Winpak Ltd. (WPK) Earnings Call Transcript & Summary

Hello, and welcome to Winpak Ltd. Annual Meeting of Shareholders 2021. It is now my pleasure to turn today's meeting over to Martti. 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 Mandy Meyer, Secretary. As announced in Winpak's press release dated June 1, 2021, as restrictions continue related to the unprecedented public health impact of COVID-19, Winpak has changed the location of today's meeting from the in-person to the virtual format. Firstly, as this meeting is being held virtually via 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. General questions will only be addressed during the question period at the end of the meeting, provided that questions regarding procedural matters or directly related to motions before the meeting will be addressed during the meeting. For the purposes of the meeting today, voting on all matters will be conducted by electronic ballot. Registered shareholders and duly appointed proxy holders will be asked to vote on each business item after it has been presented. Please register your votes by selecting the for or withhold buttons next to the name of each post Director and next to the resolution with respect to the appointment of the company's auditors. For the resolution to accept the company's approach to executive compensation, please select the for or against buttons. Once the electronic balloting closes, the voting page will disappear, and your votes will automatically be submitted. The polls will be open until all motions for matters to be considered meeting have been made and seconded. 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 Shareholders of the company come to order. I appoint Mandy Meyer, 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. I will now take a moment to ask that the balloting be opened to registered shareholders and duly appointed proxy holders. The polls are now open. At this point, Board-registered shareholders and duly appointed proxy holders who have properly logged in with their control numbers or user name and wish to vote will be able to see, on the screen, all motions being brought forth at this meeting. The purposes of today's meeting are set out in the Notice of Annual Meeting of Shareholders of the company dated April 23, 2021. The notice of meeting, the management proxy circular and the form of proxy was mailed to shareholders on May 27, 2021. The audited consolidated financial statements of the company for the fiscal period ended December 27, 2020 and related MD&A to shareholders of the company who requested such statements and related MD&A were mailed on March 30, 2021. A copy of the confirmation of mailing is being filed with the minutes of this meeting. Copies of the management's 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 called -- is properly called and duly constituted for the transaction of business. I have received the scrutineer's report, and I direct that their formal report be annexed to the minutes of this meeting as a schedule. 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. As the first item of business on today -- on the agenda for today's meeting, I will now present to the meeting the audited financial statements of the company as at and for the fiscal period ended December 27, 2020, together with the auditor's report to the shareholders thereon. Copies of such documents have been mailed to the shareholders who requested such statements, and it is not proposed to read them 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; 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 they are 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. [Voting]

If there are no further nominations, I move and second a motion that the nominations be closed, and the directors elected for the ensuing year or until their successors are elected or appointed. Ms. Secretary, have any questions been received on this motion? There have been no questions. The next item of business is the appointment of the company's auditors 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 is appointed auditors of the company until the next Annual Meeting of Shareholders. You have heard the motion. Is there any discussion on this matter?

No discussions.

The last item of business is to consider and approve an advisory resolution to accept the company's approach to executive compensation. Before I ask for a motion on the resolution, I would like to say a few words. Winpak is committed to enhancing its corporate governance practices. One of the new ways to satisfy that objective is to seek input from our shareholders on important issues. One of those issues is executive compensation, and we are asking you today whether you are satisfied with our current approach. Although the resolution, if passed, is advisory only, it will provide the Board with valuable feedback in terms of moving forward on this very important subject. If there are no concerns of the company's approach to executive compensation, I move and second that the advisory resolution to accept the company's approach to executive compensation. Ms. Secretary, have any questions been received on this motion?

No questions have been received.

As all motions for matters to be considered at the meeting have been made and seconded, we will now give registered shareholders and duly appointed proxy holders approximately 15 more seconds to complete the electronic ballots. [Voting]

The polls are now closed. The voting page will disappear and your votes will automatically be submitted. The formal items of business as set out in the notice of meeting have now been dealt with. I would 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. Please, Mr. Muggli.

Thank you, Mr. Chairman. The presentation that I will go through should appear on your screen on the right-hand side. I cannot move through the slides, so I will ask attendees to navigate at their leisure. I will indicate to which slide I am actually speaking to in the course of the presentation. Welcome to Winpak's 31st Annual Shareholders' -- 35th Annual Shareholders' Meeting, which is our second virtual one. Today, I will review our 2020 results, the company's performance during the first quarter of 2021, and I will also give you some insights into Winpak's future. For the entire industry and the world, 2020 was impacted by maneuvering through the various impacts from COVID-19. And while in 2021, we hope to see us gradually emerging from the pandemic, certainly the first half of the year is unprecedented from the standpoints of input cost increases and overall supply tightness of just about everything. Having said that, we have a lot of exciting elements planned for this year and ahead. But first, I would like to express a special thank you to everyone at Winpak, to all our suppliers and ultimately, our clients for the tremendous cooperation and effort of every day to help us all navigate and maintain control in these uncharted waters. All have overcome their fears of the pandemic, embraced the extraordinary protective measures that we've introduced in all our sites, have gone the extra mile to support our clients who at times were under a lot of difficulties, and we have maintained all of our sites open and productive. We've 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. Providing quality packaging to protect food and pharmaceutical products was essential during these difficult times, and under no circumstances could we take any shortcuts. Despite the reopening of many states, we maintain strict adherence to OSHA, CDCs, any federal and local regulations in all the jurisdictions we operate in. And we remain particularly vigilant to the rapid spread of new COVID-19 variants and encourage all stakeholders to get vaccinated. Again, thank you all. Moving to Slide 2. Certain statements here may contain forward-looking statements, and while these represent the company's expectations and beliefs -- They contain risks and assumptions and caution should be, hence, prevailed when relying upon such statements. On Slide 3, there's some disclosure policies for your own reading. So let's review the 2020 results, moving on to Slide 5. In 2020, revenues receded to USD 852.5 million indicating a slight overall volume contraction as a result of decreased rigid business volume in specialty beverages and food services due to COVID-19. And despite nice volume growth in the flexibles business of modified atmosphere, vacuum packaging and barrier films, COVID-19 negatively affected some broker market segments, such as food service, bag-in-box and party balloons and also had a negative impact in health care sales. There were a few doctor visits, hardly any regular OR activities and no cold and flu season. After adjustments for the acquired Winpak Control Group business, volumes receded overall by 2.5%. Product and selling mix reduced revenue by 1.9%, while the somewhat weaker Canadian dollar had a small negative effect of 0.1%. Raw material prices were deflationary for most of 2020, but started increasing notably in the last quarter. It is to be noted that COVID also delayed a number of new product launches as resources required on site to validate new products weren't available due to sanitary restrictions. Slide 6. Geographically, 79% of Winpak's revenues realized in the United States, while 13% are coming from Canada. Export sales outside of Canada and the United States represent 8% of the total volume. Slide 7. Winpak's current structure is made up of 3 distinct product groups: 2 flexible packaging plants in Winnipeg; one in the Atlanta region and the newly expanded one in Mexico, which is operational since fall of 2019; and Winpak Control Group's 2 sites in New Jersey, which were acquired in the last quarter of 2019, account for 53% of the corporation's sale. Rigid and lid facilities located in Toronto, Montreal, Pekin, Illinois, 2 in the Chicago area and in Mexico contribute to 43% of the total sales. And the growing packaging machinery business based in the Los Angeles area is responsible for 4%. Not counting yet the AVI expansion in Winnipeg, Winpak now occupies 2.266 million square feet of production space and employs over 2,500 people. The rigid containers and flexible lidding segment experienced some drops in volume in part by a reduction of the specialty beverage business and in part through COVID-19 impacting food service. For the lidding product groups, Rollstock with yogurt and dessert die-cut lids grew revenues by 2.5% despite some negative impact due again to the pandemic. The flexibles segment experienced mixed results with 3.7% revenue growth in modified atmosphere and vacuum packaging, while product ranges in food service segments receded, which overall led to 1.2% in segment growth. The packaging machinery segment experienced a remarkable 11% growth. Moving to Slide 8. Net income attributable to equity holders of the company fell by 7.4% due to weaker sales volume, slightly reduced margins due to competitive pressures and a reduction in net finance income. The weakening input costs and the remarkable productivity improvements in most of the business units didn't compensate for the reduced volume, mostly impacting the rigid business. Net income, on Slide 9. Over the past 10 years, Winpak's net income has grown at a compounded annual growth rate of 6.8%. Slide 10. On a per share basis, the year-over-year impact on net earnings per share was a negative $0.13 or 7.4%. Counterproductive were the rigid and COVID-related volume contraction and associated increased fixed manufacturing costs, compensated in part only with reduced input costs after price adjustments through indexing, while also affecting gross margin negatively. Operational excellence improvements held only partially offset these setbacks. Finance impact had a negative effect on EPS due to the low interest rates in 2020. On Slide 11, EBITDA. In 2020, the company's EBITDA reached $191.5 million or a decline of 3.5% over prior year, yet at a very healthy 22.5% of revenue and representing a compounded annual growth rate of 6.2% since 2010. Slide 12. Let's have a quick recap on the 2020 results before moving on to the first quarter of 2021. Revenues receded by 2.4% to $852.5 million under an overall volume decline of 2.5%, driven by a contraction in our rigid business, while flexibles grew significantly and food service being impacted by COVID-19. EBITDA was negatively affected by 3.5%, mostly driven by volume contraction, although EBITDA margin itself remains stable. Let's now proceed with looking at the 2021 first quarter results. Moving to Slide 14. First quarter consolidated revenue increased by 5.2% versus the same period last year, primarily driven by volume increases of 6.6% from all categories of our business. While the first quarter of 2020 was not impacted by COVID-19, the pandemic had a slight overall negative effect on the first quarter of 2021, with the food service business not having yet recovered, and the at-home consumption still being higher than customer. The rigid and lidding business showed some significant volume gains with the introduction of new products that had been delayed by COVID-19, along with sustained demand in snack foods, condiment and meat trays. On the flexible side, modified atmosphere and vacuum packaging, gross protein and dairy market segments showed remarkable volume growth. And the same is true for the volume of our machinery segment, which grew by 12%. Selling prices and mix changes had a 1.7% negative impact on revenue for the quarter, whereas the foreign exchange impact was negligible. Slide 15. As a result of the significant volume increase, first quarter earnings increased 5.8% to $0.38 per share compared to the same period last year. While foreign exchange and operating expenses had a favorable impact on earnings, gross profit margin had a negative effect, mainly driven by increased input costs not yet passed through to customers. Slide 16. The significant volume increase in the quarter was negatively impacted by the significant rise in input costs for just about every category of raw materials and the fact that the pass-through to clients is delayed by a quarter or longer depending upon agreements. Other costs such as transportation, packaging materials, et cetera, sharply increased as well. Slide 17. 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 17 reflects the price of Winpak's 8 most important raw materials and the U.S. dollar between 2016 and the first quarter of 2021. A weak Canadian dollar and lower raw material prices are good for Winpak's bottom line. As you see here, both were low for the most part of 2020, but raw material input costs increased in the latter part of 2020 and sharply in the first quarter of 2021. Tight supplies and record high increases of just about all raw materials, higher transportation costs, extended lead times have dampened margin expansion expectations. While ForEx is highly unpredictable, Winpak expects raw material costs to remain high until the fourth quarter of 2021, anticipates that some raw material shortages may extend into the third quarter and may even worsen from an active hurricane season according to weather forecasters. But of course, all of that remains highly unpredictable. Slide 18. This year, we announced the creation of Wiicare, the joining of forces between Winpak and Wipak to service the growing health care market on a global footprint, combining client management, R&D and technical development, production in Europe, North America and Asia with a local commercial support and more importantly, our field technical service. The vision is to provide and enhance our unmatched capabilities in terms of medical films, pouches, hospital pouches and a complete suite of pharmaceutical flexible packaging to the market on a global footprint with identical quality attributes regardless of destination. Slide 20, capital investments. Over the past decade, Winpak invested USD 613 million in capital project or on average, 7.2% of revenue, a rather unique situation in our industry. Let's review some of the -- some of the key capital projects. Slide 21. Here in Winnipeg is the location of American Biaxis Inc. This is the site of the BOPA 3 expansion, our highest investment in a single line in our industry -- in our history, together with our joint venture partner Sojitz of Japan. Construction completion of this massive line and building is expected for the fourth quarter of this year. Slide 22. Applications range today from event balloons to high-barrier packaging for highly perishable food and pharmaceutical product and aseptic or retort pouches, where the puncture and heat resistance of polyamide are irreplaceable. We are also expecting the new generation BOPA films to find applications in new high-tech devices such as lithium polymer battery packaging and specialty pharmaceutical applications. Slide 23, this is the current state of the BOPA 3 installation. The new line will boast a number of world's first, such as output speed and layer sophistication, while also capable of duplicating our current products made on the existing BOPA 1 and BOPA 2 lines. As mentioned, we expect BOPA 3 to start up in the fourth quarter of 2021. Slide 24. Also in Winnipeg, we completed 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. Both are now operational and were completed on time. In addition, an extrusion coating line to complement existing ones nearing capacities under construction are expected to ramp up before the end of 2021. Phase 1 for a new pouch technology has been installed in is commercial and Phase 2 is under current installation. Separately, sophisticated laser and label equipment has been installed and is commercial for the manufacturing of specialty repositionable packaging. On Slide 25, is pictures of one of the 2 retrofitted cast extrusion lines, reengineered to produce recycle-ready, low-carbon thermoformable films for vacuum or modified atmosphere packaging. On Slide 26, the platform of the new extrusion coating line that is being installed, which is expected to be commercial before the end of the year. And on Slide 27, the laser DCR equipment and new pouch technology for the most part already installed and commercial. On Slide 28 are examples of our current products, out of the Winnipeg facility, in-barrier, high-barrier applications, modified atmosphere packaging and pouches. At Winpak Portion Packaging in Sauk Village, Illinois on Slide 29, after the 360,000 square feet expansion of the site, a 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. Slide 30 shows a new injection molding center, which after taking line 53 automated sheet and thermoforming into full production, the construction of the new injection molding center has been undertaken. The IML center is expected to be up and running by the fall of 2021 and expanded from there into other injection-molded parts. Examples of our current products are shown on Slide 31 and 32, besides producing a wide range of so-called custom thermoforming packaging application running from hot beverages, high-barrier snacks, retort human and pet food and a wide variety of stock condiment: dessert, apple sauce cups and MAPfresh Modified Atmosphere Packaging meat trays. Slide 33, Winpak Films in Senoia, is Winpak's site dedicated to shrink films, barrier shrink bags, barrier films and converter films for all of our market streams. Last year, a new large 9-layer of long film line was taken into commercial production, which was the second in a row. And this year, Slide 34, significant upgrades were made to a number of lines, notably to support and expanding our medical liners and medical device activities and a new plate making center. Slide 35 shows some of the typical application for shrink bags, sorry, to lengthen the preservation of meat and cheese. This time last year, Slide 36, we show the rendering of the future home of Winpak Lane in Rialto, California, which was then under construction. Our machinery business is growing rapidly and a new larger facility for design and assembly of equipment was needed. And of course, keeping in mind that Winpak Lane is also a conduit for a system sales approach of machinery and consumable sales. The move was finalized in January, Slide 37, and all activities have resumed in a larger and improved site. A new generation of equipment is under development and will be assembled there. And of course, the continuous improvement of the existing lines is a never-ending endeavor. Slide 38 shows the new [ sheathing ] area to accommodate the emerging wind speed service model at Winpak Control Group, which operates from over 82,000 square feet facilities and specializes in a quick turnaround of printed inserts, outserts, labels, blister lidding and sachets for the health care market. The hallmark of the Winpak Control Group Service model is the 100% inspection of every single printed item to guarantee defect-free delivery to our clients. The backwards integration in base materials manufacturing is progressing rapidly. And now that the health care industry is emerging from the pandemic, we expect to see a rapid increase in activity. Slide 39. Here are some examples of our typical products from control groups such as blister lidding, sachets, WinForm, cold form blister material, inserts, outserts, label and all plastic bag outlets. Let's now approach Winpak's sustainability promise, IT'S OUR NATURE TO PROTECT. On Slide 41, single-use plastic is not what Winpak 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 level of protection to packaged good. No other material is more effective at providing the required attributes of protection, information, logistics, processing and is more affordable than our high-barrier plastic packaging products, not from a cost standpoint and more importantly, not from a sustainability or environmental footprint. Having said that, our clients and their brands are in the crosshairs of public opinion of being responsible for the damage to the environment, the pollution of land and oceans. And they are, in turn, seeking 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 in sustainable products and introduction. And of course, Slide 42, sustainability extends to the entire supply chain and stakeholders, our Winpak family, our business and governance practices. We've established a track -- key performance indicator for each of our pillars being the valued partner, our extended family, proud of our roots, the code of conduct, responsible supply and planet for future generations. Winpak has introduced, Slide 43, 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 cost-effective manner. We introduced low-carbon footprint, recycle-ready thermoformable high-barrier film, for which I've shown pictures of the commercial high output line. This is, again, a landmark new technology in the world of flexible packaging, which opens unheard of possibilities for recycle-ready, low-carbon footprint solution with the nonforming or lidding partner products. A variety of recycle-ready, high-barrier lidding solutions for our already-recyclable high-barrier rigid trays have been introduced so that the entire packaging system can be recycled as one. A new generation of high and ultra-high barrier recycle-ready family of pouches from reclosable zipper to spouted type has been introduced. Beyond these products, we are nearing the introduction of high-barrier materials relying on renewable resources to significantly lower the carbon footprint of certain types of packaging even further. As an example of such packaging solution made out of renewable materials, we have introduced EcoWrap, a paper-based flow wrap for the food or nonfood product that is 100% curbside recyclable with the paper waste stream. The following 3 slides contain further financial details and forward-looking statements from the company and are available for individual reading. This presentation as well as detailed financial disclosures are available from Winpak's website at www.winpak.com. With this, Mr. Chairman, I'm coming to the end of my presentation, and thank you all for attending Winpak's Annual Meeting of Shareholders. Back to you, Mr. Chairman.

Thank you, Mr. Muggli. I now open the meeting for questions. [Operator Instructions] We will answer as many questions as time permits. When asking a question, please state your name, the entity you represent, if any, and confirm you are a registered shareholder or a duly appointed proxyholder. Please limit your questions, topics relating to today's subject matter and keep your questions short and to the point. We will now give attendees a moment to type in their questions. For each question we answer, we will summarize the question and read out loud the name of the person who asked such question, and if applicable, the entity that such person represents. We would like you to remind -- we would like to remind you that questions that were already answered or that are redundant or repetitive will not be published nor answered. Ms. Secretary, are there any questions?

There are no questions at this time.

Very well. As there is no further business to come before the meeting, I move and second this meeting now be terminated. Thank you, everyone, and I wish you a pleasant summer.

And this concludes the meeting. You may now disconnect.

Thank you.

Thank you, everyone.

Thank you. Bye-bye, everybody.

Thank you.