Winpak Reports 2017 First Quarter Results

WINNIPEG, April 27, 2017 /CNW/ - Winpak Ltd. (WPK) today reports consolidated results in US dollars for the first quarter of 2017, which ended on April 2, 2017. 

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 The 2017 fiscal year comprises 53 weeks and the 2016 fiscal year comprised 52 weeks.  Each quarter of 2017 and 2016 comprises 13 weeks with the exception of the first quarter of 2017, which comprised 14 weeks.

² 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.  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, 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 first quarter of 2017 of $28.6 million or 44 cents in earnings per share (EPS) exceeded the $26.6 million or 41 cents per share recorded in the corresponding quarter of 2016, an increase of 7.5 percent.  This represented the highest first quarter earnings achievement for the Company.  Strong organic volume growth elevated EPS by 6.5 cents but the effects were dampened by a contraction in gross profit margins which lowered EPS by 5.5 cents.  Reduced operating expenses and favorable foreign exchange supplemented EPS by 1.5 cents and 1.0 cent respectively.  Higher income taxes had the opposite effect, decreasing EPS by 0.5 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 2017 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 2017 first quarter was essentially the last week of the 2016 calendar year which contained several statutory holidays.  Consequently, it is estimated that this additional week contributed 6 percent to first quarter 2017 volumes and net income results.

Revenue
Revenue in the first quarter of 2017 was $228.4 million, $30.2 million or 15.2 percent greater than the first quarter of 2016.  Even normalizing for the additional week of revenues in the first quarter of 2017, the revenue level represents the highest quarterly result ever recorded by the Company.  Volume growth was substantial at 16.1 percent compared to the initial quarter of 2016.  After taking into account the additional week in the current quarter, volume growth was approximately 10 percent.  All product group volumes advanced except for specialty films.  The leading contributor to the Company's growth in volume came from rigid containers, which advanced by nearly 20 percent in the quarter relative to the first quarter of 2016 as specialty beverage, condiment and tray packaging sales were robust.  Modified atmosphere packaging volumes were strong, progressing in the high-single-digit percentage range.  Gains at major US protein processors drove success for this product group.  Biaxially oriented nylon followed up a successful 2016 with further advancement of 8 percent.  Lidding volumes exhibited mid-single-digit percentage growth due to progress at select yogurt accounts.  Packaging machinery and parts continued the strength exhibited in the final quarter of 2016, advancing more than 30 percent.  Lighter demand for specialty films resulted in volumes receding in the mid-single-digit percentage range.  Selling price/mix changes had an unfavorable effect on revenues for the quarter of 1.4 percent, while foreign exchange, due to a stronger Canadian dollar, increased revenues by 0.5 percent in comparison to the first quarter of 2016.

Gross profit margins
Gross profit margins fell to 32.1 percent of revenue in the first quarter of 2017, down from the 34.2 percent of revenue recorded in the same quarter of 2016.  The rise in raw material costs in relation to those incurred a year earlier was the main factor leading to the margin erosion, resulting in a decrease in earnings per share of 5.5 cents.  Selling price adjustments with respect to indexed accounts typically lag the change in raw material costs by three months.  Manufacturing variances, in terms of material usage and labor costs, also lowered margins in the quarter.  However, improvement is expected in the upcoming quarters as more experience is gained with new products and processes and operational efficiencies are increased.

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 26, 2016 to reflect the mix of the eight primary raw materials purchased in 2016. 

The purchase price index advanced by 2.7 percent compared to the fourth quarter of 2016.  In the last 12 months, the change in the index was even more pronounced at 8.4 percent.   Nylon, polystyrene and polypropylene resin prices increased by more than the index in the past quarter, while polyethylene prices retreated by nearly 5 percent over the same period.

Expenses and Other
Operating expenses in the quarter, adjusted for foreign exchange, progressed at a lower rate than the expansion in sales volumes in the first quarter of 2017 versus the corresponding period in 2016.  This operating leverage augmented EPS by 1.5 cents.  This outcome was achieved even with the increase in share-based incentive expenses as a result of the rise in the Company's stock price of nearly 15 percent in the quarter.  In addition, foreign exchange had a favorable effect on EPS in the first quarter of approximately 1.0 cent compared to the equivalent period in 2016 primarily due to the maturation, at more favorable rates, of foreign exchange forward contracts.  A greater effective income tax rate in the current quarter, due to a larger proportion of earnings being realized in higher income tax rate jurisdictions, decreased EPS by 0.5 cents. 

Capital Resources, Cash Flow and Liquidity
The Company's cash and cash equivalents balance ended the first quarter of 2017 at $231.7 million, an increase of $20.5 million from the end of the prior year.  Winpak continued to generate strong and consistent cash flows from operating activities before changes in working capital of $51.4 million, outpacing the first quarter of 2016 by $4.0 million.  Working capital provided an additional $2.0 million in cash.  Trade and other receivables declined by $8.5 million in the quarter.  In January 2017, the Company entered into an ongoing agreement to sell certain extended term accounts receivable without recourse to a financial institution in exchange for cash.  The increase in trade payables and other liabilities generated an additional $7.1 million in cash and stemmed from the magnitude and timing of raw material purchases.  Conversely, the incremental investment in inventory amounted to $11.7 million, a consequence of servicing the larger sales volumes and the rise in raw material costs.  Cash was utilized for plant and equipment additions of $18.2 million, income tax payments of $11.9 million, dividends of $1.4 million, employee defined benefit plan contributions of $1.0 million, and other items totaling $0.4 million.

Looking Forward
Following a solid start in volume growth in the first quarter, the Company anticipates sustained sales volume momentum and earnings performance in 2017.  Winpak continues to deliver on organic growth with opportunities progressing for new revenue streams for the Corporation.  Further business from North America's major food processors is being realized.  To enhance this position moving forward, Winpak will need to continue to gain new customer business as well as maintain sales with existing customers by renewing contracts, some of which are due to expire in the coming year.  From a raw material perspective, the prices of several of the Company's widely used resins rose considerably towards the end of 2016 and in the first quarter of 2017 due to tightness in supply in the market and the rise of world oil prices.  Price increases announced at the end of the first quarter, for certain resins, will likely lower gross profit margins in the second quarter by as much as a couple of percentage points as elevated resin costs make their way into cost of goods sold before they are reflected in higher indexed selling prices in the third quarter.  The Company will remain focused on improving manufacturing performance, principally in those areas where new product offerings require more knowledge and familiarity to enhance production capabilities.  The new state of the art coextrusion line at the Company's modified atmosphere packaging plant in Winnipeg was commercialized towards the end of 2016 and will continue to be fine tuned to improve its productivity.  The building expansions at the Company's specialty films operation in Senoia, Georgia and rigid container facility in Sauk Village, Illinois are scheduled to be completed in the second quarter of 2017.  Capital spending is expected to be lower than the record-high amount achieved in the prior year and is expected to be in the range of $55 to $65 million.  Current year expenditures will consist primarily of the costs to complete the two building expansions and additional extrusion and converting capacity.  The Company will remain committed to organic growth through capital investment and continue to pursue acquisition opportunities when the proper strategic fit and price are present and align with Winpak's core competencies of sophisticated packaging for food, beverage and healthcare applications to add long-term value to the Company's shareholders.

Winpak Ltd.
Interim Condensed Consolidated Financial Statements
First Quarter Ended: April 2, 2017

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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