Business review
Chairman’s report
Management's short term focus remains to achieve an equal margin contribution from non-dairy and new value-add products on the one hand, and traditional dairy products on the other
Dear Stakeholder,
The year under review will go down in history as one where our “Way Better” philosophy was well and truly tested.
Continued pedestrian sales during some of our peak trading months, exogenous economic and climatic impacts as well as currency volatility fuelled by political uncertainty and regulatory changes constrained the entire retail sector in the country.
Since listing in 2010, Clover has followed a strategy of diversifying away from bulk, commoditised food stuffs, to focusing on value-added, branded products. It is therefore no coincidence that during this period, we announced and completed the final leg of our operational restructuring with the establishment of an independent company, The Dairy Farmers of South Africa Proprietary Limited (“DFSA”).
Following the finalisation in July 2017, the agreement with DFSA is expected to significantly reduce Clover’s high exposure to milk as an input source. It also provides raw milk producers with a stake in the non-value-added dairy products business where the highest volumes of raw milk is used, enabling them to leverage from the entire value chain for their benefit.
This transaction represents the most significant milestone in Clover’s history since Project Cielo Blu at the time of listing. Johann Vorster will elaborate in more detail on DFSA in his CEO report.
Macro-economic environment
For context on the global and domestic dairy industry, readers should refer to the Bureau for Food and Agricultural Policy’s 13th baseline agricultural outlook for 2017 to 2026. It provides a good perspective and is available here
After the traditional peak trading period of December 2016 – an important yardstick in measuring consumer confidence and share of discretionary spend patterns – it became clear that the prolonged impact of the severe drought in the previous season, increasing input costs, higher raw milk and fruit pulp prices as well as the stagnant economy would place significant pressure on the Group’s financial performance for the year.
Clover increased selling prices to recover higher input costs, however, pressure on volumes and market shares was experienced as consumer sentiment remained subdued. Although these unfortunate events weighed in heavily on the results, strategically it was the correct action to take, as the Clover brand is heavily reliant on the continued supply of quality milk and fruit pulp.
Although many of the negative factors were beyond Clover’s control, the Board and management had to make some tough decisions at the expense of this year’s results, to support the longer-term sustainability of the Group. Following a strategic review of the business environment against our internal capacities, structural changes to Clover’s infrastructure were introduced which are expected to lead to significant cost savings across the current cost base. More information on the practical application of this can be found in the CEO Report.
Consequently, Headline Earnings Per Share (“HEPS”) for the year under review is 66,2% lower at 63,9 cents compared to the 188,9 cents reported for the year ended 30 June 2016. Normalised earnings per share also reduced by 57,3% to 82,0 cents, compared to 192,2 cents in the corresponding period.
Elton Bosch will elaborate more on our financial performance in his report here.
Regulatory Environment
Along with the proposed sugar tax, new dairy regulation R260 was introduced by the Department of Agriculture, Forestry and Fisheries towards the end of the review period here. The dairy industry is now required to show ingredients lists, batch codes and best by/use by/sell by dates on packaging. It also impacted labelling regarding fat content, creating a new medium fat category in many areas. Overall, the impact of regulation R260 on Clover’s business is minimal and we welcome the additional transparency allowing consumers to make more informed choices.
The past year has also saw changes to the proposed sugar tax. Most significantly, the tax will now look at both intrinsic and added sugars when calculating the tax. In addition, Treasury has proposed a threshold that would make the first 4g of sugar per 100ml beverage exempt from the sugar tax. An important step forward includes the fact that 100% fruit juices and milk products will be considered exempt from the tax.
We are working tirelessly to reduce the impact of the tax through revising the composition of some of our products to ensure that we do not compromise on quality or taste whilst reducing the overall sugar content. One of our successes in this regard has been the introduction of Tropika Slenda which has been well received by our customers.
Going forward, our commitment to the sustainable growth of our industry means that we will continue to engage with regulators on finding an optimal way forward that will have the minimal impact on output and employment.
Transformation and Empowerment
Clover’s B-BBEE status was assessed earlier this year and we maintained our rating as a level 4 contributor. New B-BBEE codes for the broader agricultural sector are still being debated. Realistically, Clover can only evaluate the potential impact of these once they’ve all been promulgated. Internally, our employment equity planning is well on track in preparing the next generation for leadership across the business.
The Environment and Our Communities
Throughout our endeavours to create shareholder value and growth, we remain cognisant of our responsibility towards our stakeholders and our operating environment. Our Report on Six Capitals detailing how we interacted as a corporate citizen with our stakeholders is available on page 91 of this report, as well as online at www.clover.co.za.
Governance
We are exceptionally proud and honoured to have been voted “the most reputable company in South Africa” for the second year running in the 2017 SA RepTrak Pulse reputation survey, conducted by Reputation House. Considering that seven out of the top 10 companies were FMCG and retail companies, including some of the world’s largest multinationals, makes this no small feat.
The Board wishes to congratulate Johann Vorster and his entire team on this exceptional performance. Brand and reputation is about consistency: in supply and delivering on the brand promise. Clover’s corporate governance and ethics are geared towards providing a guideline against which our day-to-day practices and conduct is measured.
With the onset of King IV, global integrated governance norms have entered conversations around “how much is enough” when considering the question of organisation-wide pay and value creation. The answer to this emotive question centres on a range, between the extremes of “not less than the market” and “not more than the organisation can afford”. Our approach at Clover has always been to provide adequate disclosure to our external stakeholders based on our commitment to fairness and the creation and preservation of value over the long term.
It has been encouraging to see the impact that continued shareholder engagement had in mutual understanding of performance targets and valuation metrics. Dr Steve Booysen elaborates more on this in his letter to shareholders here.
King IV was released in November 2016 and builds on the current principles contained in King III, aligning the approach to integrated thinking across all six capitals, new governance structures, emerging risks and opportunities, from new technologies and new reporting and disclosure requirements.
Complying with King IV is a JSE Listings Requirement and effective for financial years commencing from 1 April 2017, and only with regard to integrated reports published on or after 1 October 2017. Clover’s Board has concluded a gap analysis and no material concerns or insufficiencies were identified regarding the Group’s current disclosure and application of principles. The new reporting requirements will be adopted during the current reporting period and disclosed in the integrated report for the period ending 30 June 2018.
Legal compliance to Regulation 43 of the Companies Act pertaining to the Social and Ethics Committee and the management of Clover’s performance against ethics guidelines are described fully in the Report on Six Capitals. Compliance with Clover’s regulatory universe is described under Compliance in the Governance section, here.
Dividend
Should the current year HEPS be lower than the HEPS reported in the prior year, the Board’s policy is to maintain the current dividend at the prior year level. In line with this policy, the Company declared and paid an interim dividend of 24,21 cents per share during April 2017. Consequently, no final dividend has been declared by the Board, maintaining the total dividend for the year at 24,21 cents per share. Dividends are paid from retained earnings and shareholder can elect to receive a scrip dividend or cash dividend net of dividend withholding tax. Although the Board communicated in the past that it will follow a progressive dividend policy whereby dividends are as minimum maintained or grown by at least the growth in the headline earnings per share, the Board has resolved not to declare a final dividend due to the current weak economic circumstance and the Group's growth funding requirements.
Looking to the future
While the financial performance for the year was disappointing, the board remains positive on Clover’s future. The drought has been broken in some of the worst affected areas and the agricultural cycle has turned with a bumper maize crop anticipated this year, which is expected to have a positive effect on farm gate milk prices and a recovery in milk production as well as normalised fruit production volumes. The continued relative stability of the rand and dollar weakness in recent times is expected to curb rising input cost inflation.
Cost efficiencies implemented prior to and during the review period as well as increased sales supported by our investments in production facilities, distribution platforms and research and development as well as ongoing marketing efforts is expected to support volume and margin growth.
The restructuring of Clover’s current operations as described above and in more detail in the Chief Executive’s report will form the cornerstone of our strategy to develop branded value-added products that are less impacted by agricultural cyclicality. We therefore remain committed to our medium- to long-term goals of investing in and growing our value-added product portfolio and infrastructure whilst exploring synergies to leverage our infrastructure, passing the resultant cost savings on to consumers.
An encouraging development post the balance sheet date has been DFSA’s pro-active approach to stimulating the production of butterfat. There is currently a worldwide shortage of butterfat. In South Africa, this is partly due to a higher demand from consumers as well as a consumer shift away from low fat drinking milk to full fat drinking milk as a result of changes in health perceptions. This has resulted in less cream being available to make butter.
DFSA recently announced a price stimulus whereby dairy producers will receive a premium according to the content of butterfat in their milk. Clover welcomes this as an important step to not only sustain the primary industry, but to address consumer demand as well.
Appreciation
Mr Elton Bosch resigned as Financial Director post the reporting date, in July this year to pursue personal interests. Elton served as Financial Director since January 2016 and was the Executive: Business Development, Risk and Africa prior to taking up the position. He leaves a legacy at Clover, having contributed significantly to the risk and governance areas of the business, over and above his financial acumen. On behalf of the Board, I thank Elton for his valued contribution. A suitable candidate is being sourced to replace Elton, who will continue with his responsibilities until December this year to ensure a smooth transition.
Following the retirement of Messrs Wixley, Lerm, Botha and Griffin from our Board, we undertook a change in director responsibility. The Clover board now constitutes two executive directors and five non-executive directors, three of whom are deemed independent. On the back of these changes, we appointed Ms Neo Violet Mokhesi as a member of the Audit and Risk Committee and Remuneration Committee of the Company at the beginning of 2017. Prior to this, Ms Mokhesi served as an independent non-executive director and as the Chairperson of the Social and Ethics Committee. I am particularly grateful for her continued commitment and contribution to the board since her appointment.
Finally, I want to thank Johann Vorster, his team and all Clover employees for the dedication and hard work during a difficult year. The restructuring and other internal cost saving initiatives impacted on the working environment of many individuals. Your continual commitment and adaptability is much appreciated and will play a huge role in the wellbeing of the company in future.
Werner Büchner
Chairman of the Board
11 September 2017
