Ranpak Holdings Corp (PACK) 2024 Q1 法說會逐字稿

Welcome to the Ranpak Holdings first quarter 2024 earnings call. My name is Benjamin, and I'll be your operator for today's call. (Operator Instructions) As a reminder, the conference is being recorded.

And I'll now turn the call over to Sara Horvath, General Counsel. You may begin, sara.

Thank you, and good morning, everyone. Before we begin, I'd like to remind you that we will discuss forward-looking statements as defined under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those forward-looking statements as a result of various factors, including those discussed in our press release and the risk factors identified in our Form10-K and our other filings filed with the SEC.

Some of the statements and responses to your questions in this conference call may include forward-looking statements that are subject to future events and uncertainties that could cause our actual results to differ materially from these statements. Ranpak assumes no obligation and does not intend to update any such forward-looking statements.

You should not place undue reliance on these forward-looking statements, all of which speak to the company only as of today. The earnings release we issued this morning and the presentation for today's call are posted on the Investor Relations section of our website. A copy of the release has been included in a Form 8-K that we submitted to the SEC before this call. We will also make a replay of this conference call available via webcast on the company website.

For financial information that is presented on a non-GAAP basis, we have included reconciliations to the comparable GAAP information. Please refer to the tables and slide presentation accompanying today's earnings release. Lastly, we'll be filing our 10-Q with the SEC for the period ending March 31, 2024. The 10-Q will be available through the SEC or on the Investor Relations section of our website.

With me today, I have Omar Asali, our Chairman and CEO; and Bill Drew, our CFO. Omar will summarize our first quarter results and provide commentary on the operating landscape, and Bill will provide additional detail on the financial results before we open up the call for questions.

With that, I'll turn the call over to Omar.

Thank you, Sara. Good morning, everyone. I appreciate you all joining us today. Our first quarter financial results were largely in line with our expectations as we experienced 4.4% top line growth and meaningfully improved profitability to start of the year.

We are pleased to report that we experienced our third consecutive quarter of volume growth in PPS as activity levels continue to improve. While the overall operating landscape remains uneven, we are pleased to see continued but moderate general improvement.

Our gross margins on a constant currency basis improved by 400 basis points year-over-year, and adjusted EBITDA margins improved 500 bps on a constant currency due to the favorable paper pricing environment compared to a year ago and higher volumes flowing through the complex. Overall, we are happy with the start of the year and believe it sets us on a path to achieve our targeted results for 2024.

Consistent with much of our recent operating history, we expect the first half of the year will be a lower contributor to 2024 top line performance compared to the back half, as we expect more large account activity to ramp up as the year progresses and traditional seasonality to drive higher volumes in the second half of the year.

North American sales were up 2.6% in the quarter versus last year, driven by improved void-fill and Automation sales year-over-year. At a more macro level, box shipments were flat to slightly up for the quarter, while freight and trucking data remains mixed.

The industrial and manufacturing sector remains sluggish while we are seeing some improvement in e-commerce activity. The impacts of higher rates, constraining housing activity and all of the spend that goes with it as well as inflationary pressures impacting consumer discretionary spend remain present.

This has led to activity levels in North America being okay, but inconsistent from month-to-month. On a positive note, more recently, we've seen improvements in consumer confidence. So hopefully that will inspire additional demand for goods. While that as the macro picture, we tried to focus on driving outcomes that are within our control at Ranpak, such as executing on our strategic account plan.

We are pleased with our progress. I'm optimistic that the ramp up in the plastic to paper shift provides us with solid volume momentum for the remainder of the year. While the macro hopefully stabilizes and improves.

We said in our first quarter call last year that the plastic to paper shift was a longer sales cycle, given the complexity of some of the organizations involved, but that we believed it was only a matter of time before the volumes start to reflect the shift in thinking.

I'm pleased to say that in April, we're seeing a pickup in activity from our strategic account initiatives, and many accounts are beginning the transition away from plastic. Europe, APAC activity levels in the first quarter were solid with sales up 5.4% versus the prior year, driven by higher volumes in void-fill and wrapping.

Activity levels in the region continue to improve slowly, although manufacturing and industrial activity remained subdued impacting cushioning utilization. Consumer confidence in the region has been improving since the end of the third quarter but is still well below pre-COVID levels.

Geographically speaking, we've seen strength in Southern Europe in countries like Spain and Italy as well as improvement in the UK, while the central part of Europe that is more manufacturing heavy like Poland, Belgium and Germany are weaker.

In APAC, Japan and Australia continue to be bright spots. The input cost environment provides us with a benefit for the first half of the year as paper pricing moved lower throughout the year before reaching a trough in Q4.

We expect paper pricing in the first half of the year to be in line with Q4 as pricing flattened out the start of the year. We are, however, seeing some producers of North America and Europe making a push to increase pricing as we get deeper into the year. Overall, we are targeting to maintain a gross margin in 2024 that is in line with our finish in 2023.

So we're working closely with our vendors to plan accordingly and determine if we need to make pricing adjustments based on the commodity environment. The freight market has been roughly flat to start of the year and the US has remained favorable given the freight recession that has been present for the past two years.

Freight market participants have struck a more optimistic tone recently. So we're monitoring that closely to see how potential improvement in freight level activity along with rising tensions in the Middle East, driving oil higher may impact pricing and availability.

Inventory levels at our distributors and end users remain tight with many in our value chain in North America and Europe, keeping tight lid on the amount of product on hand given the increased cost of capital and uneven environment. Destocking is no longer an issue while we continue to watch inventories at our customers across the globe.

Now with that, let me turn it over to Bill for some financial detail.

Thank you, Omar. In the deck, you'll see a summary of some of our key performance indicators. We'll also be filing our 10-Q, which provides further information on Ranpak's operating results. Machine placement increased 0.9% year-over-year to approximately 140,800 machines globally. Cushioning systems declined 0.9% while Void-fill installed systems increased 1.3% and wrapping systems increased 1.8% year over year.

Growth in the machine field population has been lower this year due to a combination of lower activity levels generally, particularly related to industrial and manufacturing sectors in Europe as well as our efforts to optimize our fleet. To maximize capital efficiency, we are focused on getting underutilized converters back and redeploying them to more productive areas.

Overall, net revenue for the company in the first quarter was up 4.4% year-over-year on a constant currency basis, driven by increased volumes and contribution from Automation, offset by slightly lower price.

North America net revenue increased 2.6% year-over-year, with void-fill and Automation up versus the prior year, offset by decreases in cushioning and wrapping. Volumes were lower versus prior year, driven by a softer March, but we expect those to pick up in the region as the year progresses, driven by strategic account activity.

In Europe and APAC, net revenue on a constant currency basis was up 5.4% year-over-year, driven by void-fill, wrapping and Automation, offset by lower cushioning revenue as the industrial sector in Europe remains pressured.

We are pleased to see the general continued recovery in this reporting unit as volumes increased 10% year-over-year and businesses begin to recover. We believe a part of the recovery we are seeing is due to the increased confidence stemming from the continued favorable natural gas pricing in Europe with Dutch Nat gas hovering around EUR30 per megawatt.

There has been some volatility recently due to rising geopolitical tension, but we believe the amount of expected LNG capacity coming online and becoming available to Europe beginning in 2025 should help to keep a lid on pricing.

Our gross profit increased 16.7% on a constant currency basis, implying a margin of 38% compared to 34% in the prior year. This is in line with expectations, as we expected gross margin to be roughly in line with Q4 throughout the year. As Omar mentioned, we are monitoring the commodity environment closely and are extremely focused on maintaining the gross margin profile we thought to regain after 2022.

Adjusted EBITDA increased 33.8% year-over-year to $20.2 million, implying a 22.8% margin driven by higher gross profit flow through and controlled G&A spend. We are pleased with the continued overall improvement in the financial profile and are optimistic as more volumes flow through the complex and Automation grows, we will continue to work our way back towards an attractive high margin and cash generative profile.

Capital expenditures for the quarter were [$9.8 million] driven by converter placement and investments related to our Malaysia production facility. We're keeping tight controls on capital expenditures this year as we are moving beyond our infrastructure investment cycle that brought us world-class technology platform and fully invested and funded physical infrastructure assets across the globe.

Moving briefly to the balance sheet and liquidity. We completed Q1 with a strong liquidity position, including a cash balance of $55 million in the quarter and no drawings on our revolving credit facility. We continued to make steady progress on our goal of deleveraging and reached [4.4 turns] at the end of the quarter, down from 4.6 times at 2023 year-end and 5.7 times as of Q2 2023.

We expect to build cash in the back half of the year as we enter the traditionally stronger holiday season and volumes pickup. The Malaysia production facility go live this summer, marks the end of our multi-year and infrastructure investment initiatives. It enables us to focus on getting the return on our investments as we scale our PPS and Automation businesses.

Capital expenditure plans in 2024, a much more modest compared to recent prior years at less than $35 million, which we expect will enable us to generate cash in 2024 and help us deleverage further.

Following quarter end, in April, we settled a litigation matter and sold to patents, which resulted in total cash proceeds of EUR20 million, bolstering our cash position and implying a pro forma leverage ratio of 4.1 times on constant currency basis, including the additional cash proceeds.

Based on our adjusted EBITDA guide and expected cash generation, we expect leverage to be below 4 turns on a constant currency basis by year end with an ultimate goal to get into 3 turns or below. We believe our recent commercial and financial progress, along with focus on deleveraging and cash generation position us well to address our term loan maturities well before their maturities in June 2026.

Ranpak have a long history in the credit markets from years of private equity ownership and I think would be well received by credit investors. For those of you who have spent time with us over the past few years, you know our goal is to have the cap structure, not be a topic of conversation. This means a simple structure and a conservative leverage profile that addresses needs well in advance.

With that, I'll turn it back to Omar before we move on to questions.

Thank you, Bill. In closing, I'm pleased with the continued progress and third quarter in a row of volume growth. While the macro remains unclear, I believe our company-specific drivers, such as our strategic account activity and momentum in Automation will enable us to continue to drive the top line and improve profitability.

Driving volumes in PPS, scaling Automation and generating cash are the top priorities that Ranpak in 2024 and going into 2025. Automation continues to get the traction that we are seeking with large accounts as our systems are in facilities this year as the first step to larger follow through opportunities.

We continue to anticipate revenue growth of more than 50% and Automation this year. And I continue to strongly believe the investments we have made in this area will be a critical growth driver and differentiator for Ranpak in the upcoming years.

Our long-term objective remains to have a business that is steadily growing revenue in the high single to low double-digit area, gross margins in the high 30% to 40% area and adjusted EBITDA margins in the high [20s to low 30s] area, with substantial cash being generated along the way.

We have a strong platform in place supported by our state-of-the-art digital infrastructure and facilities that can support our growth ambitions. With these multiyear projects behind us, the focus can be solely on execution of our strategic initiatives and gaining efficiencies.

I'm energized by what I see happening within Ranpak and across the world. The team is invigorated by the narrower scope of objectives and what we all read about seemingly every day regarding the tailwinds related to the shift from plastic to paper and warehouse automation needs.

This year, it's Earth Day theme, Planet versus Plastics and has a goal of raising awareness to drive a 60% plastic reduction by 2040. There has been a plethora of great, yet alarming content created this year that aims to promote widespread public awareness of the damage done by plastic to human, animal and all biodiversity's health.

EARTHDAY.ORG is also trying to achieve a phaseout of all single-use plastics by 2030 and achieving that commitment at the United Nations treaty on plastic pollution in 2024. At Ranpak, we are extremely proud to be at the forefront of this movement, and we are doing our part to deliver a better world.

With that, let's open the call up for some questions. Operator?

Thank you. We'll now begin the question-and-answer session. (Operator Instructions)

Greg Palm, Craig Hallum Capital Group.

Thanks. This is Danny Eggerichs on for Greg today. Hoping to maybe just start little bit more on the strategic accounts. I guess it seems like it's improved, but how would you say your visibility into those accounts has changed over, say the last couple of months?

Seems like it's improved and does feel like you're even more confident on that second half step up, especially with the, I guess, comments on a few of these accounts already beginning the transition away from plastic in Q2?

Yeah, Sure. I feel and obviously, as I said, some of these conversations, in particular with very large sizable accounts take some time. I said in our last quarter call that we expect things to start ramping up in early Q2. And as I said on the call today in April, we're starting to see that.

So I would say the level of activity in strategic accounts moving from trial pipeline, funnel, early install activity to accounts purchasing our product, expanding the installed base and scaling up, that's starting to occur in this quarter in Q2. We feel really good about the visibility that we have.

Obviously, the macro environment is always a factor, but in terms of large accounts, in particular in the US making meaningful moves and switches from plastic to paper, that's occurring. And we think, frankly, every month starting in -- again, the beginning of Q2 that ramp up will continue.

So we feel we've made tremendous progress. And as we've said for a while, we're hoping that you're going to start seeing that in the volume and results starting in Q2 of '24.

Got it. And then I guess just in terms of Q2 normal seasonality, some moderate sequential growth. I guess as we think about that and some of these strategic accounts starting in Q2, I guess, is it fair to say that there could be some incremental revenue on top of that typical seasonality there in Q2?

I'll let Bill provide a bit more detail, but I would just say where we are, again, we've provided the guidance for the year. Early on, we're just sticking to that guidance. We feel pretty confident. I think, I've said in the last quarter that we feel there's even upside. So that's how we continue to view the world, but I'll let maybe Bill provide a bit more color.

Yeah, Danny, I'd say, typically what you see in Q2 is build in North America and then somewhat of a step down at times in Europe and APAC, just given the seasonality. I think for us, we are expecting something similar like that to continue. But again, as Omar mentioned, we're expecting a little bit more of a 47%, 48% contribution to the top line versus first half versus back half. So getting back to that cadence.

Okay. That's helpful. Maybe one more for me on Automation. I guess maybe an update on the pipeline there, order activity. I don't know if I missed it, but how are the bookings this quarter? I know we've been seeing seen record bookings over the last couple. So any additional color there would be helpful.

Yeah. Honestly, we continue to perform very, very well in Q1. We did have another record booking -- our level activity, our funnel activity is pretty high. We feel very confident that for the year, top line growth in Automation globally will be north of 50%, which is important for us.

And frankly, our visibility, as you can imagine, we're working our funnel and our pipeline towards some 25 activity. And that activity is looking good as we keep ramping up our installed base and hopefully have more and more repeat customers, which is really important in Automation, in particular with large customers.

So I would say we're on track in Automation. Level of activity is good, our bookings continue to be very healthy and we're pretty confident in the 50%-plus growth profile this year.

Okay, great. I will leave it there. Thanks.

Thank you, Danny.

Ghansham Panjabi, Baird.

Thank you, operator. Good morning, everybody. I guess, Omar, maybe stepping back a little bit, just from a macroeconomic standpoint, we saw what you did in the first quarter with the North America, Europe and APAC, et cetera.

But from an end market standpoint, adjusting for some of the new initiatives and so on and so forth that you have underway, especially North America. How do you see the momentum across the end markets as you think about the region globally?

Yeah. I think if -- from an end market standpoint and this applies to North America and frankly, other geographies, we continue to see healthy trends and recovery in e-commerce long-term, we continue to see relatively decent activity with retailers doing more with shipping and building their online capabilities.

I think industrial activity is a little bit more uneven, frankly, the largest, probably sluggishness we see our end markets like in Germany and Central Europe. I visited the regions a couple of times already.

This year, I do think, CEOs are nervous in some of these markets, given the macro backdrop, et cetera. But there's a lot of chatter in Europe about how important manufacturing and industrial activity is and I'm expecting that we will start seeing some pickup and some improvement, whether it's driven by companies, by governments, by both. I don't expect Europe to just accept that their most important sector is going to be slow.

So I think we're expecting that level of activity will become a little bit better. But there's no doubt what we're seeing, you know, some strength that is more around e-commerce and around different areas in e-commerce, whether you're seeing that in books and in publishing, whether you're seeing it in some level in beauty or in guys that are just general merchandise. That level of business feels a little bit better than where it was a few quarters ago.

And then in terms of your market positioning, right, because you had a very strong first-to-market advantage. The markets have normalized, your competitors including those that sell different substrates have been reorganizing and trying to come back with some fiber-based offering for protective packaging, et cetera. Just your thoughts in terms of any change in competitive backdrop as you think about your major end markets.

And then just lastly, in terms of raw material cost inflation, I mean upstream pulp prices have picked up quite a bit. And I know you've been benefiting from some level of deflation and rightfully just given -- how you came up there, peak inflation cycle from a few quarters back, but just your thoughts in terms of forward-looking indicators for inflation specific for Ranpak as well.

Sure. So on the first point, Ghansham, let's call it the competitive landscape. I really like where we are for a couple of reasons. One, I am convinced we're in the right substrate and that gives us a competitive advantage.

Paper and fiber-based solutions are 100% of our thinking and execution, and we continue to see and the shift from plastic to paper, frankly, it's very pronounced in the US now. It's been pronounced in other geographies.

You know that I have visited and that we've been seeing growth trends there for a while. So I like how we're positioned there. I also like that our investment cycle is behind us. From a strategic standpoint, Ranpak is stable. We're in execution mode.

We're very focused on driving key initiatives, like driving PPS volume, driving Automation, generating cash flow. I feel our team is focused and our organization, honestly, has not been in a better spot in a long time than the spot that we're in right now. It's literally down to execution, execution, execution. And I think that sets us apart.

I do see that in a lot of account activity, some of that large strategic account activity that we mentioned a lot on this call. Some of it is small and medium-sized, where I feel our ability to win these accounts to expand our business with them is terrific. And I feel competitively we're very well positioned. I think the combination of PPS and Automation is going to accrete a lot more value for us.

We are truly a full-service solution for end of life needs for Automation. We're a full solution for PPS. That's fiber based for needs for so many industries. And I think what we bring to the table to a lot of our customers, and I see it in our dialogue Ghansham. I think it's very compelling and now it's up to us at the team to basically work our asset base and execute on the plan that's ahead of us.

As far as your second question on inflation and pricing, I would say from a Ranpak perspective, the first half of the year, we pretty much have very good visibility in terms of pricing and the environment and where our deals are from a commodity standpoint. And we feel very good about how we're positioned.

We have secure supply for part of our needs for the second half of the year. We are negotiating other parts. I would say the landscape is a little bit shifting, as we mentioned in the call where you're starting to see with consolidation in the paper industry with dynamic, with geopolitical risks and the dynamic of, frankly, the switch to paper, you're starting to see some pricing pressure and increases.

I feel very good, Ghansham, that we will be able to negotiate and secure the supply that we want in the second half of the year, given our size that we will be able to get the cost structure that we want. And if there is a little bit of pressure from a cost standpoint, we will react from a pricing standpoint.

So our expectations is that we will be able to deliver the margin profile that -- as Bill said, we fought folk so hard to get to. I think this is a year where we will be able to manage what happens in the landscape, but it may require a little bit more work in the second half of the year than in the first half. Does that give you a good sense?

It does. Thank you, Omar. Appreciate that.

Adam Samuelson, Goldman Sachs.

Yes, thank you. Good morning, everyone. Maybe first something that Bill alluded to in the prepared remarks. Just want to clarify. So there was a litigation settlement that was EUR20 million of cash that you received in April. Can you maybe elaborate a little bit on that? And is there a tax impact on that? Just make sure we're clear not something that had been previously the filing. So any additional color would be helpul.

Sure, Adam. So this is litigation matter that had been ongoing for a number of years, just related to some patent infringement. So it was great to get this settled, get it behind us, get the cash proceeds in. At this point, the proceeds are gross.

So we'll have the tax impact when we go to file our tax returns in the following year. But for now that cash goes straight to the balance sheet. So it's nice to get some additional yield on that cash and be able to maximize liquidity ahead of any potential refinancing later this year.

And Adam, just to add, the EUR20 million settlement is EUR15 million settlement on the litigation and about EUR5 million on us, giving them some rights to a couple of patents we have. So the total proceeds will be, as Bill said is the EUR20 million.

But it's these two separate things that got us there. And then in terms of tax impact, obviously that's something that we'll be assessing based on the two transactions that I outlined for the rest of the year. But this was a real good conclusion for us, and we get to move on. And as I said a little bit earlier, just execute on our business plan and not have too many open matters.

Okay. That's very helpful. And then if you think about some of the strategic accounts, Omar, that are starting to come to fruition in the core business in the second quarter. How should we think about and saw these trends rolling forward? Is that going to drive a pickup in void-fill and cushioning machine placements through the year? Or is there a little bit further decline before those start to reaccelerate?

We have been in a laser focused, Adam, as you know about redeploying, refurbishing and working our asset base to the extent possible. And that continues to be our priority given in the last couple of years, we did feel that some accounts were overcapitalized, and the world changed. And we needed to react and we continue to do that. So that's priority one.

With some of the large strategic accounts and as we're ramping those up, just given the scale of some of these accounts, redeploying and refurbing, et cetera, may not be enough to meet the demands that we're seeing. So you will see some pickup that we've already planned for in Q1 because we're frankly ramping up as we speak, that some of these accounts.

I don't think you're going to see something that's going to move the needle at 140,000 installed base. It will be maybe a modest increase from the last couple of quarters for us to fulfill the needs of these customers. But we're trying to be very, very prudent with our CapEx and how we fulfill these customer demands.

And the beauty of some of these large accounts, Adam, is the efficiency per converter, the efficiency per machine given volume. Sometimes tends to be above what we've offered other customers that just given shear needs so they tend to be pretty efficient from a CapEx standpoint.

That's all, very helpful color. I'll pass it on. Thank you.

Thank you.

And that concludes the Q&A session. And I will now turn the conference back over to Bill Drew for closing remarks.

Thanks, Benjamin, and thank you, everybody, for joining us today. Look forward to catching up next quarter.

Ladies and gentlemen, that concludes today's call and thank you all for joining. You may now disconnect.