Clover released a disappointing set of results today citing rising inflation, costs and a tough consumer environment as contributors to its 14.2 percent fall in headline earnings per share. While Clover's sales increased by 8.9 percent it saw lower volumes as gradual price-hikes affected consumers. Alec Hogg was joined by Johann Vorster, Clover's CEO, on the CNBC Power Lunch today, to get an understanding of where Clover is, what the impact of losing Danone as a customer is, and what he expects from future results. Is Clover on a downward trajectory, or can it be dusted off and fighting fit next time this year? – LF.GUGULETHU MFUPHI: Clover has reported a full-year increase in revenue and a decrease in headline earnings per share. Joining us now to unpack these numbers further is Johann Vorster, Chief Executive of Clover Industries Limited. It's good to have you with us, Johann. Reading through your numbers, no doubt your input costs have risen quite significantly. Is this the headache that's been keeping you awake at night?.JOHANN VORSTER: Firstly, we're not pleased with the results but we're satisfied with what we've achieved during the year. There was huge pressure on us, specifically from the farmers' side. The farmers were under huge pressure and at one stage or another, we had to concede to that pressure and all of us in the industry had to put up our prices quite considerably. We couldn't recover that in a short period of time (two or three months) and we're all in the same position. Perhaps Clover was a little bit worse off because we were also in the middle of the fight with Danone for milk. As you know, they're leaving by the end of the year and we'll then have to get rid of some of their milk, so that was a double whammy for us. We also lost some milk already ahead of the winter season to some of the other players, which left us with a shortage in winter..ALEC HOGG: Just take us through the Danone story..JOHANN VORSTER: We've had a partnership with Danone for the last 18 years. We used to do all their milk procurement and their sales distribution etcetera. They opted to go on their own from the 1st of January next year, so we gradually had to let some of the milk go to other buyers. Otherwise, we would sit with this enormous headache on the 1st of January with 150-million litres of milk that we wouldn't know what to do with. We gradually had to reduce it, which was a little bit against the story that we were about on the up, and we had to mitigate the risk of that 150-million litres..ALEC HOGG: But with Danone…with that relationship now ending, what is the impact of that likely to be on Clover in the year ahead?.JOHANN VORSTER: Firstly, we've filled up some of the space that they would leave by new principals. We took on Red Bull and Enterprise. Secondly, we've left some space for us to grow into naturally. Thirdly, we will be able to launch our own yoghurt and custard, which we were previously not allowed to do..ALEC HOGG: That sounds fine, but in the language of business and accounting, what's it going to have as an accounting impact? What's the number?.JOHANN VORSTER: It's going to be a phased out approach over six months if they opt to do that. We're currently in a bit of a dispute with them. Then the number will be about 50-million. If there were no phase-out, the number would be about 80-million..ALEC HOGG: Eighty million…what?.JOHANN VORSTER: Rand, on an annual basis..ALEC HOGG: So your headline earnings are down 14 percent, operating profit down by one-quarter in this financial year to June. Are you looking for another decline?.JOHANN VORSTER: No. Firstly, it was over three months. We did that because we didn't want to lose market share so as we increased the prices to the producers – 15 percent – we dropped the GP, we chose a gradual increase in the prices, and our GP for July and August is back at 29 percent. For that reason, those numbers that have seen a drop, will not drop anymore..ALEC HOGG: They won't drop even after Danone has gone..JOHANN VORSTER: No. The operating profit levelled out to about 50-million. You're talking about headline earnings….ALEC HOGG: Operating profit was down by one-quarter…25 percent..JOHANN VORSTER: We will get principals to fill that and we will put in our own products as well..ALEC HOGG: So you're confident that when we talk to you in a year's time, that at the very worst you're going to be at the same level as you are for this financial year-to-end June – even with Danone gone..JOHANN VORSTER: My team tells me to never make predictions, but I will sit here in a year's time and if there's no major train smash in the economy, we will recover because the reasons for that have been completely different to a weak market. If there was a weak market, we could understand that, but the price correction to the farmers had to come at some stage and there's always a leader-lag. You increase the price to the farmers. You don't immediately get the extra milk and you can't pass on the prices immediately to the trade. It has now been passed on and we are confident that we will recover easily from that..GUGULETHU MFUPHI: Will prices continue to increase then for consumers?.JOHANN VORSTER: We don't plan any more increases. We had quite a tough time to get the price increases through. As you know, retailers and wholesalers are all fighting for market share because their numbers don't look as good either. We had quite a tough time getting the price increases through, but all our prices increases are through now and our GP has recovered back to 29 percent..ALEC HOGG: Johann, it's a little bit of a different angle here, but we've seen the Tim Noakes phenomenon in South Africa. Has it helped you at all? People are now allowed to eat cheese, butter, and cream: things that were previously off the list. With Tim Noakes' influence, many people are saying that's good. They'll eat it again. Has it helped?.JOHANN VORSTER: Yes. Maybe not in bread or in potatoes because I've heard there's been… Maybe I'm a walking example. I've lost 23kg. I've been drinking a lot more milk..ALEC HOGG: Are you doing it on the Noakes diet?.JOHANN VORSTER: Yes, I'm doing it on the Tim Noakes diet..ALEC HOGG: Twenty-three kilograms. In what time?.JOHANN VORSTER: In eight months..ALEC HOGG: Wow..JOHANN VORSTER: I'm quite fortunate and I feel much better for that. Yes, we've seen a tick-up in full-cream milk. We've also seen a tick up in some of the mature cheeses, but that might be because other players have been out of stock, so I can't vouch 100 percent for Tim Noakes yet, but I'm pretty sure that there'll be an effect..ALEC HOGG: I was looking through the details in your presentation. Pre-packed cheese: that surged in the past year. Butter was up strongly as well and so was cream. That's why I thought 'hang on. There's an influence coming on here. Could it be Tim Noakes?'.JOHANN VORSTER: It's definitely an influence. It's not solely due to Tim Noakes, but everybody overseas… If you look at all the food magazines, they're all saying the same thing: carbohydrates are wrong and sugar is wrong. We know there's a bigger traffic in sugar. We definitely see that people are switching from the other products that we know to butter because butter is now claimed to be healthier, whereas it was out a couple of years ago. I definitely think there's going to be a change towards more fat products. We're also really excited about the fact that with the Danone exit, we're going to launch our yoghurt and we're focusing quite a bit on the richness of our full-cream yoghurt..GUGULETHU MFUPHI: I think I might just join that diet, Alec. Very quickly, the success of ADR that was launched in the U.S. in December last year: how has that picked up?.JOHANN VORSTER: It hasn't really worked that well for us yet. I think it's a 'wait and see' approach. We have other outside international shareholders (Fidelity is one) that have bought some shares, so we see a more direct approach to international investors as opposed to the ADR..ALEC HOGG: Well, that's Johann Vorster, a living, walking example of his own business and the Tim Noakes diet – 23 kilos in eight months. Wow. It's good to see Johann looking so healthy and strong and certainly, the business being very confident despite the setback undoubtedly, by losing Danone as a client. Johann Vorster is the Chief Executive of Clover Industries Ltd.
