Following the completion of Project Cielo Blu and in light of R300-million in capital expenditure (capex) projects currently being implemented, JSE-listed branded consumer goods and beverages group Clover was focusing on increasing volumes to make use of the additional capacity created, Clover CE Johann Vorster said on Tuesday.

Speaking to Engineering News Online following the release of Clover’s results for the year ended June 30, he noted that, through Project Cielo Blu, which was aimed at rectifying historical structural and supply-chain inefficiencies and mitigating input and high transportation costs, significant additional capacity had been created.

During the period under review alone, the project had contributed R42-million in distribution benefits and R55-million in production benefits to the company’s bottom line.

In addition, Clover was currently implementing approved capex projects worth R300-million, excluding the investment in a yoghurt production facility, to take advantage of new market opportunities in terms of yoghurt and custard products, following the sale of its 45% stake in Danone Clover to Danone for about R1.08-billion.

The company had, in March, indicated that it planned to re-enter the yoghurt market by the first quarter of 2015 and that it had approved a R150-million investment in a yoghurt production facility.

Vorster noted that the R300-million in projects would take some strain off the Clover distribution network and increase its efficiency even further.

“We need extra volumes now because we created that capacity. That is what we are looking for, either through our own growth or through acquisitive growth,” he said, adding that the company was actively looking at acquisition opportunities.

FINANCIAL RESULTS
Affected by strong inflationary cost pressures, a constrained trading environment, weakened discretionary consumer spending, lower sales volumes and a milk shortage during the winter, Clover’s headline earnings for the financial year declined 12.8%, from R214.9-million in the 2013 financial year, to R187.5-million.

This translated into a 23.1% decrease in earnings a share to 102.3c, while headline earnings a share, at 102.7c, were down 14.3% year-on-year.

Clover pointed out that the decrease in headline earnings constituted a 19.9% reduction in headline operating profit to R69-million; a 23.7%, or R11.1-million, increase in net finance costs; a 47.6%, or R47.1-million, decrease in headline income tax; and a 87.8%, or R1.1-million, increase in noncontrolling interests.

Meanwhile, revenue rose 8.9% to R8.53-billion, up from R7.83-billion in the prior year, while operating profit was 24% lower at R282.3-million.

The company’s operating margin decreased from the 4.7% reported in the prior year to 3.3%.

Revenue from the sale of product increased 8.9%, with average price inflation for the year of 11%. Overall sales volumes declined by 0.8%.

Vorster said that, while the company was not pleased with the results, it was satisfied given the challenges faced during the year.

“This has been an exceptionally tough second half of the financial year. A sharp increase in on-farm input costs led to a shortage of milk and subsequent fierce competition for raw milk. In order to protect our source, we paid above inflationary increases to our producers.

“At the same time, consumer spending was constrained and further fuelled by a price war in the [ultra-high temperature (UHT)] market,” he said.

He added that, in the lackluster economy, Clover took the decision to increase prices gradually to protect its market share and sales volumes.

Vorster also explained that the company had lost some of its milk supply ahead of the winter months following Clover’s rebalancing of its milk buying agreements in preparation for its exit from supplying raw milk at cost to Danone Southern Africa on January 1, 2015.

OUTLOOK
Commenting on the way forward, Vorster said the company’s cash flow remained strong, adding that the company was implementing a number of additional capital projects that would deliver further efficiencies and costs savings.

“We’ll largely focus on high-margin, value-added products where we can leverage our strong brand,” he said.

Vorster added that the acquisition of DairyBelle gave Clover access to yoghurt and UHT milk manufacturing facilities in the Bloemfontein and the Western Cape regions respectively.

“Combining these assets with our sales and distribution capabilities will not only improve efficiencies but will also enable us to develop the current DairyBelle brands and provide capacity to launch our own Clover branded products in this market. The acquisition is expected to provide Clover with an approximate market share of 10% in yoghurt and 19% in UHT milk,” he noted.

Clover declared a final dividend of 16c a share, bringing the total gross dividend for the year to 32c. This was equal to the dividend paid in the previous financial year, which was in line with the company’s dividend policy.