WINPAK LTD.
TSX : WPK

WINPAK LTD.

July 27, 2005 12:39 ET

Winpak Reports Second Quarter 2005

WINNIPEG, MANITOBA--(CCNMatthews - July 27, 2005) - The Board of Directors announces Winpak's (TSX:WPK) consolidated results reported in US dollars for the second interim period of 2005, which ended on July 3, 2005. Earnings per share reflect the 10 for 1 share split that occurred in May 2005.



July 3 June 27
Year-To-Date Ended 2005 2004
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(thousands of US dollars, except per share amounts)

Sales 216,692 189,500
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Net earnings 11,613 12,097
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Minority interest (28) 505
Provision for income taxes 4,321 7,761
Interest 1,607 1,293
Depreciation and amortization 9,694 9,246
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EBITDA (1) 27,207 30,902
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Basic and fully diluted net earnings per share 0.18 0.19
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July 3 June 27
Second Quarter Ended 2005 2004
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(thousands of US dollars, except per share amounts)

Sales 110,663 98,779
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Net earnings 6,306 7,272
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Minority interest 74 313
Provision for income taxes 1,387 4,688
Interest 832 669
Depreciation and amortization 4,841 4,603
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EBITDA (1) 13,440 17,545
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Basic and fully diluted net earnings per share 0.10 0.12
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Caution: (1) EBITDA is not a recognized measure under Canadian GAAP. Management believes that in addition to net earnings, this measure provides useful supplemental information to investors including an indication of cash available for distribution prior to debt service, capital expenditures and income taxes. Investors should be cautioned, however, that this measure should not be construed as an alternative to net earnings, determined in accordance with GAAP, as an indicator of the Company's performance. The Company's method of calculating this measure may differ from other companies, and, accordingly, the results may not be comparable.

The Company: Winpak Ltd. manufactures and distributes high-quality packaging materials and innovative packaging machines that are sold in combination with packaging materials. The Company's products are used primarily for the protection of perishable foods, beverages, pharmaceuticals and in medical application.

Management's Discussion and Analysis presented in US dollars

Forward-looking statements: Certain statements made in the following Management's Discussion and Analysis contain forward-looking statements including, but not limited to, statements concerning possible or assumed future results of operations of the Company. Forward-looking statements represent the Company's intentions, plans, expectations and beliefs, and are not guarantees of future performance. Such forward-looking statements represent our current views based on information as at the date of this report. They involve risks, uncertainties and assumptions and the Company's actual results could differ, which in some cases may be material, from those anticipated in these forward-looking statements. Unless otherwise required by applicable securities law, we disclaim any intention or obligation to publicly update or revise this information, whether as a result of new information, future events or otherwise. The Company cautions investors not to place undue reliance upon forward-looking statements.

Summary Results of Operations

Net earnings per share in the quarter ended July 3, 2005 were 2 cents lower than in the second quarter of 2004. For the six months ended on the same date, net earnings were 1 cent per share less than in the comparable period of the prior year. The sale of the printed, paper-bag business in the second quarter, described in more detail later in this MD&A, had no noticeable impact on net earnings per share.

In the quarter, organic growth of the business added 1 cent per share to net earnings. However, the impact on net earnings of lower gross profit margins was a reduction of 2.5 cents per share. Other factors reduced net earnings by 0.5 cents per share.

For the six-month period, organic business growth contributed 2.5 cents per share to net earnings while other factors added 0.5 cents per share. The decline in gross profit margins cut 4 cents per share from net earnings.

Sales, volume growth and pricing

Sales, quarter over quarter, increased 12.0 percent, which included 2.7 percentage points of volume growth. Year-to-date, sales were 14.3 percent higher compared to the comparable prior-year period, including 6.3 percent volume growth. Volume growth in the first six months for lidding products reached 16 percent, for modified atmosphere packaging ("MAP") products, 9 percent and for biaxially oriented nylon ("BOPA") film, 42 percent. Volume for all other products receded 4 percent. Selling prices were 7.3 percent higher than in the second quarter of 2004 and 6.3 percent higher, year-to-date. Foreign exchange differences contributed the remainder of the sales increases, both in the second quarter and the six-month period.

Margins

Gross profit margins declined 3.3 percentage points in the second quarter of 2005 to 27.0 percent and 2.4 percentage points in the first half-year to 26.8 percent, due to inadequate selling price increases in the face of raw material cost escalations. Pass-through selling price increases could not be implemented for BOPA film and only partially for MAP and certain other products given competitive pressures and greater availability of competing BOPA film. Consequently, the increase of raw material costs alone, relative to sales, represented 4.5 and 3.8 percentage points, respectively in the second quarter and first half of 2005. Partially offsetting the impact of these cost increases were efficiencies in manufacturing operations costs of 1.2 percentage points and 1.4 percentage points, respectively for the second quarter and first half of 2005 compared to 2004.

The dramatic escalations of oil and natural gas based products used as feedstock for Winpak's primary raw materials has impacted the Company's processes for passing through normal cost fluctuations. As illustrated in the following table, as a result of a series of price increases, the indexed purchase cost of Winpak's eight primary raw materials increased 39.4 percent between the fourth quarter of 2003 and the first quarter of 2005. This series of significant increases has strained the Company's ability to adequately pass-through cost fluctuations.



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Quarter and Year 4/03 1/04 2/04 3/04 4/04 1/05 2/05
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Index of Winpak's
eight primary raw
materials 103.1 110.7 113.5 123.0 127.8 143.7 139.2
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However, in the second quarter of 2005, for the first time since the last quarter of 2003, the index for the reported quarter did not sustain a significant increase from the immediately preceding quarter, reducing 3.1 percent between the first and second quarters of 2005. On this basis, the Company anticipates that during the remainder of the current year purchased raw material unit costs will not change significantly from the first quarter level, taking into account certain potential increases expected early in the third quarter. However, raw material costs that will be reflected in the earnings statements of the remaining two quarters of 2005, when compared to the same costs in the equivalent quarters of 2004, will be significantly greater.

Other factors

In the second quarter, increases in selling, general and administrative expenses and the foreign exchange losses were partially offset by the impact of a lower effective rate of income tax. Selling expenses encompass freight and distribution costs and increases include fuel surcharges and costs associated with augmenting the sales force. Year-to-date, the impact of the lower effective income tax rate more than offset higher selling, general and administrative expenses. In both periods, the lower effective income tax rate occurred consequent to the greater proportion of taxable income arising in lower tax-rate jurisdictions.

Sale of business

In June 2005, Winpak sold certain assets of the printed, paper bag business operated from the traditional converting plant at Laird Drive, Toronto, Ontario for cash proceeds of $6.1 million, representing a pre-tax gain of $3.8 million. In the fourth quarter of 2005, at the end of a transition period, additional cash proceeds will be received for the inventory associated with the paper bag business. Subsequently, the Laird Drive plant will be closed and, at an undetermined date, the premises sold. Consequent to the asset sale and future plant closure, the Company incurred termination and other costs and realization of cumulative currency translation adjustments totaling $5.5 million (see Note 5 to the Financial Statements), netting to a pre-tax loss on sale of the business of $1.7 million. The circumstances for income tax purposes of the sale and closure transactions drove an income tax recovery amounting to $1.8 million, leaving a negligible impact on net earnings.

Capital Resources, Cash Flow and Liquidity

Winpak concluded the second three-month period of 2005 with available cash funds of $10.9 million, including a surplus of $15.8 million provided during the second quarter. The surplus comprised primarily the funds received for sale of a business as previously discussed and $14.0 million cash provided by operating activities, partly offset by investments in property, plant and equipment totaling $3.9 million. Expenditures for property, plant and equipment were $6.8 million lower in the second quarter in keeping with the reduced capital investment program undertaken in 2005 compared to last year.

Winpak is confident that sufficient resources are available to fund cash needs for the foreseeable future.

Looking Forward

Winpak anticipates organic growth of at least 6 percent in 2005 and the year after. However, the growth in 2005 has been overshadowed by the inability of many participants in the flexible packaging industry, including Winpak, to pass through oil and natural gas based raw material cost increases. Winpak now does not anticipate that selling price adjustments in 2005 will recover raw material cost increases. Therefore, gross profit margins are anticipated to decline in 2005 with a consequent reduction in net earnings compared to 2004. Accordingly, and assuming no other unforeseen events, the Company anticipates net earnings in 2005 of between 35 and 40 cents per share, compared to 40 cents per share in 2004.



Corporate Office
100 Saulteaux Crescent
Winnipeg, Manitoba
Canada R3J 3T3
Tel. (204) 889-1015
Fax (204) 888-7806
Internet: www.winpak.com


Winpak Ltd.
Interim Consolidated Financial Statements
Year-to-date ended: July 3, 2005

These interim consolidated financial statements have not been audited
or reviewed by the Company's independent external auditors,
PricewaterhouseCoopers LLP.


Winpak Ltd.
Consolidated Balance Sheets
(thousands of US dollars)
(2005 Unaudited)

July 3 December 31
2005 2004
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Assets

Current Assets:
Cash 10,922 11,654
Accounts receivable 54,616 51,841
Inventories 68,977 63,802
Prepaid expenses 2,495 1,935
Future income taxes 3,188 2,234
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140,198 131,466

Property, plant and equipment (net) 195,756 200,870

Other assets 4,542 5,920

Intangible assets (net) 12,057 13,198

Goodwill 15,953 16,140
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368,506 367,594
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Liabilities and Shareholders' Equity

Current Liabilities:
Accounts payable and accrued liabilities 37,892 36,348

Long-term debt 54,000 59,000

Deferred credits 9,261 9,669

Future income taxes 28,110 28,704

Postretirement benefits 597 894
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129,860 134,615

Minority interest 10,942 10,971

Shareholders' Equity:
Share capital (note 3) 29,195 29,195
Retained earnings 171,146 160,856
Cumulative currency translation adjustments 27,363 31,957
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227,704 222,008
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368,506 367,594
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See accompanying notes to consolidated financial statements.


Winpak Ltd.
Consolidated Statements of Earnings
(thousands of US dollars, except per share amounts)
(Unaudited)
Second Quarter Year-To-Date
Ended Ended
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July 3 June 27 July 3 June 27
2005 2004 2005 2004
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Sales $110,663 $98,779 $216,692 $189,500
Cost of sales 80,734 68,887 158,584 134,134
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Gross profit 29,929 29,892 58,108 55,366

Expenses
Selling, general & administrative
(note 4) 16,956 14,522 33,430 29,437
Research and technical 2,092 2,421 4,066 4,207
Pre-production 535 7 1,352 66
Loss on sale of business (note 5) 1,747 - 1,747 -
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Earnings from operations 8,599 12,942 17,513 21,656

Interest 832 669 1,607 1,293
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Earnings before income taxes and
minority interest 7,767 12,273 15,906 20,363
Provision for income taxes 1,387 4,688 4,321 7,761
Minority interest 74 313 (28) 505
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Net earnings $ 6,306 $ 7,272 $ 11,613 $ 12,097
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Basic and fully diluted earnings per
share $ 0.10 $ 0.12 $ 0.18 $ 0.19
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Average number of shares outstanding
(000's) (note 3) 65,000 65,000 65,000 65,000
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Consolidated Statements of Retained Earnings
(thousands of US dollars)
(Unaudited)
Second Quarter Year-To-Date
Ended Ended
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July 3 June 27 July 3 June 27
2005 2004 2005 2004
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Retained earnings, beginning of
period $165,503 $141,610 $160,856 $137,435
Net earnings 6,306 7,272 11,613 12,097
Dividends declared (663) (653) (1,323) (1,303)
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Retained earnings, end of period $171,146 $148,229 $171,146 $148,229
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See accompanying notes to consolidated financial statements.


Winpak Ltd.
Consolidated Statements of Cash Flows
(thousands of US dollars)
(Unaudited)
Second Quarter Year-To-Date
Ended Ended
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July 3 June 27 July 3 June 27
2005 2004 2005 2004
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Cash provided by (used in):

Operating activities:
Net earnings for the period $ 6,306 $ 7,272 $ 11,613 $ 12,097
Items not involving cash:
Depreciation 4,272 4,091 8,556 8,224
Amortization - intangible assets 569 512 1,138 1,022
Pension plan and postretirement
benefits 715 473 1,418 976
Future income taxes (2,423) (122) (1,131) 600
Foreign exchange loss on
long-term debt 240 582 729 1,128
Minority interest 74 313 (28) 505
Loss on sale of business (note 5) 1,747 - 1,747 -
Other 166 97 357 101
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Cash flow from operating
activities before change
in working capital 11,666 13,218 24,399 24,653

Change in working capital:
Accounts receivable (316) (1,108) (3,254) (4,486)
Inventories (640) 52 (6,237) (2,345)
Prepaid expenses 779 (336) (599) (1,126)
Accounts payable and accrued
liabilities 2,740 6,640 (3,283) 5,347

Pension plan and postretirement
benefits payments (234) (183) (1,867) (382)
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13,995 18,283 9,159 21,661
Investing activities:
Acquisition of property,
plant and equipment (3,873) (10,738) (9,575) (16,154)
Proceeds on sale of
business (note 5) 6,073 - 6,073 -
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2,200 (10,738) (3,502) (16,154)
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Financing activities:
Proceeds from long-term debt - - 2,000 -
Repayments of long-term debt - - (7,000) -
Dividends paid (799) (739) (1,612) (1,495)
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(799) (739) (6,612) (1,495)
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Foreign exchange translation
adjustment on cash 401 328 223 332
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Change in cash/bank indebtedness 15,797 7,134 (732) 4,344

Cash (bank indebtedness), beginning
of period (4,875) (945) 11,654 1,845
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Cash (bank indebtedness), end of
period $ 10,922 $ 6,189 $ 10,922 $ 6,189
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Supplemental disclosure of cash
flow information:
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Cash paid during the period for:
Interest expense $ 449 $ 246 $ 1,792 $ 1,452
Income tax expense 1,898 2,339 6,566 5,699

See accompanying notes to consolidated financial statements.



Winpak Ltd.

Notes to Consolidated Financial Statements
For the periods ended July 3, 2005 and June 27, 2004
(thousands of US dollars, unless otherwise indicated)
(Unaudited)


1. Basis of presentation:

The unaudited consolidated interim financial statements have been prepared in accordance with Canadian Generally Accepted Accounting Principles "GAAP". They have been prepared using the same accounting policies and methods of application as disclosed in the Company's audited consolidated financial statements for the year ended December 31, 2004 except as disclosed in note 2 to the consolidated interim financial statements.

These unaudited consolidated interim financial statements do not include all of the information and notes to the financial statements required by GAAP for annual financial statements and therefore should be read in conjunction with the audited consolidated financial statements and notes included in the Company's Annual Report for the year ended December 31, 2004.

2. Fiscal year:

Effective January 1, 2005 the Company changed its fiscal year-end from December 31 to the nearest Sunday to December 31. The Company's fiscal year will normally be 52 weeks in duration but will include a 53rd week every 5 to 6 years. The second quarter consolidated statements of earnings and retained earnings and cash flows are for the periods April 4 to July 3, 2005 and March 29 to June 27, 2004.

3. Share capital:

During the second quarter of 2005, the shareholders of the Company approved a ten-for-one share split of its issued and outstanding common shares. All references to net earnings per share (basic and fully diluted) have been retroactively restated to reflect the impact of the Company's ten-for-one common share split. As a result of the share split, the Company has 65,000,000 common shares authorized, issued and outstanding.

4. Selling, general & administrative expenses:



Included within selling, general & administrative expenses are the
following amounts:
Second Quarter Year-To-Date
Ended Ended
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July 3 June 27 July 3 June 27
2005 2004 2005 2004
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Foreign exchange translation losses 356 383 620 714
Defined benefit pension plan expense 565 385 1,116 794


Foreign exchange translation losses represent the realized and unrealized foreign exchange differences recognized upon translation of monetary assets and liabilities (including long-term debt) and realization of cumulative currency translation adjustments.

5. Sale of business, related assets and associated costs:

In June 2005, the Company sold the assets of the printed, paper-based bag business operated from the Company's facility on Laird Drive, Toronto, Ontario. The divestment further focuses and aligns Winpak's manufacturing capabilities with core strategic markets. During a short transition period, customers will continue to be served from the Company's premises at Laird Drive and at the end of the transition, the purchaser will acquire the inventory associated with the bag business. Subsequently, the plant will be closed and the property vacated and sold. The second quarter earnings statement records the sale of the bag business and realization of cumulative currency translation adjustments as well as employee termination and other costs related to the future plant closure. It is expected that a majority of the employee termination costs will be paid out by the end of the second quarter of 2006.



The following is a summary of the amounts recognized on the sale of
the paper bag business and future plant closure:

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Gain on sale of business and related assets (3,765)
Realized cumulative currency translation adjustments (1,663)
Employee termination costs 4,775
Pension plan curtailment costs 1,329
Equipment write-down and other costs 1,071
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Loss on sale of business 1,747
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The income tax recovery corresponding to the loss on sale of business was $1,872 and therefore the increase to net earnings recorded in the financial statements was $125.

The following is a summary of the costs recognized in the second quarter of 2005 regarding the plant closure, as well as the corresponding liability as at July 3, 2005:



Equipment
Employee Pension Plan Write-Down
Termination Curtailment and Other Total
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Balance - beginning of
period 0 0 0 0
Costs accrued 4,775 1,329 1,071 7,175
Non-cash amounts 0 (1,047) (1,013) (2,060)
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Balance - end of period 4,775 282 58 5,115
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6. Seasonality:

The Company experiences seasonal variation in sales, with sales typically being the highest in the second and fourth quarters, and lowest in the first quarter.

7. Comparative interim amounts:

Certain comparative interim amounts have also been reclassified to conform with the presentation in the current period.

Contact Information

  • Winpak Ltd.
    M.G. Johnston
    Vice President & CFO
    (204) 831-2254
    or
    Winpak Ltd.
    B.J. Berry
    President & CEO
    (204) 831-2216