Johannesburg, 11 August 2016. Mpact, one of the leading paper and plastics packaging businesses in southern Africa, today reported interim results for the six months ended 30 June 2016.
Commenting on the results, Bruce Strong, Chief Executive Officer of Mpact said, “In the first half of 2016, businesses within the Group achieved varied levels of performance. The Plastics business excluding Mpact Polymers (“Plastics Converting”) showed pleasing revenue and operating profit growth, while in the Paper business Corrugated showed its resilience in a difficult market also growing revenue and operating profit. These gains were offset by a loss in Mpact Polymers, the recycled polyethylene teraphylate (rPET) business which is still in a development phase, as well as the effects of lower containerboard sales.”
The Group increased revenue by 6.2% to R4.7 billion, with acquisitions contributing 1.7% to this growth. External sales volumes were 0.8% lower when compared to the prior year period with good growth in the Plastics business offset by a decline in Paper. Underlying operating profit decreased 6.0% to R321.7 million, due to lower containerboard sales as well as a loss in Mpact Polymers, offset partially by an improved trading performance in the rest of the Paper and Plastics business.
Higher net finance costs and a higher effective tax rate compared to the same period last year, resulted in basic and underlying earnings per share decreasing 29.6% to 95.2 cents (June 2015: 135.3 cents) and headline earnings per share for the period declining 29.4% to 94.9 cents (June 2015: 134.4 cents).
“Notwithstanding significant capital investment, the Group’s balance sheet remains strong, with gearing at of 33.8% and a return on capital employed of 16.7%,” said Mpact Chief Financial Officer, Brett Clark.
Strong added, “While the drought across the country remained a concern during the reporting period, the impact on the demand for our packaging products was limited. Some operations reduced their water consumption in response to low water levels in supply dams.”
In May 2016, the Group concluded the acquisition of Remade Holdings (“Remade”). Remade is a collector and trader of recyclable material, with nine branches in the Gauteng and North West provinces. Although relatively small, the acquisition complements a number of initiatives by Mpact Recycling to expand its own collections of paper and plastic, and to increase recycling rates of these materials in South Africa. These initiatives increase the material available for the Felixton mill, for Mpact Polymers and for the recently commissioned liquid-packaging recycling plant at the Springs paper mill.
The leadership succession process in the Mpact Corrugated business has progressed well, with Johan Stumpf having taken over as Managing Director (“MD”) from 1 January 2016. Ralph von Veh, the former MD, remains with the Group and has assumed executive responsibility for Remade, Mpact Polymers and the paper bags and sacks businesses.
Revenue in the Paper business grew by 5.6% to R3.5 billion, with sales volumes including the recently acquired Remade business declining 0.2%. Excluding Remade, sales volumes declined 6.6%, due to lower external containerboard sales, the effects of which were partly mitigated by increased integration of containerboard into Mpact’s Corrugated. In light of the decline in sales volumes, uncertain demand in the near term and relatively high waste paper prices, the business reduced paper production by approximately 4% of capacity during the period.
Commenting on the current imbalance in domestic recycled containerboard supply and demand, Strong said, “we remain confident in the rationale for the Felixton mill upgrade project, Phase 2 of which is due to be completed during the second half of 2017. Once completed, the R765 million mill upgrade will significantly enhance Mpact’s product offering and cost position in the recycled containerboard and corrugated markets.”
Underlying operating profit in the Paper business decreased 7.4% to R292.1 million on the back of lower production and sales volumes.
The Plastics business increased its revenue by 10.2% to R1.3 billion attributable to volume growth of 5.6% and higher average selling prices. Plastics Converting achieved volume growth of 4.2% from bins, crates, preforms and closures despite lower sales in trays, films and the FMCG business.
A pleasing 22.8% growth in underlying operating profit in Plastics Converting was offset by a loss in Mpact Polymers, which was exacerbated by the slower than anticipated start-up. Consequently, underlying operating profit for the Plastics business declined 20.1% to R69.7 million.
The Group’s net finance costs increased by 57.0% to R90.9 million, “due to higher interest rates on increased average net debt over the period as well as the borrowing costs related to the Mpact Polymers and Felixton (Phase 1) projects no longer being capitalised, following their completion in 2015,” said Clark.
Net debt increased by 12.5% to R1.9 billion mainly due to investments in major capital projects and the Remade acquisition.
The effective tax rate for the period was 34.4% (June 2015: 21.1%), which is higher than the statutory rate of 28%, due to deferred tax on certain tax losses in Mpact Polymers not being recognised.
Mpact declared an interim gross dividend of 30 cents per ordinary share, which is unchanged against the comparable period last year.
“We anticipate subdued trading conditions across most sectors serviced by the Group during second half of 2016.
The effects of excess recycled containerboard capacity in South Africa will continue to exert pressure on profits in the Paper business. Notwithstanding this, we are confident our interventions and investments in enhancing Mpact’s competitiveness in this sector will provide profitable growth over the medium term. Phase 2 of the Felixton mill upgrade project is progressing according to plan with completion schedule for the second half of 2017.
Mpact continues to make steady progress in addressing the challenges associated with the start-up phase of the Mpact Polymers rPET plant. Nevertheless, the business is only expected to begin generating profits during 2017.
We remain concerned about the possible effects of the drought in certain regions of South Africa despite relief brought by the recent rain,” added Strong.
The Group’s second half earnings will continue to be impacted by a higher effective tax rate and higher finance costs compared to the same prior year period. Additionally, depreciation charges related to the Felixton mill (Phase1) and Mpact Polymers projects, which were capitalised in the last quarter of 2015, will also impact comparable earnings.
“Mpact has an experienced management team, confident in their ability to navigate the turbulent environment in which we are currently operating while also developing key aspects of the business to ensure profitable growth for the Group over the long term,” Strong concluded.