Mpact’s full-year results pack a punch

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SIMON BROWN: I’m chatting with Bruce Strong, CEO of Mpact. Results out for the year to end December: revenue up 7.1%, headline earnings per share up 25.3%, and the dividend for the year up 130% at 115 cents. Bruce, I appreciate your time.

You start off the results announcement pretty much saying that investment in solar and backup power increased the resilience of operations during load shedding. You’ve put a fair bit into it and got a fair bit of capacity now. Are you sort of totally off grid or how much Eskom (power) are you still using?

BRUCE STRONG: I think it’s quite important to just put into perspective that our solar installations actually don’t take us off grid, because at the scale that you’re using power it’s not really possible in a paper mill to go off the grid when you’re using 10 megawatts at a paper mill, for example. So it’s not off-grid necessarily, but (solar) certainly contributes to the load-curtailment agreements that we’ve got with Eskom, for example. And it definitely reduces the cost. In some of our smaller converting operations, which don’t use that much power, we are able to run in a day even when there’s load shedding. So that’s very helpful from that point of view.

SIMON BROWN: You’ve currently got 9.4 megawatts and you’re adding to that. Is there a cost advantage to the solar?

BRUCE STRONG: Yes, it’s definitely got a good payback. When we started these projects five or six years ago the first project we did in Paarl had like a less than a two-year payback just because of the tariff structure in Paarl. But other than that, most of the projects we estimate at a payback of four to five years, and some of them a little longer than five years. With the escalation in electricity costs I think those paybacks are more like three to four years, four years being the longest at the moment. So they’ve definitely paid back in cost and also in convenience and just the ability to be able to operate, where otherwise you might’ve been stopped.

SIMON BROWN: Certainly, as I said, a strong set of numbers with headline earnings up markedly ahead of revenue. How are your input costs generally, because the last time we chatted that had been [under] pressure? Is that coming down a bit?

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BRUCE STRONG: The input costs last year were a huge challenge, and they remain elevated. We were able in the last quarter to recover some of those higher costs through our paper prices. That’s helped a lot. And then what we have seen is while the inflation – if I could call it the change in prices – has moderated so that it’s not going up, (and) the inflation is lower, the costs are still elevated in most cases. So we are seeing that sustained cost pressure in terms of elevated prices, but certainly not at the same level of inflation that we saw this time last year across most of the business.

SIMON BROWN: Your clients – load shedding obviously hits them to a fair degree. Are you seeing any hit there? You mentioned that you’re actually seeing improved demand from QSRs (quick-service restaurants).

BRUCE STRONG: It’s sort of mixed. I’d say the more substantial customers have already made their plans, and they’re busy making more plans, so they’re able to weather the storm here – I’d say for the time being. They are all dependent on front-end demand. If consumers are under tremendous pressure, that would be a challenge for everybody, including us to some extent. And so we are seeing some pressure in that respect, but fortunately a number of our product lines are not aimed necessarily directly at the South African consumer. We don’t need consumer spending growth to see improved offtake.

For example, our fruit-export packaging requires export fruit operators to be able to do their job, and they’ve got great growth ambitions. So we are investing behind those ambitions.

And then changing consumer patterns also play into our business to a large extent because we’re seeing a lot more home deliveries for online shopping – the likes of the big retailers delivering to homes. So we don’t only make the bags for those home deliveries, we also make the paper that’s used for those bags, and we also collect the waste paper that’s used to make the paper that’s used to make those bags. [Simon chuckling]. And so that in essence is our circular-economy business model. And that doesn’t need huge consumer spending growth, it needs a change in patterns. Those patterns are changing and we are benefiting from that.

We are also seeing that in types of packaging. So for example, three or four years ago we started with paper punnets to replace some of the plastic punnets we make, and we’ve seen tremendous interest and also growth in those products, albeit off a low base. But they are definitely gaining a lot of traction, and we continue to develop new products that fit those consumer requirements.

SIMON BROWN: There is a lot of innovation in this space. No disrespect, but (if) people think packaging they’re going to think boxes and the like. That’s not untrue. But you talked around the export fruit. You talked around the convenience. You’ve got your wheelie bins with RFIDs (radio frequency identification) in them. There is actually a huge amount of innovation and new product coming through as things shift.

BRUCE STRONG: That’s absolutely true. And I think that there’s an opportunity here for a lot more innovation. With the increased environmental pressure there has been a lot of low-hanging fruit. I think there is still quite a lot of low-hanging fruit in terms of what could be done, not only to reduce the amount of packaging, but to increase its utility and its protective ability at lower weights, for example. And that’s traded off against convenience.

Convenience by its very nature is breaking bulk, and that requires more packaging.

You want to be able to do that without increasing proportionately. So you want to make sure that you don’t increase more tonnes. By lightweighting and doing things like that I think one can offset to some extent.

SIMON BROWN: We’ll leave it there. That’s Bruce Strong, CEO of Mpact. Bruce, appreciate the time.

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