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

Firstly, I must apologize to everyone for the 60-minute delay to the start of our webcast, and thank you all for your patience. Hello, everyone, and welcome to the results presentation for Pro-Pac Packaging Financial Year ended June 30, 2023. I am John Cerini, 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. The reorganization of our business structure has had broad impacts across our business and has been reflected in increases in both TRIFR and LTIFR for the period. Pro-Pac Group has reviewed its risk management framework, reassessed its risk profile and risk mitigation approach to achieve a cohesive and aligned safety culture. We have recently appointed both the group HSE manager and a risk and ESG manager to improve our safety performance and focus on our risk management initiatives and realign our focus to site-based accountability. We remain committed to reducing these safety metrics and to build a disciplined safety culture throughout the group. We have been resolutely focused on delivering our strategy of improved operational performance, cost reduction and positioning for profitable growth in the face of a challenging market and in a high inflationary period, which has created uncertainty around consumer buying patterns. Revenue for the full year was $339.1 million, as we focused on margin improvement, both through the development of sales growth in higher value-add and higher-margin products whilst reducing cost structures. We are gaining new customers and achieving growth in our existing customer base as we restore customer confidence through better service delivery. We recently secured a significant customer in Arnotts and our pipeline of attractive opportunity remains. Our priority is to use our manufacturing capabilities and improve delivery service levels and leverage our expertise to convert these pipeline opportunities for profitable revenue. Recent investments in new equipment and site rationalizations completed will allow the business to grow volumes without the need for further significant capital spend. 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. Our focus on our investment in recycling, which will be supported by the recent receipt of the first installment of a government grant of $5.6 million, will ensure the business takes an important role in the plastics industry around soft plastic recycling in the circular economy. We intend to undertake this recycling project with partners in the industry and with the help of the Federal Government Modern Manufacturing initiative grant. Pleasingly, we are continuing to see the 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 financial year was $339.1 million, a decrease of 5.5% on FY '22, as John mentioned, reflects the impact of site consolidation, rationalization and a renewed focus on the more profitable market segments. EBITDA pre-AASB 16 for the financial year from continuing operations was $1.1 million, an improvement from the prior financial year of negative $0.1 million. With the second half of the financial year, producing an EBITDA of $1.9 million versus the first half of minus $0.8 million. Pleasingly, the positive trend that we began to see towards the end of the first half of the financial year, continue throughout the remainder of the financial year, and we expect this to continue into FY '24. This continue to occur with our selling prices being better aligned with our cost structures and with the cost reduction activities that have already been implemented. Pleasingly, this full year result had a considerably reduced level of significant items. Slide 8 illustrates the trend that we have witnessed in the last 3 half year periods in our EBITDA pre-AASB 16 results. We have seen this number progressively improve from the negative $0.5 million (sic) [$5.0 million] in the second half of FY '22 to $1.9 million in the second half of FY '23. We expect this trend to continue into the first half of the 2024 financial year. Moving on to Slide 9. Our working capital increased by $3.7 million for the full year to $74.8 million, up from $71.1 million at 30 June 2022. However, pleasingly, we saw a decrease in working capital of $8.6 million for the second half of the financial year, down from $83.4 million as at 31 December 2022. This increase in working capital was relatively small when one takes into consideration, we significantly reduced our trade payables by over $20 million during the financial year. The successful completion of our $30 million rights issue during the first half assisted in this being able to be achieved. During the financial year, we also saw improvements with our receivables and inventory balances. In December, the group successfully refinanced its previously syndicated debt facilities through the establishment of our $30 million debtor's finance facility. All syndicated debt facilities were fully repaid at that time. However, we maintained our $5 million bank overdraft facility. The activity throughout the financial year resulted in our net debt reducing from $23.6 million at 30 June '22 to $13.9 million at 30 June 2023. However, note the net debt balance we are quoting as at 30 June 2023 excludes the government grant we received of $6.1 million, inclusive of GST in late June. Slide 10, cash flow. Cash flows from operating activities were an outflow of $3 million versus an inflow of $6.5 million in FY '22. However, it includes a significant reduction in trade creditors previously mentioned. Pleasingly, the second half of the financial year produced a positive cash inflow from operating activities of $12.5 million. Cash flows from investing activities were a modest outflow of $0.2 million. This reflects net capital expenditure in property, plant & equipment and intangibles of $7.7 million, offset by the receipt of the first installment of the government grant. With the considerable capital expenditure invested in the group in recent years, we expect our capital expenditure to be relatively modest going forward, albeit a bit higher than what we spent this financial year. Cash flows from financing activities were $10.2 million reflecting the $28.2 million (sic) [$28.3 million] of net proceeds received from the rights issue and a reduction in our net debt. Turning to the Flexibles segment on Slide 12. Revenue for the segment was 5.1% lower than for the prior financial year, reflecting the impact of site consolidation, rationalization and a focused transition towards more profitable market segments. Service delivery levels significantly improved within these businesses during the financial year, which has provided the business development opportunities that we have continued to make in the second half of the financial year and expect to continue into the 2024 financial year. In addition, as previously outlined, Selling prices are now better aligned with increased cost experience, and we expect the recovery in margin to continue to materialize throughout FY '24. The Specialty Packaging business, revenue decreased by 6.8% for the financial year, down from $79.2 million to $73.8 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 proceeds that business was able to achieve in response to higher supply chain input costs incurred, together with the reduction in cost structures resulting in the specialty packaging business, achieving an improved positive EBITDA pre-AASB 16 of $0.7 million. I'll now hand you back to John.

Thanks, Dom. As stated in earlier commentary, Pro-Pac has received a grant to establish a soft plastics recycling business, which will see PPG and its business partners to recycle soft plastics into Stretch and Shrink Film products. This concept will lead the Australian market in enabling mechanically recycled post-consumer waste to replace virgin plastic in our film products. We plan to construct the plant with partners in the industry and we'll provide further information as this project develops. The trading environment remains challenging in a high inflationary market, which has created uncertainty around consumer buying patterns. However, we continue with the process of restoring customer confidence through better service delivery. Our focus on our investment in recycling will ensure the business takes an important leadership role in the plastics industry around soft plastic recycling in the circular economy. The Flexibles business recently secured the Arnotts contract for their flexible packaging requirements, which will benefit the business in the 2024 financial year. This demonstrates the business improvement and the confidence, our business partners in our service delivery. We are gaining new customers and achieving growth in our existing customer base whilst maintaining a strong focus on reducing costs. We expect our increased profitability to continue into the financial year and result in an improved positive pre-AASB 16 EBITDA for the 2024 financial year. I will now hand you back to Domenic, who will step you through the further aspects of the financial results.

Thanks, John. Slides 18 to 23 within the appendices section are various reconciliations for our continuing operations and for the group, which comprises both the continued and discontinued operations. These reconciliations walk you through in more detail on our financial results and the impact related to accounting standard AASB 16. This is for the group's profit and loss result, cash flows, working capital balances and significant items. I'll now hand you back to John to conclude today's presentation.

Thanks, Dom. In closing, I would like to firstly 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 and improve positive pre-AASB 16 EBITDA for the 2024 financial year. I would also like to take this opportunity to thank all 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. Thanks again for your patience following the delayed start. Kathleen Forbes, our Company Secretary, will now moderate the Q&A session.