Johannesburg, 3 August 2023 – Mpact, the largest paper and plastics packaging business and recycler in Africa, reported a strong performance for the six months ended 30 June 2023 with operating profit increasing by 37% to R530.7 million when compared to the prior period.
Bruce Strong, Mpact Chief Executive Officer, said: “It’s been a very pleasing performance despite the tough economic conditions. Our revenues, profits and interim dividend are all up, which validates our investment thesis, and our prudent growth strategy. All operations reported improved performances, underpinned by our successful investments in both new capacity and alternative power and water supplies, which have increased our operational resilience. Executing on our value-enhancing strategy, and deliberately pursuing innovation, has enabled the Group's expansion into new, higher-margin product areas domestically and for the offshore market. We have strategically positioned Mpact and our products to capitalise on the global push towards a circular economy. Our unwavering commitment to closing the loop in paper and packaging places us at the forefront of this transformative movement and is improving profitability while giving the Group a sustainable growth trajectory.”
While inflation has reduced from the high levels of last year, costs still remain elevated. Towards the end of the period, there was some relief in the cost of some plastic polymers, recovered paper and pulp, which partially offset the increases in other costs, such as electricity, coal, fuel, and certain imported raw materials that were affected by the weaker rand. The significant global supply chain constraints that hindered the sourcing of raw materials last year, have now improved.
Load shedding has increased considerably compared to the first half of last year. As previously advised, Mpact’s paper mills and most converting operations have demand curtailment agreements with Eskom rather than being subject to load shedding schedules. The required curtailment is linked to load shedding stages implemented by Eskom, but thanks to our installed solar generation capacity and process designs we have been able to respond to the curtailment requirements up to Stage 6 load shedding without materially reducing production. Some converting operations remain affected by load shedding and still need to amend production schedules. To mitigate these effects, where feasible, generators are used to meet customer requirements.
New solar generation installations totalling 6.7 Megawatts peak (MWp) at our Springs Mill and Castleview factory are on schedule to be completed during the second half of this year. They will bring the Group’s solar capacity to approximately 16.1 MWp.
Group revenue for the six months increased by 8.7% to R6.2 billion compared to the prior period, despite sales volumes decreasing by 10.2%.
Operating profit (EBIT) increased by 37.1% to R530.7 million (June 2022: R387.1 million) mainly due to an improvement in profitability of the Plastics business, higher selling prices in the Paper business implemented in October 2022, and the benefits of recently completed investment projects.
Revenue of R5.3 billion was 7.2% higher than the same prior period (June 2022: R4.9 billion), due to higher selling prices which were partly offset by lower sales volumes in both paper manufacturing and converting.
Paper manufacturing sales volumes decreased, due to subdued consumer demand and to the late arrival of imports of containerboard and cartonboard ordered by customers last year when there were global shortages. The slowdown in containerboard sales and high customer inventories necessitated production downtime at the containerboard mills to avoid unnecessarily locking up cash in working capital. As such, the Mkhondo and Felixton Mills took commercial downtime amounting to approximately 13% of their capacity during the period.
In Paper Converting, both agricultural and industrial sales volumes were down compared to the prior period. In the agricultural sector, good growth in citrus, avocado, tomato, and banana packaging volumes was offset by declines in grapes, pome fruit and stone fruit which were affected by adverse weather in the Western and Eastern Cape growing areas in late 2022. Industrial sector volumes declined due to subdued consumer demand and the negative effects of load shedding.
Despite this, the business performed well with operating profit up 19.8% to R548.3 million as a result of higher selling prices and a recovery from the impact of the 2022 floods in KwaZulu-Natal (KZN). While there were no insurance proceeds received in the current period, the prior period included insurance proceeds of R47 million.
During July, the Springs Mill experienced 18 days of production downtime due to supply interruptions of water and electricity from the City of Ekurhuleni, which have since been resolved.
Revenue in the Plastics business of R992.5 million increased by 17% (June 2022: R848.6 million) with operating profit increasing to R63.2 million (June 2022: R3.5 million). This was on the back of recent investments in the Bins & Crates business and the consolidation of the Preforms & Closures sites in 2022. This strong performance was achieved despite lower volumes in FMCG, and Preform & Closures businesses due to lower consumer demand as the financial health of the consumer continues to deteriorate.
Insurance proceeds of R6.5 million associated with the KZN floods were recognised in June 2023. In the prior comparable period, R11.6 million was incurred for asset impairments and other costs relating to the floods.
Globally, the supply chain constraints that affected our business during 2022 have improved, and we expect the related cost inflation to continue declining. However, in South Africa, input costs are likely to remain elevated with consumer demand expected to be muted due to factors such as Eskom load shedding and the weakening of the rand compared to 2022. These factors could, in turn, affect demand for some of our products and put pressure on margins.
Despite the challenges, our strategy of investing in innovative, higher-margin, and sustainable products is expected to consistently yield tangible benefits for the business, leading to improved returns for our shareholders. We have strategically targeted sectors that are projected to grow in the foreseeable future, and these sectors are also somewhat insulated from South African consumer spending patterns. Some of our key areas of focus include fruit exports, convenience shopping, recycling, and waste management.
For the rest of this financial year, the Plastics business is expected to benefit further from recent investments in the Bins & Crates business, and continued portfolio optimisation and cost improvement initiatives.
The Paper business’ profitability during the second half of the year will be affected by planned downtime at the Felixton Mill and the Mbombela paper converting plant for the implementation of capital projects, which will benefit the business in future. The Felixton Mill upgrade project is aimed at increasing the production of quality lightweight recycled containerboard by an additional 16,000 tonnes per annum and is expected to be commissioned by the end of September. The Mbombela paper converting project, which is scheduled to be completed by the end of December, entails equipment upgrades to meet the growing needs of our fruit customers in the region, who are expanding.
Strong concluded: “Our management team is dedicated to executing our value-enhancing strategy, designed to optimise our business portfolio and drive both organic and inorganic growth. We will continue to focus on the management of costs and working capital, including through carefully calibrated commercial downtime if and when necessary.”
Issued on behalf of:
Bruce Strong, Chief Executive Officer
Tel: +2711 994-5508
Compiled and released by:
Keyter Rech Investor Solutions
Contact: Marlize Keyter
Tel: 083 701 2021