Nompumelelo Magwaza
The Costs of promoting new products, coupled with sharp increases in fuel and other input costs, had a negative impact on Clover’s interim profit, which plunged by 22.5 percent for the six months to last December, the dairy producer said yesterday.
Costs were incurred for advertising and aggressive price promotions on new products launched ahead of the peak December trade period, it said.
At the same time, Clover said, the impact of industrial action, including in the mining sector, slowed the consumption of its products and affected sales volumes across all segments, with consumers generally cutting back on spending over the festive season.
As a result, Clover had decided to cut back on its capital expenditure on projects in the next six months and shift its focus to raising product prices and growing sales volumes.
Chief executive Johan Vorster said that although rising prices would hurt volumes, this was one of the ways to realise a return on investment.
The group’s operating profit slid 22.5 percent year on year to R145.6 million and interim headline earnings declined by 33.5 percent to R72.9m.
In response to the fall in profit, Clover’s shares slid as much as 4.3 percent yesterday, the steepest intraday decline since early February, according to Bloomberg. Clover closed 3.25 percent down at R16.35.
Despite the tight consumer environment, Clover managed to increase its first-half revenue, from brands including Tropika, SuperM, Aquartz and Clover Krush, by 10.8 percent to R3.98 billion.
Vorster said the results were a bit of a mixed bag because Clover was excited about the internal achievements on new projects, but it also found itself in an unfortunate position as margins came under pressure.
“All this happened in the six months, however we were able to realise some great achievements, which include increasing shelf life from 12 days to 18 days on our fresh milk and Tropika packaging as well.”
Vorster added that Clover expected consumer spending to remain under pressure.
“We have seen an increase in stocking of cheaper products and house brands. We have, however, managed to gain some market share and we are fortunate because we have strong brands,” he said.
He said the focus in the next financial period would include completing some projects and implementing a strategy to grow volumes. Clover has increased the price of its products by 8 percent to 10 percent.
“The investments in the next six months will not be the same as the investments in the period under review. In the coming period, we will be very dependent on the volumes and price increases.”
In its first half, Clover secured a deal to take charge of sales and merchandising for the top end of Enterprise Foods and Red Bull’s product ranges and distribution for the bottom end products of both ranges.
The dairy producer spent a total of R345.8m on capital expenditure, which was in line with the group’s strategy to continuously invest in infrastructure, consolidate the industry and buy out minorities in the group.
Vorster said Clover had previously indicated that it would invest in capital projects and “we have a lot of capital projects which are profitable that we would like to invest in”.
Overall sales volumes expressed in milk equivalent for those products containing dairy grew by 4.4 percent.
Clover noted that the market for drinking milk changed during the 2012 calendar year, with very competitive pricing on ultra-high-temperature processed goods resulting in a 7.5 percent growth in the market for long-life products.