• Focused on growth: Pro-Pac CEO Tim Welsh
    Focused on growth: Pro-Pac CEO Tim Welsh
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Pro-Pac Packaging (ASX: PPG) grew its revenue by four per cent in the first half with its core Flexibles business up by seven per cent, but its profit before tax fell by 60 per cent, under what it said were challenging market conditions.

First half revenue reached $244.7m, with profit before tax down by $7.5m at $4.2m, as margins shrank to 1.7 per cent, down by 326 basis points compared to the same period last year, due to the impact of the market conditions, primarily impacting the flexibles business.

Flexibles up: seven per cent this half
Pro-Pac Flexibles revenues up by seven per cent.

"The company said it continued to deliver on its operational strategy in the face of Covid-19 “headwinds” and focused on strategic priorities “within its control”.

It said an increasing pipeline of demand, investment in capacity and technology, and focus on organic and acquisitive growth will underpin revenue growth.

Its ERP consolidation project is on track with the supply chain and manufacturing pilot go-live scheduled for the current half year. It also completed the closure of its Chester Hill facility.

However, the company acknowledged that the impacts of the Covid-19 pandemic, particularly labour shortages, site closures and global supply chain disruptions, affected Pro-Pac’s businesses throughout the first half of the financial year.

Commenting on the first half results, Pro-Pac’s CEO and managing director Tim Welsh said, “The first half of FY22 has been a challenging period for the company, as the impacts of the ongoing Covid-19 pandemic, including labour shortages, site closures and global supply chain disruptions, constrained our manufacturing capacity.

“We have developed mitigating strategies for the various Covid-19 impacts, and have implemented a significant response to inflationary pressures in raw materials, freight and labour, as we continue to build a more resilient business.

“We have remained focused on delivering on our strategy and executing on the priorities within our control to capitalise on our investments. The closure of Chester Hill is complete, and our Centres of Excellence for Flexibles printing and conversion are now established in Dandenong, which provides a world class platform for growth.

“We remain focused on profitable growth, with organic and inorganic opportunities under active consideration. While we expect the operating environment to remain challenging for the remainder of the financial year, steps taken by management, and investment in critical areas are expected to have a material positive impact on 2H22 and therefore we anticipate 2H22 PBT to be materially greater than 1H22.”

Pro-Pac said freight and resin supply have been constrained, which has in turn led to significant increases in cost and increased stock holdings. It said the rapid and significant resin inflation related not only to global supply chain disruptions, but was also due to “extreme weather events” in the US during 2021 that restricted global supply, as well as higher general global demand for polyethylene products.

Pro-Pac has introduced a freight surcharge to address increased freight charges. Price increases continue to be progressively and routinely implemented across its business units in response to increased resin costs, but there has been a lag in the timing to recover these costs. Global shipping delays are making the timing of deliveries unpredictable and extending its cash conversion cycle, particularly in the Industrial Specialty Packaging (ISP) business.

Covid-19 site disruptions and stoppages, closures across sites in Victoria following storm activity, and commissioning issues associated with the relocation of key assets from the decommissioned Chester Hill site, all contributed to production backlogs, which delayed the introduction and impact of certain price increases.

Labour costs on several sites were “substantially above expectations” with Pro-Pac saying that was to address backlogs and meet customer demand, particularly in the Flexibles business. Pro-Pac says while this is creating a temporary cost burden on the business, Pro-Pac has chosen to invest in this additional cost to ensure continuous customer service while also working on a range of strategies to manage labour supply in the short, medium and long term.

Stronger demand in Flexibles and ISP was offset by the continued re-basing of Rigid revenues post the peak of pandemic demand. The underlying profit before tax of $4.2m is broadly in line with the guidance provided to the ASX on 20 December. The statutory profit before tax of $0.2m compared to $8.8m in the first half of the prior year

Flexibles revenue was up 7 per cent at $144.9m but PBT down 70 per cent at $2.9m from $9.7m.

The Industrial Specialty Packaging business has continued its growth trajectory with increased revenue, up 9 per cent at $68m, with a significantly increased profit before tax, up 117 per cent at $2.4m, compared to $1.1m in the prior year.

Additional capacity in lamination has been introduced in 2H22, and additional printing capacity is scheduled for commissioning in 2H22. The capacity of these assets has been pre-sold. The company says there is also a strong pipeline of revenue demand in the Flexibles business to support 2H22 earnings. It says Flexibles continues to develop and implement strategies to deal with labour shortages, but this remains an ongoing challenge across the market.

Pro-Pac says the Rigid business has continued “to adjust well” to the new Covid-normal, re-basing production levels from peak Covid-19 demand and performing largely in line with expectation. Revenue was down 12 per cent at $31.8m, with PBT down by 60 per cent or $1.8m at $1.2m compared to $3.0m in 1H21.

Following a management and sales team restructure in November 2021, the Rigid business is focused on converting the extensive new business pipeline. Pro-Pac says early new business wins combined with price increases, freight surcharge, and the realisation of cost efficiencies, position this business well for 2H22.

In light of 1H22 financial performance, ongoing Covid-19 disruptions, and, it says, taking a disciplined approach to responsible capital management, the Board has determined not to declare an interim dividend.

Pro-Pac expects its underlying PBT for 2H22 to be in the range of $7.8m-11.8m, up on the 2H21 figure of $7.1m, and therefore FY22 to be in the range of $12m-$16m, which will be below last year’s $18.8m result.

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