Winpak Reports 2020 First Quarter Results

WINNIPEG, May 5, 2020 /CNW/ - Winpak Ltd. (WPK) today reports consolidated results in US dollars for the first quarter of 2020, which ended on March 29, 2020.

	Quarter Ended
	March 29		March 31
	2020		2019
(thousands of US dollars, except per share amounts)
Revenue	213,596		224,035
Net income	23,546		29,188
Income tax expense	8,605		10,535
Net finance income	(1,030)		(1,137)
Depreciation and amortization	10,835		10,158
EBITDA (1)	41,956		48,744
Net income attributable to equity holders of the Company	23,155		28,429
Net income attributable to non-controlling interests	391		759
Net income	23,546		29,188
Basic and diluted earnings per share (cents)	36		44

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, payment of lease liabilities 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.

(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; ability to 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.  In addition, factors arising as a result of the Coronavirus (COVID-19) global pandemic that could cause results to differ from those expected include, but are not limited to: potential government actions, changes in consumer behaviors and demand, changes in customer requirements, disruptions of the Company's suppliers and supply chain, availability of personnel and uncertainty about the extent and duration of the pandemic.  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 first quarter of 2020 of $23.2 million or 36 cents in earnings per share (EPS) decreased by 18.6 percent from the $28.4 million or 44 cents per share recorded in the corresponding quarter in 2019.  Foreign exchange reduced EPS by 3.5 cents.  Additionally, the lower sales volumes and the contraction in gross profit margins each caused EPS to decline by 2.5 cents.  A lesser proportion of earnings attributable to non-controlling interests raised EPS by 0.5 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 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.  Specialized printed packaging provides packaging solutions to the pharmaceutical, healthcare, 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 2020 of $213.6 million was $10.4 million or 4.7 percent below the initial quarter of 2019.  Normalizing for the revenue stemming from the acquisition of Control Group in 2019, volumes contracted by 5.6 percent from the prior year comparable quarter.  The flexible packaging operating segment experienced volume growth of 3 percent in the quarter.  The modified atmosphere packaging product group benefitted from elevated order levels with respect to retail food customers towards the end of the quarter, which eclipsed the diminished order levels from customers that serve the restaurant and food service industries.  Additionally, growth within the Mexican market contributed to the positive result.  Volumes within the rigid packaging and flexible lidding operating segment receded by 12 percent in the quarter after adjusting for the Control Group acquisition.  The significant downturn in rigid container volumes reflected the reduced participation in supplying the specialty beverage business with the new recyclable polypropylene cup.  Conversely, the modest growth in lidding product group volumes was due to gains in specialty beverage lidding.  For the packaging machinery operating segment, volumes retreated by over 40 percent, a consequence of the exceptionally high number of machines that were shipped during the first quarter of 2019.  However, the machinery sales backlog is very strong, which will favorably influence revenue for the balance of the year.  Selling price and mix changes had an unfavorable impact of 1.9 percent on first quarter revenue while the effect of foreign exchange on revenue was negligible.

Gross Profit Margins
Gross profit margins in the current quarter of 30.0 percent dropped by 0.9 percentage points from the 2019 first quarter result of 30.9 percent.  Lower sales volumes led to heightened manufacturing costs per unit of production due to lower equipment utilization, generating a reduction in gross profit margins.  This was partially mitigated by raw material costs declining to a greater extent than the related selling price adjustments.  This expansion in margins resulted from the timing of selling price pass-through adjustments to customers on formal price indexing programs. 

The raw material purchase price index dropped by 2.0 percent compared to the fourth quarter of 2019.  In the past 12 months, the decrease in the index was more pronounced at 8.9 percent.  During the first quarter, polypropylene resin prices fell by 13 percent while all other major raw materials were relatively unchanged.

Expenses and Other
In the first quarter of 2020, operating expenses, exclusive of foreign exchange and the acquisition of Control Group, receded at a similar rate relative to the contraction in sales volumes, thereby having an insignificant impact on EPS.  Foreign exchange subtracted 3.5 cents from EPS in the quarter due to the negative translation differences recorded on the revaluation of monetary assets and liabilities denominated in both Canadian dollars and Mexican pesos.  The magnitude of income attributable to non-controlling interests elevated EPS by 0.5 cents.

Capital Resources, Cash Flow and Liquidity
The Company's cash and cash equivalents balance ended the first quarter at $417.4 million, an increase of $20.2 million from the end of the prior year.  Winpak continued to generate solid cash flow from operating activities before changes in working capital of $42.5 million.  Cash was consumed by net working capital additions of $6.8 million.  Trade payables and other liabilities declined by $7.2 million, reflecting the timing of supplier payments.  In addition, cash was utilized for income tax payments of $7.3 million, plant and equipment expenditures of $6.4 million, dividend payments of $1.5 million, employee defined benefit plan contributions of $1.3 million and other items totaling $0.1 million while net finance income provided cash of $1.1 million.

Summary of Quarterly Results

			Thousands of US dollars, except per share amounts (US cents)
	Q1		Q4		Q3		Q2		Q1		Q4		Q3		Q2
	2020		2019		2019		2019		2019		2018		2018		2018
Revenue	213,596		217,456		212,734		219,618		224,035		222,138		220,647		225,191
Net income attributable to equity holders
of the Company	23,155		26,679		28,578		31,086		28,429		26,683		27,835		28,042
EPS	36		41		44		48		44		41		43		43

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

Looking Forward
Winpak, along with all businesses throughout the world, is closely monitoring the Coronavirus (COVID-19) pandemic with the utmost importance and fully embraces its corporate responsibility to undertake every necessary measure to help limit the impact of COVID-19.  This includes the health and safety of our employees, families and communities and our customers and suppliers.  The Company's facilities are classified as being an essential provider of packaging materials and machinery for the food, beverage and healthcare industries.  Our customers depend on us to continuously supply packaging materials and machinery to support their respective supply chains and Winpak will endeavour to do its best to satisfy these critical needs.

Commencing in the middle of March, customer order volumes have changed in earnest reflecting the pronounced shift in consumer behavior with elevated buying at the retail level due to pantry loading and increased at-home food consumption.  However, the demand for products in the restaurant and food service industry has deteriorated considerably.  The flexible packaging segment has experienced a sizeable increase in orders within the protein and cheese markets.  Several of our customers' protein plants have been shut down, for up to two weeks, due to COVID-19 cases within their operations which may negatively affect their future order levels.  This segment has had a notable softening in order activity in the food service and non-food retail markets.  The lidding product group has had a moderate uptick in volumes within the specialty beverage, food rollstock and case ready meat categories with other die-cut lidding remaining steady.  Rigid container products have realized moderate expansion in fresh meat trays along with newly awarded pet food retort tray business scaling-up in the second quarter.  However, sizeable volume reductions have been evident in single-serve rigid containers for the food service sector.  Unrelated to the effects of COVID-19, rigid containers had a substantial contraction in volumes as a result of the diminished supply position with the new recyclable specialty beverage polypropylene cup which is expected to continue into the future.  The packaging machinery segment has a healthy machine order backlog which should keep it operating at capacity for the remainder of 2020.  For the near term, plant operations are being closely monitored to ensure everything possible is being done to provide a safe work place for our dedicated employees and where possible, production will be distributed amongst Winpak facilities to manage capacity and fulfill customer orders. To date, the raw material supply chain has remained relatively resilient which has enabled our plants to continue operating.  The dramatic collapse in world oil prices, from over supply and weakened demand due to the pandemic, has lowered certain raw material resin costs.  The costs for the Company's three primary resins are forecasted to decline in the second quarter and then possibly move upwards in the second half of 2020.  Presently, the magnitude of the potential reductions in these resin costs is difficult to ascertain.  In the short term, these decreases would be a catalyst for enhanced gross profit margins.  The decline in resin costs will lower customer selling prices in the next six months as 66 percent of the Company's revenues are indexed albeit with a three to four-month time lag.  Should the current weakness in the Canadian dollar persist, the effect will be to reduce revenues but increase net income, as Canadian dollar denominated costs exceed revenues in that currency.  However, for 2020, the positive effect on net income would be minimal due to foreign exchange hedges in place. The recent reductions in North American interest rates will negatively affect finance income for the balance of the year.

Capital spending was relatively light in the first quarter, due mainly to timing of supplier payments, and expenditures are forecasted to be in the range of $50 to $60 million for the year.  Given the pandemic, there is a degree of uncertainty as to the timing of completing certain projects due to potential procurement delays with equipment suppliers in North America and Europe.  At the Winnipeg, Manitoba modified atmosphere packaging plant, expenditures are focused on adding cast co-extrusion capacity, including upgrades and modifications to existing lines, which will enhance the Company's capabilities and product portfolio with a new generation of recyclable/reusable high-barrier thermoformable films.  The new biaxially oriented polyamide (BOPA) line and building expansion in Winnipeg, Manitoba is progressing with commercial start-up planned for the second quarter of 2021.  Other notable capital projects include: additional converting capacity at the Norwood, New Jersey plant and relocation of the packaging machinery operations from San Bernardino to Rialto, California, occupying a new, considerably expanded leased facility.  Due to COVID-19, the Company will take a pause in actively pursuing potential acquisition opportunities and will focus its efforts on being an essential supplier of packaging materials to our customers.  Winpak has a solid balance sheet with significant cash resources on hand, unused credit facilities comprised of unsecured operating lines of $38 million and strong cash flows from operations to enable the Company to function effectively during the COVID-19 pandemic.

Winpak Ltd.
Interim Condensed Consolidated Financial Statements
First Quarter Ended: March 29, 2020

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)
	March 29		December 29
	2020		2019
Assets
Current assets:
Cash and cash equivalents	417,385		397,159
Trade and other receivables	141,467		141,855
Income taxes receivable	6,009		1,253
Inventories	127,109		130,467
Prepaid expenses	4,859		2,715
Derivative financial instruments	-		527
	696,829		673,976
Non-current assets:
Property, plant and equipment	482,593		489,267
Intangible assets	36,937		37,326
Employee benefit plan assets	11,176		11,131
Deferred tax assets	667		688
	531,373		538,412
Total assets	1,228,202		1,212,388
Equity and Liabilities
Current liabilities:
Trade payables and other liabilities	56,832		64,134
Contract liabilities	2,489		3,715
Provisions	149		149
Income taxes payable	283		3,529
Derivative financial instruments	1,697		8
	61,450		71,535
Non-current liabilities:
Employee benefit plan liabilities	11,878		11,411
Deferred income	13,883		14,237
Provisions and other long-term liabilities	4,590		4,839
Deferred tax liabilities	50,110		44,604
	80,461		75,091
Total liabilities	141,911		146,626
Equity:
Share capital	29,195		29,195
Reserves	(1,243)		380
Retained earnings	1,026,963		1,005,202
Total equity attributable to equity holders of the Company	1,054,915		1,034,777
Non-controlling interests	31,376		30,985
Total equity	1,086,291		1,065,762
Total equity and liabilities	1,228,202		1,212,388

Winpak Ltd.
Condensed Consolidated Statements of Income
(thousands of US dollars, except per share amounts) (unaudited)
	Quarter Ended
	March 29		March 31
	2020		2019
Revenue	213,596		224,035
Cost of sales	(149,427)		(154,905)
Gross profit	64,169		69,130
Sales, marketing and distribution expenses	(17,701)		(17,689)
General and administrative expenses	(8,093)		(8,634)
Research and technical expenses	(4,053)		(4,077)
Pre-production expenses	(178)		-
Other expenses	(3,023)		(144)
Income from operations	31,121		38,586
Finance income	1,659		2,106
Finance expense	(629)		(969)
Income before income taxes	32,151		39,723
Income tax expense	(8,605)		(10,535)
Net income for the period	23,546		29,188
Attributable to:
Equity holders of the Company	23,155		28,429
Non-controlling interests	391		759
	23,546		29,188
Basic and diluted earnings per share - cents	36		44
Condensed Consolidated Statements of Comprehensive Income
(thousands of US dollars) (unaudited)
	Quarter Ended
	March 29		March 31
	2020		2019
Net income for the period	23,546		29,188
Items that will not be reclassified to the statements of income:
Cash flow hedge gains recognized	-		459
Cash flow hedge losses transferred to property, plant and equipment	-		95
Income tax effect	-		-
	-		554
Items that are or may be reclassified subsequently to the statements of income:
Cash flow hedge (losses) gains recognized	(2,143)		691
Cash flow hedge (gains) losses transferred to the statements of income	(73)		546
Income tax effect	593		(331)
	(1,623)		906
Other comprehensive (loss) income for the period  - net of income tax	(1,623)		1,460
Comprehensive income for the period	21,923		30,648
Attributable to:
Equity holders of the Company	21,532		29,889
Non-controlling interests	391		759
	21,923		30,648

Winpak Ltd.
Condensed Consolidated Statements of Changes in Equity
(thousands of US dollars) (unaudited)
	Attributable to equity holders of the Company
					Non-
	Share		Retained		controlling
	capital	Reserves	earnings	Total	interests	Total equity
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	-	965	-	965	-	965
Cash flow hedge losses transferred to the statements
of income, net of tax	-	400	-	400	-	400
Cash flow hedge losses transferred to property, plant and
equipment	-	95	-	95	-	95
Other comprehensive income	-	1,460	-	1,460	-	1,460
Net income for the period	-	-	28,429	28,429	759	29,188
Comprehensive income for the period	-	1,460	28,429	29,889	759	30,648
Dividends	-	-	(1,460)	(1,460)	-	(1,460)
Balance at March 31, 2019	29,195	(804)	920,248	948,639	28,452	977,091
Balance at December 30, 2019	29,195	380	1,005,202	1,034,777	30,985	1,065,762
Comprehensive (loss) income for the period
Cash flow hedge losses, net of tax	-	(1,570)	-	(1,570)	-	(1,570)
Cash flow hedge gains transferred to the statements
of income, net of tax	-	(53)	-	(53)	-	(53)
Other comprehensive loss	-	(1,623)	-	(1,623)	-	(1,623)
Net income for the period	-	-	23,155	23,155	391	23,546
Comprehensive (loss) income for the period	-	(1,623)	23,155	21,532	391	21,923
Dividends	-	-	(1,394)	(1,394)	-	(1,394)
Balance at March 29, 2020	29,195	(1,243)	1,026,963	1,054,915	31,376	1,086,291

Winpak Ltd.
Condensed Consolidated Statements of Cash Flows
(thousands of US dollars) (unaudited)
	Quarter Ended
	March 29		March 31
	2020		2019
Cash provided by (used in):
Operating activities:
Net income for the period	23,546		29,188
Items not involving cash:
Depreciation	10,802		10,418
Amortization - deferred income	(388)		(372)
Amortization - intangible assets	421		112
Employee defined benefit plan expenses	915		856
Net finance income	(1,030)		(1,137)
Income tax expense	8,605		10,535
Other	(341)		(739)
Cash flow from operating activities before the following	42,530		48,861
Change in working capital:
Trade and other receivables	388		(1,810)
Inventories	3,358		3,619
Prepaid expenses	(2,144)		(1,213)
Trade payables and other liabilities	(7,151)		(1,324)
Contract liabilities	(1,226)		(1,958)
Employee defined benefit plan contributions	(1,299)		(1,984)
Income tax paid	(7,292)		(8,251)
Interest received	1,549		2,132
Interest paid	(477)		(889)
Net cash from operating activities	28,236		37,183
Investing activities:
Acquisition of property, plant and equipment - net	(6,387)		(17,315)
Acquisition of intangible assets	(31)		(18)
	(6,418)		(17,333)
Financing activities:
Payment of lease liabilities	(101)		(104)
Dividends paid	(1,491)		(1,429)
	(1,592)		(1,533)
Change in cash and cash equivalents	20,226		18,317
Cash and cash equivalents, beginning of period	397,159		344,322
Cash and cash equivalents, end of period	417,385		362,639

SOURCE Winpak Ltd.

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

Related Links

www.winpak.com