Mr. S.M. Taylor reports

WINPAK REPORTS 2023 FIRST QUARTER RESULTS

Winpak Ltd. has released consolidated results in U.S. dollars for the first quarter of 2023, which ended on April 2, 2023.

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 2023 of $39.3-million or 60 cents in earnings per share (EPS) exceeded the $33.9-million or 52 cents per share recorded in the corresponding quarter of 2022, an increase of 16 per cent. This represented the highest first quarter earnings achievement for the company. Organic volume growth elevated EPS by 4.5 cents. Net finance income and foreign exchange augmented EPS by four cents and 1.5 cents, respectively. The level of income attributable to non-controlling interests added a further one cent. Conversely, higher operating expenses lowered EPS by two cents. In addition, gross profit led to a contraction in EPS of one cent.

The fiscal year of the company ends on the last Sunday of the calendar year and is usually 52 weeks in duration. However, the 2023 fiscal year consists of 53 weeks, with the first quarter comprising 14 weeks, one more week than the prior year. The additional week included in the 2023 first quarter was essentially the last week of the 2022 calendar year which contained several statutory holidays. Consequently, it is estimated that this additional week contributed 6 per cent to first quarter 2023 sales volumes and net income results.

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 first quarter of 2023 was $304.5-million, $28.5-million or 10.3 per cent greater than the first quarter of 2022. Volume growth of 8.7 per cent was achieved compared with the initial quarter of 2022. After taking into account the additional week in the current quarter, volume growth was approximately 3 per cent. Within the flexible packaging operating segment, volume growth of 1 per cent was realized. For the modified atmosphere packaging group, healthy volume growth reflected enhanced demand and business gains relating primarily to protein packaging. Biaxially oriented nylon product group volumes declined significantly as several core customers continue to unwind the excessive inventory levels that accumulated during the recent period of heightened supply chain challenges. In addition, specialty film volumes decreased mainly on account of customer loss. The rigid packaging and flexible lidding operating segment posted volume growth of 8 per cent. For the lidding product group, volumes rebounded by 20 per cent. In the first quarter of 2022, volumes were constrained by the inability to procure sufficient levels of aluminum foil. Furthermore, improvements in productive capacity have been realized over the past 12 months. Rigid container volumes fell slightly as gains in retort pet food packaging were eclipsed by lower condiment container activity. Packaging machinery volumes advanced by 6 per cent. Selling price and mix changes had a modest positive effect on revenue of 2.4 per cent. Foreign exchange had a minor negative influence on revenue.

Gross profit margins

Gross profit margins narrowed to 28.8 per cent of revenue in the first quarter of 2023 from the 29.5 per cent recorded in the same quarter of 2022. Consequently, EPS was adversely impacted by one cent. The level of selling price increases moderately outpaced the corresponding rise in raw material costs, generating an increase in EPS of 6.5 cents. The company benefited from the notable drop in raw material costs that took place in the fourth quarter of 2022 and the temporary delay in passing these along to customers with formal price indexing arrangements. The impact of inflation on both consumables and personnel expenses, coupled with the incurrence of outside warehousing expenses to support the higher balance of inventories, dampened EPS by 7.5 cents.

In the first quarter of the year, the raw material purchase price index receded by 3 per cent compared with the fourth quarter of 2022. In the past 12 months, the index declined by 8 per cent. During the first quarter, nylon resin had the most sizable decrease of 17 per cent while polypropylene resin experienced an increase of 13 per cent.

Expenses and other

Operating expenses in the current quarter, adjusted for foreign exchange, progressed at a rate of 13.3 per cent which exceeded the growth in sales volumes, resulting in a reduction in EPS of two cents. Higher personnel costs were the main contributing factor. Foreign exchange raised EPS by 1.5 cents in the quarter, largely a result of the weakened value of the Canadian dollar that was in effect to translate transactions in that currency into U.S. dollars. Net finance income added four cents to EPS as the cash invested in short-term deposits and money market accounts was at much higher rates of interest than a year earlier. 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 2023 at $420.5-million, an increase of $21.8-million from the end of the prior year. Winpak continued to generate strong cash flow from operating activities before changes in working capital of $60-million. Cash was consumed by net working capital additions of $4.2-million. Inventories decreased by $6.6-million, mainly a result of the drop in raw material costs. Due to the timing of supplier payments, trade payables and other liabilities declined by $10.6-million. Cash was utilized for income tax payments of $25.5-million, property, plant and equipment expenditures of $9.4-million, dividend payments of $1.4-million, and other items totalling $1.3-million. Net finance income provided incremental cash of $3.6-million.

Looking forward

The first quarter provided solid revenue and earnings performance, and for the full year, Winpak is on pace to realize all-time highs for each of these financial metrics.

Monetary policies implemented in the United States and Canada have been successful in lowering the rate of inflation and improving the availability of labour. Throughout the remainder of 2023, it is projected that the trend of disinflation will continue and may eventually lead to deflation next year. Economic growth in North America has slowed with a mild recession forecasted for the second half of 2023. The recent stresses in the U.S. financial system appear to have stabilized; however, further turmoil could have a material impact on both economic growth and inflation.

On a normalized basis, the year started with sales volumes advancing modestly with varying results across the company's product groups. The overall trend of customers lowering the abnormally high level of inventories will continue but is expected to subside by the middle of 2023. Additionally, with production capacity coming on stream later in 2023, new business opportunities will be cultivated by the modified atmosphere packaging and rigid container product groups. Furthermore, the timing of order fulfilment within the rigid container and lidding product groups should have a positive impact on sales volumes. Conversely, the weakening economy may somewhat limit the company's growth aspirations. Winpak remains optimistic that sales volume growth for the remainder of 2023 will be in the range of 3 to 5 per cent.

In aggregate, raw material costs decreased by 12 per cent over the past six months. The pass-through of these reductions to customers with formal price indexing arrangements will be implemented, on average, after a time lag of four months. For the balance of 2023, market expectations are that overall resin prices will be relatively stable with some materials projected to increase while others may decrease. Although the long-term outlook for inflation is positive, the current rate remains well above historical norms and key components of the company's cost structure are directly impacted. The challenges experienced in attracting and retaining personnel and the resulting impact on compensation are also hampering profitability. With several competitors experiencing a much-higher-than-normal magnitude of unsold capacity, the ability to implement selling price increases in 2023 has been extremely limited. Based on the preceding factors, gross profit margins for the rest of 2023 should be comparable with the level achieved in the first quarter of the year.

We seek Safe Harbor.