Mr. S.M. Taylor reports

WINPAK REPORTS 2022 FOURTH QUARTER RESULTS

Winpak Ltd. has released consolidated results in U.S. dollars for the fourth quarter of 2022, which ended on Dec. 25, 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 fourth quarter of 2022 amounted to $31.2-million or 48 cents in earnings per share (EPS), surpassing the 2021 corresponding result of $30-million or 46 cents per share by 4 per cent. The improvement in gross profit was the main factor and positively impacted EPS by six cents. Net finance income and foreign exchange added 2.5 cents and 1.5 cents, respectively, to EPS. The level of net income attributable to non-controlling interests augmented EPS by a further one cent. Conversely, operating expenses lessened EPS by seven cents. In addition, lower sales volumes caused EPS to decline by two cents.

For the year ended Dec. 25, 2022, net income attributable to equity holders of the company of $128.3-million or $1.97 per share, representing the highest level in Winpak's history, advanced from the prior year's income of $103.8-million or $1.60 per share by 23.6 per cent. Gross profit propelled EPS forward by 62.5 cents. Net finance income elevated EPS by three cents and the level of net income attributable to non-controlling interests raised EPS by an additional four cents. Modestly higher sales volumes benefited EPS by one cent. Operating expenses had the opposite effect, dampening EPS by 26.5 cents. Foreign exchange and income taxes each lowered EPS by 3.5 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, pet food, 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 fourth quarter of 2022 was $292.4-million, surpassing the prior-year level of $279.1-million by 4.8 per cent. Volumes contracted by 4.3 per cent. The flexible packaging operating segment recorded a reduction in volumes of 1 per cent. The modified atmosphere packaging product group realized modest volume growth following the healthy demand for retail meat and cheese products. For the biaxially oriented nylon product group, volumes declined sharply as most customers unwound the exceptional inventory levels that were previously established to combat the unstable supply chain environment. Within the rigid packaging and flexible lidding operating segment, volumes retreated by 7 per cent. Rigid container volumes decreased by 10 per cent due to lower condiment container activity, which was exceptionally strong in the fourth quarter of 2021. For the lidding product group, the availability of labour continued to constrain manufacturing output and volumes declined by 5 per cent as a result. Packaging machinery volumes declined in the quarter as customers temporarily scaled back on capital purchases with the uncertainty prevailing in the current economic environment. Selling price and mix changes had a notable positive effect on revenue of 9.8 per cent, which was largely due to the magnitude of raw material pass-through adjustments to customer selling prices. Foreign exchange had a minor negative influence on revenue.

For 2022, revenue reached an all-time high of $1,181.1-million, growing by 17.9 per cent from the 2021 level of $1,002-million. Volumes were virtually unchanged, advancing by 0.6 per cent. Within the flexible packaging operating segment, volume gains amounted to 4 per cent. Growth for the modified atmosphere packaging product group reached 11 per cent, fuelled by the frozen food packaging business as well as heightened demand for protein and cheese packaging, particularly for customers that supply retail food industries. Conversely, specialty film volumes retreated because of customer loss and the strategic exit from certain low-margin business. Biaxially oriented nylon volumes fell significantly as several key customers altered their order patterns in response to the excess inventory they had accumulated in the prior year as a means to counteract the severe supply chain challenges. The rigid packaging and flexible lidding operating segment volumes receded by 3 per cent. For the rigid container product group, lower condiment and specialty beverage shipments caused volumes to decline by 5 per cent. The lidding product group experienced a shortage of manufacturing labour throughout 2022, limiting productive capacity. Additionally, severe aluminum foil procurement obstacles prevailed during the first quarter of 2022. Consequently, volumes contracted by 3 per cent. Stemming from the nutraceutical packaging business secured during 2021, sizable volume growth was generated by the specialized printed packaging group. Packaging machinery volumes were essentially equal to the prior year. Selling price and mix changes had a large favourable effect on revenue of 17.6 per cent as the substantial overall rise in raw material and other costs over the past 18 months generated much higher selling prices to customers. Foreign exchange had virtually no effect on revenue.

Gross profit margins

Gross profit margins of 27.2 per cent of revenue in the fourth quarter of 2022 fell slightly from the 27.6 per cent recorded in the same quarter of 2021. In dollar terms, gross profit improved by 3.4 per cent from the fourth quarter of 2021 even though sales volumes contracted over the same time horizon. Accordingly, EPS was augmented by six cents. The magnitude of selling price increases significantly outpaced the corresponding rise in raw material costs. This divergence elevated EPS by 18.5 cents. This was a function of both sales mix and the sequence of inflationary selling price adjustments that have been implemented over the past 15 months. In terms of operating leverage, manufacturing costs increased by more than 10 per cent while sales volumes narrowed, lowering EPS by 12.5 cents.

For the current year, gross profit margins of 28.1 per cent of revenue exceeded the 2021 level of 27.4 per cent. More importantly, gross profit surged by 20.9 per cent from $274.4-million to $331.8-million over the same time period while sales volumes expanded by only 0.6 per cent. A sizable increase in EPS of 62.5 cents took place as a result. Selling prices rose to a much larger extent than raw material costs, which included significant aluminum foil transportation costs, raising EPS by 94 cents. During 2021, on account of the inherent delay prescribed within formal customer price indexing programs, raw material costs escalated much greater than the related selling price adjustments. The opposite dynamic took place in 2022. Additionally, since the final quarter of 2021, a series of inflationary selling price increases have been enacted to combat the growth in operating expenses. Compared with 2021, the rate of acceleration of fixed manufacturing overheads exceeded the muted rate of sales volume growth, tempering EPS by 31.5 cents.

The raw material purchase price index declined by 9 per cent from the third quarter of 2022. Since the start of 2022, the index receded by 5 per cent. During the fourth quarter, polypropylene resin experienced a considerable decrease of 27 per cent. Additionally, aluminum foil and nylon and polyethylene resins each realized decreases ranging between 8 and 10 per cent.

Expenses and other

Operating expenses in the fourth quarter of 2022, adjusted for foreign exchange, expanded by 13.9 per cent relative to the drop in sales volumes and, consequently, lowered EPS by seven cents. Personnel costs, as well as freight and distribution expenses, were the leading factors. Also influential were the significant, non-recurring credit loss recoveries on trade and other receivables recorded in the fourth quarter of 2021. Foreign exchange benefited EPS by 1.5 cents in the quarter with the overriding component being the weakened value of the Canadian dollar that was employed to translate transactions in that currency into U.S. dollars. The cash invested in money market accounts and short-term deposits was at much higher rates of interest in the quarter. Thus, net finance income elevated EPS by 2.5 cents. The proportion of net earnings attributable to non-controlling interests added one cent to EPS.

For the 2022 fiscal year, operating expenses, adjusted for foreign exchange, advanced at a rate of 18.2 per cent in comparison with the 0.6-per-cent expansion in sales volumes, subtracting 26.5 cents from EPS. Heightened freight and distribution costs, in combination with higher personnel and expected credit loss expenses, were the key variables leading to the rise in operating expenses. Furthermore, preproduction costs, which related mainly to the commercialization of the new biaxially oriented polyamide (BOPA) line, were significant. Over all, foreign exchange reduced EPS by 3.5 cents. Significantly higher negative translation differences were recorded on the revaluation of Canadian-dollar monetary assets and liabilities in the current year. Additionally, losses were realized on foreign exchange contracts in 2022 in contrast to the gains that were recorded in 2021. These occurrences were only partially mitigated by the company's Canadian-dollar transactions being translated at a more advantageous average exchange rate in 2022. The effective income tax rate advanced by 1.4 percentage points, subtracting 3.5 cents from EPS. Due to the substantial increase in the rates of interest earned on the company's cash and cash equivalent amounts throughout 2022, net finance income boosted EPS by three cents. Lastly, the level of net income attributable to non-controlling interests enhanced EPS by four cents.

Capital resources, cash flow and liquidity

The company's cash and cash equivalents balance ended the current year at $398.7-million, an increase of $21.5-million from the end of the third quarter. Winpak continued to generate strong cash flows from operating activities before changes in working capital of $52.4-million. Cash was consumed by net working capital additions of $8.3-million. Inventories grew by $7.4-million as sales volumes did not reach the anticipated level. Trade payables declined by $7.9-million, reflecting the timing of supplier payments. Cash was utilized for plant and equipment additions of $13.8-million, income tax payments of $8.6-million, dividend payments of $1.4-million, and other items totalling $500,000 while net finance income provided cash of $1.7-million.

For the year, the cash and cash equivalents balance ascended by $21.2-million, led by the exceptional cash flow generated from operating activities before changes in working capital of $221.2-million. The net investment in working capital amounted to $116.4-million. Inventory balances climbed by $101.1-million mainly as a result of the substantial increase in aluminum foil inventories and, to a lesser extent, due to the offering of customer inventory programs to help mitigate the unprecedented supply chain challenges. Trade and other receivables expanded by $26.2-million following the growth in revenue in the final quarter of the year relative to the fourth quarter of 2021. Largely due to higher inventory balances, trade payables and other liabilities advanced by $10.6-million. Property, plant and equipment additions were $49.1-million. The company acquired land and building adjacent to the Winnipeg, Man., modified atmosphere packaging facility to accommodate future expansion endeavours and to reduce the reliance on outside warehousing. Furthermore, new conversion capacity was added to the modified atmosphere packaging plant and the next phase of the injection moulded container initiative at the Sauk Village, Ill., rigid container site commenced. Other uses of cash included: income tax payments of $26.8-million, dividend payments of $6-million and other items amounting to $3.2-million. Net finance income produced incremental cash of $1.5-million.

Looking forward

Winpak is currently well positioned to build upon the record-setting revenue and profitability levels achieved in 2022 in both the coming year and over the long term.

Central banks raised interest rates aggressively during 2022, and by the fourth quarter, the rate of inflation declined from the peak experienced earlier in the year. Throughout 2023, it is forecast that the rate of inflation will decline considerably. This expectation, in addition to the continued easing of global supply chain disruptions, the resilience of consumer consumption in the United States and the favourable shift in COVID-19 policies in China, has improved the economic outlook for the coming year in relation to projections made in the final two quarters of 2022.

As new production capacity becomes available in 2023, business gains will be sought by the modified atmosphere packaging, biaxially oriented nylon and rigid container product groups. Additionally, both the rigid container and flexible lidding product groups will benefit from gains in retort pet food and snack food activity. New nutraceutical and pharmaceutical business has been awarded to the specialized printed packaging product group. Over all, the challenges faced in 2022 regarding supply chain and availability of labour will persist again in 2023 but are expected to moderate. On the other hand, indications are that customers will continue to significantly reduce the abnormally high level of inventories that was built up in the preceding year, reducing demand for the company's products. This headwind is projected to have a more profound influence on the first half of 2023. Taking the above factors into account, Winpak expects sales volume growth in 2023 to moderately outpace the 0.6-per-cent increase achieved in 2022.

After experiencing tremendous volatility in 2021, and to a lesser extent in 2022, current market views are for raw material costs to be relatively stable throughout the coming year in relation to the prices in effect at the start of 2023. Falling energy prices and weaker economic conditions are putting downward pressure on raw material costs. In response, suppliers have curtailed supply in order to maintain the current pricing levels to the extent possible. During the first half of 2023, Winpak should benefit from the notable drop in raw material costs that took place in the fourth quarter of 2022 as the pass-through of these declines to customers with selling price indexing agreements are estimated to be delayed by an average of four months. Although inflationary forces have begun to abate, the rate of inflation is still well above historical norms. In addition, the limited availability of labour resources will put further pressure on the company's cost structure. Rising costs will likely dampen profitability as the ability to implement additional selling price increases will be limited given the large cumulative adjustments already put into effect over the past two years.

Capital spending for the coming year is anticipated to be significantly higher than the 2022 level and is forecast to be in the range of $80-million to $90-million. Extensive preproduction activities relating to the installation of the new BOPA line in Winnipeg, Man., were undertaken during 2022 and it is currently projected that the line will be fully operational by the fourth quarter of 2023. In the second half of 2023, new co-extrusion modified atmosphere packaging and injection moulded rigid container capacity will become available and contribute favourably to the company's growth aspirations, including the strategy to enter adjacent product markets. At two of its main production facilities, Winpak is also poised to undertake sizable building expansions and acquire additional extrusion capacity. As a complement to this robust, internal capital spending plan, acquisition candidates will be considered and evaluated when they align strategically with the company's strengths in sophisticated packaging for food, beverage and health care applications, and provide a satisfactory economic return for shareholders.

We seek Safe Harbor.