160914 Clover CEO Johann Vorster drinkng one of his company product after the company results that was held at JSE in Sandton North of Johannesburg.photo by Simphiwe Mbokazi
160914 Clover CEO Johann Vorster drinkng one of his company product after the company results that was held at JSE in Sandton North of Johannesburg.photo by Simphiwe Mbokazi

Clover’s earnings fall as costs rise

By Time of article published Sep 17, 2014

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Clover’s decision not to pass price hikes on to consumers when input costs sky-rocketed soured the full-year performance, the dairy and beverage producer said yesterday.

For the year to June, Clover’s gross margins declined from 28.6 percent to 27.9 percent due to the under-recovery of raw milk, packaging and fuel cost increases through selling prices.

The operating margin slumped to 3.3 percent from 4.7 percent.

A litre of milk has increased by at least 22 percent over the past year after three years of muted price increases.

Clover chief executive Johann Vorster said yesterday: “In the current lacklustre economy, the typical lead-and-lag effect in terms of cost recovery through selling price increases is aggravated.

“We took a strategic decision to increase prices gradually, to protect hard-won market share and sales volumes.”

He was of the view that aggressive price increases could have led to a market share loss.

The group’s revenue grew 8.9 percent to R8.5 billion.

Earnings a share decreased 23.1 percent to 30.8c and headline earnings a share were 14.3 percent lower at 17.2c compared with the previous year.

Clover said the business was also affected by the rising costs of packaging and ingredients, which were imported, as well as the increase in raw milk prices paid to farmers.

Imports were more expensive as the rand was weak during the results period.

“These cost increases could not immediately be recovered due to a very constrained trading environment and weakened discretionary spend,” it said.

Farm gate milk prices were up 15 percent year on year in March 2013 and again in February, March and April this year.

Packing costs were up by R139.2 million, while milk collection costs increased by R38.4m due to fuel cost increases and manufacturing costs grew by 10 percent.

Higher selling prices coupled with rising inflation eroded market share in a number of categories, with overall sales volumes dipping 0.8 percent.

In response to consumers’ cut back on spending, Clover plans to introduce new reduced packet sizes, as well as new products.

Daniel Isaacs, an analyst at 36One Asset Management, said all food producers faced similar cost pressure dynamics in the form of raw materials, labour and packaging.

“In general, these companies do not have much control over their raw material costs,” he said.

Isaacs believed that food companies could recover some of the cost by increasing prices. However, “the amount of pricing they can push to cover their cost depends on how commoditised their product is and how much brand equity they have”, he said.

Isaacs said food producers who could push their prices more without losing volume were going to be able to hold on to their margins. But he said certain elements of Clover’s portfolio, like their long-life milk, was more of a commoditised product and might not have the brand equity required to offset costs with necessary price increases.

“Times are tough and consumers are under a lot of strain. For commoditised products with low brand equity, consumers will change brands quickly for cheaper alternatives. Companies dealing with this dynamic and increased costs are finding themselves in a tough space, as their price increases cannot offset costs and result in lower volumes, affecting the overall margins of the business,” he said.

Vorster said although he was not pleased with the company’s performance, he was at least satisfied with what Clover had achieved with the Cielo Blu project, which was completed within its timeframe.

The Cielo Blu project strategically expanded the Queensburgh production and distribution facility in Durban.

“We had a unique year with a lot of challenges, but we are also happy with our DairyBelle acquisition, which will help us produce yoghurt, as well as custard,” he said.

Clover acquired the yoghurt and long-life milk business of fellow dairy company DairyBelle for R200m in May.

Clover slumped 5.07 percent to close at R17.80 yesterday.

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