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Mpact well positioned for growth

07 March 2018

Johannesburg, 7 March 2017. Today Mpact, one of the largest paper and plastics packaging businesses in southern Africa, reported final results for year ended 31 December 2017.

Salient features

  • Underlying operating profit of R457 million (December 2016: R784 million)
  • Underlying earnings per share of 166.3 cents (December 2016: 252.7 cents)
  • Return on Capital Employed (ROCE) of 7.7% (December 2016: 14.2%)
  • Gearing at 34.8% (December 2016: 33.6%), working capital well managed
  • Total gross dividend of 55 cents per share (December 2016: 95 cents per share)
  • Good progress on implementing significant capital projects
  • 22 fully-funded university bursaries awarded through the Mpact Foundation Trust

Commenting on the results, Bruce Strong, Chief Executive Officer of Mpact said, While 2017 was the most challenging year for the Group from a trading perspective since listing, as reflected in the financial results, good progress was made in implementing significant capital investments which will enhance our market positions and contribute positively to future earnings. The investments include the R765 million Felixton paper mill rebuild, the new R100 million 5500-ton jumbo bin injection moulding machine in Brits, the new R150 million corrugator in Port Elizabeth, and the two new carbonated soft drinks closure lines in Wadeville at a R50 million investment.

A highlight on the transformation front is the good progress we have made with respect to the Mpact Foundation Trust (Trust). By the end of 2018, the Trust had awarded 22 fully-funded university bursaries to dependents of Black Mpact employees. We've had good engagements with the bursars since inception in 2016 and are proud of how they are performing at the various universities where they are registered.

Finally, we commissioned our first 750 kW solar power installation in Paarl and also achieved a reduction of over 50% in municipal water consumption in our eight Western Cape operations.

 

Group Performance

Group revenue of R10.1 billion and sales volumes were in line with the prior year, with increased exports offsetting a 4.3% decline in domestic sales volumes. Lower domestic volumes were because of subdued demand, the drought in fruit-growing regions key to Mpact which affected fruit packaging volumes, and a supply shortage of virgin PET resin during the peak production period.

The underlying operating profit of R456.6 million reflects a 12.2% increase in depreciation compared to the prior year.

 

The Group's Return on Capital Employed of 7.7% (December 2016: 14.2%) reflects the weaker trading environment and recent capital investments, which have not yet contributed to profitability, but will do so in the future.

 

Operating Performance

Revenue in the Paper business increased by 4.3%. Sales volumes were in line with the prior year, helped by exports of containerboard, which offset a 4.1% decline in the domestic market due to subdued consumer demand, increased competition and the effects of the drought on fruit packaging volumes in the Eastern Cape and Western Cape.

Underlying operating profit of R443.0 million in the Paper business was lower when compared to the prior year period as because of higher recovered paper costs, as well as the lost contribution relating to the planned project downtime for the rebuild of the Felixton paper mill.

Strong said, Recovered paper costs escalated sharply to record highs following China's imposition of strict quality measures on imported waste, which increased demand for relatively clean material such as recovered paper generated in South Africa. Since the third quarter of 2017 however, international US Dollar-denominated benchmark prices declined significantly as demand from China decreased. This led to favourable change in the domestic market, although prices only started moving down in early 2018 after stocks had been replenished.

The new Felixton paper machine and automated warehouse were successfully commissioned in July and December 2017 respectively. The project has met expectations in terms of quality, market acceptance and variable costs.

The Plastics business revenue of R2.5 billion (December 2016: R2.7 billion) declined compared to the prior year, with decreases in both sales volumes and average prices. Sales volumes in the Plastics converting business were negatively impacted by a shortage of virgin PET resin, the closure of the Zimbabwe operation in 2016 and subdued demand. Revenue was also impacted by the drought, which affected apple tray sales.

The Plastics converting business reported an underlying operating profit of R142 million, offset by a loss in Mpact Polymers, bringing the underlying operating profit for the Plastics business to R69.7 million.

Mpact Polymers' full year throughput was above the prior year but well below our plan, which was a disappointment, especially considering that demand for Mpact's SavukaPETTM is good. Throughput was constrained during the second half of the year by a shortage of used bottles and by other operational inefficiencies. Many of the inefficiencies related to the quality of the bottle feedstock, which deteriorated as collection rates increased. On the recommendation of an independent technical expert in rPET plants, we have approved process modifications to deal with the quality of incoming feedstock, which will be commissioned during 2018, explained Strong

Financial Performance

The Group's net finance costs increased by 6.1% to R202.6 million (December 2016: R191.0 million). This was due to higher net debt during the year. Interest capitalised on Phase 2 of the Felixton mill upgrade amounted to R27.5 million. Excluding capitalised borrowing cost, net finance costs increased by 14.3%, said Mpact Chief Financial Officer, Brett Clark.

Net debt of R2.2 billion (December 2016: R2.0 billion) increased by 12.1% after investing R856 million in new capital projects.

Clark added, With gearing at 34.8% and having successfully refinanced the portion of our borrowing facilities, which were due to mature in December 2017, we still have sufficient headroom for future growth.

 

Underlying earnings per share for the year of 166.3 cents (December 2016: 252.7 cents)

Mpact declared a final gross dividend of 40 cents per share, bringing the total gross dividend for the year to 55 cents per share (December 2016: 95 cents per share).

Outlook

While business and consumer confidence have recently improved from the lows of 2017, growth remains subdued and the outlook uncertain. The strength of the rand and lower inflation provide hope for increased consumer spending but this is tempered by factors such as sugar tax, higher VAT and drought.

The drought in the Eastern Cape and Western Cape remains a concern and its effect on the Group's future performance is uncertain. In the affected regions, we have eight manufacturing operations, 1,786 employees and an annual revenue of R3.3 billion. Conservation efforts over the past two years have resulted in municipal water consumption halving during the first two months of 2018 compared to the 2015 baseline. Contingency plans are in place to provide potable water to staff if necessary.

The Group is nearing the end of an extensive capital investment programme, which is anticipated to contribute to improved future earnings. The most recent investment of R150 million in the new corrugator in Port Elizabeth was successfully commissioned during January 2018. In February the Piet Retief paper mill completed a R60 million upgrade of its paper forming section, which will yield improved quality and entrench its products in the market. During April a new PET extruder and tray thermoforming line will be commissioned, doubling PET tray capacity, which is expected to displace imported products once fully operational.

We expect to see a further improvement in Mpact Polymers during 2018 but at a lower rate than initially planned due to feedstock quality. As already mentioned, certain plant modifications will be implemented this year to effectively process available feedstock.

Recovered paper costs are anticipated to be lower than the prior year and the Felixton paper mill is expected to reach design throughput by year end. Domestic demand for mill's products is encouraging, concluded Strong.

 

For further information contact:

Nthabiseng Chapeshamano
Group Communications Manager
Mpact Limited

Tel: 011 994 5547
E-mail: nchapeshamano@mpact.co.za

NOTE FOR EDITOR

About Mpact:

Mpact is one of the largest paper and plastics packaging businesses in southern Africa, with leading market positions in recovered paper collection, corrugated packaging, recycled-based cartonboard and containerboard, polyethylene-terephthalate (PET) preforms and trays, recycled PET (PET) and plastic jumbo bins. These market positions allow Mpact to meet the increasing requirements of its customers and achieve economies of scale and cost effectiveness at the various operations.

Mpact has 41 operating sites, of which 22 are manufacturing operations, in South Africa, Namibia, and Mozambique. Sales in South Africa account for approximately 89% of Mpact's total revenue for the current year while the balance was predominantly to customers in the rest of Africa.

As at 31 December 2017 Mpact employed 4,889 people (December 2016: 4,998 people).