CONTINUED Enterprise Development The Group s business encompasses a value chain which includes farmers and suppliers across South Africa. Enterprise development activities focus on suppliers throughout this value chain. The Group allocated R7.5 million (2015: R2.1 million) to enterprise and supplier development initiatives in 2016 in the form of grants. The majority of the contributions were allocated to agriculture-related projects. Pioneer Foods continues to support eight commercial farming operations with majority shareholding by previously disadvantaged groups. They are mentored by commercial farmers as well as Pioneer Foods employees. Supplier engagement has been transforming with a more holistic approach, placing more emphasis on transformation, leading to a larger number of high-value contracts being allocated to a vendor base with level 4 or higher B-BBEE credentials. Supplier development initiatives include the following focus areas: Access to business development support Access to market opportunities Access to finance Total spend on Qualifying Small Enterprises ( QSEs ) was 4.9% (2015: 5.4%), while the spend on Exempt Micro Enterprises ( EMEs ) was 3.7% (2015: 2.3%) of total measured procurement spend. Since the 2012 season, Pioneer Foods procured raisins and fruit worth R22.3 million from the enterprise development farm projects. Most of the raisin farms took three to five years to produce to full capacity and, in the last two years, an increased supply was available. Pioneer Foods also provided long-term loans to these farms. The total loan balance is R22.2 million, which was used to buy land, equipment and to finance working capital. Focus area Beneficiaries Description Enterprise and supplier development Primary agriculture projects Varhoyi and Mgodleni Cooperative Heart of Kayamandi vegetable hub Smollans Pioneer Foods supports eight majority black-owned farm operations in the Northern and Western Cape. These farms focus on raisin grapes, peaches and nectarines. As part of the supplier development, Pioneer Foods buys their produce during the harvesting seasons. This community initiative in the rural Eastern Cape, just outside King William s Town, farms maize to be used as animal feed. Pioneer Foods supports this project. The project employs the youth and the elderly, thereby generating income for the community. Pioneer Foods supports this Kayamandi agricultural hub with the capacity to produce approximately bunches of vegetables every year. Read more about Heart of Kayamandi on page 98. Pioneer Foods contributed to Smollans by providing a grant that is used for training previously disadvantaged employees at all levels. The grant assists in orientating new employees and entrenches the values that lie at the heart of the business, connecting employees to the vision. The grant also supports training on key FMCG principles, which include supply chain, market share and rate of sale, as well as skills such as managing relationships in-store and dealing with conflict contribution R6.7 million R1.4 million R R Environment Pioneer Foods is committed to operate in compliance with all relevant international best practice, national, provincial and local environmental legislation and regulations as well as to minimise and manage all environmental impacts related to our activities. As a food and beverage producer, Pioneer Foods strives to build the resilience of its value chain while facing environmental impacts including climate change. Regular external audits ensure that Group facilities maintain certification of compliance and align with best practice. The business subscribes to the following health and safety standards: HACCP (Hazard analysis and critical control points) ISO (Environmental management) ISO 9001 (Quality management) selected elements ISO (Food safety management) Essential Foods only OHSAS (Occupational health and safety) NOSA Integrated Five Star SHE System (National Occupational Safety Association) Groceries/International only FSSC (Food safety system certificate) Environmental reporting BRC Essential Foods only AIB Essential Foods only NRCS certification fish paste only NRCS e-mark audit SANBWA Ceres spring water only GSFI (Food safety management) Essential Foods only The following were included in the design of the integrated management system ( IMS ): ISO Customer satisfaction Guidelines for complaints handling in organisations ISO Guidelines for quality management system documentation ISO Risk management Principles and guidelines ISO Managing for sustained success of organisations SANS Risk management Risk assessment techniques Pioneer Foods received no material environmental, health or safety fines during the year. Read more about the Group s approach to regulatory compliance on page 118. Energy, water and waste were the primary KPIs identified by the Group to monitor the impact of the business on the environment. These KPIs were chosen after an internal and external stakeholder engagement process during the formulation of the Group s sustainability strategy. The data collected internally on these KPIs is useful in establishing the business s exposure to various risks (e.g. carbon tax), but also allows for the quantification of business opportunities and more informed decision-making. Data is collected and collated at site level and presented to the Group manufacturing forum on a quarterly basis and to the executive committee on a monthly basis, where progress is measured and assessed. Total Energy Consumption Coal Tonnes Petrol Litres Diesel stationary equipment (generators, boilers, etc) Diesel mobile equipment (vehicles and forklifts) Litres Litres Paraffin / lo 10 Litres PIONEER FOODS 95

50 SUSTAINABILITY REPORT CONTINUED LPG - stationary equipment (boilers, ovens, heating, etc) Kilograms LPG - forklifts Kilograms Natural gas (Sasol gas / Egoli gas) Kilograms Heavy fuel oil (HFO) stationary equipment (boilers, ovens, heating, etc) Litres Total electricity purchased MWh Total steam purchased Tonnes Total Water Consumption Municipal water KL Underground water KL Surface water KL Scope 1 or direct emissions were tco 2 e LA (tons of CO 2 equivalent) (2015: tco 2 e). Total scope 2 or indirect emissions, including electricity and steam purchased, were tco 2 e LA (2015: tco 2 e), bringing total combined emissions to tco 2 e (2015: tco 2 e). The Group has made some headway in reducing energy and fuel consumption, particularly in terms of monitoring usage and the implementation of energy-saving measures. When comparing the amount of energy used per ton of product produced, the Group reduced its combined energy usage by 4%. Energy management Energy savings are both a business imperative (in terms of achieving improved efficiencies) and an environmental responsibility as a good corporate citizen. As at 30 September 2016, an estimated saving of R34.4 million has been achieved through a partnership with an energy service provider that identified potential energy optimisation opportunities at Pioneer Foods sites. Below is a summary of some of the projects implemented during the year: Intervention category Tariffs Steam and boiler optimisation Lighting Description Switching of sites to the most cost-effective energy tariffs. Replacement of existing boilers with coal boilers and optimisation of existing site boilers. Pioneer Foods buys steam from an independent service provider. Replacement of existing lights with energy-efficient alternatives. Energy saving through solar panels Pioneer Foods, in conjunction with energy solutions provider Energy Partners, started rolling out a national solar programme during the past year. The programme entails the installation of large commercial solar systems with a combined size of 2.5 MWp at five of Pioneer Foods manufacturing facilities: Ceres Fruit Juices in Wadeville (780 kw) Bokomo in Clayville (440 kw) Sasko bakery in Bloemfontein (261 kw) Klerksdorp mill in the North West (752 kw) SAD Treefruit in Worcester (298 kw) The entire programme will comprise 90 SMA inverters and Tier 1 solar modules covering a roof space of m 2. While saving on electricity expenses, these solar solutions also decrease the Group s carbon footprint, with the total effective carbon offset for these solar plants amounting to about tons per year. Water Water is a vital resource in Pioneer Foods production processes. The Group aims to measure and, where possible, reduce the amount of water used per ton of product produced. In 2016, 2.4 million m 3LA was consumed (2015: 2.5 million m 3 ). This is 4% less than in A Group-wide basic water assessment was completed in October 2015, based on the locations of all sites. The geographic and catchment-specific risks were assessed for each operational plant. Additional risk assessments with site-specific information and Group financial and production data are being completed to establish a Group-wide priority risk. A number of projects have been commissioned, which have resulted in improved process efficiencies and lower water consumption. An example is the automation of water addition to the maize conditioning process as well as identification of water leaks in underground water supply systems. To further mitigate the effects of droughts and climate change on business continuity, several service providers were appointed in 2016 to assist in reducing water consumption and identifying possible recycling or reuse opportunities on-site. In 2016, approximately m 3 of water savings were achieved from the implementation of these interventions. Waste Waste is an output of Pioneer Foods business model. Waste management provides secondary value-creation opportunities. Waste reduction, recycling and reuse options are continuously explored within the business, particularly in the area of yield improvements and product waste. Standard contracts are in place with suppliers who recycle waste, and the Group continuously strives to make use of recycled material where possible. Solar Electricity meters Installation of solar PV panels at selected sites. The installation of electricity meters per site for the measurement of electricity consumption and consumption patterns and demand site management surveys by Eskom to enable the formulation of improvement plans to correct excessive use or wastage. 96 PIONEER FOODS 97

51 REALISING SUSTAINABILITY POTENTIAL: HEART OF KAYAMANDI The Kayamandi township outside Stellenbosch is regarded as the second oldest township in the Western Cape and has an estimated unemployment rate of 40%. Loyiso Mbete (36) moved there after growing up in the Transkei and studying at the Cape Technikon. He worked for Absa for two years before starting his own construction business. In 2013, he met social entrepreneur, Peter Shrimpton, and not long after that, Heart of Kayamandi was born. oday, Loyiso is the owner of a franchise business. TIt generates revenue through selling vegetables to the local community, supplying spekboom trees to Stellenbosch businesses and the university to assist with landscaping while offsetting their carbon footprint, and hosting functions and events mainly for tourists. University groups from all over the world visit the Heart of Kayamandi vegetable hub as an example of innovative and sustainable social entrepreneurship, while local people are paid to help plant cuttings and interns start developing their own franchise business. An unused piece of land on the premises of Kayamandi High School has been turned into a neat area of tunnels, micro-houses, walkways and social areas. Positive and colourful messages brighten up 98 PIONEER FOODS walls, trees and even the tunnels, where milk crates have been turned into vegetable patches with rows of vibrant green leafy plants. Talking about his own journey, Loyiso explains how Heart of Kayamandi changed his life. He now understands how to help solve poverty-related issues, develop people and achieve business viability. On a personal level, Heart of Kayamandi brought stability and dignity to his family. He learned how to run the financial aspects of a business, employ and manage people, and run an office and he has been able to give back to the community. Ten local crèches with between 245 and 300 babies, toddlers and preschool children benefit from Heart of Kayamandi. Pioneer Foods sponsors weekly vegetables that are collected and prepared by the crèches to feed the children. According to the women who own the crèches, they have seen children gain weight, become more active and develop improved immune systems, and they have more children wanting to join the crèches. Pioneer Foods has been involved with Heart of Kayamandi since We have contributed to the development of infrastructure and skills transfer, and sponsor initiatives such as the crèche feeding scheme. The project faces continuing challenges, such as theft and cash flow difficulties. However, there are opportunities to expand the franchise model by involving the Agricultural Research Council, the university and other business partners to ensure sustainable future growth and empowerment for Loyiso and his community. Shared value impact 4 Jobs created 10 Foodpods franchises 6 Projects vegetable bunches per annum Trees per annum R2.4 MILLION Pioneer Foods contribution to date 99

52 REALISING SUSTAINABILITY POTENTIAL: SUPPORTING NEW FARMERS The main goal of the Agri Dwala Group is to develop new farmers from the previously disadvantaged groups in our community with skills such as leadership, ownership, decision-making and self-respect. By developing these skills, everyone in the group gets a chance to live life to their full potential. The destiny and legacy of 14 families in Napier in the Overberg have changed completely: from being farmworkers to being shareholders, partners in or beneficiaries of a R7.7 million project. The Agri Dwala Trust (with 21 beneficiaries) owns 70% shares in the Agri Dwala Company and 100% shares in the Agri Dwala Property Company the latter with two 600 ha farms as its main assets. he empowerment venture was established in TMarch 2006, led by visionary farmer Kosie van Zyl. He started a joint venture with his farmworkers by leasing 200 ha of public commonage, which evolved into a formal business with an operating company employing nine permanent and 11 temporary workers. Today the company is 100% black owned and farms 600 ha of own land and 800 ha of leased land. Operations include cattle and sheep farming and cash crops such as canola, wheat, barley and oats, a guest house and function venue. A foster home and school were recently opened on one of the Agri Dwala farms. With more than 90% of agricultural land reform projects funded by government having failed, the Agri Dwala project is a model of hope. The team has been awarded the following accolades in recognition of their success: A national prize for the best new entrant into commercial farming (November 2011) The prize for the highest yield and gross income in canola production in the Southern Cape region (March 2013) The national prize for best cattle stockmen of the year at Aldam near Bloemfontein (October 2013) The success of the project can be ascribed partly to the support of a network of established stakeholders, which include the Department of Rural Development and Land Reform, local co-operative Overberg Agri and Pioneer Foods. Pioneer Foods supported the project with a R3 million grant and a R3 million 15-year loan. Other success factors include a commitment to sound business principles, producing good-quality crops and livestock, the ability to upscale, sharing resources, time and knowledge, and a significant investment in training and mentorship. 100 PIONEER FOODS 101

53 REALISING SUSTAINABILITY POTENTIAL: MBEKWENI YOUTH CENTRE My name is Shaun Aphiwe Madze and I am an 18-year-old male. I am a singer, dancer and sportsman; you can say I am an active guy. Since I started dancing at the Mbekweni Youth Centre ( MYC ), my whole life has changed. Dancing gave me something I never thought I could ever have, which is self-confidence, and through dancing I have learned how to make friends and I have met new people. Even my way of thinking has changed when I m sad or hurt, dancing changes my state of being sad to being happy. Anathi Rose Tembali is an 18-year-old female from Mbekweni. She attended Wellington High and matriculated in She is now a first-year student at the University of the Western Cape, studying accounting to become a chartered accountant. She has outlined a five-year plan for her life. One of her goals is to complete her studies and then to start her own accounting firm. She has already developed a business plan for her company. Anathi has spent quite a significant amount of time at MYC and still does when she is not at university. She is grateful and thankful for all that MYC has done for her. My name is Ms Hendry. I am a teacher at Ihlumelo Secondary School and I am involved with the sport committee at the school. It is my opinion that, with the youth centre here in Mbekweni, the learners that want to do something with their lives now have the opportunity to do so. A centre like MYC is not about the beautiful building alone, but the interest the manager and the staff show towards the learners. I thank MYC for the effort they put into the sports, and training and coaching the learners for the athletics. Shared value impact (since inception) Total membership 30 computer work stations youth have completed MOT (life skills) training R4.3 MILLION PFECT contribution R7.7 MILLION Pioneer Foods contribution An evolving haven for young people elcoming, cheerful, bright, clean, spacious, Wmodern, and neat as a new pin these words describe the Mbekweni Youth Centre in the township between Paarl and Wellington. The township is home to about people, more than 30% of whom are between the ages of 14 and 25. MYC offers a combination of beautiful physical spaces and a network of relationships and commitments to improve the lives of young people in the area. Consisting of a computer lab, training room, lounge and chill area, sports hall, kitchen, offices, boardroom and boma, the centre is versatile in its offering of multifunctional spaces. Learners and students register to become members of the centre. They receive secure access linked to an incentive system, which builds credits according to training modules completed. The centre s five areas of support are: Academic performance Career guidance Life skills Health, wellness and sport Youth economic development Free Wi-Fi, supervision and access to a social worker further support a safe environment to interact and grow. Most of the youth in the township battle with drugs, peer pressure and family problems related to violence and health issues. At the centre, they find help from attentive and supportive employees. Innovative events to attract more learners to the centre include the annual career exhibition and the interschools derby between Desmond Mpilo Tutu and Ihlumelo Secondary Schools. The Mbekweni Youth Centre is a combined effort by Pioneer Foods and PFECT. While Pioneer Foods established the building and infrastructure, the trust carries the operating costs. Other business sponsors related to Pioneer Foods have also contributed towards infrastructure, such as the computer network. The centre has a small core of employees, assisted by interns from the BANKSETA and the Western Cape Health and Welfare SETA. The centre also works with the Department of Labour to provide a pool of candidates for recruitment and learnership opportunities. A board, consisting of PFECT trustees and centre management, governs the activities of the centre and assists centre manager, Selwyn Paterson, in creating a sustainable funding model. The oversight is further enhanced by the centre s community forum, which consists of teachers, pastors, business people and other NPOs. Future priorities for the centre include increasing membership, diversifying funding, and growing awareness of and integration into the community to ensure that they are able to address specific needs related to young people in a potentially volatile environment. 102 PIONEER FOODS 103

54 REALISING SUSTAINABILITY POTENTIAL: BEGINNING WITH BREAKFAST The breakfast programme is a key element in Pioneer Foods noncommercial value-creation efforts, contributing to food security and nutrition. Every weekday morning, children start their day with a bowl of ProNutro, Weet-Bix, White Star or Bokomo corn flakes, which they receive at school thanks to Pioneer Foods breakfast nutrition programme. Twenty-five schools in the Western Cape, Northern Cape, North West, Limpopo and Free State participate in the effort to ensure that these children who often suffer from low energy and poor concentration due to malnutrition, obesity and stunted growth are given the best possible opportunity to achieve their full potential at school. n addition to cereals, Pioneer Foods provides bowls, Ispoons and aprons for the food handlers, as well as long-life milk. The programme partners with the Department of Basic Education, which provides lunch through their NSNP. Their combined efforts meet a critical need in areas where rising food prices and the effects of the drought place strain on communities. Mrs Ndleleni, principal of Lesaoana Intermediate School in QwaQwa in the Free State, said: This has made a great difference to us as we are a deeply rural school. We tried to feed the children ourselves, but could not because of the financial constraints. With Pioneer s programme, the children have breakfast every day, and those learners who never used to come to school are now here at 07:00. She said teachers reported a marked improvement in discipline and performance since the feeding scheme was introduced. Pioneer Foods plans to expand the programme to feed over children daily by PIONEER FOODS 105

55 CORPORATE GOVERNANCE Creating shared value for all stakeholders continues to be a priority for Pioneer Foods. The Group s corporate governance policies and procedures are controlled and executed according to a structured, formal system. This encompasses maintaining a balance between business outcomes and expectations of our stakeholders, which include, but are not limited to, the following interest groups: Stakeholders who are affected by our business Stakeholders who could potentially influence how we conduct business Stakeholders who have an interest in the Group s actions and how these are performed The Board of directors ( the Board ) functions as the accountable custodian of corporate governance. It is committed to ensuring, collectively and individually, that sound governance principles are fully integrated into all aspects of the business. 106 PIONEER FOODS 107

56 CORPORATE GOVERNANCE CONTINUED Board of directors NON-EXECUTIVE DIRECTORS EXECUTIVE DIRECTORS EXECUTIVE LEADERSHIP TEAM NON-EXECUTIVE DIRECTORS ZL (KK) COMBI (64) Diploma in Public Relations Chairperson of the Board, independent non-executive director, member of the human capital committee and chairperson of the nomination committee. Mr Combi was the executive chairman of Thembeka Capital Ltd. He holds a diploma in public relations and was awarded the EY South African of the Year Award in 2000, as well as the World Entrepreneur of the Year in Managing Change Award in Mr Combi is a member of the Institute of Directors and serves on various listed and unlisted companies boards. Director since 29 March N (NORMAN) CELLIERS (43) BEng (Civil), DipSoc (Oxon), MBA (Oxon) Non-executive director, member of the risk committee and the human capital committee. Mr Celliers holds a BEng (Civil) degree from Stellenbosch University and an MBA from the University of Oxford (England). His professional experience includes engineering, management consulting and private equity in South Africa and abroad. He is the Chief Executive Officer of Zeder Investments Ltd since 2012 and serves on numerous boards, including Capespan Group Ltd (chairman) and Quantum Foods Holdings Ltd. Director since 1 October PIONEER FOODS PROF ASM (MOHAMMAD) KARAAN (48) BSc Agric, BSc Agric (Hons), MSc Agric, PhD Independent non-executive director, chairman of the social and ethics committee. Prof Karaan joined the Development Bank of Southern Africa as an economist and later returned to Stellenbosch to join the Rural Foundation as Head of Research. In 1997, he joined Stellenbosch University as a lecturer in Agricultural Economics. In October 2008, he became the Dean of the Faculty of AgriSciences at Stellenbosch University. He is a member of the National Planning Commission and holds other directorships in the agribusiness sector. Director since 29 March NS (NONHLANHLA) MJOLI-MNCUBE (57) MA (City and Regional Planning), Executive leadership qualifications (Harvard and Wharton, USA), Postgraduate Certificate: Technology Management (Warwick, UK) Independent non-executive director, member of the social and ethics committee. Ms Mjoli-Mncube is a fellow of the Massachusetts Institute of Technology and Aspen Global Leadership Institute, USA. She is the former economic advisor to the Presidency and former deputy chair of the Construction Industry Development Board. Ms Mjoli-Mncube serves on the boards of several listed companies and has held various executive positions. She is also a former recipient of the SABC Businesswoman of the Year Award and currently manages her own construction company. Director since 25 November G (GERRIT) PRETORIUS (68) BSc, BEng, LLB, PMD Lead independent non-executive director, chairman of the human capital committee and a member of the nomination committee. Mr Pretorius is an electrical engineer by qualification and profession. He was an executive director and CEO of Reunert Ltd until retiring in August 2010 after 37 years of service. Since his retirement, he has been appointed as a non-executive director to the boards of various companies. Director since 17 February AH (ANDILE) SANGQU (50) BCom (Acc), BCompt (Hons), CTA, Higher Dipl Tax, MBL Independent non-executive director, chairman of the risk committee. Drawing on multiple years of financial management experience at some of South Africa s revered corporations, Mr Sangqu has garnered a deep understanding of the commercial market and business landscape. He has completed an Executive Development Programme (EDP) at Wits University as well as a Masters Degree in Business Leadership at Unisa s Graduate School of Business Leadership in He completed a High Performance Board (HPB) programme at IMD Lausanne campus in Switzerland in October Mr Sangqu served as deputy director-general (Finance and Corporate Services) of the Department of Public Works and was the former CEO of Prodigy-Coris Asset Management. He was also the managing director of Budget Foods (Pty) Ltd and currently serves as Executive Head of Anglo American South Africa. Director since 24 February NW (NORMAN) THOMSON (65) BCom, CA(SA) Independent non-executive director, chairman of the audit committee, member of the risk and human capital committees. Mr Thomson worked 22 years for Woolworths, serving in various senior positions in Foods, Store Operations and Supply Chain. He was appointed to the Woolworths board in 2000 and held the position of Group Finance Director from 2001 until his retirement in He also served as a director on the board of Country Road in Australia and was chairman of the Woolworths group subsidiaries in Kenya, Tanzania, Uganda, Nigeria and Zambia until Director since 19 November PJ (PIET) MOUTON (40) BCom (Maths) Non-executive director, member of the risk committee. Mr Mouton is the Chief Executive Officer of the PSG Group. He currently serves as a director on the boards of various PSG Group companies, including Curro Holdings, PSG Konsult, Zeder Investments and Capitec Bank. Director since 19 November SS (SANGO) NTSALUBA (56) BCom, BCompt (Hons), CTA, CA(SA), HDip Tax Law, MCom Independent non-executive director, member of the audit committee, risk committee and nomination committee. Mr Ntsaluba is the founding Chief Executive Officer and executive chairman of NMT Capital. He currently serves as a director on the boards of Barloworld, National Housing Finance Corporation and Basil Read. Director since 19 November LE (LINDIWE) MTHIMUNYE-BAKORO (43) BCom, Postgraduate Diploma: Accounting, Postgraduate Diploma: Tax Law, MCom, CA(SA) Independent non-executive director, member of the audit committee. Ms Mthimunye-Bakoro is a Chartered Accountant (SA) and has extensive governance, finance and business experience, having worked in investment banking and served on the boards of various listed and unlisted companies including Woolworths, Group 5, Sea Harvest, PetroSA and Hyundai Automotive South Africa. Director since 1 November MM (THYS) DU TOIT (57) BSc, MBA Independent non-executive director, previous chairman of the human capital committee and member of the nomination committee. Mr du Toit has been actively involved in the financial and investment markets for 29 years. He was a founding member of Coronation Fund Managers and CEO for 10 years. Mr du Toit currently runs Rootstock Investment Management and is a director of various companies, three of which are listed on the JSE. Mr du Toit resigned as an independent non-executive director on 12 February LP (LAMBERT) RETIEF (63) BCom (Hons), CA(SA), OPM (HBS) Independent non-executive director, previously member of the audit committee. Mr Retief is a qualified CA(SA) and is a former director of Naspers, Media24 and Zeder Investments. He is the chairperson and former chief executive officer of Novus Holdings. Mr Retief resigned as an independent non-executive director on 12 July 2016 due to health reasons. 109

57 CORPORATE GOVERNANCE CONTINUED EXECUTIVE DIRECTORS PM (PHIL) ROUX (51) BCom (Hons), MBA Chief executive officer. Mr Roux joined Pioneer Foods from Tiger Brands where he held the position of business executive: consumer brands as well as serving as an executive director. He has in excess of two decades of experience in the FMCG industry in various senior positions, including Chief Operating Officer: Africa for Coca Cola SABCO and non-executive director of Oceana Group Ltd. Director since 1 April CJ (CINDY) HESS (40) BCom, PGDA, CA(SA) Chief financial officer. Ms Hess joined the Group from Sea Harvest where she held the position of financial director for seven years. She started her career at KPMG in 1999 and has since held executive positions at Woolworths and within the Transnet Group. Ms Hess resigned as a director on 31 October EXECUTIVE LEADERSHIP TEAM 15 PM (PHIL) ROUX (51) BCom (Hons), MBA 19 Chief executive officer. Refer to number TERTIUS CARSTENS (53) BEng (Chem), MBA Business executive: Essential Foods. Mr Carstens has extensive experience with the Group in managerial and executive capacities. He is the executive responsible for the Essential Foods division. He has been with the Group for 22 years. THUSHEN GOVENDER (40) BCom (Hons), CA(SA), MBA Business executive: International, joint ventures, mergers and acquisitions. Mr Govender joined the Group in 2013 from Tiger Brands, where he served as the executive: business development, strategy and investor relations. His career commenced at Deloitte South Africa. He later transferred to the United States to gain international experience. Over the past 10 years, he has been involved in business development and strategy within various emerging markets while working for Stanbic Africa and Tiger Brands respectively. He joined the Group in October CINDY HESS (40) BCom, PGDA, CA(SA) Chief financial officer. Refer to number JAY-ANN JACOBS (44) BA LLB, LLM, Postgraduate Diploma: Environmental Law Group executive: legal and compliance and company secretary. Ms Jacobs practised as a corporate and commercial attorney for 12 years prior to joining Pioneer Foods, four of which she was a director at Cliffe Dekker Hofmeyr Inc. in Cape Town. She has been with the Group for six years. FELIX LOMBARD (47) MCom (Tax), CA(SA) Business executive: Groceries. Mr Lombard started his career with the Group in 1995 as head of information systems at Bokomo and then Pioneer Foods. He then acted as financial manager for Sasko Maize Mills and, in 1999, he was promoted to executive: agribusiness and packaging. He is currently the executive responsible for the Groceries division. He has been with the Group for 21 years. MARTIN NEETHLING (52) BSocSc, MBA Chief marketing officer. Mr Neethling s career spans 28 years during which time he has held various senior positions within the retail, advertising and FMCG sectors including managing director of Berry Bush BBDO, director for marketing and financial services within the Pepkor Group and chairman of Jay Jays. He has more recently been adjunct faculty at both the University of Cape Town and the University of Stellenbosch Business School, and researcher at the UCT Unilever Institute of Strategic Marketing. He joined the Group in October DALE FOBIAN (48) BCom (Hons), MBL, Dip Counselling Executive human resources: Group services. Mr Fobian has 25 years human resources experience. He is the executive responsible for Group Services, leads the organisation s Human Resources Forum and co-ordinates human resources functional strategy. He has been with the Group for 22 years. PIET BURGER (53) BEng (Chem), MBA Executive: supply chain. Mr Burger has 22 years experience in the supply chain and manufacturing environments. He is responsible for Group procurement, logistics, sustainability, safety, health and environment and manufacturing. He has been with the Group for 11 years. 110 PIONEER FOODS 111

58 CORPORATE GOVERNANCE CONTINUED 2016 governance milestones Key governance milestones achieved during the year include: The appointment of four new non-executive Board members on recommendation of the said nomination committee as a result of the committee exercising its mandate, which includes the continuous review of the skills set and requisite expertise necessary for the Board to function optimally and effectively. Committee membership was reviewed and revised following the new Board appointments. An assessment of the independence of directors was conducted by an external subject matter expert in accordance with sound governance practices. This process is not yet completed. The Board and committee charters were subject to an independent review by external experts to ensure that the content remains relevant, complete, accurate and compliant. Recommendations were made to the affected committees and subsequently tabled for Board approval. The audit and risk committee was separated into two committees to ensure that, bearing in mind the statutory duties and responsibilities assigned to an audit committee as per the Companies Act and the JSE s Listings Requirements, risk management required an enhanced focus. Accordingly, the composition and mandates of both committees were reviewed The Group decision-making framework ( DMF ) was reviewed and approved by the Board on recommendation by the audit committee. Director training continued to keep the Board abreast of topical issues affecting the business and, in particular, new developments in the regulatory and compliance sphere. Since the release of the draft King IV, training on the proposed changes has been provided to the Board (among others). The Group s credit management policy was reviewed a significant milestone achieved during the reporting period. The independence of the auditors was reviewed by the audit committee to ensure the independence and objectivity of internal and external auditors. The external auditors were re-appointed following a tender process during the period under review. After due consideration, the audit committee re-awarded the tender for the external financial audit to PricewaterhouseCoopers, while KPMG was appointed as the external financial auditors for the Group s Groceries division. These appointments were confirmed and approved at the AGM that was held in February Since the Group s pilot exercise, which was completed in May 2016, the Company has implemented its newly acquired compliance management reporting tool. This enables the Group to report and monitor the Company s level of compliance with material regulatory risks. The Group implemented an automated system for enterprise risk management reporting and monitoring purposes, which assists management to report and monitor progress with material risks identified at Group and divisional level. A competition law audit was performed, given the Group s continued focus on conducting business in an ethical manner. The independent external review included a detailed assessment of Pioneer Foods business practices in alignment with the Competition Act, Act 89 of 1998 and associated regulatory requirements. This process is, however, not yet complete, but interim recommendations made by the external auditors have been considered and implemented accordingly. 112 PIONEER FOODS 113

59 CORPORATE GOVERNANCE CONTINUED Board of directors The Board exercises overriding control over the Group and its subsidiaries. In line with the Board s charter, which is reviewed on an annual basis, the Board is responsible for ensuring that the necessary systems and processes are in place, aimed at enabling the Group to achieve its objectives in a sustainable manner. During the period under review, the Board considered and evaluated various business opportunities with the objective of creating value while expanding the Company s footprint and product basket through prospective mergers and acquisitions, locally and abroad. One such example is the acquisition of the entire issued share capital of Streamfoods Ltd (UK), which was a subsidiary of Streamfoods Holdings Ltd, wholly owned by The Wellness Group of Companies. The Board continued to provide management with guidance on formulating strategy, setting targets and developing plans, while being mindful of the business impact on its triple bottom line i.e. the Group s stakeholders ( people ), its financial performance ( profit ) and the environment ( planet ). The Board is structured so that no individual director has unfettered powers of decision-making. Composition and size The Board consisted of 11 members at year-end, of whom the majority are non-executive members. The Board s composition adheres to the minimum requirements outlined in the Companies Act and the Group s memorandum of incorporation ( MOI ). The Board, with the assistance of the nomination committee, assesses the requisite skill of its members and, when appropriate, recommends the appointment of new members in terms of the MOI, for approval by the shareholders at the following AGM. Aligned with good corporate governance practice the Pioneer Board s effectiveness is reviewed on a regular basis. The Chairman and the Lead Independent director conduct an annual assessment of the Board s performance. Pioneer Foods has engaged an independent service provider and the Board is currently undergoing an independent review of the Board performance. The recommendations of this review will be considered by the Board during the 2017 financial period. Roles and responsibilities The Board s terms of reference govern and regulate how the members of the Board, collectively and individually, discharge their duties according to the principles of good governance. The Board s charter, the lead independent director s charter and the committees terms of reference are available on the website at The chairman, Mr Combi, was appointed to the Board in 2010, and was elected as chairman in the same year. He has since been re-elected as the chairman of the Board for three consecutive terms. Mr Combi is also the chairman of the nomination committee and a member of the human capital committee. In the event that the chairman is conflicted on any matter for discussion at Board meetings, he is assisted by the lead independent director, Mr Pretorius. Non-executive directors The Board consists of members from diverse backgrounds and careers, who bring a broad spectrum of skills and expertise to the decision-making process. Each member, individually and collectively, provides insight, guidance and judgement on progress in terms of the corporate strategy, risk management, resource management and stakeholder relations. In terms of the MOI, non-executive directors are appointed for a three-year period, rotate by retirement and may avail themselves for re-election. The Board continued to provide management with guidance on formulating strategy, setting targets and developing plans, while being mindful of the business impact on its triple bottom line. Executive directors The executive directors are appointed by the Board and are responsible for leading the implementation of the Group s strategy, agreeing to operational and capital budgets in consultation with the Board, ensuring the Group s overall financial health and effectiveness, operational results, effective risk and compliance management and effective leadership of the organisation. Statement of compliance In accordance with the JSE Listings Requirements, the Group applied all the principles and recommendations outlined in King III. Appointment of directors: In alignment with the MOI, which details the appointment of members of the Board, the Group has a nomination policy setting out the procedure for appointments, which is formal and transparent. Balance of power: The Board charter, which is reviewed annually, is evidence of a clear balance of power and authority at Board level, ensuring that no single director has unlimited or unfettered powers of decision-making. In line with best practices, the CEO and the chairman are two separately appointed positions. The Board also appointed a lead independent director. The lead independent director chairs Board meetings in the event that the chairman is conflicted on any matter for discussion and/or when he is unavailable to attend Board meetings. The audit committee and the human capital committee were established when the Group was listed on the stock exchange. The mandates, role and responsibilities of all the Board committees are available online at The attendance register relevant to each committee can be found on page 117. During the reporting period, Ms Hess was the financial director. Ms Hess resigned as the chief financial officer on 31 October 2016, after the reporting period. A process is currently underway to appoint a new financial director. At its meeting held on 27 July 2016, the audit committee satisfied itself of the appropriateness and adequacy of the expertise and experience of the financial director, including the finance function, after due debate. The chief executive officer and the chairman of the Board assessed the company secretary as a direct consequence of their daily interactions with her. The outcome of the evaluations highlighted no areas of concern, and the Board satisfied itself of the competence, qualifications and experience of the company secretary. The company secretary has an arm s length relationship with the Board and is not a director of the Company, nor involved in day-to-day operations of the Group other than the provision of legal and compliance services to the Group. Reference is also made to section 3.84(j) of the JSE Listings Requirements. The company secretary does, however, serve as a director on the following subsidiaries within the Group: Pioneer Foods Holdings Ltd Pioneer Foods (Pty) Ltd The full interactive King III Governance report is available online at The Group has succeeded in maintaining its Level AAA of compliance for the last three consecutive financial years. 114 PIONEER FOODS 115

60 CORPORATE GOVERNANCE CONTINUED Pioneer Foods compliance status with regard to the mandatory King III/JSE s reporting requirements is summarised in the table below: Pioneer Food Group Ltd 1996/017676/06 JSE Corporate Governance Listings Requirements Fully Complied/Review Fully Complied The following link can be used to access the JSE s Corporate Governance Listings Requirements relevant to Pioneer Foods, as published on the Institute of Directors Southern Africa s ( IoDSA s ) Governance Assessment Instrument ( GAI ): The company secretary The company secretary, Ms Jay-Ann Jacobs, was appointed in August All directors have access to the company secretary who, in turn, ensures that the Board procedures and applicable rules and regulations are fully observed and implemented. The company secretary is responsible for the administration of shareholders and the direct interface between the transfer secretaries, i.e. Computershare and Strate. In addition, she is the custodian of governance with regard to, among other things, compliance with the JSE Listings Requirements and insider trading. The company secretary is also responsible for regulatory compliance and is the delegated information officer of the Group in terms of the Promotion of Access to Information Act ( PAIA ), Act 2 of She is responsible for the execution of all statutory requirements applicable to those responsibilities. Board committees The Board delegates some of its functional responsibilities to its committees by means of clearly defined mandates. These committees are: The audit committee The risk committee The social and ethics committee The human capital committee The nomination committee The committees report on a continuous basis to the Board as a collective on their respective directives and deliverables in accordance with each committee s Board-approved committee charter. The committee charters, in addition to an annual work plan relevant to each of the committees, are reviewed annually. The committees report on a continuous basis to the Board as a collective on their respective directives and deliverables in accordance with each committee s Board-approved committee charter. Board and committee meeting attendance The table below provides a synopsis of the attendance of members serving on the Board and its committees during the year: Board meetings (scheduled) Special Board meetings 10 Audit committee meetings Risk committee meetings Audit and risk committee meetings Social and ethics committee meetings Human capital committee meetings Nomination committee meetings Board of directors ZL Combi (Chairman) G Pretorius (lead independent director) 1 N Celliers MM du Toit Prof ASM Karaan NS Mjoli-Mncube LP Retief PM Roux (chief 5 2 executive officer) AH Sangqu NW Thomson SS Ntsaluba PJ Mouton CJ Hess (chief 5 2 financial officer) 11 LE Mthimunye- Bakoro 12 Dates of meetings held 19/11/ /10/ /03/ /05/ /11/ /11/ /11/ /11/ /02/ /11/ /05/ /03/ /02/ /02/ /05/ /07/ /09/ /05/ /09/ /07/ /09/ /09/2016 Note: 1 Mr Pretorius was appointed chairman of the human capital committee on 11 February 2016 and as a member of the audit committee on 7 August 2016, on an interim basis. 2 Mr N Celliers resigned as a member of the social and ethics committee and was appointed as a member of the risk committee on 11 February Mr MM du Toit resigned as independent non-executive director on 12 February Ms N Mjoli-Mncube resigned as a member of the combined audit and risk committee and was appointed as a member of the social and ethics committee on 11 February Mr LP Retief resigned as independent non-executive director and member of the audit committee on 12 July 2016 due to health reasons. 6 Mr A Sangqu resigned as chairperson of the combined audit and risk committee and was appointed as chairman of the risk committee on 11 February Mr Thomson was appointed as chairman of the audit committee and a member of the risk committee and the human capital committees on 12 February Mr Ntsaluba was appointed as a member of the audit committee, subject to ratification at the AGM in 2017, the risk committee and the nomination committee on 11 February Mr Mouton was appointed as a member of the risk committee on 11 February Special Board meetings were convened on 15 October 2015 and 2 November 2015 respectively. 11 Ms Hess resigned as an executive director on 31 October Ms LE Mthimunye-Bakoro was appointed as an independent non-executive director effective 1 November 2016 and as a member of the audit committee, subject to ratification at the AGM in PIONEER FOODS 117

61 CORPORATE GOVERNANCE CONTINUED Group compliance Pioneer Foods remains committed to conducting its business in a responsible and ethical manner. It acknowledges its accountability to its stakeholders insofar as ensuring regulatory compliance to applicable legislative requirements, rules, codes and standards. The aforementioned governs the Group and forms the basis of the Company s ongoing objective to manufacture and supply trusted brands and highquality food, beverages and related products. The Group s approach to regulatory compliance remains risk based and aligned to best practices. Its methodology is guided by the Generally Accepted Compliance Practice ( GACP ) framework of the Compliance Institute of Southern Africa. COMMITMENT AND MANDATE Group compliance policy Compliance programmes Compliance procedure/guidelines Assurance plan Monitor, report and review MANAGE AND REVIEW GROUP COMPLIANCE STRATEGY Compliance performance assessments ( health checks ) Compliance to applicable regulatory requirements forms an integral part of the business s overall strategy and is a standing item on the Group s risk committee s agenda. The Company continuously invests in making the necessary resources and tools available to equip its employees with the requisite skills and expertise to comply with applicable laws and regulations, and to perform optimally in a responsible and ethical manner. Group compliance strategy Identify applicable regulatory and non-regulatory compliance requirements Translate and interpret Allocate and assign responsibility Self-assessment Corrective action/mitigation Continuous improvement methodology (medium term vs long term) Governance Compliance reporting and monitoring Assurance (management, internal and external) Compliance programme progress Benchmarking Group compliance approach and objectives The Group is committed to integrity, ethical behaviour, accountability, transparency and fair dealing in the conduct of its business. This is evident from the Group s intention to adhere to both the spirit and the letter of applicable compliance requirements and Strategic application Pioneer Foods has a Board-approved compliance strategy which underpins the Group s overall business practices. The various aspects are illustrated below: RESPONSIBILITY AND STRUCTURE Board vs audit and risk committees respectively Group exco Group compliance officer Group compliance forums (various) Divisional compliance champions Operational subject matter experts (SMEs) STAKEHOLDER ENGAGEMENT Communicate and consult Identify target audience and appropriate communication mediums (including change control) Communicate, share and advocate Create awareness Training strategy Reporting plan always to act with due skill, care and diligence. For this reason, Pioneer Foods remains dedicated to embedding compliance management practices within the Group s broader risk management and governance frameworks, as well as integrating it into all business processes and operations to drive consistent, effective and accountable decision-making. The Group s approach to regulatory compliance remains riskbased and aligned to best practice. In support of its commitment to compliance and meeting its core values, vision and strategic objectives, the Group s approach to compliance management has a number of key objectives. These include the following: To promote an enterprise-wide approach by integrating compliance management processes with: business strategy and decision-making; and risk, audit and general governance frameworks; To develop and foster a compliance culture within the business, which relates to: the proactive and accountable management of the Group s compliance framework, i.e. with particular reference to regulatory compliance risk management; taking ownership of compliance obligations and compliance-related risks within the business through the established formal reporting lines; including clearly defined roles and responsibilities at both Group and operational level; and providing adequate resources to discharge the Group s agreed compliance management obligations. To identify, assess and monitor the Company s ongoing compliance obligations. This includes identifying the relevant compliance risks and assessing the likelihood and materiality of potential compliance failures, as well as allocating the necessary resources for treatment ( corrective actions ) accordingly; To recognise and acknowledge that compliance risks are embedded in all business activities and that the underlying compliance risk appetite is an integral part of effective decision-making processes; To raise the level of awareness of the Group s compliance obligations throughout the business by providing relevant compliance-related training, education and guidance on an ongoing basis; To enable the design and implementation of compliance systems, processes and controls that: are adequately structured to promote the effective realisation of objectives; enable the Company to monitor and report on the agreed compliance criteria at Group, divisional and operational levels; provide appropriate assurance to management and the Board; and are cost-effective and suitable given the Group s existing operating model. To recognise that timely and accurate monitoring, review, communication and reporting on compliance are critical to effectively mitigate, manage and address compliance-related risks. Group compliance policy The Company is subject to a wide range of compliance obligations coupled with the competing demands of stakeholders and increased regulatory supervision. For this reason, the Group s compliance policy, which is reviewed on an annual basis, has been designed to guide the Group s approach to manage its compliance obligations. It includes the following criteria: Legal and regulatory compliance: legislative and regulatory requirements (national, provincial and applicable by-laws), enforceable codes and/or guidelines, licences, permits and contractual obligations applicable to the Group and relevant in the countries in which the Company operates; Non-regulatory compliance: industry requirements, customer requirements as well as best practices adopted by the Group by choice; and Organisational compliance requirements: the Group s internal policies and procedures. 118 PIONEER FOODS 119

62 CORPORATE GOVERNANCE CONTINUED Compliance risk management The Group reviews its compliance universe on an annual basis. This includes assessing the completeness and accuracy of those regulatory requirements identified by management and subject matter experts. After each of the applicable regulatory requirements have been identified, it is categorised as a core, topical (pertinent) or secondary compliance requirement. Continuous risk assessments are being conducted on each of the applicable regulatory requirements identified, taking into account the following aspects that could potentially influence the Group s compliance risk profile: Rules of the JSE JSE Listings Requirements and rules of the JSE derivatives division Value-Added Tax Act, Act 89 of 1991 Road Transportation Act, Act 74 of 1977 Broad-Based Black Economic Empowerment Act, Act 53 of 2003 (i.e. including the Generic Codes of Good Practice as well as the AgriBEE Sector Code, given its relevance) Labour Relations Act, Act 66 of 1995 Foodstuffs, Cosmetics and Disinfectants Act, Act 54 of 1972 (including the associated regulations, such as R146) Financial Markets Act, Act 19 of 2012 Electronic Communications and Transactions Act, Act 25 of 2005 Short-Term Insurance Act, Act 53 of 1998 National Environmental Management: Waste Act, Act 59 of 2008 Administrative Adjudication of Road Traffic Offences Act, Act 46 of 1998 Employment Equity Amendment Act, Act 55 of 1998 Regulation of Interception of Communication and Provision of Communication-Related Information Act, Act 70 of Materiality reputational damage, monetary penalties, monetary loss, imprisonment, et al. Probability of occurrence influenced by the controls that the business has implemented in order to mitigate the risk of non-compliance, which ultimately relates to technology, people, processes and information. Group compliance universe and risk profile During the year under review, the following laws and regulations (in no order of importance) have been identified and monitored, among others, as key focus areas: Regulations: Pesticide Residues: Maximum Levels (Gn R246) Employment Tax Incentive Act, Act 26 of 2013 Companies Act, Act 71 of 2008 National Environmental Management Act, Act 107 of 1998 Basic Conditions of Employment Act, Act 75 of 1997 Consumer Protection Act, Act 68 of 2008 Compensation for Occupational Injuries and Diseases Act, Act 130 of 1993 Occupational Health and Safety Act, Act 85 of 1993 (including the associated regulations) Trade Metrology Act, Act 9 of 2014 Protection of Personal Information Act, Act 4 of 2013 Environmental Regulations for Workplaces as per the Occupational Health and Safety Act, Act 85 of 1993 National Water Act, Act 36 of 1998 Employment Services Act, Act 4 of 2014 Competition Act, Act 89 of 1998 Compliance reporting and monitoring During the previous reporting period, Pioneer Foods procured and implemented a software solution to assist with reporting and monitoring critical compliance requirements. The software application is used as a management reporting tool, which functions as a central repository of information for customised compliance-related reporting at Group, legal entity, divisional and/or operational level. Given the level of reporting and monitoring that has been done and recorded on the system during and after the pilot phase, notable progress has been made from a change management, mitigation and reporting perspective. The Group furthermore performs frequent compliance health checks in response to applicable regulatory requirements to ensure that any and all updates and/or regulatory changes that come into effect are incorporated from a monitoring and reporting perspective post promulgation. These compliance assessments are conducted per act and/or regulation. The current level of management assurance provided to the Group s risk and audit committees including the Board with regards to the Company s response to applicable regulatory compliance requirements will be augmented going forward. Internal and external audits, as independent appraisal functions, will going forward fulfil a pivotal role in terms of providing additional assurance on regulatory compliance, including the adequacy and effectiveness of existing controls. Non-compliance Non-compliance is viewed in a serious light. Any violation of applicable laws, rules or regulations that could potentially put the Group s integrity or reputation at risk, is not tolerated. To its knowledge, the Board confirms that the Group was not involved in and/or associated with any material transgression or non-compliance penalty during the year. Compliance management, training and awareness The Board perceives compliance in a serious light and expects all employees to fulfil the necessary compliance obligations. Each area within the business is accountable for managing key compliance risks, as well as making sure that affected employees understand and are aware of their duty to ensure adherence. The onus is hence on management at all levels of the organisation to ensure that the necessary structures and processes to achieve effective compliance management are implemented accordingly. Empowering and equipping employees is thus also a critical aspect of the Group s skills development strategy. This includes making the necessary resources available and creating adequate platforms for engagement and interaction with employees on topical regulatory issues. Apart from creating awareness on specific themes on an ongoing basis, the Group s compliance management training programmes include a suite of online training interventions, workshop-based training initiatives, and train-the-trainer engagements. Regulatory alerts and notifications Besides subscribing to various alerts, licences and key sources of information, the Group s legal and compliance department scrutinises regulatory and compliance alerts on an ongoing basis. Regulatory changes affecting the Group and/or impacting the Group s product basket, are communicated to the relevant internal stakeholders on an ongoing basis. As and when necessary, such changes are also incorporated into the Group s compliance monitoring and reporting tool. This ensures that the compliance risk assessments that are conducted over time, in alignment with the Group s compliance monitoring frequency matrix, include the necessary postpromulgation regulatory changes. 120 PIONEER FOODS 121

63 CORPORATE GOVERNANCE CONTINUED New regulatory developments Pioneer Foods embraces each opportunity afforded to influence and participate in policymaking processes at industry and/or company level by engaging key regulatory bodies. This ensures that the Group s views on topical regulatory issues, are properly documented and communicated to the relevant enforcement and/or regulators. Breach reporting and complaints handling The Group actively encourages the proactive reporting and remediation of compliance-related complaints, breaches, incidents and issues through established breach reporting and complaintshandling processes. Management, employees and interest groups are therefore encouraged to make use of the independent Tip-Offs Anonymous facilities to report any suspicion and/or awareness of non-adherence to the Group s compliance policy or the Group s code of conduct. Tip-Offs Anonymous is managed by an independent service provider, who has been contracted to treat every incident reported as confidential. Consumer Goods and Services Ombud ( CGSO ) and Code Pioneer Foods is a committed participating member of the CGSO Ombud. The objective of the Ombud s office is to operate as an alternative dispute resolution mechanism, aimed at safeguarding the interests of consumers. Since its inception, the office of the Ombud has confirmed that, to date, no consumer complaint has been referred to it for resolution and adjudication. This is evident of Pioneer Foods sound internal consumer complaints resolution procedure, and associated protocols aimed at addressing consumer concerns and complaints regarding the Group s trusted brands. Ethics management The Group subscribes to the highest ethical standards of business practices. Its corporate values and the Group s code of ethics ( the code ) are aligned to the Group s new business model and the dti s Guidelines for Good Business Practice. Pioneer Foods perceives conducting business in an ethical manner as a governance and commercial imperative that ensures the sustainability of the Group. This includes the Group s ethics management programme, with the primary focus of encouraging and reinforcing a culture of sound business behaviour and adherence to applicable requirements. The following summarises the Group s actions to embrace and enhance ethical business conduct across the organisation: Reduce risks and liabilities associated with ethics Limit exposure to lawsuits, financial losses, sanctions and fines, while striving to conduct business in compliance with applicable laws, regulations, rules, codes and standards Meet and/or exceed the requirements of King III Promote sound controls and integrity in terms of reporting Foster respect and admiration from the business community, including, but not limited to, customers, business partners, competitors and shareholders Prevent and detect misconduct Promote dialogue and synergies between business leaders in managing corporate governance and ethics-related risks Ensure the effective allocation of resources and implementation of adequate controls Protect the brand, including the Group s reputation and assets It is a primary requirement that all employees and directors display integrity, honesty, mutual respect and openness when conducting business for and on behalf of Pioneer Foods. This includes affording employees the right and obligation to challenge those who are not adhering to these values, while conducting themselves in a manner which is beyond reproach. The code guides the Group s policy with respect to the declaration of potential conflicts of interest, bribery, fraud, fair competition, corruption, theft, conspiracy, diversity and transformation, ethical purchasing practices, harassment and intimidation, human rights, whistle-blowing, fairness in the workplace, safeguarding the health and safety of employees, acceptance of gifts from third parties, fair dealing, insider trading as well as the protection and proper use of Group assets and resources. The outcomes of various independent and internal risk assessments have shaped the business s approach to and implementation of initiatives to address these challenges and/or shortcomings. Training and creating awareness were some of the key focus areas. Representatives from the human Group s core business values Integrity Accountability Consumer and customer focus Empowerment Teamwork Passion Be ethical, transparent and honest Do as you say Put clients and consumers first resources community across the business were identified as divisional ethics champions, assisting management to ensure that ethics management, as a business practice, is embedded and advocated. The Group s ethics programme is being monitored by both the social and ethics committee and the audit committee from an internal control perspective. Employees found guilty of ethical breaches are disciplined in accordance with the Group s disciplinary code. However, should the breach be criminal, the Group pursues prosecution of the employee concerned. As per the obligatory requirements outlined in section 159(7) of the Companies Act, Pioneer Foods also has a whistle-blowing policy, which is reviewed annually. Together with the Tip-Offs Anonymous hotline, the whistle-blowing policy was established not only for the purposes of bona fide disclosures made by employees, but also for a broader stakeholder base including suppliers and customers. Pioneer Foods corporate values are directly linked to the code and include the following principles: Enable people to grow, excel and realise full potential Drive results and deliver value through collaboration Being relentless in pursuit of excellence Tip-offs Anonymous is managed by an independent service provider, who has been contracted to treat every incident reported as confidential. 122 PIONEER FOODS 123

64 CORPORATE GOVERNANCE CONTINUED Even though the leadership of Pioneer Foods takes cognisance of the accountability and responsibility linked to corporate governance practices, the effective implementation and application of governance principles, is dependent on the calibre of people involved and their interpretations of what ethical behaviour entails. Personal morals and individual attributes thus have the ability to enhance or harm the Group s corporate image. The challenge therefore remains to find a sound balance between performance and conformance, while attracting and retaining talent and integrity. Even though the Board is accountable for overseeing risk management processes within the Group, the actual management of risks, as well as conducting business in an ethical manner, remains the responsibility of each employee. Acknowledging and recognising employees Pioneer Foods invests in recognising employees who portray outstanding ethical values. The spot recognition process encourages employees to nominate colleagues for executing and living the Pioneer Foods values in an outstanding and admirable way. In addition, the Group s annual Excellence Awards aims to honour key employees who have displayed exceptional ethical values in fulfilling their respective mandates. Various categories exist to recognise enhanced performance for individual excellence, community-based initiatives and ambassador criteria. Tip-offs Anonymous During the financial year, 49 Tip-Off reports were received through the independently managed anonymous hotline. Following an investigation, 32 of these reports were regarded as unfounded allegations. This includes five reports related to consumer complaints, which were each dealt with through a separate channel that is governed by the Group s consumer complaints handling procedure. Two reported incidents could not be investigated due to insufficient information made available. Five investigations led to disciplinary hearings, which resulted in formal disciplinary action instituted against the relevant employees. Period Total reports Founded Unfounded In progress 01/10/15 30/09/ /04/15 30/09/ /10/14 31/03/ /04/14 30/09/ Stringent anti-corruption measures, as well as contract management controls, have been put in place to help drive adherence to the procurement governance principles aimed at promoting anti-corruption legislative compliance. Each of the reports submitted via Tip-Offs Anonymous is also being reviewed and considered by an independent forensic investigator. Human rights Pioneer Foods respects the human rights of employees, suppliers and everyone else it interacts with. Human rights requirements are included in the Group s code of ethics, and all suppliers are expected to ensure they are not complicit in any form of abuse, but that they support, respect and protect internationally proclaimed human rights. The Group s procurement policy also contains a section that covers this important aspect and the expected behaviour of suppliers. The Group, furthermore constantly monitors supplier operations for ethical practices. No incidents of human rights violations were brought to the Board s attention during the reporting period. Procurement controls review Stringent anti-corruption measures, as well as contract management controls, have been put in place to help drive adherence to the procurement governance principles aimed at promoting anticorruption legislative compliance. Anti-corruption compliance questionnaire: as a minimum requirement, suppliers are required to complete the questionnaire before a contract is awarded, which is then incorporated into the agreement to ensure accountability. Request for Proposals ( RFP ) document enhancement: various clauses highlighting anti-corruption governance principles have been added to the RFP document as recommended by internal audit and external counsel. Procurement policy enhancement: the Group s procurement policy has been updated to reflect the anti-corruption compliance requirements to be fulfilled by Pioneer Foods employees. Responsibilities have been clearly defined for specific procurement categories and approval levels have been adjusted according to revised risk profiles. A SAP contract management module: this was developed during the year under review and commissioned in July Going concern The Board is of the view that, after considering and scrutinising factual and substantiated information, the Company and its subsidiaries will continue as a going concern in the new financial year. The Board, under the auspices and recommendations of the Group s audit committee, considered this aspect at both the interim reporting stage and at the end of September Reference is made to the statement in this regard, as per the report of the chairman of the audit committee, which is available on page 7 of the annual financial statements. 124 PIONEER FOODS 125

65 RISK REPORT Business risk management and continuity is a core element of Pioneer Foods ability to realise potential. RISK MANAGEMENT PROCESS Pioneer Foods risk management process is governed by the following: King III Pioneer Foods risk charter Pioneer Foods enterprise risk management policy Pioneer Foods enterprise risk management framework During the year, the Group considered the key risks facing Pioneer Foods which could compromise the achievement of its strategic themes, as well as management s assessment of these risks and actions taken to minimise the impact on the Group. Primary operational risks materialise and are managed at a divisional and functional level, while strategic risks are the direct responsibility of the executive committee. The executive committee reviews all risk registers, including the strategic risk register, on a quarterly basis. This is enabled through the recently implemented Exclaim risk management tool, which integrates risk management throughout all divisions and functions. Roles and responsibilities are defined within the policy and framework. The chief financial officer is responsible for coordinating the risk management process, and ensuring the effective monitoring and reporting of the relevant information to the executive committee, the chief executive officer and the risk committee. Risk management approach Pioneer Foods participates in the FMCG industry, which is confronted by very challenging trading conditions. All or most of the top strategic risks were prevalent or escalated during As a result of economic and political instability, there is negative sentiment towards the general social, environmental and economic well-being of South Africa, with low expectations of improved business conditions in the short term. Pioneer Foods top strategic risks have been benchmarked against its major FMCG peers and were found to be complete and comparative. The Group s approach to strategic risk management remains that of pragmatic sophistication. 126 PIONEER FOODS 127

66 RISK REPORT CONTINUED Strategic risks The Group implemented an organisational-wide enterprise risk management framework and methodology as a means of regulating governance discipline. Through its strong brands, internal capability and self-help potential, Pioneer Foods continuously manages and mitigates these risks. The table below contains management s final assessment of the top 11 risks for 2016: Risk element Trend and actions Strategic response Risk element Trend and actions Strategic response Business interruption due to infrastructure failure and disrupted energy and water supply The general condition of South African infrastructure and the reliability of supply is deteriorating, while costs are high and increasing. Significant work has been done to ensure cheaper alternative water and energy supply to key sites. Reset the cost base and step up productivity Pioneer Foods close proximity to key ports enables efficient logistics during high import periods Commodity exposure with concomitant availability and pricing risk Exchange rate volatility and a weak currency affecting inflation on imported raw materials The current commodity cycle is particularly challenging due to the severe drought, a weak exchange rate and the significant increase in the wheat import duty tariff. Pioneer Foods engaged with government to find solutions. Read more about the challenges and engagement in the chairman s report on page 38. Similar challenges are prevalent in the Groceries division, where concentrate and pulp were in short supply due to the drought. In other areas, heavy rains and floods affected raisin crops. Pioneer Foods continues to secure successfully the largest share of the local fruit crop. Various actions are considered to identify opportunities to partly decommoditise international fruit supply. At least 60% of Pioneer Foods costs have a direct or indirect hard-currency link. Performance is therefore impacted by a weaker and volatile rand. Cost of sales is therefore growing faster than inflation and revenue growth rates. Raw materials affected include packaging, concentrates and most soft commodities. Pioneer Foods continues to manage its net import position on a real-time basis, at an executive and procurement committee level. Shape a winning corporate portfolio Decrease portfolio exposure to Essential Foods Longer maize procurement positions were taken to secure a significant portion of Pioneer s requirements towards February 2017 White Star remains the leading brand in the category despite unavoidable price increases Reset the cost base and step up productivity Pioneer Foods continues to relentlessly drive cost and efficiencies to be able to apply price restraint in a low-growth and highly competitive environment Industrial action resulting in cost and damage Skills shortage The current political landscape and competition among unions create an increasingly challenging environment with a higher likelihood of industrial action, which can, potentially, result in unviable settlements. Read more about the impact of industrial action for 2016 in the sustainability report on page 81. Mitigating actions include increased engagement by keeping shop stewards informed of business performance and challenges and improved general employee relations. Voluntary employee turnover is at 10.8%. Employee recruitment and retention is facilitated by a revised employee value proposition, maturing the adoption of seamless end-to-end recruitment technology and improving the quality of candidates by reaching the passive talent segment through social media. Read more about skills development in the sustainability report on page 79. Build high-performing teams Pioneer Foods has an established, strong relationship with majority union, FAWU, on multiple platforms in Essential Foods, Groceries and International s South African operations Build high-performing teams Structural skills scarcity in technology and logistics is addressed through graduate placement programmes and apprenticeships Rewards through the STI and LTI remuneration schemes 128 PIONEER FOODS 129

67 RISK REPORT CONTINUED Risk element Trend and actions Strategic response Risk element Trend and actions Strategic response Negative consumer activism related to new food legislation and health or diet trends Structurally disruptive competition Food safety risks resulting in financial and reputational risk Heightened consumer sensitivity towards sugar is further encouraged by the DoH and Treasury s proposed tax on sugar-sweetened beverages ( SSBs ). Read more about Pioneer Foods response in commentary on operational and product-responsibility events in the sustainability report on page 92. Pioneer Foods is finalising an internal sugar policy to guide innovation and stakeholder engagement on these issues. The FMCG and retail sectors in South Africa are mature, sophisticated and generally considered overtraded. Competitors have the capability to invest in capacity in key categories while multinational entry could further disrupt the competitive landscape. Read more about Pioneer Foods competitive advantage and unique competencies from page 50. Food safety risks relate to the management of chemical, microbiological and physical risks associated with the production, processing, distribution, marketing and consumption of foods. To prevent food safety incidents, the FSSC standard has been adopted for all manufacturing sites. The CGCSA and the retailers in South Africa also subscribe to this standard. An external consultant was appointed to assist manufacturing sites with food safety-related support and training. This included a review of the divisional product recall procedures and an external audit by Deloitte in May Focus on building our power brands Pioneer Foods strategic alignment with the South African Fruit Juice Association ( SAFJA ) drives the argument for exception of 100% fruit juices from SSB tax Pioneer Foods breakfast cereals and bread products were proactively compliant with the 2016 sodium targets, which were effective 30 June, while many related products are already compliant with the 2019 targets Embed strategic customer management Pioneer Foods remains invested in attractive, high-margin, defensive categories with strong and increasing brand positions Shape a winning corporate portfolio Current controls are maintained and continuously evaluated to ensure that Pioneer Foods products and brands are protected against financial and reputational risk Concentrated geographic exposure to higher-risk debtors in Africa Liquidity risk and funding Low-growth outlook for South Africa Liquidity shortages, soft currencies, and poor economic conditions in African export destinations increased during The impact of deteriorating conditions in these countries creates volume and margin pressure in the International division. Credit insurance is obtained where possible. Read more in the International operational report on page 62. Pioneer Foods remains highly cash generative. Working capital remains healthy despite an extremely anomalous soft commodity cycle, the weak rand and a sizeable international debtors book. Local economic and political uncertainty limits Pioneer Foods growth aspirations. Consumer and business confidence remain low. Pioneer Foods investment in brands, cost conscious mantra, innovation capability, strength in exports and continuous search for opportunities enable the Group to mitigate this risk. Read more about growth challenges and opportunities in the chief executive officer s report on page 40. Shape a winning corporate portfolio Progress is under way to develop markets in Europe, Asia and West Africa Shape a winning corporate portfolio Pioneer Foods statement of financial position is able to support strategic raw material stock positions, capital expenditure and potential acquisitions Shape a winning corporate portfolio Geographic diversification is driven by the International division, which is fast-tracking export growth with attractive margins to decrease Pioneer s dependence on South Africa 130 PIONEER FOODS 131

68 RISK REPORT CONTINUED The Group contextualised and summarised its risk management according to two processes: Governance and assurance Risk management and reporting Governance and assurance processes The Board carries the main responsibility for risk through its governance and oversight role, which includes the following: Monitoring and evaluating the governance of risks and effectiveness of the risk management process Setting the risk appetite of the Group Aligning the risk management process with King III Aligning the risk management process with the strategic objectives, management priorities, material issues, reputational risks and stakeholders expectations The risk committee is also responsible for oversight and governance through the following actions: Reviewing and approving risk management policy and plan Reviewing and considering the list of strategic, high and critical risks and related systems of mitigation controls Reviewing and considering the operational and corporate risk, mitigation and incident reports, and assessing against the Board s established risk appetite Reviewing business continuity capability, disaster management plans and insurance cover Combined Assurance The diagram below illustrates the Group s combined assurance model, which aims to optimise the assurance coverage obtained from management and internal and external assurance providers on the risks affecting Pioneer Foods. Collectively the Group s combined assurance methodology includes assessing the effectiveness of the controls and mitigating factors implemented across the Group, with a simultaneous focus on continuous improvement. Combined Assurance Model INTERNAL ASSURANCE PROVIDERS MANAGEMENT EXTERNAL ASSURANCE PROVIDERS COMBINED ASSURANCE Given the Pioneer Foods decentralised operating model, each of its business divisions has a customised combined assurance model complementing and enhancing the Group s assurance requirements. The assurance activities in the mentioned model comprise assurance required over those controls identified to mitigate risks, and excluding assurance over the risks itself. The identification, type and implementation of the controls identified remain the responsibility of management at all levels of the organisation and do not necessarily form part of the combined assurance activities. Noteworthy to mention is that the relevant assurance providers, are also required to make recommendations with regards to the effectiveness and adequacy of a particular control as well as highlighting the absence of the same should the need occur. Furthermore, the nature and significance of the risks and controls identified are used to determine the type of assurance needed as well as the necessary expertise and experience required to provide sufficient assurance over certain risks being adequately mitigated. Risk management and reporting processes The risk management processes are aligned with the strategic theme and direction provided by the Board and the executives, as well as management priorities, material matters, stakeholders expectations and reputational risk. As part of the risk management and reporting process, operational and corporate management teams compile a functional risk register, which includes defining the risks. They assess the potential impact of the risks and the likelihood of the risks happening. Risks are accordingly classified and indications of mitigation factors and controls implemented are provided. Risk mitigation and control activities are managed on a daily basis through the implementation of preventative and detective systems, structures and controls. Risk management and incident reports assist in monitoring and reporting on risk management. Reporting by management to the risk and audit committees respectively includes the following: Risk management processes and policy application Strategic, high and critical risks and related system of mitigation controls Risk controls and assurance monitoring High-risk incidents and decision to treat, tolerate, terminate or transfer the risk External assurance and internal audit Assurance for risk management is provided to the risk committee as follows: RISK AREAS AFFECTING THE COMPANY Business and the corporate management teams identify and mitigate risks daily through the implementation of preventative and detective systems, structures and controls Internal audit team performs risk-based internal audits External assurance providers, regulatory and legislative audits, as well as independent reports provide assurance 132 PIONEER FOODS 133

69 IT GOVERNANCE REPORT Information technology is regarded as a strategic asset, which is deeply entrenched in the way the Group conducts its business. For this reason, Pioneer Foods recognises the pivotal role that IT governance plays in conducting business in a highly competitive environment. The Group s IT governance charter is reviewed on an annual basis to ensure the content remains relevant and current. In addition, it is based on the principles of IT governance as recommended in King III. It guides the Board in discharging its IT responsibilities and provides management with a clear view of the implementation of IT-related procedures and business practices. Information technology is regarded as a strategic asset, which is deeply entrenched in the way the Group conducts its business. For this reason, Pioneer Foods recognises the pivotal role that IT governance plays in conducting business in a highly competitive environment. The Group s IT governance framework and reporting system enables the Board to reinforce and verify the value derived through the appropriate use of IT, implementing it at an acceptable level of risk, in line with the business strategy. It continues to make provision for centralised oversight and guidelines, in alignment with the Company s overall enterprise technology architecture. Protocol includes all IT-related projects being designed and implemented in partnership with business units with measurable outcomes. The Board has satisfied itself that an appropriate IT governance framework exists and is functioning effectively. The Group s IT enabler strategy is aligned to the Company s corporate pillars, as well as the functional streams in Pioneer Foods value chain. The Group s IT strategy addresses the distinct modes of modern business which includes the following key aspects: Mode 1: The need to operate in a business-asusual fashion, in the most efficient manner Mode 2: The digitalisation of business processes to embrace trends and prepare and adapt to innovation and disruption A notable milestone during the year under review is the stabilisation and maturity of service-level agreements with strategic outsource partners and the significant progress made on the ERP roadmap, which underpins Group IT s contribution in mode 1. Initiatives such as the introduction of Industrial IT ( IIT ), the piloting of mobile application usage in certain parts of the Group s distribution channels and enhanced integration with key customers IT systems have established a sound foundation for Pioneer Foods to excel in the era of digitalisation and innovation. The proliferation of large amounts of data generated across the Group, including customer ecosystems, provided an opportunity for the Group to develop and entrench a business intelligence ( BI ) strategy aimed at empowering and equipping the Group s internal user base to analyse data effectively and producing reports internally. Another milestone is the Group s cyber security framework, one of the key outcomes of the cybercrime risk assessment that was conducted during the previous financial year. This included the introduction of various technology toolsets and frequent internal and external reviews aimed at enhancing governance, while ensuring continuous improvement. 134 PIONEER FOODS 135