The company's higher input costs are behind the expected 65% decline

Investors skimmed 7% off Clover’s share price in intraday trade on Monday after the dairy products group said that it expected to report a drop of as much as 65% in full-year headline earnings.

Clover said that the drought and currency fluctuations had resulted in above-inflation input costs, which it had been unable to recover through price increases.

The company, which is headed by Johann Vorster, said while the expected results were not desirable, management remained optimistic about the company’s future.

Kagiso Asset Management associate portfolio manager Dirk van Vlaanderen said Clover’s trading update echoed the themes seen throughout the reporting season, namely:  inflation, input costs and  pricing. "There has been significant cost inflation for food producers which has not been fully offset through higher pricing, combined with much lower volumes due to weak consumer demand. The latter is resulting in a material margin squeeze," said Van Vlaanderen.

But all was not lost for Clover, he said. "Lower input costs, a new cost-saving plan, the spin-off of the more volatile and commodities milk business via the creation of Dairy Farmers SA and improving market share trends should see a notable improvement in Clover’s results in the 2018 financial year."

For the year to June 2017, Clover expects to report a decrease in headline earnings per share of up to 65% compared with the headline earnings per share of 188.9c in the year-earlier period. The company said it had been forced to make some tough decisions at the expense of the 2017 results for longer-term sustainability. These were procuring milk and fruit pulp at high prices in a bid to ensure steady supply.

"Clover increased selling prices to recover these higher input costs, however pressure on volumes and market shares was experienced as consumer sentiment remained subdued," the company said.

"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," the company said.

Clover said the establishment of Dairy Farmers SA would significantly lower its high exposure to milk as an input source once the operational restructuring was fully implemented on July 1.

In addition, the end of the drought would assist the 
recovery of milk production volumes and normalised fruit production volumes. "The stabilisation of the rand has, hopefully, curbed rising input cost inflation," it said.

In the past year, Clover’s share price has retreated by 14.17%. In the same time frame, Pioneer Foods, which released its interim results last week, has declined 12.59%. The food group also said it had been forced into some strategic decisions due to the drought and economic climate that had "regrettably weighed heavily" on earnings.t, pointing to the receding drought, which would allow the recovery in milk production volumes and normalised fruit production volumes.

Clover is in the process of reshaping its business that seeks to develop higher margin, value-added products in dairy and other related food categories.

The share price was off 6.88% to R16.25 in mid-morning trade on the JSE, valuing the company at about R3bn.