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

Hello, everyone, and welcome to the Pro-Pac Packaging Half Year ended 31 December 2023 Results Presentation. I am John Cerini, CEO and Managing Director of the 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. It is pleasing to report that we are starting to see the benefits in our safety performance following the review of our risk management framework, where we reassessed our risk profile and risk mitigation approach to achieving a cohesive and aligned safety culture. Our LTIFR at 31 December 23 was 8.31, a reduction from the 10.96 as at June 30, 2023. And our TRIFR remained constant at 21.24. We anticipate that this will also further improve as we focus on lead indicators to drive improvement and continue to implement our actions to prevent similar injuries from reoccurring. We remain committed to reducing these safety metrics and to build a disciplined safety culture throughout the group. Revenue for the half year was $158.9 million compared to the previous period of $183.3 million or a reduction of 13.3%. This was due to both the impact of the pass-through of lower raw material costs, primarily resin costs to customers as a result of price adjustment mechanisms built into contracts and the loss of volume in industrial and agricultural films. Of the overall revenue reduction of 13%, price reductions account for 5% and volume 8%. The volumes were lower due to the current difficult trading conditions on the back of reduced consumer spending patterns in the marketplace, accelerated destocking programs by our customers and the weather conditions in both Australia and New Zealand impacting our agricultural volumes. Pleasingly, in addition to improving our safety performance, we have continued to improve on service, quality and delivery levels as well as the ease with which we do business whilst we embed our recent customer wins with major customers such as Arnott's. We will continue to drive our business development through innovation and sales growth opportunities with new and existing customers. Recent investments in new equipment, including the new 8-color printing press installed in January 24, will allow the business to grow volumes when the market rebounds without the need for further significant capital spend. We also remain focused on achieving operational efficiencies across our Australian and New Zealand operations, together with a strong focus on reducing costs. Innovation continues to play 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 and product development. Our investment in recycling, which will be supported by the grant received for the Federal Government Modern Manufacturing Initiative will ensure the business takes an important and leading role in the plastics industry around soft plastic recycling and the circular economy. We intend to undertake this recycling project in collaboration with partners in the industry to ensure we optimize the collection of feedstock, the processing of waste plastic films and the manufacturer of plastic film products with recycled content. Pleasingly, the project is moving ahead quickly. The development application for the building is being undertaken and agreements being entered into with the major suppliers of equipment. I will now hand over to Domenic, who will step you through the group financial results.

Thank you, John. Our revenue for the half year was $158.9 million, a decrease of 13.3% on the corresponding period. And as John mentioned, reflects the impact of pass-through of lower raw material cost to customers under contract pricing mechanisms. Sales volumes were lower compared to the corresponding period with difficult trading conditions on the back of reduced consumer spending patterns in the marketplace and the weather conditions we have experienced in both Australia and New Zealand impacting our agricultural sales. EBITDA pre-AASB16 for the half year from continuing operations was $1.2 million, an improvement from the prior corresponding period of negative $0.8 million. The improvement in the result from the prior corresponding period reflected the benefits of the cost reduction programs that commenced in late 2022. The current result was again without significant items. Moving on to the balance sheet on Slide 8. Our working capital increased by $4 million during the half year period to $76.3 million, up from $72.3 million at 30 June 2023. The increase in working capital was predominantly due to a reduction of $5.7 million in trade payables held at 31 December and a small increase in trade receivables of $1 million. This was offset by a reduction in inventories over the same period of $2.7 million, predominantly due to a reduction in raw materials. Net capital expenditure for the period was $4.9 million. This, together with the movement in working capital, resulting in our net debt increasing from $8.9 million to $17.3 million at 31 December 2023. With excluding proceeds received from the government grant relating to the recycling facility, net debt was $22.9 million, up from $15 million for the same period. Cash flows from operating activities were an inflow of $0.9 million versus an outflow of $15.5 million in the corresponding period. The previous period included the significant realignment of payables at the time. Cash flows from investing activities was an outflow of $4.9 million. This included a $2.6 million paid for the new 8-color printing press, which recently became operational and $1.4 million spent on the development of our ERP systems. Other than through the use of the government grants we have received, we expect capital expenditure to be modest for the remainder of the financial year. Cash flows from financing activities were $1.8 million, reflecting the use of our borrowing facilities. Turning to the Flexibles segment on Slide 11. Revenue for the segment was 13.2% lower than -- for the corresponding period, reflecting the impact of the pass-through of lower raw material cost to customers under price adjustment mechanisms built into contracts. In addition, volumes were lower when compared to the corresponding period given the difficult market conditions on the back of reduced consumer spending patterns in the marketplace. The improved service levels within these businesses have been maintained during the half year, which continues to provide business development opportunities with new customers whilst embedding those customers previously won. The EBITDA performance for the segment improved versus the corresponding period on the back of cost reduction programs and improved plant efficiencies. Specialty Packaging business revenue decreased by 13.8% for the half year, down from $39.9 million to $34.4 million. This reflects the impact of the difficult trading conditions, together with product range rationalization that has taken place within this business. However, pleasingly, the segment maintained its EBITDA pre-AASB16 at $0.6 million despite the drop in revenues on the back of a reduction in costs and margin improvement within the business. I'll now hand you back to John.

Thanks, Dom. PPG is committed to becoming an industry leader in the recycled plastics and circular economy through the development of a soft plastics recycling facility. The company has been awarded a grant through the Federal Government's Modern Manufacturing Initiative of $13.9 million to spend a $30 million-plus facility targeted to be completed in quarter 4 FY '25. Kin Group, the company's major shareholder, has committed to the role of developer on the selected site in Albury with significant work having been done on the preparation of the development application, which is expected to be launched in the near term. The required equipment has been selected after an extensive investigation and tendering process and agreements entered into with major suppliers. Discussions with interested industry collaboration partners is being undertaken to establish a consortium of equity and sponsor partners to optimize the collection of feedstock, processing of waste plastic films and the offtake of manufactured products with recycled content. Trading environment remains challenging in a high inflationary market, which has impacted consumer buying behavior. Our customer service levels have been restored at levels which meet and exceed expectations whilst maintaining a strong focus on reducing costs. Recent investments in new equipment, including the new printing less installed in quarter 3 FY '24, will allow the business to grow volumes when the market rebounds without the need for further significant capital spend. We continue to work on innovative product offerings together with our customers to meet recycled content targets of future APCO mandates, which is our strategic priority. Our focus on our investment in recycling assisted by the government grant will ensure the business takes an important leadership role in the plastics industry around soft plastic recycling and the circular economy. We anticipate further announcements on our partnerships and industry collaboration, but our objective is to be operational by quarter 4 FY '25. However, given the current trading environment, business remains challenging and volatile. We are experiencing higher operating costs on the back of increased input costs. The market remains soft with low consumer confidence, resulting in subdued volumes in our existing customer base. Weather conditions in both Australia and New Zealand have had an impact on our agricultural sales volumes and the disruption being caused by the Middle East war is starting to affect logistics and customer sentiment and will negatively impact our export sales to the region. In light of this and following a disappointing January result, we expect to be around breakeven EBITDA pre-AASB16 for the FY '24 year. I will now hand you back to Domenic, who will step you through further aspects of the financial results.

Thanks, John. Slides 17 to 20 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 our financial results and the impact relating to accounting standard AASB16. This is for the group's profit and loss result, net debt and working capital balances. I will 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 improve our businesses. 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. If you would like to ask questions, please refer to your prompt on the right-hand side of your screen. Kathleen, will you please assist and moderate questions.

Yes. Sure, John. We have a few from David Meehan, who is asking, firstly, volumes declined by approximately 8% in first half '24. Were the volumes lower to start in the first half of '24?Or did they deteriorate towards the back end of the half? And how should we think about volumes in the second half of '24.

Thanks, David, Kathleen. So if we think about that 8% decline, a fair proportion of that has been around our agricultural volumes, both across Australia and New Zealand. So although they occurred in the latter half of the first half of '23, '24, they are comparing themselves to last year. So they are more seasonal related volumes rather than underlying volumes. And if we look at our underlying volumes in the second half of '23, '24 that we're forecasting, we expect that they will be at or above last year's level.

Thanks, John. Another question from David. When do you expect to receive the remaining cash from the federal grant and what does the CapEx cost schedule look like for the soft plastics recycling facility?