Clover Industries is warning it will have no choice but to soon hike the selling prices of its products as the rand continues to trade weakly.

The company notes, in its results for the six months to December, that it also sacrificed some margins to protect market share. It did not disclose which products it discounted.

Despite the margin sacrifice, the company boosted operating profit 5.8 percent to R340.3 million and headline earnings by 10.2 percent to R219.7 million off revenue that gained 7.9 percent to R5 billion it said Wednesday.

Clover says the improved figures are “particularly encouraging” as the six months to December 2014 set new performance records.

The listed company also points out that the sector experienced much higher national milk flow year-on-year, with the exception of December, and industry selling prices remained low as inventories remained high.

According to Milk SA, milk production for 2014/15 was 7.3 percent higher than in the prior year.

To protect its market shares, Clover did not increase its dairy selling prices during the interim period. The company also had to lower its selling prices to successfully defend its market share in fresh and UHT milk. “We participated in the price war,” says CEO Johann Vorster .

“In some instances, we lowered selling prices to successfully defend our market share in certain categories. We also experienced significant inflationary cost pressures during the period, as highlighted by our cost of sales increasing by 10.7 percent. Most of these increases were absorbed by extensive cost cutting measures and increased efficiencies,” Vorster adds.

Clover also offset inflationary costs through “extensive” cost cutting initiatives and increased efficiencies across the group, especially in categories where no selling price increases made. Vorster explains cost-cutting was done across the supply chain, in areas such as marketing spend and optimised delivery schedules, but no jobs were lost. “We want to grow our business.”

However, its gross margin contracted from 31 percent to 29 percent, while its operating margin also lost slight ground, declining to 6.9 percent from 6.8 percent.

Overall, its brands traded in line with expectations, buoyed by solid demand during the Festive season and severe heat wave towards the end of the interim period, it says.

Volumes and market shares were maintained for most product categories. Vorster notes “the majority of newly launched products traded above our expectations, with our value-added products, including custard and yoghurt, which are more independent of dairy price fluctuations performing especially well.”

However, it notes, the impact of continued rand weakness on input costs, with the currency continuing to hover around the R16 to the dollar mark, and general inflationary increases in the industry will mean price increases will have to be passed on to the consumer.

Vorster says “the protracted drought across most of the country has resulted in a shortage of feed and an increase in on-farm costs. In this environment, the only short-term solution to protect the raw milk source is to increase the price paid at the farm gate. Clover has already provided further price increases to its producers and will continue to monitor this situation closely in order to ensure a sustainable supply of raw milk.”

The company adds it is cognisant of the plight of the consumer, and will continue to identify and exploit cost efficiencies across its value chain to the benefit of consumers, and to defend and maintain its existing market shares. Vorster notes, however, that with continued rand volatility and higher electricity prices, there will be an inflationary effect on consumers.

During the six months, Clover invested R217.5 million more in capital expenditure projects, including expanding its Clayville facility’s chilled capacity (R111 million), extending its yoghurt production capacity in Bloemfontein (R35 million) and improving its beverages production (R45 million).

Vorster adds the low selling prices experienced will in all likelihood continue, which may result in a second six month period where gross margins come under increasing pressure.

IOL