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

Good afternoon, ladies and gentlemen. My name is Jonathan Ling, and I am 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, present and emerging. I also acknowledge the Traditional Custodians of the various lands from which you will join this meeting today. I extend that respect to Aboriginal and Torres Strait Islander Peoples here today, whether in person or virtually. On behalf of the directors and management, I extend a warm welcome to everyone joining us today. I am pleased that you could join us for the 2023 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 the green or white card, or with joining us remotely via the Lumi platform you have logged in 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 question. You will receive confirmation that your question has been sent after you click on the send 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, you would have received a voting card at the registration desk. Persons entitled to vote on this poll are all shareholders. Corporate representatives, attorneys of members and proxy holders who hold a green voting cards. Detailed on the reverse of your voting card is the resolution being put to this poll. Relevant instructions are also printed on the reverse of your voting card. Please ensure that you print your name where indicated and sign the voting card. When you have finished filling your voting card, boardroom will collect them at the end of the discussion of all resolutions when the Chair announces that the poll is closed. And all votes will now be collected online and in person. Please note that any unsigned voting cards will be invalid. For those online, the polls are already open, and you will be able to see an icon on the Lumi platform that resembles a bar chart. 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 a 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 or submit or enter button as the vote is automatically recorded. Shareholders and proxy holders can change their vote at any time before the polls close. 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: Rupert Harrington, sitting on my right, a Non-Executive Director, our Chair of the Remuneration and Nomination Committee and a member of our Audit, Business Risk and Compliance Committee. To his right, Mark Blackburn, a Non-Executive Director, Chair of the Audit, Business Risk and Compliance Committee and a member of the Remuneration and Nomination Committee. So to my left is John Cerini, our Managing Director and Chief Executive Officer. From our executive team, I would like to introduce Kathleen Forbes, our General Counsel and Company Secretary; and Domenic Romanelli, our Chief Financial Officer. Also in attendance today is Kester Brown and Kylie Bodenham, representing our external auditor, Ernst & Young. Kester was our lead audit partner for the 2023 financial year and was therefore responsible for the audit of the financial reports being tabled at this meeting. In line with EY's audit partner rotational policies, the 2023 financial year was his last as lead audit partner. And thank you, Kester, for your work over the years. Kylie Bodenham has been selected and endorsed by the Board as our new audit partner for financial year 2024. Thank you, and welcome, Kylie. I will 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 seen a focus on strengthening a foundation for improving profitability, stabilization of our customer and supplier relationships and reducing costs. With the successful rights issue of 2022 underpinning a reset of the company and a focus on rebuilding from a difficult cash position, we are pleased to now be in a position of positive and upwardly trending EBITDA, improved working capital management and a solid foundation of investment in capacity or creating a platform for future growth. During the year, we also refocused our operations with the divestment of the non-core source and sell business and the exit from nonprofitable categories in our Specialty Packaging division, leaving a core business focused on the manufacture of flexible films and packaging and accompanied by the distribution business of our manufactured and related products. Expansion of our commitment to innovation and sustainability is a key driver of our planned new circular recycling capabilities in flexible plastic packaging. We plan to build a soft plastics recycling facility and have received a grant to facilitate this, which Domenic will talk more about in his update. The 2023 financial year also saw John Cerini at the helm as Chief Executive Officer and Managing Director; and Domenic Romanelli as Chief Financial Officer for most of the year, with both being appointed in October 2022. In addition, your current Board members have all been in place for the past 12 months, seeing an end to the leadership changes experienced in 2022 and bringing greater stability for the company and all of its stakeholders. At this Annual General Meeting, Mark Blackburn is nominated for reelection, having joined the Board as a new independent nonexecutive director just after last year's AGM. Mark has a very strong technical financial reporting and analysis skills as well as extensive experience in business planning, risk management and financial management. He has been Chair of the Audit Business Risk and Compliance Committee and an asset to the Board this year. I strongly endorse his reelection. Whilst the Board of just 4 directors is relatively small, we are not planning any new appointments over the next 12 months. As the business grows in both scale and profitability, we may seek to add additional directors. And finally, I'd like to comment upon the resolutions, which we are putting before shareholders for approval this year. And more specifically, the change in the performance hurdles applicable to the performance rights issued to CEO, John Cerini, in 2022. As a Board, we strongly believe in the motivation of our executive team and the retention incentive that performance rights offer. As events transpire, the regional hurdle set for the performance rights issued in 2023, became realistically unachievable and no longer held the motivational effect desired. We have, therefore, taken the opportunity to seek to reset these to a level where the CEO is incentivized to achieve a realistic but excellent result in the circumstances, thereby benefiting all shareholders. 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 during another busy and challenging year. We thank them all for their commitment and hard work and 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 2023 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, Mr. Chairman. 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. And I would also like to pay my respects to Elders past, present and emerging. My name is John Cerini, and I'm Managing Director and CEO of Pro-Pac Packaging. I have been in the role now for just over 12 months and having had many years of history with the business in the past, it has been a pleasure to rejoin the company as CEO and reestablish valuable relationships with our customers, suppliers and shareholders. I would like to thank them all for their support during a challenging year. Pro-Pac is fortunate to enjoy positive collaborative relationships with all its stakeholders, and we thank them for their 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 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. However, we are committed to reducing these safety metrics and to building a disciplined safety culture throughout the group. In the past 6 months, we have appointed a new group HSE manager and a risk manager to improve our safety performance, focus on risk management initiatives and reinforce site-based accountability for safety. We have also reviewed and reignited our risk management framework and reassessed our risk profile and risk mitigation approach. We continue to make progress in our behaviors, practices and procedures throughout the group to achieve a cohesive and aligned safety culture. Turning to the group financial performance. Our revenue for 2023 financial year was $339.1 million, a decrease of 5.5% on FY '22. This in part reflects the impact of site consolidation, product rationalization and divestment of non-core and less profitable product lines within our Specialty Packaging business. FY '23 saw an improvement in the EBITDA pre-AASB 16 from continuing operations for the second half of the financial year, producing an EBITDA of $1.9 million versus the first half of negative $0.8 million. During the financial year, we also significantly improved our cash position. We reduced our trade payables by over $30 million, following our rights issue and refinanced our bank and debt facilities with a new debtors facility. In addition, we were able to decrease our working capital by $8.6 million in the second half of the financial year. Pleasingly, the full year results also had considerably reduced level of significant items, reflecting our focus on core business operations. With selling prices better aligned to cost structures and cost reduction initiatives implemented, the improved profitability that we began to see towards the end of the first half of '23 financial year, continued throughout the remainder of the financial year. In FY '24 to date, we have continued to focus on improved operational performance, cost reduction and positioning for profitable growth, all in the face of a challenging and volatile market and in a high inflationary period, which has created uncertainty around customer buying patterns. Moving on to refinancing. In December '22, we implemented a new $30 million debtors facility, which has provided us with the flexibility we require to support our growth plans. All syndicated debt facilities were fully repaid at this time. Pleasingly, the activity throughout the financial year resulted in a net debt reducing from $23.6 million at June 30, 2022, to $13.9 million at June 30, 2023, excluding the impact of the government grant. I will now talk about our strategic priorities. Major site rationalizations and cost reduction initiatives have been completed and provide the foundation for further business growth. We continue our relentless focus on cost management across the organization, particularly in the current challenging and high inflationary market environment. Appropriate investment in updated plant and equipment will be uptaken sensibly in line with revenue growth. We are beginning to gain -- we are gaining new customers and achieving growth and our existing customer base as we restore customer confidence through improved quality, service and delivery. FY '24 has begun to see the benefits of this with a long-term supply contract with Arnott's secured and their sales level already reaching our expected annualized run rate of over $12 million. Our priority is to use our manufacturing capabilities, improve delivery service levels, leverage our expertise to convert other pipeline opportunities into profitable revenues. Sustainability plays a key role in our strategic plans. We believe there are real benefits to our customers and our communities through our committed approach to a circular economy. We continue to market and develop the DuraTrac engineered railway sleeper made from recycled plastics as well as other products such as bollards and benches, made by our Integrated Recycling business in Mildura. Our commitment to innovation and sustainability is a key driver around our planned new circular recycling capabilities in flexible plastic packaging. We have embarked on a project to create a circular economy of soft plastic waste through the development and processing of recycled raw materials, which can be used in packaging films and products manufactured by PPG and its business partners. This concept will be at the forefront of the Australian market in enabling mechanically recycled post-consumer waste to replace virgin plastic in our film products. The project is supported by the recent receipt of the first installment of a Government grant of $5.6 million through the Federal Government's Modern Manufacturing Initiative for the establishment of a soft plastic film recycling plant. We plan to construct the plant in collaboration with partners in the industry at a site which has already been selected in Albury. We expect the Development Approval for construction to be lodged in the new year. An engineering partner has been selected and the design work commenced. We have also selected equipment, equipment vendors and negotiated with key commercial terms, and expect to sign contracts and place orders using grant monies in the new year. In addition, film extrusion trials have commenced with several key customers, meeting imported recycled materials that will closely match the materials the facility will produce. We are currently seeking additional partners to share in the future costs and benefits of the projects, and we have the support of our majority shareholder as the owner and developer of the site. We will provide any further material updates as this project progresses. Finally, our business outlook. The trading environment remains challenging in a high inflationary market, which has created uncertainty around customer buying patterns. We are also conscious of the impact of a wide range of events around the globe, including geographical, political and war risks. Against this backdrop, we continue to work with all customers to minimize risk and supply disruptions. At this point in time, our business remains unaffected, and we continue to monitor the situation closely. We are confident in our business improvement plans and the growing confidence and trust of our customers in our service delivery. We are securing new customers and achieving growth in our existing customer base while maintaining a focus on reducing costs. 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 2024 financial year. In closing, I would like to thank you, our shareholders, for your continued support. I look forward to delivering progress for you into the future. I would also like to take this opportunity to reiterate my thanks to all our management employees for their commitment, support and their hard work over the last year. I will now hand you back to the Chairman to take us through the formal business of today's meeting. Thanks, Jonathan.

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 voting at this meeting should also note that the voting exclusion statements in relation to each resolution is 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. Item #1, the financial report, directors' report and auditor's report. To receive and consider the financial report of the company and of the consolidated entity, for the year ended 30 June 2023 and the reports by directors and auditors thereon. The annual accounts, including the directors' statements and the 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, not yet.

Thank you, Kathleen. Shareholders are also invited to indicate now if they would like to verbally ask a question. No questions. Thank you. If there are no questions, we will move to the remaining resolutions for your consideration. Resolution #2 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 of June 2023. 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 considerations 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.

Thank you, Kathleen. Shareholders are also invited to indicate now if they would like to verbally ask a question. We have no questions in the room. Please cast your vote now if you have not already done so. Resolution #3. To consider and if thought fit, pass the following resolution as an ordinary resolution. That for the purposes of Clause 7.1(c) of the company's constitution and for all other purposes, shareholder approval is given to the election of Mr. Mark Blackburn as a Director of the company. Mark's skills and experience are set out in the notice of meeting. He has extensive senior finance management experience with ASX and NYSE-listed corporations and has held Chief Financial Officer roles at McMillan Shakespeare, iSelect, IOOF, AusDoc Limited and the Laminex Group. Mark is also a Non-Executive Director and Chair of the Audit Committee of Lifestyle Communities Limited and has recently been appointed a Non-Executive Director of FleetPartners Group Limited. 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's not, Jonathan, but I should point out that our proxy votes seem to have had a malfunction. So I'll just verbally tell the room what proxy votes are. For, we have 143,586,802, which is 99.82% for; and against, we have 59,138, which is 0.04% of the votes.

Thank you, Kathleen. Shareholders are also invited to indicate now if they would like to verbally ask a question. [indiscernible].

I'm just curious, obviously, you're the first new blood that we've had on the Board for a while. So thank you for joining. I was just curious as to your impressions of the business. Obviously, the business has earned significantly more in the past and shareholders, we hope that it will return to that level of profitability. Can you just perhaps give us [indiscernible] Board, your insights into the business and what you think the aspirations of this company should be?

Thanks, [indiscernible]. It's been an interesting period for the company, as you'll appreciate. And I've joined as a new independent director to support the new management team. And just -- if I start with the focus that I've had over the past 12 months has been on the quality and the timeliness of the financial reporting and the identification and management of business risks, and making sure that there's a strong financial focus on all matters that are brought to the Board, so that's been my emphasis. And to answer your question more fully, I would say that the strategies that the new management team have put in place to stabilize the business, to reestablish themselves with trust and loyalty to the customer base and the opportunity to increase our sales, improve our operating performance, are all starting to show the benefits of the business, and you see that in a number of different ways. So from that perspective, I think the outlook is very positive. And I'm looking forward to working with the rest of the Board and the management team to get the company back to its rightful position in terms of its earnings.

I see, Kathleen, the proxy votes aren't on the screen again.

Yes. I think [indiscernible] not the latest version.

Did you want to just read them again or?

I can read as we go through each resolution [indiscernible] proxy votes. There also have already been released in the presentation that's gone to the ASX. So if any shareholder wanted to follow along, they could actually see that in that document.

Thank you. Okay. So if I could ask you now to please cast your vote if you have not already done so. Resolution #4. To consider and if thought fit, to pass the following resolution as an ordinary resolution. That in accordance with ASX Listing Rule 7.2 (exception 13) and for all other purposes, shareholders approve the issue of securities under the company's executive long-term incentive plan and performance rights plan on the terms set out in the explanatory notes accompanying the notice convening this Annual General Meeting. The proxy votes received in respect of this resolution are now on your screen. Are there any written questions relating to this item?

No written questions, Jonathan. I'll just read out the proxy votes, for 119,868,794, which is 83.32%; against 23,830,176, which is 16.56%.

Thanks, Kathleen. Shareholders are also invited to indicate now if they would like to verbally ask a question. Thank you. There are no questions on this resolution. So can I ask you to please cast your vote now if you have not already done so. Resolution #5. To consider and if thought fit, to pass the following resolution as an ordinary resolution. That for the purposes of ASX Listing Rule 10.14 and for all other purposes, shareholder approval is given to the issue and allotment of 2,942,857 performance rights and shares on an exercise of such performance rights to Mr. John Cerini, the company's Chief Executive Officer and Managing Director, under the company's performance rights plan and otherwise, on the terms set out in the explanatory notes accompany this notice of Annual General Meeting. The proxy votes received in respect of this resolution are not on the screen, but Kathleen will update you in a moment. Are there any written questions relating to this item?

No. Jonathan, no written questions. The proxy votes we have for this resolution 143,222,973, which is 99.56%; against this resolution, 464,497, which is 0.32%.

Thanks, Kathleen. Shareholders are also invited to indicate now if they'd like to verbally ask a question. [indiscernible].

This refers to the Resolution 5. So the target here is EBITDA of $20 million. Can you clarify, is that pre- or post-AASB 16? And second question is, why [indiscernible] number, which is less subject to manipulation than an EBITDA target?

Absolutely. I'll tackle that. I think the -- as I mentioned earlier, the primary objective for us now is to return the business to its profitability that we achieved a couple of years ago. We traditionally have done it in an EBITDA measure. And because what we're focusing more on the operating profit of business, and at the time, when we set some of these targets, we weren't sure where our balance sheet position would be. I don't think from where we see, there's a material difference. I think the reality is that the short-term EBITDA target and restoring it is our main focus, and that's the reason why we've done it. I take your point about net -- sorry, pre-AASB 16, yes. Does that answer your question?

Yes. I suppose my other question was the -- it's obviously open -- it could be open to manipulation and it's pre-AASB and that answers the question. But I just thought the NPAT would be a better target given.