Q3 2021 Ranpak Holdings Corp Earnings Call
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Hello, and welcome to TB land Pack Q3, 2021 earnings call. Please note that all lines all Romney until the Q&A session. If you do wish to ask a question during that session. It starts so that by one on your telephone keypad.
I'll now hand over to circle back to begin today's presentation.
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 actually.
Actual results may differ materially from those forward looking statements as a result of various factors, including those discussed in our press release and the risk factors identified in our Form 10-K, and our other filings filed with the SEC.
Some of the statements and responses to your questions. In this conference call May include forward looking statements that are subject to future events and uncertainties that could cause our actual results to differ materially from these statements.
<unk> assumes no obligation and does not intend to update any such forward looking statements.
You should not place undue reliance on these forward looking statements all of which speak to the company only as of today.
The earnings release, we issued this morning and the presentation for today's call are posted on the Investor Relations section of our website.
A copy of the release has been included in a form 8-K that we submitted to the SEC before this call we will.
I'll also make a replay of this conference call available via webcast on the company website.
For financial information that is presented on a non-GAAP basis.
We have included reconciliations to the comparable GAAP information.
Please refer to the table on slide presentation accompanying today's earnings release.
Lastly, we'll be filing with the SEC, our 10-Q for the three months ending September 32000.
In 'twenty one.
The 10-Q will be available through the SEC or on the Investor Relations section of our website.
With me today, I have Omar <unk>, our chairman and CEO and Bill <unk> 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 I'll turn the call over to Omar.
Thank you Sarah and good morning, everyone. I appreciate you all joining us this morning.
Ramp up continued the momentum of our strong first half of 2021 by delivering another quarter of outstanding results.
Strong performance was driven by our employee base around the globe dedicating their efforts to drive growth and improvements in the business.
The focus dedication and most importantly, the effort has been tremendous and I could not be more proud of the team.
In particular I'd like to recognize the supply chain team for their contributions over the past few months as we navigate a complex and dynamic supply chain environment.
At the same time, our business development team has helped us add meaningful capabilities to our complex through our M&A and investment efforts.
Demand for our products remains robust as companies across the globe are looking to make their fulfillment processes more efficient more reliable and more.
More environmentally friendly.
Our teams have done an excellent job to position us well to meet this increased demand.
We continue to expect a record year at ramp back meaningfully surpassing our original guidance entering 2022, well positioned to achieve our longer term growth objectives.
Our diversified portfolio once again delivered balanced results with old product lines up meaningfully year over year, and all regions displaying double digit topline growth.
We also have a number of initiatives in process currently that we believe will position ramp back for success over the next few years.
Our profitability was up meaningfully in the quarter as the teams have been working extremely hard to address headwinds from the inflation affecting so many input costs, such as commodities and transportation as well as scarcity of labor.
Although we are not completely immune from these market challenges our teams have been diligent throughout the year in their pursuit to insulate us as much as possible from the impact of supply chain disruptions occurring globally.
Our investments in working capital earlier this year have helped us navigate this environment well and enabled us to continue to meet customer needs for our paper and equipment.
Our pricing actions to date have helped maintain our best in class margin profile, while also positioning us to increase penetration.
This environment continues to be fluid. So we will continue to be proactive about managing our P&L and addressing areas of continued input cost pressure.
In general given the rise in input costs globally, whether it is materials freight or labor. We believe this is an environment that should drive further demand for our solutions as we provide our end users with the ability to have faster throughput reduce labor optimized on age and reduce package size.
In our last earnings call, we announced our strategic investment in pick a robot.
As a reminder, <unk> has developed a low cost collaborative package handling rohbock.
Automate several key tasks along with the e-commerce supply chain.
We believe theyre offering is a great complement to ramp ex portfolio of automated solutions.
And this quarter ramp alchemy, and additional strategic investment this time in the area of material science.
We have invested in an emerging German company called Korea paper, which uses a patented process to produce <unk>.
Raw material required for producing glass paper.
Grasberg is exciting because it is renewable and helps reduce C O two emissions across the global paper and packaging industry.
Glass paper reduces the use of wood pulp and meaningfully reduces water consumption.
Our view Korea papers, Ras paper products, which currently include hygienic papers food and carrying bags and single use plastic replacements are bullish for expansion across the globe and complement <unk> core products quite well.
Turning the discussion now to third quarter highlights I am extremely pleased with the performance of the quarter as we achieved solid growth in all regions and product lines compared to prior year.
For the quarter consolidated net revenue on a constant currency basis increased 25, 6% to $95 $6 million driven by robust demand for all product lines.
North America continued its solid growth trajectory for the year with an increase in net revenue of 12% for the quarter driven by cushioning and wrapping.
Activity levels across all applications remained strong as we continue to expand our relationships with three pls and achieving closes related to toys retail health and beauty.
We continue to gain traction with our post consumer paper offering.
Helping us replace air pillows at a number of retail and consumer brands.
Europe and Asia Pacific led the way this quarter in terms of growth on a constant currency basis for the quarter net revenue in Europe, and Asia Pacific was up approximately 36, 2% as all product lines delivered meaningful growth.
We have strong close activity across a variety of end markets in the quarter with sustainability in e-commerce continuing to be key drivers of performance in the region.
Retail and industrial where particular areas of strength in the quarter, resulting in void fill and cushioning seeing substantial new close activity.
Adjusted EBITDA in constant currency terms increased 23% year over year due to increased sales offset slightly by increased operating costs and G&A as we manage inflationary headwinds and increased head count dedicated to our growth initiatives.
Overall, I'm very pleased with our results and believe they reflect the balance we are trying to achieve as a company between growth and maintaining profitability.
We're investing in additional production capacity across the globe.
As well as growth initiatives to fuel ramp back over the next number of years with the goal of creating incremental shareholder value.
We believe <unk> has the ability to grow meaningfully through new product innovation.
Spansion into underpenetrated geographies and by expanding our offering.
With that let me turn the call over to Bill who will give you further details related to the quarter.
Thank you Omar.
In the deck, you'll see a summary of some of our key performance indicators. We will also be filing our 10-Q, which provides further information on <unk> operating results machine.
Machine placement increased at its fastest rate this year, increasing 14, 2% year over year over 129000 machines globally.
Especially in systems grew five 1% void fill installed systems increased 14, 7% wrapping increased a robust 33, 3% year over year.
Overall net revenue for the company in the third quarter was up 25, 6% year over year on a constant currency basis.
Given by excellent top line performance in Europe, and APAC as well as strong growth in North America.
Within Europe, and APAC from a geographic standpoint growth was most pronounced in eastern Europe, and the Nordic region with excellent performance as well in Australia, Japan, and South Korea.
In North America, we experienced strength in all regions with the west and Midwest in particular bright spots and regarding end market sectors, such as health and beauty electronics retail and three pls continued their momentum.
On the global perspective within PPS, all categories were up meaningfully with cushioning up 28.0%.
Would fill up 18, 5% and wrapping up 23, 8% on a constant currency basis.
Our gross profit increased 25, 1% on a constant currency basis, driven by higher volume and price.
This rate was just slightly behind our sales growth due to the impact of higher material and overhead as well as freight costs versus the prior year.
Actually offset by improved margin on automation in production variance.
Implying a gross margin of 39, 1% in the quarter compared to 39, 3% in the prior year.
Adjusted EBITDA rose, 23% year over year to $28 5 million, implying a robust 29, 8% margin.
In the quarter, we benefited from strong sales growth, which was slightly offset by increased operating costs related to production and investments in personnel to further enhance our teams.
All we were pleased with the balance in the quarter sales growth, while maintaining an attractive margin profile.
Capital expenditures for the quarter were $14 4 million driven largely by increased investment in converters and investments in key initiatives to enhance our capabilities.
Throughout the year, we have invested meaningfully in enhancing our safety stock to blend some of the impacts of the supply chain disruptions being experienced globally. We.
We feel that our levels of safety stock at this point are sufficient and will look to convert our spend to be more in line with placements going forward.
Moving briefly to the balance sheet and liquidity in September we entered into a cross currency swap agreement to hedge the variability of the exchange rate impacts between the U S dollar and the euro.
Under the terms of the cross currency swap agreement, which took place at a spot exchange rate of 130.
Three five we notionally exchanged 80 million USD term loan debt at an interest rate of 584%.
67, 6 million euros at a weighted average interest rate of approximately five 2%.
Saving up 82 deaths annually on the interest expense on the notional and better hedging our exposure to the cash flows associated with our Europe and APAC operations.
This cross currency swap agreement has been designated as a net investment hedge and will expire in June of 2024 as.
As a result of this transaction the company will have effectively $170 million and USD term loan outstanding as well as $204 million of the euro tranche.
The cash side following our investments in pickle and create paper as well as other initiatives our cash balance in the quarter was $110 4 million.
Our net leverage based on reported LTM adjusted EBITDA was two six times at the end of the quarter.
We have a strong balance sheet and have been putting it to work recently strategic investments that help our business and our customers now as well as provide optionality in the future.
Looking forward, while the fourth quarter as a challenging comparison given the exceptional profitability last year. We believe we are well positioned heading into the end of the year and 2022 as industrial activity remained solid consumer spending remains robust and environmental considerations are more integrated packaging decision, making.
We've taken pricing actions to date across the globe to maintain our attractive margin profile and are continuously evaluating the need for further actions as the environment requires particularly as it relates to moves in commodity and energy markets.
Touching on energy.
One hand oil as a key feedstock for the petrochemical industry.
Stained upward movements have the potential to further improve our competitive position versus plastic and resin based competition all else equal.
Hopefully, providing additional opportunities to expand our business.
On the other hand in Europe, the natural gas market has been influx recently and while our own operations are not major users of electricity. We are closely monitoring the impact prices could have on our paper suppliers as well as industrial and consumer activity again, we are extremely vigilant of the environment and continuously working to manage our cost structure to maintain our margin profile.
Customers see the value in our solution, particularly in an environment like this and we feel confident in our ability to pass through cost with that I'll turn it back to Omar before we move on to questions.
Thank you Bill to summarize I'm very happy with our performance the environment is not an easy one to navigate the pandemic inflationary pressures on supply chain headwinds, while we have a great team and a great model that continues to show its power and resilience.
Our exciting times at ramp back our head count is now greater than 850 people up from $5 51, Ratpack first went public.
The talent, we have added is across the board and I'm pleased to report our new folks are hitting the ground running and integrating well with the ramp back veterans all coming together to deliver a better world.
Every day, we take once the closer in our cultural development, focusing as one global team on customer Centricity performance and accountability.
Along with sustainability those principles comprise our north star.
To continue to build our ownership culture I'm proud to share that in September we made a companywide equity grants for employees on payroll has that date and who do not receive equity as part of their annual compensation.
Grant vest after two years of continued employment and this is the second grant of its nature, we have made since going public.
Im thankful to our board for supporting this equity ownership program as I believe the first grant we did back in 2019 went a long way towards establishing our ownership culture.
I believe this additional grant cement to that mindset and is still to that behavior even further.
With that thanks again for joining us this morning.
Now open it up to questions operator.
As a reminder, and when he does wish to ask a question on today's call. It star followed by one on your telephone keypad. Please. Thank you. So I'll be your line is not meet you likely as it will be conducting the call.
You can no longer wish to ask a question field. Your question has been sufficiently outfit it staff followed by team.
As a reminder, we are limiting it to one question with <unk>.
Thank you for that in mind. Our first question today comes from Greg Palm of Craig Hallum Capital. Your line is open. Please go ahead.
Thanks, Good morning, everyone and congrats on the really good results here.
Good morning, Greg Thanks, Craig.
So I guess just.
Starting on supply chain logistics environment, you've seemed to have navigated this whole lot better than what we're hearing from a lot of other companies out there and so I guess my question is was there any impact or maybe you can quantify if there was an impact and I guess looking ahead do you feel like you have sufficient.
Tori levels or at least a line of sight into at least continuing to navigate this sort of whole mess in the year ended into next year.
Yeah.
Yes, Greg.
I feel.
Very good about the effort that the team is putting into it supply chain. Obviously right now is a tricky topic for for all sorts of companies.
I think as we look out for the next number of months, we feel very good.
Taking more work and it is taking more effort, but I think our planning has paid off.
When we started investing a bit more in working capital.
Planning to build safety stock in our inventory as well as in our converters all that is paying off.
What we see right now is a continuation of some delays here and there.
Our freight costs creeping up but the overall picture for US continues to be a pretty good one and we continue to feel that despite the challenges given the incremental work, we're doing we were well positioned.
Got it and I know, we're only allowed one question. So I just wanted to maybe clarify.
Bill some of your comments on profitability and challenging year over year compares obviously last year's margin was maybe an outlier, but even with all sorts of maybe some investments and increased costs is it still fair to assume that you are expecting a nice bump in EBITDA margins at least sequentially.
Yes, I think Thats fair I think I just wanted to point out in the opening remarks that last year was exceptionally profitable for us.
We had a favorable paper price environment as well as exceptional capacity utilization.
Our production facilities.
It is.
A little bit more challenging year over year, given the environment that we're in.
Yes, it makes sense all right I'll hop back in the queue. Thanks.
Yeah.
Thank you. Our next question today comes from Ghansham Panjabi from Baird. Your line is open. Please go ahead.
Thank you good morning, Omar Andrew how are you.
Good morning Ghansham.
Yes, so I guess.
My question is really on 2022, I mean, there's obviously a lot going on and you have supply chain constraints sort of your customers or the suppliers.
Based on what you see at this point can you give me give us some framework as to how to think about how you expect machine placement in some of the major constituents as we kind of tightened up our models specific to 2022.
And then related to that North America has picked up quite a bit in terms of growth.
And Europe.
Europe and Asia Pac has been carrying the optics of the growth over the past several quarters do you see that you sort of envision a more balanced sort of growth contribution in 2022, it's specific to those two separate regions.
Yeah.
I do Ghansham, I think 22 will shape up to be a little bit more balanced given all the investments that we've done in North America and in the last couple of quarters, we started trending nicely.
In the U S and I expect that to continue in 2022.
Local despite the challenges from a supply chain standpoint, labor market standpoint, and demand for our product continues to be robust from everything we're seeing our expectation is that robustness will go into 2022.
We expect demand for our converters demand for our automation solutions, and frankly demand for cold chain as we build more capabilities there.
To be quite strong when we look at underlying sectors.
In retail and industrial activity.
In automotive toys email health and beauty and I can go on and on we are seeing quite a bit of strength with our end users and.
Despite the challenges of getting products to them on time et cetera, and then shipping to their own customers. We think of that picture is going to be with us for a little while so our expectations is that we believe given the demand that we're seeing in the backlog of interest that we're seeing that 2022 should shape up pretty nicely for us.
Got it thanks, so much.
Thank you. Our next question comes from Adam Samuelson of Goldman Sachs. Your line is open. Please go ahead.
Yes, Thank you and good morning, everyone.
Good morning.
Good morning.
I guess.
Two part question one looking at the performance in the quarter in terms of machine placements a sequential change.
And the installed base.
I guess you've had on AR.
Quarterly basis since you've been a public company and I'm, just trying to get a sense of that.
Activity kind of getting at trying to get ahead of supply chain challenges getting ahead of the holiday season or do you think there really has been a.
A bigger step change in terms of the demand for our paper solution with your customers and I guess the corollary to that is.
With that step up in the installed base potentially with some newer customers does that does it take time for those newer customers.
You start pulling product in.
At the rate consistent with the rest of the installed base such that your kind of revenue per machine might tick down just given a less mature customer set.
I'll, let bill take.
Yeah.
A big part of both of your questions, but let me start by just the following.
Observation I think.
What we are seeing with demand for for our converters you're spot on that typically the way our cycle works.
As you know selling the idea of a product of our customer trialing than at close than Youre, installing and Thats, what youre seeing and then theres a little bit of a ramp up period until they are using more and more of that product.
I think for the point I was mentioning earlier in terms of a more balanced growth.
Part of that more balanced approach as youre seeing more converters more equipment being placed also in the north American market and driving that growth so that certainly.
Driving the number of converters out there.
When we are planning ahead, certainly we're keeping supply chain in mind as we plan ahead, but the biggest driver.
Is the bottom up analysis customer by customer, where we see demand and where we see the needs for our equipment.
And thats reflected sort of in our numbers off of growth in terms of the number of converters out there. So I think thats typically a great sign for our business in terms of continuously ramping up growth growth in revenues.
Bill maybe I can turn it over to you.
Sure. Thanks Omar.
So demand has been strong.
Consumer spending has been has been solid industrial activity continues treated to come back.
What we're seeing there.
<unk> been seeing some increasing activity on the regulatory front and also some increased shareholder activity. So I do think thats getting close attention.
Let's take a look at paper based solutions.
So the demand we feel good about kind of across the globe.
It was a little bit of pent up demand I think in North America as we were getting caught up on some converters from earlier this year.
But overall, it's been pretty steady and you are spot on that 14, 2% is that versus the $12 nine in the first couple of quarters of the year, and then I think versus nine or so in the quarter last year. So.
Overall feel good about the machine placement and continuing to grow and drive growth.
As far as when they start contributing yes, there can be a lag at times.
As people get their operations ramped up sometimes they do have to work through existing inventory and to make a switch.
Plastic resin based products to ours.
There could be a little bit of a lag, but not not dramatic in most cases.
Alright, that's helpful color I'll pass it on thanks.
Thank you. Our next question comes from Stefan <unk>, Chris.
J S Securities. Your line is open. Please go ahead.
So Martin Bill good morning, Congrats on the quarter.
Good morning.
I'd like to go into a little more on the Korea paper investment.
Maybe can you discuss your long term vision, there well this graph paper being put into machines eventually.
Any detail you can give on that would be great.
Yes, sure So Korea paper.
You know, it's honestly a terrific opportunity before us based in Germany that use glass fiber.
To produce certain paper products. So those grants of pellets on fiber go into the mills.
And the paper that's been you made which is a different basis weights is 2030, and some cases, 40% glass fiber and the rest is the normal.
<unk> opportunity both in our core business as well as in our retail offering.
That's great. Thank you.
I'll jump back in queue.
Thank you. Our next question comes from Alexander Leach of Baron Capital Markets. Your line has been opened please go ahead.
Good morning, guys and thanks for taking my question.
On.
Ultimate solutions I noticed in your press release.
Sort of a pickup in terms of its growth rate in there.
When we start thinking about 2022.
And what are your backlogs looking like within this business line and when can we expect for sort of further acceleration from here on out I understand there's sort of a.
Hello base currently, but we'll see sort of outlook like when we look forward to next year.
Yeah.
Yeah, Good morning, Alex I think.
And you know and I've said this before for the rest of this year.
We're pretty much booked four four with automation with our slots as you look at our backlog for the early part of 2022. It looks very very strong we continue as we speak right now to work on opportunities in 'twenty two two in particular stuff right now that we're working on that we can close we can deliver.
Later in the year from a percentage standpoint, I expect automation in 'twenty two over 'twenty, one to deliver outstanding results, but as you indicated it's still a relatively small piece of our puzzle.
I think the growth potential is frankly limited by our ability to make and ship the equipment. It's not limited in terms of demand and that's where we're investing heavily in more engineering more machine Assembly.
A bigger service some parts of organizations, so that we can meet that demand.
I'm expecting that Youll see frankly, very strong numbers from us in 2022, and certainly if you look at it percentage wise 20 to over 21.
They're going to be very strong.
Alright, thanks, guys.
Thank you. We have also received a follow up from Greg Palm. So Greg Your line has been opened.
Thanks.
Just wanted to follow up on on the automation side because it just it feels like what we've seen over the last few months, probably just only adds fuel to the interest level, there and I guess Omar really what im trying to figure out is is.
How does this business ramp and what is your kind of long term vision in terms of what customers are actually asking you to do and provide for them.
So so Greg we really are focused on end of line activity and that includes anything from robotic arms splitting the padding or putting the item toolbox customization to case erection relating labeling everything that happens towards the end of the line of putting an item.
Inside a box or a parcel all the way to shipping it frankly, including.
Loading and unloading given our partnership with vehicle.
We today have solutions that can automate that full part of your business. We also have solutions that could reduce the amount of labor and partially automated the vision is to continue to invest in both from a hardware standpoint at software standpoint.
And the machine learning and computer vision standpoint, and frankly, we have the talent and the pieces in place to do that so that's a decision for our business in terms of what our customers are asking for it depends on the customer.
Some customers are asking for the full solution some customers are asking for pieces.
And bits of it where they may need certain help with adding or with case erection or with box sizing.
So we're having a lot of dialogue with customers.
Really think in automation.
We are in the first inning of this opportunity. So I know, we've been investing behind it and talking about it we've been putting the pieces together for the last year year and a half.
During COVID-19, we try to invest more in our business to get ready.
I think the opportunity for the next two to three years, it's phenomenal and it's up to us to execute to go and deliver on that opportunity and that's what we're trying to do as a company.
Okay, that's great looking forward to seeing how that evolves.
Thanks, Greg.
Any further questions or any follow ups. Please press star followed by one on your path and keypad.
Your line is not likely.
At this time, we have no further questions. So I'll hand back over to management.
Great. Thank you and thanks, everybody for joining today and we'll look forward to catching up on our next quarterly call.
We thank you all for joining today's conference call has now concluded you may now disconnect your lines.
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