Salient features from continuing operations
Johannesburg, 5 August 2020 – Mpact, the largest paper and plastics packaging business and recycler in southern Africa, reported its results for the six months ended 30 June 2020.
Bruce Strong, Chief Executive Officer of Mpact, commented: “Events over the past six months have been truly unparalleled. The period started with persistent external electricity supply interruptions across the country, exacerbating the effects of an already weak economy. Then, since mid-March, we’ve been dealing with Covid-19 and the nationwide lockdown imposed by Government. Fortunately, as one of the critical supply chain links in the South African economy, all of our divisions were designated as essential service providers, so most of our facilities have remained operational since the start of the lockdown. The positive response to the challenges by my colleagues across the entire business, our suppliers and customers has been nothing short of exceptional, for which we are most grateful.”
Mpact’s first priority is to provide and maintain a safe and healthy work environment for all of its employees. To this end, a comprehensive plan of action with stringent safety and hygiene practices to mitigate the risks associated with the pandemic was implemented across all operations in addition to the strict pre-existing health and safety measures.
Not all packaging manufactured by the Group is used for purposes of packaging essential goods. Consequently, non-essential production lines, such as those producing packaging for quick-service restaurants (QSR) and alcoholic beverages, did not operate at all times during the lockdown period.
Group revenue from continuing operations for the six months decreased by 1.4% compared to the same period last year to R5.06 billion, due to lower average selling prices in the Paper business, and declines in sales attributable to the lockdown. External sales volumes decreased by 4.7%.
The lockdown has had a negative impact on demand for other paper and plastics packaging products and for recycled paper, plastic and glass. Sales volumes for the second quarter (April, May and June 2020) declining by 6.4% when compared to the same prior year period.
In response to these challenges, numerous measures have been implemented to reduce costs and conserve cash. The Group generated cash from operations of R698 million during the period (June 2019: R101 million) through strict working capital management, postponing non-essential capital expenditure and stringent cost-containment initiatives.
Despite these efforts, it was not possible to reduce costs in proportion to the decline in gross profit. Earnings before interest, taxation, depreciation and amortisation (EBITDA) decreased by 31.1% to R395.7 million (June 2019: R574.5 million), mainly attributable to the weak economic conditions combined with lower margins in the Paper business given subdued international demand for recycled containerboard and lower average selling prices, already evident at the beginning of the period. Profits were also adversely impacted by persistent external electricity supply interruptions at several operations since the beginning of the year. Most notably, the Springs paper mill lost 22 production days in the period at a cost of approximately R27 million directly as a result of the catastrophic failure of a municipal sub-station in Ekurhuleni. Underlying operating profit (EBIT) of R126.9 million was 50.3% lower than the prior period (June 2019: R255.2 million).
The Paper business reported revenue of R4.0 billion, 1.7% lower than the same prior year period (June 2019: R4.1 billion). Sales volumes decreased by 4.8%, with lower domestic sales volumes offset by an increase in exports.
Sales volumes in the Paper Converting business declined by 6.7%, with good growth in the fruit sector offset by declines in the other sectors as a result of the lockdown.
Paper Mill sales volumes increased by 15.8% due primarily to exports of rolled recovered paper pulp. Excluding rolled pulp, mill sales increased by 1.9%, with a decline in the domestic market offset by an increase in exports of containerboard. Recycling sales volumes declined by 11.8% due to reduced activity in the plastics recycling market and reduced glass sales.
Second quarter sales volumes for the Paper business decreased by 6.5% due to lockdown related declines in the QSR, beverage, tobacco and recycling sectors.
Underlying operating profit in the Paper business of R184.0 million was 37.8% below the prior period (June 2019: R295.9 million) mainly due to lower Paper Mill margins, the effects of lockdown and electricity supply interruptions.
Revenue in the Plastics business was R1.1 billion which is in line with the prior period, with higher average selling prices offset by a 3.9% decline in sales volumes. Good volume growth in Bins & Crates and FMCG was offset by declines in Preforms & Closures and Trays & Films.
Lower demand from the beverage and QSR sectors during the lockdown led to Plastics volumes declining by 5.3% in the second quarter.
The Plastics business made an underlying operating loss of R17.7 million compared to a break-even in the comparable prior period. This is due primarily to provisions for inventory and bad debt write-downs of R37 million and R5 million respectively, and a sharp contraction in sales of preforms and closures during the second quarter. The restructuring of the Trays & Films business has been completed, with the inventory provisions detracting from an otherwise good year-on-year improvement in EBITDA despite lower volumes. Underlying operating profits improved in FMCG and Bins & Crates.
Basic earnings per share (EPS) and headline earnings per share (HEPS) for the period were 9.0 cents (June 2019: 57.8 cents) and 8.4 cents (June 2019: 56.6 cents) respectively. Underlying EPS decreased by 84.2% to 9.0 cents (June 2019: 57.0 cents).
Net debt as at 30 June 2020, including R350 million of lease liabilities was R1.94 billion (30 June 2019: R2.70 billion), while the Group has total borrowing facilities of approximately R2.8 billion. The Group met all of its debt covenants.
The Board has resolved not to declare a dividend for the six months ended 30 June 2020 to preserve cash resources given the uncertainty of the impact of the lockdown and Covid-19 pandemic.
“Our interventions over this difficult time have extended well beyond our operations. We have continued to make a tangible difference in our communities through innovation and caring for the less fortunate. Mpact Recycling repurposed some of its collection fleet during the initial lockdown stages to deliver meals, vouchers, face shields and other supplies to many waste reclaimers whose activities were restricted,” said Strong.
In April, Mpact Plastics developed, prototyped and produced new face shields in a matter of weeks for use by health care workers and others to address the pressing need to reduce the spread of the virus. The shields, produced from polyethylene terephthalate and polypropylene, both fully recyclable materials, were very well accepted in the market, with additional variations for schoolchildren introduced in May.
“In June, 25 000 face shields were donated to the Gauteng Department of Health and 6 000 to waste reclaimers, and face shields have also been provided to all of our employees, demonstrating once again that our purpose at Mpact goes beyond making packaging – we make a difference,” added Strong.
The outlook for the remainder of the financial year remains uncertain given the extent of the lockdown measures imposed by Government in an already fragile economy, coupled with ongoing power outages. There was some recovery in QSR demand in July, however the beverage and tobacco sectors remain weak. We expect good demand for fruit packaging in the second half and improved demand in other sectors as lockdown regulations ease. While global containerboard and cartonboard prices appear to be rising off a low base, the market remains in oversupply.
He concluded: “Mpact’s strong balance sheet and experienced management team give us confidence that the Group will be able to navigate these challenges. Our focus will continue to be on cash preservation through strict working capital management, the postponement of non-essential capital expenditure and implementing additional cost-containment initiatives to mitigate the effects of the weak economy.
Our integrated business model is uniquely focused on closing the loop in paper and plastic packaging. We will continue with product innovation initiatives and work with our customers to develop new markets to ensure our business is well positioned for any recovery.”
Issued on behalf of: Mpact Limited
Contact: Bruce Strong, Chief Executive Officer
Tel: +2711 994-5508
Compiled and released by: Keyter Rech Investor Solutions
Contact: Marlize Keyter
Tel: 083 701 2021
Issue date: 5 August 2020
JSE code: MPT