Winpak Reports 2018 Fourth Quarter Results

WINNIPEG, Feb. 26, 2019 /CNW/ - Winpak Ltd. (WPK) today reports consolidated results in US dollars for the fourth quarter of 2018, which ended on December 30, 2018.

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.

 (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 fourth quarter of 2018 of $26.7 million or 41 cents in earnings per share (EPS) declined by 32.7 percent from the $39.6 million or 61 cents per share recorded in the corresponding quarter of 2017.  However, the exceptional result in the prior year was greatly influenced by the United States tax reform enacted in December 2017, whereby the Company was required to recalculate the deferred tax asset and liability amounts pertaining to the temporary differences within its US subsidiaries.  This resulted in a one-time income tax recovery of $11,090 or 17.0 cents per share.  On a normalized basis, EPS fell by 3.0 cents.  Elevated operating expenses lowered EPS by 4.5 cents.  Additionally, the contraction in gross profit margins and foreign exchange each reduced EPS by 1.0 cent.  The impact of the US tax reform was also positive in the current year as the Company's effective income tax rate decreased significantly, enhancing EPS by 2.5 cents.  Net finance income supplemented EPS by 1.0 cent. 

For the year ended December 30, 2018, net income attributable to equity holders of the Company of $108.9 million or $1.68 per share decreased from the prior year's net income of $119.3 million or $1.84 per share by 8.7 percent.  Excluding the income tax recovery due to US tax reform recorded in 2017, EPS advanced by 1.0 cent.  The income tax expense recorded in 2018 with respect to income earned in the United States was the main factor, boosting EPS by 10.0 cents while the increase in net finance income and a smaller proportion of net income attributable to non-controlling interests added a further 3.0 cents and 1.0 cent respectively.  Conversely, the negative impact of foreign exchange, the contraction in gross profit margins and higher operating expenses caused EPS to decline by 4.5 cents, 3.5 cents and 3.0 cents respectively.  The lower sales volumes in the current year dampened EPS by 2.0 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 consisted of 53 weeks, with the first quarter comprising 14 weeks, one more week than the current 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 2.0 percent to both 2017 year-to-date sales volumes and net income results.

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 fourth quarter of 2018 of $222.1 million essentially matched the comparable 2017 period of $222.3 million.  Volumes, in total, were down slightly from the fourth quarter of 2017 by 1 percent.  Within the rigid containers and flexible lidding operating segment, volumes contracted by 2 percent in the quarter.  The lidding product group experienced a temporary drop in volumes due to customer order patterns with respect to specialty beverage lidding.  Furthermore, a reduction in sheet and dessert volumes contributed to weaker shipments for the rigid container group.  The flexible packaging operating segment's volumes were similar to the prior year.  Within the modified atmosphere packaging product group, volume growth was restrained in comparison to a very strong fourth quarter in 2017.  The packaging machinery operating segment had a solid quarter, outpacing the 2017 fourth quarter by 5 percent.  Selling price and mix changes had a favorable impact of 1 percent on fourth quarter revenues while the effect of foreign exchange on revenues was negligible.

For 2018, revenue reached an all-time high of $889.6 million, up by 0.3 percent from the $886.8 million recorded in the previous year.  After taking the additional week of revenues in the first quarter of 2017 into account, volumes were virtually unchanged.  The rigid containers and flexible lidding operating segment experienced a negligible drop in volumes.  For the lidding product group, rollstock materials in combination with yogurt and dessert die-cut lidding were the main factors leading the positive performance.  Conversely, sheet and dessert container shipments receded in the current year and led to an overall contraction in volumes for the rigid container product group.  The flexible packaging operating segment realized a limited uptick in volumes.  Within the modified atmosphere packaging product group, growth was challenging due to tempered demand levels at major US protein processors.  For the packaging machinery operating segment, growth was exceptional at 14 percent.  In relation to 2017, selling price and mix changes had a favorable influence on revenue of 1 percent.  The average value of the Canadian dollar in comparison to the US dollar during 2018 was essentially on par with the 2017 level.  Accordingly, foreign exchange had little impact on reported revenue.

Gross Profit Margins
Gross profit margins fell to 30.6 percent of revenue in the fourth quarter of 2018, down from the 31.3 percent of revenue recorded in the same quarter of 2017.  Due to the heightened competitive selling price pressures within key product markets, a deterioration in gross profit margins was experienced.  Additionally, the lack of sales volume growth has led to under-utilized equipment capacity, causing a reduction in gross profit margins.  

For the current year, gross profit margins reached a level of 30.4 percent of revenue, falling short of the 31.2 percent realized in 2017, culminating in a decrease in EPS of 3.5 cents.  Competitive pressures in key product markets were prevalent during the year.  This margin erosion was compounded by the rise in raw material costs compared to 2017.  These negative factors were essentially nullified through the qualification of more cost efficient raw materials and the implementation of selling price adjustments for customers on raw material price-indexing programs.  This was complemented by the significant progress that has been made in curtailing expenses relating to production waste and inventory obsolescence.  As part of the Company's long-term organic growth aspirations, sizeable investments in capital have been made in recent years, expanding the manufacturing footprint.  Consequently, the cost structure has risen whereas sales volumes remained relatively the same in the current year leading to a narrowing of gross profit margins. 

The purchase price index fell by 2.4 percent from the third quarter of 2018.  In comparison to a year earlier, the index has dropped by 1.8 percent.  During the fourth quarter, polypropylene resin experienced the most significant decrease of 10 percent while the Company's most widely used resin, polyethylene, recorded a more modest decrease of 4 percent.

Expenses and Other
In the fourth quarter of 2018, operating expenses, exclusive of foreign exchange, increased by 14.6 percent in contrast to the slight decline in sales volumes, thereby lowering EPS by 4.5 cents.  Higher personnel costs and employee benefit expenses were the main contributing factors.  Additionally, the rise in research and technical expenses reflected the level of activity that was undertaken during the quarter in support of product development initiatives.  The maturation of foreign exchange forward contracts at less beneficial rates compared to the fourth quarter of 2017 was only partially offset by the positive impact of the weaker Canadian dollar in the current quarter.  Accordingly, foreign exchange reduced EPS by 1.0 cent.  Effective January 1, 2018, the US federal statutory income tax rate decreased from 35.0 percent to 21.0 percent, generating the lower overall effective income tax rate, which provided 2.5 cents to EPS.  The cash invested in money market accounts and short-term deposits was at much higher interest rates in 2018.  Consequently, net finance income elevated EPS by 1.0 cent.

For the 2018 fiscal year, operating expenses, adjusted for foreign exchange, advanced by 1.6 percent whereas sales volumes were virtually unchanged, subtracting 3.0 cents from EPS.  Greater personnel expenses and strategic product development activities were the main catalysts.  The expansion in freight costs due to elevated fuel charges also played a role.  Furthermore, foreign exchange had an unfavorable effect on EPS of 4.5 cents due to the combined impact of losses on conversion of the Company's net Canadian dollar expenses into US funds at a higher average rate and the maturation of foreign exchange forward contracts at less favorable rates than was experienced in 2017.  More than offsetting these reductions was the much lower income tax expense which resulted from the substantial drop in the US federal statutory income tax rate and contributed 10.0 cents to EPS.   The expansion in net finance income and a smaller proportion of net income attributable to non-controlling interests provided an additional 3.0 cents and 1.0 cent to EPS respectively.

The Company has initially applied 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.

Capital Resources, Cash Flow and Liquidity
The Company's cash and cash equivalents balance ended the current year at $344.3 million, an increase of $20.8 million from the end of the third quarter.  Winpak continued to generate strong and consistent cash flow from operating activities before changes in working capital of $47.5 million.  Cash was consumed by net working capital additions of $2.7 million.  In addition, cash was utilized for property, plant and equipment additions of $16.0 million, income tax payments of $6.9 million, dividends of $1.5 million and other items totaling $0.4 million while net finance income provided cash of $0.8 million.

For the year, the cash and cash equivalents balance advanced by $52.4 million, driven by the exceptional cash flow generated from operating activities before changes in working capital of $191.4 million.  Working capital additions utilized cash of $27.7 million.  During 2018, the tariffs implemented by the US government on aluminum products caused demand for aluminum to outpace supply with the Company's aluminum foil suppliers.  To minimize the disruption on operations, alternate sources of supply were secured and the level of inventory kept on hand was increased.  This item was the overriding factor causing inventories to advance by $15.6 million.  The timing of selling extended term accounts receivable without recourse to finance institutions in exchange for cash raised trade and other receivables by $14.9 million.  Uses of cash included property, plant and equipment additions of $71.2 million, income tax payments of $33.2 million, dividends of $6.1 million and other items amounting to $2.4 million.  The property, plant and equipment expenditures included the acquisition of the building and property adjacent to the Winnipeg, Manitoba plant and a new Mexican facility which will house state of the art printing and converting technology.  Furthermore, the building expansion of the Company's biaxially oriented nylon operations and incremental extrusion capacity began during the second half of 2018.  Net finance income produced cash of $1.6 million.   

Looking Forward
Business Outlook
Entering 2019, the Company is cautiously optimistic on realizing positive overall growth in terms of sales volumes.  Mixed results were encountered in 2018 with modest volume growth in certain product markets and contractions in other product markets resulting in 2018 sales volumes being virtually unchanged.  The growth in the North American food packaging industry was slightly negative in 2018, due in part to changing consumer patterns, this may influence revenue growth to some degree with existing customers moving forward.  The Company is continuing to develop new sales opportunities however, the timing for conversion of these into new business remains uncertain as customers' protocols for new supply control the process.  Competitive pressures are expected to persist in the coming year and could negatively impact selling prices for existing products or anticipated prices for new product initiatives.  In 2018, positive selling price and mix changes were realized with the recovery of resin price increases incurred in the past year due to 73 percent of the Company's revenues being indexed to the price of raw materials albeit with a 3 to 4 month time lag. The decline and volatility in world oil prices in recent months and new resin capacity (polyethylene) coming on stream has reduced the cost of certain resins and this should translate into lower raw material prices for these resins in the first 6 months of 2019.  However, early in 2019, there has been some announced cost increases for certain resins.  Currently, there is uncertainty whether these resin increases will hold in the market and be implemented.  Given these raw material cost uncertainties, it is difficult to predict the magnitude and effect these may have on gross profit margins in first half of 2019.  As in 2018, the Company will remain focused on reducing manufacturing costs and improving operational performance, particularly in those areas where new products and processes require more refinement and experience to optimize production.

Capital expenditures of approximately $70 - $80 million are forecasted for 2019 due in part to certain progress payments on extrusion capacity expected to be incurred in late 2018 being delayed until early 2019.  New extrusion capacity is planned to be fully operational by mid 2019 at the rigid container facility in Sauk Village, Illinois.  The new Mexican plant which will accommodate increased production capacity and new capabilities in printing technology for flexible packaging products is planned to be fully operational early in the second quarter of 2019.  In addition, the building expansion and new biaxially oriented polyamide (BOPA) line capacity in Winnipeg, Manitoba is progressing with an anticipated commercial start-up in the latter half of 2020.  The Company will stay the course on capital deployment and invest in organic growth opportunities including new technologies and expanded product offerings while continuing to remain patient and evaluate acquisition prospects that align strategically with Winpak's core strengths in sophisticated packaging for food, beverage and health care applications.

Winpak Ltd.
Interim Condensed Consolidated Financial Statements
Fourth Quarter Ended: December 30, 2018

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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