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Clover deals with sugar tax impact as takeover talks continue

Company releases interims following announcement of Israeli buyout offer.

NOMPU SIZIBA: Dairy product and beverage producer Clover came out with interim results today [Tuesday]. For the six months ended December 2018 the company reported revenue from sales of products up 4.6% at R3.44 billion. Headline earnings per share rose 5% to 123.5 cents, with operating profit down 7.3% at R343.5 million. In April shareholders are said to get a gross dividend payout of just over 27 cents/share – that’s up 5% on the prior period.

Read: Clover management backs bidders with plans to expand in Africa

The release of Clover’s results comes weeks after it was revealed that it is to be bought outright by a consortium with an Israeli private-equity group specialising in the beverages sector taking a majority stake in the business with a view to delisting the company.

To give us the lowdown on what’s happening at the company I’m joined on the line by Johann Vorster, the CEO of Clover. Johann, your headline metrics are not shooting the lights out but they are up, although your operating profit was down for the period. Just break down the numbers for us.

JOHAN VORSTER: Thank you very much. Yes, if you make the adjustments for IFRS 15 [International Financial Reporting Standard 15] and you change the comparative figures, the turnover went up 8.3%, of which 5.1% was volume and 3.2% price. So it’s actually much better than the 4% that we’ve put there. That volume growth then resulted in some nice market-share growth.

The operating profit was slightly down because we used some of the interest savings above the line, and that’s what gave us the headline earnings growth of 5%.

I would say it’s a relatively balanced performance. We were looking for volume growth and greater market share, and to still show some growth for our investors.

NOMPU SIZIBA: You indicate that your group margin decreased from 8.8% to 7.8%. Where was the pressure coming from?

JOHAN VORSTER: There was no pressure, actually. We increased our market share in 60% of the categories we operate in. So we’ve had a wonderful run in that, due to three things. We increased our selling prices by only just below inflation – by only 3% instead of the 6% inflation. Secondly, we invested a lot more in marketing; and thirdly we invested a lot more in selling expenses. So we are now delivering to 45 000 delivery points, having added another 10 000 delivery points last year. That’s where the change came from.

NOMPU SIZIBA: How much did the sugar tax and the higher fuel prices affect your cost profile, and how did you manage those headwinds?

JOHAN VORSTER: When it started, the sugar tax had a R200 million effect. We’ve worked it down through, for example, recipe changes to R45 million. That’s about as far as we can go. We don’t want to affect our customers’ taste profiles, so that is now in our base. We haven’t been able to recover that from consumers since we didn’t want to increase the price point.

Fuel is a problem because it behaves like a yoyo – it goes up and down and you can’t get the increases through and confuse consumers. That’s more of a difficult one that we hope over a period of a year smooths out.

NOMPU SIZIBA: With some of your product lines you achieved substantial volume growth – I saw some things as high as 70%. But that doesn’t necessarily translate into your profit line to the same extent. Why so?

JOHAN VORSTER: We call it the “fuel principle”. We use the advantages of the financial benefits from that, which we reinvest in the business. It’s such a big business with high infrastructure that volumes are very important for us. So we made a decision three years ago that we were going to lead, driving the volumes. And as the profits come through we will reinvest them – up a point, of course. But at the most we still see benefits of increasing our market and increasing our sales force and delivery points.

NOMPU SIZIBA: Your capex for the year was R203 million – you’ll correct me if I’m wrong. What were the key acquisitions or improvements that you worked on?

JOHAN VORSTER: We spent only R79 million as opposed to R108 million last year. So overall our capex has come down quite nicely. You will recall that after the listing we spent quite heavily on our infrastructure, so the company is becoming more asset-light. We don’t spend as much capital since we’ve got very good capacities and our infrastructure is fairly modern. That’s why we generated about R250 million more cash during the year.

NOMPU SIZIBA: You touched on the aggressive marketing costs that appear to be quite a factor for you. Is there an aggressive move on your part to move towards more digital advertising – which arguably is cheaper, while providing you with substantial potential reach?

JOHAN VORSTER: Exactly. Our last two launches, Whistling Chef and our Cream O’Naise mayonnaise did extremely well in that space. They are cheaper versions. We have been advising consumers at the point of sale, and explaining the value proposition. People are under pressure, so they want to buy only once. They are quality conscious and don’t want to be disappointed. To communicate the value proposition is a very important element.

NOMPU SIZIBA: What is the outlook for your sector going forward? We know that your performance will be heavily correlated to the fortunes of the consumer, but then again people will always need to eat and drink.

JOHAN VORSTER: We have some uncertainties. They include the election coming up, the state-owned enterprises, and the Eskom saga and its effects on factories. But managing directors handle all those – that is something you need to manage for.

From a consumer point of view we want to do more of the same. We do not want to burden consumers with price increases, so let’s see how much more in terms of costs we can take out of the system by increasing volumes and being more effective through becoming technologically advanced.

NOMPU SIZIBA: On the Eskom front, when we do experience bouts of load shedding, do you guys have the infrastructure in place for alternatives to kick in?

JOHAN VORSTER: No, we don’t. That’s too expensive in our business. We just have to ride it out and switch off our machines and then switch them on again. We do work closely with municipalities to see that we handle the load shedding in an orderly and responsible manner. But it remains a challenge. On the distribution side, our trucks are on diesel, the cooling units, so from that point of view we are not at risk. It’s really just on the production side that there are some concerns.

NOMPU SIZIBA: Now that Clover is being taken over, where is that process at the moment, and is this likely to be the last time you’ll be reporting your results to the market, or could the process take some time?

JOHAN VORSTER: The circular is out. The shareholders’ meeting will be on March 29, in a couple of weeks. If 75% of the shareholders vote in favour it will then be lodged with the Competition Commission, and that normally takes three or four months. So, yes, it might be the last time that I’m on air with this particular results presentation, but hopefully you’ll still be able to keep contact with the doings of Clover.

NOMPU SIZIBA: Many thanks, Johann.

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