Pact Group profit plunges as costs and supply chain challenges bite

Pact Group has written down millions in worthless hand sanitiser stocks as its annual profit and dividend tumble.

Pact Group has written down millions of dollars worth of hand sanitiser.

Pact Group has slashed its final dividend by 75 per cent, with its full year profit down by a quarter and a muted outlook for the year ahead, with hand sanitiser writedowns and contract manufacturing weighing on the result.

The company reported a full year underlying net profit of $70m, down 25 per cent, but once one-offs were factored in that fell to $12m, down 86 per cent.

Inventory writedowns of $17.8m were largely due to the write off of hand sanitiser inventory “with no realisable value”, and the company wrote down the value of its contract manufacturing segment by $67.6m.

Pact reported full year revenues of $1.84bn, up 4 per cent, but only its packaging and sustainability division managed to grow earnings, with a 5 per cent increase in the pre-tax result to $110m.

The material handling and pooling division experienced an 8 per cent fall in earnings to $50m, while contract manufacturing had a large turnaround, from a $24m profit in the previous period to a $4m loss.

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The final dividend has been cut from 6c to 1.5c, with the full year payout falling from 11c per share to 5c, or a 55 per cent fall.

Pact managing director Sanjay Dayal said the company achieved “sound revenue ... against the backdrop of a challenging market and tough economic conditions’’.

“While we continue to see escalating demand for recycled content, our performance was impacted by higher costs of both input materials and labour, as well as additional costs due to the ongoing impact of Covid and supply chain disruption,’’ he said.

“We were able to recover some of these costs during the latter half of the year and will continue to do so and our focus remains on cash flow generation.’’

Mr Dayal said revenue in the contract manufacturing division fell 5 per cent to $306m, with the impact caused by elevated raw materials costs, supply chain issues and lower volumes.

“With a new management team in place we have made progress in the areas of expense management and in winning significant new contracts,’’ he said.

“These new contracts will contribute volume and earnings growth to FY23, and pleasingly, we are seeing the impact of the supply chain issues stabilise.”

In contrast, the packaging and sustainability division delivered an “excellent result’’ given the current trading conditions.

“It also reflects strong performances in the New Zealand dairy and fresh food businesses, and in large format industrial packaging in Australia,’’ Mr Dayal said.

“Growth was also boosted by significant contract wins in the Asian closures business, where we lead the market in light weighting of packaging and closures.”

The materials handling and pooling division achieved volume growth despite supply chain challenges.

“We anticipate improvement in the materials handling and pooling segment with increased cost recovery underway and our experience since year end is that councils have opened up their bin tender processes and our Sulo business has been very successful in winning contracts that will be evident in FY23,” Mr Dayal said.

The company told the ASX that it expected a modest improvement in pre-tax earnings this financial year.

“Pact expects supply chain availability issues, rising raw material costs and elevated energy prices to remain throughout the first half of the 2023 financial year, before normalising in the second half of FY23.

“As a result, the company expects underlying EBIT to grow slightly in FY23.’’

The company will pay its final, partly-franked, dividend on October 6.

Pact shares were 5 per cent lower at $2.07 in early trade.