It has been a testing time for Clover Industries, with the dairy products producer attempting to fend off the pain from severe drought conditions and consumers that are battling to afford rising food prices.
So tough has the operating environment been for Clover that it increased the price of its dairy products by 10.6% to protect the sustainability of its dairy-reliant business.
Drought conditions, which have been felt across SA’s agricultural lands while the Eastern Cape and Western Cape have been slightly spared, have dampened Clover’s earnings.
The company’s operating profit fell by 5.2% to R322.7 million for the six months to December 31 on the back of the company’s revenue, which grew marginally by 2.1% to R5.1 billion. Its headline earnings per share fell by 14.7% to 99.8 cents during the period under review.
Clover CEO Johann Vorster says the company was pushed to increase prices as its dairy product sales volumes and market share were impacted by the difficult operating environment.
Its volume growth declined the most in its dairy fluids, non-alcoholic beverages and dairy concentrated products in a range of 3.4% to 14.6% while fresh milk bled the most market share.
Clover spent R123 million more on raw milk (than it budgeted for) while it saw an overall 7.3% decrease in sales volumes as a result of price increases, consumers financial pressures and warm weather.
“We saw ahead of time that our product categories would be under pressure and we knew that we wouldn’t be able to protect the volumes. The only result was to increase prices so that we don’t lose market share,” he says.
Vorster says the drought caused a drop in milk production – as seen in Milk SA’s figures that show that milk production in 2016 is estimated to have been 1.4% less than the previous year.
Adding further pressures for the dairy producer was the volatility in the rand exchange rate. If the local unit weakens, then it’s bad news for input costs of dairy product producers as milk shortages would result in milk imports that make it more expensive.
Inflationary cost pressures largely led to its operating margin – a key metric for profitability – decreasing to 6.3% compared with 6.8% during the corresponding period.
Dirk van Vlaanderen, associate portfolio manager at Kagiso Asset Management says Clover’s results echo similar trends seen by the other food producers of lower consumer demand and higher input costs that have dragged margins down. “In milk, the drought saw feed costs for farmers soar. To ensure continued milk supply, Clover had to raise farm-gate milk prices much higher and for much longer than normal.”
Van Vlaanderen says this was not fully recouped in price increases to retailers, which resulted in margin pressure.
Clover doesn’t expect further price increases this year as it looks to recover lost market share. Kagiso Asset Management’s houseview is that Clover might have a better performance in the next six months.
To mitigate against industry pressures the company will pursue export opportunities further into the African continent in markets such as Mozambique and Tanzania.
Clover recently announced that it’s in the process of restructuring its raw milk production (low-margin business) and the pricing of products such ultra-pasteurised milk and ultra-high-temperature milk – allowing it to develop high-margin products such as yoghurt.
Also, Clover will create a new special-purpose vehicle called Dairy Farmers SA (DFSA), which is expected to determine the price at which the company will buy raw milk from producers, and the raw milk price it sells to companies it competes with. This is due to “the misconception” that in setting the price of raw milk, Clover favours producers over profitability, says Vorster.
“From an income perspective, Clover will have less revenue as products will go across to DFSA but we will have reciprocal income from DFSA,” says Vorster.
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