https://www.engineeringnews.co.za

Clover lifts HEPS 41.3% owing to improved gross, operating margins

Clover lifts HEPS 41.3% owing to improved gross, operating margins

Photo by Duane Daws

17th March 2015

By: Tracy Hancock

Creamer Media Contributing Editor

  

Font size: - +

JSE-listed Clover has reported significantly improved results for the six months ended December 31, 2014, with the company’s headline earnings increasing by 41.3% to R199.3-million on the back of “much improved” gross and operating margins.

To recover the significant cost increases in raw milk and other costs during the prior financial year, the branded consumer goods and beverages group increased its selling prices in June 2014, which also provided for expected inflationary cost increases in the current financial year.

As a result, Clover’s gross margins, which deteriorated sharply during the 2014 financial year, were restored and, for the period under review, the group achieving a gross margin of 31% compared with 28% in the prior corresponding period.

Similarly, the group’s operating margin increased to 6.9% from 5.4% and – when excluding the effect of raw milk sold at cost to multinational food products corporation Danone, as the supply of raw milk to Danone ended on December 31, 2014 – the operating margin improved from 5.8% to 7.1%. 

Industry selling prices remained firm throughout the yearly peak milk production period, during which industry inventory levels were restored following the national shortage of raw milk during the winter of 2014. 

The peak milk production season, combined with the normal seasonal increase in stocks, increased inventory by R416-million from June 2014. 

“As expected, Clover's increased selling prices and profitability resulted in volume and market share losses in most product categories.”

The group explained that the June 2014 selling price increases provided for expected inflationary cost increases throughout the current financial year, with some of those cost increases expected to occur in the second semester of the financial year, leading to a reduction in margins.

Further, the low inventory levels at the start of the period, following the 2014 raw milk shortage, severely constrained Clover's ability to supply the market, particularly with regard to cheese and ultrahigh-temperature milk.

This resulted in overall sales volumes decreasing by 3.2% during the review period compared with the prior corresponding period.

Clover noted that the continued overall market contraction in the group's beverage categories was indicative of the ongoing reduction in South African consumers' discretionary spending.

With regard to product group sales-volume changes, dairy fluids were down 3.6%, concentrated products declined by 5%, ingredients grew by 12.9% and nonalcoholic beverages fell by 3%.

During the period, farm-gate milk prices remained high in relation to on-farm costs, mainly owing to the national shortage of raw milk during the last quarter of the previous financial year and volatility in the raw milk market in anticipation of Clover's cessation of milk supply to Danone. 

The international oil price collapsed during the last quarter of the six-month period, which, in turn, led to a delayed reduction in domestic fuel prices.

“Clover benefited from this cost reduction during the latter part of the period under review, although not significantly.

“Volatile oil prices, currency fluctuation and the industry's general challenges in passing on constantly changing fuel prices, however, argue against immediate price reductions,” the group said, noting that it was cognisant of the plight of consumers and, should the low oil price persist, it would positively impact on future selling price adjustments. 

FINANCIAL OVERVIEW
Clover CEO Johann Vorster described the results as “balanced” in a telephone interview with Engineering News, saying that during the period under review the group had spent R47-million more on research and development, marketing and the launches of products than in the previous period.

“We could have postponed that and the results would have looked better. But we didn’t, we went full-out to launch products and that will build on a foundation. I am happy with the results [and] don’t think it could have gone any better,” he said.

Meanwhile, similarly to headline earnings, headline earnings per share (HEPS) increased to 109.2c during the review period, while diluted HEPS of 103.6c were 41.5% higher than the previous period.

Clover reported a revenue increase of 7.9% to R4.659-billion, with operating profit 36.8% higher at R321.7-million and headline operating profit up by 38.7% to R303.2-million.

Net finance costs were slightly higher (R800 000) than the previous period, while the group's income from its joint venture, Clover Fonterra Ingredients, declined by R5.9-million, or 60.1%, in the wake of plummeting international dairy commodity prices and strong competition. 

The effective tax rate was 29.2% compared with the 24.6% reported during the comparative period.

In terms of International Financial Reporting Standards, the gain on the acquisition of the Nestlé water business in the prior comparative period was shown as net after tax, as part of other operating income and, therefore, resulted in the projection of an artificially low effective tax rate. 

Clover’s profit for the period ended 28.5% higher at R210.5-million.

Revenue from the sale of products increased by 11% to about R4-billion, owing to an overall volume decline of 3.2%, while overall price inflation came to 14.2%. 

Clover advised that raw milk sales at cost declined by 42.7% to R146.6-million as the supply of raw milk to Danone was systematically phased out. Revenue from principals for services rendered ended on R453.3-million, or 12% higher, than the previous period, owing mainly to the annual tariff increases and additional contract manufacturing income from the group's Bethlehem creamer factory. 

Meanwhile, cost of sales increased by 3.5% – 7.7% when excluding raw milk sold.  “The aggressive selling price increases necessitated increased cooperative advertising and, hence, charges against sales increased by R14-million, or 21.9%, to R77.8-million,” stated Clover. 

Raw material costs increased by 2.2% and by about 10.3% when excluding raw milk sales to Danone; mainly as a result of the 3.2% lower sales volumes and the 15% farm-gate milk price increases early in 2014.  Although sales volumes were 3.2% lower during the period, packaging costs increased by 10.3% owing to substantial cost increases during the prior year. 

However, milk collection costs declined by 5%, despite annual inflationary cost increases, mostly on the back of phasing out raw milk supply to Danone. 

Clover’s six months to December 2014 started with very low inventory levels, following the raw milk shortage in the autumn and early winter of 2014. Factory throughput for the period was “significantly higher than usual” in an attempt to replenish inventory levels.

“Owing to the predominantly fixed nature of manufacturing costs and the excess capacity available, unit manufacturing costs reduced markedly,” Clover advised.

With the savings achieved from the consolidation of the group's Parow and Stikland factories, manufacturing costs increased below inflation at 4.2%, or R20-million, notwithstanding the additional costs to service the additional creamer contract manufacturing income included in services-rendered revenue.

Primary distribution costs benefited from the lower fuel prices during the period and the overall volume decline, resulting in a 0.5%, or R1.2-million, reduction. 

Other operating income declined by 12.2% to R31.3-million owing to lower foreign exchange profits in Clover West Africa and Clover Botswana.

A net capital gain of R18.5-million, mostly resulting from a R24.4-million gain on the change in ownership of the group's leased head-office building, was included in other operating income, while the prior period included a capital gain of R20.7-million on the acquisition of the Nestlé water business.

OPERATING COSTS
Clover reported a higher-than-inflation increase of 11.2%, or R100.4-million, in selling and distribution expenses for the six-month period, mostly owing to the group investing R47.6-million, or 43.9%, more in research, development, marketing and advertising. 

The group also declared a 45.6% increase in administrative costs for the period.

During the six months ended December 31, 2013, Clover did not achieve the profit targets set by the board and, accordingly, no provision was raised for profit-based, short-term incentives to staff.

However, for the current period, the year-to-date profit targets had been achieved and a provision for profit-based, short-term incentives was raised; the primary reason for the increase in administrative costs, explained Clover.

Further contributing to the above inflation increase in administration costs were uninsured damages at two factories totalling R8.5-million and the reversal of R5.5-million of previously straight-lined lease costs on the cancellation of a lease during the prior period. 

FINANCIAL POSITION AND CASH FLOW
Capital expenditure (capex) on tangible assets was R234.5-million, which net of the depreciation charge accounted for a R156.5-million increase in property, plant and equipment from June 2014.

Major projects included in the capex were the R66-million Gauteng-based Clayville chilled capacity expansion and a new Tetra Pak 125 ml Prisma filling line, valued at R19-million.

Trade and other receivables were 19.7% higher than at December 2013, following the average selling price increases of 14.3% and a temporary increase of the debtor days outstanding after the implementation of a new enterprise resource planning system during the period under review. 

Higher inventory levels, price inflation, much increased deferred income and growth in the sales of principals, which Clover collected on behalf of some of its principals and, hence, included under trade payables, all contributed to the R308.1-million increase in trade and other payables from December 2013. 

The R386.3-million cash flow from operations, which was 42.2% higher than the prior period, funded the increased investment in working capital during the period of R380.1-million.

Capex, taxation and finance charges were funded partly from cash resources and short-term interest-bearing debt. Cash, as a result, reduced by R208.4-million from June 2014, while short-term interest-bearing debt increased by R138.4-million for the same period. 

Gearing at the end of the period was 41.3%, compared with 38.4% at December 2013 and 38.6% at June 2014, generally owing to the seasonal nature of the business.

Edited by Creamer Media Reporter

Comments

Showroom

Hanna Instruments Image
Hanna Instruments (Pty) Ltd

We supply customers with practical affordable solutions for their testing needs. Our products include benchtop, portable, in-line process control...

VISIT SHOWROOM 
Rittal
Rittal

Rittal is a world leading provider of top-quality integrated systems for enclosures, power distribution, climate control, IT infrastructure and...

VISIT SHOWROOM 

Latest Multimedia

sponsored by

Option 1 (equivalent of R125 a month):

Receive a weekly copy of Creamer Media's Engineering News & Mining Weekly magazine
(print copy for those in South Africa and e-magazine for those outside of South Africa)
Receive daily email newsletters
Access to full search results
Access archive of magazine back copies
Access to Projects in Progress
Access to ONE Research Report of your choice in PDF format

Option 2 (equivalent of R375 a month):

All benefits from Option 1
PLUS
Access to Creamer Media's Research Channel Africa for ALL Research Reports, in PDF format, on various industrial and mining sectors including Electricity; Water; Energy Transition; Hydrogen; Roads, Rail and Ports; Coal; Gold; Platinum; Battery Metals; etc.

Already a subscriber?

Forgotten your password?

MAGAZINE & ONLINE

SUBSCRIBE

RESEARCH CHANNEL AFRICA

SUBSCRIBE

CORPORATE PACKAGES

CLICK FOR A QUOTATION







sq:0.077 0.129s - 170pq - 2rq
Subscribe Now