Mr. O.Y. Muggli reports

WINPAK REPORTS 2023 THIRD QUARTER RESULTS

Winpak Ltd. has released consolidated results in U.S. dollars for the third quarter of 2023, which ended on Oct. 1, 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 (presented in U.S. dollars)

Net income attributable to equityholders of the company for the third quarter of 2023 of $34-million, or 52 cents in earnings per share (EPS), increased by $4.4-million, or seven cents per share, from the comparable 2022 quarter. Net finance income raised EPS by 5.5 cents. Gross profit and foreign exchange were also influential, elevating EPS by four cents and two cents, respectively. Weaker sales volumes had the opposite effect, lowering EPS by three cents. Operating expenses dampened EPS by 1.5 cents.

For the nine months ended Oct. 1, 2023, net income attributable to equityholders of the company advanced by 16.7 per cent to $113.3-million, or $1.74 per share, from the corresponding 2022 result of $97.1-million, or $1.49 per share. The improvement in gross profit was a key factor, augmenting EPS by nine cents. Net finance income and foreign exchange bolstered EPS by 14 cents and seven cents, respectively. The level of net income attributable to non-controlling interests and income taxes each added 1.5 cents to EPS. The drop in sales volumes subtracted 3.5 cents from EPS. Operating expenses reduced EPS by a further 4.5 cents.

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 2 per cent to 2023 year-to-date 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 third quarter of 2023 was $273.8-million, falling short of the prior-year comparable level of $302.5-million by 9.5 per cent. Volumes contracted by 6.0 per cent. Consistent with the experience of the second quarter, consumer demand was constrained, stifling the company's growth aspirations. Within the flexible packaging operating segment, volumes declined at the rate of 8 per cent. For the modified atmosphere packaging product group, much lower order levels for protein applications were only partially offset by the inroads made at cheese accounts. Specialty film volumes decreased by 19 per cent due to customer loss. As a result of tempered demand from core accounts, in addition to customers securing secondary sources of supply, biaxially oriented nylon product group volumes contracted by 16 per cent. Volumes for the rigid packaging and flexible lidding operating segment fell by 2 per cent. Rigid container volumes were virtually unchanged as the drop in specialty beverage container shipments was offset by enhanced retort pet food container activity. Lidding product group volumes decreased by 5 per cent due to the moderate drop in specialty beverage orders, a function of the major customer working through excess inventories. Attributed to the higher cost of capital and economic uncertainty, several packaging machinery customers have delayed order placement and volumes declined by 19 per cent as a result. Selling price and mix changes had an unfavourable impact on revenue of 3.2 per cent. Foreign exchange had a minor negative effect on revenue.

For the first nine months of 2023, revenue decreased by $23-million from the $888.8 million recorded in the corresponding prior year period. Volumes receded by 2.1 per cent. When normalizing for the additional week in the first quarter of 2023, volumes were 4 per cent lower. The flexible packaging operating segment recorded a reduction in volumes of 6 per cent. Modified atmosphere packaging product group volumes fell by 2 per cent as demand for protein and health care applications tapered off significantly. For the biaxially oriented nylon product group, volumes declined by more than 20 per cent because of customer inventory destocking and losing sole supplier status at key accounts. Stemming from customer loss, specialty film volumes retreated by 17 per cent. Within the rigid packaging and flexible lidding operating segment, volumes were essentially equivalent to the prior year. Healthy volume growth of 21 per cent for the specialized printed packaging product group was facilitated by pharmaceutical business gains. Lidding product group volumes advanced by 1 per cent. The stabilization of the aluminum foil supply contributed favourably to volume growth, however, this was substantially nullified by the performance of the specialty beverage product line. This same product line similarly influenced rigid container volumes, which decreased by 3 per cent. With the sharp drop off in new machinery orders placed in the current year, packaging machinery volumes dropped by 8 per cent. Selling price and mix changes had a positive effect on revenue of $0.6 million whereas foreign exchange lowered revenue by $5.0 million.

Gross Profit Margins

Gross profit margins in the third quarter climbed by 2.3 percentage points to 29.2 per cent of revenue from the 26.9 per cent recorded in the same quarter of 2022. Material costs, which in the prior year included the remaining aluminum foil air freight transportation expenses, declined by a much larger extent than the corresponding selling prices, generating an increase in EPS of 12.0 cents. The impact of inflation on manufacturing costs and the unfavourable operating leverage arising from weaker sales volumes was substantial, lowering EPS by 8.0 cents.

For the first nine months of 2023, gross profit margins were 29.4 per cent of revenue, expanding by 1.0 percentage point from the 28.4 per cent of revenue achieved during the 2022 year-to-date comparative period. Raw material costs dropped by 8.0 per cent whereas selling prices were virtually unchanged, generating an uplift in EPS of 38.0 cents. The pass-through of these savings onto customers governed by formal price indexing arrangements follows a contractual delay, temporarily benefitting the company. Also noteworthy were the substantial non-recurring expenses incurred in the prior year to expedite the delivery of aluminum foil to the lidding plant in Montreal. Although the rate of inflation has moderated in recent months, the cumulative effect on the company's cost structure was considerable. Simultaneously, the effective cost of production was hampered by diminished output levels, and on a combined basis, these factors lowered EPS by 29.0 cents.

The raw material purchase price index decreased by 6 per cent compared to the second quarter of 2023. In relation to a year earlier, the index has fallen by 21 per cent. During the third quarter, polypropylene and nylon resin prices each realized declines ranging between 10 and 14 per cent while other resins and aluminum foil experienced more modest reductions.

Expenses and Other

Operating expenses in the third quarter of 2023, adjusted for foreign exchange, declined at a rate that was approximately half of the corresponding deceleration in sales volumes and as such, lowered EPS by 1.5 cents. As a consequence of the inflationary environment, personnel costs advanced at a rate well above historical norms. This was partially offset by the notable drop in freight and pre-production expenses. Foreign exchange added 2.0 cents to EPS mainly on account of the diminished level of unfavourable translation differences recorded on the revaluation of monetary assets and liabilities denominated in Canadian dollars relative to the third quarter of 2022. Due to the substantial increase in the interest rates applied to the company's cash and cash equivalents, net finance income boosted EPS by 5.5 cents.

On a year-to-date basis, operating expenses, exclusive of foreign exchange, advanced at a rate of 1.2 per cent in comparison to the 2.1 per cent reduction in sales volumes, thereby having an unfavourable impact on EPS of 4.5 cents. Inflationary forces raised employee compensation expenses. In contrast, freight expenses, which were heightened in the prior year, normalized in the current year. Additionally, significant pre-production costs were incurred during 2022 to commercialize a biaxially oriented polyamide (BOPA) line. Foreign exchange had a positive effect on EPS of 7.0 cents due to favourable translation differences recorded on the revaluation of monetary assets and liabilities in comparison to unfavourable translation differences recorded in 2022. Furthermore, the company benefitted from the weakened value of the Canadian dollar that was employed to translate transactions in that currency into US dollars. Net finance income added 14.0 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. The effective income tax rate decreased by 0.5 percentage points in 2023, enhancing EPS by 1.5 cents. A smaller proportion of earnings attributable to non-controlling interests raised EPS by 1.5 cents.

Capital Resources, Cash Flow and Liquidity

The company's cash and cash equivalents balance ended the third quarter of 2023 at $513.0 million, an increase of $58.3 million from the end of the second quarter. Winpak continued to generate strong cash flows from operating activities before changes in working capital of $53.3 million. Working capital generated another $36.4 million in cash. The $26.0 million decrease in inventories was impacted by the systematic unwinding of raw materials and finished goods that had accumulated during 2022. Trade and other receivables declined by $9.0 million, reflecting the lower revenue level relative to the preceding quarter. Other cash outflows included: $22.9 million in property, plant and equipment additions, income tax payments of $10.4 million, employee defined benefit plan contributions of $1.5 million, dividend payments of $1.5 million and other items amounting to $0.3 million. Net finance income provided cash of $5.2 million.

For the first nine months of 2023, the cash and cash equivalents balance increased by $114.3 million. Cash flows generated from operating activities before changes in working capital were solid at $175.2 million. The net investment in working capital decreased by $35.9 million. The sizeable $46.4 million reduction in inventories arose due to the reversal of the strategic accumulation of raw materials in 2022 to combat supply chain challenges, especially with aluminum foil. Lower sales volumes and raw material prices also contributed to the contraction. In addition, trade and other receivables fell by $14.7 million due to the lower level of revenue in the current quarter compared to the final quarter of 2022. Stemming from the magnitude of raw material purchases, trade payables and other liabilities decreased by $18.0 million. Cash was utilized for income tax payments of $56.8 million, property, plant and equipment additions of $44.5 million, dividend payments of $4.3 million, employee defined benefit plan contributions of $2.3 million and other items totaling $1.2 million. Net finance income produced incremental cash of $12.3 million.

Looking Forward

Although profitability reached an all-time high for the first three quarters of 2023, Winpak is cautiously optimistic about the outlook for the balance of 2023 and the upcoming year. Overall, inflation has remained elevated for a longer period of time than was anticipated a year ago. This has eroded consumer demand and dampened projections for the North American economy, which is still at risk for a recession. Additionally, the effect of the developing crisis in the Middle East, especially with respect to oil prices, is unclear at the present time.

It is expected that weakened consumer demand will continue to be impactful in the upcoming quarter and at least the first half of 2024. However, it is anticipated that this headwind will be less severe than was experienced in the two most recent quarters. The company's growth strategy is focused on new product launches, new customer onboarding and customer contract renewals, especially within the rigid container, flexible lidding and modified atmosphere packaging product groups. Based on the preceding factors, the company is projecting sales volume growth in the range of 0 to 2 per cent for the final quarter of 2023.

Current market expectations are for raw material costs to be stable in the fourth quarter of 2023 and then advance moderately throughout 2024. The reduction in raw material costs over the past six months will benefit margins in the next two quarters until they are fully passed through to customer selling prices. With higher than normal unsold capacity in the product markets that the company participates, pricing pressure has intensified. Overall, gross profit margins in the fourth quarter of 2023 should be slightly higher than the immediately preceding quarter.

Capital expenditures for 2023 are forecast to be in the range of $65 to $70 million. During the third quarter, the company dedicated significant resources to the multi-year expansion project at the Winnipeg, Manitoba modified atmosphere packaging facility. As the largest capital project in Winpak's history, it will establish the foundation for sizeable volume growth and the development of sustainable packaging solutions. More immediately, a new cast co-extrusion line is scheduled for start-up in early 2024 at the same facility, targeting additional growth in the dairy market. Furthermore, the company is currently evaluating a potential building expansion at one of its key manufacturing sites. Concurrently, Winpak will continue to assess prospective 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.

Winpak Ltd.

Interim Condensed Consolidated Financial Statements

Third Quarter Ended: October 1, 2023

These interim condensed consolidated financial statements have not been audited or reviewed by the company's independent external auditors, KPMG LLP. For a complete set of notes to the condensed consolidated financial statements, refer to www.sedar.com or the company's website, www.winpak.com.

We seek Safe Harbor.