Winpak Reports 2016 Fourth Quarter Results

WINNIPEG, Feb. 16, 2017 /CNW/ - Winpak Ltd. (WPK) today reports consolidated results in US dollars for the fourth quarter of 2016, which ended on December 25, 2016. 

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.

(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.  Unless otherwise required by applicable securities law, we disclaim 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 fourth quarter of 2016 amounted to $28.6 million or 44 cents in earnings per share (EPS), surpassing the 2015 corresponding result of $27.6 million or 43 cents per share by 3.4 percent.  This represented the highest earnings performance of any quarter in the Company's 40-year history.  Organic volume growth provided the impetus by advancing EPS by 3.0 cents and was aided by a further 3.0 cents for reduced operating expenses and 1.0 cent due to favorable foreign exchange impacts.  This was offset in part by a lower relative gross profit margin which reduced EPS by 4.5 cents while higher income taxes and a greater proportion of net income attributable to non-controlling interests subtracted 1.0 cent and 0.5 cents from EPS respectively.

For the year ended December 25, 2016, net income attributable to equity holders of the Company of $104.3 million or $1.61 per share eclipsed the prior year record net income of $99.2 million or $1.53 per share by a respectable 5.1 percent.  Organic volume growth propelled EPS forward by 11.0 cents while foreign exchange and reduced operating expenses added a further 5.0 cents and 2.5 cents respectively.  A reduced rate of growth in gross profit in relation to sales volumes negatively impacted EPS by 7.0 cents.  Furthermore, a larger proportion of net income attributable to non-controlling interests and higher income taxes reduced EPS by 2.0 cents and 1.5 cents correspondingly. 

Revenue
Revenue in the fourth quarter of 2016 of $215.6 million set new heights and exceeded the 2015 final quarter level of $205.7 million by 4.8 percent.  Volumes continued where they left off at the end of the first three quarters, advancing by 6.9 percent in the fourth quarter, when compared to the same period in 2015.  On a percentage basis, biaxially oriented nylon volumes led the way, accelerating by over 30 percent followed by packaging machinery and parts sales which rebounded from a slower third quarter of the year.  Specialty film shipments also recovered from their decline in the previous quarter by moving forward in low double-digit percentage terms as bottlenecks within the operation continued to be addressed.  Modified atmosphere packaging volumes ascended in the high single-digit percentage range as ongoing progress was made at securing additional business at major US protein customers.  After a particularly strong third quarter, rigid container and lidding volumes advanced by low single-digit percentage increases over the 2015 final quarter.  Custom container shipments, including specialty beverage, along with condiment packaging and trays for home meal replacements bolstered volume growth.  Lidding for yogurt applications provided further gains.  Selling price/mix changes had an unfavorable impact of 2.1 percent on 2016 fourth quarter revenues compared to the prior year corresponding period while the effect of foreign exchange on those revenues was negligible.

For 2016, revenue reached an all-time high of $822.5 million, up by 3.2 percent from the $797.2 million recorded in the previous year despite customer selling price-indexing and foreign exchange headwinds.  Volumes grew by a notable 6.8 percent with all major product groups progressing.  Consistent with the quarterly result, biaxially oriented nylon volumes had the highest percentage achievement versus the prior year.  Lidding shipments followed with high single-digit percentage gains due to new customers in foil rollstock applications along with sustained progress in die-cut lidding including retort products.  Rigid container along with specialty films and modified atmosphere packaging volumes all expanded in the mid single-digit percentage range as the areas of growth experienced in the fourth quarter were present throughout much of the year.  Although packaging machinery shipments were down from the prior year, spare part sales were robust in 2016.  Partially offsetting the positive impact of organic volume growth on annual revenues was a reduction of 3.1 percent due to selling price/mix changes as indexed selling prices fell in response to reduced raw material costs, with an approximate 90-day lag.  Likewise, the decline in the value of the Canadian dollar in comparison to its US counterpart was responsible for a decline in revenues of 0.5 percent. 

Gross profit margins
Gross profit margins of 32.2 percent of revenue in the fourth quarter of 2016 fell short of the 33.5 percent of the corresponding quarter of 2015.  This resulted in a decrease in EPS of 4.5 cents and was due to a combination of factors.  Rising raw material costs provided a squeeze on margins at non-indexed accounts as well as indexed accounts where the lag in selling prices responding to raw material cost changes resulted in a temporary contraction in gross profit.  In addition, gross profit margins were impacted by sales mix as well as elevated manufacturing variances resulting from ongoing challenges in the production of new products and certain capacity constraints.  There has been some recent progress in these areas although further improvement is required and anticipated.

For the current year, gross profit margins attained a level of 32.7 percent of revenue versus the 32.3 percent reached in 2015.  While volumes advanced by 6.8 percent in 2016, gross profit only grew by 4.5 percent from $257.8 million in 2015 to $269.3 million in the present year, resulting in a reduction in EPS of 7.0 cents.  The operational challenges mentioned previously were largely responsible for the curtailed gross profit performance.  

For reference, the following presents the weighted indexed purchased cost of Winpak's eight primary raw materials in the reported quarter and each of the preceding eight quarters, where base year 2001 = 100.  The index was rebalanced as of December 28, 2015 to reflect the mix of the eight primary raw materials purchased in 2015. 

The purchase price index has been on the rise for the last three quarters, increasing by 2.6 percent in the final three months of 2016 compared to the third quarter and 3.5 percent higher than a year earlier.  The Company's most widely used resins all experienced escalations and with the recent ascent in the price of oil, the near-term trend is also upward. 

Expenses and Other
Despite an increase in sales volume in the fourth quarter of 2016 of 6.9 percent in comparison to the corresponding quarter of 2015, operating expenses actually declined in the current quarter.  This resulted in a 3.0 cent increment in EPS with lower employee incentive expenses, including share-based compensation, playing a large role in the favorable result.  Foreign exchange was responsible for an additional 1.0 cent in EPS, primarily due to the maturation, at more favorable rates, of foreign exchange forward contracts that are an integral part of the Company's foreign exchange policy.  In contrast, a higher effective income tax rate in the final three months of 2016 in comparison to the same period in the prior year generated a decline in EPS of 1.0 cent.  Lastly, a greater proportion of net income attributable to non-controlling interests resulted in a further reduction of 0.5 cents in EPS in relation to the final quarter of 2015. 

For the 2016 fiscal year, operating expenses, exclusive of foreign exchange impacts, increased by only 4.8 percent from the prior year in contrast to the expansion in sales volume of 6.8 percent, resulting in an addition to EPS of 2.5 cents.  With the moderate incline in the Company's share price during the current year versus the nearly 40 percent surge which occurred in the previous year, the result was a significant reduction in share-based incentive expenses.  This, when combined with a one-time $1,000 CAD 40th anniversary payment made to each of the Company's over 2,200 employees in the third quarter of 2015, was more than enough to offset increases in research, technical and pre-production costs primarily related to new products and processes.  Foreign exchange had a favorable impact of 5.0 cents on EPS due to a combination of a gain on conversion of the Company's net Canadian dollar expenses into US funds at a lower average exchange rate in 2016 versus 2015 as well as the maturation of foreign exchange forward contracts at more favorable rates than the prior year.  Partially offsetting these positive effects, a larger proportion of net income attributable to non-controlling interests and a higher average income tax rate subtracted 2.0 cents and 1.5 cents from EPS respectively. 

Capital Resources, Cash Flow and Liquidity
The Company's cash and cash equivalents balance ended the current year at $211.2 million, an increase of $13.5 million from the end of the third quarter.  Winpak continued to generate strong and consistent cash flows from operating activities before changes in working capital of $50.0 million, surpassing the corresponding quarter of the prior year by $1.1 million.  Cash was utilized for net working capital additions of $3.9 million, of which $3.6 million pertained to reductions in trade payables and other liabilities as progress payments relating to capital expenditures incurred in the third quarter were paid in the current period.  Other uses of cash included $24.1 million in plant and equipment additions primarily related to the facility expansions in Sauk Village, Illinois and Senoia, Georgia; income tax payments of $6.7 million; dividends of $1.5 million; and other items totalling $0.3 million.  The Company's world-class 13-layer cast coextrusion line at its Winnipeg modified atmosphere packaging facility became commercialized in December 2016.

For the year, the cash and cash equivalents balance climbed by $46.2 million, led by the significant cash flow generation from operating activities before changes in working capital of $191.6 million.  Working capital additions utilized $20.1 million of cash primarily in trade  receivables and inventories.  In addition to the increase in these two assets that paralleled the growth of the business, trade receivables were further impacted by extended payment terms at certain customers as part of contract negotiations.  Inventories were also affected by the rise in raw material costs during the year.  Cash was further utilized for plant and equipment additions of $72.2 million, income tax payments of $44.5 million, dividends to equity holders of the Company of $5.9 million, and other items totaling $2.7 million.  The plant and equipment expenditures were at an all-time high for Winpak as the Company embarked on two significant building expansions in the year as well as a substantial investment in the latest extrusion and printing technology to support the continued advancement of organic volume growth, a consistent pillar of the corporate strategy for the past decade.  The Company remains debt-free and has unutilized operating lines of $38 million, which should be sufficient to meet all anticipated cash requirements for the foreseeable future, with the ability to increase borrowing capacity further should the need arise.

Looking Forward
Following a strong finish to 2016, the Company remains optimistic as it enters 2017 in terms of volume and earnings advancement.   Winpak continues its strategic focus on organic growth with opportunities in the sales pipeline progressing on the road to new revenue for the corporation.  In particular, additional business from North America's major food processors continue to bear fruit as these companies gain increased confidence in Winpak's capabilities and become entrenched in the outstanding customer service for which the Company has become known.  From a raw material standpoint, the prices of many of the Company's widely used resins have escalated as of late due to tightness in supply and the rise of world oil prices and while the future is uncertain, the near term trend is decidedly upward.  This should not have a significant impact on gross profit margins as nearly 70 percent of the Company's revenues are indexed to the price of raw materials, albeit with an approximate 90-day time lag.  As in 2016, the Company will remain focused on improving operational performance, particularly in those areas where capacity constraints have presented challenges and where new products and processes require more experience to optimize production.  Of note, the massive cast coextrusion line at the Company's modified atmosphere packaging plant in Winnipeg was declared commercial in the fourth quarter of the year and 2017 will see added refinements and enhancements to further improve its operation.  Capital spending for 2017 is expected to be diminished from the record-high level experienced in the current year to an amount of between $55 to $65 million, as the majority of the work on the building expansions at the Company's specialty film operations in Senoia, Georgia and its rigid container facility in Sauk Village, Illinois has been completed.   The Company will continue to invest in organic growth opportunities while pursuing acquisition prospects that fit strategically with Winpak's core competencies in sophisticated packaging for food, beverage and healthcare applications.  With Winpak's solid financial footing, it has the resources at its disposal to complete an acquisition when the proper strategic fit and price are present to provide long-term shareholder value.

Winpak Ltd.
Interim Condensed Consolidated Financial Statements
Fourth Quarter Ended: December 25, 2016

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.

SOURCE Winpak Ltd.

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