Mr. S.M. Taylor reports

WINPAK REPORTS 2022 FIRST QUARTER RESULTS

Winpak Ltd. has released consolidated results in U.S. dollars for the first quarter of 2022, which ended on March 27, 2022.

Winpak manufactures and distributes high-quality packaging materials and related packaging machines. The company's products are used primarily for the packaging of perishable foods, beverages and in health care applications.

Financial performance

Net income attributable to equity holders of the company for the first quarter of 2022 of $33.9-million, or 52 cents in earnings per share (EPS), exceeded the corresponding quarter of 2021 by $9.4-million or 38.3 per cent. The exceptional result was influenced by the substantial advancement in gross profit which led to an expansion in EPS of 18 cents. The level of income attributable to non-controlling interests added a further one cent. Higher operating expenses lowered EPS by five cents.

Operating segments and product groups

The company provides three distinct types of packaging technologies: a) flexible packaging, b) rigid packaging and flexible lidding, and c) packaging machinery. Each is deemed to be a separate operating segment.

The flexible packaging segment includes the modified atmosphere packaging, specialty films and biaxially oriented nylon product groups. Modified atmosphere packaging extends the shelf life of perishable foods, while at the same time maintains or improves the quality of the product. The packaging is used for a wide range of markets and applications, including fresh and processed meats, poultry, cheese, medical device packaging, high-performance pouch applications, and high-barrier films for converting applications. Specialty films include a full line of barrier and non-barrier films which are ideal for converting applications such as printing, laminating and bag making, including shrink bags. Biaxially oriented nylon film is stretched by length and width to add stability for further conversion using printing, metalizing or laminating processes and is ideal for food packaging applications such as cheese, fluid and viscous liquids, and industrial applications such as book covers and balloons.

The rigid packaging and flexible lidding segment includes the rigid containers, lidding and specialized printed packaging product groups. Rigid containers include portion control and single-serve containers, as well as plastic sheet, custom and retort trays, which are used for applications such as food, pet food, beverage, dairy, industrial and health care. Lidding products are available in die-cut, daisy chain and rollstock formats and are used for applications such as food, dairy, beverage, industrial and health care. Specialized printed packaging provides packaging solutions to the pharmaceutical, health care, nutraceutical, cosmetic and personal care markets.

Packaging machinery includes a full line of horizontal fill/seal machines for preformed containers and vertical form/fill/seal pouch machines for pumpable liquid and semi-liquid products and certain dry products.

Revenue

Revenue in the first quarter of 2022 soared to $276-million, eclipsing the prior-year level by $51.2-million or 22.8 per cent. Volumes, in total, were virtually unchanged from the prior-year comparable quarter. COVID-19 infections peaked in early 2022, negatively impacting the availability of labour and consequently lowered productive capacity. Supply chain disruptions, specifically with aluminum foil procurement, also tempered the company's growth aspirations. Within the flexible packaging operating segment, modest volume growth of 4 per cent was realized. For the modified atmosphere packaging product group, healthy volume growth reflected business gains pertaining to protein and cheese packaging with both retail and food service customers. Also influential was the new frozen food product launch in the second half of 2021. The rigid packaging and flexible lidding operating segment volumes contracted by 8 per cent. The rigid container product group experienced a temporary drop in volumes due to order patterns with respect to specialty beverage containers, with volumes recovering over the balance of the year. Furthermore, lidding product group volumes were constrained by the inability to procure sufficient levels of aluminum foil to meet customer order levels. Volume growth was exceptional for the packaging machinery operating segment, surpassing 50 per cent, largely a function of the timing of machine order fulfilment. Selling price and mix changes had a large favourable effect on revenue of $51.4-million as the substantial increase in raw material and other costs throughout 2021 resulted in higher selling prices to customers. The impact of foreign exchange on revenue was insignificant.

Gross profit margins

Gross profit margins reached a level of 29.5 per cent of revenue in the first quarter of 2022, surpassing the 29.3 per cent recorded in the same quarter of 2021. More importantly, gross profit surged by 23.8 per cent from $65.8-million in the first quarter of 2021 to $81.5-million in the current quarter, while sales volumes were essentially equivalent. The outcome was a sharp increase in EPS of 18 cents. Selling prices escalated to a significantly greater extent than raw material costs, raising EPS by 24 cents. By the first quarter of 2022, raw material cost increases realized in the previous year had been passed along to customers. In addition, inflationary price increases were implemented during the current quarter for other key cost categories, including freight and distribution, consumables, and energy expenses. In contrast, the first quarter of 2021 experienced a downward movement in selling prices while raw material costs were rapidly rising. With muted sales volume growth, in tandem with the expansion in the company's productive capability, fixed manufacturing costs lowered EPS by six cents.

In the first quarter of the year, the raw material purchase price index declined by less than 1 per cent compared with the fourth quarter of 2021. In the past 12 months, the index increased considerably by 29 per cent, which was caused by the elevated global demand for the company's primary raw materials coupled with constrained producer supply. During the first quarter, polypropylene and polyethylene resins each realized decreases ranging between 7 and 10 per cent while aluminum foil and nylon resin both experienced advances ranging between 7 and 10 per cent.

Expenses and other

Operating expenses in the current quarter, adjusted for foreign exchange, progressed at a rate of 12.7 per cent in contrast to the relatively constant sales volumes, resulting in a reduction in EPS of five cents. Heightened freight and distribution costs were the main contributing factors. Preproduction costs were incurred in the quarter with the start-up of the new biaxially oriented polyamide (BOPA) line. A lower proportion of earnings attributable to non-controlling interests augmented EPS by one cent.

Capital resources, cash flow and liquidity

The company's cash and cash equivalents balance ended the first quarter of 2022 at $387.1-million, an increase of $9.7-million from the end of the prior year. Winpak continued to generate solid cash flow from operating activities before changes in working capital of $56.1-million. Cash was consumed by net working capital additions of $24.2-million. Inventories climbed by $24-million due to deliberately increasing the scale of purchases for aluminum foil and certain resins during the quarter. In addition, trade and other receivables grew by $12.8-million, stemming from the timing of customer receipts. Trade payables advanced by $16.6-million, reflecting the magnitude of raw material purchases. Cash was utilized for property, plant and equipment expenditures of $11.9-million, income tax payments of $6.5-million, dividend payments of $1.5-million, employee defined benefit plan contributions of $1.5-million, and other items totalling $800,000. Property, plant and equipment additions included the acquisition of land and building adjacent to the modified atmosphere packaging plant in Winnipeg, Man., as well as progress payments made for converting capacity additions.

Looking forward

The company continues to effectively manage an extremely volatile supply chain environment, exceptional inflationary pressures, a challenging and highly competitive labour market, and the COVID-19 pandemic. The heightened level of employee absenteeism recorded in January of this year relating to COVID-19 infections tapered off significantly in February and March. However, North America is presently dealing with the continuing persistence of the pandemic and this may continue to impact operations in 2022. The pandemic, along with the geopolitical risks surrounding the war in Ukraine, brings about a degree of uncertainty regarding the outlook for the North American economy.

Although sales volume growth slowed during the first quarter of 2022, the company anticipates solid volume growth for the final three quarters of the year. This is due, in part, to improved labour availability and the enhanced capability to supply lidding customers with the heightened aluminum foil purchases made during the first quarter. Furthermore, the new cast co-extrusion line commercialized at the modified atmosphere plant toward the end of 2021 has supported the acquisition of sizable new cheese and protein business and continued expansion of the frozen food category. Both the rigid container and lidding product groups will reap the benefit of additional retort pet food and snack food business. Additionally, specialty beverage container activity should rebound and shipments for the full year are forecast to be comparable with those realized in the prior year. Following the launch of the Wiicare global health care platform in 2021, new medical packaging business has been awarded to Winpak and the opportunity pipeline is promising.

Raw material input costs remained elevated in the first quarter of 2022 following the surge in oil and natural gas prices. Resin producers have announced additional price increases for polypropylene and nylon for the upcoming quarter. The market expectation for resin costs is a gradual reduction in the second half of the year barring any major unexpected events. Consequently, there will be compression of gross profit margins in the near term as pass-through pricing adjustments to customers with formal indexing agreements will take place with an average delay of 90 to 120 days. As anticipated, inflation continues to have a significant impact on the company's overall cost structure. To the extent possible, corresponding selling price increase will be passed onto customers.

Capital expenditures for 2022 are forecast to be in the range of $60-million to $70-million. Preproduction activities relating to the installation of the new BOPA line in Winnipeg, Man., commenced in the first quarter of 2022. It is currently projected that the line will be fully operational by the beginning of the third quarter. In addition, printing and laminating converting capacity will be added to the modified atmosphere packaging facility during 2022. As new business is realized, the company will be in a position to commence certain building expansions and acquire additional extrusion and converting capacity to accommodate the volume growth. Focused and dedicated resources will be allocated to capital spending that enhances Winpak's technical expertise and capabilities in producing sustainable packaging solutions that are being actively pursued by customers. Acquisition opportunities have been more prevalent in the market as the impact of the pandemic on the North American economy subsides. Winpak will continue to evaluate potential acquisition opportunities that align strategically with the company's core strengths in sophisticated high-barrier packaging for food, medical and pharmaceutical applications that provide long-term shareholder value.

We seek Safe Harbor.