Dairy producer Clover last week moved to reassure shareholders that its restructure and the transfer of its low-margin business will not negatively impact on the JSE-listed firm.
Clover last month announced the restructuring of its business to develop higher-margin, value-added products in dairy and other related food categories and to eliminate Clover’s exposure to the cyclical nature of its low-margin business.
The proposed restructure will see Clover unbundle its low-margin assets, which include the marketing and selling of nonvalue-added fresh milk, ultrapasteurised milk and ultra-high-temperature milk, into the newly established special-purpose vehicle, Dairy Farmers South Africa (DFSA), which will now be responsible for determining the raw milk price.
“Clover’s attention is currently split between driving the high-margin business and improving profitability in the low-margin business by driving volumes. It is anticipated that a second entity focused exclusively on driving volumes in the low-margin business will enable Clover, in line with its stated objectives, to focus on the high-margin business,” Clover explained in a statement.
The move will also eliminate the “unfounded speculation” or misconception that Clover favoured profitability over the interest of producers or sacrificed profitability in favour of producers.
“DFSA will determine the price at which it purchases raw milk from producers, as well as the price at which it sells raw milk to third parties such as customers or consumers,” the firm said, adding that, with DFSA selling raw milk to parties other than Clover, the price would be unequivocally driven by market forces.
Clover’s initial 100% shareholding in DFSA will be reduced to 26% after June 30, when 74% of the shares will be made available to the producers.
While it is expected that Clover’s turnover will be reduced by R1.75-billion a year, the impact on operating income and profitability will likely be neutral, given the fees payable by DFSA to Clover for services rendered and royalties.
As the raw milk supplier grows, Clover expects to benefit from its revenue gains on the back of additional volumes distributed through the group’s supply chain network.