Mpact incentive to focus on reducing working capital pays off

CFO Brett Clark says, as a result, the company has generated R700 million of cash from operations.

Paper and plastics packaging business Mpact has reported a decrease in operating profit from R255.2 million in 2019 to R126.9 million for the six-month period ended 30 June 2020, largely due to the unstable economy and Covid-19 lockdown measures.

One of the company’s key objectives, set by CFO Brett Clark and MD Bruce Strong, has been to ensure that Mpact has sufficient cash, especially during this tough economic climate. 

“As part of this objective, we changed part of management’s incentive to focus on reducing working capital,” Brett says. “Bruce and myself tried to attend all the divisional management committee meetings where we emphasised the importance of generating cash.”

The focus resulted in Mpact generating R700 million of cash from operations, compared to R101 million in 2019. 

In the same period, Mpact increased its borrowing facilities and postponed non-essential capital expenditure, which resulted in the company meeting all its covenants and having more than sufficient headroom in its facilities. 
 
Mpact’s recycling division also implemented a new software system which went live at the end of July. 
 
When South Africa went into hard lockdown at the end of March, Mpact was halfway into its reporting period, but most of the company’s divisions were designated as essential service providers due to it being one of the critical supply chain links in the economy, producing paper and packaging for food, pharmaceuticals and other essential products. 
 
However, not all packaging manufactured by the group is used for essential goods. “Consequently, non-essential production lines, such as those producing packaging for quick-service restaurants and alcoholic beverages, did not operate at all times during the lockdown period,” Brett says.
 
The lockdown had a negative impact on demand for paper and plastics packaging products and for recycled paper, plastic and glass. This resulted in sales volumes from continuing operations for the second quarter (April, May and June 2020) declining by 10.4 percent when compared to the same prior year period.
 
“Our first priority was to provide and maintain a safe and healthy working environment for our employees,” Brett says. “To this end we had a comprehensive plan of action with stringent safety and hygiene practices to mitigate the risks associated with the pandemic.”
 
He adds that they also had to make sure that Covid-19 could not be used as an excuse for not supplying their customers or delivering projects or financial results on time. 
 
The majority of Mpact’s finance team has worked from home and, despite the uncertainty the crisis has brought forward, all their deadlines have been met. “In fact, our reporting timeline was slightly shorter than in previous years,” Brett points out. 
 
He explains that, through proper planning and instilling the right culture from the start, reporting has not been impacted materially by Covid-19.
 
The results for the six months ended 30 June 2020 include:

  • Revenue from contracts with customers decreased to R5.06 billion (down from R5.13 billion in 2019)
  • Operating profit came to R126.9 million (down from R255.2 million in 2019)
  • Profit attributable to equity holders of Mpact lowered to R15.4 million (down from R68.7 million in 2019)
  • Headline earnings per share from total operations decreased to 8.4 cents per share (down from 39 cents per share in 2019)