Q4 2021 Ranpak Holdings Corp Earnings Call
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Good morning.
Yes.
Good morning.
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Hello, and welcome to the <unk> holdings fourth quarter and full year 2021 earnings call. My name is Emily and I will be coordinating the call today. During the presentation you will have the opportunity to ask a question by pressing star and then one on your telephone keypad I will now hand, the call over to our host Sarah whole both general counsel.
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 of 1995.
Actual results may differ materially from those forward looking statements as a result of various factors, including those discussed in our press release and the risk factors identified in our Form 10-K , and our other filings filed with the SEC.
Some of the statements and responses to your questions. In this conference call May include forward looking statements that are subject to future events and uncertainties.
That could cause our actual results to differ materially from these statements.
<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 also make a replay of this conference call available via webcast on the company website.
For financial information that is presented on a non-GAAP basis. We've included reconciliations to the comparable GAAP information.
Please refer to the table and slide presentation accompanying today's earnings release.
Lastly, we'll be filing our 10-K with the SEC for the period ending December 31st 2021.
10-K will be available through the SEC or on the Investor Relations section of our website.
With me today, I have Omar honestly, our chairman and CEO and Bill drew our CFO .
Omar will summarize our fourth quarter results provide an update on our growth strategies and issue our outlook for 2022.
Bill will provide additional detail on the financial results before we open up the call for questions.
With that I'll turn the call over to Omar.
Thank you Sarah and good morning, everyone I hope everybody stays safe and healthy rent that's had a strong fourth quarter and robust results for the calendar year 2021.
Extremely pleased with our overall results and the execution of our team.
We delivered strong growth in our top line and meaningfully grew our profitability against a tough Q4 2020 comparison.
We've accomplished a tremendous amount this year not only the financial results, but also advancing key initiatives for our company.
We had a number of significant projects going on in 2021 in prior calls we mentioned our digital transformation and investments in technology. The most impactful component of which was upgrading to our new ERP platform.
This is a project that stretched across the entire organization and took one year for us to implement.
We went live with the new system in January of this year and I'm genuinely impressed with the hard work and dedication witnessed by our global team to accomplish this task.
He took volume and dedication from all involved working late nights weekends and holidays to accomplish.
As we get up the learning curve associated with an ERP system as sophisticated as this one we expect the benefits to the organization will be tremendous in terms of better processes access to data and visibility into the business.
It also significantly improves our ability to scale the business globally and onboard acquired companies as we pursue a more robust M&A strategy going forward.
It infrastructure does not always get the limelight, but given the critical role it can play into successful growing organization improving this area has been a priority of mine.
Pleased to report ramp accident as World Class ERP.
Financial planning human resources, and data analytics software and information systems.
It's been a tremendous undertaking to get all of these systems implemented I'm talking to each other and most of this activity has taken place in the past year. While the team has also been focused on executing and growing the business I.
I could not be more excited about our new systems and processes as well as the efficiencies we will hopefully extract due to our additional insights my hat is off to the global team that really drove these processes.
Overall the theme for US the past couple of years has remained the same stay focused on executing in the short term while investing in the business for the long term.
Capital allocation decisions are critical to the long term success of any company and creating shareholder value or.
Our mindset has always focused on maximizing value for the long term.
But we are also cognizant of maintaining strong performance along the way.
It's a balancing act as we weigh the sequencing and depth of investments due to their impact on near term results, while making sure we are being aggressive enough to really pursue the opportunities that provide maximum upside for shareholders in the next five years.
We feel we have been very prudent in our strategic decision, making the past few years and as we will discuss later in the call. Our guidance for 2022 shows that this year, we plan to continue to take a more aggressive approach to investing in the business to support our growth objectives.
We finished the year with solid momentum in the business and with the acquisition of reticle and manufacturer of sustainable gel packs.
These green safe and plant based <unk> are a great addition to our coaching offerings and we're excited to blood griffey called into the ramp back networks to help expand the business and bring these solutions to the United States.
Now a few words on the quarter.
I am pleased to report consolidated net sales on a constant currency basis increased 21% driven by broad based growth in all product lines, bringing full year sales to up 26% on a constant currency basis.
Europe , and APAC experienced exceptional demand in the quarter.
Exhibit in the year with good momentum.
Revenue on a constant currency basis was up 24% driven by strong growth across all product lines.
Our North America business also delivered excellent top line results at 18% for the quarter, marking the third quarter in a row of double digit growth overall.
Overall, I'm really pleased with the activity levels, we see in the region and believe that in 2022, North America is on a real path.
To sustainable growth.
Adjusted EBITDA of $35 7 million was up 2% in constant currency terms year over year and resulted in a very strong margin of 32, 6%.
Our growth in adjusted EBITDA was due to higher sales compared to a year ago offset somewhat by increased input costs and investments in personnel.
For the year constant currency adjusted EBITDA was up 26% to $117 8 million and in line with our revenue growth.
Overall really excellent performance to finish the year in the face of a challenging supply chain environment and inflationary headwinds I am very proud of what we have accomplished in 2021 and on.
Even more excited about 2022 and beyond we continue to navigate well and believe we are well positioned for further success. The additional investments in the business are beginning to pay off and we look forward to an even greater impact going forward.
The backlog for 2022 is a positive one four went back as ramp backs three key structural tailwind remain in place.
E Commerce activity remains robust as the share gain from brick and mortar appear structural sustainability continues to gain momentum globally and increased wages and labor shortages drive the need for further automation and efficiencies.
We will take you through our guidance for 2022 after Bill's remarks, but to summarize we are focused on achieving the double digit growth again this year and we'll further invest in the business to position ourselves to maximize the opportunity over the longer term.
With that let me turn the call over to Bill who will give you further details related to the quarter and full year 2021.
Thank you Omar.
In the deck, you'll see a summary of some of our key performance indicators lost from filing our 10-K, which provides further information on <unk> operating results.
Machine placement continued its steady and broad based increase of 13, 5% year over year over a 133000 machines globally.
Freshening systems increased four 8%.
Void fill installed systems grew 14% and wrapping continued its expansion path going really well at 29, 7% year over year.
Overall net revenue for the company in the fourth quarter was up 21% year over year on a constant currency basis, driven by strong double digit growth in all regions for the quarter combined revenue on our Europe , and APAC reporting division increased 24% on a constant currency basis, bringing full year 2021 combined revenue in those regions to 34% on a constant currency basis.
Yeah.
Europe and APAC entered the year on a strong note experiencing robust growth across all categories versus the prior year.
North America posted another strong quarter of double digit topline growth reported net revenue of $45 8 million, which was up 18% versus the comparable period in 2020, bringing full year results top 15%.
For the quarter all categories were up double digit percentages exiting 2021 with solid momentum.
Execution in North America continues to improve and sustainability is growing in importance.
Bolstered the team with key talent across the board and provided additional resources to enhance growth and improve the way we serve customers.
Reported gross margins of 35, 6% for the quarter were lower versus 42, 1% in the prior year as we experienced incremental input and production costs that surpassed our year to date pricing actions contributing more than three five points of the decline.
We are implementing targeted pricing actions in the first half of 2020 to claw back a significant portion of the increase and put in production cost we absorbed in the last few months. Additionally.
Additionally, we took a one time write off of consumables related to our S&P conversion, which represented another roughly one eight points or $1 9 million pressure.
Important to clarify the consumables right off was purely a new accounting mechanism that we're adopting going forward that will expense these items directly versus carrying them in inventory and then expanding them.
Also it is helpful to keep in mind that from a profitability standpoint, the fourth quarter of 2020 was exceptionally strong as Kraft paper pricing was extremely favorable volumes were robust and staffing levels at our company, we're significantly leaner and so we're still gaps to fill up our key initiatives.
Now, let me elaborate on our input costs and margins.
In response to rising cost of Kraft paper freight labor and pallets, we've taken pricing actions at various points throughout the year in different parts of the globe.
We have been strategic in our action triangulating between accelerating topline to grow share.
Reserving margin.
As well as being mindful of how and when pricing might get passed on in different geographies.
Fortunately volume elasticities have been better than expected following our price increases in 2021 as many businesses are experiencing similar inflationary pressures.
Given how dynamic the commodity markets have been we did face a bit more pressure in Q4, the prior period as our pricing actions like the movement in Kraft paper and energy markets to finish the year.
Already in 2022, we have enough additional pricing actions to recover some of the margin pressure, we experienced in Q4 and as always we continue to analyze weather conditions warrant further increases in the future.
To support growth initiatives SG&A continued to build last year, driven by increasing head count from approximately 645 to finish the year at around 850.
As Omar mentioned, we added talent in senior management sales operations and finance personnel as well as began building out our internal automation effort, resulting in an increase of $2 $9 million year over year for the quarter.
Many of our team members have been dedicated to S&P over the past year. So we are looking forward to integrating them back in their roles. Some of the efficiencies they may be able to bring as the year progresses.
As expected and consistent with seasonality in years past the fourth quarter was our largest from a revenue and adjusted EBITDA standpoint.
Although it was a challenging comparison and we had our largest input cost headwinds for the year. The team did a great job managing the P&L achieving meaningful constant currency adjusted EBITDA growth of eight 2% on top of last year's exceptional results, bringing full year constant currency adjusted EBITDA up 25, 7% versus 2020.
Moving to the balance sheet liquidity.
We completed 2021 with a strong liquidity position, including a cash balance of $104 million and no drawings on our revolving credit facility, bringing our net leverage ratio to two six times on an LTM basis.
We are pleased with the continued progress on our capital structure in 2021, as we pay down debt and reduced our interest expense and believe our cash balance and conservative leverage profile provides us with excellent flexibility to pursue growth initiatives and M&A.
I'll turn it back to Omar before we move on to questions.
Thank you bill over the past year, we made a strategic decision to invest further and accelerating share gains to hopefully emerge with more momentum as market disruptions lesson.
In 2022, we plan on maintaining this approach and accelerate our investment in some areas to maximize opportunities in 2023 and beyond.
This year on a constant currency basis, we are anticipating revenues of $425 million to $445 million, reflecting topline growth is the area of 13% to 18% and adjusted EBITDA growth of 9% to 12%, implying a range of 128 to 132.
<unk>.
Our expected outsized top line growth for the year reflects our expectations of continued volume growth as we expand our business as well as 2021 pricing actions and planned increases for 2022.
Our growth in adjusted EBITDA of 9% to 12% reflects investments in key areas, such as automation as well as our expectation that some of the input cost inflation pressures, we experienced in Q4 to persist in the first quarter and then our offset through additional pricing action.
In earlier calls we shared our plans for a meaningful investments in capacity related to automation.
This involves our new European headquarters, which will consolidate our PPS and automation operations in the Netherlands, as well as a new automation and R&D facility being built in Shelton, Connecticut.
Most of these facilities are new builds and we anticipate them opening hopefully in Q4 2022.
From a capacity standpoint, these investments will increase our ability to produce automation equipment by three to four times what it is today.
For 2022, we're targeting more than $20 million in sales, which is more than 50% above last year, and which Max out the capacity of our credit facility.
This implies the ability for automation to contribute $60 million to $80 million in top line as we ramp up activity on our new facilities and gain some efficiencies in our processes.
To position ourselves to hit the ground running when we open our facilities, we are ramping up our hiring in 2022 in areas such as engineering sales Assembly installation and service to achieve greater scale in 2023 as quickly as possible.
2022 is a pivotal year for ramp that we're investing in the infrastructure that will enable us to continue to grow organically and should we decide to do so scale up through M&A over the next number of years.
These investments are in the form of renovation of our headquarters in Concorde and three new facilities.
One new automation center in Connecticut, our new headquarter and automation center in the Netherlands, and lastly, a new production facility in China.
The second leg of our investments in our it infrastructure, including SAP CRM.
CRM and other business apps as well as a number of operational projects to enhance our capabilities.
All in these projects, which I consider to be nonrecurring will be roughly $35 million to $40 million in 2022, bringing total capex closer to $75 million for the year, including our converter spend.
These one time investments in real estate and technology will enable us to target outsized growth in future years and capitalize on the strong end user demand we continue to see in our business.
Overall I am very excited about the business for 2022 and beyond within Pts Europe continues to execute well.
And benefit from a strong sustainability tailwind.
The further push to replace plastic and foam that initially began in northern Europe .
Continues to spread throughout the rest of the continent.
In North America, many of the enhancements we have made over the past couple of years and sales engineers and digitalization are taking hold resulting in improved performance as well as a passionate workforce and reinvigorated network of distributors and end users.
Encouragingly sustainability is showing signs of increasing in importance in the decision making process in North America as companies are feeling pressure from boardrooms employees and shareholders to reduce their plastic output.
In Asia Pacific the team continues to expand and further penetrate the region.
We are thrilled to be opening up a production facility in China in the second half of 'twenty two.
Which will reduce our lead times as well as our freight and logistics costs, removing the additional cost burden from serving this region out of Europe will enable us to be significantly more competitive and help us drive growth.
On automation I mentioned earlier, our goal for this year to surpass $20 million in sales, which is the Max capacity of our facilities.
We expect that much of this growth will be within Europe , where the majority of our existing automation infrastructure is.
We have ramped up hiring plans in North America focused on automation as well and are pushing to expand rapidly in this market as quickly as possible.
We are celebrating <unk> anniversary this year, our bps business has been the consistent high margin growth engine for ramp back over our first five decades.
With our focus on R&D and innovation as well as sustainability tailwind I believe EPS will continue to be a critical growth driver and robust cash generator for ramp up going forward.
Four ramp back the structural demand IC unfolding for automated solutions provides what I believe is the biggest opportunity to step change growth over the next decade.
So in the near term it impacts profitability, we believe allocating the capital and resources to this area, including the build out of service Assembly and installation organizations will provide us the best opportunity to more rapidly execute on our plan to expand our automation platform when our facilities open.
And now just a moment to share with you some things that we are seeing on the sustainability front.
Globally, we continue to see a push to tackle the plastic waste crisis.
Later this year would officials will need at the United Nations Environment Assembly Conference also known as <unk> and <unk> five.
$5 two to start negotiations on aligning UN member states on legally binding policies to address plastic pollution.
This includes initiatives that are both upstream and downstream with goals of reducing the use of fruition plastic and speeding up the transition to a circular global economy.
More than 70 signatories, including many of the world's biggest brands have joined this effort to come up with systemic solutions to stop plastic leakage into nature.
Initiatives such as this one as well as continued rollout of EPR laws in Europe , and now in the United States, including in California could do wonders for the environment and for demand for paper based protective packaging solutions.
We at <unk> are very excited about being part of the solution and doing our part to deliver a better world.
It's a special journey that we're on.
In closing I will reiterate that we are proud of what we did in 2021 and are excited about our plans for 2022.
Thank you all again at this point, we'd like to open the line for questions operator.
Thank you if you'd like to ask a question. Please do so now by pressing star and then one on your telephone keypad. If you change your mind and wish to withdraw your question from Nicky. Please press star followed by case.
Turning to ask your question. Please ensure that your device Andrew microphone on mute locally.
Our first question today comes from Ghansham Panjabi from Baird. Your line is open.
Thank you good morning, everybody.
Good morning.
First off on the paper consumable volumes.
5% in the fourth quarter up almost 17% and <unk> can you just give us some color on what's going on with that dynamic was there a pre buy ahead of price increases.
If so what are you seeing for paper consumable volumes for the current quarter and how much of how much volume are you assuming for consumables as it relates to your top line growth guidance for 'twenty two.
So in terms of what we saw in the last quarter.
We had a number of.
Closes ghansham that helped drive quite a bit of growth. So there was a number of sort of.
Ganic growth that drove part of that volume.
Given the.
And the ERP announcement.
We believe with some of our partners there was a little bit of buying.
Just to make sure that.
Whatever they got in terms of supply in January of this year, what seamless and then what we've seen since then and since implementing the new system is it pick up back again to just normal rates of volume and growth.
And frankly, a continued growth in our in our trials, which hopefully will lead to further close is that will continue to drive sort of the volume going forward. So we continue to see strong trends in terms of volume and in terms of end user demand.
Bill I don't know if you want to add some color to that volume.
Yes.
Yes, ghansham that the other thing I'd point out just on the volume side.
Fourth quarter of last year was.
Extremely from net frenetic environment from an ecommerce perspective. So I think you had a pretty dramatic increase last year, so a little bit of a challenging comparison on the volume side year over year.
Got it and for 'twenty two what are you baking in for volumes.
We're looking at roughly if you look at our guidance Ghansham. We're looking at roughly kind of 50 50 in terms of price volume contribution on the top line there.
Okay Perfect and then for my second question Omar maybe for you on on automation and a lot of companies, including those in our coverage and Theyre talking about ramping up their investments. There can you just sort of share specifically about how ramp back your differentiating itself from a competitive standpoint on specific to automation.
What capabilities are you, bringing to the table for your customers.
Sure. So we're very focused on what we call end of line activity for automation that is anything from frankly, putting the item in the box erecting the box customizing the size of the box relating labeling and frankly with some of our partnerships all the way.
To loading.
The truck if you will and we have solutions that can do all of that in an automated fashion.
Onshore or some solutions that let's say are semi automated and reduce the amount of flavor that you do.
The biggest challenges we have is an equipment that we make which is box customization bad insertion robotics and automated void fill as we've been hitting capacity in our existing physical footprint and we've been saying for a while that we want to invest in real estate to expand that capacity because frankly the demand we're seeing.
From our existing customers as well as prospects surpasses our capacity quite a bit. So we are working hard on expanding that in Europe as well as building our facility here in the U S. I wish there was a way to do that even at a faster rate given the robust demand that we need.
And once we do that this will enable us to basically increase our production by three to four times for just that equipment. There is a number of other solutions, we have where we work with other external parties on sub Assembly and assembly that we're also increasing capacity there.
That would put us in a position to we believe.
We are leader in end of line solutions that our customers want.
And that's sort of really the focus and the investments that we're making in our fully.
Robust organization from installation project delivery, all the way to services on parts. So that we can meet the demands of our customers.
Thanks, so much Omar.
Our next question comes from the line of Adam Samuelson from Goldman Sachs. Your line is open.
Yes. Thank you good morning, everyone.
Good morning, Adam.
First.
Wanted to just make sure I followed.
Follow up on <unk> question on the revenue guidance and maybe think about it this way so the installed base at the end of the fourth quarter was up about 13, 5%.
You had 12 points.
A price on your paper consumables youre talking about incremental.
Pricing actions.
Moving forward so.
Pricing.
You've got some pretty easy comps on pricing, especially in the first half of the year.
The 13% to 18% constant currency revenue guidance had I think it took the automation piece that you talked about thats like a point point and a half of revenue growth.
And.
So.
I guess I'm trying to make sure why are implied volumes per machine in the install base declining.
Are you finding that those new add those new placements are considerably less productive from a <unk>.
Throughput perspective than some of your legacy or you're finding kind of reduced throughput with existing customers because otherwise I'm struggling to really figure how.
We get to that 13% to 18% constant currency revenue guidance.
Sure.
Watch our revenue per machine very very closely it's an important metric for us one of the things that get lost when you do things sort of at the overall company level is what type of converters and equipment are you sort of investing and growing so I will give you an example.
We see a lot of opportunity and wrapping we see a lot of opportunity in ship from store solid add equipment.
As smaller equipment, just by definition has less revenue per machine compared to some of the larger industrial stuff. So were taking part of that as part of our calculus. I think your numbers are generally correct, where you were talking about a point point and a half of automation.
And then the rest of the growth roughly speaking this is not exact we think it's a mix between between price and between volume one of the things I want to highlight on price. We've instituted some price increases we will be doing some more I would say given the inflationary.
We're seeing and given a lot of noise out there with what could be transitory what isn't transitory.
We are asking for price increases were not pushing on that lever all the time as much as we can to continue to see where the world settles. So we're being a little bit patient and you saw that in our numbers in Q4 and Thats part of why we're giving you the guidance that we're giving could there be some.
Room for further price increase yes, potentially but I think we're taking the position of let's see what happens in the inflationary environment and supply chain before we start doing that across our different markets.
Okay, Alright, that's helpful. A couple of kind of maybe a quick hit kind of model.
<unk> one <unk>.
What was the $5 6 million adjustment to adjusted EBITDA in the period that was a big kind of item that wasn't really defined or just.
Detailed in the press release second what would be.
What was your reported revenue and EBITDA be for 'twenty two at current exchange rates I know you just guide constant currency.
And then maybe if I could just finally.
Any thoughts on kind of free cash conversion I'm looking at 2021.
Even just cash from operations versus your adjusted EBITDA.
A meaningful gap in just how we should think about that into <unk>.
Enter into 'twenty two.
Sure Adam So I'll start with the EBITDA add backs. So the biggest chunk of that is related to FX and the digital transformation.
Big chunk of that is related to the consumables right off that I mentioned.
In the prepared remarks.
There is also some backfill cost an extra professional fees associated with that that was about three 5% to four of that add back and then the others.
We're largely driven by expenses related to the rescue called acquisition and some other legal fees. So it recognizes bigger than normal, but a lot of it related to S&P.
As far as on a free cash flow conversion question.
This year, we did invest a lot more in our working capital right. We've talked about that on a few of the calls where we were building up inventory of converters.
And to be ready to serve our customers just given all the supply chain constraints that are going on in the world. So that I think was a big driver of what.
The disconnect between the EBITDA and the cash from operations, we expect that to normalize going forward right as we built up sufficient safety stock and expect to be selling out of stock now rather than building up inventory.
But for 'twenty, two we do expect to generate meaningful cash even with these investments that we're talking about.
With $75 million of Capex and the growth profile that we have and the cash generation from our PPS business, we are expecting to generate cash.
Going forward and then on the EBITDA question at current exchange rates I'd have to get back to you on that I don't have that handy in front of me, but.
We can follow up.
Okay, Alright, I appreciate all that color. Thank you.
Okay.
Our next question is from Greg Palm from Craig Hallum Capital Great. Greg. Please go ahead.
Yeah. Thanks, Good morning, everybody I guess, just wanted to dig into pricing just a bit more just unclear. So do these newly announced price increases can that completely.
Offsetting the input cost inflation or will there be a continued sort of lag or headwind in 2022 based on what youre seeing today.
Yes, Greg This is bill I'll start.
With that so there's been a lot of movement in the commodity markets recently and continue so.
Constantly analyzing those and making sure that we're calling back the margin where we see fit.
You saw some impact in the fourth quarter, we've already announced some pricing actions to take place I think if you're just thinking about the cadence of it we do expect some of that pressure to persist in Q1, and then improve going forward as the announced pricing actions are implemented.
Just given the transition to <unk>, we were not able to implement those as quickly as we normally would.
We are expecting to claw back a meaningful amount of margins, particularly as the year progresses.
The plant the plant.
The plan Greg is ultimately.
As the year goes on you will see us implementing.
Price increase to sort of offset the inflationary environment.
That we're seeing and one thing I want to highlight on that and you guys obviously notice.
Yes paper price increases have occurred in the marketplace. There is inflation vis vis labor and labor costs and so on.
From a competitive landscape standpoint.
We actually are getting into an area, where our competitors that are doing more with plastic and plastic substrates are facing more pricing pressure and asking for more price increases and that is helping us from a competitive standpoint. So when bill says it's dynamic we're watching it we're trying to decide what to do.
Our capital is also is to balance that with what we want to do from a market share standpoint.
And what we want to do from a volume standpoint, do we want to sort off push a bit more on volume and wait a little bit on price because we have that choice or do we want to just implement price increases to offset everything we're seeing that's part of the stuff that we're reacting to the marketplace.
Depending on what we're seeing out there from a competitive standpoint.
It's important to highlight we're seeing advantages like I'll give you. One example, with phone in the industrial channel the price increases there have been significantly higher than paper and Thats an area that we're focused on gaining more market share in the industrial channel.
Yes that makes sense and I'm guessing some of these price increases for the alternatives don't even take into account the recent move in LNG and crude prices right.
That's correct.
Another added relative benefit if you will but this is why we're watching things and we're making decisions based on new data and based on what we're seeing out there in the market reaction.
From some of our customers and competitors.
Yes, it makes a lot of sense and then I am curious what do you think the current demand profile of automation is today, so you're maxed out right now im guessing demand is quite a bit higher than the $20 million that you said you'd be able to fulfill this year. So I guess better said how much revenue do you think you generate this year if you had.
More capacity.
I think if we have the capacity.
We have delivered double double the machines that we have from a demand standpoint honestly easily.
Limitation has been us our capabilities our physical footprint.
It has not been the end users and that demand is robust.
And Japan, and Korea, and Australia, and Europe , and North America. So the demand for automation solutions I think.
It's quite large by the way for us and for our competitors and the question is who is going to be ready and crack the code to provide the right solutions at the right.
And time and Thats sort of the rates that were in.
Got it so.
We shouldn't be expecting just some growth next year as that capacity comes online, but pretty meaningful growth in automation.
That's why we highlighted in our in our commentary just the capacity to three to four X that we are recruiting to get ready for that as you can imagine lets say if all of our physical facilities are ready by end of 'twenty. Two there will be a little bit of a ramp up period in early 'twenty. Three we're hoping we would do enough planning that that ramp.
A period is short.
And then you should start seeing us hopefully operating at a much meaningful.
Larger capacity and try to sort of meet the demand at those elevated levels.
Great Alright, well best of luck going forward. Thanks.
Thank you.
Our next question comes from Stefan <unk> from CJS Securities. Please go ahead.
Good morning, Bill good morning.
Morning, Scott.
I want to address one of the previous questions you talked about taking share from customers with plastic as oil prices are rising are.
Are you taking share from existing customers for us.
Both paper.
And plastic or is that helping you gain new customers.
We are very focused on gaining share from customers that are utilizing.
Plastic solutions today.
A big part both in industrial and in void fill of where we're targeting some growth opportunities.
And helping them switch from plastic to paper based solutions, obviously with sustainability being a key part of it frankly trying to push on pricing where it makes sense.
Given given what we discussed with sort of the inflationary environment. So our key focus is on switching a lot of customers overtime from plastics to paper and that is similar to what we've seen in Europe and frankly. This is why we mentioned EPR regimes the extended producer responsive.
Military regime, where that's been implemented in the state of Maine in Oregon, There is discussions about it in New York and in California.
If these regimes are implemented and implemented in a way where there are let's call it more.
Texas or fees associated with Virgin plastic and less with paper solutions, given the high recycling greater paper solutions, that's going to continue to help us shift more customers.
From plastics to paper and frankly, that's precisely what happened the last number of years in Europe with their EPR regime, and Thats been something that you guys can see our numbers on what we delivered in terms of growth out of out of the European continent, and we're hoping that that's something we can duplicate in North America in the upcoming couple of years.
So to answer you.
In a nutshell, there's a big focus on switching folks from plastics to paper.
Great. Thank you.
I just wanted to follow up on cold chain.
Could you give us a sense of what percentage of revenue that is currently in the potential of that end market.
Yes.
Now cold chain low single digits right.
But we see a lot of potential for this.
We're excited to invest in raki called an <unk>.
Package that with some of our existing <unk> solutions, we think it's a really nice combination.
And in a solution to offer to customers.
We think that the growth opportunities that are meaningful and we're continuing to invest in.
AD solutions to our profile and similar profile to our current cold chain offering in the future and continue to grow there. So.
Just the food and beverage I think Patrick Cold chain market alone is roughly about a 5 billion market growing high single digits, 10% area and then you can add some pass the cold chain on pharma, but thats longer ways away. So we think that there is meaningful opportunity to expand this business with our current offerings.
Perfect. Thanks, so much.
Next we have a question from Alexander Leach from Baird. Your line is open.
Good morning, everyone. Thanks for taking my question.
No.
I know you usually agreed on pricing for the year with notes.
But given the volatility in pricing can you discuss a little bit.
More of the conversations you've been having with the most recently.
However, negotiations fed for the grain prices for 2022 and have spoken much about the expectations.
For the year.
Yes, I mean listen obviously.
In the last few months many of our suppliers and mills have been very focused about the inflationary prices that theyre enduring and that has been part of the conversations we're having with them in particular on the energy side.
Sure.
In addition to all other labor issues et cetera on the energy side, you've seen some quite a bit of pressure.
We have secured the supply that we want for 2022, so we've negotiated on the volumes that we want.
We have negotiated with folks at prices that we feel good about and as I said.
With some price increases that we would be doing that we feel we would be maintaining the financial profile in some cases, we have a number of.
Of suppliers, where we also agreed on indexing things.
Based on like the grocery bag index et cetera, but it's infrequent where it gets re rated so call. It with some suppliers every six months or so we may revisit depending on what's happening.
With some of the indices out there and the reality of that is just more of a reflection.
How volatile the world. So maybe if things ease up we see some favorable pricing if not it'll be a mechanism for our mills too.
To continue to get respectable margins and that would be something that if that happens and prices go up and let's call. It six months with some of the vendors we would be adjusting for that in our own price increases with our customers.
But in general we feel very very good about securing our supply.
For this year and we've locked in I think at rates that were comfortable with that we will maintain our financial profile.
Okay great.
You made some comments on.
M&A going forward.
This year and next year can you just discussed a little bit about the pipeline that you're seeing for 2002.
Yes, we continue to look M&A right now is really largely driven by what we think our solution or solutions that our customers want.
So we continue to look for certain situations that beef up our automation capabilities.
We will look for products that enhance our.
Suite of offerings and PBS.
The world is a little bit uncertain right now I wouldn't say we are aggressively.
Looking at anything we are more always sort of keeping our eyes and ears open and looking for things that our customers want and we feel we can offer those products to them.
Are those solutions to them. So that's really what we're looking at it's not different than what you've seen from us in prior year. The biggest difference is today from a technology and platform standpoint, given all of the digital investments that we highlighted.
Our company has a lot more robust to take on bigger M&A, if an opportunity like that arises, but we all know M&A is dynamic it is fluid it depends on valuations under a lot of factors out there we're going to be very very disciplined it's part of our allocation of capital strategy and when we think something that make sense.
In particular makes sense for our customers, we will pursue it but in the meantime, you have a sense of what we've done whether it was the investment in pickle and Kraft paper or buying reticle. These are all things that were driven by us trying to have better offerings for our customers and we will continue with that strategy.
Okay, great and if I could just.
Some are more in how much of a benefit are you expecting.
From a digital transformation on our margins.
Assuming that the benefit will be.
Used to reinvest back into the business as we scale, but just trying to get an idea of how much.
How much of the.
Anyway, it's going to give you.
In terms of being able to reinvest back in the business, while maintaining the margin profile.
Yes, so it depends on the different areas that we're in right Theres real opportunities when you implement a system like this in procurement.
The data that we have on that is really attractive where we might be able to.
Extract efficiencies meaningfully there.
As well as another a number of our other process flow. So we think that.
Going forward this will provide us a nice opportunity to reinvest in the business to drive growth and maintain that kind of 30% EBITDA margin profile that we like to target as far as giving you specific.
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The numbers on what that margin opportunity is.
It's hard to say at this point, because we just implemented the system, but we think that from the benchmarking data that there is real opportunity for savings here.
Okay, great. Thanks, guys.
Next up we have a follow up question from Adam Samuelson from Goldman Sachs. Your line is open.
Yes, Thank you I just wonder.
Follow up on the outlook for 'twenty two on the base business and if there's any delineation or kind of distinction you draw in terms of the price volume outlook across the different parts of your installed base tune cushioning and void fill and wrapping in terms of.
What areas, where youre more optimistic on growth versus maybe a little bit more guarded and corollary could.
Can you just disclose what you're.
Our exposure direct exposure is in Russia and Ukraine.
Okay.
Sure. So on the outlook, if you think about our major PPS categories with cushioning and wrapping in void fill.
The outlook that we have on each one of those categories are attractive where we think there are real opportunities is to continue to grow that cushioning business just what's going on in the film in place market, We think that there's real opportunity for our paper solutions to expand there. So we're optimistic about improving the growth rate within our cushioning solutions.
Void fill ecommerce remains strong and the share shift from brick and mortar is real.
We're continuing to see nice growth opportunities there, particularly in North America, where we may be a little bit more under indexed.
Then.
Wrapping that's a product that gets great traction across the globe. So that the growth profile. There I think is consistent with what we've seen in the past.
There is real opportunity to expand that business, particularly as the ship from store opportunities expand.
And on your Russia, and Ukraine question in terms of customer exposure, it's de Minimis for us across the company. It's very very small I think the exposure is a few basis points of our revenue. So that's not really an area of concern for us we do have some suppliers.
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Out of Russia, we're monitoring that closely we feel pretty good again about securing our supply and if needed given our negotiations we can flex with others, but we're watching that piece.
Alright, Thats really helpful. Thank you.
Thank you.
As a reminder, if any further questions. Please press star followed by one on your telephone keypad now.
We have no further questions I'll hand back to the management teams any concluding comments.
Thanks, a lot Emily and thanks, everybody for joining US today, we look forward to getting together in the first quarter.
Thank you everyone for joining us today. This concludes our call. Please now disconnect your lines.
Okay.