Ranpak Holdings Corp (PACK) 2021 Q2 法說會逐字稿

Good day and thank you for standing by. Welcome to the Ranpak Q2 2021 Earnings Call. (Operator Instructions) Please be advised that today's conference call is being recorded. (Operator Instructions)

I would now like to hand the conference over to your speaker for today, Mr. David Murgio.

Thank you and good morning, everyone. Before we begin, I'd like to remind you that we will discuss 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 Form 10-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 the 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've included reconciliations to the comparable GAAP information. Please refer to table and slide presentation accompanying today's earnings release. Lastly, we'll be filing with the SEC our Form 10-Q for the 3 months ending June 30, 2021. 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 second quarter results and Bill will provide some additional detail before opening up the call for questions.

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

Thank you, David, and good morning, everyone. Our team continued its momentum and performed extremely well in today's environment. Our strong results were underpinned by the continued hard work and resilience of the global Lam Pac organization. Teams in all regions of the world are communicating well and coordinating to efficiently manage the business and its record demand for our products and longer lead times in shipping and supply chains. We're seeing exceptional demand for our products and working tirelessly to fulfill our rapidly growing customer needs. The men and women in our facilities producing paper and assembling our equipment has been the bedrock of our success throughout COVID, and I want to, as I do in each quarter, express my sincere appreciation to them all.

We continue to pay close attention to local health trends surrounding our facilities to ensure we maintain the safety and health of our colleagues while maintaining business continuity. We follow local health and safety guidelines as we bring back staggered groups of employees to our offices.

Our terrific start to the year for Ranpak continued in the second quarter. Our results for the quarter were exceedingly strong and well-rounded with success occurring in multiple key areas. We expect to have a record year at Ranpak, both financially and strategically, meaningfully surpassing our original 2021 guidance and entering 2022 well positioned to achieve our multiyear growth objectives of double-digit top line growth.

Over the past 8 quarters, we've changed the trajectory of Ranpak through investing in the team and providing additional resources to the organization to accelerate growth. This comes in the form of increased innovation and training, product line and capacity expansion, increased marketing and awareness as well as digital and technology investments. We've taken actions to greatly simplify and improve our capital structure, resulting in a more conservative leverage profile that provides us great flexibility to pursue our growth initiatives and make strategic investments that we believe will enhance our customer value proposition.

The second half of 2021 is an important period for us as we continue to invest behind our key initiatives and build out the infrastructure to position Ranpak as the key beneficiary of powerful global trends, making businesses more efficient and environmentally friendly. Following the end of the second quarter, we made a strategic investment in an emerging company called Pickle Robot. Pickle has developed a low-cost collaborative package handling robot that automates several key tasks along the e-commerce supply chain.

Ranpak Automation's investment in Pickle is highly strategic and complements Ranpak's existing portfolio of automated solutions. This investment follows Ranpak's recent creation of R Squared Robotics, an internal division that uses 3D computer vision and artificial intelligence technologies to improve end-of-the-line packaging and logistics. Ranpak Automation along with Pickle and R Squared Robotics will design and build automated integrated systems for high-volume end users to improve the speed and efficiency of their operations. Between our projected packaging offering, Ranpak Automation, R Squared and Pickle, we believe we have the most compelling, comprehensive and sustainable offering available to high-volume end users.

Turning the discussion now to second quarter highlights. I'm very pleased with the second quarter performance as we achieved strong growth in all regions and in all product lines compared to prior year. Our excellent top line results were mirrored by increased profitability as we executed on our top line growth strategy with intense focus on maintaining our attractive financial profile. For the quarter, consolidated net revenue on a constant currency basis increased 29%, driven by broad-based growth across all products with particularly strong performance from cushioning and wrapping as well as continued strong growth Void-fill.

North America posted its best quarterly sales increase as a public company by a considerable margin as economic activity ramps up and demand for our products grows. We have made a lot of changes to the North American organization over the past 2 years and believe those efforts are beginning to show up in the results. We added resources across the board initially investing in areas such as sales, marketing and engineering, and more recently, adding talent in operations, supply chain and quality. We are pleased with the second quarter results as North America net revenue increased 26.6% year-over-year primarily driven by exceptional growth in wrapping and a strong performance by cushioning.

Activity levels across all applications were strong as we secured key wins in general industrial, automotive, cosmetics, e-commerce and ship from store. Europe and Asia Pacific led the way again this quarter as e-commerce remained strong, industrial activity improved, and we further penetrated areas of geographic expansion. On a constant currency basis, for the quarter, net revenue in Europe and APAC was up approximately 30.8% driven by strong growth across all product lines with particular strength in wrapping and cushioning.

Our constant currency gross profit increased 25% year-over-year, slightly behind sales growth. But overall, we were able to improve profitability as adjusted EBITDA in constant currency terms outperformed our sales growth, increasing 35% year-over-year to $25.6 million due to our sales growth being meaningfully higher than our increase in G&A spend. From an operational and supply chain perspective, our production continues uninterrupted and we continue to serve outsized demand globally as industrial activity increases and e-commerce remains elevated.

We're investing in additional production capacity across the globe and qualifying additional paper suppliers to expand our network. These initiatives should result in improved efficiencies over time and an even greater service to our customers. Like many global players, we continue to manage through higher input costs including materials, labor and transportation as well as longer lead times for parts arriving from overseas due to port congestion and container availability.

To offset some of the constraints in the global supply chain, we're investing more in safety stock and inventory ahead of our seasonal high-volume periods so we can be better positioned to meet demand. Our business units and finance teams have done an outstanding job of working together to identify pin points and take steps to mitigate margin exposure. We have implemented price increases to protect our margins, but also carefully designed to provide us with an opportunity to increase market share as customers increasingly look for more sustainable packaging solutions. Overall, we're pleased with our competitive positioning and feel this is an environment where paper solutions are very attractively positioned to gain share against plastics and foam-based products.

Additionally, we believe that in a world where labor and input costs are higher, Ranpak can thrive because our solutions can increase throughput, lower damage rates as well as reduce shipping and labor costs. These are the high-level points on our second quarter in which we delivered record results and took key steps to position ourselves for further success over the coming years.

With that, let me turn the call over to Bill, who will give you further details related to the quarter.

Thank you, Omar. In the deck, you'll see a summary of some of our key performance indicators. We will also be filing our 10-Q, which provides further information on Ranpak's operating results. Machine placement continued its strong trajectory in the quarter, up 12.9% year-over-year to nearly 124,000 machines globally. Cushioning systems grew 3.6%, while Void-fill installed systems increased 14.1% and wrapping increased a robust 29.6% year-over-year.

Overall, net revenue for the company in the second quarter was up 29.1% year-over-year on a constant currency basis, driven by excellent top line performance in Europe and APAC as well as North America. In Europe and APAC, from a geographic standpoint, growth was most robust in Eastern and Southern Europe, while Middle East and Africa performed strongly as well.

In North America, from a regional standpoint, we experienced growth in all regions with the Midwest, Central, Southeast and Mexico as particular bright spots. Across our business, sectors such as food and beverage, electronics, home furnishing and 3PLs contributed to growth as many existing customers open new locations and expanded their relationship with Ranpak. Also overall in our PPS business, all categories were up meaningfully with cushioning up 39.5%, Void-fill up 17.3% and wrapping up 48.8% on a constant currency basis.

Our gross profit increased 25% on a constant currency basis, slightly behind our sales growth due to the impact of higher material and overhead as well as freight costs versus the prior year, offset by improved margin on Automation sales and lower depreciation as a percentage of sales, implying a gross margin of 39.7% in the quarter compared to 40.9% in the prior year.

The increase in sales was surpassed by growth in adjusted EBITDA, which rose 34.7% year-over-year, improving margins of 29.3% compared to 28% in the prior year. In the quarter, we benefited from sales growth far exceeding our increase in comp and benefits even as we continue to invest in personnel and further enhance our teams.

Cash interest expense for the quarter was approximately $5.4 million. Following the equity offering at the end of May, we paid down a portion of our term loan. So going forward, run rate annual interest expense should be just north of $20 million. Given the entire remaining USD tranche of our term loan, it's hedged at a blended rate of 5.7% and our euro tranche is out to 3.75 to 0% floor.

Capital expenditures for the quarter were $15.3 million, driven largely by increased placement of converters, in addition to continuing to allocate capital to increasing our fleet. In a moment, Omar will discuss some of the key projects we are investing in for the back half of the year to enhance our production capacity and improve our capabilities. We believe the projects we are embarking on position Ranpak extremely well for the future and provides the proper infrastructure required for us to execute on our multiyear growth plans.

Moving briefly to the balance sheet and liquidity, we are pleased to share that we completed a successful equity offering in May, which greatly improved our leverage profile, while also improving float and liquidity. We know those have been important areas of focus for the investor community. So we opportunistically access the capital markets to address these areas and provide Ranpak with additional dry powder.

We utilized almost $21 million of the $110 million gross proceeds to pay down the unhedged portion of our USD term loan, leaving $250 million in USD term loan outstanding as well as $137 million of the euro tranche, bringing our cash balance to $125.3 million as of June 30. Following the transaction, our net leverage based on reported LTM adjusted EBITDA was 2.6x at the end of the quarter and 2.4x on a bank-adjusted EBITDA basis.

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

Thank you, Bill. To summarize, we've had an exceptionally strong first half of the year. I'm proud of the team and the results, and I'm excited to continue to build on our momentum. It is great to see the balanced contributions across all regions and the continued progress we are making in our investment initiatives. We expect to achieve a record annual performance for Ranpak in 2021 and to finish the year with Ranpak well positioned for the next phase of growth. To give you some insight into how we are thinking about the next chapter, I wanted to highlight a few projects we're working on to drive our global expansion.

Given the strong demand we are seeing in Asia Pacific, we will be establishing a manufacturing presence in the region through localizing production in China with operations beginning in 2022. We believe expanding our presence in the region will enhance our competitive position and also enable us to better serve our customers through more attractive pricing and shorter lead times paving the way for further penetration. We currently serve Asia Pacific out of our European production facilities. So the new facility will also free up much needed capacity to serve the rapidly growing demands of the European region. In addition to the capacity freed up through our Asia expansion, in Europe, we have contracted to move to a new building in [Harland] that will serve as our expanded European headquarters and consolidate our Dutch manufacturing operations, including PPS and Automation.

This new facility which we are targeting entering at the end of 2022 will significantly increase our PPS production capabilities and double our Automation footprint in the Netherlands. In North America, we continue to ramp up our capabilities in Automation, building out the team and securing a facility in anticipation of building a much larger presence in the region. Within Ranpak, we have created R Squared Robotics, which is the talented team of engineers out of Virginia Tech that uses 3D computer vision and artificial intelligence to improve end-of-line packaging and logistics.

We also made a strategic investment in Pickle Robot, led by a talented team from MIT which I mentioned earlier. We're now in the process of finalizing plans for an East Coast based Automation center which should be ready to begin serving the North American market beginning in the second half of 2022. Together, our European and North American facilities will enable us to serve the global markets and provide the runway we need to achieve our Automation goals for the foreseeable future.

These investments are a reflection of our conviction and the growth opportunities that we are seeing in the marketplace. In my view, the scale of the opportunity presented by these dual sustainability Automation tailwinds is historically unique. I and the team are laser-focused on making sure we methodically take advantage of this tailwind.

With that, thank you again for joining our call. I'll now open it up to questions. Operator?

(Operator Instructions) Your first question comes from the line of Greg Palm of Craig-Hallum Group.

Congrats on the results here. I wanted to start off by thinking about some of the trends that you are seeing. I think last quarter you pointed to sustainability is becoming a more important driver for customers switching from plastic to paper-based solutions, at least in Europe. And it looks like we saw a pretty big improvement in the growth rate in North America this quarter. So do you think sustainability is becoming a bigger talking point here or is that just more of a byproduct of improved execution in the region?

I think right now it's a little bit of both, Greg. There is no doubt we have better cadence and rhythm in the North American market as a company and that's a contributing factor after a couple of years of investing in the team and the organization. There is no doubt we are also seeing more tailwinds from sustainability in the U.S. I think the issues with end-of-life for plastics and single-use plastics in particular continue to get a lot of traction globally and it is a big factor in some of the wins and some of the closes we've had in the U.S. I would say it continues to feel like early days and we are excited about where we are and we're hopeful that that's going to become a bigger tailwind in North America in the next few quarters and hopefully the next few years. But the sustainability tailwind is certainly a contributing factor.

Yes. Makes sense. In terms of margins, it looks like it was down a little bit quarter-over-quarter, assuming some of that may just have to do with mix knowing that North America is lower margin, but I think you did allude to maybe an increase in supply chain-related costs, input costs. I mean, it seems like we're in an environment where everything is going up. So how are you thinking about pricing in the wake of everything going on?

Yes. I think we are -- as you know, we're very focused on maintaining our financial profile. What you've seen in the quarter, mix was a part of it, both from product as well as from a geography standpoint. The global issues that we all know, they apply to us: freight issues, labor issues, certain lead time issues. I would say where we sit, we feel pretty good that we can pass these price increases to the customers. We've done some of that. We continue to do that. Given the robust demand environment, we think -- and frankly given the global issues of supply chain and pricing, our customers are not surprised when they see some of these price increases from us. So we feel very good about maintaining our financial profile in the strong demand environment, Greg.

Do you envision it getting worse from here in upcoming quarters or should it start to improve?

I would say our visibility between now and year-end is more or less the same. So similar challenges, similar issues that we feel pretty good we can manage. I think in 2022, my personal prediction for what it's worth is I think some of these pressures may ease up as all companies and different players in the supply chain are accustomed to sort of the new world and hopefully over time -- and this will depend obviously, on what happens with the pandemic and with COVID. As the world stabilizes, there are less unusual reopening related items, if you will, that are creating some of these pressure points but between now and December, we expect more or less the same and we feel very good about maintaining our financial profile in this period.

Okay. Good. I guess just last one. I wanted to spend just a minute or 2 on Automation because it's obviously a theme that's built in. But Omar, what's your long-term vision, if you want to call it that, on what end-of-line fulfillment or manufacturing looks like and maybe just sort of bucket how Ranpak may fit in with that vision?

Yes. I think our vision is end users with high-volume will continue to sort of look for more automated solutions, less reliance on labor. Our solutions are not designed to eliminate labor completely. They're designed to add efficiency, reduce the number of people you need for your end-of-line and rely more on smart equipment, smart machines to do those functions well and to do them with tremendous speed. I honestly think the next couple of years are going to be a unique time in history for the opportunity in that space as more folks look for fulfillment and logistics. And the role I envision us playing is being a leader in the space, not just in providing the best equipment, but hopefully the smartest equipment and this is why we've been laser-focused over the last 1.5 years on making sure we're building our AI knowledge, machine learning knowledge, computer vision knowledge, robotic capability and I'm great -- I feel great about where we are today and now it's up to us as a team to execute. But we have all the key pieces in place, Greg.

Your next question comes from the line of Stefanos Crist from CJS Securities.

Congrats on the quarter. I just wanted to touch on the SG&A. Up a little bit year-over-year. Could you maybe bridge that increase? Is that all Automation or how should we think about that?

Yes. Stef, I think in SG&A this quarter, right, there was the offering obviously in May so there were some professional fees that were in there and then also some additional RSU expense related to us outperforming our plan. So we had to catch up on that.

Got it. And could you maybe quantify how much that was? And how much it would have been without?

There was probably $2 million to $3 million.

Got you. And then on the Capex, it seems pretty high just in terms of per machine and you talked about increasing inventory. Do you count CapEx just buying machines and not placing them yet? How should we think about that?

Yes, Stef, when we buy machines and have them placed into our inventory and they're ready to be deployed into the field, that's going to be included in our Capex.

Got it. So it's not an issue of just parts getting more expensive?

No. I mean I think with supply chain, right, you have to do a little bit more on the freight side and in time, put the demand that we're seeing to fulfil customers' needs, sometimes you have to speed that up a little bit. So getting the machines to North America into Europe is a little bit more expensive right now, but over time, we expect to normalize.

Stef, one of the things to highlight, and you're alluding to it in your question is, obviously, we're entering our big season with the second half of the year and just we want to make sure, given the robust demand, we're ready and we've had a lot of success globally with a lot of closes in the last 6 months and these closes by definition will require equipment as some of these customers scale and sort of implement our solutions in more facilities. So part of that Capex is getting ready for ramping up for the peak of our business.

Your next question comes from the line of Alexander Leach of Berenberg Capital.

Congrats on the quarter. Just on the topic of CapEx, how do we think about it on a more medium-term basis? You guys have mentioned number of projects and initiatives that you're planning on implementing over the next couple of years. The China facility and potentially more M&A going forward as something you've discussed previously, how do we think about CapEx just towards 2022 and 2023? Is it going to increase as the proportion of sales?

I think, Alex, let me give a high level and then I'll have Bill chime in. At a high level, the main driver for Capex will be investing in our equipment and converters that drive our growth. Then clearly we have maintenance Capex that you're familiar with and in addition to that, for the next, let's call it, 18 months or so, given our real estate expansion plans and expanding our capacity, that will be that added aspect to Capex. The dollars associated with that last piece are going to be relatively modest and Bill can give you a better sense. But each facility, we're not talking about huge amounts of capital to either expand our footprint or get these facilities ready, and that's going to position us for further growth. But outside of that, once we're done with these projects, expect more of a normalized Capex. But frankly, as we grow as a percentage of sales, Capex will be coming down. But I'll let Bill chime in with a bit more specificity.

Yes. Alex, if you're looking for some color on the real estate projects that Omar outlined earlier, I think you can ballpark it into the less than $20 million area. These are projects that we feel like we'll be funding out of our cash flow generation. So we'll have plenty of dry powder to deploy for growth initiatives as well.

And then just so that sort of clear in my head for the remainder of the year, from your press release, it sounds like you guys are expecting a step down from the sort of 30% year-over-year revenue growth. Is that largely due to sort of better comparables in H1 of 2020 and tough comparables in H2 2020? How do we think about revenue for the rest of the year?

Yes, Alex, I don't think we've quantified what to expect in the next 6 months other than saying we're expecting a record year. Obviously Q3 and Q4 of last year where we were very robust and we frankly expect very strong performance in the next 2 quarters to finish the year. So we're less focused on what percent of growth we deliver each quarter and more on the cadence of our business and sort of how we're going to finish the year and obviously, how we position ourselves for 2022. But I think the rest of this year, we're expecting a very strong finish to the year.

Your next question comes from the line of Ryan Danisavage of Sidoti & Company.

As a quick question as a follow-up of Automation and where are you seeing the most constructive talks of customers in terms of end markets and is anything holding you back in initiatives with Automation around the global supply chains?

Around the global supply chain, there are some modest lead times and delays on certain parts. I would not say it's holding us back. I would say it's just causing us to do more work to deliver things on time, which is similar to our PPS business. Just supply chain in general requires more precise management and more hard work, if you will. In terms of where we're seeing opportunities, I would say e-commerce players, retailers, a couple of industrial opportunities and a lot of 3PL. These areas need a lot of help in moving more boxes, more parcels out the door. And we're spending a lot of time in these sectors around different Automation solutions.

And just one more. North America results were obviously very strong. Can you just talk about the conversations you guys are having in North America? Is it from new or existing customers? And what is the product offering they would be most interested in?

We have had -- and again, this is something I've said publicly for a while given the investment we made in the sales organization. In the last few months, we've had a number of successful closes. And as you know, once we close on a new account, it takes a little bit of time for some of these accounts to ramp up. So in Q2, we saw a number of these successful closes become meaningful paying customers. So we are winning new business. We're winning new accounts and the leading indicators as we speak in our business in terms of pipeline, trials, et cetera, continues to be very robust in North America.

So part of the growth is new business that we've been winning. In some cases, it's folks that are experiencing growth themselves. In other cases, as we mentioned, it's folks making the decision to have more sustainable packaging solutions, and we fit that bill. My expectation, as we sort of go-forward, is you will continue to see a number of these new closes ramp up and sort of increase the level of activity. And then the second piece in North America is we've had a number of existing accounts opening new facilities, expanding their physical footprint, and we were the natural partner for them as they've expanded their business.

At this time, I'm showing no further questions. I will turn the call back over to Bill.

Thank you. And thank you all for joining us today. We look forward to speaking again for Q3.

Thank you. This concludes today's conference call. You may now disconnect.