Strategic overview. MPACT Integrated Report COMPANY OVERVIEW OPERATIONAL REVIEW STRATEGIC OVERVIEW FINANCIAL STATEMENTS ADMINISTRATION

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1 INTRODUCTION COMPANY STRATEGIC OPERATIONAL REVIEW GOVERNANCE FINANCIAL STATEMENTS ADMINISTRATION Strategic overview Strategy and objectives Innovation Awards Five-year performance history Strategic investments Material matters summary Chairman s message Case Study: Dalisu Holdings Commercialising and Empowering MPACT Integrated Report

2 Strategy and objectives Mpact s strategy aims to create value for stakeholders over the long term. The core pillars of the strategy are: LEADING MARKET POSITIONS We aim to develop and selectively grow our leading market positions in rigid plastics, paper-based packaging and packaging paper in sub-saharan Africa. We will grow by extracting value through business and operational management expertise as well as product application, design and market knowledge. CUSTOMER-FOCUSED We will further develop our established manufacturing and service footprint to deliver superior solutions to our customers, underpinned by: A decentralised structure reflecting management depth and experience at all levels. Innovative customer-focused product offerings. Leading market positions that enable us to achieve sustainable cost effectiveness through economies of scale. FOCUS ON PERFORMANCE We will focus on performance through effective business excellence programmes and sound asset management, enabling us to sustainably: Provide our customers with quality products and services worth their price. Retain a motivated and skilled workforce. Deliver good returns to our shareholders. 16 MPACT Integrated Report 2017

3 INTRODUCTION COMPANY STRATEGIC OPERATIONAL REVIEW GOVERNANCE FINANCIAL STATEMENTS ADMINISTRATION The key principles underlying each strategy pillar are expanded upon in the following table: Leading market positions Customer-focused Focus on performance Scale Maintain leading market positions in chosen geographies with scale to enable competitiveness at a decentralised level May consider entry below leading market position but always considering sectors where there is potential to lead in future Capability Invest in sectors where Mpact has sustainable competitive advantages or at least has the prospect of developing them Products and geographies Rigid plastics and paper-based packaging in sub-saharan Africa Decentralised structure Customer-centric Responsive Accountable Flexible Leverage parenting advantage wherever possible Effectively execute differing strategies or even hybrids across business units Innovation and capability Applied to products and processes internally and externally Use of own R&D capabilities where feasible Investing to meet new and emerging demands of customers with good returns Intimate understanding of the Value Chain Engage customers and other stakeholders to improve supply chain efficiency and anticipate changing requirements Product specification bodies, marketing and branding people, key distribution networks Make partnerships work Financial returns ROCE and profitable growth Disciplined capital allocation and spending Re-investment and capital allocation based on track record Stringent and continuous cost management Long-term view of investments Effective risk management and governance Skilled and motivated people Invest in support of management with a track record Reward performance and results and appreciate effort Commit resources to proactive training and development of staff Safety Sustainable practices Responsible environmental management Contributing to social upliftment in the areas in which we operate Rigorously pursuing the highest ethical standards in governance Specific strategic goals have been developed for the businesses and these are set out in detail in the respective operational reviews. MPACT Integrated Report

4 Strategy and objectives (continued) ANTICIPATING CUSTOMER NEEDS Unless differentiated, paper and plastic packaging can become little more than a commodity. Margins become lower and customer loyalty is limited. Mpact focuses on premium quality products and building long-term relationships with our major customers to understand their business and anticipate their needs by creating innovative packaging solutions. Our well-established research and development function works closely with customers to develop and test products tailored to their specific requirements, meeting the challenge of our slogan by creating Smarter, Sustainable Solutions. We have innovation centres for structural and graphic design, value-added services and a plastics design studio where new designs are created and prototype forms for the development of new plastic containers are made. Our goal is to look beyond incremental improvements to existing packaging to identify game-changing solutions and new product classes. This ongoing commitment to innovation has seen relationships with our industrial and agricultural customers deepen and the range of packaging options we can offer increase significantly. Five years ago in the fast food industry only pizzas were sold in boxes now an increasing number of fast food chains are recognising the advantages and environmental benefits of paper-based packaging. 18 MPACT Integrated Report 2017

5 INTRODUCTION COMPANY STRATEGIC OPERATIONAL REVIEW GOVERNANCE FINANCIAL STATEMENTS ADMINISTRATION Innovation Awards Innovation Awards During the year, Mpact s focus on innovative packaging solutions was recognised with nine awards at the Gold Pack 2017 awards and seven Fta SA Flexographic Print Excellence Awards: Gold Pack Awards The IPSA Trophy, a Gold Award (Food Category) and a Gold Award (Best Rigid Plastics) for the Eco Spice Grinder, which converted a three-part spice grinder to a two-part grinder, improving efficiencies and reducing cost to the brand owner while improving value and convenience for consumers A Gold Medal (Transit Category) for the Langkloof 9kg Hawker Inner and Outer A Silver Medal (Transit Category) for the Burger King Corrugated Tray A joint Bronze Medal (Transit Category) for the Grown4U Open Ledge Citrus Carton A Bronze Award (Packaging-related Category) for the Striped Horse Beer Gift Pack A Finalist Award (Food Category) for the Debonairs Pizza on the Triple box A Finalist Award (Packaging-related Category) for the Newlands Spring Beer Carry Pack Fta SA Flexographic Print Excellence Awards A Silver Medal (Corrugated Uncoated (line/tone) in-line case-maker or printer/die-cutter Category) for the Smirnoff Vodka 12 x 750ml A Gold (Corrugated Coated (line/tone) in-line case-maker or printer/die-cutter Category) for Lucozade Boost A Silver (Corrugated Coated (line/tone) in-line case-maker or printer/die-cutter Category) for Bain s Cape Mountain Whisky 6 X 750ml A Silver (Corrugated Coated (line/tone) in-line case-maker or printer/die-cutter Category) for Don Vincente Limes A Bronze (Corrugated Coated (line/tone) in-line case-maker or printer/die-cutter Category) for Haute Cabriere A Silver (Corrugated Coated (process) in-line case-maker or printer/die-cutter Category) for Nola Original Mayonnaise 5kg A Bronze (Corrugated Coated (process) in-line case-maker or printer/die-cutter Category) for Seasons Dry White (Liquor City) GOLD PACK THE INSTITUTE OF PACKAGINGSA FLEXOGRAPHIC PRINT EXCELLENCE AWARDS Famous Brands Supplier of the Year Awards Mpact proved itself as not another brown box manufacturer at the Famous Brands Annual Supplier of the year Awards. Mpact won the following three awards: Account Manager of the year (Sandy Rowles) Supplier of the year Packaging Supplier of the year Overall MPACT Integrated Report

6 Five-year performance history Profit performance Revenue R m 10,120 10,099 9,548 8,617 7,698 Underlying operating profit R m Underlying profit before tax R m Underlying earnings R m Financial position Total assets R m 9,182 8,712 8,069 7,063 6,207 Total equity R m 4,243 4,021 3,712 3,206 2,884 Total liabilities R m 4,939 4,691 4,357 3,857 3,323 Total operating assets R m 8,420 7,996 7,285 6,299 5,571 Cash flow information Net cash from operations before working capital R m 1,019 1,275 1,322 1,146 1,028 Working capital inflows/(outflows) R m 6 (289) (235) (157) (221) Capital expenditure R m Ratio and statistics Underlying operating profit margin % Basic EPS cents Underlying EPS cents Basic HEPS cents Total dividend per share cents Net asset value per share cents 2, , , , ,762.9 ROCE % Current ratio times Interest cover (underlying EBIT) times Gearing % Stock Exchange statistics Market value per share at year-end cents 2,440 2,825 4,694 3,675 2,690 Highest (year to 31 December) cents 3,500 5,499 5,189 3,999 2,819 Lowest (year to 31 December) cents 1,720 2,200 3,251 2,352 1,800 Closing PE ratio times Market capitalisation close R m 4,184 4,760 7,790 6,031 4,400 Volume traded (year to 31 December) ,250 84,386 61,106 63,736 96,225 Weighted number of shares , , , , ,510 Issued shares at 31 December , , , , , MPACT Integrated Report 2017

7 INTRODUCTION COMPANY STRATEGIC OPERATIONAL REVIEW GOVERNANCE FINANCIAL STATEMENTS ADMINISTRATION Strategic Investments CAPITAL INVESTMENTS IN SUPPORT OF STRATEGY In line with our customer-centric business model and commitment to business excellence, Mpact has over the last few years invested significant capital in modernisation and strategic acquisitions. While not all of these investments have yet achieved their full planned benefits, we believe that they are on track to do so and will position the Group well to benefit from any improvement in economic conditions. Good progress was made on implementing significant capital projects. The current capital investment cycle is now coming to an end. R765 million Felixton paper mill rebuild The mill upgrade has significantly enhanced quality and product offering, producing advanced lightweight containerboard for the recycled containerboard and corrugated markets, as well as increasing capacity by 60,000 tonnes. R150 million Port Elizabeth R100m corrugator and R50m building Increased production capacity to meet the needs of the agricultural sector in the region. R100 million 5,500-ton jumbo bin injection moulding machine Enhance Mpact s leading market position in the agricultural jumbo bin and wheelie bin sectors. R50 million in two new carbonated soft drinks closure lines Investment to increase capacity and produce lightweight closures. MPACT Integrated Report

8 Material matters summary Sustaining profitable growth Operating environment Regulatory environment Innovation Capital funding and allocation Being a responsible employer Labour relations Health and safety Social wage Diversity Being a responsible corporate citizen Communities Governance Environmental responsibility Cost competitiveness and anticipating and meeting customer needs Managing input cost and availability Driving efficiencies Implementing capital projects 22 MPACT Integrated Report 2017

9 INTRODUCTION COMPANY STRATEGIC OPERATIONAL REVIEW GOVERNANCE FINANCIAL STATEMENTS ADMINISTRATION Being a responsible employer Our ability to deliver on our strategy depends on the skills, health, safety and development of our human capital. See our Sustainability review on the Company s website. Sustaining profitable growth Mpact is committed to delivering profitable and sustainable long-term growth for the benefit of all our stakeholders. See page 28 for our CEO s report. See page 90 for our CFO s review. Being a responsible corporate citizen Mpact is committed to maintaining high standards of corporate governance and demonstrating honest and responsible conduct See page 63 for our Corporate Governance report. See our Sustainability review on the Company s website Cost competitiveness and anticipating and meeting customer needs Our customer-focused business model is built on business excellence in quality and service as well as operational, safety and environmental performance. See page 28 for our CEO s report. See page 90 for our CFO s review. Refer to page 50 for a full discussion of Mpact s most material matters, how these were derived and where to find more information for each issue. MPACT Integrated Report

10 Chairman s message FOCUS ON PROGRESS AGAINST STRATEGY The political environment and continued revelations of public and private sector corruption and fraud during 2017 intensified concerns about governance and the direction South Africa is taking. These factors contributed to reduced consumer and investor confidence. The severe countrywide drought of 2016 broke in some parts of the country but persisted in the Eastern and Western Cape important areas for Mpact in the fruit export market. These local challenges have manifested in the context of continued change and uncertainty in the global socio-political environment, with questions around the status of international trade agreements and their likely impact on South Africa. While economies around the world start to recover, South Africa s GDP growth remains at a very low level and we appear to be again missing an opportunity to tap into that growth, as happened during the commodities boom at the start of the century. Changes to Chinese legislation affected global waste prices and locally severe storms in Durban led to port congestion which impacted imports of raw materials and exports of goods. PET supply shortages, which have now normalised, were a crisis for the plastics businesses and could not be met by imports. The year also saw unrealistic wage demands arising from the increased urgency from workers to be included in the perceived prosperity of business. However, by the end of the year, there was a turn in prospects and an increased sense that South Africa is moving in the right direction to ride global trends. The relationships that sustain business with our major industrial and agricultural customers are supported by our focus on excellent quality and service and our wide footprint across South Africa that keeps us close to our customers and helps us react faster. INNOVATION AS A DRIVER OF OUR BUSINESS Paper and packaging products run the risk of becoming commoditised with pricing power rapidly eroded by high levels of competition. Mpact s customer-focused business model emphasises innovation in processes and products to build relationships with our customers by better understanding and meeting their packaging needs in a cost-effective way. The relationships that sustain business with our major industrial and agricultural customers are supported by our focus on excellent quality and service and our wide footprint across South Africa that keeps us close to our customers and helps us react faster. Mpact s investment in research and development and our close relationships with our customers have greatly increased the range of innovative products over time. New products we launched in 2017 include the H eataway freezer to oven food container that can be taken out of the oven undistorted with bare hands, which offers an alternative to foil products for home meal replacement. INCREASED GLOBAL FOCUS ON RECYCLING Our business model begins with the collection of recovered paper and plastics, providing a valuable environmental service to the country by reducing waste to landfill and creating jobs for small and micro-enterprises that collect the waste. The global trend of multinational FMCG companies and other plastics users towards increasing the use of recycled material in their packaging continues. The Coca-Cola Company, for example, has made a commitment to help collect and recycle a bottle or can for every one they sell by 2030 as part of their vision for a World Without Waste. The New Plastics Economy is an initiative by the Ellen MacArthur Foundation that brings together key stakeholders to rethink and redesign the future of plastics by applying the principles of a circular economy. At the start of 2018, more than 40 leading brands, 24 MPACT Integrated Report 2017

11 INTRODUCTION COMPANY STRATEGIC OPERATIONAL REVIEW GOVERNANCE FINANCIAL STATEMENTS ADMINISTRATION retailers, and packaging companies had signed up to work towards 100% reusable, recyclable or compostable packaging by These include Evian, L Oréal, Mars, Marks & Spencer, PepsiCo, The Coca-Cola Company, Unilever, Walmart and Proctor & Gamble. While we are disappointed that Mpact Polymers is not yet operating at planned levels, our plant uses technology that is not only new in South Africa but also at the global cutting edge. Once operating efficiently, it will enable us to support such companies to achieve their commitments in South Africa. This initiative encompasses all three of our strategic pillars a leadership position in recycled plastics, moving early to meet customer needs and focusing on performance by supporting sustainability. PERFORMANCE The financial performance of the group reflects the challenging macro-economic conditions and competitive environment. The drought affected our operations in the Western Cape and Eastern Cape. We continue to focus on minimising our water usage through process optimisation, water treatment, water recycling and the implementation of alternative technologies, such as air coolers. While we re-evaluated our presence in Zimbabwe (closed in 2016) and Botswana (consolidated into Detpak in 2017) this is not an indication that we have de-emphasised expansion, but rather that geographic expansion will happen in a considered way. The benefits of the recent plant upgrades have confirmed for us that in a business such as ours, organic projects are more likely to deliver better returns over time than acquisitions. and practices are discussed in detail in the Governance report on page 58. We believe the current Board represents a good balance of skills and experience, and is moving in the right direction in terms of diversity. In May 2016, Mpact received notification from the Competition Commission that it was being investigated for alleged contraventions of the Competition Act. Mpact continues to engage with the Competition Commission on this matter. We are monitoring and evaluating the impact of developments in the regulatory environment that will affect our operations, including the sugar tax, carbon tax, waste levies and the changing requirements of Broad-Based Black Economic Empowerment legislation. I would like to thank my fellow Board members for their dedication and support during the year. On their behalf, I would like to thank our Chief Executive Officer, his management team and all of the employees of Mpact for their commitment and strong contribution in executing the strategy during Tony Phillips Chairman 6 March 2018 AND GOVERNANCE Issues of environmental and social sustainability at Mpact are viewed as part of our focus on excellent performance. We recognise that safeguarding the safety and health of our workforce, investing in skills development, driving transformation in the Company and training and mentoring the next generation of leaders underpins our ability to create long-term value for all stakeholders. Maximising the efficiency of our manufacturing equipment reduces water and energy use per tonne of production and aims to eliminate waste. Our corporate social investment initiatives make a difference in communities around our operations and I am particularly pleased with the positive change the Mpact Bursary Scheme will make for the 22 students who will be supported in their tertiary studies in Mpact is committed to ethical business practices and good governance, as is described in our Code of Ethics, which is available on our website. The Company s governance structures MPACT Integrated Report

12 Case Study DALISU HOLDINGS: COMMERCIALISING AND EMPOWERING Dalisu Holdings (Dalisu) is a partnership between Dalisu Specialty Products (owned by Mr Mohlomi Mothobi and Dr Nathi Ngcobo, former employees of Mpact Operations) and Mpact Operations. It was established to create a business structure to use sodium lignosulphonate, which is derived from the wood pulping process, to create a dust suppression solution for the mining industry, thereby assisting the mining industry to meet their environmental and regulatory commitments. The focus area is predominantly in Mpumalanga and Northern KwaZulu-Natal. The dust suppression business opportunity does not fully consume the by-product stream from the pulping process, so further opportunities have been identified and are being developed. Dalisu represents a win-win situation it commercialises an industrial by-product, helps to address the environmental challenge of dust emissions, supports the development of black industrialists and creates jobs. 26 MPACT Integrated Report 2017