Chairman’s report

Once upon a year

Introduction

During recent years, Clover set out on a path of transforming from a supplydriven to a demand-driven company. This evolution continues as Clover has firmly established itself as one of the country’s leading branded foods and beverages groups with a strong emphasis on value-added products.

In line with the Group’s business strategy, most Clover brands continue to occupy the number one or two position in its chosen product segments.

Building on its impressive 114 year history, the year under review yielded a number of milestones and some challenges, as Clover progresses with Project Cielo Blu.

Operating environment

Given the persistent global financial turmoil, international economists and financial analysts are of the opinion that the status quo could continue for quite some time. While South Africa can take comfort from being partially insulated from the effects of global trends, the local economic conditions remain subdued with real GDP growth expected to remain around 2,5% in the near term.

Against the backdrop of difficult global and domestic conditions, local business in general remained subdued, households more frugal and bank credit providers cautious in their lending.

In the agricultural sector, a combination of severe weather conditions in some of the world’s largest food producing regions and various pressures on input costs continued to impact on food inflation. Food security is increasingly becoming topical. The lead-and-lag factor will see food prices rise and impact on general inflation in the foreseeable future, with basic foodstuffs the hardest hit. For Clover, input costs which are subject to inflationary pressures such as maize and fertiliser will have a ripple effect throughout the chain.

Locally, substantial national on-farm cost increases placed severe pressure on milk production. This affected the first quarter of the financial year and lead to a short supply of milk, which was further exacerbated by a lackluster market as a result of national strike action.

Clover’s unique milk procurement model mitigated milk shortages to some extent, although the Group did act prudently by entering into further supply contracts with new producers, and increased the price it pays to its producers by total of 60 cents per litre.

Although Clover was unable to recover all of the higher input costs due to the high milk flow season, it managed to absorb a part of the short fall through higher sales volumes, especially in branded and non-bulk products. Clover’s brands performed well overall, which again underlines the importance of brand strength during difficult times.

The latter part of the year proved more stable and showed considerable improvement, especially as some of the earlier price increases could more readily be recovered. The Group also benefited from the margin enhancing effects of additional capacity for UHT milk and distribution that came on-stream. Please see the report by the Chief Financial Officer for a summary of the financial performance of the Group for the year under review.

Project Cielo Blu

Project Cielo Blu is part of Clover’s supply chain optimisation and most of the R575 million proceeds from the capital raised is being used towards the repositioning and expansion of facilities, which will lead to improved efficiencies, increased production capacity and overall cost reductions.

Project Cielo Blu is progressing well, although the positive impact of additional capacity for UHT milk and distribution is only partially reflected in this review period. As highlighted, the Queensburgh distribution facility design was reconsidered and processes simplified to enhance long-term benefits. The revised commissioning date is now expected to be in September 2013. The balance of savings from Project Cielo Blu’s capacity and efficiency improvements are on track and are expected to accrue to Clover during the next two years.

Governance and the Board

The Board is committed to the highest corporate governance standards as set out in the King Report on Corporate Governance in South Africa 2009 ("King III").

The Board’s mandate and how it discharges its detailed requirements in full alignment with the requirements of King III are fully explained in the Corporate governance report of this Integrated Annual Report. Among the issues the Board pays close attention to the economic viability of the Group, product responsibility and quality, ethics, stakeholder engagement and management, broad-based black economic empowerment, employment equity and transformation, training and development, Clover’s environmental impact and strategy as well as its corporate social initiatives.

More information of the above is available in the Social and Ethics Committee report and sustainability of this Integrated Annual Report.

Corporate responsibility

Since its inception in 2004, Clover’s major Corporate Social Investment (“CSI”) initiative has been Clover Mama Afrika which today have an impact on more than 14 000 children and more than 2 000 elderly through 35 dedicated “Mamas”. Clover Mama Afrika continued to grow from strength to strength over the past year under the leadership of Prof Elain Vlok and this was recognised with the project winning the prestigious Proudly Homegrown – CSI Champion of the Year Award in 2011.

Clover has been part of South Africans’ lives for the past 114 years and aims to continue playing an important role in the development of the country’s art and culture. The Group is now in its second year of a five-year sponsorship of the Clover Way Better™ Aardklop National Arts Festival. Apart from the commercial benefits, Clover’s involvement allows for a number of productions to be performed across the country, exposing the performing arts to communities that would otherwise not have had the opportunity.

One of the contributing factors to Clover’s success is its people. They are the driving force enabling us to be consistently more competitive in our chosen markets. We are convinced that our people will also be the single biggest contributor to Clover’s future growth, profitability and excellence and the Company has a number of successful initiatives aimed specifically at ensuring that our employees are productive and rewarded through their work.

During the year under review, Clover further developed its environmental strategy with significant benefits expected from Project Cielo Blu in terms of a reduced carbon footprint. More details on the various initiatives can be found in Clover’s Social and Ethics Committee report and sustainability of this Integrated Annual Report.

Transformation

Clover is fully committed to achieving B-BBEE as outlined by the Department of Trade and Industry and received a Level 6 rating in a recent external audit by Empowerlogic. The Group views B-BBEE as an opportunity to increase economic activity, creating sustainable livelihoods for as many of the country’s inhabitants as possible as well as developing a sustainable consumer market. Clover also practises preferential procurement in the supply chain and approximately 62% of the money spent by the Group in its non-milk procurement process is spent with suppliers who enjoy various levels of B-BBEE compliance status.

In the sphere of employment equity, Clover has made steady progress in increasing the number of people from designated Groups at management level and have completed detailed plans for a three-year employment equity process, which will ensure that Clover’s workplace remain free of unfair discrimination and that reasonable progress is made towards employment equity in the workplace.

A key business strategy to support Clover’s performance and growth and to position it as the industry’s employer of choice, is focused employee training and development. The Group’s training and development focuses on, firstly, building competence that will ensure effective execution of operational tasks, and, secondly, on generating capacity in human resources that will ensure sustainable performance and growth.

Clover’s Competence Development Model, designed principally to increase the competence of previously disadvantaged individuals for advancement has been in operation for some time now and is yielding encouraging results.

Prospects

The global economy is set to remain uncertain in the year ahead and we are bracing ourselves for another difficult year economically in South Africa.

In spite of this, Clover is confident that the continued implementation of Project Cielo Blu, ongoing cost saving drives and other margin-enhancing projects approved by the Board will ensure Clover retains a healthy market share and strong balance sheet.

Land reform

A comprehensive program of land reform in South Africa is urgently needed as it is clear that current policies have been unsuccessful in rectifying the disastrous agricultural and land policies of the past. Food security is receiving high levels of unprecedented attention globally and in South Africa, as with other developing countries, must consider the crucial role that land plays in the development and sustainability of a thriving agricultural sector. This in turn plays an important part in alleviating poverty in rural communities. To achieve meaningful progress, a number of processes need to be addressed urgently, including:

Developing the necessary level of skills required to run commercially viable farming operations.
Encouraging and supporting family-owned and -run farming enterprises.
Ensure productive use of communal and state-owned land for the establishment of commercial farms by way of long-term leases.
Maintain the viability and sustainability of a region’s existing agricultural infrastructure.

Recommendation and election of a new Chairman

It has been an honour and privilege to have been able to contribute to this remarkable Group as Chairman for the last seven years and as a Director for the last 22 years, during which time I have been closely associated with a great many of the excellent Clover people who drive its success.

The time has now come for me to step down, however, to devote myself fully once more to the relative tranquillity of dairy farming in KwaZulu-Natal and to look back with a great deal of pleasure on how Clover has developed and changed over the years that I have known it.

The Nomination Committee will make a recommendation to the Board with regard to a successor as Chairman whose appointment as Chairman will be voted on by the Board as soon as possible after the forthcoming Annual General Meeting.

Appreciation

In taking my leave of the company, I wish to thank my colleagues on the Board most sincerely for their personal friendship and for their wholehearted commitment towards Clover and its people. I have been associated with many of the incredible people who have served Clover so passionately and loyally over many years and I would like to thank all those who have contributed to the group’s success and growth during good and difficult times.

It is difficult to single out individuals but during my tenure as Chairman the creative thinking and inspired leadership of CEO, Johann Vorster, ably supported by his Executive Committee has charted the ground breaking transformation of Clover and led to a new level of excellence of which we are justifiably extremely proud. Its effects will certainly remain an indelible part of the group’s history. I consider myself fortunate to have had my term coinciding with the appointment of Johann as CEO and enjoyed a professional association and valued friendship with him. As company secretary Manie Roode has played a crucial role in advising and supporting the Board. My sincere appreciation Manie, for the invaluable support and advice you have given me and for the interesting and sometimes challenging times we have shared.

We have a very strong compliment of Independent Directors all of whom are making a valuable contribution in the best interests of Clover. I would like to make special mention of Desmond Smith, though no longer on the Board, who played a pioneering role for the group in this regard. Tom Wixley has been associated with Clover for many years and I would like to thank him personally for the wise counsel and great patience he has afforded me in so many ways and for the value he has brought to the Group.

It remains only for me to wish the new Chairman, the Board, and all stakeholders, everything of the very best for an exciting road ahead.

John Bredin
Chairman of the Board