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

Hello, everyone, and welcome to the Pro-Pac Packaging First Half Financial Year 2023 Results Presentation. I am John Cerini, the CEO and Managing Director of Pro-Pac Packaging Group, and I am joined by our CFO, Domenic Romanelli. Safety is our priority and is at the forefront of everything we do at Pro-Pac. Our focus, as always, is on keeping our people safe. Over 2022, our safety culture was impacted by the difficulties of achieving a cohesive and aligned safety culture while we have worked through the restructuring activities across the business. This has reflected in increases in both TRIFR and LTIFR for the period. However, over the more recent period, our LTIs have reduced from 10 for the second half of '22 to 7 for the first half of 2023. We remain committed to further improvements as we build a disciplined safety culture throughout the group. We have been resolutely focused on delivering our strategy in the face of the difficult operating conditions. Revenue for the half was $183.3 million as we focused on margin improvement, both through the development of sales 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 capital investments in additional capacity and technologies were taken to maximize manufacturing efficiency and support the growth pipeline. These capital investments have included a 7-layer extruder, HD extrusion line and an 8-color printer, all of which are expecting to facilitate additional revenue. We also remain focused on lowering costs across the organization and creating a structure to achieve more profitable growth. Innovation also plays a key role in our strategic plans. We believe there are real benefits for our customers and our communities through our committed approach to innovation. Near-term priorities include the development of Duratrack, our engineered railways sleeper and developing new circular recycling capabilities in our Flexibles business. Pleasingly, we are starting to see initial positive signs from this work in recent times. I will now hand over to Domenic, who will step you through the group financial results.

Thank you, John. Our revenue for the first half was $183.3 million, a decrease of 2% on the first half of FY '22, which, as John mentioned, reflects the impact of site consolidation and renewed focus on the more profitable market segments. EBITDA pre-AASB 16 for the first half of the 2023 financial year was a loss of $0.8 million. However, towards the end of the 2022 calendar year, the results were trending in a more profitable direction. This will start to occur as our selling prices became better aligned to our significantly increased cost structures. Pleasingly, this half year result had a considerably reduced level of significant items. Moving on to Slide 8. Our working capital increased by $12.3 million for the half year to $83.4 million, up from $71.1 million at 30 June 2022. This increase was as expected, and we significantly reduced our trade payables for the period by $23 million, following the successful completion of our $30 million rights issue during the first half. During the half year, we saw improvements within our receivables and inventory balances. In December, the group successfully refinanced its previously syndicated debt facilities through the establishment of a $30 million debtor finance facility. All syndicated debt facilities were fully repaid at this time. However, we maintained our overdraft facility. This all resulted in a net debt reducing from $23.7 million at 30 June 2022 to $16.3 million at 31 December 2022. Cash flows from operating activities were an outflow of $15.5 million, which was predominantly due to the significant reduction in trade creditors of $23 million, as previously mentioned. This cash flow from operating activities was in line with the $15 million outflow achieved for the first half of the 2022 financial year. Cash flows from investing activities were a modest $1.9 million, reflecting the considerable capital expenditure invested in the group in recent years. Going forward, we expect capital expenditure to remain at reduced levels. Cash flows from finance activities was $19.3 million, reflecting the $28.2 million of net proceeds received from the rights issues and a reduced reduction in our net debt. Turning to the Flexibles segment on Slide 11. Revenue for the segment was comparable to the corresponding reporting period, reflecting the impact of site consolidation and a focused transition towards more profitable market segments. Service delivery within these businesses have significantly improved which will allow for the expected business development opportunities that we anticipate in the second half of the financial year, leveraging off the group's capital investment in capacity in recent years. In addition, as previously outlined, selling prices are now more aligned with our increased cost structure. We expect the benefits of this alignment to materialize in the second half. The Industrial Distribution business revenue decreased by 5.5% for the half year, down from $42.2 million to $39.9 million. This reflects the product range rationalization that has occurred within this business, designed to better align with targeted market segments. The result was also partly impacted by supply chain challenges. In addition, the increased sales prices the business was able to achieve in response to the high supply chain for cost incurred, together with a reduction in cost structures, returned Industrial Distribution to a positive EBITDA pre-AASB 16 of $0.6 million versus a loss of $0.6 million in the corresponding period. I'll now hand you back to John.

Thanks, Dom. The trading environment remains volatile. However, we continue with the process of restoring customer confidence through better service delivery and improving the self cost imbalance in the Flexibles segment. It is pleasing to note that the profitability of the Industrial business continues to improve through increased margins. As indicated at the AGM, we have begun a process to reduce costs and can report we have now completed a significant reduction in corporate costs and other labor savings with the full annualized benefits of circa $10 million to benefit FY '24. We have also reduced inventories and external warehousing costs, which will also add to cost savings. Recent investments in new equipment and site rationalizations completed will allow the business to grow volumes without the need for further significant capital spend, and our focus on recycling will ensure the business takes an important leadership role in the plastics industry around soft plastic recycling and the circular economy. The company is focused on business development opportunities in the second half of the financial year to leverage off the strategic investment undertaken in recent years. And as margins improve as a result of our lowered cost structure, we are on track to return a positive pre-AASB 16 EBITDA for the 2023 financial year. I will now hand back to Domenic, who will step you through the further aspects of the financial results.

Thanks, John. Slide 16 to 26 within the appendices section are various reconciliations for our continuing operations and for the group, which comprises both the continuing and discontinued operations. These reconciliations walk you through in more detail our financial results and the impact relating to accounting standard AASB 16. This is for the group's profit and loss result, cash flows, working capital balances and significant items. In addition, Slide 26 illustrates the positive trend in EBITDA pre-AASB 16 when comparing second half FY '22 to first half FY '23. I will now hand you back to John to conclude today's presentation.

Thanks, Dom. In closing, I would like to thank you, our shareholders, for your continued support. We will focus on the elements we can directly control and pursue our strategic priorities to return the business to a positive pre-AASB 16 EBITDA for the 2023 financial year. I would also like to take this opportunity to thank our management and employees for their commitment, support and hard work over the past year. We thank you for your interest in Pro-Pac Packaging and now welcome your questions.

Thank you, John and Dom. We don't yet have any questions that have been posted. [Operator Instructions] Great. We have one. Thank you, David. We have a question from David Meehan at Moelis. Firstly, just on the strategic capital investments, are you able to provide any color around the revenue capacity that the 7-layer extruder, HD extrusion line and 8-color printers could add? Are the gross margins on these products typically higher than your existing Flexibles business? There is also a second question, but I'll just read that one in due course. So over to you, John and Dom.