Clover rolling over milk-supply bump

When the going gets tough, the tough get going.

This will likely resonate with dairy producer Clover Industries as it races to grow market share in a tough environment, which will likely to put the brakes on growth.

Clover is up against an industry currently seeing an oversupply of raw milk in SA, which has prompted dairy producers to be aggressive in keeping their price of products low to gain market share.

Underscoring the oversupply of milk is latest figures from Milk SA, which show that since the latter part of 2014, SA’s milk flow has been 7.3% higher than the previous year. This is well above the national consumption rate of about 3.5%.

In response to market pressures, Clover kept the prices of its products low to defend its market share and remain competitive. Its efforts have seen it deliver a credible set of results for the six months to December 31 2015, with a 7.1% rise in headline earnings per share to 117 cents.

Clover grew operating profit by 5.8% to R340.3 million on the back of revenue growth of 7.9% to R5 billion.

However, keeping product prices low saw Clover’s gross margin drop slightly from 31% to 29% in the period under review. Its operating margin also decreased from 6.9% to 6.8%. Financial director Elton Bosch says this was expected given the national milk flow surplus. But the group foresees price increases on dairy products.

Clover’s products, which span across pure juice, milk, cheese, butter and more, saw volume growth during the festive season, boosted by the recent heat wave conditions.

“Clover has maintained market share. In some categories, we grew market share like in processed cheese slices and feta cheese. Pure juice has grown market share from 6% to 8.3% and we gained additional revenue.”

In recent months, Clover launched a swathe of new products including its Clover Classic yoghurt and custard range in addition to DairyBelle’s Fruits of the Forest brand. These are high margin products. Clover launched the yoghurt and custard line, after the end of its service agreement with France-based Danone – barring it from producing yoghurt products.

“The majority of Clover’s newly-launched dairy products traded above expectations. We are anticipating a 15% market share in the next five years,” says Bosch.

The company has been active on the deal-making front, as it acquired the Dairybelle yoghurt and UHT businesses and recently a 51% stake in Frankie’s Olde Soft Drinks.

Adding to the pressures Clover faces is the severe and protracted drought, which has hit large parts of SA’s agricultural land with the Western Cape and the Eastern Cape slightly spared.

Because of the drought, Clover saw an increase in on-farm costs to producers. “In this tough market, the short-term solution to protect the raw milk source is to increase the price paid at the farm gate. Clover has already provided further price increases to its producers,” says Bosch.  Although there is not much Clover can do to insulate itself from drought pressures, Bosch says the company will focus on controlling costs.

Its cost-controlling drive will see Clover withdraw future investments in Nigeria due to the region’s financial crisis – exacerbated by the drop in oil prices to 12-year lows and the rapid devaluation of the Nigerian naira. Clover has been exporting its product in the region since 2010, although Bosch says its exposure to the region is limited.

Clover will continue to expand its operations within the Botswana, Namibia, Lesotho and Swaziland region, and will continue to pursue export opportunities on the continent. However, the capital previously earmarked for Africa will no longer be spent.

The company declared an interim dividend of 24.21 cents per share, which is up 7.1%.

To listen to the podcast with Clover’s chief executive, Johann Vorster and Andries van Zyl, please click here.

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