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CLOVER CORPORATION LTD (CLV) - Clover Corporation is Revolutionizing Nutritional Ingredients Through Strategic Integration and New Markets.

• Andrew Musgrave

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Dive deep into the world of nutritional innovation as Peter Davey, CEO of Clover Corporation Limited, reveals how this Australian company has become a global leader in microencapsulation technology. With manufacturing facilities spanning Australia, New Zealand, and Ecuador, Clover has positioned itself as an essential supplier to the world's infant formula manufacturers – with an impressive 98% of their production exported globally.

The conversation unpacks Clover's remarkable financial rebound, achieving 38% revenue growth despite challenging global market conditions. Peter explains their dual-strategy approach: vertical integration into their supply chain (including their strategic Ecuador fish oil extraction facility) and horizontal expansion into new products and markets. This approach has not only improved margins by 270 basis points but has opened exciting new market opportunities beyond traditional infant formula.

Most fascinating is Clover's innovation pipeline, including their patented Gelphorm technology that achieves what was previously considered impossible – incorporating omega-3 into UHT products. This breakthrough has already gained traction in North America and is poised for expansion into Europe and Asia. As global birth rates decline (China's has halved in six years), Peter shares how Clover is pivoting with their customers to adult nutrition, sports formulas, and even pet food applications, demonstrating remarkable adaptability.

Andrew Musgrave Host

00:03

Welcome back to ASX Briefs, where we dive into the strategies and stories of ASX listed companies. And today we're joined by Peter Davey, the Chief Executive Officer of Clover Corporation Limited, a global leader in nutritional ingredients, renowned for its innovative microencapsulation technologies that enable the addition of sensitive nutritional oils into infant formulas, food beverages and more. The company's dedication to R&D and product development continues to open up exciting new markets in nutraceuticals, pet nutrition and specialty medical foods. Peter, thanks for joining me today and welcome to the ASX Briefs podcast. 

Peter Davey Guest

00:40

Thanks, Andrew. 

Andrew Musgrave Host

00:41

Now, Peter, for investors that may be unfamiliar with Clover Corporation, can you just provide a brief overview of the company? 

Peter Davey Guest

00:47

Sure, the company is sort of like a biotech business. We microencapsulate high-value oils to be then incorporated into food, pharmaceutical, nutraceutical products. We're in most infant formula in the world. We do that in a series of factories. We have a factory in Ecuador where we extract oil, we have a factory in New Zealand, one in Australia, and so we're manufacturing most of our final finished products across Australia and New Zealand, which is has a really good image for the rest of the world, and then that gets supplied. 98% of it gets exported and we supply the world's food market effectively with quite a unique product that allows them to fortify a product with usually omega-3 fish oils. 

Andrew Musgrave Host

01:36

Okay, and Clover has posted a strong financial rebound in the first half of FY25. So, what were the key drivers behind the 38% revenue growth and margin improvements during this period? 

Peter Davey Guest

01:48

The marketplace has been through some regulatory change. The world has introduced changes to the legislation around what constitutes infant formula and can be done, and that caused a fair bit of change in our customer base. So, we saw a reduction in sales over a period of about three years. The recent recovery has been some of our customers finding their way back into that channel. So really the Australian, New Zealand customers have found the way back into the infant formula channel. In China and then our European customers have found the way into doing new products and new markets and we've been supporting them with our products and in their applications. So, we've had really two sections of the world show some really good, substantial rebound and growth. 

Andrew Musgrave Host

02:35

And the company significantly improved its gross margin by 270 basis points. So, can you talk about the role of product mix optimization and manufacturing performance in achieving this? 

Peter Davey Guest

02:46

Yeah, sure, we run two strategies across the business. One is called vertical integration, so we vertically integrate the company into its supply chain and its processes, so we have more control over the product and the quality and even the pricing. And the secondary one is a horizontal integration into new products and markets. So, they're both improving our sales and our margin position. Our sales and our margin position by being more integrated into our supply chain. Rather than paying somebody else to do the production, we're actually doing it ourselves, and the higher volumes that we've been getting has been able to contribute to the margin position. And then the new products that we're doing to customers has helped us improve their overall sales and increase their range of products, and they're delivering better margins as well. 

Andrew Musgrave Host

03:31

And with a cash balance of over $15 million and a declared interim dividend, how are you balancing capital management with growth investment opportunities, especially in light of your expanding global footprint? 

Peter Davey Guest

03:43

It's nice to have some cash to be managing, so it is a real balance. We've done a lot of work around managing the balance sheet. We've addressed debtors and creditors and we've certainly done a lot of work to bring our inventory down. There's been a fair bit of uncertainty over the last three years and now we're seeing demand rise, so we're going to increase our inventory position so there’s a short term capital position that we’ll have to increase to meet the demand that we've got. And then, longer term, we've always been about a growth business, so, as we've seen the market improve, we've got several new products that we will be launching over the coming years that allow us to expand our markets even further, but they'll need some capital investment, so we'll be investing for growth there. 

Andrew Musgrave Host

04:26

And looking offshore, your Ecuador facility is now delivering crude fish oil. So how strategic is this operation to Clover's supply chain and margin enhancement goals? 

Peter Davey Guest

04:37

We decided a year ago after COVID, after freight issues, after supply issues, that we needed to be more involved in again vertical integration in our supply chain. So, we decided to take more control. One of the key inputs in our product is omega-3 or fish oil, and so we established a fish oil extraction plant in Ecuador. So, we buy the parts that don't go into the can and we crush them and we turn them into oil and then we sell the remainder as a protein meal. That business allows us access to market control, especially quality, and we can continuously get supply and obviously it's because we own it, we're getting a cheaper supply chain. We haven't seen that wash through into our P&L at the moment, but in the second half it'll start to become cost of goods and therefore we'll get the benefits financially. 

Andrew Musgrave Host

05:28

And you've launched innovative products like high omega-3 powders and Gelphorm. So how are these being received in the market and what's the pipeline looking for further product innovation.

Peter Davey Guest

05:39

Sure, being part of that horizontal integration is to provide new products to open new segments of the market. So, Gelphorm is a product that's quite unique. It allows a customer to be able to put Omega 3 into a UHT product, which should be impossible to do. We've got a global patent on a product that allows them to do it. We've done really well in North America. That's just gone national in a kid's product, and we expect it to also take off in Europe and Asia over time. There is a regulatory hurdles that we need to get through. Being a new product, you've got to get all the governments of the world to agree to use it. Then the other products have really opened up other channels. Many of our customers are looking for ways they can bring products to market. We have a unique series of products that allow them to do that. So, we've been benefiting by helping them with new applications, launch new products in the market. 

Andrew Musgrave Host

06:33

And Melody Dairies has shown improved efficiency and utilisation. So how is this asset contributing to your broader operational goals and how do you see its role evolving? 

Peter Davey Guest

06:43

Again part of the vertical integration more control we have over our supply chain. We can give surety to our customers that we can supply them with product and that's critical and we have control over the quality of it. Part of the development of new products is you need facilities to be able to manufacture it. So, we designed and built a facility that supported smaller niche products that allow us to get the product made and get it to market efficiently and cost effectively. We started building it during COVID, which I don't wish upon anybody, but now it's done and complete. It's operating quite well. We run at a cost, so we're running a break-even facility. We're just running for the lowest of cost and so it's really started to deliver. Prior to that it was costing us a bit of money, but in recent months it's been delivering a slight profit, which is very nice to see. 

Andrew Musgrave Host

07:35

And looking at the global infant formula market, the company is seeing recovery in Europe as well as domestically. So, what's your outlook for those markets and how is demand shifting across your customer base? 

Peter Davey Guest

07:46

It's a really interesting question. If you look at the birth rate across the entire world, it's going down. China has effectively halved over the last six years. So, there are assets that people have built to make huge volumes of infant formula which just isn't there. Where we've been uniquely positioned is we have relationships with the customers. We're in their supply chain. They understand the quality and that we can match all of their requirements and our unique products that we've developed has been able to support them in growth. So, they're utilizing those assets now to go into adult formulas, seniors formulas, sports nutrition style products, which we are going in with them, and that's where we're seeing the growth in our products and there's a supply chain will continue. A lot of them are relatively new and a lot of them are still to come. 

Andrew Musgrave Host

08:33

Yeah, and just touching on that, your diversification into DHA applications for pet food, sports and adult nutrition is gaining momentum. So, what are the growth prospects in those segments compared to your traditional markets? 

Peter Davey Guest

08:45

Yeah, DHA is an element of omega-3 and it's well recognised that it's required for brain development and for overall nutrition. You need it. Your body doesn't create it, so you've got to get it from somewhere. We've been able to successfully turn it into a series of products that are in drinks, and powders and gummies and tablets so people are able to consume it. And as the marketplaces become more aware of their health and understand the requirements for DHA or omega-3, we're seeing more and more application opportunities for it, especially across the European market. They've become very aware of it. 

Andrew Musgrave Host

09:23

Okay, and finally, just to wrap things up, as we look towards the second half of FY25, what are some of the key catalysts investors should look for, especially regarding product adoption and operational scale-up? 

Peter Davey Guest

09:35

Yeah, so we've made the market aware of several new products that we've got coming into the marketplace. We'll be looking to introduce those over the next six to 12 months and so you'll start to see information and news and awareness of those products being promoted in the marketplace, which is the next milestone in their development from research and development to actual sales and implementation. 

Andrew Musgrave Host

10:01

All right, Peter. Well, it's been great to chat today to get an update on the company and we look forward to further updates from Clover Corporation in the upcoming months. 

Peter Davey Guest

10:08

Thanks very much, Andrew. I appreciate your time. 

Andrew Musgrave Host

10:11

That concludes this episode of ASX Briefs. Don't forget to subscribe and we look forward to catching you on our next episode.