Winpak Reports 2019 Second Quarter Results

WINNIPEG, July 25, 2019 /CNW/ - Winpak Ltd. (WPK) today reports consolidated results in US dollars for the second quarter of 2019, which ended on June 30, 2019.

	Quarter Ended				Year-To-Date Ended
	June 30 2019		July 1 2018 *		June 30 2019		July 1 2018 *
(thousands of US dollars, except per share amounts)
Revenue	219,618		225,191		443,653		446,856
Net income	31,893		28,818		61,081		55,685
Income tax expense	11,247		10,791		21,782		19,926
Net finance income	(1,304)		(130)		(2,441)		(79)
Depreciation and amortization	10,205		9,896		20,363		19,775
EBITDA (1)	52,041		49,375		100,785		95,307
Net income attributable to equity holders of the Company	31,086		28,042		59,515		54,403
Net income attributable to non-controlling interests	807		776		1,566		1,282
Net income	31,893		28,818		61,081		55,685
Basic and diluted earnings per share (cents)	48		43		92		84

Winpak Ltd. 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 healthcare applications.

^1	EBITDA is not a recognized measure under International Financial Reporting Standards (IFRS).  Management believes that in addition to net income, this measure provides useful supplemental information to investors including an indication of cash available for distribution prior to debt service, capital expenditures and income taxes.  Investors should be cautioned, however, that this measure should not be construed as an alternative to net income, determined in accordance with IFRS, as an indicator of the Company's performance.  The Company's method of calculating this measure may differ from other companies and, accordingly, the results may not be comparable.
*	The Company has initially applied IFRS 16 "Leases" at December 31, 2018.  Under the transition method chosen by the Company, comparative information has not been restated.

(presented in US dollars)

Forward-looking statements: Certain statements made in the following report contain forward-looking statements including, but not limited to, statements concerning possible or assumed future results of operations of the Company.  Forward-looking statements represent the Company's intentions, plans, expectations and beliefs, and are not guarantees of future performance.  Such forward-looking statements represent Winpak's current views based on information as at the date of this report.  They involve risks, uncertainties and assumptions and the Company's actual results could differ, which in some cases may be material, from those anticipated in these forward-looking statements.  Factors that could cause results to differ from those expected include, but are not limited to: the terms, availability and costs of acquiring raw materials and the ability to pass on price increases to customers; ability to negotiate contracts with new customers or renew existing customer contracts with less favorable terms; timely response to changes in customer product needs and market acceptance of our products; the potential loss of business or increased costs due to customer or vendor consolidation; competitive pressures, including new product development; industry capacity, and changes in competitors' pricing; ability to maintain or increase productivity levels; contain or reduce costs; foreign currency exchange rate fluctuations; changes in governmental regulations, including environmental, health and safety; changes in Canadian and foreign income tax rates, income tax laws and regulations.  Unless otherwise required by applicable securities law, Winpak disclaims any intention or obligation to publicly update or revise this information, whether as a result of new information, future events or otherwise.  The Company cautions investors not to place undue reliance upon forward-looking statements.

Financial Performance
Net income attributable to equity holders of the Company for the second quarter of 2019 of $31.1 million or 48 cents in earnings per share (EPS) compared to $28.0 million or 43 cents per share in the corresponding quarter in 2018, an increase of 10.9 percent.  The expansion in gross profit margins contributed 2.5 cents to EPS while foreign exchange elevated EPS by 2.0 cents.  Furthermore, net finance income and lower income taxes raised EPS by 1.0 cent and 0.5 cents respectively.  Conversely, higher operating expenses reduced EPS by 1.0 cent.

For the six months ended June 30, 2019, net income attributable to equity holders of the Company amounted to $59.5 million or 92 cents per share which surpassed the 2018 first half result of $54.4 million or 84 cents per share by 9.4 percent.  Enhanced gross profit margins propelled EPS forward by 6.0 cents while foreign exchange and net finance income each augmented EPS by 2.5 cents.  Higher operating expenses and a greater proportion of earnings attributable to non-controlling interests had the opposite effect by decreasing EPS by 2.5 cents and 0.5 cents accordingly. 

Operating Segments and Product Groups
The Company provides three distinct types of packaging technologies: a) rigid packaging and flexible lidding, b) flexible packaging and c) packaging machinery.  Each of the three are deemed to be a separate operating segment.

The rigid packaging and flexible lidding segment includes the rigid containers and lidding product groups.  Rigid containers includes 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 healthcare.  Lidding products are available in die-cut, daisy chain and rollstock formats and are used for applications such as food, dairy, beverage, industrial and healthcare.

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 includes 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 are ideal for food packaging applications such as cheese, fluid and viscous liquids, and industrial applications such as book covers and balloons.

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 second quarter of 2019 reached $219.6 million versus $225.2 million in the same quarter of 2018, a decrease of 2.5 percent.  Volumes contracted by 1.0 percent.  Within the rigid packaging and flexible lidding operating segment, volumes receded by 4 percent in the quarter.  The lidding product group benefitted from gains in rollstock applications.  However, a modest volume reduction within the rigid containers product group was experienced due to the loss of retort tray business and timing of customer orders.  The flexible packaging operating segment achieved volume growth of 2 percent in the quarter.  The modified atmosphere packaging product group secured additional processed meat business.  Following the exceptional results of the first quarter, biaxially oriented nylon volumes were solid again in the second quarter.  Competitive pressures with respect to less sophisticated non-barrier films, in combination with the timing of orders, caused specialty films volumes to retreat.  For the packaging machinery operating segment, sales were respectable, progressing by 6 percent.  Selling price and mix changes had a negative impact of 1.1 percent on second quarter revenues while foreign exchange lowered revenues by a further 0.4 percent.

For the first half of 2019, revenue fell by $3.2 million to $443.7 million from $446.9 million recorded in the first six months of 2018.  Volumes were essentially unchanged, declining by less than 0.5 percent.  The rigid packaging and flexible lidding operating segment recorded a decline in volumes of 6 percent.  For the lidding product group, healthy first half volumes were driven by inroads made with rollstock applications.  A reduction in retort and specialty beverage container volumes contributed to a contraction in volumes for the rigid containers product group.  The flexible packaging operating segment attained volume growth of 5 percent.  Biaxially oriented nylon volumes were robust, reflecting the organic growth at key accounts.  Modified atmosphere packaging volumes advanced by over 3 percent, mostly with protein customers.  Within the packaging machinery operating segment, growth was 6 percent.  Foreign exchange was responsible for a decrease in revenues of 0.5 percent compared to 2018.  Selling prices and changes in product mix had a limited impact on revenue in relation to the corresponding prior year period.

Gross Profit Margins
Gross profit margins for the second quarter of 2019 rose to 32.4 percent of revenue versus 30.9 percent of revenue in the comparable 2018 quarter, an improvement of 1.5 percentage points.  Raw material costs fell to a greater extent than the corresponding selling price adjustments.   The inherent timing delay in passing along price modifications to customers on formal price indexing programs contributed to this gross profit margin enhancement.  In addition, the Company's sustained focus on reducing production waste and optimizing the utilization of its manufacturing workforce generated positive results.    

For the first six months of 2019, gross profit margins of 31.6 percent of revenue exceeded the 2018 year-to-date level of 30.3 percent by 1.3 percentage points.  This translated into an increase in EPS of 6.0 cents.  Lower raw materials costs was the greatest contributor as the related selling price adjustments put forth to customers on formal price indexing arrangements did not become effective until the latter part of the second quarter.  This was augmented by cost savings achievements made in new material science, material waste and labor cost curtailment.

The raw material purchase price index declined by 2.1 percent compared to the first quarter of 2019.  However, in the last 12 months, the decrease in the index was more pronounced at 10.8 percent.  During the second quarter, polyethylene and polypropylene resin prices declined while all other major raw materials were relatively unchanged.

Expenses and Other
Operating expenses in the current quarter, exclusive of foreign exchange impacts, advanced by 2.6 percent relative to the corresponding slight decrease in sales volumes, thereby having a negative 1.0 cent impact on EPS.  Foreign exchange had a favorable effect on EPS of 2.0 cents as the weaker Canadian dollar had a positive influence on earnings as expenses exceeded revenues in that currency.  Furthermore, translation differences, which arise when Canadian dollar monetary assets and liabilities are translated at rates that change over time, were positive.  Higher rates of interest were obtained on cash and cash equivalents, uplifting net finance income and raising EPS by 1.0 cent.  Additionally, the effective income tax rate declined in the current quarter, adding 0.5 cents to EPS. 

On a year-to-date basis, operating expenses, adjusted for foreign exchange, increased at a rate of 3.5 percent in contrast to the small contraction in sales volumes, resulting in a reduction in EPS of 2.5 cents.  During the first half of 2019, one-time personnel costs were incurred for a group of employees due to the closure and relocation of an administration office.  In addition, higher research and technical expenses reflected key new product initiatives that were undertaken.  Foreign exchange had a positive influence on EPS of 2.5 cents primarily due to the conversion of the Company's net Canadian dollar expenses into US funds at a lower average rate.  Net finance income also elevated EPS by 2.5 cents and was the outcome of advancements in both the level of cash and cash equivalents on hand and the rate of interest earned thereon.  The magnitude of income attributable to non-controlling interests subtracted 0.5 cents from EPS.

Capital Resources, Cash Flow and Liquidity
The Company's cash and cash equivalents balance ended the second quarter of 2019 at $395.4 million, an increase of $32.8 million from the end of the prior quarter.  Winpak generated strong cash flows from operating activities before changes in working capital of $52.5 million.  Working capital provided $4.8 million in cash.  Trade payables and other liabilities advanced by $4.0 million, reflecting the magnitude of raw material purchases and the timing of supplier payments.  Trade and other receivables declined by $3.5 million due to the quantity of extended term accounts receivable that were sold without recourse to financial institutions in exchange for cash.  Conversely, inventory levels climbed by $2.9 million as a result of the planned build-up of finished goods inventories in advance of equipment maintenance activities scheduled for the third quarter.  Cash was used for income tax payments of $12.7 million, plant and equipment additions of $11.5 million, dividends of $1.5 million and other items totaling $0.1 million while net finance income provided cash of $1.3 million.

For the first half of 2019, the cash and cash equivalents balance advanced by $51.1 million as a result of the significant cash flow provided by operating activities before changes in working capital of $101.4 million.  Working capital generated $2.2 million in cash.   Other cash flows included $28.9 million in plant and equipment additions, income tax payments of $20.9 million, dividend payments of $2.9 million, employee defined benefit plan contributions of $2.1 million and other outflows amounting to $0.3 million.  Net finance income had a positive impact of $2.6 million.

Summary of Quarterly Results
			Thousands of US dollars, except per share amounts (US cents)
	Q2 2019		Q1 2019		Q4 2018		Q3 2018		Q2 2018		Q1 2018		Q4 2017*		Q3 2017
Revenue	219,618		224,035		222,138		220,647		225,191		221,665		222,323		218,348
Net income attributable to equity holders
of the Company	31,086		28,429		26,683		27,835		28,042		26,361		39,633		25,368
EPS	48		44		41		43		43		41		61		39

The Company has initially applied IFRS 16 "Leases" at December 31, 2018 and IFRS 15 "Revenue From Contracts With Customers" and IFRS 9 "Financial Instruments" at January 1, 2018.  Under the transition methods chosen by the Company, comparative information has not been restated.

*Includes the one-time income tax recovery of 17 cents per share due to the revaluation of deferred tax asset and liability balances within the US operations as a result of US tax reform enacted in December 2017.

Looking Forward
Business Outlook
The Company remains optimistic on earnings performance for the balance of 2019.  Enhanced gross profit margins in the second quarter were a result of the continued decline in certain raw material resin costs and notable productivity gains across the manufacturing operations.  Sales volumes were essentially flat in the first six months of the year and expectations for the second half are for improved volumes albeit with similar variability amongst the Company's product groups.  Winpak continues to develop new revenue prospects with existing and new customers and the timing for commercialization of these opportunities remains uncertain as customers' protocols control the process.  Raw material costs for the Company's main resins experienced slight declines in the second quarter due to high supplier inventory levels and new capacity.  Since 70 percent of the Company's revenues are indexed to the price of raw materials, with a 90 to 120-day time lag, selling prices will be moving downwards in the third quarter.  Current market forecasts are for resin costs in the second half of 2019 to remain relatively stable except for polyethylene which may see further easing.  During the second quarter, the Canadian dollar strengthened in relation to the US dollar, which will more than likely have a negative impact on earnings for the last six months of 2019.

Capital spending is expected to accelerate in the second half of 2019 and finish in the $60 - $70 million range.  During the second quarter, new extrusion capacity was added at the rigid container facility in Sauk Village, Illinois.  The Mexican facility became fully operational, providing new capabilities in printing technology for flexible packaging products.  The building expansion and new state-of-the art biaxially oriented polyamide (BOPA) line in Winnipeg, Manitoba is moving forward with an expected commercial start-up in the latter part of 2020.  Winpak continues to invest in organic revenue growth opportunities with new processes, technologies and material sciences to enhance its product portfolio including new recycle-ready offerings which are becoming an important focal point in the North American plastic packaging market.  The Company continues to evaluate acquisition candidates that align strategically with Winpak's fundamental competencies in sophisticated packaging for food, beverage and health care applications all being focused on adding long-term shareholder returns.

Winpak Ltd.
Interim Condensed Consolidated Financial Statements
Second Quarter Ended: June 30, 2019

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.

Winpak Ltd.
Condensed Consolidated Balance Sheets
(thousands of US dollars) (unaudited)
			June 30 2019		December 30 2018*
Assets
Current assets:
Cash and cash equivalents			395,445		344,322
Trade and other receivables			130,129		131,851
Income taxes receivable			553		1,294
Inventories			131,608		132,318
Prepaid expenses			4,144		2,761
Derivative financial instruments			524		-
			662,403		612,546
Non-current assets:
Property, plant and equipment			462,589		453,867
Intangible assets			14,114		14,311
Employee benefit plan assets			8,912		7,507
Deferred tax assets			697		707
			486,312		476,392
Total assets			1,148,715		1,088,938
Equity and Liabilities
Current liabilities:
Trade payables and other liabilities			66,851		63,687
Contract liabilities			1,467		3,031
Provisions			660		-
Income taxes payable			2,280		3,753
Derivative financial instruments			80		2,697
			71,338		73,168
Non-current liabilities:
Employee benefit plan liabilities			11,908		11,108
Deferred income			14,258		14,786
Provisions and other long-term liabilities			-		660
Deferred tax liabilities			42,604		41,313
			68,770		67,867
Total liabilities			140,108		141,035
Equity:
Share capital			29,195		29,195
Reserves			307		(2,264)
Retained earnings			949,846		893,279
Total equity attributable to equity holders of the Company			979,348		920,210
Non-controlling interests			29,259		27,693
Total equity			1,008,607		947,903
Total equity and liabilities			1,148,715		1,088,938

*The Company has initially applied IFRS 16 "Leases" at December 31, 2018.  Under the transition method chosen by the Company, comparative information has not been restated.

Winpak Ltd.
Condensed Consolidated Statements of Income
(thousands of US dollars, except per share amounts) (unaudited)
			Quarter Ended				Year-To-Date Ended
			June 30 2019		July 1 2018*		June 30 2019		July 1 2018*
Revenue			219,618		225,191		443,653		446,856
Cost of sales			(148,359)		(155,550)		(303,264)		(311,573)
Gross profit			71,259		69,641		140,389		135,283
Sales, marketing and distribution expenses			(17,230)		(17,672)		(34,919)		(35,317)
General and administrative expenses			(7,985)		(7,702)		(16,619)		(15,675)
Research and technical expenses			(4,381)		(4,030)		(8,458)		(8,102)
Pre-production expenses			(160)		-		(160)		(115)
Other income (expenses)			333		(758)		189		(542)
Income from operations			41,836		39,479		80,422		75,532
Finance income			2,285		1,186		4,391		2,015
Finance expense			(981)		(1,056)		(1,950)		(1,936)
Income before income taxes			43,140		39,609		82,863		75,611
Income tax expense			(11,247)		(10,791)		(21,782)		(19,926)
Net income for the period			31,893		28,818		61,081		55,685
Attributable to:
Equity holders of the Company			31,086		28,042		59,515		54,403
Non-controlling interests			807		776		1,566		1,282
			31,893		28,818		61,081		55,685
Basic and diluted earnings per share - cents			48		43		92		84
Condensed Consolidated Statements of Comprehensive Income
(thousands of US dollars) (unaudited)
			Quarter Ended				Year-To-Date Ended
			June 30		July 1		June 30		July 1
			2019		2018*		2019		2018*
Net income for the period			31,893		28,818		61,081		55,685
Items that will not be reclassified to the statements of income:
Cash flow hedge gains recognized			43		-		502		101
Cash flow hedge losses (gains) transferred to property, plant and equipment			413		-		508		(235)
Income tax effect			-		-		-		-
			456		-		1,010		(134)
Items that are or may be reclassified subsequently to the statements of income:
Cash flow hedge gains (losses) recognized			585		(813)		1,276		(1,320)
Cash flow hedge losses (gains) transferred to the statements of income			309		299		855		(237)
Income tax effect			(239)		138		(570)		417
			655		(376)		1,561		(1,140)
Other comprehensive income (loss) for the period  - net of income tax			1,111		(376)		2,571		(1,274)
Comprehensive income for the period			33,004		28,442		63,652		54,411
Attributable to:
Equity holders of the Company			32,197		27,666		62,086		53,129
Non-controlling interests			807		776		1,566		1,282
			33,004		28,442		63,652		54,411

*The Company has initially applied IFRS 16 "Leases" at December 31, 2018.  Under the transition method chosen by the Company, comparative information has not been restated.

 

Winpak Ltd.
Condensed Consolidated Statements of Changes in Equity
(thousands of US dollars) (unaudited)
		Attributable to equity holders of the Company
		Share capital	Reserves	Retained earnings	Total	Non- controlling interests	Total equity
Balance at January 1, 2018*		29,195	596	788,636	818,427	25,037	843,464
Comprehensive (loss) income for the period
Cash flow hedge losses, net of tax		-	(866)	-	(866)	-	(866)
Cash flow hedge gains transferred to the statements
of income, net of tax		-	(173)	-	(173)	-	(173)
Cash flow hedge gains transferred to property, plant and
equipment		-	(235)	-	(235)	-	(235)
Other comprehensive loss		-	(1,274)	-	(1,274)	-	(1,274)
Net income for the period		-	-	54,403	54,403	1,282	55,685
Comprehensive (loss) income for the period		-	(1,274)	54,403	53,129	1,282	54,411
Dividends		-	-	(2,997)	(2,997)	-	(2,997)
Balance at July 1, 2018*		29,195	(678)	840,042	868,559	26,319	894,878
Balance at December 31, 2018		29,195	(2,264)	893,279	920,210	27,693	947,903
Comprehensive income for the period
Cash flow hedge gains, net of tax		-	1,437	-	1,437	-	1,437
Cash flow hedge losses transferred to the statements
of income, net of tax		-	626	-	626	-	626
Cash flow hedge losses transferred to property, plant and
equipment		-	508	-	508	-	508
Other comprehensive income		-	2,571	-	2,571	-	2,571
Net income for the period		-	-	59,515	59,515	1,566	61,081
Comprehensive income for the period		-	2,571	59,515	62,086	1,566	63,652
Dividends		-	-	(2,948)	(2,948)	-	(2,948)
Balance at June 30, 2019		29,195	307	949,846	979,348	29,259	1,008,607

*The Company has initially applied IFRS 16 "Leases" at December 31, 2018.  Under the transition method chosen by the Company, comparative information has not been restated. 

Winpak Ltd.
Condensed Consolidated Statements of Cash Flows
(thousands of US dollars) (unaudited)
	Quarter Ended				Year-To-Date Ended
	June 30 2019		July 1 2018*		June 30 2019		July 1 2018*
Cash provided by (used in):
Operating activities:
Net income for the period	31,893		28,818		61,081		55,685
Items not involving cash:
Depreciation	10,468		10,155		20,886		20,278
Amortization - deferred income	(383)		(394)		(755)		(782)
Amortization - intangible assets	120		135		232		279
Employee defined benefit plan expenses	908		938		1,764		1,870
Net finance income	(1,304)		(130)		(2,441)		(79)
Income tax expense	11,247		10,791		21,782		19,926
Other	(444)		(373)		(1,183)		(787)
Cash flow from operating activities before the following	52,505		49,940		101,366		96,390
Change in working capital:
Trade and other receivables	3,532		666		1,722		(8,772)
Inventories	(2,909)		(7,946)		710		(9,285)
Prepaid expenses	(170)		304		(1,383)		(1,223)
Trade payables and other liabilities	3,995		8,589		2,671		9,128
Contract liabilities	394		(224)		(1,564)		1,091
Employee defined benefit plan contributions	(107)		(122)		(2,091)		(1,831)
Income tax paid	(12,652)		(13,280)		(20,903)		(21,634)
Interest received	2,227		1,151		4,359		1,961
Interest paid	(880)		(1,007)		(1,769)		(1,782)
Net cash from operating activities	45,935		38,071		83,118		64,043
Investing activities:
Acquisition of property, plant and equipment - net	(11,547)		(20,554)		(28,862)		(33,014)
Acquisition of intangible assets	(17)		(84)		(35)		(115)
	(11,564)		(20,638)		(28,897)		(33,129)
Financing activities:
Payment of lease liabilities	(105)		-		(209)		-
Dividends paid	(1,460)		(1,513)		(2,889)		(3,063)
	(1,565)		(1,513)		(3,098)		(3,063)
Change in cash and cash equivalents	32,806		15,920		51,123		27,851
Cash and cash equivalents, beginning of period	362,639		303,890		344,322		291,959
Cash and cash equivalents, end of period	395,445		319,810		395,445		319,810

*The Company has initially applied IFRS 16 "Leases" at December 31, 2018.  Under the transition method chosen by the Company, comparative information has not been restated.

SOURCE Winpak Ltd.

L.A. Warelis, Vice President and CFO, [phone]; O.Y. Muggli, President and CEO, [phone]

Related Links

www.winpak.com