Ranpak Holdings Corp (PACK) 2020 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Ranpak Holdings Q4 Earnings Call. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions) I would now like to hand the conference over to your speaker today, David Murgio, Chief Sustainability Officer and Secretary. Thank you. Please go ahead, sir.

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 most recent Form 10-K filed with the SEC and our other filings 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. We 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 an 8-K 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.

Financial information that is presented on a non-GAAP basis would include reconciliations to the comparable GAAP information. Please refer to the table and slide presentation accompanying today's earnings release. Also, as we will discuss in more detail later, due to the accounting treatment for the business combination we closed on June 3, 2019, we've also presented our full year 2019 results on a combined basis, reflecting a simple arithmetic combination of the GAAP predecessor and successor periods without further adjustment as well as any other adjustments as described. Lastly, we'll be filing our 10-K with the SEC for the period ending December 31, 2020. The 10-K will be available through the SEC on the Investor Relations section of our website. With me today have Omar Asali, our Chairman and CEO; and Bill Drew, our CFO. Omar will summarize our fourth quarter results, provide an update on our growth strategies and issue our outlook for 2021 and beyond. 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, David. Good morning, everybody. I hope everyone listening in and their families are staying safe and healthy. Ranpak had a strong fourth quarter and robust performance for the calendar year 2020. I'm extremely pleased with our overall results and the execution of our team who delivered strong growth in our topline as well as our profitability. The team has come together and taken a global approach to fulfilling our customers' needs and pursuing opportunities to grow the business. I'm grateful to be part of an organization that not only delivered such results, but digital while maintaining the highest health standards. The safety of our employees has been the top priority over the past year, and I'm proud of our team's ability to execute while maintaining strict safety protocols.

Additionally, while experiencing modestly longer lead times for some items, our employees have worked hard to ensure our global supply chain remains intact, and our focus on execution and customer service is unwavering. We finished the year with solid momentum in the business and are excited about what 2021 has in store for us. Overall, we have stayed focused throughout the pandemic on executing in the short-term and investing in the business for the long term. We believe we are well positioned to pursue the substantial market share gains and growth opportunities that exist for Ranpak.

Growth in e-commerce, increased focus on sustainability and automation are all key trends that have played throughout last year and are here to stay. This past year, e-commerce gained significant share versus brick-and-mortar. Consumers worldwide are buying items rarely purchased online prior to the pandemic, and I believe consumers have become accustomed to the convenience online shopping it has to offer. Included in our earnings presentation are findings from Ranpak's first annual e-commerce and packaging trends survey, which we conducted in partnership with Harris Research. The takeaway is regarding the consumer's propensity to ramp up online shopping in 2021 and the desire for more paper-based packaging are very encouraging, as 2/3 of respondents expect to do more online shopping in 2021 versus 2020, and 78% of respondents cited they preferred paper for in the box packaging.

Shopify also recently put out a report outlining their view on the future of e-commerce and included a consumer survey, which cited almost 50% of respondents expecting to shop online more frequently after the outbreak is over. In that same report, they also cited that 72% of global consumers want brands to use sustainable packaging. Over the past year, we have been consistently investing in raising awareness of our solutions and our brand, so companies across the globe know that Ranpak is the answer to their sustainable packaging needs.

For the quarter, I'm pleased to report consolidated net sales on a constant currency basis increased 13.9%, driven by broad-based growth in all product lines, bringing full year sales up 7.8% on a constant currency basis. Europe and Asia-Pacific experienced exceptional demand in the quarter, exiting the year with strong momentum. Net revenue on a constant currency basis was up 30%, driven by strong growth across all product lines. Overall, my hat is off to the production teams in Europe as they navigated unprecedented demand, brought on additional capacity in the quarter and coordinated with our North American colleagues to source more product to meet record customer needs.

Our North America business, which had a very strong fourth quarter in 2019, delivered topline results that were slightly down at 2% year-over-year. Our pipeline of new activity and new trials in North America is extremely robust, and I believe the fourth quarter figures are not indicative of the power of the business in North America today. Overall, I'm really pleased with the activity levels we see in the region and believe that in 2021, North America is on a strong path to sustainable growth. We made a number of changes over the past year in the region that I think are starting to pay dividends.

Pro forma adjusted EBITDA of $33 million was up 14.6% in constant currency terms year-over-year due to higher sales and improved pricing, resulting in a very strong margin of 36.6%. For the year, proforma adjusted EBITDA was up 7.3% to $93.7 million, in line with our revenue growth. Overall, really exceptional performance to finish the year, which sets us up well for further success in 2021. This year, we continue to build our growth platform at Ranpak. We're investing in people, systems, capacity and technology. When we spoke about the fourth quarter last year, I shared that we were investing in the sales team in the U.S., bringing automation production in-house, adding engineering talent, filling out the finance function and upgrading technology resources. I'm pleased to report today, we've done all these things and are investing further in some of these areas. We began to feel positive impact of these initiatives beginning in the second half of 2020, and I believe we'll reap the benefits of these investments more fully in 2021.

In order to take Ranpak to the next level, in 2021, we will continue to add personnel to the organization with particular emphasis on sales and support, engineering as well as operations as we expand product lines and further penetrate our operating regions. Our technology and digital transformation continues as we upgrade our systems to position us for success organically and through M&A. The demand for sustainable and automated products is loud and clear. It's up to us at Ranpak to ensure the right resources are in place to fulfill it. Our guidance for 2021 reflects this level of investment, continued meaningful topline growth and slightly lower EBITDA growth in the short-term as we ramp up investments. Areas like automation will scale up this year and will position us well to achieve our longer-term goals. We'll discuss the 2021 outlook further after Bill's remarks. With that, let me turn the call over to Bill, who will give you further details related to the quarter and full year 2020.

Thank you, Omar. Due to the predecessor and successor periods and transaction adjustments for the business combination with One Madison. With convenience of readers, we presented the 12-month period ended December 31, 2019, on a combined basis, reflecting a simple arithmetic combination of the GAAP predecessor and successor periods without further adjustment and also pro forma for constant currency and purchase accounting adjustments in order to present a meaningful comparison against 2020 results.

Machine placement continued its steady and broad based increase, up 12.2% year-over-year to over 117,000 machines globally. Cushioning systems increased 4%. Void-fill installed systems grew 12% while our smallest product line, Wrapping, continues to gain a hold globally, growing really well at north of 35% year-over-year. Overall, net revenue for the company in the fourth quarter was up 13.9% year-over-year on a constant currency basis, driven by strong performance in Europe and APAC.

For the quarter, combined revenue in our Europe and APAC reporting division increased 30% on a constant currency basis, bringing full year 2020 combined revenue in those regions to 18.3% on a constant currency basis. Europe and APAC finished the year with a lot of momentum, experiencing growth across all categories versus the prior year, driven particularly by strength in Void-fill and Wrapping and an encouraging signs of global industrial activity, Cushioning finished at up 5% for the year.

North America faced a challenging comparison to the fourth quarter of 2019, which was a record quarter and up a solid 7% versus 2018. Although topline was down 2% for the quarter and 3.8% for the year, driven by underperformance in Cushioning, we like how North America exited 2020 and laid the groundwork for a more successful 2021. On a consolidated basis, consistent with the seasonality in prior years, Ranpak experienced its highest sales volume in the most profitable quarter of the year in the fourth quarter. Gross margins for the quarter were 42.1% compared to 42.4% in the prior year, as material and overhead were up slightly as a percentage of revenue and we experienced some freight cost headwinds.

Consistent with our communications on previous calls, depreciation expense, which had been a headwind for us through the first 3 quarters of 2020, came in apples-to-apples comparison in the fourth quarter. Our largest input cost, kraft paper, was favorable for us in 2020, but the market has tightened somewhat recently. While pricing on certain grades will be a headwind for us, we are working to offset some of the pricing pressure with a more favorable mix of less expensive grades and new products. As always, we are focused on growth of our topline, but also having a consistent growth profile for our profitability. While there is some near-term pressure, overall, we remain constructive on the supply-demand dynamics in the paper markets. We will closely monitor the situation and take the necessary steps required to maintain our attractive margin profile.

To support growth initiatives, SG&A continued to build last year driven by increasing headcount from approximately 550 to finish the year at 645. As Omar mentioned, we added talent in senior management, sales, operations and finance personnel, as well as begin building out our internal automation effort, resulting in an increase of $2.9 million year-over-year for the quarter. As a percentage of revenue, R&D spend for the quarter was up 44 bps, as we continue to invest in development of our product portfolio. For the year, overall R&D spend increased approximately 9%. And given the activity levels, you can expect that pace to accelerate some going into 2021.

As expected, the fourth quarter was our largest from a revenue and EBITDA standpoint. We achieved significant operating leverage to finish the year, as fourth quarter proforma adjusted EBITDA increased 14.6% year-over-year, resulting in an EBITDA margin of 36.6%. This demonstrates the power in the business in the second half of the year and particularly in the fourth quarter.

Moving to the balance sheet and liquidity. We completed 2020 with a strong liquidity position, including a cash balance of $48.5 million and no drawings against our $45 million revolving credit facility. From an LTM standpoint, this puts our leverage at 3.9x on a bank adjusted EBITDA basis, and using the midpoint of our 2021 guidance implies 3.75x. Due to our success in deleveraging this quarter on a net debt basis, we've gone under the threshold, which requires us to make a final additional financing payment to our lender related to the business combination with One Madison. This is a onetime payment of 1.5% of the initial amounts drawn on our credit facility of approximately $8.2 million, which will be paid out in the next week or so. To be clear, this is a onetime fee to our lender, it will not reduce the principal outstanding on our facility.

Overall, we are pleased with the progress on our capital structure in 2020. We eliminated the warrants from our structure on September 22, 2020, and made progress to deleveraging towards the target of 3.0x leverage. Most recently, in the first quarter, our equity structure was fairly simplified as all 6.85 million earn-out shares surpassed the 20-day trading thresholds required to best. With that, I'll turn it back over to Omar before we move on to questions.

Thanks, Bill. Now a few words on our 2021 guidance. This year, on a constant currency basis and assuming no significant economic downturn, we're anticipating revenues of $330 million to $340 million, reflecting topline growth in the area of 10% to 13% and adjusted EBITDA of $101 million to $103 million, reflecting growth of 8% to 10%. The low end of our range reflects the uncertainty in the timing of the impact of the investments we have been discussing as well as timing of automation ramping up as economies open.

As I mentioned earlier, we're focused on growing the protective packaging business, building automation and expanding our product portfolio to drive a healthy topline growth profile. Some of our platform building investments in personnel as well as slight increases in our input cost, drive a modestly lower, but still very attractive growth profile in our adjusted EBITDA. Overall, we feel Ranpak is well positioned to deliver our longer-term targets of continued double-digit growth in revenue and adjusted EBITDA.

In general, I'm very excited about the business for 2021 and beyond. I feel like an environment where e-commerce remains elevated, albeit at a lower level than some of the hyperactivity we saw in Q4. While at the same time, industrial activity begins to improve, could be a really attractive backdrop for Ranpak. I believe we are at an inflection point in North America and that sustainability movement across the globe has more momentum than I anticipated even only 1.5 years ago when I became CEO.

The Ellen MacArthur Foundation recently published their 2020 Global Commitment progress report, outlining actions of companies committed to phasing out or reducing their use of plastic packaging. If you have not seen the report, I encourage you to take a look. In that report, substituting plastic with paper was the greatest percentage response in terms of how businesses were going to achieve their environmental reduction goals and improve their packaging materials. I find that to be an incredibly powerful point and want to convince an even greater share of companies to do the same. We are doing our utmost to make sure we have the best solutions in the marketplace. We are fortifying our reputation as the most reliable service provider and leader in protective packaging. Our goal is to deliver a better world and to encourage companies to improve the environmental footprint of their supply chain by choosing Ranpak.

Lastly, we expect to publish our 2020 annual ESG impact report in the next month or so, which will highlight our progress and continued commitment to environmental and social responsibility. Thank you all again for joining us. At this point, we'd like to open up the line for questions. Operator?

(Operator Instructions) Your first question comes from Greg Palm with Craig-Hallum Capital Group.

Really good results here, so congrats on the quarter. As I look at the details, what's most impressive, what most caught our eye is the activity level in Europe and APAC. And I know North America lagged a bit. I think based on our math, it was still the -- maybe the second highest revenue quarter in quite some time, maybe ever. But maybe just help explain what's going on a region basis? And more importantly, as we look ahead, you seem pretty confident in the pipeline for North America. So should we expect some growth acceleration here in 2021?

Yes, sure. Let me start geographically first, and then I'll focus on North America. So Europe, as you indicated, very, very strong quarter, very strong year. Frankly, in Europe, it's a mix of new customers as well as existing customers expanding their footprint and a lot of market share gain with the switch from plastic to paper. So all these factors are supporting our business in Europe. And I believe that is going to continue for quite a while. As we speak, if you look at market share, plastic is still a majority of the market in Europe despite all these switches. So I think there's going to be quite a bit of momentum there.

In Asia-Pacific, obviously, it depends by region. E-commerce has just been very robust in places like South Korea, Australia, in China. So in these markets, we've done really well. And those trends continue and we expect that Asia-Pacific this year will have another very robust sort of year. The other region that's worth mentioning real quickly is Latin America, where we are investing heavily with some of our e-commerce partners and places like Brazil, we continue to see a lot of growth there and those numbers are reflected in the European geography.

North America. As you indicated, the quarter was a very good quarter. In absolute dollars, it was one of the strongest quarters. Last year or in 2019 we had a very strong Q4, so the comp was a little bit challenging. But more important than just the result that we saw in the quarter, which I was happy with, is frankly where we're trending in North America. And a couple of factors -- our business has a number of leading indicators, as you know, Greg. And a couple of factors, that gets me excited about 2021 for North America is our number of trials is up. The demand for our converters and equipment is up and increasing, more and more dialogue with existing and new customers about switching from plastic to paper. So as I've said for a while, North America on sustainability is maybe a couple of years behind Europe. Well, we're starting to see that. And I expect this year, you will see meaningful switch from guys that use plastic into paper. So you put all these factors together and some of our anticipated closes. And that's why we're excited about North America, which I think is going to deliver meaningful growth in 2021.

Got it. So it sounds like you're pretty optimistic that we're going to see maybe an inflection higher in North America for 2021 versus kind of what we've seen in the last few years?

Yes.

And how much of that is driven by the core product versus some of these newer adjacencies. Cold-chains, one that you pointed out last quarter. I mean it sounds like automation, I mean, that is a theme that is growing increasingly in importance post-pandemic. So I'm just kind of curious, specifically for North America, but more broadly, how you view kind of new product introduction adoption this year and going forward as well?

Sure. So for North America, I think our core protective packaging business, given the dynamics I just described, it's going to experience meaningful growth this year, and that's going to be with existing customers and with new customers. So I think that's going to be a big tailwind. In addition to that, frankly, automation needs globally are bigger than we all think, Greg. So we are hearing from all of our customers about more and more automation needs for their warehouses, their facilities. The limiting factor right now in automation is COVID and opening up more and more facilities, and that's improving a little bit. Hopefully, post-vaccine, that improves quite a bit. And I think you'll see automation contribute meaningfully in 2021. Cold-chain, we've won a number of important businesses, as we've discussed in the past. We are investing heavily in that area. I'm very focused on it. I think it's going to be a big growth opportunity. I suspect the big numbers from cold-chain will occur in 2022. Given this year, we are really more in investment mode. And then coming up with the right products and expanding our offering so that we can address more and more customer needs.

Good. Okay. Makes sense. And then one for Bill. You mentioned the input cost, the kraft paper headwind. I'm just kind of curious how you sort of view that overall? How big of an impact? Is it manageable? And more importantly, what we've heard is the cost of resin has gone up pretty significantly here in recent months. And I'm curious how you view sort of the switching potential from customers that go from resin to paper, if what we've seen in the marketplace for that could be an accelerator as well.

Sure. Thanks, Greg. So as you'll recall, we do negotiate with our suppliers on an annual basis. So we have a lot of those conversations in the fourth quarter for the upcoming year. And as you pointed out, there is some tightness that we're seeing now in the paper markets. So we are talking to some suppliers and working with them on some solutions for any extra demand where we may need some more supply. As you pointed out, it seems like supply chains and commodity inputs in a number of areas are seeing some increases, whether you're paper or resin. So you are seeing a fair amount of movement there kind of across the board. So in the next few months, depending on what happens with reopenings and the vaccine, some of that could normalize and level out. And you'll also have worked through some of the, I think, unplanned downtime that was at a number of producers. So now it's an area that we're watching closely. And we'll plan accordingly.

(Operator Instructions) And your next question comes from Stefanos Crist with CJS Securities.

Congrats on the quarter. So my first question is on the 2021 guidance. How much recovery in industrial end markets is baked in there?

There is some element of recovery. It's not for the full year, given -- obviously, we think industrial activity may be a bit more robust as the year progresses and as we have maybe a bit of a more normalized environment. So that is reflected where we're expecting that there will be an improvement in industrial activity. And then we continue to think e-commerce activity stuff will remain elevated. And as I've quoted on a number of surveys, frankly, our discussions with a lot of customers, we think that will continue to provide quite a bit of growth opportunity this year. In particular, in the U.S., I will highlight some of the largest retailers, pretty much all of our big customers are talking about more warehouses, more DCs, even mini warehouses where they need more equipment to ship product, and then many of them are also talking about ship from store. So a mix of all these factors is what's driving growth, but there is an element of recovery in the industrial activity as the year progresses.

Got it. Also on the guidance, you talked about meaningful growth in automation. Is that a big part of how you're thinking about next year? And maybe can you talk about what returns you're expecting to see from all your investments in automation?

Yes. This year, in absolute dollars because automation is still a small piece of the puzzle, it's not the biggest needle mover, if you will. As a percentage year-over-year, we think in 2021, we're going to have very meaningful growth in automation. But in terms of absolute dollars, it's certainly a contributor, but it's a portion -- a bulk of what you're seeing in our business and in our growth projection remains in sort of the protective packaging area and the core business. I think as time goes on and automation gain scale, expect that to become a very meaningful contributor. But the one thing I want to highlight, Stef, that's important, is, remember, a lot of times, replacing automation equipment and that equipment is placed at customers that are buying more of our consumable as well. So automation is really -- extremely adjacent to our business because this automated equipment, in many cases, is yielding more and more consumable business for us.

Got it. Makes sense. And just one more quick one and I'll jump back. Last quarter, there were some concerns with automation just getting into facilities due to COVID. Are you still seeing those concerns? Have those lightened up? Any progress there?

Lightened up a little bit. We expect them to lighten up meaningfully, frankly, as the weather improves and given what we're hearing from some of our customers. So I think in automation, what you're seeing in our expectation is, again, numbers will improve as the year progresses and more facilities will open up. We feel pretty good from what we're hearing from our customers. The schedules we've agreed with them in terms of delivery, in terms of FATs visits, we think are going to occur as planned, but you will see a lot more activity in the second half of the year.

(Operator Instructions) And at this time, there are no further questions.

Great. Well, thank you all for joining us this morning. We look forward to speaking with you again next quarter.

That concludes today's conference. Thank you for your participation. You may now disconnect.