Clover’s FY18 earnings rise despite challenging trading conditions

12th September 2018 By: Marleny Arnoldi - Creamer Media Online Writer

Clover’s FY18 earnings rise despite challenging trading conditions

Clover CE Johann Vorster
Photo by: Creamer Media

JSE-listed food and beverage group Clover Industries returned the business to historical profitability levels in the financial year ended June 30, declaring a final gross cash dividend of R92.9-million, or 48.6c apiece.  

The company reported normalised headline earnings of R394-million, which is a 224% increase compared with the prior year; normalised headline earnings a share of 206c, which are up 223%; and normalised earnings a share of 210c apiece, which are up 152%.

Clover CE Johann Vorster stated that it was no easy feat and required collaborative effort amid challenging trading conditions, which is as a result of political instability, poor economic growth, rand volatility, rising unemployment, higher electricity and fuel costs and tax increases, all of which eroded discretional consumer spend considerably.

Additionally, trading conditions were exacerbated by structural changes in the retail environment, which included aggressive pricing from competitors. Further, the listeria outbreak resulted in losses in principal fee income, which could not be replaced during the reporting period.

Clover refocused on the basics and took a consumer-centric approach to improve efficiencies and reduce costs, concurrently with its strategy towards diversifying Clover’s business away from low-margin commoditised bulk dairy products, and focusing on higher-margin, value-added branded food and beverages to improve operation margins across the portfolio.

“The savings that we achieved through strategic initiatives such as Project Sencillo, which involves optimising the supply chain, and Project Meglio, which involves product recipe reformulations, were ploughed back into selected product selling prices, resulting in 8.2% year-on-year growth in sales volumes and an improvement in market shares across a number of product categories,” Vorster explained.

Vorster told Engineering News Online that Project Sencillo entails the streamlining of Clover’s 14 factories across the country, by making bigger factories more efficient and productive, to reduce the overall number of factories.

He added that Project Meglio will continue for another year to increase the value that is offered through products to consumers. The project currently prioritises Clover’s cheese products.

During the reporting period, Clover launched several new products, which were well received by the market, while Project Masakhane, which involves increasing the company’s access to informal trade and underserviced areas, effectively aided growth of distribution points by 51%.

Products that were launched include Numel, Sip Up, Snack Pack, Cream O’Naise, Whistling Chef, Bliss Yoghurt Double Cream, Krush flavour extensions, olive oil and soya products.

Additionally, Clover finalised the unbundling of its nonvalue-added dairy fluids business through Dairy Farmers of South Africa (DFSA), which was a significant adjustment from what had been the norm for 120 years.

“This enabled us to focus on more profitable product offerings that will suit the ongoing business model better, while remaining a substantial service provider to the dairy industry,” said Vorster.

Clover still works closely with DFSA to ensure leadership succession and sustainability of the business, which also secures Clover’s raw milk source.

FINANCIALS

Improved profitability and a reduction in finance charges contributed to higher cash generation in the reporting period, with cash generated from operations, before working capital changes, totalling R769-million compared to R439-million reported in the prior year.

Group revenue increased by 7.9% to R8.3-billion, supported largely by a 25.7% increase in the fermented products and desserts category and a 12.5% increase in the value-added dairy fluids category, where optimal pricing was rewarded with higher volumes.

The dairy concentrated product category contributed 13.7% more to revenues, owing to above-inflationary increases in butter, which was in shortage, as well as higher volumes of cheese sales.

Services rendered to principals was moderately up by 2.1% on a comparable like-for-like basis and contributed R1.9-billion to revenue, having been impacted by subdued market conditions as well as the outbreak of listeriosis.

Clover provides manufacturing, distribution and sales and merchandising services to DFSA which became a significant principal and contributed substantially to services rendered revenue.

Cost of sales on a like-for-like basis increased only 6.9%, despite the 7.9% increase in total revenue. Vorster noted savings were achieved through a continued and intense focus on efficiencies, recipe reformulations and robust retendering drives on input costs such as ingredients and packaging material.

Pressure on primary distribution cost, driven by fuel inflation and transport of products between factories and distribution centres eroded some of the gains. As a result, the like-for-like gross profit margin increased from 34.9% to 35.5%.

Selling and distribution costs increased only marginally by 1.4%, or R28-million, despite the accelerated roll-out of the Masakhane project.

Vorster expects challenging macroeconomic and trading conditions to continue over the next year. Specifically, inflationary cost pressures in the form of wages, fuel and electricity will continue to take their toll on consumers, who are likely to opt for cheaper alternatives while trade competition for market share remains a key challenge, as a disproportionate number of promotions lead to the erosion of margins.

Clover has secured strategic trading partnerships and is confident that it can provide cost and value effective solutions to alleviate pressure faced by consumers.

“The strategy to grow value-added products that places consumers' perceptions of what value means front of mind continues to be implemented in a responsible and sustainable way while efficiency drives will remain a key focus into the future.

“Management will continue to drive volumes and market shares and expand the

value-added product portfolio which is now a core business focus,” highlighted Vorster.