Winpak Ltd. (WPK) Earnings Call Transcript & Summary

Hello and welcome to the Annual Meeting of Stockholders of Winpak Ltd. Please note that today's meeting is being recorded. It is now my pleasure to turn today's meeting over to Martti Aarnio-Wihuri. The floor is yours.

Good morning. It's my pleasure to welcome you to Winpak's Annual Meeting of Shareholders. My name is Martti Aarnio-Wihuri, Vice Chairman of the Board of Directors of the company, and your Chairman for today's meeting. I would also like to introduce representatives from Winpak that will be joining me today: Olivier Muggli, President and CEO; Larry Warelis, Vice President and CFO; and Lynn Kemp, Secretary. As announced in Winpak's press release dated June 12, 2020, to proactively deal with the unprecedented public health impact of COVID-19, Winpak has changed the location of today's meeting from in-person to the virtual format. As this meeting is being held virtually via a live webcast, we think it is necessary to set out a few rules for the orderly conduct of the meeting. Questions in respect of a motion can be submitted by any registered shareholder or duly appointed proxy holder using the instant messaging service of the virtual interface. Please note that there will be a slight delay in the publication of the communications received. Questions will generally appear shortly after they are submitted but will only be addressed during the question period at the end of the meeting, provided that questions regarding procedural matters or directly related to the motions before the meeting may be addressed during the meeting. For the purposes of the meeting today, a voting on all matters will be conducted via electronic ballot. Registered shareholders and duly appointed proxy holders will be asked to vote on each business item after the presentation of all business items. When you are asked to vote, you will receive a message on the virtual interface requesting you to register your votes. You will only have a certain amount of time to do so when the poll is opened. We will now proceed with the formal portion of today's meeting. To expedite the formal part of the meeting, I will move and second all motions. I now ask that the annual meeting of the shareholders of the company come to order. I appoint Lynn Kemp, Secretary of the company, as secretary of this meeting. For the purposes of today's meeting, I appoint Computershare Investor Services or Computershare Trust Company of Canada, through its representatives, as scrutineers to compute the votes of any polls taken at this meeting and to report thereon to the chairman. The purposes of today's meeting are set out in the Notice of Annual Meeting of Shareholders of the company dated February 21, 2020. The notice of meeting, the management proxy circular and the form of proxy were mailed to shareholders on March 26, 2020, along with the audited consolidated financial statements of the company for the fiscal period ended December 29, 2019, and related MD&A to shareholders of the company who requested such statements and related MD&A. A copy of the confirmation of mailing is being filed with the minutes of this meeting. Copies of the management proxy circular and other meeting materials are available under the company's profile on the SEDAR website. I have been advised that there are voting shares representing more than 51% of all outstanding voting shares of the company present, and therefore, a quorum of shareholders of the company is present, and the meeting is properly called and duly constituted for the transaction of business. I have received the scrutineers' report, and I direct that their formal report be annexed to the minutes of this meeting at schedule. As the first item of business on the agenda for today's meeting, I now present to the meeting the audited financial statements of the company as at and for the fiscal period ended December 29, 2019, together with the auditor's report to the shareholders thereon. Copies of such documents have been mailed to the shareholders who requested such documents -- such statements, and it is not proposed to read them at this -- to the meeting. The next order of business is the election of directors. The bylaws of the company provide that, at each annual meeting, the shareholders shall elect directors to hold office until the next annual meeting or until their successors are elected or appointed. At this meeting, there are 7 directors to be elected: Antti I. Aarnio-Wihuri, Martti H. Aarnio-Wihuri, Rakel J. Aarnio-Wihuri, Bruce J. Berry, Kenneth P. Kuchma, Dayna Spiring and Ilkka T. Suominen have been nominated as directors for the ensuing year or until their successors are elected or appointed. Each of the persons nominated has confirmed that he or she is prepared to serve as a director. Are there any further nominations? If you want to make a nomination, please use the instant messaging feature of the virtual interface to do so. If there are no further nominations, I move and second a motion that the nominations be closed, and that directors elected for the ensuing year or until their successors are elected or appointed. Unless there are any questions, I will move to the next item of business. The next item of business is the appointment of the company's auditors -- is the appointment of the company's auditors of the company for the ensuing year. The Board of Directors approved the appointment of KPMG LLP, subject to shareholder approval. I move and second that KPMG LLP be appointed auditors of the company until the next annual meeting of shareholders. Unless there are any questions, I will move to the last item of business. Although this item of business was not set out in the notice of meeting dated February 21, 2020, it was referred to in our press release dated June 12, 2020, announcing the change in format of this meeting. On June 5, 2020, Winpak's Board of Directors approved, by resolution, a bylaw allowing meetings of shareholders to be conducted entirely by means of a telephonic, electronic or other communication facility that permits all other participants to communicate adequately with each other during the meeting, a virtual meeting. The bylaw was effective immediately upon its approval and allowed this meeting to be conducted virtually, but Winpak's shareholders must confirm the bylaw at this meeting to ensure its validity going forward. The bylaw reads, if directors or the shareholders of the corporation call a meeting of shareholders, pursuant to the Canada Business Corporations Act, those directors or shareholders, as the case may be, may determine that the meeting shall be held in accordance with the regulations under the act, if any, entirely by means of a telephonic, electronic or other communication facility that permits all participants to communicate adequately with each other during the meeting. I move and second that the bylaw allowing Winpak to conduct virtual meetings of shareholders in the future, if and when the shareholders or directors calling the meeting decide such meetings would be appropriate, be approved by the shareholders. As we mentioned, voting today will be conducted by electronic ballot. I will now take a moment to ask that the balloting be opened to registered holders and appointed proxy holders. The polls are now open. And at this point, all registered holders and proxy holders who have properly logged in with their 11-digit holder ID, provided on your form of proxy provided by Winpak, and who wish to vote will be able to see on the screen all motions being brought forth at this meeting. Please register your votes by accessing the Voting page and selecting the For or Withheld buttons next to the name of each proposed director, and next is the resolution with respect to the appointment of KPMG LLP as the company's auditors. For the resolution confirming the bylaw allowing virtual meeting to shareholders in the future, please select the For or Against buttons. Once the electronic balloting closes, the Voting page will disappear, and your votes will automatically be submitted. We'll take just a brief pause so everyone has time to conduct their votes. [Voting]

I would ask that the scrutineer compile the report regarding the results of voting on all business matters, and results will be published on SEDAR and by press release. The formal items of business, as set out in the notice of meeting, have now been dealt with. I'd like to call on our President and CEO, Olivier Muggli, to provide us with information about your company and comment on the year just completed. Mr. Muggli.

Thank you, Martti. I would welcome you to Winpak's 34th Annual Shareholder Meeting. It's our first virtual or hybrid one. For those watching your screen, and the presentation is on the right-hand side of the screen, I am not able to flip the charts for you. So you have to hover yourself with your mouse and change the slides accordingly. I'll try to indicate, if I don't -- hopefully not forgetting too often on which slide I am. But today, I will review our 2019 results and the company's performance during the first quarter of 2020. I will also give you some insight into Winpak's future. But first, I would like to express a special thank you to everyone at Winpak. All have overcome their fears of the pandemic, embraced the extraordinary protective measures that we've introduced in all of our sites. All have gone the extra mile to support our clients, who, at times, were under a lot of difficulties, and have maintained all our sites open and productive. We even reached record productivity at times. I would also like to thank all Winpak suppliers, who have equally done their best to support our activity. And last but not least, all the frontline workers' extraordinary dedication. Providing quality packaging to protect food and pharmaceutical products was essential during these difficult times, and as it is under all other circumstances, and taking shortcuts was not an option. Again, thank you all. I move on to Slide 2. Certain statements made here contain forward-looking statements. And while this represents the company's expectation and beliefs, they contain risks and assumptions, and caution should hence prevail when relying upon such statements. I also quickly move over to Slide 3, and then moving to Slide 4. And let's review our 2019 results, starting on Slide 5. In 2019, revenues receded slightly to USD 873.8 million, indicating a slight overall volume contraction as a result of lost rigid business volume, despite growing nicely on the flexible side. As in 2018, retail grocery consumption was flat or slightly declining throughout 2019. Revenue contraction also reflects negative impact of selling price/mix to the tune of $6.5 million and a weaker Canadian dollar impact of CAD 2.7 million or more than half of the shortfall. Raw material prices were flat or slightly deflationary. Moving on Slide 6. Geographically, 81% of Winpak's revenue is realized in the United States, with 13% coming from Canada. Export sales outside of Canada and the U.S. represent 6% of the total volume. Moving on Slide 7. Winpak's current structure is made up of 3 distinct product groups. 3 flexible packaging plants in Winnipeg; one in Atlanta region; and the newly expanded one in Mexico, which is operational since the fall of 2019, account for 51% of the corporation's sales. Rigid and lid facilities located in Toronto; Montreal; Pekin, Illinois; 2 in the Chicago area; and in Mexico contribute to 46% of the total sales. The packaging machinery business based in the Los Angeles area is responsible for 3%. The newly acquired Winpak Control Group and its 2 sites in New Jersey are part of the flexibles business. The acquisition closed on October 1. With the current 55,000 square feet expansion in Mexico, the additional 82,000 square feet of Control Group and not counting yet the ABI expansion in Winnipeg, Winpak now will occupy nearly 2.275 million square feet of production space and employ 2,500 people. The rigid containers and flexible lidding segment experienced some drops in volume. For the lidding product group, rollstock, with yogurt and dessert die-cut lids, led in positive revenue growth performance in the mid-teens percentage. Sheet and hot beverage cups on the other sites and rigid packaging receded, resulting in an overall contraction for the rigid container and flexible lidding business. The flexible segment realized a low-teen percentage revenue uptick in volume within the modified atmosphere packaging, whereas the revenue from the ABI joint venture with Sojitz saw revenue growing in the mid-teens. Normalized for the 2019 acquisition that was completed in the fourth quarter, the overall volume decline was 1.3%. The packaging machinery segment experienced a remarkable 6.9% revenue growth. Moving on to Slide 8. Despite intense competitive pressure and the volume pressure on the rigid business, the flattening of the input costs and the remarkable productivity improvements in most business units have resulted in regaining colors in our profitability. And net income grew by 5.4% over 2018 to reach $114.8 million, however, just a little shy of our all-time high. Moving on to Slide 9. Over the past 10 years, Winpak's net income has grown at a compounded annual growth rate of 10.3%. Moving on Slide 10. On a per share basis, the year-over-year impact was a positive $0.09 or 5.4%. Counterproductive were the volume contraction, but improvements in gross margin and flat operational expenses helped boost the earnings per share on impact from taxes and ForEx, which are out of our control, but they played in our favor in 2019. Moving on to Slide 11, EBITDA and EBITDA margin. In 2019, the company's EBITDA reached $198.5 million or an improvement of 4.4% over prior year, at a very healthy 22.7% of revenue and representing a compounded annual growth rate of 8% since 2009. Moving on to Slide 12. Currently, approximately 69% of selling prices to the company's customer are now indexed to raw material costs. Slide 13 is a recap for the year 2019. Revenue receded by 1.8% to $873.8 million, under a slight overall volume decline of 1.3%, driven mainly by our rigid business, while EBITDA margin improved by 4.4% despite intense competitive pressure but flattening input costs. I will now proceed with looking at the 2020 first quarter results, starting with Slide 15. First quarter consolidated revenue decreased by 4.7% versus the same period last year, primarily driven by volume shortfall in our rigid business and flat revenues from other businesses. On the other hand, the flexible vacuum packaging and modified atmosphere packaging grew very healthily. Selling prices and mix had a negative impact on revenue for the quarter, and so did foreign exchange. Moving to Slide 16. As a result of the significant volume shortfall in our rigid business, our first quarter earnings receded to $0.36 per share. Gross margin was affected as well and went from 30.9% in Q1 of 2019 to 30.0% in Q1 of 2020. Slide 17. The volume shortfall in margin eroded the earnings per share, as did the impact of foreign exchange, while operational expenses and other costs were slightly beneficial. Raw material index on Slide 18 as well as ForEx. Raw material prices and the Canadian-to-U.S. dollar exchange rate will continue to have an impact on Winpak's overall performance. The graph charts the price of 8 of Winpak's most important raw materials and the U.S. dollar between 2010 and the first quarter of 2020. A weak Canadian dollar and lower raw material prices are good for Winpak's bottom line. And as you can see, both are low for the time being. While ForEx is highly unpredictable, Winpak does not expect sudden and significant raw material rises in the short term. I will now review some of our capital projects, starting with Slide 20. Over the past decade, Winpak has invested $562 million in capital projects or, on average, 7.3% of revenue, which is a rather unique situation in our industry. So let's review some of the key capital projects. Slide 21. Winpak closed on October 1, 2019, with the acquisition of the Control Group in Norwood, New Jersey. Control Group is ideally situated in the heart of the health care industry's hotbed from Pennsylvania to Massachusetts, and has developed an industry-leading service model with 100% inspection of overall the printing, and delivers to pharma and medical customers. Winpak expects to further develop this service model, vertically integrated with its store of pharma products, WinForm, Drug PAK, Safety PAK and sachets, and expand further with the entire portfolio of medical products as well. Winpak Control Group operates from over 82,000 square feet facilities and employs 71 people. On Slide 22, you have a short excerpt of some of the Control Group products, such as blister liddings, sachets, WinForm, cold form blisters, inserts and outserts, label and also all-plastic die-cut lids. Here in Winnipeg, the location of American Biaxis, this is the site of our BOPA 3 expansion, our highest investment in a single project in our history, together with our joint venture partner, Sojitz of Japan. Hovering to Slide 24. These are some applications, from event balloons to high-barrier packaging for highly perishable foods, pharmaceutical products, aseptic or retort pouches, where the puncture and heat resistance of polyamide are irreplaceable. We are also expecting a new generation BOPA film to find applications in new high-tech devices such as lithium polymer battery packaging. On Slide 25, you can see the current state of the future hall for the BOPA 3 and a view of the outside of the building, along Wihuri Road. The new line will boast a number of world's firsts such as in output, speed and layer sophistication. We are also capable of duplicating our current products made on the existing BOPA 1 and BOPA 2 lines. We expect BOPA 3 to start up in the early 2021. Moving on to Slide 26 in Winpak Sauk Village, our potion packaging -- one of our portion packaging plants, excuse me. After the 360,000 square feet expansion of the site, our first 2 in-line sheet production and thermoforming lines were taken into commission last year, while installing yet a new line, which went into production in 2020. There is room for another 7 such massive lines in that expansion. And on Slide 27, this is the last of the 3 lines mentioned earlier. And the scale of the line is such that looking at the pre-heat and thermoforming part on the picture, while the sheet extrusion part on the left is even outside of that picture. The line has highly automated sorting and packing to keep costs low. Last year, I've shown the newly installed and running line 52, and this is the line 53 now, also fully operational. The Board has approved the capital for new investments in 2 new technologies at that particular site to broaden the product portfolio of our rigid business, staying in existing markets and providing unique selling proposition. More information will be disclosed in due time. On Slide 28 and 29, you have some overviews of some of the thermoform packaging applications, from hot beverages, high-barrier snack geared towards human and pet food, as well as a variety of stock condiment, dessert, apple sauce cups, et cetera, that constitute our Winpak Potion Packaging portfolio. On Slide 30, this is the outside of our new facility in Querétaro, Mexico. In 2012, Winpak followed one of its customers to Mexico for die-cut dairy lidding to shorten lead time and opened its first facility there. Last September, we inaugurated the new 55,000-square foot building to complement our die-cut offering with printed laminated structures and printed lids, to complement our vacuum or modified atmosphere packaging, and for creating flexible packaging. The site has also ample room for further expansion. On Slide 31, besides having moved the die-cut operation into the new site, the objective is to offer local service for printing and laminated flexible packaging. And we are designing and installing a true showcase of the latest print technology, with the first such CI offset fully automated press in North America, solventless and solvent-based lamination and sleeving. Moving on to Slide 32, Winpak Films in Senoia, Georgia. Winpak Films and Winpak Division in Winnipeg are now under one management team to focus and manage on our high-barrier flexible business across food, protein, Latin American and health care applications. Moving to Slide 33. Our success in growing primary packaging barrier films has required the addition of yet another high capacity blown film line. And we're in the process of adding another one, which will be operational as we speak. It's also to be noted that our growth in medical nylon films used in reactors for the production of pharmaceutical active ingredients. And on Slide 34, another hallmark product range from Senoia is barrier shrink bags. And the original lines have all been reengineered to the highest level of productivity and producing an even tighter specification than before. And the completion of this massive undertaking has now been completed. On Slide 35 are some of the current shrink bag applications that we produce out of Senoia. In Winpak Division in Winnipeg, we are working on the reengineering of 2 of our large cast lines to be able to produce a new generation of recycle-ready, low-carbon footprint vacuum or modified atmosphere packaging in the most cost-effective manner so that they can be competitive with current nonrecyclable offering. One line should be operational late this year, and the other mid-2021. In addition, the Board has approved an extrusion line to complement the existing ones which are near capacity, and this new line should ramp up in the end of 2021. Furthermore, the Board has approved the investment in 2 new technologies to develop the next generation of flexible packaging solutions, and more will be announced in due course. On to Slides 37 and 38, there are some example of high-barrier applications, modified atmosphere packaging and pouches that are produced in Winnipeg. Winpak Lane in San Bernardino, California on Slide 46. I mentioned earlier that our machinery business has been performing very well. And we are now at the point of rethinking our footprint with the next generation of machinery development, both for sachet form/fill/seal and for cups filling equipment, as well as cooperation with machine manufacturers from overseas. On Slide 39, this is Winpak's Lane (sic) [ Winpak Lane's ] future home in Rialto, California. This is a rendering of that new building, which is currently under construction. This will enable the expansion of the activity and the broadening of the portfolio of tight packaging machine solutions that we'll offer. Of course, keeping in mind that Winpak Lane is also the conduit for our system sales approach of machinery and consumables. Let's -- on Slide 40, let's have a quick overview of our sustainability approach. It's our nature. It's our promise to our nature to protect. And on Page -- on Slide 41, now we are -- we all know that single-use plastic is not what Winpak's products are about. We are protecting food and health care products. We are protecting or extending the shelf life of these products. We allow for a safe distribution and storage of perishable goods until they are consumed and provide valuable use and nutrition or safety information. We are producing primary packaging, and for the vast majority, in high barrier. In other words, providing high levels of protection to packaged goods. No other material is more effective at providing these required attributes of protection, information, logistics, processing, affordability than our high-barrier plastics product, not from a cost standpoint and more importantly, not from a sustainability or environmental footprint standpoint. Having said that, our clients and their brands are in the crosshairs of public opinion of being responsible for damage to the environment, pollution of land and oceans. They, in turn, seek new and improved solutions to reduce their impact and, eventually, our impact on the environment. This is a fantastic opportunity for Winpak. With our advanced production infrastructure and second-to-none investments in material sciences, we are uniquely positioned to lead the way sustainable products can be introduced in the market. On Slide 42, you can see our sustainability pillars. And of course, sustainability extends to the entire supply chain and stakeholders, our Winpak family, our business and our governance practices, not just the products. Having said that, though, on Slide 43, we'd like to demonstrate some recent product launches. At PACK EXPO 2019, we've introduced a record number of standard-setting products, all recycle-ready. And as mentioned earlier, the Board of Winpak has approved investments to produce these advanced materials in the most effective manner. We introduced low-carbon footprint, recycle-ready thermoformable high-barrier films with the nonforming or lidding partners to go along; and a variety of recycle-ready, high barrier lidding solutions for our already-recyclable high-barrier rigid trays so that the entire packaging system can be recycled; and at last but not least, a new generation of high and ultra-high barrier recycle-ready family of pouches, from closable zippers to spouted types. Moving on to Slides 44 and further. The following 3 slides contain financial details and forward-looking statements for the company and are available for individual reading. I will not go through one by one. This presentation, as well as detailed financial disclosures, are available from Winpak's website at www.winpak.com. With this, Mr. Chairman, I am coming to the end of my presentation. And thank you all for attending Winpak's Annual Meeting of Shareholders. And let's check whether there are any questions. No questions? And there are no questions. So back to you, Mr. Chairman.

Thank you, Olivier. [Operator Instructions] We will answer as many questions as time permits. [Operator Instructions] We will now give attendees a moment to type in their questions. Are there still no questions, Olivier?

No questions, Mr. Chairman.

Okay, thank you. Well, as there are no questions and as there is no further business to come before the meeting, I move and second that this meeting now be terminated. Thank you, everyone.

Thank you.

This concludes the meeting. You may now disconnect.