Q3 2020 Ranpak Holdings Corp Earnings Call

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After the speaker's presentation to be question and answer session to ask a question. During the session you will need to press star one on your telephone.

Please be advised that she's conference is being recorded if you're acquiring further assistance. Please press star zero I would like to now hand, the conference over to your speaker today, David Mergeco Chief Sustainability Officer.

Please go ahead.

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 like 95 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 annual report on form 10-K, and our other file.

Yes, you see.

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 those statements.

Back assumes no obligation is not intend to update any such forward looking statements 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 the presentation for today's call are posted on the Investor Relations section of our website copies of the releases were included in a form 8-K, we submitted to the FCC before this call. We will also make a replay of this conference call available via webcast on the company website.

The financial information that is presented on a non-GAAP basis. We have included reconciliations to the comparable GAAP information. Please refer to the table in slide presentation accompanying todays earnings release.

Also as we will discuss in more detail later today the accounting treatment for this combination we closed on June 32019.

We've also presented our results for the three and nine months ended September Thirtyth, 2000 lights and on a combined basis, reflecting a simple arithmetic combination of the caf predecessor, and successor period without further adjustment.

As well as any other adjustments as described.

Lastly, later today, we'll be filing our 10-Q with the FCC for the period ending September Thirtyth 2020, the 10-Q will be available through the FCC to run the Investor Relations section of our website with.

With me today, I have Omar Asali, our chairman and CEO and Bill drew our CFO Omar will summarize our third quarter results and Bill will provide some additional detail before opening up the call for questions with that ill turn the call over to Omar.

Thank you David and good morning, everyone I hope everybody listening and then their families are staying safe and healthy.

This quarter I again would like to begin by thanking everyone at ramp back and in particular, those who work in our manufacturing and converting facilities across the globe.

While many members of our team continued to work remotely.

Condition of our success this year and it's challenging conditions has been the women and men who show up each and every day in our factories.

Because of their relentless efforts as a result, we've been able to continue to serve our customers effectively throughout the world.

A time when many businesses are grappling with so many disruptions our customers have been able to consistently rely on receiving their products from ramp back.

Not only are we providing them with the solutions they already know on value.

While we also had been providing our distribution partners with new and innovative products to help them grow their business.

Execution focus have been terrific in a rapidly changing environment.

And I'm extremely proud of the team for their extraordinary efforts.

As the number of cases is increasing in many areas of the world. We continue to encourage everyone in our organization to be vigilant.

We require our team to follow proper safety measures to ensure their own health as well as those around them.

Our top priorities this year have been to safety and health of our employees and customers as well as proactively managing our global supply chain to ensure uninterrupted supply to our customers.

We believe we have executed well on these goals.

In addition to our essential workers at the converting facilities remaining in place we brought back stagger groups to our offices of the summer.

But today given the rising cases for our office workers, we remain largely every remote working population.

We are closely monitoring conditions and will continue to adjust accordingly, while not losing focus on achieving our operating objectives.

We have taken a balanced approach to the business this year.

We're focused on areas with the greatest near term opportunities, while continuing to drive forward initiatives that position ramp back well for 2021 and beyond.

The strength of our core business positions us well, we are fortunate that we can pursue new and large opportunities that require investment such as automation and cold chain, while still achieving strong results.

We view this as a winning combination for creating sustained shareholder value over the long term.

An operational and supply chain perspective.

So it has had minimal delays on our equipment and has not disrupted our paper supplies.

Operations at each of our global facilities continuous uninterrupted with the greatest constraints currently being labor and capacity for certain product lines to meet the strong demand we are experiencing particularly in Europe.

While we have been able to navigate successfully thus far our existing network. We are taking steps to diversify our supplier base and add additional production capacity in Europe.

We're very pleased with the progress we are making.

We also have been working well as a global team to satisfy demand in various parts of the world and the most efficient manner I'm very impressed with the global collaboration I'm seeing across the company there.

The resilience of our business model and diversity of our portfolio served us well in the third quarter and year to date, whether it's geographic split our diverse product offering or the variety of end markets and customers. We serve our business is well balanced and contains many levers for us to achieve our goals.

While some areas of our business such as cushioning have been under pressure wrapping envoy trail continue to outperform and drive growth.

We're excited to have been on offense again this quarter by focusing on winning new business and rolling out new products.

Im happy with the strong results of the third quarter as the team continued to execute an advance key ramp back initiatives.

Similar to the drivers of the second quarter performance robust growth in Europe, and Asia Pacific grew over the top line.

Much like it was the first area impacted by Cobot age.

Asia Pacific continues to show signs of a normalization of trends, which is encouraging.

From a product line and end market perspective, industrial activity has been slowly improving and E commerce demand for our wrapping and voice both products remains elevated.

Areas, such as beauty cosmetics, food and beverage home furnishings, omnichannel activities for retailers and warehousing and third party fulfillment have been and continue to be key growth drivers for wrap back this year.

North America delivered sequential improvement with new products, such as strident Guardian, and new recycle paper types driving discussions as of late and providing good momentum.

Regionally you have seen greater activity in the north east and southeast with the middle of the U.S. slower to return.

We remain constructive on the outlook for North America going into year end and expect momentum to continue to improve given the activity as of late.

Also recently.

Pleased to share that in the cold chain market, we want to sizable account in North America in the food and beverage sector.

Revenues from fiscal chain customers start. This month. This is a direct validation of our R&D efforts that we pivoted to at the beginning of the endemic to focus on the poultry market.

I'm expecting a meaningful contribution from our Coltrane business starting in 2021, as we invest and innovate in this important market segment.

Turning the discussion now to third quarter highlights fourth quarter consolidated net revenue on a constant currency basis increased 8.1% to $76.1 million driven by robust demand for voice fill and dropping.

Primarily in response to continued growth in ecommerce activity.

North American net revenue returned to growth, increasing 1% year over year, primarily driven by growth in wrapping an offset somewhat by continued lower sales into industrial markets.

Overall, North America continues a sequential improvement, but still lags, what we're seeing in Europe and Asia.

Best in class new products are driving encouraging activity no.

No post consumer paper offerings as well as new product introductions continues to garner great feedback from customers.

In the third quarter in North America, We recently launched the next generation of our accu fill and auto automation technology, which I think has great potential.

For some background on how this works our tower sensors scam, the box coming down the line.

Determined the block size and volume of objects in the box and then compute the amount of paper needed to fill the void.

Our sensors communicate with our converters to dispense the optimal amount of paper into the box, enabling our customers to decrease their environmental footprint and supply chain costs.

Our solutions range from automation equipment that reduces your labor needs to solutions that fully automate and eliminate your end of line labor needs.

On a constant currency basis for the quarter net revenue in Europe, and Asia Pacific was up approximately 15% driven by growth across all product lines with particular strength in void filled and wrapping.

Performance in Europe continues to be strong fueled by solid execution of geographic expansion initiatives.

Continued elevated E commerce demand.

And significant sustainability tailwinds.

In Asia Pacific, We saw continued strength in demand from ecommerce customers in places like Australia, and South Korea as well as the continued economic recovery in China Auto.

Automation has been the area of our business most impacted by Covance as travel restrictions have made it challenging to install new equipment and conduct in person demonstrations for new customers.

To provide some context around automation sit back this quarter too few words to look at sales excluding automation.

Net sales would have increased 10.4% year over year.

Although coal that has presented a challenge within automation in 2024 equipment delivery.

We took decisive action to utilize this time to advance the development of our next generation box customization machine the Evault too.

This positions us well for the next phase of building automation.

I'm pleased to share we have recently placed our first evil to prototype out in the field in Europe and it is receiving excellent feedback.

Automation is going to be a key driver of growth for us going forward. So I'm really pleased that the team in Europe was able to turn this challenging period during the pandemic into a long term foundation for innovation and advancement.

Despite the near term physical disruptive effects, resulting from Covance our activity level in automation is strong.

Our current order book of business and our near term pipeline are very healthy the.

The overall demand for our automation products is robust and our level of customer dialogue is hyper active.

This positions us well for outstanding growth in 2021 in automation.

In addition to our in house Advancement, we completed a small acquisition in October, which broadens our product portfolio and service capability.

For approximately 1 million euros ramp back acquired from manufacturer incentive and the exclusive rights to the IP and associated assets that offer automatic height reduction machines as well as wedge and document insertion technologies.

These products will be a nice bolt on to our existing automation offering.

In constant currency terms and pro forma for purchase accounting adjustments in the third quarter in 2019, adjusted EBITDA of $23.7 million was up 7.7% year over year due to higher sales and lower input costs offset slightly by increased gionee and production various costs.

Due to investments in personnel and ramping up of newer product lines.

I also would like to highlight that we streamlined our capital structure this quarter by eliminating our outstanding warrants and converting all of them to shares we.

We had previously communicated that our top two priorities for our capital structure, our deleveraging and having a capital structure that consists simply of long term debt and common equity.

Following our de leveraging transaction in late 2019.

Removing the overhang from the warrants will stop on our list of priorities for our capital structure.

Feedback from the investment community to on the exchange has been quite positive.

Those are the high level points on our strong third quarter performance in short, we insured employee safety maintained our business operations at a high quality level invested for future growth and streamlined our capital structure.

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 for the convenience of readers. We presented the comparison of the three month period ended September Thirtyth 2020 pro forma for constant currency and purchase accounting adjustments in order to prevent a meaningful comparison against the corresponding period.

We'll also be filing our 10-Q today, which provides further information around pet operating results.

Machine placement continued its steady increase as we placed over 3000 machines in the quarter of 10.6% year over year to 113000 machines globally.

Consistent with recent performance Cushioning systems grew 3.4%, while boys will install to increased 10.1%.

Our smallest product line wrapping continues its rapid expansion growing 34.6% year over year and with all the way to becoming a meaningful contributor to our top line.

Adam I mentioned overall net revenue for the company in the third quarter was up 8.1% year over year on a constant currency basis, driven by strong performance in Europe, and APAC and improving conditions in North America.

On a pro forma basis for constant currency and purchase accounting adjustments gross margin for the quarter was 39.3% compared to 44.2% in the prior year.

As a percentage of sales depreciation expense within Cogs increased 300 bits year over year to 10.4% due to step up in value of converter assets that took place in the fourth quarter of last year.

Turning next quarter that comparison will be apples to apples.

Production variance and costs associated with automation ramp up and expansion of product lines adversely impacted gross margin by approximately 200 basis points, but we believe these are temporary in nature and will normalize going forward.

On a cash basis gross margins were largely in line with our recent performance.

Regarding the large input cost Kraft paper supply and demand in the paper space remains fairly balanced at this time. So we do not anticipate material changes to our input costs in the near term.

In the quarter adjusted EBITDA grew 7.7% year over year, while margin held roughly flat at 31%.

In 2020, we view savings on raw material input costs to invest in R&D systems, and additional personnel, including many focused on automation, bringing total head count up to 615 globally.

We are pleased with our ability so far to go our profitability closely in line with our sales simultaneously investing meaningfully in the business positioning us well for the future.

Cash interest expense for the quarter was approximately five and a half million and should remain consistent for the remainder of the year as the majority of our interest exposure on our unique tranche of our term loan is hedged.

Capital expenditures for the quarter were 6.8 million driven largely by increased placement of burgers as demand has been robust, especially within wrapping and boy. So we've been actively growing our installed base throughout the year and placing converters across the globe.

Moving to the capital structure and liquidity dirt.

During the quarter, we successfully tendered for exchange, 100% of the $20.1 million previously outstanding warrants.

We change these warrants at a 4.4 million shares which helps simplify our capital structure, while improving float and liquidity.

A key priority for us.

Our cash position grew $8.6 million in the quarter over $31 million at September Thirtyth, and a $45 million revolver is undrawn and fully available to us should we seek additional liquidity.

Our leverage from a bank adjusted EBITDA standpoint was 4.3 times at the end of the quarter.

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

Thank you Bill to summarize I'm very happy with the achievements and improvements our company made in the third quarter and year to date, our fundamentals and financial position are strong and our innovation pipeline is exciting.

Our pipeline of new business opportunities is robust everyday I challenged the team to improve and May cramp pack, a better company and corporate citizen than the day before.

A few months ago, we joined the board challenge as a tighter pledge partner to add more diversity to our board and encourage other companies to do so.

As you have seen we announced yesterday that Pam eel will join our board.

Pam was formerly Chief marketing officer at the MBA. She brings more than 30 years of experience in global marketing and modernizing golf brands I'm very proud to welcome them to our board and look forward to her contributions lastly, while cobot has certainly presented new challenges for US we continue to execute and lay the groundwork to it.

Our longer term growth objectives, both organically and through accretive acquisitions E Commerce automation and sustainability remain key to our growth algorithm and I believe ramp back is extremely well positioned to expand with these forces reshaping the global economy.

With that thank you all again for joining our call I'll now open it up to questions operator.

As a reminder to ask a question you will need to press star one on your telephone switch try your question has to pound or hash key please.

Please standby compile the queue any roster.

Your first question comes from the line of Greg Palm from Craig Hallum Capital. Your line is now open.

Yeah. Thanks morning, Omar Hey, Bill Congrats on the really good quarter here.

Good morning, Greg.

I guess just started off the growth in Europe, and Asia Pac really stood out to us and it sounds like it was really across the board I mean, I can't imagine Thats all end market growth over there. So presumably it's it's potentially some new customers and maybe you're taking share can you just go into a little bit more detail what you're seeing.

Yes sure.

I think you are right. It is a mix it is a mix of factors, let's let's start in Europe.

Certainly, we're seeing more activity with existing customers in E commerce.

And frankly.

That continues given what's happening with the pandemic.

But in Europe in particular, we've seen a nice market share gain.

With a number of large accounts moving away from other substrates from blast.

Plastic offerings and.

Looking for our solutions.

We've got a number of customers.

I have reached out to us.

Asking us to come and help them in their warehouses and their businesses, so you're seeing a shift.

Away from plastic to paper.

In in Asia Pacific, It's frankly and mix of E Commerce like I mentioned in terms of certain geographies.

Australia South Korea.

But we are clearly seeing.

Pretty good activity in China.

There is a lot more normalization in the whole Asia Pacific region versus the rest of the world. So as I said they were first to get into the sort of the pandemic and the rhythm and the economies there seem to have stabilized quite a bit so thats, helping our business.

And the activity in both geographies continues to be very robust.

Yeah good.

And in terms of North America can you talk about maybe the cadence of how demand trended through the quarter, what you're seeing in October any positive impact.

The October month or November just from E. Commerce, you had prime day at a bunch of other online sales events Walmart pluses is launching here and what are you what are you seeing here specifically.

Sure. So let me start with industrial activity, then I'll talk about.

Ecommerce and retail industrial activity as the year has progressed activity has improved in the U.S., it's been uneven but it continues to improve and certainly in Q3, it was better than what we saw in Q2.

Some geographies are stronger than others, we continue to see some weakness in the Midwest and some weakness in the central part of the country.

The coast seem to be doing a little better.

So thats, one one aspect but.

As we speak industrial activity continues to improve in the west which is which is a great sign for us and we expect that to continue.

In terms of E commerce activity. It honestly has been super robust our expectation is that's going to continue.

We don't think that's going to change even in 2021, you asked about a number of accounts pretty much all the large retailers are in discussions with us.

About doing more in E commerce and in their online fulfillment.

And they are investing quite a bit and many of them have said that publicly in new Dcs new warehouses.

They want to increase their level of sales online and we are a beneficiary of that one leading indicator and this is why I'm excited about what I'm seeing in the U.S.. It's obviously the number of trials and the pipeline that we have and that has continued to trend very very well.

As the year has gone on and it continues to be a very high level. So I think expect E. Commerce activity to continue to be robust expect industrial activity to continue to recover and hopefully stabilize.

Great and then the Coldstream customer you commented on thought that was that was interesting how big of an opportunity could that be and then to be clear is this a direct to consumer application what can ensure.

It is a direct to consumer it is a sizable opportunity we are generating revenue as we speak this.

This was really important for us as a company as you would recall early in the pandemic, we pivoted to investing more in R&D and innovation in cold chain, we created our prototype put it out in the marketplace. We got great feedback, we continue to invest behind that technology we.

We continue to look to add talent and hire more people for our cold chain business, which I'm quite excited about.

And I think you know, we will continue to see us gain traction.

I wanted to highlight this opportunity one because.

It is of of meaningful size and two.

Just to show that when were investing in R&D and innovation, we are getting some traction and now we're getting into a place where we want to execute better in cold chain on.

And I think cold chain is going to be hopefully something that's pretty important for us in 2021 and beyond if you think about our business and I've discussed automation quite a bit we have used this year to invest heavily in automation.

And automation is a little bit ahead of cold chain for us and I'm expecting.

Very strong growth in automation in 2021 and coaching is behind so these are two areas of growth where ramp back has invested a lot of capital and resources that I think are going to start bearing fruit in the upcoming year and I like where we are today.

Okay. Thanks for the color there and I guess last one bill you talked about some impact to gross margins I know it was not writing fast enough, but I think you mentioned that you're expecting that pressure to use going forward did I hear that right.

Yes, Thats correct, Greg So we had.

You know 300 bips of impacts due to the step up in depreciation related to the converter assets in the fourth quarter of last year. So that will normalize going forward next quarter on and then we just had some reclasses overhead from GE and 18 Cogs this quarter.

But on a cash margin basis.

Our performance is largely in line with historical so we expect that to normalize.

Going forward.

Got it requires okay. That's what I missed okay. Good I'll leave it there thanks and best of luck going forward. Thanks.

Thanks, a lot Greg.

Your next question comes from the line of Stefano Christie FMCG CJS Securities. Your line is now open.

Good morning, and congrats on the quarter.

Good morning, Stephen Thank you.

So no machine placement growth, what's fantastic almost.

Almost 11% are.

Are you still seeing any roadblocks from facilities. Many wanting the social distance or are those mostly out of the way.

I think they are mostly out of the way there as you know certainly certain situations, where some companies are still waiting and may be referring to that.

Not to have too many visitors or our technicians and engineers on their premises, but by and large it's a very different rhythm today.

Versus a few months ago, but obviously, we are watching caused you know as we all have seen the number of cases in the us and in Europe is increasing and what would that mean or we will see but right now I would say a lot of the big closures et cetera delays in trials.

It feels better today than a few months ago stuff.

Sure. Thank you.

On squeeze in one more.

Now briefly mentioned that now.

Now the warrants are out of the way you talk about where your biggest priorities are and then just reducing debt or.

You mean, a small tuck in.

Really what are your biggest priorities near term I mean, I would put them in three buckets. One is execution, we have a lot of initiatives that we're working on that we think can deliver outstanding growth. So execution in our core business converting the trials I talked about into closes.

Execution and automation.

Building, the cold chain business and executing on that that is a very important priority.

The team is quite energized, we feel very very good we like the competitive landscape, we really like the feedback we're getting from our customers. We like the feedback we're getting from our trials. So that is our top priority.

Intended in terms of our cap structure, you know we will continue to monitor the things we've done a lot we have de Levered we have.

Removed the warrant overhang, but.

But we're also very focused on building you know every public company and that has a pretty simple cap structure.

As you know the right amount of flow liquidity et cetera, So thats something that we are watching.

And these are really sort of the big areas in terms of acquisitions. We are opportunistic we watch what's out there we did the small tuck in.

In Europe that I think is a really nice tuck in thats going to pay dividends very very quickly, but at the same time, we are value sensitive and we see a lot of organic potential for growth. So the hurdle for M&A is high for us it has to be the right strategic fit the right business at the right valuation.

And we're watching everything closely out there when we see something that checks. These boxes, we will execute on it.

But the level of energy the number of initiatives, we have it at a company is high and.

We feel pretty good in terms of ending the year and getting ready for 2021.

Perfect I'll make sense, thank both wrapping up thanks.

Thanks, a lot Steph thanks.

Thanks Steph.

Again, if you would like to ask a question press star one on your telephone.

Your next question comes from the line of Chris Mcginnis from Sidoti <unk> Company. Your line is now open.

Good morning, Thanks for taking my question.

I just want to ask this money on the automation.

Pretty robust conversations.

Expectations.

Or at least Uh huh.

While growth in point for one talk is that more with the 10, new customers is that driving new customers can you just talk a little bit about that.

We've taken those.

That's helpful. Thank you.

Yes, thanks for Us that's a great question, it's it's actually both with existing customers and it is new customers.

I think in today's world Fair to say given what companies have seen with pandemic and frankly with labor issues globally. When you talk to customers about automated solutions, whether they are semi automated and they reduce the number of labor or whether they are fully automated and they eliminate the need.

Labor in certain tasks.

Customer's eyes light up I mean, they are very focused on that if something that improves their speed. Their reliability is something that helps them you know handle any contagion issues in depend deneke. So the level of activity and discussion is terrific. It is with existing customers that buy our.

Product that know us as a reliable vendor.

Like what we've done to them in their business and say Hey look to the extent you have more automated solutions you know I want to explore those conversations because I have a certain level of trust and confidence and ramp back and we are pursuing those and then there is a set of new customers that historically.

We havent access because they were looking you know for automated solutions from from day, one and their warehouses may have been you know more on the north side and more automated and the more we invest in automation and in R&D and robotic arms and so on.

Moreover, these conversations are opening up for us. So it's honestly it makes a lot of it is existing customers asking for more solutions, but a meaningful piece of it is also new customers and thus, enabling us to really expand our pipeline and our channel and go to market strategy.

Great I appreciate that and then just one quick follow up I know you highlighted Europe.

So full implementation is that also kind of on a geographic basis pretty diverse.

Sorry, whats the question again.

Just just that those conversations you're having on the automation just when you think about it on a geographical basis is that it.

Diverse as well it is absolutely diverse so it's a lot in Europe. It's a lot in North America with a lot of the big names that you would now and then in certain geographies.

In Japan for instance, and in Australia, we have a number of automation conversations as well as South Korea, but the biggest two markets in terms of our conversations are Europe as well as the U.S.

Great appreciate the taking the questions and good luck in Q4 overall.

No problem thanks, Chris.

Your next question comes from Matt Dallas, I know from Discovery capital. Your line is now open.

Hey, guys.

Thanks for all the exploration on the quarter.

I was wondering if you could spend just a few minutes putting the pieces together the the investment that you've made this year has been obviously very appropriate well timed and and robust combining with sort of the depreciation et cetera. When we think forward to next year, how do I think about the operating leverage.

Coming through both on the gross margin and the operating line because there's just a lot a lot there on the gross margin investment on your investment in technology and people. The normalization of the acquisition. So there is I don't want to be I, just would be very helpful. If you could clarify putting those pieces together because the directionality seems.

Robots, but I don't don't want to go overboard.

So please any help there would be appreciated thanks sure Matt. Thanks for the question I'll kick it off and then I'll have bill chime in so I would say in our core business. We invested a lot we invested in R&D, we invested in adding a number of people that we think are critical to helping us grow we frankly.

Did a lot of investment in the sales organization in North America, and we're starting to see that again.

Yes, some reward so expect in 2021 I think in our core business, we'll start seeing some operating leverage we still have some investments we want to do and I suspect. We will continue to do that early in 2021, but as the year progresses I would expect operating leverage there in automation. This was a huge year off investment.

In Europe.

I suspect next year, we will do some investments in the U.S. to just expand our human capital to.

To add again more sales talent, maybe a bit more engineering I'm always looking for top notch engineers in the company.

So I think automation is going to have a pretty strong year.

In 2021, I wouldn't expect huge operating leverage given the investments we'd like to do in the U.S. and then cold chain is behind.

In terms of it's the area that requires some investment, but it looks extremely promising and I think it's going to drive quite a bit of growth. If you put in my mind. These pieces together overall, you're going to see.

I think decent operating leverage because obviously the core piece of our business is the largest piece. The other pieces are small they continue to require some investment.

And I think and I think these investments are going to pay off very handsomely. The last piece I will tell you in automation in particular and this was related to the prior question as we invest there automation is very adjacent to our core paper business. A lot of these investments are not just yielding more equipment sale.

And more robotic arm sales they are yielding more accounts that are buying more of our paper and more of our consumable costs that are looking for a lot more solutions from ramp back so.

So the investment in automation is paying back in two ways in the sale of equipment as well as in helping our core business.

Bill I don't know if you want to chime in on this question.

Sure.

I think it's a great question and as I mentioned, we are investing in a number of areas. So automation and retail are smaller businesses for us that are that are ramping up.

So those are a slightly lower margin profile than the core paper business, but we think that they're highly complementary and also don't have that same capex component. So they contribute really well to free cash flow, but I think you'll see some operating leverage within the core paper business.

And then also we'll be investing some of that though in in growing these smaller businesses to drive topline.

Got it okay, thats very very helpful context, and so just taking a step back and bigger picture there.

The right way to think about as we made a big investment. This year, we will start that investment will yield over the next 18 to 24 months. The next investment in the coming year in material, but slightly smaller and that will yield over the over the over the following 18 to 24 months. So it will build up my cohorts on sort of capital and thank the returns on top.

It all the time, we get the benefit of that increase of those but that increased leverage and return coming through in the next 12 months is when we start to see it.

And the Incrementals will be higher if I model out. The next couple of years is the right way to think about it and we'll see that the returns from.

Assumable, the R&D that are the.

Been.

Been born from this investment start coming through in the <unk> and the same time periods is that is that the right way to think about it very big picture incrementally smaller investments, but larger cohorts of profitability kind of drug.

I think that is absolutely the right way to think about it Matt So I think thats a very fair.

Fair way to think about what we're trying to do.

Great. Thanks, guys I appreciate the help thank you thanks a lot.

Your next question comes from the line of Greg Palm from Craig Hallum Capital. Your line is now open.

Yes, thanks for taking the follow ups I thought some of the comments on new customers was interested and wanted to dive into that a little bit more.

I mean, it sounds like there's lots of trials lots of activity going on I guess I would have thought given where we are you know with co bid and still a lot of facilities walk down and whatnot that getting in front of a new customer may have been more challenging than what it could have been so curious if that's been an impact and it doesn't sound like it's been huge but.

Assuming we all open up at some point you know curious what your thoughts are in terms of new customer growth when that happens.

Sure I mean I'll share with you My perspective, Greg 2020 is it's just an unusual year, where normally if you look at our trials in general the trial to close period and the percentage of trials that closed successfully for us and historically for a number of years, it's been eggs.

Limiting certain patterns. This year is different where some trials have gone a bit longer because of lockdowns and physical limitations et cetera. So thats one change that has occurred this year.

And then as as the World opened up a little bit and we'll see where the world is into in the next few months. We've seen some conversion of those into close is typically Q4 is our peak time and the number of trials and the ability to access certain places becomes a bit limited because everybody is focused.

On on the peak season, what we are seeing in E. Commerce is demand is so robust they need more and more solutions and they find for things to help the customers.

Customers are trying for ways to help productivity, including this peak season, so im not sure. This existing trial pipeline that we see in this Q4 is going to persist in future years.

2020 is an unusual year, and it's giving us certain opportunities and we have been nimble enough to capture these opportunities and frankly, we're reacting to our customer needs, but I think the way to think about it is we feel really great about our pipeline our trials, it's probably a bit higher than what you would expect in a normal.

For if that makes sense.

Yes, yes, it does and the cold chain customer can you confirm that whether that was a an existing customer of the company or is that a brand new customer.

It was it was a small existing customer what are we really didn't have a sort of the right footprint in terms of thermal or any discussions like that which is important to them and now this is going to become a meaningful customer and it's opening up our dialogue with other customers and culture.

Okay, Great all right. Thanks.

Thanks, Rick.

There are no further questions at this time I will turn the call back over to presenters.

Okay, well. Thank you everyone for joining us today, we look forward to speaking again to update you on our fourth quarter and full year results.

Ladies and gentlemen, this concludes today's conference call. Thank you. Thank you Sir you may now disconnect.

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