ANNEXURE TO THE RESULTS ANNOUNCEMENT FOR THE YEAR ENDED 30 JUNE 2017

PRO FORMA REGARDING THE EFFECT OF THE OPERATIONAL RESTRUCTURING OF DFSA ON THE CONSOLIDATED RESULTS OF CLOVER INDUSTRIES LIMITED (“clover”)

Introduction

On the 1st of July 2017 Clover concluded a corporate action that will have an impact on the 2018 financial year.

A recent strategic review of our product portfolio highlighted new trends in the milk business model where owner-producers supply the trade directly, as opposed to traditional intermediary companies like Clover. This means that commodity products like Fresh, Ultra High Temperature (‘UHT’) and Ultra Pasteurised (‘UP’) milk (‘non-value-added drinking milk’) has drifted outside of our core product portfolio.

Since our strategic focus is on value-added product categories, it made strategic sense to transfer the supply and demand side of the volume driven business to a new entity and invest our future funds in products and businesses that will suit our future business model better, whilst remaining a substantial service provider to non-value added drinking milk industry.

As communicated on the Stock Exchange News Service on 6 July 2017 and earlier, Clover has formed a wholly owned subsidiary (called Dairy Farmers of South Africa (Pty) Ltd (‘DFSA’)). Clover transferred the non-value added dairy business and sold the related finished goods, packaging material and ingredients inventory, to DFSA with effect from 1 April 2017. In exchange for the transfer of the non-value added dairy business as aforementioned, DFSA allotted and issued to Clover A shares (which constituted the entire issued share capital of DFSA at the time) for a nominal amount, and a loan account for the inventory.

With effect from 1 July 2017, DFSA issued and allotted B shares in to the milk producers for a nominal amount and accordingly, the milk producers now hold all the B shares which constitute 74% of the voting rights of DFSA. Clover holds all the A shares which constitute 26% of the voting rights of DFSA.

With effect from 1 July 2017 Clover relinquished its control of DFSA and will for accounting purposes treat it as an investment in an associate going forward.

DFSA houses the non-value added drinking milk business and is responsible for the procurement of raw milk as well as the selling, marketing and distribution of the non-value-added drinking milk referred to above.

DFSA will subsequently become Clover’s largest principal, where all its related requirements such as distribution, production, administration (invoicing, debt collection, marketing), IT services, payroll administration, central services, sales and merchandising are outsourced to Clover for an initial period of 20 years. In exchange for these services, Clover will earn service income.

This Annexure to the results announcement includes the 30 June 2017 audited results which have been adjusted to reflect the loss of control of DFSA (“Pro Forma Adjustments”) as if the loss of control of DFSA had occurred (a) on 1 July 2016 for purposes of the Pro Forma Adjustments made to the pro forma consolidated statement of comprehensive income and (b) as at 30 June 2017 for purposes of the Pro Forma Adjustments made to the pro forma consolidated statement of financial position.

The pro forma financial information has been prepared for illustrative purposes only, to provide information about how the Pro Forma Adjustments might have affected the financial information presented by Clover had the unbundling of DFSA occurred on 1 July 2016 for statement of comprehensive income purposes and as at 30 June 2017 for statement of financial position purposes. Because of its pro forma nature, the pro forma financial information may not fairly present Clover’s financial position, changes in equity, results of operation or cash flows. It does not purport to be indicative of what the financial results would have been, had the loss of control of DFSA been implemented on a different date.

The Clover Directors are responsible for the preparation of the pro forma financial information. The pro forma financial information has been prepared using accounting policies that are consistent with IFRS and with the basis on which the historical financial information has been prepared in terms of the accounting policies of Clover. The pro forma financial information has been prepared in accordance with the Listings Requirements and the revised Guide on Pro Forma Financial Information issued by the South African Institute of Chartered Accountants.

These pro forma financial effects have been prepared to assist Clover’s shareholders in assessing the impact of the loss of control of DFSA on the Clover consolidated statement of comprehensive income and statement of financial position.

This pro forma financial information has been reported on by the independent external auditors, Ernst & Young Inc., in terms of International Standards on Assurance Engagements (ISAE) 3420, Assurance Engagements to Report on the Compilation of Pro forma Financial Information Included in a Prospectus. Their unmodified limited assurance report is available for inspection at the Company’s registered office.

PRO FORMA CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

	30 June 2017 Audited ⁽¹⁾ R’000	Exclusion of the revenue and cost of sales of the DFSA business ⁽²⁾ Pro forma adjustment R’000	Income from services rendered to DFSA ⁽³⁾ Pro forma adjustment R’000	Packaging material procured and sold to DFSA ⁽⁴⁾ Pro forma adjustment R’000	Interest charged on working capital facility ⁽⁵⁾ Pro forma adjustment R’000	After Pro Forma Adjustments R’000
Sales of products	9 401 842	(3 549 806)		517 499		6 369 535
Rendering of services	641 499		1 192 922			1 834 321
Sale of raw milk	11 907					11 907
Rental income	3 351					3 351
Revenue	10 058 599	(3 549 806)	1 192 922	517 499		8 219 214
Cost of sales	(7 333 041)	2 321 032		(517 499)		(5 529 508)
Gross profit	2 725 558	(1 228 774)	1 192 922			2 689 706
Other operating income	60 040					60 040
Selling and distribution costs	(2 089 364)					(2 089 364)
Administrative expenses	(284 721)					(296 760)
Restructuring expenses	(48 098)					(48 098)
Other operating expenses	(48 936)					(48 936)
Operating profit	314 479	(1 228 774)	1 192 922			278 627
Finance income	12 647				35 852	48 499
Finance costs	(145 765)					(145 765)
Share of profit in a joint venture	18 486					18 486
Profit before tax	199 847	(1 228 774)	1 192 922		35 852	199 847
Taxation	(41 105)	344 057	(334 018)		(10 039)	(41 105)
Profit for the year	158 742	(884 717)	858 904		25 813	158 742

PRO FORMA CONSOLIDATED STATEMENT OF FINANCIAL POSITION

	30 June 2017 Audited ⁽¹⁾ R’000	Sale of inventory ⁽⁶⁾ Pro forma adjustment R’000	After Pro Forma Adjustments R’000
Assets
Non-Current assets
Property, plant and equipment	2 427 444		2 4727 444
Investment properties	9		9
Intangibles assets	650 663		650 663
Investment in joint ventures	38 946		38 946
Other non-current financial assets	3 165		3 165
Deferred tax assets	45 496		445 496
	3 165 723		3 165 723
Current assets
Inventories	964 630	(244 076)	720 554
Trade and other receivables	1 341 311	244 076	1 585 387
Prepayments	19 844		19 844
Income tax receivable	7 165		7 165
Cash and short term deposits	544 863		544 863
	2 877 813		2 877 813
Assets classified as held for sale	4 607		4 607
Total assets	6 048 143		6 048 143

	30 June 2017 Audited ⁽¹⁾ R’000	Sale of inventory ⁽⁶⁾ Pro forma adjustment R’000	After Pro Forma adjustments R’000
Equity and liabilities
Equity
Issued share capital	9 542		9 543
Share premium	892 692		892 692
Other capital reserves	78 642		78 642
Foreign currency translation reserve	9 637		9 637
Retained earnings	1 904 349		1 904 349
Equity attributable to holders of the parent	2 894 862		2 894 862
Non-controlling interests	(15 179)		(15 179
Total equity	2 879 683		2 879 683
Liabilities
Non-current liabilities
Interest bearing loans and borrowings	767 621		767 621
Non-controlling put liability	57 088		57 088
Employee-related obligations	82 595		82 595
Deferred tax liability	221 065		221 065
Trade and other payables	25 492		25 492
Other non-current financial liabilities	9 683		9 683
	1 163 544		1 163 544
Current liabilities
Trade and other payables	1 274 700		1 274 700
Interest-bearing loans and borrowings	714 304		714 304
Other current financial liabilities	6 141		6 141
Employee-related obligations	9 771		9 771
	2 004 916		2 004 916
Total liabilities	3 168 460		3 168 460
Total equity and liabilities	6 048 143		6 048 143

Notes:

1.	As per the consolidated statement of comprehensive income and the consolidated statement of financial position for the year ended 30 June 2017 with reference to the Audited Annual Financial Statements.
2.	The sale of products relating to the non-value added drinking milk, namely Fresh, UHT and UP milk that will be excluded from Clover and be part of DFSA in future. The Pro Forma Adjustment was determined with reference to actual volumes sold and realised. The tax effect was determined using the corporate tax rate of 28%.
3.	Clover provided all the production, distribution, sales and merchandising, marketing and certain administrative service to DFSA at a contracted fee. The pro forma adjustment was determined with reference to actual volumes produced. The contracted fee was calculated based on the actual costs for the period 1 July 2016 to 31 December 2016. The tax effect was determined using the corporate tax rate of 28%.
4.	Clover procured the packaging material from third party suppliers and on-sold the packaging material to DFSA at no margin.
5.	Clover provided the working capital funding to DFSA in the form of an interest bearing facility on which Clover earned interest at a rate equal to the average rate Clover pays to its interest bearing debt funders. The tax effect was determined using the corporate tax rate of 28%.
6.	All the finished goods, packaging material and ingredients inventory related to Fresh, UHT and UP milk were sold to DFSA on loan account on 1 April 2017. It was assumed that the inventory was sold in the same manner on 30 June 2017 to give effect to the Pro Forma Adjustment.
7.	The loss of control of DFSA was structured in such a way that the non-value-added drinking milk business broke even and therefore there was no equity accounted earnings or Investment in Associate in terms of IAS28.
8.	IFRS 10 Consolidated Financial Statements paragraph 25 requires the calculation of a gain / (loss) on the deemed sale of the investment in DFSA when control is lost. On 1 July 2016 this gain / (loss) on the deemed sale would however equal the nominal amount received as consideration for the B shares issued by DFSA. It was assumed that the inventory, the only asset of DFSA on 1 July 2016, was sold in the same manner on this date as it was on 1 April 2017. Therefore, the fair value of any retained interest is zero.

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Annual financial statements

ANNEXURE TO THE RESULTS ANNOUNCEMENT FOR THE YEAR ENDED 30 JUNE 2017

PRO FORMA REGARDING THE EFFECT OF THE OPERATIONAL RESTRUCTURING OF DFSA ON THE CONSOLIDATED RESULTS OF CLOVER INDUSTRIES LIMITED (“clover”)

Introduction