In what CEO Bruce Strong described as the “most challenging year” for the group since listing, JSE-listed Mpact’s headline earnings a share for the year ended December 31, decreased to 166.3c, from 252.7c in 2016.

Underlying operating profit fell to R457-million from R784-million in 2016, while the company’s earnings fell by 34% year-on-year.

“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,” Strong said at a presentation of the company’s financial results, in Johannesburg, on Wednesday.

Group revenue was 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.

Domestic sales volumes decreased as a result of subdued demand, the drought in fruit-growing regions and a supply shortage of virgin polyethylene terephthalate (PET) resin during the peak production period.
 
 The group’s return on capital employed of 7.7% reflects the weaker trading environment and recent capital investments, which have not yet contributed to profitability, but will in future, he noted.

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 owing 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-million in the paper business was lower when compared with the prior year period 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.
 
“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,” he said.
 
The new Felixton paper machine and automated warehouse were successfully commissioned in July and December 2017 respectively and have met expectations in terms of quality, market acceptance and variable costs.
 
The plastics business revenue of R2.5-billion declined compared with the prior year, with decreases in both sales volumes and average prices.

Sales volumes in the plastics converting business were negatively impacted on 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 declared a final gross dividend of 40c a share, bringing the total gross dividend for the year to 55c share.
 
OUTLOOK
While business and consumer confidence have recently improved from the lows of 2017, growth remains subdued and the outlook uncertain, Strong said.

The strength of the rand and lower inflation provide hope for increased consumer spending but this is tempered by factors such as the sugar tax, the higher value-added tax and ongoing drought conditions in some regions.

“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 a yearly revenue of R3.3-billion,” he said. 

He added that conservation efforts over the past two years have resulted in municipal water consumption halving during the first two months of 2018 compared with the 2015 baseline.

“Contingency plans are in place to provide potable water to staff if necessary.”