Alec Hogg|
20 September 2011 07:41

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ALEC HOGG: It's Monday September 19 2011 and in this Boardroom Talk special podcast, Johann Vorster, who's the chief executive of Clover, joins us. Well, your first set of financial results as a publicly listed company, listed in December last year, these are for the year to end June 2011, were pretty solid, Johann. Dividends, nice, good, strong dividend stream with a 15c final dividend. Headline earnings per share, from continuing operations, 113c. On the face of it everything looks fine but you do wave some flags that there are some challenges in the year ahead.

JOHANN VORSTER: Yes, Alec, thank you very much. Look, it is a solid performance for us, specifically if you take into consideration that there was a capital restructuring listing and the kick-off of Cielo Blu, all of this in the one year. Project Reset has done us well, we've lowered our prices, we've ploughed back some of the cost savings into the prices of our product. So, we've had some nice market share growth over this last period. However, we have seen in the last quarter a little bit of a flat consumer confidence, I think we can prescribe it to an Easter that was disappointing, as well as the World Cup in the previous corresponding period, June/July but we expect things to normalise. We had some strikes in the industry, we had some out of pocket and we will see the wage increases coming through and hopefully things will normalise towards the end of November.

ALEC HOGG: Let's just put it all together, in essence, you're a milk, cheese and butter provider and you like to get more branded products, you talk there about getting away from commoditised products. What is that? Do you also sell milk to, perhaps, people who make chocolate?

JOHANN VORSTER: We, for the last four years, have been moving away, migrating away from commodity products like bulk cheese and powders, we're almost out of all of those. So, our ingredient business has been going, by design we've reduced that. So, we want to concentrate on branded products, where we're either number one or number two. For example, our fresh milk, we're number one; our UHD market, we're number one; pre-packed cheese, we're number one. But then also you must remember we're in high-margin beverage products as well, for example, Tropika, we're number one; our juices, Crush juice, we're number one; ice tea we're number two in the market. So, we focus on being number one and number two in branded products and reduce our reliance on commodity products as far as we can. There's still a lot of expansion we can do with the Clover brand.

ALEC HOGG: If you take your R6.5bn worth of turnover, how much of that is branded and how much commoditised?

JOHANN VORSTER: Roughly about R5.9bn is branded and about R600m is ingredients in commodities.

ALEC HOGG: So, you're almost completed with that...

JOHANN VORSTER: We're almost completed with that. We're taking about 650 million litres of milk, coming next year we've increased our quota to 680 million litres and the majority of that, if not all, will go into our branded business. So, we've worked very hard, we went to the market last year after all the changes had been made. We didn't expect the market to assist us before we did those changes and in the last four years we've made that dramatic move away from commodities. As being a supply driven company where we have to, in the old days, had to work the milk away, today we're demand driven, we only take the milk in that we can sell successfully and that's on the back of our 14 000 delivery points, which gives us that competitive advantage.

ALEC HOGG: That's very interesting because you would have thought that there are very low barriers to entry into this market and I guess if you're just selling plain milk that is the case.

JOHANN VORSTER: In our particular instance we're very fortunate that we inherited, through the co-op, a very asset rich business. Not always profitable, that's what we've been working on for the last four years and that is the confidence that the market showed in us by investing us in December. But this strong asset base is very difficult to replicate, so the barriers to entry here are the assets that we have, 14 000 delivery points, by far the biggest chilled distributor but we ran out of capacity and that is why we went to the market, to get money and that is where Cielo Blu was born. So, it will take a bit of time for us create these capacities

ALEC HOGG: You mention Cielo Blu, let's just dwell on that if we can for a moment because those who don't know Clover that well wouldn't understand the relevance of this to the company. You're moving closer to where the milk is actually being produce.

JOHANN VORSTER: There are two main aims of Cielo Blu, the one is to move our facilities closer to the source of the milk, so that we don't have to cart the milk up from the Eastern Cape and Natal to our factories in the north. It ended up in the north because of historical reasons, control board, so we need to do that. Secondly, we need to create extra capacity because as a supply driven company, milk powder and so on didn't need all these warehouses. Now that we're in brands we need all these warehouses and we ran out of capacity. So, just to summarise, to reposition our facilities and to expand our facilities.

ALEC HOGG: So, your factories are now going to be in Pinetown and Port Elizabeth, as well as the one in Midrand, where you're going to do something different with it. But the main factories; are you building these from scratch?

JOHANN VORSTER: No, we've got facilities there but in the past, before 1994, the country was divided in two, we were not allowed to have our factories in the south, our competitors needed to operate there. After '94 that was abolished, then we ended up with our factories being in the wrong place. So, we have already built in Pinetown, Queensburgh and in Port Elizabeth facilities, not big enough. We're going to expand those and then take our Clayville or our Midrand facility, which is in the wrong place, we move that down to the coastal areas.

ALEC HOGG: And then you're taking beverages, also it says in your information, your commentary to the results, from your Johannesburg central factory to Midrand, just explain that?

JOHANN VORSTER: Yes because it hasn't got a big milk content, it's not that important for that factory to be in the source. It's more important for that factory to be near the market and Clayville is well positioned for that. So, we're going to close down Mayfair, the central Johannesburg, close that down and then we'll have the saving by only having our juices and Tropika in our Clayville facility.

ALEC HOGG: It's a really good story and it's not difficult to understand why investors would like this stock but the thing that does raise a little bit of a concern must be the health issues. Maybe starting with the cattle themselves, we hear and we read so much about hormones being put into cattle and the increased concern that consumers have with all kinds of food. How do you control this?

JOHANN VORSTER: Well, each litre of milk undergoes 55 quality checks, from the farm right to the end product and we put our product in quarantine as well. Clover has always prided itself because of its quality, if you look at the most connected brands, we came in at number three lately, just after Pick n Pay and Coke. So, it's a brand that's trusted across the board. It's an aspirational brand, people want to buy it and our farmers, who have been all shareholders up until now, are very conscious about the fact that quality is the one that will give them growth. So, we've got a nice supply chain that all understand quality for the last 113 years. So, from a government point of view, the regulatory controls have all been neglected and we had to pick that up. So, for example, when we have foot and mouth disease and those sort of things we, as Clover, play an active role to make sure that we address those but...

ALEC HOGG: So, you're self-regulated in many ways?

JOHANN VORSTER: We're self-regulated, we've got rBST-free, we make sure from the farm right to the end that we control that chain with absolute precision.

ALEC HOGG: What about hormones that are being used now increasingly in farming?

JOHANN VORSTER: You can pick that up quite quickly if you look at the sales of those and the imports of those hormones. In our case, each farmer signs a certificate that it will not us rBST, although in America it's been found to be harmless, we don't believe in that. So that's a claim that we make that our products are rBST-free.

ALEC HOGG: So, people like Woolies would be quite happy to stock Clover products. The other issue is the, on the health side, is lactose intolerance. Increasingly when people are looking at their health and we are becoming a more health conscious society, this is an area of some debate that particularly Africans have a higher percentage of lactose intolerance than other parts of the world, would that give you some concerns for the longer-term of your business?

JOHANN VORSTER: If we look at the growth that Australia, Mexico and China, who's always been said very close to South Africa, I think that's a meter that we need to address. It's a trial and error, specifically on cheese, we're very low consumption on cheese and cheese has got much better properties, so it's an educational process. Of course, I'm not saying that there aren't people that are lactose intolerant but it's about the whole diet, if there's malnutrition of course you would be prone to have more problems with that. But also it is about the cold chain, is the product up to scratch when you eat it, so it's more complex than just saying that a particular part of our community or population is lactose intolerant.

ALEC HOGG: So, you don't see that as a problem for your growth?

JOHANN VORSTER: As I say, if I take my clues from some other countries, who've got the same issues, water issues, health issues and how they've overcome it, I think we've got some work to do but I think it is possible, it's not a concern for us at all.

ALEC HOGG: On a more financial basis you do say one of the big challenges in the year ahead is passing on all these costs, you made mention of it earlier, higher energy prices, higher fuel prices, higher labour prices. How easy is it or how difficult is it for you to do that?

JOHANN VORSTER: When you're out of commodities and you're into brands, brands are more resilient to price increases and with the size and with our relationship with our trading partners, it is much easier for us to pass that on. Of course, the threat is always whether you're going to lose market share or volumes but in terms of getting the price increase, we're not concerned to get that. But if you go back to our strategy, which is Project Reset, that is why we want to make the product cheaper for our consumer. We want the product to be more affordable, so we do everything within our means to lower our cost base so that we can decrease the price. So, we would like to ride this out, the pressure from input cost, as long as we possibly can to give the consumer the confidence of repeat buying. But just to mention quickly, having said that, we can see that there's a lot of pressures on farm, specifically the same pressures that we have and the way to counter that is to increase the volumes on farm and that we've done but you can only do that up to an extent. So, we can see that if the current pressures persist, we can see that something is going to happen within the next autumn, we will have to have some reprieve to the producers to ensure enough milk.

ALEC HOGG: Johann, are the dairy farmers growing in South Africa or are they constricting?

JOHANN VORSTER: Ten years ago, when I joined Clover, there were 3 200 producers producing to Clover, today there are 270 farmers producing more than what they did ten years ago. So, there's a lot of consolidation in the industry but that is not unique to South Africa, it's an international tendency. So, they are getting less but they are getting bigger and getting more efficient. Technically they invest a lot in capital, so that was the name of the game for the producers. The small farmers are not very, they're getting less but the big farmers are certainly very efficient.

ALEC HOGG: So, you've got Project Reset, which focuses on your supply chain, you're making that more efficient. You've got Cielo Blu, another project, you like your projects at Clover, that's moving the factories down to the coast and closer to where the milk is actually produced by the farmers. You've got no concerns that you can see of the potential for health issues. It looks like you're pretty set fair for the future, excepting this, I suppose, is not a market that one would see dramatic growth in, it's more a steady increase.

JOHANN VORSTER: Well, there are two things, the one is that Project Cielo Blu we've got to take in stages because the milk is a live product, so it takes longer to implement a project like Cielo Blu than in other companies. So, we're only expecting results there in the next 12 to 18 months time but you're right, it's more of a defensive stock, it's got fantastic brands behind it but we haven't really started with the brand extension. We have introduced ice tea and water and so on but there's still a lot of scope for us for the Clover brand, the strength of the Clover brand. So, I think it's a double-edge sword, on the one side it's not the fastest growing, it's defensive but on the other hand, we are looking forward to some other leverages that we can do off the brand.

ALEC HOGG: Johann Vorster is the chief executive of Clover.

Source: Moneyweb (http://www.moneyweb.co.za/mw/view/mw/en/page292670?oid=552147&sn=2009+Detail)