Winpak Reports Third Quarter Results

Winpak Ltd.

WINNIPEG, Oct. 20, 2016 /CNW/ - Winpak Ltd. (WPK) today reports consolidated results in US dollars for the third quarter of 2016, which ended on September 25, 2016. 

	Quarter Ended				Year-To-Date Ended
	September 25		September 27		September 25		September 27
	2016		2015		2016		2015
(thousands of US dollars, except per share amounts)
Revenue	204,699		193,726		606,982		591,423
Net income	25,126		23,063		78,590		73,426
Income tax expense	11,004		10,151		36,629		33,699
Net finance (income) expense	(80)		(20)		(75)		35
Depreciation and amortization	8,607		7,964		25,329		23,639
EBITDA (1)	44,657		41,158		140,473		130,799
Net income attributable to equity holders of the Company	24,036		22,305		75,766		71,613
Net income attributable to non-controlling interests	1,090		758		2,824		1,813
Net income	25,126		23,063		78,590		73,426
Basic and diluted earnings per share (cents)	37		34		117		110

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 third quarter of 2016 of $24.0 million or 37 cents in earnings per share (EPS) eclipsed the 2015 third quarter record of $22.3 million or 34 cents per share by 7.8 percent.  Organic volume growth was the catalyst, advancing EPS by 3.0 cents and was supplemented by 1.5 cents for favorable foreign exchange impacts and 0.5 cents for reduced operating expenses.  A lower relative gross profit margin reduced EPS by 1.5 cents while a greater proportion of net income attributable to non-controlling interests deducted 0.5 cents from EPS.

For the three quarters ended September 25, 2016, net income attributable to equity holders of the Company totalled $75.8 million or $1.17 per share and exceeded the corresponding 2015 result of $71.6 million or $1.10 per share by 5.8 percent.  Organic volume growth drove EPS forward by 8.0 cents while foreign exchange added a further 4.0 cents.  A reduced rate of growth in gross profit in relation to sales volumes negatively impacted EPS by 2.5 cents.  In addition, a larger proportion of net income attributable to non-controlling interests, greater operating expenses, and higher income taxes reduced EPS by 1.5 cents, 0.5 cents and 0.5 cents respectively.

Revenue
Revenue in the third quarter of 2016 of $204.7 million exceeded the prior year level of $193.7 million by a healthy 5.7 percent.  Volume growth of 7.9 percent, when compared to the third quarter of 2015, continued the strength exhibited in the second quarter.  On a percentage basis, biaxially oriented nylon volumes led the way, advancing just over 25 percent.  Rigid container and lidding volumes were also robust, ascending between 10 to 15 percent over the prior year third quarter.  Custom container shipments, including specialty beverage, along with condiment packaging and meat trays propelled volume growth.  Foil rollstock applications including multi-pak yogurt lidding, added to the list of new customer wins.  Modified atmosphere packaging shipments were solid, progressing in the mid single-digit percentage range over the third quarter of 2015.  Continued progress at securing business at major US protein producers contributed to increased volumes.  Meanwhile, shipments were restrained by capacity constraints in specialty films which declined in the low single-digit percentage range.  Additionally, elevated machinery part sales in the quarter were not sufficient to offset a decline in new packaging machinery shipments compared to the corresponding quarter of 2015.  However, the machinery sales backlog is very strong and should provide for an uptick in revenue in the fourth quarter for this product group.  Selling price/mix changes had an unfavorable impact of 2.0 percent on 2016 third quarter revenues compared to the prior year corresponding period while the effect of foreign exchange on revenues was minimal, with a 0.2 percent decline.

For the first nine months of 2016, revenue climbed by 2.6 percent to $607.0 million from $591.4 million in the corresponding prior year period despite customer selling price-indexing and foreign exchange headwinds.  Volumes grew by a sizeable 6.8 percent with all product groups advancing except packaging machinery.  Consistent with the third quarter, biaxially oriented nylon volumes had the highest percentage gain.  Lidding shipments followed closely behind with low double-digit percentage gains due to new customers in foil rollstock applications along with continued progress in die-cut lidding including retort and specialty beverage products.  Rigid container volumes expanded in the high single-digit percentage range due to upswings in demand for condiment and retort containers as well as meat trays.  Both specialty films and modified atmosphere packaging volumes grew by mid-single digit percentages while packaging machinery volumes lagged behind the prior year record levels.  In response to reduced raw material costs, indexed selling prices drove year-to-date revenues lower as selling price/mix changes had a negative impact of 3.4 percent on sales.  Likewise, the decline in the value of the Canadian dollar in comparison to its US counterpart was responsible for a decline in revenues of 0.8 percent.    

Gross profit margins
Gross profit margins in the third quarter of 2016 equalled the corresponding quarter of 2015 on a percentage of revenue basis at 31.3 percent.  However, gross profit increased by only 5.7 percent from $60.7 million in the third quarter of 2015 to $64.1 million in the current quarter, while volumes accelerated by 7.9 percent in the same time frame.  The result was a relative decrease in EPS of 1.5 cents.  Heightened unfavorable manufacturing variances on new products and challenges with capacity constraints in certain areas were the main reasons surrounding the contraction in EPS due to gross profit changes. 

For the first three quarters of the current year, gross profit margins reached 32.9 percent of revenue compared to the 31.9 percent attained in the same period of 2015.  While volumes advanced by 6.8 percent during this time frame, gross profit only grew by 5.8 percent, resulting in a reduction in EPS of 2.5 cents.  The operational challenges mentioned previously were largely responsible for the slight pullback on margins.  

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.  

Quarter and Year	3/16	2/16	1/16	4/15	3/15	2/15	1/15	4/14	3/14
Purchase Price Index	140.2	138.1	136.4	139.1	147.7	152.1	156.9	175.1	176.2

Although the purchase price index has declined by 5.1 percent from a year ago, the last two quarters have seen an upward trend, rising 1.5 percent in the latest quarter.  Escalations in the price of certain resins occurred part way through the third quarter and will be fully reflected in the index in the fourth quarter, which should move the index higher by 3 to 4 percent, all else being equal.

Expenses and Other
Operating expenses, exclusive of foreign exchange impacts, in the third quarter of 2016 grew by 6.0 percent in relation to the 2015 comparable quarter, while sales volumes expanded by 7.9 percent.  This resulted in an addition of 0.5 cents to EPS.  Lower share-based incentive costs offset the impact of higher pre-production and new product development expenses.  Foreign exchange contributed 1.5 cents to third quarter EPS, primarily due to the maturation of foreign exchange forward contracts at more favorable rates which form an integral part of the Company's foreign exchange policy.  Lastly, a greater proportion of net income attributable to non-controlling interests subtracted 0.5 cents from the current quarter's EPS in relation to the prior year comparable period. 

On a year-to-date basis, after adjusting for foreign exchange, operating expenses increased by 7.8 percent in contrast to the 6.8 percent advancement in sales volumes, resulting in a reduction of 0.5 cents in EPS in comparison to the previous year period.  A one-time gain recorded in 2015 upon the settlement of the Company's withdrawal liability with regard to a US multiemployer pension plan was the dominant factor in offsetting operating expenses in the prior year and coupled with higher pre-production and research and technical expenses in the current year, were greater than the savings realized from lower share-based incentive costs in 2016.  Higher earnings attributable to non-controlling interests and a slightly higher income tax rate further reduced EPS by 1.5 cents and 0.5 cents respectively.  More than offsetting these reductions was the favorable impact of foreign exchange on EPS of 4.0 cents.  The decline in the average value of the Canadian dollar in contrast to its US counterpart for the first three quarters in 2016 versus 2015 had a positive effect when applied to the Company's net Canadian dollar expenses and in combination with the maturation of foreign exchange forward contracts were responsible for the favorable result. 

Summary of Quarterly Results
	Thousands of US dollars, except per share amounts (US cents)
	Q3	Q2	Q1	Q4	Q3	Q2	Q1	Q4
	2016	2016	2016	2015	2015	2015	2015	2014
Revenue	204,699	204,129	198,154	205,746	193,726	198,257	199,440	206,269
Net income attributable to equity holders
of the Company	24,036	25,166	26,564	27,635	22,305	26,845	22,463	23,343
EPS	37	39	41	43	34	41	35	36

Capital Resources, Cash Flow and Liquidity
The Company's cash and cash equivalents balance ended the third quarter of 2016 just short of $200 million at $197.7 million, an increase of $21.4 million from the end of the previous quarter.  Winpak continued to generate strong and consistent cash flows from operating activities before changes in working capital of $45.5 million, surpassing the third quarter of the prior year by $3.4 million.  Working capital additions for trade receivables and inventories were outpaced by heightened capital in progress liabilities which boosted trade payables, resulting in a net positive impact of $6.7 million on cash.  Cash was utilized for plant and equipment additions of $20.0 million, income tax payments of $9.3 million and dividends to equity holders of the Company of $1.5 million.   

For the first nine months of 2016, the cash and cash equivalents balance grew by $32.7 million from the beginning of the year, led by the significant cash flow generation from operating activities before changes in working capital of $141.6 million.  Working capital additions utilized $16.2 million of cash primarily in trade and other receivables of $13.3 million and inventories of $8.8 million.  The expansion of working capital was required to support the significant growth in sales volumes.  Other uses of cash and cash equivalents consisted of $48.2 million in plant and equipment additions, $37.8 million in income tax payments, $4.4 million in dividends paid to equity holders of the Company, $1.1 million in employee defined benefit plan contributions and other items totaling $1.2 million.  The Company remains debt-free and has unutilized operating lines of $38 million, with the ability to increase borrowing capacity further should the need arise.

Looking Forward
Following another strong quarter in the growth of the business, the Company remains optimistic in terms of volume and earnings advancement for the fourth quarter and into 2017.  Winpak continues to execute on its path of sustained growth as the opportunities in the sales pipeline progress into new business generation.  From a raw material standpoint, resin prices overall are expected to remain relatively stable for the near future with some materials projected to increase while others may decrease.  However, the recent escalation in world oil prices may put additional upward pressure on certain resin prices but this trend is difficult to predict.  Improving operational performance will remain a prime focus for the Company, particularly in those areas where capacity constraints have presented challenges.  The optimization of the manufacturing processes of new products and equipment will also be a priority.  Of note, the massive cast coextrusion line at the Company's modified atmosphere packaging plant in Winnipeg was officially launched at a ceremony held on September 13, 2016 and is expected to be manufacturing commercial product for sale in the fourth quarter of this year.  Capital spending for 2016 is projected to end the year at between $75 million and $85 million as construction continues on the facility expansions of 350,000 square feet at the rigid operations in Sauk Village, Illinois and 85,000 square feet at the specialty films unit in Senoia, Georgia.  The Company will continue to invest in organic growth opportunities while remaining open to acquisition prospects that fit strategically with Winpak's core competencies in sophisticated packaging for food, beverage and healthcare applications.

Winpak Ltd.
Interim Condensed Consolidated Financial Statements
Third Quarter Ended: September 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.

Winpak Ltd.
Condensed Consolidated Balance Sheets
(thousands of US dollars) (unaudited)
		September 25		December 27
		2016		2015
Assets
Current assets:
	Cash and cash equivalents	197,721		165,027
	Trade and other receivables	121,122		107,805
	Income taxes receivable	2,085		2,050
	Inventories	105,303		96,498
	Prepaid expenses	3,977		3,411
	Derivative financial instruments	823		40
		431,031		374,831
Non-current assets:
	Property, plant and equipment	391,569		369,436
	Intangible assets	14,410		14,745
	Employee benefit plan assets	5,963		5,723
	Deferred tax assets	1,142		1,408
		413,084		391,312
Total assets		844,115		766,143
Equity and Liabilities
Current liabilities:
	Trade payables and other liabilities	75,073		68,534
	Income taxes payable	5,844		10,569
	Derivative financial instruments	17		1,683
		80,934		80,786
Non-current liabilities:
	Employee benefit plan liabilities	10,578		8,885
	Deferred income	12,988		14,071
	Provisions	760		760
	Deferred tax liabilities	40,805		38,250
		65,131		61,966
Total liabilities		146,065		142,752
Equity:
	Share capital	29,195		29,195
	Reserves	591		(1,208)
	Retained earnings	647,672		576,359
Total equity attributable to equity holders of the Company		677,458		604,346
Non-controlling interests		20,592		19,045
Total equity		698,050		623,391
Total equity and liabilities		844,115		766,143

Winpak Ltd.
Condensed Consolidated Statements of Income
(thousands of US dollars, except per share amounts) (unaudited)
		Quarter Ended				Year-To-Date Ended
		September 25		September 27		September 25		September 27
		2016		2015		2016		2015
Revenue		204,699		193,726		606,982		591,423
Cost of sales		(140,568)		(133,033)		(407,133)		(402,544)
Gross profit		64,131		60,693		199,849		188,879
Sales, marketing and distribution expenses		(16,107)		(14,859)		(46,985)		(44,722)
General and administrative expenses		(6,869)		(7,611)		(22,055)		(23,791)
Research and technical expenses		(4,308)		(3,760)		(12,924)		(11,506)
Pre-production expenses		(782)		(356)		(1,138)		(790)
Other expenses		(15)		(913)		(1,603)		(910)
Income from operations		36,050		33,194		115,144		107,160
Finance income		177		102		434		273
Finance expense		(97)		(82)		(359)		(308)
Income before income taxes		36,130		33,214		115,219		107,125
Income tax expense		(11,004)		(10,151)		(36,629)		(33,699)
Net income for the period		25,126		23,063		78,590		73,426
Attributable to:
	Equity holders of the Company	24,036		22,305		75,766		71,613
	Non-controlling interests	1,090		758		2,824		1,813
		25,126		23,063		78,590		73,426
Basic and diluted earnings per share - cents		37		34		117		110
Condensed Consolidated Statements of Comprehensive Income
(thousands of US dollars) (unaudited)
		Quarter Ended				Year-To-Date Ended
		September 25		September 27		September 25		September 27
		2016		2015		2016		2015
Net income for the period		25,126		23,063		78,590		73,426
Items that will not be reclassified to the statements of income:
Cash flow hedge losses recognized		(23)		(447)		(3)		(490)
Cash flow hedge (gains) losses transferred to property, plant and equipment		(33)		4		19		4
Income tax effect		-		-		-		-
		(56)		(443)		16		(486)
Items that are or may be reclassified subsequently to the statements of income:
Cash flow hedge (losses) gains recognized		(387)		(1,963)		1,629		(2,910)
Cash flow hedge (gains) losses transferred to the statements of income		(86)		641		804		1,867
Income tax effect		127		353		(650)		279
		(346)		(969)		1,783		(764)
Other comprehensive (loss) income for the period  - net of income tax		(402)		(1,412)		1,799		(1,250)
Comprehensive income for the period		24,724		21,651		80,389		72,176
Attributable to:
	Equity holders of the Company	23,634		20,893		77,565		70,363
	Non-controlling interests	1,090		758		2,824		1,813
		24,724		21,651		80,389		72,176

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 29, 2014			29,195	(641)	555,697	584,251	17,136	601,387
	Comprehensive (loss) income for the period
		Cash flow hedge losses, net of tax	-	(2,166)	(455)	(2,621)	-	(2,621)
		Cash flow hedge losses transferred to the statements of income, net of tax	-	1,367	-	1,367	-	1,367
		Cash flow hedge losses transferred to property, plant and equipment	-	4	-	4	-	4
	Other comprehensive loss		-	(795)	(455)	(1,250)	-	(1,250)
	Net income for the period		-	-	71,613	71,613	1,813	73,426
	Comprehensive (loss) income for the period		-	(795)	71,158	70,363	1,813	72,176
	Dividends		-	-	(77,818)	(77,818)	(646)	(78,464)
Balance at September 27, 2015			29,195	(1,436)	549,037	576,796	18,303	595,099
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	-	1,234	-	1,234	-	1,234
		Cash flow hedge losses transferred to the statements of income, net of tax	-	19	-	19	-	19
		Cash flow hedge losses transferred to property, plant and equipment	-	546	-	546	-	546
	Other comprehensive income		-	1,799	-	1,799	-	1,799
	Net income for the period		-	-	75,766	75,766	2,824	78,590
	Comprehensive income for the period		-	1,799	75,766	77,565	2,824	80,389
Dividends			-	-	(4,453)	(4,453)	(1,277)	(5,730)
Balance at September 25, 2016			29,195	591	647,672	677,458	20,592	698,050

Winpak Ltd.
Condensed Consolidated Statements of Cash Flows
(thousands of US dollars) (unaudited)
				Quarter Ended				Year-To-Date Ended
				September 25		September 27		September 25		September 27
				2016		2015		2016		2015
Cash provided by (used in):
Operating activities:
	Net income for the period			25,126		23,063		78,590		73,426
	Items not involving cash:
		Depreciation		8,834		8,210		25,995		24,384
		Amortization - deferred income		(390)		(395)		(1,164)		(1,193)
		Amortization - intangible assets		163		149		498		448
		Employee defined benefit plan expenses		793		769		2,615		2,494
		Multiemployer defined benefit pension plan withdrawal liability settlement gain		-		-		-		(1,815)
		Net finance (income) expense		(80)		(20)		(75)		35
		Income tax expense		11,004		10,151		36,629		33,699
		Other		11		113		(1,477)		(1,445)
			Cash flow from operating activities before the following	45,461		42,040		141,611		130,033
	Change in working capital:
		Trade and other receivables		(3,408)		(769)		(13,317)		5,186
		Inventories		(1,156)		2,166		(8,805)		2,953
		Prepaid expenses		797		412		(566)		(539)
		Trade payables and other liabilities		10,446		(37)		6,456		(3,154)
	Provisions			-		-		-		(4,467)
	Employee defined benefit plan contributions			(101)		(86)		(1,138)		(1,254)
	Income tax paid			(9,263)		(6,697)		(37,837)		(19,781)
	Interest received			148		79		346		207
	Interest paid			(2)		(1)		(64)		(16)
			Net cash from operating activities	42,922		37,107		86,686		109,168
Investing activities:
	Acquisition of plant and equipment - net			(20,002)		(14,553)		(48,163)		(36,819)
	Acquisition of intangible assets			(42)		(57)		(171)		(226)
				(20,044)		(14,610)		(48,334)		(37,045)
Financing activities:
	Dividends paid			(1,500)		(1,583)		(4,381)		(4,809)
	Dividend paid to non-controlling interests in subsidiary			-		-		(1,277)		(646)
				(1,500)		(1,583)		(5,658)		(5,455)
Change in cash and cash equivalents				21,378		20,914		32,694		66,668
Cash and cash equivalents, beginning of period				176,343		189,515		165,027		143,761
Cash and cash equivalents, end of period				197,721		210,429		197,721		210,429

SOURCE Winpak Ltd.

Image with caption: "WINPAK (CNW Group/Winpak Ltd.)". Image available at: http://photos.newswire.ca/images/download/20161019_C2208_PHOTO_EN_799882.jpg

K.P. Kuchma, Vice President and CFO, [phone]; B.J. Berry, President and CEO, [phone]