SOUTH AFRICA – Clover says headline earnings per share for the year to June are expected to be 50% to 65% down from 2016 as “stagnant and falling” selling prices and rising input costs are forcing it to make difficult decisions about long-term growth.

The “new normal” constrained economy has “heavily affected” its latest financial results at a time the group is restructuring to derive more profits from value-added products such as custards, yoghurts and infant foods.

“Clover has experienced similar margin pressures to many of the other South African food producers, but it looks as though this is most concentrated in its beverages and milk divisions,” Dirk van Vlaanderen, associate portfolio manager at Kagiso Asset Management, said on Thursday.

“There was a large increase in farm-gate milk prices that Clover was not able to pass on fully to consumers and therefore profits were squeezed,” he said.

Clover said it had contended with “many complex challenges” in the year, including the effects of prolonged drought across SA since late 2015 and rand volatility that resulted in above-inflation input costs.

These could not be recovered through revenue increases as the sentiment of consumers remained subdued, Clover said.

The group’s price increases during April 2016 coupled with a comparatively wetter and cooler summer later on affected sales volumes negatively overall, except for the new yoghurt and custard categories.

The key objectives of its restructuring were to improve access to new volume-based growth markets, while improving volumes in the company’s low-margin business, including raw, pasteurised and ultra high-temperature milk production.

To this end, a special-purpose vehicle, Dairy Farmers SA, majority-owned by independent milk producers that supply Clover, was now driving volumes and determining the price at which the company buys raw milk, as well as the price at which it sells raw milk to customers and consumers.

Clover said resultant increased volumes in the low-margin business would benefit group profitability as this used up excess production capacity.

But studies show that many South African consumers use milk products with long shelf life in the absence of cold-storage facilities. This has put pressure on Clover’s low-margin fresh milk products.

The group said while the effects of the prolonged drought would still be felt for some time, a gradual recovery in milk and fruit production volumes in SA was expected.

It also said one-off restructuring costs and the effects of the drought were seen as non-recurring anomalies, and given the recent improvement in the economy, input-cost inflation would be reduced.

September 7, 2017: BD Live