Pro-Pac Packaging Limited (PPG) Earnings Call Transcript & Summary

Hello, everyone, and welcome to the Pro-Pac Packaging First Half Financial Year '22 Results Presentation. I am Tim Welsh, CEO and Managing Director of Pro-Pac Packaging group, and I'm joined by our CFO, Iona MacPherson. Our focus, as always, is on keeping our people safe. We are building a robust safety culture embedded throughout every level of the organization. Our target is zero harm. We made good progress during the half. TRIFR improved 13% and LTIFR improved 15%. We continue to deal with the difficult operating conditions and the ongoing COVID-19 pandemic, strictly adhering to all COVID safe protocols and government requirements. Importantly, we've successfully managed employee safety throughout the period, and I'd like to thank all of our people for their compliance, patience and understanding. We have been resolutely focused on delivering our strategy in the face of difficult operating conditions. Revenue growth remains a priority, and we delivered 4% growth across the group. We executed responses to a range of factors that impacted continuity of operations throughout the half, building contingency plans and a more resilient business overall. The closure of the New South Wales Chester Hill manufacturing facility is now complete, and our Centres of Excellence for Flexibles printing and conversion are now established in Dandenong, which provides a world-class platform for growth. We consolidated our Supreme Packaging acquisition into the Centres of Excellence, demonstrating the efficacy of integrating new acquisitions. Over the last 3 years, the company has invested significant capital to develop platforms for growth, including the establishment of our COEs and our ERP system. We have also invested in new technology and capacity that is being prefilled by new blue-chip customers. Our growth investment strategy is working and will continue to support the strong pipeline of new business into the future. I'll now hand over to Iona MacPherson, who will step you through the group financial results. Iona?

Thanks, Tim. During the half year, revenue grew by 4% across the group to $244.7 million, with 7% revenue growth in our core Flexibles business. Profit before tax was down by $7.5 million at $4.2 million, with the profit before tax margin down 326 basis points at 1.7% when compared to the first half of 2021. This was primarily due to challenging market conditions and the impacts of COVID-19, which manifested themselves in global supply chain disruptions; significant freight and resin price inflation; site disruptions, including closures; and labor shortages. We have already introduced responses for the majority of these issues, which Tim will take you through in a moment. The financial recovery from these responses will be realized progressively through the second half of FY '22. Moving on to Slide 7. On this slide, we've broken down the various factors that have impacted on revenue and profit before tax during the half year. Structural changes in our business include the acquisition of Supreme Packaging, which was offset by the divestment of the Integrated Machinery and the closure of our Chester Hill manufacturing facility in New South Wales. After adjusting for these structural changes, volumes were largely in line with prior corresponding period, and sales price was adjusted given the rising input costs. There have been significant increases in the costs of resin and freight. Compounding this were increased labor and off-site storage costs. The delayed recovery of these increased input costs had the most significant impact on our trading results in the first half. Finally, investments related to increased occupancy costs associated with the printing and conversion Centres of Excellence plus incremental depreciation on our new 7-layer extruder and the finance and accounting modules of the ERP that have already been rolled out. The benefits of these investments support our future growth and will be realized in the future. I'll hand back to Tim now to take you through our responses to the major events that have impacted the first half.

Our first priority throughout the pandemic has been employee safety. We've also been managing our response to some of the other impacts of COVID-19 and the challenging market conditions, starting with global supply chain disruptions. Firstly, container freight and resin supply led to significant and rapid inflation. Global shipping interruptions then resulted in unpredictable shipment timings. We have responded, firstly, with a freight surcharge that was implemented progressively from November 2021 to offset increased freight charges. Secondly, and following price increases in May 2021, significant price increases were implemented again in December. However, the timing to recover the balance of inflation will not be fully realized until the end of the second half of FY '22. Thirdly, we are deliberately holding higher inventories of key lines as a contingency and to manage security of supply. Site disruptions and labor shortages have been another impact of the pandemic. Production disruptions came from enforced site closures and absenteeism through COVID-19. There were also closures across Victorian sites due to storm activity. There were further disruptions from commissioning delays with relocated key assets from the Chester Hill site closure as well as delays in raw material availability. These production backlogs then delayed the realization of certain price increases and added additional labor and freight costs in order to service customer demand. Labor costs on several sites were substantially above expectations to address backlogs and meet customer demand, particularly in Flexibles, creating a temporary cost burden on the business. As a company, we have invested in this additional labor cost to ensure continuous customer service, while also working on a range of strategies to manage labor supply in the short, medium and long term. I'll now hand you back to Iona, who will step through further aspects of the financial results.

Thanks, Tim. There are a couple of things to note on our balance sheet. Firstly, our balance sheet has supported significant investment in new technology over the last 3 years, and that is starting now to deliver growth. Working capital has increased during the half year by $22.2 million. There are 2 key elements to this. Firstly, we are offsetting the risk of the global supply chain disruption through holding increased inventory levels. Secondly, we are carrying higher receivables. In part, as in prior years, this represents the seasonality of the agricultural sector. And in part, it reflects the current delays being experienced in our export sales, where payment is made on the delivery of goods. Our net debt increased to $82.1 million as at 31 December 2021, and our gearing increased to 3.3x. This reflected the reduction in group earnings, our higher working capital and the $9.5 million of capital expenditure that we invested in the first half, the benefits of which will be realized in the future. On operating cash flow conversion, as is usual for Pro-Pac, it's positively weighted to the second half, driven by the agricultural sector in Australia and New Zealand. A significant increase in our export sales growth in our industrial business also negatively impacted working capital in this half, with export delays extending the cash conversion cycle for these sales. A disciplined focus on planned capital expenditure has continued. Of the $9.5 million invested, growth CapEx in plant and equipment represented $4.9 million, and further investments in our ERP project represented $3 million. Moving on to Slide 11 and our financial results in the Flexibles business. Revenue in our Flexibles business grew by $9.2 million, which represented 7% growth. $4 million of this growth was due to the net impact of the Supreme acquisition and the Integrated Machinery divestments. Out of all our businesses, the COVID-19 disruptions and price inflation impacted Flexibles the most. There was a net reduction in profit before tax of $6.8 million, which reduced it to a first half outcome of $2.9 million. As a management team, we are concentrating on executing the initiatives to counter the price inflation and COVID-19 impact. And we're also reviewing opportunities to further optimize the Flexibles customer and product base and ensure optimal production across the network and product base. Of note, for the second half, we have already invested in additional production capacity. This month, a new laminator has been commissioned at the Centres of Excellence for Flexible printing and conversion in Dandenong, Victoria. And a new printer will be commissioned later in the second half. This capacity is fully presold to our customers. We also have a strong pipeline of revenue demand to support our second half earnings. Labor shortages continue to be an ongoing challenge across the market, and we will continue to focus our efforts and strategies to address this. Moving to the Industrial Specialty Packaging business, or ISP. This business has continued to grow, reporting revenue up 9% and significantly improved profit before tax, up 117% at $2.4 million. ISP continues to deliver on its strategy for growth, which is centered around developing a customer-centric value culture based on solutions-orientated partnerships. This financial outcome in ISP has been achieved despite being impacted by shipping and supply delays and by labor shortages. Pricing increases were introduced in November at the same time as the rollout of freight surcharge. As I mentioned previously, the full financial benefits of these increases will be realized progressively through the second half. And finally, our Rigid business. This business has continued to adjust well to the new COVID normal, re-basing its production levels from the peak of the pandemic. Revenue was down 12% at $31.8 million, which was in line with our expectations for this business. Their profit before tax was $1.2 million. The Rigid business has an extensive new business pipeline, and there have been several early new business wins in the first half. This, combined with recent price increases, the implementation of their freight surcharge and the realization of cost efficiencies position this business very well for the second half of the year. I'll now hand back to Tim, who will take you through our outlook for the remainder of the financial year.