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

Good afternoon, ladies and gentlemen. My name is Jonathan Ling, and I'm your Chairman. I begin today by acknowledging the traditional custodians of the land on which we meet today and pay my respects to their elders past and present. I also acknowledge the traditional custodians of the various lands from which you all joined this meeting today. I extend that respect to Aboriginal and Torres Strait Islanders people here today, whether in person or virtual. On behalf of the directors and management of Pro-Pac, I extend a warm welcome to everyone joining us today. I'm pleased that you could join us for the 2022 Annual General Meeting of Pro-Pac Packaging Limited. We greatly appreciate your interest and attendance, whether virtually or in person. I am informed that a quorum is present, and I declare the meeting open. Before we progress further, I will spend some time explaining how the meeting will be conducted. Firstly, during today's meeting, shareholders or their appointed representatives will have the opportunity to ask questions or make comments to the company, either personally by raising their hand or joining us remotely via the Lumi platform you have logged into today. On the platform, questions will be moderated and may be amalgamated where there are multiple questions on the same topic. For those online, to ask a question during the meeting, click on the speech bubble icon at the top of the screen, type your question and then click the arrow to submit your questions. You will receive a confirmation that your question has been sent after you click on the sand arrow. The question function is open now so it would be helpful if you could submit questions as early as possible. When you submit your question, please identify which resolution it relates to. Or if it does not relate to any resolution, please indicate it is a general question. Secondly, today, all voting will be conducted by poll. For those here in person, the share registry will conduct a poll at the end of the questions on each resolution. For those online, you may cast your votes at your own pace. The polls are already open, and you will be able to see an icon on the Lumi platform that resembles a bar chat. By clicking this icon, each of the resolutions and the voting options will appear on your screen. And you may vote for a motion, against the motion or you may abstain your vote. Shareholders and proxy holders can vote by clicking on one of the applicable voting options that is displayed. There is no need to hit a submit or enter button as the vote is automatically recorded. Shareholders and proxy holders can change their vote at any time before the polls closed. The poll will remain open until the conclusion of the meeting. But if you need to leave the meeting early, you may wish to cast your vote now. At the conclusion of the meeting, voting will be collated to include all proxy votes and those cast at today's meeting. The final poll results will be announced on the ASX later today. I would now like to introduce you to my fellow directors. Leonie Valentine, a Non-Executive Director and a member of our Remuneration and Nomination Committee. Darren Brown, a Non-Executive Director and Chair of our Audit Business Risk and Compliance Committee. Both Leonie and Darren are retiring at the end of this meeting. Also in attendance is Rupert Harrington, a Non-Executive Director and Chair of the Remuneration and Nomination Committee and a member of our Audit, Business Risk and Compliance Committee. And John Cerini, our Managing Director and Chief Executive Officer. We are also joined online by Mark Blackburn, who will be formally joining the Board as an independent non-Executive Director from tomorrow and also taking on the role of Chair of the Audit, Business Risk and Compliance Committee. Mark was unable to join us here in person today. However, we extend our all welcome to him. From our executive team, I would like to introduce you to Kathleen Forbes, our General Counsel and Company Secretary; and also Domenic Romanelli, our Chief Financial Officer. Also in attendance today is Kester Brown, representing our external auditor, Ernst & Young. I'll now make some introductory comments reflecting upon our last year which will be followed by a business update from our CEO, John Cerini. The past year has been an eventful one for Pro-Pac. During the year, we successfully achieved the sale of the Rigid business for a pleasing headline price of around $53 million, after retaining debtors and creditors. The divestment was an important strategic project implemented well and ultimately, allowing the company to focus on its remaining core businesses. As a result of the divestment, we embarked upon some restructuring activity focused predominantly on reducing corporate costs and rightsizing other parts of the business. I'm pleased to report that these are almost complete, with annualized cost savings of around $10 million already being achieved. We also more recently divested our Source and Sell business, which was not part of our future strategy, particularly given its impact on working capital and the typical time between order receipt and cash receipts. The demands on working capital were unsustainable, and the benefits in removing these demands have been a key outcome for us. Towards the end of financial year 2022, we also saw a number of leadership changes, including our CEO and our CFO and the appointment of interim leadership in myself and Darren Brown until such time as permanent appointments were made. I'm pleased to say that we are now moving towards a period that we hope will bring greater stability for the company and all its stakeholders. The appointment of John Cerini, as CEO in early October 2022, sees a seasoned executive with extensive industry and manufacturing experience join us. John is well known to the company having been CEO of Integrated Packaging for 12 years before it was acquired by Pro-Pac and as well as being Pro-Pac's Chief Operating Officer for 2 years. His knowledge and experience has helped John make an immediate impact. We have also recently announced the appointment of Domenic Romanelli as CFO. Domenic is an experienced finance professional with publicly listed company experience. Domenic was CFO at Gale Pacific Limited for 2 years and has held key senior financial roles at Orica Limited, Smorgon Steel Group and BHP, spanning a 20-year period. Even though it has only been a few weeks, I'm confident Domenic's focus on our debt refinancing and responsible management of working capital will deliver the required results. Our Board has been unchanged for the last 12 months. However, the retirement of Leonie Valentine and Darren Brown at the end of this meeting brings an opportunity for a Board refresh. I would like to extend my thanks to both Darren and Leonie for their past 4 years of committed and invaluable service to the company. Both of them will be missed but no doubt, both will enjoy having a little more time on their hands, particularly given the challenging demands of the last year. I wish them both all the best. As announced earlier this month, Mark Blackburn will be joining the Board as a new independent nonexecutive director. Mark's appointment brings strong technical finance reporting and analytical skills to the Board as well as extensive experience in business planning, risk management and financial management, making him the ideal Chair of the Audit, Business Risk and Compliance Committee. Welcome, Mark. It's great to have you join us. I should note that the Board also expects to appoint 1 or 2 more directors over the next 12 months, aiming for a board size of around 5 or 6 directors. In this respect, as announced in our rights issue presentation, Pro-Pac has agreed with its major shareholder, Bennamon, that up to 2 persons nominated by Bennamon will be appointed to the Board. We expect that Bennamon will formally nominate at least 1 director in the near future. And finally, I would like to comment upon our successful capital raising launched in September and completed in October this year. We undertook a fully underwritten 1.24:1 pro rata accelerated renounceable entitlement offer to raise approximately $30 million. The offer comprised both an institutional entitlement offer and a retail entitlement offer, both of which were priced at $0.30 per share. I would like to thank all of our shareholders for their support of the capital raise. The funds have been used to pay down debt and support the working capital requirements of the business. This allowed us to reset the capital structure and allow the business to focus on stabilizing its earnings in a difficult market trading environment. The pace of change at Pro-Pac Packaging has been very demanding. On behalf of the Board of Directors, I would like to thank you, our shareholders, for your ongoing support of Pro-Pac. I'd also like to take this opportunity to acknowledge the extraordinary efforts of Pro-Pac's employees and management team during another busy and challenging year. We thank them all for their commitment and hard work in support of the company. I'm now delighted to invite our CEO and Managing Director, John Cerini, to talk to you about our financial year '22 performance, our strategy and the progress we've made with our business priorities before we address the formal items on today's agenda. Over to you, John.

Thanks, Jonathan. Good afternoon, everyone, and once again, thank you for joining us today. I'd like to begin by acknowledging the traditional owners of the land on which we meet today. I would also like to pay my respects to Elders past and present. My name is John Cerini. I am the Managing Director and CEO of Pro-Pac Packaging. Firstly, I'm delighted to be rejoining the company as CEO, and I look forward to personally meeting and reestablishing relationships with our shareholders, customers and suppliers. And I would like to thank them for support during a challenging year. Pro-Pac is fortunate to enjoy positive collaborative relationships with all its stakeholders, and we thank them for the commitment to our future. Safety is at the forefront of everything we do at Pro-Pac and must be a priority at all times. The gains made in previous years have not been repeated with safety performance impacted by the introduction of new employees across the business and the difficulty in aligning behaviors, practices and procedures to achieve a cohesive and aligned safety culture. We remain committed to further reductions as we build a disciplined safety culture throughout the group. FY '22 was a difficult year for the company, with performance adversely impacted by a number of factors. The cost of raw materials, freight and other costs increased at a faster rate than we were able to improve our selling prices. We experienced production capacity restraints, caused by shortages of labor associated with absenteeism due to COVID-19. And we incurred inefficiencies as a result of the planned rationalization program during a time where supply chains were disrupted and there was a lack of availability of skilled labor. The first quarter of FY '23 has seen some stabilization of raw materials and freight costs, giving us the opportunity to reset margins. Our production facilities are fully operational, and absenteeism is trending favorably, increasing our efficiency. As a result, our customer service levels are improving. One of the initial focuses on the new management team has been to secure new financing facilities for the group. The group has agreed on best endeavours basis to recapitalize the business financing facilities and repay all amounts outstanding under the existing syndicated debt facility. We are well advanced in the process with alternative financiers and expect that we will have completed settlement under the new facility in this quarter. My fundamental remit from the Board is to restore the company to profitability, and this is my key priority. We are focusing on margin improvement in our business through both the development of sales growth in higher value-add and higher-margin products and reducing cost structures. We have an increasing pipeline of attractive opportunities, and our priority is to use our manufacturing capabilities and expertise to convert this pipeline into profitable revenue. Our strategic investments in additional capacity and technologies have been designed to optimize manufacturing efficiency and support the growth pipeline. These include a 7-layer extruder, an HD extrusion line and an 8-color printer, all of which are expected to facilitate additional revenue. We also remain focused across -- focused on lowering costs across the organization and creating a structure to achieve a platform for a more profitable growth. As Jonathan mentioned, approximately $10 million in annualized savings has already been achieved. We continue to implement our ERP platform with finance, accounting and HR live across the entire group. We have successfully deployed supply chain and manufacturing at our Regency Park South Australia facility and will progressively roll out to further sites. This ERP will standardize processes across the organization and bring enhanced transparency and efficiency to all operations. Innovation also plays a key part in our strategic plans. We believe there are real benefits to be had for our customers and our communities through our committed approach to innovation. Near-term priorities include expanding the deployment of DuraTrac, our engineered railway sleeper, and developing new circular recycling capabilities in flexible plastic packages. The trading environment remains dynamic and uncertain. During the 4 months of the financial year-to-date, Pro-Pac has continued to focus on delivering its strategic priorities, including the returning the company to profitability. We have begun the process of restoring customer confidence and redressing the sell cost imbalance in the flexibles segment. It is pleasing to note that profitability of the industrial business continues to improve. During the first half of the 2023 financial year, we have seen the following impacts on the Pro-Pac business, high resin prices continue to impact costs during the first quarter, although we are now seeing resin prices start to stabilize. The difficulties experienced in passing through significant price increases during FY '22 has impacted relationships with our customers, which has resulted in reduced volumes in the first part of the year. The cost of manufacturing labor remains a challenge, as inflation has increased the cost of doing business across all of our sites. We will focus on the elements we can directly control and relentlessly pursue our strategic priorities. We expect the business to return to a positive pre-AASB 16 EBITDA by the end of the first half '22, and we are on track to restore profitability in the 2023 financial year. In closing, I would like to thank you, our shareholders, for your continued support. I look forward to delivering progress for you in the future. I would also like to take this opportunity to reiterate my thanks to our management and employees for their commitment, support and hard work over the last year. I will now hand you back to our Chairman to take us through the formal business of today's meeting. Thank you, Jon.

Thanks, John. Now turning to the formal part of the meeting. The explanatory statement provided with the notice of meeting sets out the reasons for each resolution. And I propose to take it as read. Shareholders voted at this meeting should also note the voting exclusion statements in relation to each resolution as set out in the notice of meeting. All voting exclusion requirements imposed by the ASX listing rules and set out in the notice of meeting have been taken into account in determining all proxy counts in relation to the resolutions proposed. I intend to vote all open proxies that I hold in favor of the resolutions. As previously mentioned, for those online, votes may be cast in relation to each item of business by clicking on the icon on the Lumi platform that resembles a bar chart, which is at the top of the screen. I'll now move to item number 1 to receive and consider the financial report of the company and of the consolidated entity for the year ended June 30, 2022 and the reports by directors and auditors thereon. The annual accounts, including the director statements and auditor's report have been provided to shareholders. Ladies and gentlemen, this item of business does not require a vote. However, the reports are open for discussion. The company's auditor is in attendance and is available to answer questions for shareholders relevant to the conduct of the audit, the preparation and content of the auditor's report, the accounting policies adopted by the company in relation to the conduct of the audit and the independence of the auditor. Are there any written questions relating to this item?

No, there's not.

No questions in prior to this item. Shareholders are also invited to indicate now if they would like to verbally ask a question and particularly for people in the room. There are no questions. We will move to the remaining resolutions for your consideration. Item number 2 is to consider and if thought fit, pass the following resolution as an ordinary resolution to receive, consider and adopt the remuneration report of the company and consolidated entity for the year ended 30th June 2022. The Corporations Act requires the preparation of a remuneration report and that a resolution be put to members that the remuneration report be adopted. Voting on the resolution is not binding on the company or the directors. However, the Board takes seriously the views of members on this matter and will be given proper consideration when we review our remuneration practices and policies. The proxy votes received in respect of this resolution are now on your screen. Are there any written questions relating to this item?

No.

There are no questions relating to this item. So therefore, shareholders are also invited to indicate now if they would like to verbally ask a question. There are no questions. So please cast your vote now. if you have not already done so. I'll now hand over to Rupert Harrington to act as Chair for the next resolution.

Thank you, Jonathan. Resolution 3 is to consider and if thought fit, pass the following resolution as an ordinary resolution. But for the purposes of clause 6 of the company's constitution and for all other purposes, shareholders' approval is given to the election of Mr. Jonathan Ling as a Director of the company. Jonathan skills and experience are set out in the notice of meeting. Relevantly, he is an experienced CEO and senior management of complex manufacturing businesses, including GUD Holdings Limited, Fletcher Building Limited, Austrim Nylex, Visy Recycling and Pacifica. Jonathan joined the Board on the 8th of April 2019. The proxy votes received in respect to this resolution are now on your screen. Are there any written questions related to this item?

No.