Winpak Ltd. (WPK) Earnings Call Transcript & Summary

Thank you for standing by. Welcome to the Annual Meeting of Shareholders of Winpak Ltd. Please note that today's meeting is being recorded. If you participate in today's meeting and disclose personal information, you will be deemed to consent to the recording transfer and use of the same. If you disclose the personal information of another person in today's meaning you'll be deemed to represent and warrant to Computershare and the corporation that you first obtain all required consent record disclosure, recording, transfer and use of such personal information from all appropriate persons before your disclosure. During the meeting, we will have a question-and-answer session. [Operator Instructions] It is now my pleasure to turn the meeting over to Martti Aarnio-Wihuri, Vice Chairman of the Board of Directors of Winpak Ltd. Mr. Wihuri, the floor is yours.

I would like to thank the operator and good morning to all attendees. It's my pleasure to welcome you to the Annual Meeting of Shareholders of Winpak Ltd. 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; Scott Taylor, Vice President and CFO; and Mandy Meyer, Secretary. 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 this meeting. Questions in respect to a motion can be submitted by any registered shareholder or duly appointed proxy holder using the Q&A icon located on the right of your screen. Please note that there may be a slight delay in the publication of communications received. Questions will appear shortly after they are submitted. General questions will only be addressed during the question-and-answer period at the end of the meeting. Questions regarding procedural matters or directly related to the motion received 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 who have not yet done so, will be asked to vote on each business item after it has been presented. Please register your votes by selecting the for or against buttons next to the name of each proposed director; for or withhold next to the resolution with respect to the appointment of KPMG LLP as the company's auditors; and for or against for the resolution to accept the company's approach to executive compensation. Once the electronic balloting closes, the voting page will disappear, and your votes will be automatically submitted. The polls will be opened until all motions for matters to be considered at the 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 will 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 the meeting. For the purposes of today's meeting, I appoint Computershare Investor Services, 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 open to registered shareholders and duly appointed proxy holders. The polls are now open. At this point, all registered shareholders and duly appointed proxy holders who have properly logged in with their control numbers 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 February 16, 2023. The Notice of the Meeting, the Management Proxy Circular and the Form of Proxy was mailed to shareholders on March 29, 2023. The audited consolidated financial statements of the company for the fiscal period ended December 25, 2022, and related management's discussion analysis to shareholders of the company who requested such statements and related management discussion analysis were mailed on March 7, 2023. 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 called -- is properly called and duly constituted for the transaction business. I have received a scrutineer's report, and I direct that the formal -- 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 the results will be published on SEDAR and by press release. As the first item of business on the agenda for today's meeting, I will now present to the meeting the audited financial statements of the company as of and for the fiscal period that ended December 25, 2022, 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 and Ilkka T. Suominen, have been nominated as directors for the ensuing year or until their successors are elected or appointed. Each of the nominated individuals have confirmed that they are prepared to serve as director. Are there any further nominations? If you want to make a nomination, please use the inset messaging feature of the virtual interface to do so. 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 being received on this motion?

No questions have been received.

Thank you. 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? 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'd like to say a few words. Winpak is committed to enhancing its corporate governance practices. One of the many ways to satisfy that objective is to seek input from 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, this will provide the Board with valuable feedback in terms of moving forward on this very important subject. If there are no concerns with the company's approach to executive compensation, I move and second the advisory resolution to assess 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 our registered shareholders and duly appointed proxy holders approximately 15 more seconds to complete the electronic ballots. [Voting]

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 the 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. Mr. Muggli.

Thank you, Martti. I also would like to welcome you to Winpak's 37th Annual Shareholders' Meeting, and it's our fourth hybrid one. Today, I will review our 2022 results and the company's performance during the first quarter of '23. I will also give you some insight into Winpak's future. The beginning of 2022 was still impacted by COVID-related absenteeism, both at Winpak and at many clients. Supply chain was still playing havoc on many raw materials and some allocations curtailed our ability to fully service our clients. Under these premises, I would like to express a very 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 navigate and maintain control in these uncharted waters. In the meantime, much has improved in terms of supply chain, and new clouds appeared on the horizon with sustained inflation and increasing interest rates, which affect our consumer purchasing powers, slowing economy and excess inventories, many stemming from the over-ordering while supply was tight. The unprecedented input cost increases experienced in 2021 and into 2022 has stabilized and some have finally softened, providing relief from the relentless pressure to increase prices. Certain statements made here contain forward-looking statements and while these represent the company's expectations and beliefs, they contain risks and assumptions and caution should hence prevail when relying upon such statements. Let's review the 2022 results. After breaking the $1 billion revenue ceiling in 2021, our 2022 revenue jumped to USD 1.18 billion, a 17.9% increase over prior year, the highest revenue in the history of the company. We are coming out of 2 successive years of double-digit growth in our modified atmosphere vacuum packaging and a more modest 4% growth in general and flexibles. Other activities, notably in our rigid container and flexibles lidding business were affected negatively by the global difficulty to source aluminum foil for lidding applications, which negatively affected the volumes of associated container sales. Significant volume growth was generated by the specialized printing group, particularly in the nutraceutical packaging space. Packaging machinery revenue was essentially the same as prior year. Ultimately, selling price mix had a favorable effect on the revenue as the substantial rise in input costs over the prior 18 months generated higher selling prices. Foreign exchange, on the other hand, had virtually no impact on revenue. Geographically, 80% of Winpak's revenue is realized in the United States with 30% coming from Canada and export sales outside of Canada and the United States represents 7% of the total volume. Winpak's current structure is made up of 3 distinct product groups: 2 flexible packaging plants in Winnipeg, 1 in the Atlanta region, 1 in Querétaro, Mexico and 1 specialty printing packaging sites acquired in 2019 account for 54% of the corporation's sales. Rigid and flexible lease facilities located in Toronto, Montreal; Pekin, Illinois, 2 in the Chicago area and in Mexico contribute to 43% of the total sales. The newly relocated packaging machinery business based in the Los Angeles area is responsible for 3%. Winpak now occupies 2.44 million square feet of production space and employs over 2,700 people. The net income attributable to equity holders of the company eclipsed last year's reaching $128.3 million, an increase of 23.6%. This new all-time record stems from strong volume growth in our modified atmosphere packaging products and catching up on the pass-through of increased input costs. The supply chain issues, particularly with aluminum foil, resulted in lower volumes in our lidding supply and associated rigid containers as well as shorter production runs, reduced efficiencies on many production lines and thus affecting productivity and margins. Some activities were restrained during the Q4 due to overstock situations at many clients. However, overall margin recovery was outstanding during the course of the year. On a per share basis, the year-over-year impact was a positive $0.37,or 23.1%. Overall, modest volume growth, very strong margin recovery dampened by heightened freight and distribution costs, higher personnel cost and preproduction costs on our new BOPA line. Tax rate and foreign exchange dampened EPS by $0.035 each. In 2022, the company's EBITDA reached $220 million, an increase of 17.1% for the equivalent of 18.6% of revenue and that represents a compounded annual growth rate of 5.6% since 2012. As a recap for 2022. Revenue increased by 17.9% to $1.18 billion, driven by price mix, strong growth in modified atmosphere and vacuum packaging while our rigid and lidding business suffered from aluminum foil shortages and our machinery business was essentially flat. EBITDA was positively affected to the tune of 17.1%, mostly driven by margin recovery from increased input costs pass-through while operational expenses were adversely affected by higher transportation, personnel and distribution costs. Let's now review our first quarter 2023 performance. Revenue in the first quarter of 2023 grew by 10.3% to $304.5 million as a result of volume growth when compared to the same period last year. Although it's a mixed picture with modified atmosphere packaging being significantly ahead from last year as well as flexible lidding as last year was impacted by both COVID in our plants and our customers as well as aluminum foil worldwide shortages still in effect. As a result of the significant revenue increase, strong gross profit margin, the first quarter earnings increased 15.4% to $0.60 per share compared to the same period last year. Gross profit increased by 7.7% in the first quarter from $81.5 million to $87.8 million in the same period last year, driven mostly by volume and dampened by price pressure and still increased operational costs compared to last year. The 15.4% EPS increased from $0.52 to $0.60 can be characterized by positive volume, financial impact, but dampened slightly by price pressure and higher operational costs. Raw material prices and the Canadian to U.S. dollar exchange will continue to have an impact on Winpak's overall performance. This graph highlights the price evolution of Winpak's 8 most important raw materials and the U.S. dollar between 2016 and the first quarter of 2023. The weak Canadian dollar and lower raw material prices are typically good for Winpak's bottom line. 2022 started with input cost increases and eventually started declining in the latter part of the year and into 2023. The Canadian dollar, on the other hand, kept declining since its peak in 2021. While ForEx is highly unpredictable, Winpak expects raw material costs to remain more or less flat to slightly declining during the course of 2023 pending remarkable weather events, for instance, such as a hurricane season that may affect resin prices. And of course, as caveat, all of that remains highly unpredictable. Let's now review capital projects. Over the past decade, Winpak has invested USD 623 million in capital projects or on average, 6.6% of revenue, which is a rather unique situation in our industry. Going forward, we expect our investments to increase significantly when compared to, let's say, the pandemic years. So let's review some key current capital projects. But before we do that, let's first examine the rationale for current and clearly for future investments. Our business is to protect or extend the shelf life of food and health care products and our mission is to provide the best packaging solutions for people and planet. We allow for a safe distribution and storage of perishable goods until they are consumed and provide valuable use, nutrition and safety information to consumers. We are producing primary packaging and for the vast majority in high barrier, in other words, providing high levels of protection to packaged goods. We're striving to provide and further develop the highest level in attributes of protection, information, logistics, processing, while being the most affordable packaging products. Today, there isn't a more optimized type packaging, 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 opinions of being responsible for the 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 and eventually achieve carbon neutrality of zero carbon. 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 to sustainable product introductions. Without going too much in details regarding the chart on the screen, the key message is that the carbon intensity of the food products and their respective processing shown here in orange and blue bars for a variety of food products are far superior to the carbon intensity of what protects them from spoilage, which is our packaging shown here in green. In other words, if proper packaging can reduce or avoid spoilage and extend shelf life, it comes at a very small environmental cost compared to the potential loss of food. However, our ambition -- Winpak's ambition is to provide or enhance that level of production while reducing the carbon intensity of our activity and our products. So what are we doing to reduce carbon intensity? Winpak has introduced a record number of standard-setting products or 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 a low-carbon footprint, recycle-ready thermoformable high-barrier film. This is, again, a landmark, new to Winpak and new to the world and new to the world technology for flexible packaging, which opens unheard of possibilities for recycle-ready, low-carbon footprint solutions to extend shelf life. We also offer a variety of recycle-ready high barrier leading solutions for our already recyclable high-barrier rigid trays so that the entire packaging system can be effectively recycled. A new pouch generation of high and ultra-high barrier recycle-ready family of pouches from re-closable zipper to spouty types has also been introduced. Beyond these products, we are nearing the introduction of a high barrier material relying on renewable resources such as starch as a byproduct of potato or plant-based protein extraction to significantly lower the carbon footprint of rigid packaging. We actually expect these to be carbon neutral, and we call that family of products EcoForm. As an example of such packaging solution made out of renewable materials, we have introduced EcoWrap, a paper-based flow wrap for food and nonfood products that is 100% curbside recyclable with a paper waste stream, and we are introducing a paper-based compostable package as well. So that sounds like a lot of R&D and material sciences and it is, but it also means significant equipment investments and site expansions like here in Winnipeg. In the existing footprint, the green box on the screen, we introduced a third large extrusion coating line in 2021, and we are in the midst of installing a fourth one, which will be taken commercially before the end of the year. Also in the green box, we just added a triplex laminator and will take a new flexo press commercial this year as well. The Board recently approved the addition of 207,000 square feet, which is the red box in the above picture, and for a fifth cast extrusion line for Reform recyclable-ready products. As mentioned earlier, Winpak pioneered a new cast technology for high barrier recyclable thermoformable films. That new technology will now be scaled up in a new expansion with again one possibly the highest output cast in the market. These investments amount to $100 million over the next 2 years. Beyond that, the expansion is also earmarked to house our first EcoForm line, which will be a large-scale thermoplastic starch line for high barrier semi-rigid packaging from renewable resources, and we expect it to be carbon neutral. This is the fourth extrusion coating line that I mentioned earlier. And this is the new flexographic printing press, which is being installed as we speak. And as well here, the new triplex tandem laminator we introduced commercially at the moment. Here are some examples of barrier applications, modified atmosphere packaging, barrier pouches and reclosable label type packs from Winnipeg, which are all available as recycle ready or recyclable versions. Winpak division in Winnipeg, together with Winpak films in Georgia are the locations focusing on recycle ready, flexible, high barrier solutions, whether for thermoformable modified atmosphere packaging, pouch-type applications of all kinds with zippers or with pouches and caps. A number of such solutions have already obtained a how to recycle approval, and there's more to come, as you can imagine. EcoForm is another significant game changer with the introduction of thermoplastic starch high-barrier semi-rigid containers. This renewable solution is based upon starch that is a byproduct of potato processing or from the extraction of protein from peas used to produce meat replacement, both of which are available here in Manitoba, and processed into high-barrier packaging material with the use of hydro energy, in other words, clean energy. As I mentioned earlier, we expect this packaging solution to be carbon neutral and either home compostable or biodegradable. Another interesting novel approach is for so-called case-ready flowpak. The challenge here is to eliminate the high carbon intensity rigid tray often a foam tray with an overwrap or clean on type wrap with a modified atmosphere, thin high-barrier flexible mono-material flowpak. Besides the obvious significant source reduction in the range of 60% to 70%, this form of packaging maintains the texture and the quality of the ground meat while expanding its shelf life and providing an outstanding high shelf presence and a differentiating billboard. Also in Winnipeg, but in the blue box this time is the site of the new biaxially-oriented polyamide line known as BOPA III. This is the largest line of its kind and the most sophisticated in terms of technology. Applications range today from event balloons to high barrier packaging for highly perishable food or pharmaceutical products and aseptic or retort pouches, where the puncture and heat resistance of polyamide are irreplaceable. Very thin and [indiscernible] structures are intended to help achieve high-performance packaging yet maintain recyclability. We are also expecting the new generation BOPA film to find applications in the new high-tech devices such as lithium polymer battery packaging and some hard-to-hold pharmaceutical products. This is the Winpak Heat Seal Corporation site in Peoria, Illinois, and it is Winpak's largest print and die-cut center in North America. Over its 15 years of existence as a site, die-cut and print equipment has been added on a regular basis. As with many new technologies, increased demands for lower cost have meant increased processing speeds and our automation is needed to keep up with the pace of new equipment. Hence, significant upgrades are being made with the introduction of automation on new die cutters to increase output. And in addition, an expansion of the printing and ink dispensing areas become necessary to keep up with volumes. And here are some of the typical die-cut products from that Peoria, Illinois plant. Winpak Lane in Rialto, California. The 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 the conduit for our system sales approach of machinery and consumable sales. New generation cup machines and upgraded sachet machines, such as the so-called Titan, which is a commercially reality now, a new generation of high output, highly automated food clean in place line, which runs a variety of cup sizes and can accommodate roll-fed and die-cut lids, and the first of its kind has now been shipped to a client. Another novelty based on the legacy of the famous W-18 frame is the new Phoenix Sachet machine introduced at Pack Expo in Chicago. It is the next level in providing industry-leading output, 14 lanes and it has its legendary reliability. Next, an [indiscernible] industry-leading output machine inspired by the W-25 workhorse will be introduced this year at Pack Expo under a new name, the Genesis brand. Here is the top view of the 615,000 square feet Sauk Village, Illinois site and the flagship of our 3 Winpak portion packaging sites. Portion Packaging is the business unit producing a wide range of rigid containers, trays and cups, mostly high barrier ones. Here are examples of so-called custom thermal forming packaging applications ranging from hot beverages, high-barrier snacks, retort human food, vet pet food and a variety of stock condiment, dessert, apple sauce cups, and MAPfresh modified atmosphere packaging meat trays. We have gradually transformed our assets from processing polystyrene-based containers towards recyclable polypropylene ones, and we took another major step forward with the last large polystyrene line that was dedicated to hot beverage packaging, having now been reengineered to produce recyclable thermoform propylene containers. And in parallel, a new center for in-mold-label injection molding has been built. And we are in the midst of adding injection molding equipment for our Phase II and Phase III in-mold-label infrastructure. Furthermore, we're also investing in injection molding for high barrier co-injected parts for a variety of new packaging concepts such as FlexPod and SqueezePod of which the entire family is illustrated here, which stem from the combination of rigid packaging attributes but made from flexible materials. That way, there is a significant source reduction of up to 65%, new and improved functionalities, all with entirely recyclable materials. And thanks to their so-called rigid nature, these packages have a high likelihood of being identified and sorted for recycling and material recovery facilities. Besides recyclable solutions, we also have a FlexPod version that is entirely made out of renewables and is home compostable. Another game-changing new products to enhance our family of recyclable high-barrier spouted pouches, is the introduction of our new spill-resistant and high-barrier spout and caps. As an industry leader, we're putting tremendous efforts in providing pouch bodies with high barrier attributes but have accepted the spout and cap without barrier for a long time. It's like putting a lot of effort in insulating a home from heat or cold but leaving the front door open at all times. Well, no more. The new spout and cap design offers not only spill resistance, high barrier, recyclability, it is also one of the lightest in weight for source reduction and its novel anti-choke design allows for minimal space and weight. Winpak's proprietary and patent pending design is also conducive to keep the cap attached to the spout and the remainder of the pouch to ensure the recycling of the entire pack with all its constituents. The following sites 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 am coming to the end of my presentation, and thank you all for attending Winpak's Annual Meeting of Shareholders. Back to you, Martti.

Thank you, Olivier. I now open the meeting for questions. I ask that all attendees who would like to ask a question [Audio Gap] through the virtual interface to do so. We will answer as many questions as time permits. When asking your question, please state your name, the entity you represent, if any, and confirm you are a registered shareholder or duly appointed proxy holder. Please limit your questions to 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 asks a question and if applicable, the entity such person represents. We would like to remind you that questions that were already answered or that are redundant or repetitive will not be published or answered. Ms. Secretary, do we have any questions?

At this time, no questions have been received.

As there is no further business to come before the meeting, I move and second that this meeting now be terminated.

That concludes the Winpak Ltd. Annual Meeting of Shareholders. You may now disconnect.