Q1 2020 Earnings Call

[music].

Welcome to the Ranpak Holdings Corp, first quarter 2020 earnings call.

At this time, all participants are in listen only mode.

Please be advised to todays conference is being recorded.

If you require any further assistance during the call. Please press star zero.

And I would now like turn the conference over to your speaker today.

<unk> Chief of staff. Please go ahead Sir.

Thank you and good morning, everyone.

We began I'd like to remind you that we will discuss forward looking statements. That's fine I heard the private Securities Litigation Reform Act.

Actual results may differ materially let's call it 60.

Various factors.

It's gotten our press release, a risk factors identified.

S four registration statement, but yet they actually it's combination and our other filings with the FCC.

Statements and responses to your question on this conference call May include forward looking statements that are subject to future certainty that could cause our actual results to differ materially let me state.

Manpack assumes no obligation.

And.

Forward looking statements shop place undue reliance on these forward looking statements all of which speak to the company only up.

The earnings release, we issued this morning presentation today's call strong Investor Relations section on our website a copy of the release has been included an 8-K submitted to the FCC before this call.

Also make a replay of this conference call available via webcast on company website.

Financial information that is presented on a non-GAAP basis, including reconciliations to comparable GAAP information. Please refer to the table slide presentation accompanying todays earnings release also as will discuss in more detail later to the accounting treatment I think its combination we closed on June 32019 data presented at the first quarter 2019.

Credit that's what period.

Lastly, we'll be filing our 10-Q with the has exceeded the period ending March 31st 2020, 10-Q will be available through the FTC on the Investor Relations section of our website with me today are awfully chairman and CEO Omar will provide an update on how we are responding to the challenges of managing through the cobot pandemic summarize first quarter results I will then provide additional detail.

Actual results before we open the call for questions with that I'll turn the call over to Omar.

Thank you Bill good morning, everyone I'd like to begin by sharing how proud I am aware team and the role we play in helping transform bunch across the world safely sustainably and reliably to people and communities in need.

As a point of the critical logistics infrastructure ramp back has remained steadfast in its commitment to provide our customers across the globe Wednesday environmentally friendly protective packaging materials.

Rely on their products.

Ramp back is not a large company, but we are a global one doing business in roughly 50 countries.

Initially in countering the virus in our operations in Asia, then in Europe, and more recently in the Americas, our employees have been working hard on executing under difficult conditions and I'm extremely proud of how they have adapted to the changing environment and come together.

We shipped a tremendous amount of product in the first quarter very close to what we did into first quarter last year, which benefited from customers purchasing.

For the upcoming price increases and Brexit.

Hi, most employees from ramp that are currently working remotely many of our colleagues report to our operating facilities everyday to make the machine and paper necessary to serve our customers.

Their dedication and resolve in stressful times is an example for the rest of our organization.

In order to operate in the safest manner possible. The company is working closely with appropriate public health officials to follow stayed at health and safety guidelines in the cities and countries where ramp back operates.

All of the company's manufacturing distribution and other facilities, our operating under these guidelines and are fully operational.

Our top priorities are the safety and health of colleagues and maintaining business continuity to meet the needs for customers.

Given the critical role ramp back spot explained the global supply chain ramp I colleagues have worked diligently to support the integrity of the company's supply chain in order to keep its global footprint and network foreigners operating effectively.

Today, our paper supply has not been interrupted and we have experienced only minimal delays in the receipt of certain convert or machine parts.

To further protect ourselves from potential disruption, we have developed alternative sources to many of the key components required for converter machine Assembly.

Although the outlook is uncertain that seems to change daily we believe ramp back is in a solid position to weather the effects of component.

Our cash position to strong at more than $20 million as of March 31, and our 45 million dollar revolver is undrawn and available to wash should we seek additional liquidity.

We continue to perform well and generate cash within our business, giving us adequate flexibility to support operations and continue to invest into business.

We continue to hire and built out our team is most recently with an emphasis on finance and automation, but given the unknowns and overall, we have delayed some of our discretionary capex projects such as the renovation of aren't Cleveland headquarters and have an exit tighter controls on our I see any expenses.

We're fortunate to be an essential part of the supply chain and able to help our customers. So we want to do our park to help those in need and some of our active communities.

In addition to donations to local food entries near our headquarters in Cleveland and another one and.

We have made donations to the Cleveland clinic, and Mount Sinai Hospital in New York.

The funds earmarked to pay for on site meals compressor station some lodging for hospital staff treating cobot patients as well as a delivery off meals hospital staff will become infected with the virus.

In times like these we all need to come together as a global community and health, where we can.

I'm proud to say ramp back is doing its part.

Now onto the corner.

The first quarter was a respectable one given the comparison and challenging operating environment. If you recall, our fourth quarter earnings call I should that the first quarter of 2020 would be a tough comparison given the first quarter 2019 performance was up 12% on a constant currency basis due to buy inside of Brexit.

Price increases in Europe, and North America.

While I was aiming to achieving target more in line with the 2019 level. The team delivered solid results given the rolling impact of coated we felt in our operating regions throughout the quarter.

The virus has had a mixed impact overall in our business with some end market such as E commerce experiencing substantial demand growth, while more industrial segments, such as machine parts and oil and gas are under pressure.

Given our global footprint, our Asia Pacific team was the first experience they facts and so many electronics and industrial customers substantially weaker just started the year only to have a nice recovery into corner and led by many of the regional ecommerce players.

In Europe industrial end markets were considerably weaker, but this weakness was more than offset by robust growth in voice fill and wrapping products and continued sustainability tailwinds.

In North America slower start to the year as well as weakness in industrial end markets led to some pressure, while ecommerce was particularly strong exiting the quarter.

This environment has provided some additional opportunities to grow our ecommerce business with existing customers and we believe that many of our customers will permanently gainshare from the dislocation taking place.

We're very proud that we have been and reliable partner for our customers throughout the past few months and many are more customers have taken notice we believe our performance. During this period further solidifies the reputation of our company and our products and that when customers want reliability they choose ramp back.

New installations from trials and closes our obviously slower in this environment as many customers will not allow outside personnel to physically enter into their facilities, but as lockdowns aren't lifted we're encouraged by our growing pipeline that is carried over from the first quarter, which we expected to close in the upcoming months.

Feedback on our next generation voice from equipment.

I'll try to North America continues to be excellent.

And we are having great success closing deals with customers would trial this product.

Given the demand we're experiencing we are reallocating machines that were previously bound for Europe, North America, and we'll introduce stride into Europe later this year.

While feedback on our next generation cushioning machines. We have placed is quite positive. The launch has been more limited relative to plan due to the slowdown in industrial activity in Europe due to Cohen.

Expectations for this product our high across our different geographies as we look forward to bring you get to North America, and Asia Pacific and the second half a year.

We continue our innovation and new product development work and have made some exciting progress on a new Coltrane application that we began trialing recently.

We believe this curbside recycling product is ideal for the rapidly expanding grocery home delivery space and provides the thermal protection needed to keep groceries cold, while taking up minimal space in warehouses or in the back of grocery stores to our knowledge. This is a truly unique product in the marketplace and then example of.

A renewed focus on innovation ramp back.

We successfully opened our new automation centre in the Netherlands. According to plan in April the team is close to complete as we have added 32 employees fully dedicated to automation in the past few months, bringing us up to more than 60 fulltime employees dedicated to automation.

Our pipeline for automation sales is robust, but given the restrictions on travel and the inability to enter in many potential customer sites. The timeline for completing some of these sales has been extended.

We continue to believe the medium and longer term outlook for this business as bright as customers increasingly look for solutions that make their businesses more efficient and less dependent on human labor at the another line.

Following the events unfolding around the World I believe many companies who were previously on defense about automation quickly realize the value of an automated solution.

No it quick update on our expansion into retail.

Clearly given the changing landscape.

In store retail trials are experiencing some disruption for the time being.

And the interim we have submitted to focus more online and are currently selling our environmentally friendly alternative stumbled route ramp back radio rolls on Amazon and Staples Dot com.

We've been developing content to support the online roll out and have stepped up our digital marketing efforts.

We also have developed into disposable jami wrapping product used at the Pos within retailers. This product is gaining a lot of traction in Europe, even in diminished endemic and we think has great opportunities to be used globally.

Turning the discussion now to first quarter financial performance for the quarter consolidated net sales on a constant currency basis decreased 4.6% driven by weakness in industrial end markets, leading to declines in cushioning and to a lesser extent white Phil.

Wrapping was a bright spot mobley exhibiting nearly 50% growth on a constant currency basis, driven by Jami unwrap back.

Automation not surprisingly was under some pressure year over year as we were in the process of opening our facility and the pandemic slowed no sales opportunities.

After a strong fourth quarter, the North American team posted the decline was 9.4% year over year, driven by decreased cushioning and voice felt sales, partially offset by strong growth in wrapping.

While performance in North America was disappointing we are encouraged by the pipeline our new additions to the sales team have developed unexpected close activity to ramp up once business restrictions are lifted.

On a constant currency basis for the quarter net sales in Europe, and Asia Pacific were roughly flat against the first quarter in 2019 that saw an increase of 19% year over year.

Strong growth in wrapping and void films were offset by weakness in Cushing and automation.

Europe, and Asia Pacific exited the quarter on a very strong no.

And have seen solid demand since the ended the quarter.

Overall sales through April at the beginning of May are up versus last year as E. Commerce continues to be a strong driver while industrial areas are under pressure.

Sustainability remains a robust tailwind in Europe as our experience has been companies continue to move forward with their existing plans to reduce the impact their supply chain has on the environment.

Pro forma adjusted EBITDA was 18.1 million was down 8% in constant currency terms year over year.

First quarter EBITDA was adversely impacted by lower sales and the investment in the business I mentioned in our fourth quarter call.

The largest driver being increased DNA related to the hiring of 65 additional personnel in management operations Engineering sales finance customer service and automation versus last year.

Just to put that in perspective that is a 12% increase in total headcount versus a year ago.

But I believe these hires were required to put ramp back into position to succeed over the longer term.

In the second half of the year, we will begin to lap these additions and gain operating leverage that's the first quarter typically is the smallest contributor to annual sales and EBITDA.

Now with our automation center stood up and a number of key engineering and finance team members hired and the last couple of months.

The vast majority of our additions to personnel are complete we.

We have added a lot of talent over the last nine months and believe we are now largely fully staffed at this point with the expertise required to execute on our long term growth goals.

Those are the high level points on our start to 2020 to summarize while our business is not immune to the impacts of covance aspects such as E Commerce home goods and medical supplies are performing extremely well and have been largely offsetting weakness in the industrial segment.

We are in a solid position from a cash on hand on liquidity standpoint.

We continue to generate cash and our bank adjusted EBITDA leverage ratio was 4.4 times in shore. While we are extremely mindful of our operating environment. We continue to be on offense and are in a position to take advantage of the opportunities that can come about in times of dislocation.

As part of our momentum building efforts.

This morning, we launched our first B to B digital marketing campaign to engage DTC ecommerce brands and encourage them to box better by using ramp back sustainable packaging solutions.

We develop this campaign with ready set rocket to target key DTC decision makers and showcase ramp acts unique alternatives to plastic.

We're excited to raise ramp at profile and get our message out.

You can learn more about the campaign on box better dotcom.

Now Bill will take you through some further details for the quarter and then I'll discuss the outlook and open the call for questions Bill.

Thank you Omar and the deck, you'll see a summary of some of our key performance indicators. The convenience of readers. We presented the comparison of the three month period ended March 31st 2020.

Format for constant currency and percentage of completion revenue recognition adjustment in order to present, a meaningful comparison got the corresponding period.

We'll also be filing our 10-Q today, which provides further information on ran packs operating result.

[laughter] placement continued its steady increase in the quarter up 85% year over year topped 170000 machines globally.

Questioning and voice on felt systems continue to grow in the mid single digit wrapping continues to ramp well exceeding 30% Europe here.

Overall net sales for the company in the first quarter were down 4.6% year over year on an adjusted constant currency basis, driven by industrial headwinds and automation offset by continued solid performance, our core business in Europe and Asia.

So Mark mentioned, we did have some headwind to our adjusted EBITDA. This quarter the investments we've been making it still achieved a roughly 20% margin compared to 29% prior year.

We were able to offset some of the investment and personnel through more favorable input cost that's been negotiated lower pricing more paper suppliers going into this year.

We expect the paper pricing to remain a tailwind for the remainder of the year and expect to obtain greater operating leverage aren't DNA the year progressive increase.

Capital expenditures for the quarter were 10.3 million versus 6.5 million of 119.

2.4 million of the increase was due to increases in converting equipment as we ramped up production of try to Guardian, our next generation can burgers.

Our new product launches, while we also built inventory of wait till converters earmarked helmet centers coming online over the next couple of quarters.

Juan converter related Capex increased by approximately 1.4 million year over year due to our number one time projects and upgrades such that your website equipment related to making people for Guardian somebody Nike maintenance et cetera.

We're still experiencing strong demand part converters have continued to invest more fleet, but as you may recall, we the ability to ramp up scale down our converter capex with the fairly short lead time, so we can stay nimble.

Given the environment, we're watching topics closely well adjust accordingly to make sure we adequately protecting our balance sheet.

Interest expense for the quarter was approximately 6 million.

We're able to take advantage of the loan yields by reducing the rate on a 200 million dollar swap I 22 basis points to 2.1%.

The full year, saying no revolver draw expects a cash interest expense to be roughly 22 million.

Moving to the balance sheet liquidity, we completed the quarter with strong liquidity position, putting cash balance of 20.2 million no drugs again for 45 million dollar revolving credit facility today.

I'd also point out, but we have satisfied all required amortization payments are yet detractor debt or on the required to pay down 1.4 million euros per year weighted toward euro troche.

With that I'll turn back over to Omar before we move by the questions.

Thanks, Bill at this point into call I'd like to take a moment to thank Trent meyerhoff for a foreigner has efferson contributions made around back.

As you have all seen this morning, Frank will be moving on from Ranpak as of May 15th.

And we wish him the best in his future endeavors.

It is leaving on good terms and has been working with Bill drew will assumed the role of interim CFO to ensure a smooth transition.

We will be conducting a search to find a permanent replacement, which we expect to conclude by the end of the year.

We provided a lot of info on this call and tried to provide you with as much color as possible given how quickly the world is changing.

Including some color on our sales in April in early May all in all I'm encouraged by our execution in the quarter, our business fundamentals liquidity and financial health are strong we are laser focused on ensuring business continuity in our operating areas and developing contingency plans to address a wide range of scenarios.

I feel very good about where we stand right now, but understand we're navigating a very dynamic environment, where some things are not in our control.

The lack of visibility and uncertainty about the pandemic and its potential effects on the global economy and our business.

Makes it difficult to forecast the remainder of the year with any precision.

These factors we are temporarily suspending our forward looking guidance until the environment stabilizes and we get more clarity.

As always we aren't prudently managing our business in the near term, while maintaining focus on the long term health of our company.

2020 remains an investment year, and we will continue to do the things. We believe are in the best interests of the business for the long term.

We continue to ramp up our talent and areas of investment. So we can be in a position to emerge from this period in an even stronger position.

Thank you all again for joining us at this point operator, we'd like to open the line for questions.

At this time I'd like to remind everyone in order to ask your question. Please press star followed by the number one on your telephone keypad, Oh pause for just a moment, while we compile the Q and a roster.

And again as a reminder, if you'd like to ask a question. Please press Star then one on your telephone keypad.

First question comes on line of Greg Palm with Craig Hallum Capital Go ahead. Please your line is open.

Alrighty, Thanks, good morning.

The one is doing well Omar as you look back in the quarter I think you said it didnt quite meet your expectations can you talk a little bit more about various end market strengths and weaknesses points and maybe how some of these customer facility closures that you mentioned might have impacted results.

Yeah sure good morning, Greg.

You know obviously this quarter, so just tremendous volatility in certain sectors, a that that we were not anticipating I don't think anybody was so.

To give hobbies examples in some industrial segments, where certain facilities and customers of ours were shut down for the last two weeks after the quarter.

We saw that in auto related we saw that in some of the furniture players we've seen a reduction in activity in oil and gas and a lot of that occurred in sort of North America.

For the quarter that hit in Asia Pacific happened earlier in the quarter towards the ended the quarter actually things were opening up and they can't you know a back continues to perform better up to now.

And then globally there has just been tremendous shift.

It's from industrial activity to E commerce activity. So we as a company have been trying to fulfill the needs of our ecommerce players in some cases some of these customers activity has gone up 30, 40, 50% even doubled.

And we're trying to fulfill that and in the case of industrial guys that have shut down some of that activity has gone. The wrong way also you know 30 40, 50% plus so the world that we're in right now just has quite a bit of volatility in terms of off the level of activity at the underlying Oh yeah.

You know facilities level.

And what we're watching right now is as the world opens up again.

Trying to see what type of activity, we're gonna see from the industrial channel you know my personal view is the elevated level of E. Commerce is going to continue with us for awhile.

The unknown is sort of what we see from industrial activity pick up a in the upcoming weeks and months.

Yeah, Great that makes a lot of said and you also mentioned that.

All in early part of me was was up versus year ago periods I don't know.

The detailed to quantify that further but did you also say that the expectation is that Q1 revenue will likely be the smallest contributor for the year. So implying you should expect Q2 to be up sequentially, even with everything going on.

Yeah, it's really tough to predict the world, Greg as you and I know given given what's happening out there.

Under normal circumstances at this call I would not discuss April and May month to date.

Frankly sharing with investors what happened in March 31, right now it seems like Youre talking to them about an eternity I go so just to give people a timely sense. What we have seen in April and May yesterday is a continuation of these key trends I talked about a robust E commerce environment, a very strong.

Long activity in Asia Pacific very strong activity in Europe. So overall, we are we are up compared to last year and that was just designed to give people a flavor at a high level, how we're doing rather than to give position. If you talk about the rhythm of the business typically.

Q1 is is the weakest and that's typically our smallest quarter from a revenue and EBITDA standpoint, if the trends that we see today continue then I think that statement will hold and you'll see us build up.

Sales and EBITDA as we go into the next you know into this quarter and the next few quarters. So that would be our expectation what I don't know and no one daus and how will the world open up what is around the corner in terms of off the virus and a potential second wave or any of that stuff and since we don't.

Have a crystal ball, that's better than the rest of the world, We've decided to suspend guidance, Bob what you're asking about building sales I'm building, even though.

Over the ensuing quarters that is what we expect at this point.

Okay.

Let's let's shift gears, if if we can because I think with everything going on in the world It might.

Potentially might have accelerated.

First and automation.

That's kind of what the commentary implies so what are you hearing from customers and what's your longer term vision about the potential for automation not just here.

Current product line, but broader solution potential for for this industry as we look sort of out to the next few years.

Yeah, I think look from conventional wisdom is automation, which is really a sale of equipment and most.

In most instances for us.

Is that in the weakening economy like this one you would think capex projects are delayed and that would have been my feeling you know a month to month and a half ago. What we are hearing from customers a in particular the larger ones. Yeah, it's given what they're seeing in terms of disruption obviously given.

You know the human contagion aspect given their need for speed and efficiency automation when it comes to towards end of the line and finding either semi automated solutions, where you can have physical distancing done a lot easier or having completely automated solutions is something that's still very much on their mind and.

They're interested in pursuing these conversations so the level of conversations frankly in the U.S. in Europe, and Asia Pacific with our prospects and customers in automation is increasing.

What we envision is you know we finished our first chapter which is hiring the full team.

So now we have more than 60 individuals a focus solely on automation.

Have they facility dedicated to automation, we want to execute on that plan to meet the demands for this year and over time I would expect that we wouldn't be investing in increasing our manufacturing capacity.

Investing in R&D and an innovation to continue to come up with further solutions are around the automation sortof opportunity and frankly, I wouldn't be expecting that we would be coming with more automated solutions in our main converter business and core business as well.

Again, it may not be fully automated to eliminate labor in that case about to reduce labor, which from everything we're seeing from our customers are these trends are going to continue now these trends apply to the larger customers that I can't afford that equipment, the smaller warehouses and smaller customers I think we'll continue to just focus.

On sort of manual solutions, but the trends in automation continue to look robust now the reality is that business just like our business. It's a physical business in the sense people come to your facility. They want to go see your equipment that other customers.

Our employees engineers and technicians need to go to their facilities. So we need the will to open up to fulfill solve that demand.

But the demand and the pipeline continues to be robust.

Yep Yep, that's that's great okay.

Last one for me can you talk a little bit more about the cold chain opportunity I think you mentioned a new application curious if you're testing that with customers whether that's in pilot stage and maybe what you know the timeline is just so the more of a commercialization and in a contribution to the piano.

Sure and that's a great question, because I think.

You guys recall and ER in Q4 call I said our focus.

Has been on retail quite a bit to launch our product, which we were intending on launching in stores.

In March and then I talked about automation, where we'd which is why we just discussed in the third opportunity was cold chain I would say what happened in the last month and a half two months with that with Cove. It is we pivoted given the retail environment, we have been investing more resources in cold chain right now.

Again, our retail products already their online by the in store opportunity has been diminished with many of these stores.

No not open and getting the foot traffic and what we've seen given what's happening in the grocery channel what's happening with everybody loading up their pantries and their fridge is we have increased our level of activity in cold chain. We do have a prototype out there it is being tested with customers, our engineering and R&D team.

Worked very hard the last couple of months to meet that demand, which is urgent and now.

So that's what we're working on and we're very excited.

About the product that we have out there that we think will will help transmit you know food and beverage and in some cases actually medications, while controlling the temperature.

So that has become a pretty exciting area for us where a lot of resources that ramp back has moved and started focusing on that and I feel I feel pretty good that you will see the results in the upcoming weeks and months.

So it's something that was a shift given the dynamics that we saw with our customers and then the economy when the virus.

What's the market opportunity for for that solution have you been able to size it up at all or not.

I think the market opportunities gigantic as you know Greg worst we're a small company. So even if we get small small fractions of some of these markets, but if you add what you're seeing in grocery channel. If you add what you're seeing in you had all the meal kit channel a if you add.

And even some basic pharmaceutical movements not the high end sortof complicated stuff youre talking about a very sizable market that today in meal kits and in grocery alone is seeing quite a bit of search.

And what we're trying to do is meet those needs at me those demands and by the way first and foremost that's being a good supplier on partner to our customers.

So just showing them that ramp that can be nimble and addressing their needs relatively quickly.

And we think these trends will continue maybe not at these levels, but they will continue and that would be a nice market segment that is completely additive to what we have so it'll be a whole new opportunity that we're excited about.

Good.

I'll leave it there best of luck going forward. Thanks for all thank you Greg.

Thanks, a lot.

And once again, if you'd like to ask a question. Please press star followed by the number one on your telephone keypad.

And there are no further questions at this time I'd like to turn the call back over to our presenters.

Thank you Jason Thank you everyone for joining us today, the quota speaking again next quarter.

Ladies and gentlemen, this does conclude todays conference call you may now disconnect.

[music].