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Clover reports exceptional performance underpinned by strong brands and higher value product sales

• Revenue up 8,6% to R9,3 billion 
• Operating profit up 80,3% to R509,1 million 
• Operating margin improved 2,2% from 3,3% to 5,5% 
• Headline earnings per share increased by 69,0% to 173,6 cents 
• Final gross dividend of 33,4 cents per share declared, bringing the total dividend for the year to 56 cents per share 
• Total dividend of 56 cents represents dividend growth of 75% compared with HEPS growth of 69,0%

16 September 2015 – Clover Industries Limited (“Clover”, “the Group” or “the Company”), a leading branded consumer goods and beverages group operating in South Africa and other selected African countries, today announced exceptional results for the financial year ended 30 June 2015.

Commenting on the performance, Johann Vorster, Clover Chief Executive, said:

“During the year under review, we successfully consolidated a number of opportunities in the market. We acquired Dairybelle’s yoghurt and UHT businesses as well as Nkunzi Milkyway, the manufacturer of Ayrshire milk and other niche products for and on behalf of Woolworths. 
“Of equal importance is the fact that we managed to successfully implement selling price adjustments to address the high cost inflation experienced at the end of the previous financial year.

“I am happy to report that the volume losses were to some extent offset by the exceptional sales of Clover’s range of yoghurts and custard following our re-entry into the market in January 2015.

“Given Clover’s strong brands and price elasticity, finding an optimal balance between volumes, market shares and price points remains a challenge, influenced by seasonality, levels of discretionary spend and input costs. This process is ongoing for each product category.”

Revenue increased by 8,6% from the previous corresponding year to R9,3 billion mainly as a result of selling price increases implemented in June 2014 and the introduction of higher value yoghurt and custard sales in the second half of the year. Farm gate milk prices increased by 6% during the third quarter of the reporting year, in addition to the overall effects of the 15% increase in the prior year. Packaging costs increased by 11,6% on volume growth of 2,8%, following the high increases in the second half of the prior year. Milk collection costs were down 11,4% as a result of a lower fuel price and the cessation of raw milk supply to Danone. A reduction of 8,3% in primary distribution costs was as a result of the lower fuel price as well as the consolidation of the Stikland and Parow factories in the Western Cape and the move of the Group’s Mayfair factory to Clayville in the prior year.

Manufacturing costs on the other hand increased by 10,4% due to the factories acquired as part of the Dairybelle and Nkunzi Milkyway transactions, as well as additional creamer contract manufacturing costs. Gross margins commensurately improved to 30,5% compared to the 27,9% reported in the prior year. Clover’s operating margin similarly increased to by 2,2% from 3,3% to 5,5%.

If the supply of raw milk to Danone is excluded, real revenue growth of 13,7% was achieved. The supply of raw milk to Danone was systematically phased out and ceased on 31 December 2014, resulting in a decline in raw milk sales of 70,1% or R152,8 million. It is important to note however that the supply of raw milk to Danone was at cost, with no contribution to profit.
The higher selling prices coupled with low inventory levels of milk at the start of the period following the raw milk shortage in the winter of 2014, resulted in expected volume and market share losses in some categories. Clover’s inability to supply the market because of low inventory levels resulted in market share losses in cheese specifically and constrained volume growth achieved in UHT milk sales during the year. Overall sales volumes nonetheless increased by 2.8% compared to the prior corresponding year, driven mainly by exceptional sales of Clover’s range of yoghurts and custard in the second half.

Revenue from principals for services rendered ended 2,0% higher at R838,1 million. The main reason for the relatively small increase was the phasing out of the services rendered to Danone Southern Africa during the second half of the year. In line with Clover’s strategy, the additional available capacity was partly absorbed by the Company’s custard and yoghurt lines that commenced manufacturing at the same time. Additional contract manufacturing income from Clover’s Bethlehem creamer factory and annual contractual tariff increases further supported the incremental growth.
Commenting on the current oversupply of raw milk in the country, Vorster remarked:

“The relative high farm gate milk prices throughout the year under review have resulted in a sharp increase in national milk production. According to the Milk Producers Organisation, milk production in South Africa during the first six months of 2015 was 10,6% higher than during the same period last year.

“This oversupply of raw milk negatively impacts local market prices, which are further exacerbated by the current very low level of international dairy commodity prices. Clover’s unique milk procurement system (CUMPS) maintains a balance between its milk intake and sales, but the Group remains exposed to downwards pressure on overall market prices.

“It is a sad reality that no significant investments have been made in the dairy production industry over the past decade. From the current high levels of supply it is obvious that volume is not the problem for producers. The country and industry have to act on this unique opportunity that will underpin a robust primary industry, create numerous sustainable job opportunities and assist emerging farmers to enter the sector.

“We will continue to engage with government and other industry players in this regard.”

Going forward, Clover will continue to focus on the revision and revitalisation of its marketing strategy by growing its brands and the overall brand basket, including the maintenance of existing market shares as far as possible.

The Group declared a final gross dividend of 33.4 cents per share. The total dividend of 56 cents for the reporting year represents dividend growth of 75% compared the HEPS growth of 69,0%.