JSE-listed dairy products manufacturer Clover has reported improved results for the six months ended December 31, despite much higher national milk flow in South Africa last year, compared with the prior year periods, except for December.
The company reported revenue of R5-billion, up 7.9% on the prior corresponding period, operating profit of R340.3-million, up 5.8%, and headline earnings a share of 117c, a 7.1% increase, declaring an interim dividend a share of 24.2c, equating to an increase of 7.1%.
These improved results were "particularly encouraging", as Clover set new performance records in the corresponding six-month period to December 31, 2014.
“Clover's unique milk procurement system successfully maintained a balance between the company's milk intake and market demand. Industry selling prices subsequently remained low throughout the annual peak milk production period as inventories increased substantially,” Clover highlighted in a statement.
But CEO Johann Vorster told Engineering News on Wednesday that he foresaw a milk shortage.
“We have a lot of sympathy with the producers due to the drought [and] think there is possibly a shortage looming if the situation does not improve quickly.”
The increasing effects of a protracted drought across some areas of South Africa resulted in a shortage of feed and an increase in on-farm costs.
Notwithstanding the severe heat wave and drought conditions, Clover is comfortable with its inventory levels for the winter and spring.
To protect its market shares, Clover refrained from increasing its dairy selling prices during the period under review.
“The low selling prices experienced in the first six months are likely to continue, and it will in all likelihood result in a second six months with lower gross margins than those achieved in the first six months,” Clover noted.
Vorster said the company was trying to sensitise the public with regard to price increases, which he expected to come into effect in April. However, the effect of these increases would be delayed.
“It is anticipated that planned selling price increases will absorb anticipated inflationary cost increases in the second half of the year, as not all selling price increases were realised in the first half. Should the low selling prices continue for the first quarter of 2016 and cost increases exceed inflation, it will lead to a reduction in the margins achieved during the first six months,” the company explained.
The weakened global economy and the impact of low economic growth forecasts and
commodity prices had a significant impact on the risks facing Clover in the rest of Africa.
The current financial crisis experienced in Nigeria, which was fuelled by the low oil price, created further cause for concern. Thus, the group decided to withdraw from future investments in Nigeria, where the company had just started building its distribution model and route to market. Therefore, it did not expect the withdrawal to have a “serious” effect on its results.
“We hope it’s a temporary thing, but certainly we are not going to rush off to buy a company or a farm if you can’t import your basic input materials,” Vorster added.
However, Clover would continue to expand its operations within Botswana, Namibia, Lesotho and Swaziland, as well as pursue export opportunities in Africa where the currency risks could be mitigated.
The company continued its focus on fully using its capacities and the asset base that was heavily invested in during the last five years. In addition, it remained focused on continued investment in and support of newly launched products to grow a portfolio that was not exposed to dairy price fluctuations. Clover would, therefore, continue to explore local consolidation opportunities to leverage its existing value chain.
In terms of its value chain, Vorster said cost-reduction plans had been in place since September last year to counteract the low selling prices and “that’s made us achieve our objective so far”.
He explained that Clover was making sure it did not overservice the market – reducing its delivery frequencies – and looking at reducing advertising. “In surplus times it’s more about price than brand image. So, our cost inflation was really zero on the previous period on the supply chain side.”
“The group’s redesigned strategy since listing and management's ability to rapidly adapt to market changes will enable Clover to employ numerous levers to mitigate the major effects of the cyclicality in the business for the next six months. As a result, the company remains optimistic for the full year results,” stated Clover.