As branded consumer goods and beverage group Clover Industries works its way through muted trading and economic conditions, the JSE-listed group is progressing a number of strategies to set it back on a growth path.

Unpacking the lacklustre financial results for the half-year ended December 31, Clover CEO Johann Vorster pointed out that the growing economic pressures facing consumers were “becoming more evident” within an unstable local and global macroeconomic environment.

“We had to contend with a number of complex challenges during the period. The prolonged drought and rand volatility resulted in above-inflation input costs, which could not be recovered through the price increases implemented as consumer sentiment was subdued and competitive pricing aggressive.

“We also experienced a comparatively wetter and cooler summer which impacted on sales volume growth,” he explained to shareholders at the presentation held at the JSE in Sandton.

The group reported a 13.5% contraction in headline earnings to R190-million, while headline earnings per share decreased by 14.7% to 99.8c and earnings per share decreased by 10.8% to 103.6c.

Clover’s operating profit declined 5.2% to R322.7-million and the profit for the period was down 9.6% to R197.9-million.

“The group’s gross margin was slightly higher at 30%, but the inflationary cost pressures and internal restructuring impacted on the group’s operating margin, which decreased to 6.2% from 6.8% in the corresponding period,” Vorster noted.

Revenue increased by 2% from the previous corresponding period to R5.1-billion, owing to higher product selling prices, which saw inflation of 10.6% for the six months to December 31.

Clover’s hike in selling prices to recover the high inflationary input costs, in combination with subdued consumer sentiment amid the comparatively wetter and cooler summer, had negatively impacted on overall sales volumes and market shares in certain categories.

“The group faced the challenge of balancing selling price increases in the market to recover the inflationary cost pressures while assuming the added responsibility of protecting not only its own milk source, but the long-term sustainability of the primary dairy industry, given the severe drought during the previous season,” the company commented.

Clover aimed to continue its pursuit of improving cost efficiencies and the delivery of more affordable products across its value chain to limit the impact of rising selling prices on consumers and defend and maintain its existing market shares.

The group is also progressing a significant restructure that will see the development of a higher-margin business with value-added products in dairy and other related food categories and eliminate its exposure to the cyclicality of its low-margin business in future.

“The restructure will effectively result in the group rearranging its business in a way that will see Clover continue its strategy of focusing on branded products, while simultaneously supporting the ambitions of its milk producers to pursue a volume growth strategy through a newly formed entity, Dairy Farmers of South Africa, which will acquire the dairy fluid business,” Vorster said.

Clover is formalising the restructuring through the relevant agreements, with implementation planned for July 1.

“This restructuring is an exciting and new concept which offers a number of opportunities for Clover and for our milk producers,” he added, noting that the move emerged following a “strategic review” of its product portfolio, which revealed that nonvalue-added fresh, ultrahigh temperature (UHT) and ultra pasteurised liquid milk no longer “fit” within Clover’s core product portfolio and that value-added product categories were the way to go.

During the six months to December 31, Clover invested heavily into its production facilities, distribution platform and marketing units.

The continued focus on new brands and new market development led to a 20% increase in research and development spend to R29.2-million.

Clover also invested R177-million more in capital expenditure (capex) projects during the first half of the year, including R53-million for the integration of the Doornkloof ice tea and water facility, R42-million into the optimisation and expansion of the Port Elizabeth UHT facility and R24-million into the extension of its yoghurt production capacity in Bloemfontein.

Significant one-off restructuring costs of R23.6-million relating to the integration of the company’s City Deep distribution facility into the Clayville distribution facility were also incurred during the period under review, the benefits of which were expected to emerge in the second half of the year.

The company also spent R30-million in capex on the Good Hope Milnerton factory and trademarks; R18-million on the Lichtenburg gouda and feta expansion; and R10-million on the Pinetown cream expansion and palletising operations.

Other key focus areas for Clover moving forward are the exploration of adjacent revenue streams and new principal income, following the liquidation of Dairybelle, which had a R40-million impact on Clover, and the development and expansion of its value-added product portfolio and infrastructure.

In line with this, and to mitigate the impact of the incoming sugar tax, Clover will unveil sugar-free products in due course.

Further, as the group explored synergistic opportunities, Clover acquired a controlling stake in Olive Pride, forming a new joint venture entity called Clover Pride with 49% stakeholder explosives and speciality chemicals company AECI, effective April 1.

Clover will provide all services including merchandising, marketing, sales and distribution to the new entity, while Clover Pride will continue to distribute, market and sell products under the Olive Pride brand.

Clover declared an interim dividend of 24.2c a share.