Higher import costs, shipping delays and freight rates hurt BPPL

• Evaluates options for adding third polyester yarn plant as production runs at near full capacity 

BPPL Holdings PLC had to contend with some steep rise in costs across its operations in the three months to September, which hindered its margins and thereby profits as the company had to rely on imports for key raw materials while shipping delays, higher freight costs and global commodities prices came to a head. 

The producer and the exporter of brush-wear and other cleaning products using filaments made out of recycled PET bottles reported revenues of Rs.1.15 billion for the July-September quarter, up 29.2 percent from the same period last year. 

However, the cost of sales rose by a sharp 40 percent to Rs.813.8 million, weighing on its gross margins, which fell to 30 percent from 34 percent due to aforementioned reasons. 

“COVID-19 related lockdowns had a significant impact on our core timber and PET bottle raw material supplies forcing the group to import large volumes of both items at higher prices,” the company’s Chief Executive Officer, Dr. Anush Amarasinghe said.

“Timber and recycled PET usually account for 35-40 percent of the group’s raw material costs. Therefore, imports to fulfil robust order volumes significantly impacted profit margins,” he added. 

Other overheads such as distribution and administration expenses too climbed 61 percent and 12.5 percent respectively in the quarter reflecting the intensity of the rise in costs in the forgoing quarter.  

Investors were parsing interim reports to understand to what extent the rise in costs, pandemic induced logistical disruptions and the foreign exchange crisis at home affected the corporate profits in the September quarter.
Besides higher import costs, the company also confronted with higher freight costs as a result of the drop in container availability and a reduction in shipping lines serving Sri Lanka, causing delays to both imports of raw materials and exports of customer orders. 

“The group’s cash flows were also affected by these delays. There was a significant increase in raw materials in transit for the period (included in inventory) due to import delays. In addition, export shipments on several occasions required 2-3 times the regular delivery times, especially to our North American customers,” Amarasinghe said. 

Besides, the company also had to contend with the rising prices of petroleum based polypropylene, steel wire, natural fibres such as palmyra as part of the rising global commodities prices, denting margins.  

The company reported earnings of 42 cents a share or Rs.127.4 million in the three months to September compared to earnings of 44 cents a share or Rs.134.8 million in the same period last year. 

For the six months to September, the company generated earnings of 74 cents a share on total profits of Rs.225.9 million compared to earnings of 63 cents a share or Rs.194.5 million in the corresponding period last year. 

While the company incorporated the rising costs when pricing products, Dr. Amarasinghe said the impact would start to see from October-December quarter on a staggered basis with the full impact expected from January 2022 onwards. 

As the company has recommenced the collection of PET bottles after the lifting of lockdowns, it expects the profit margins to improve, as raw materials found in Sri Lanka are cheaper. 

The company is also into recycled polyester yarn manufacturing, a segment of the business which has been growing exponentially in recent times and accounted for 22 percent by June this year as fabric made out of recycled yarn is gaining popularity at home and abroad by fashion brands.

Due to the rising prospects of this line of business the company in February broke ground for the second such plant at its facility in Horana with 20 percent more capacity than its existing capacity and expected it to become operational by April 2022. 

The company last week said it was evaluating the options for a third polyester yarn plant with the same capacity along with another brush filament extrusion plant, a new fully automated bottle washing line and more bottle collection infrastructure including more collection centres over the next few years.

The company said, at present the brush production lines are running at 72 percent capacity while both brush filament and polyester yarn production lines continue to run near full capacity.