[TOP STORY] Mpact interims affected by global supply chain constraints

SIMON BROWN: I’m chatting now with Bruce Strong, CEO of Mpact. Results came out on Monday morning for the six months ending June: revenue up 5.2%, headline earnings per share 31.1 [cents] and an interim dividend of 40 cents against a zero interim dividend in the previous period. Bruce, good morning. I appreciate the early morning time.

The question which, after two-and-a-half years of pandemic you’re probably tired of [being asked] but still matters, is: How [were] your supply chains and input costs for these six months under review?

BRUCE STRONG: Good morning, Simon, and thank you for having me. As we’ve stated in our results announcement, we have been affected by persistent global supply-chain constraints, both locally and abroad, not only in the supply side of our business, but also our customers. Particularly our fruit customers have faced a number of issues around either containers, or port constraints, or issues relating to sanctions on Russia, which have meant that some fruit may have to be diverted, or at least [they have had] to wait to see [in terms of] the summer fruit.

So it’s manifested in that manner and also in costs, because we’ve seen rising costs. Inflation has been a huge challenge in the last period and remains a challenge, and we are also having to put our prices up to reflect those costs, to make sure our business is sustainable in these circumstances.

SIMON BROWN: I hadn’t actually thought of that. Of course, when I mention supply chains, I’m thinking your supply chains, but your customers have supply chains as well.

Your inventories – it bounces around a bit and I don’t know if I’m comparing this period to a year ago or versus December; there’s a bit of a difference. But the short answer is [that] inventories are up. Is that in part your response to potential issues on your side, or is that more customers simply not coming to the party because of challenges that they’re having?

BRUCE STRONG: Well, it’s certainly not because of customers, because we’ve had quite robust demand across most businesses, and we’ve had quite a challenge in increasing our finished-goods inventory.

To give you some examples, at the beginning of the year it was clear that many polymer producers – plastic polymer is a raw material for our plastics business – were suffering and battling in various parts of the world – for example, in Europe some of them had to take downtime because of the energy costs.

And we made a conscious decision to increase our raw-material inventory of plastic polymers and carry the cost on the balance sheet, just to make sure that we could supply our customers.

So it’s been a conscious decision. It’s sort of a known known that we could respond to. There have been cases where we have decided to increase our inventories but we just haven’t managed to get enough supply. And that has in turn affected our customer service levels, which have suffered in a way we are not happy with.

So I’d say all in all these supply-chain issues on the back end and the front end of the business have been and remain concerning.

SIMON BROWN: QSRs, the quick-service restaurants – it’s an area that you supply into and, of course, there were periods during the pandemic where that as an industry just vanished, completely disappeared. But you report that actually that’s [had] quite strong demand coming through, which tells us consumers are out and having some takeaway burgers and the like, and therefore the QSR industry is ordering up a bit of a storm.

BRUCE STRONG: Well, that seems to be the case. I should just add that in our QSR sector we also have the home-delivery bags and things like that. They have certainly grown exponentially since the pandemic.

A lot of people are ordering from home and having delivered to home. So that’s been a robust growth sector for us.

And then – and I don’t speak first hand from the QSR sector in terms of the front end – but we have noticed that since the load shedding began we’ve seen a greater uptick in demand, which maybe suggests that people are eating at home or buying takeouts rather than cooking during the load-shedding periods, which has been good for the business.

I should also just add that we have invested extensively across our businesses. We are seeing a number of those benefits come through, especially in these times. We continue to invest because, while our business is a South African business, a number of the sectors we service are not directly coupled to consumer-spending growth in South Africa, and we are seeing opportunities to grow our business despite the challenges in South Africa to consumer spending patterns.

SIMON BROWN: That’s a great point, and you mentioned it in your results where a lot of what we’ve spoken [about] here – well, certainly QSR – is consumer-facing, but you’re actually saying there are sectors that you can target, and one of those is fruit exports, recycling waste management, sectors that are non-consumer dependent, because certainly [from] the conversation we’ve been having the last minute or three I get insight to the consumer, but you also want to branch away from that and become less reliant on a robust consumer because there are going to be tough times for shoppers out there.

BRUCE STRONG: Indeed. So fruit exports are underpinned by plantings that are already in, which are really going to be exponential in growth and we will benefit from that. Convenient shopping, while it is consumer-spending dependent, it is a trend which is moving away from people going to shops, [to] buying from home. [So you don’t need to see] growth in actual consumer spending to see the benefits of packaging for consumer-convenient shopping.

And then on the waste-management and recycling side, it is probably not obvious from announcement, but …. we make, for example, wheelie bins like the one that stands outside your house, the refuse bin, and up to 40%, a big proportion of South African households, are not yet serviced by waste management or by refuse collection.

So that’s another sector that just from a service-delivery point of view should see quite good growth in the future as government needs to service a number of households that are not yet serviced.

So there are many areas in South Africa where we can invest and expect to see robust growth, despite the current economic circumstances we find ourselves in.

SIMON BROWN: I remember a previous conversation with you around those wheelie bins where they can almost become smarter, because in many cases the councils simply have no idea how many wheelie bins they are or aren’t picking up every week.

Bruce Strong, CEO of Mpact, I appreciate the early morning insights.

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