Winpak Reports 2017 First Quarter Results

Winpak (CNW Group/Winpak Ltd.)

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. 

	Quarter Ended (1)
	April 2		March 27
	2017		2016
(thousands of US dollars, except per share amounts)
Revenue	228,351		198,154
Net income	29,249		27,300
Income tax expense	13,755		12,310
Net finance expense (income)	133		(19)
Depreciation and amortization	9,125		8,331
EBITDA (2)	52,262		47,922
Net income attributable to equity holders of the Company	28,552		26,564
Net income attributable to non-controlling interests	697		736
Net income	29,249		27,300
Basic and diluted earnings per share (cents)	44		41

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. 

Quarter and Year	1/17	4/16	3/16	2/16	1/16	4/15	3/15	2/15	1/15
Purchase Price Index	147.8	143.9	140.2	138.1	136.4	139.1	147.7	152.1	156.9

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. 

Summary of Quarterly Results
	Thousands of US dollars, except per share amounts (US cents)
	Q1	Q4	Q3	Q2	Q1	Q4	Q3	Q2
	2017	2016	2016	2016	2016	2015	2015	2015
Revenue	228,351	215,550	204,699	204,129	198,154	205,746	193,726	198,257
Net income attributable to equity holders of the Company	28,552	28,578	24,036	25,166	26,564	27,635	22,305	26,845
EPS	44	44	37	39	41	43	34	41

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.

Winpak Ltd.
Condensed Consolidated Balance Sheets
(thousands of US dollars) (unaudited)
			April 2		December 25
			2017		2016
Assets
Current assets:
	Cash and cash equivalents		231,691		211,225
	Trade and other receivables		115,602		124,148
	Income taxes receivable		1,255		564
	Inventories		115,179		103,516
	Prepaid expenses		5,001		3,024
	Derivative financial instruments		41		308
			468,769		442,785
Non-current assets:
	Property, plant and equipment		418,304		409,147
	Intangible assets		14,594		14,501
	Employee benefit plan assets		7,376		6,721
	Deferred tax assets		1,003		1,060
			441,277		431,429
Total assets			910,046		874,214
Equity and Liabilities
Current liabilities:
	Trade payables and other liabilities		78,508		71,448
	Income taxes payable		6,999		6,226
	Derivative financial instruments		74		348
			85,581		78,022
Non-current liabilities:
	Employee benefit plan liabilities		9,747		9,253
	Deferred income		15,309		15,424
	Provisions		760		760
	Deferred tax liabilities		43,592		43,486
			69,408		68,923
Total liabilities			154,989		146,945
Equity:
	Share capital		29,195		29,195
	Reserves		(24)		(29)
	Retained earnings		703,564		676,478
Total equity attributable to equity holders of the Company			732,735		705,644
Non-controlling interests			22,322		21,625
Total equity			755,057		727,269
Total equity and liabilities			910,046		874,214

Winpak Ltd.
Condensed Consolidated Statements of Income
(thousands of US dollars, except per share amounts) (unaudited)
		Quarter Ended
		April 2		March 27
		2017		2016
Revenue		228,351		198,154
Cost of sales		(155,073)		(130,387)
Gross profit		73,278		67,767
Sales, marketing and distribution expenses		(17,624)		(15,232)
General and administrative expenses		(9,139)		(7,946)
Research and technical expenses		(3,774)		(3,745)
Pre-production expenses		(125)		(169)
Other income (expenses)		521		(1,084)
Income from operations		43,137		39,591
Finance income		316		133
Finance expense		(449)		(114)
Income before income taxes		43,004		39,610
Income tax expense		(13,755)		(12,310)
Net income for the period		29,249		27,300
Attributable to:
	Equity holders of the Company	28,552		26,564
	Non-controlling interests	697		736
		29,249		27,300
Basic and diluted earnings per share - cents		44		41
Condensed Consolidated Statements of Comprehensive Income
(thousands of US dollars) (unaudited)
		Quarter Ended
		April 2		March 27
		2017		2016
Net income for the period		29,249		27,300
Items that will not be reclassified to the statements of income:
Cash flow hedge gains recognized		-		32
Cash flow hedge losses transferred to property, plant and equipment		-		52
Income tax effect		-		-
		-		84
Items that are or may be reclassified subsequently to the statements of income:
Cash flow hedge gains recognized		438		1,412
Cash flow hedge (gains) losses transferred to the statements of income		(431)		724
Income tax effect		(2)		(571)
		5		1,565
Other comprehensive income for the period  - net of income tax		5		1,649
Comprehensive income for the period		29,254		28,949
Attributable to:
	Equity holders of the Company	28,557		28,213
	Non-controlling interests	697		736
		29,254		28,949

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 28, 2015			29,195	(1,208)	576,359	604,346	19,045	623,391
	Comprehensive income for the period
		Cash flow hedge gains, net of tax	-	1,067	-	1,067	-	1,067
		Cash flow hedge losses transferred to the statements of income, net of tax	-	530	-	530	-	530
		Cash flow hedge losses transferred to property, plant and equipment	-	52	-	52	-	52
	Other comprehensive income		-	1,649	-	1,649	-	1,649
	Net income for the period		-	-	26,564	26,564	736	27,300
	Comprehensive income for the period		-	1,649	26,564	28,213	736	28,949
	Dividends		-	-	(1,473)	(1,473)	-	(1,473)
Balance at March 27, 2016			29,195	441	601,450	631,086	19,781	650,867
Balance at December 26, 2016			29,195	(29)	676,478	705,644	21,625	727,269
	Comprehensive income for the period
		Cash flow hedge gains, net of tax	-	321	-	321	-	321
		Cash flow hedge losses transferred to the statements of income, net of tax	-	(316)	-	(316)	-	(316)
	Other comprehensive income		-	5	-	5	-	5
	Net income for the period		-	-	28,552	28,552	697	29,249
	Comprehensive income for the period		-	5	28,552	28,557	697	29,254
	Dividends		-	-	(1,466)	(1,466)	-	(1,466)
Balance at April 2, 2017			29,195	(24)	703,564	732,735	22,322	755,057

Winpak Ltd.
Condensed Consolidated Statements of Cash Flows
(thousands of US dollars) (unaudited)
				Quarter Ended
				April 2			March 27
				2017			2016
Cash provided by (used in):
Operating activities:
	Net income for the period				29,249		27,300
	Items not involving cash:
		Depreciation			9,383		8,555
		Amortization - deferred income			(416)		(394)
		Amortization - intangible assets			158		170
		Employee defined benefit plan expenses			916		878
		Net finance expense (income)			133		(19)
		Income tax expense			13,755		12,310
		Other			(1,770)		(1,377)
			Cash flow from operating activities before the following		51,408		47,423
	Change in working capital:
		Trade and other receivables			8,546		(1,355)
		Inventories			(11,663)		(1,044)
		Prepaid expenses			(1,977)		(1,306)
		Trade payables and other liabilities			7,058		(6,681)
	Employee defined benefit plan contributions				(1,005)		(947)
	Income tax paid				(11,864)		(15,185)
	Interest received				279		51
	Interest paid				(377)		(4)
		Net cash from operating activities			40,405		20,952
Investing activities:
	Acquisition of plant and equipment - net				(18,247)		(15,061)
	Acquisition of intangible assets				(251)		(10)
					(18,498)		(15,071)
Financing activities:
	Dividends paid				(1,441)		(1,408)
Change in cash and cash equivalents					20,466		4,473
Cash and cash equivalents, beginning of period					211,225		165,027
Cash and cash equivalents, end of period					231,691		169,500

SOURCE Winpak Ltd.

L.A. Warelis, Vice President Corporate Finance, [phone]; B.J. Berry, President and CEO, [phone]