Q1 2022 Ranpak Holdings Corp Earnings Call
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At this time I would like to turn the conference over to Surrey, Horvath Sara Horvath.
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 ramp.
<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.
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-Q with the SEC for the period ending March 31 2022.
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 drew our CFO .
Omar will summarize our first quarter results and provide commentary on the operating landscape and Bill will provide additional detail on our 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 appreciate you all joining us this morning.
Our first quarter financial results were disappointing however, despite the slow start to the year, we remain confident in the outlook for our business.
And believe our financial performance will meaningfully improve as the year progresses.
Our confidence is built on the fact that our key detractors this quarter.
Derived from a combination of two distinct events.
Namely our go live with a new ERP system in January which I consider to be a one time impact coupled with the abrupt start toward in Europe , which commenced in late February and quickly reshape the operating landscape, which we are adapting to.
And our fourth quarter call. We shared that we recently made one of the most important investments and ramp back history, when we implemented SAP.
So far the system is functioning as advertised with layers and dimensionality far beyond what we previously had access to and providing us with data that we believe will lead to greater efficiencies and streamline processes for ramp up.
It is also a system that we knew going in is highly complex and takes users time and dedication to truly understand and properly utilized.
Over the past three months the team has done a good job getting up the learning curve with the system and has embraced the new way of operating that ramp up.
We have dedicated a tremendous amount of internal and external resources to the project and sought to address any major areas of risk with the project and set ourselves up for success.
When you make such a dramatic shift in the way you operate even with substantial planning training and resources.
Some time for our workforce to really operate the system and become inefficient user.
It was a slow start but the strides have been great. During the hyper care period at the pace of improvement we are experiencing I believe we will begin to see more efficiencies flow through in the second quarter of the year, and we will be able to identify opportunities for cost savings and improvements as the year progresses.
While the first quarter figures are not where we want them to be.
We exited March leaps and bounds better with the new system than where we began.
Many of the issues that impacted our top line performance in Q1.
Related to our SAP transition were resolved by the end of Q1.
Because of the dislocation to begin 2022, I want to make it clear I do not believe that the first quarter results are indicative of where we are as a company and I am confident about our outlook over the medium and longer term as I believe ramp back is extremely well positioned for the structural shifts in how the world does business.
The near term macro outlook has changed since the start of the year, but our key drivers of our long term growth initiatives of automation and sustainability remain very much intact.
To make a finer point on the impacts of the SAP transition.
I want to highlight a few details.
One.
We have scheduled downtime to start the year due to cutting over to our new system.
Our operations were down for the first 10 days of the year due to cut over where we were not producing or shipping product nor entering orders in the system.
This resulted in the modest by and I mentioned on the fourth quarter, which we estimated to be around $3 million.
As well as substantial unabsorbed overhead estimate it to be more than $1 million.
As our plants were inactive during this specific period.
0.2 inefficiencies due to working in the new system related to processing orders planning production and the new inventory management system and getting products shipped.
Whether it was taking customer orders, receiving an inbound and goods, making paper loading trucks inventory planning all processes were different and took a bit longer in the new system initially leading to production inefficiencies.
Three margin dislocation due to delayed price increases driven by the SCB implementation.
Due to the complexity of the go lives we discussed on the fourth quarter call our pricing actions to offset continued input cost pressure were delayed from when we normally would have taken additional price we.
We needed to get the system up and running and make sure. We had good data in place before putting through our latest price increases.
This obviously created a dislocation in our pricing and cost structure given the inflation, we continued to experience from the fourth quarter and in the case of Europe , which accelerated more meaningfully in Q1.
Outside of the other key area that impacted our results was the changing macro landscape in Europe due to the invasion of Ukraine.
This manifests itself directly for us in a few ways with the largest being lack of trucker availability and increased energy costs.
Lack of trucker availability in Europe in March, resulting in increased variability around our customer pickups.
Given the large number of truck drivers from Ukraine, and many of them, leaving their jobs to go back to their countries to join the fight we had numerous instances of product not being picked up on schedule, leading to inefficiencies as well as a greater than normal product left on the dock at the end of the quarter negatively impacted our performance.
Energy costs in Europe continued the increase from the fourth quarter and drove substantial increases in the cost of paper, we purchased in the quarter.
<unk> gas prices elevated meaningfully at the end of 2021 due to those storage levels, which created a drag on margins in the fourth quarter. This continued into Q1 and was exacerbated further following the invasion of Ukraine.
To provide some context Dutch natural gas average just under 100 euros for megawatt hour in first quarter 'twenty two with a peak close to 212 euros in March.
This compares to an average of 18 euros per megawatt hour in the first quarter of 'twenty one.
Five extra difference and to give you a sense of how unprecedented. This is from 2005 to 2020 natural gas has average around 19 euros and had a maximum price of 30 in 2008.
The World Europe in particular and ramp <unk> are operating in a completely new environment due to this conflict and adjustments needed to be made bill.
Bill will provide some additional context on the impacts of those headwinds in the financial section.
But I think it is important to make clear that the system utilization inefficiencies dramatically improved throughout the quarter and we exited March with a significantly improved operating cadence that continued through April .
We started the year with very specific plans to implement a new ERP system, but we're planning for doing business during times of peace.
We ended the quarter with a new robust ERP system implemented but are now adjusting to doing business during times of war.
Our paper suppliers in Western Europe were hit the hardest this past quarter.
And both our suppliers and US now have better plans on how to navigate the disruptive paper and energy markets.
The market is already beginning to adapt as we are seeing shifts in how paper supplies flows throughout the world.
Part of the relief in the upcoming quarters, we believe will occur as less Russian paper is sold into western Europe , and instead is redirected to Asia, especially China.
Western European paper that would have been sold into Asia, and China are being replaced by this Russian supply freeing up western European paper to stay more local to meet the demand in the European markets, where we operate.
Again the results for Q1 are not what we wanted them to be but given the complexity of our ERP implementation and given the fact that we did so in one year on budget and on a global basis.
While most people were working remotely I am pleased with the hard work and dedication of our employees, who helped us achieve all of this while delivering almost flat results on the top line.
And more importantly, positioning us extremely well starting in Q2 of this year.
Moving on from the implementation of the war in Ukraine, I think it'd be helpful to give some color on the business activity and what we are seeing in the different regions.
Demand for our products was solid in the quarter and activity levels became more robust as the quarter went on particularly in North America, which even with all the inefficiencies had double digit topline growth year over year, driven by a strong March.
We sold the quarter evolved a bit in North America as it started slower as some larger end user's experience supply chain issues, leaving them without product to ship and omicron impacted customer visits what.
But the momentum build throughout the quarter and March saw a really strong activity levels. Both on the sales side and the new customer pipeline growth with a particular interest in automated solutions.
I am optimistic about the traction we are getting in North America and believe it will be a solid growth driver this year.
Many of you have heard me say repeatedly that sustainability in particular is a large driving force behind the momentum and I believe we have assembled the team and offering that can capture a meaningful opportunities to drive results.
Consumer spending remains strong due to continued wage growth low unemployment and strong consumer balance sheets.
Obviously, the impact of rising inflation in food and commodities.
Will be something to keep a close eye on but for now we are seeing good activity and some opportunities to really expand our business in North America.
We are well stocked on converters as we have meaningfully improved our sales and operations planning in North America and invested in safety stock to better insulate ourselves from potential supply disruptions.
Container market pricing has come down approximately 20% since the end of February .
Welcome sign of improvement to the global freight market, but the recent lockdowns in China lead me to believe that stabilization could be short lift.
On a more local level in North America freight markets have improved as spot rates have come down and trucks are more widely available.
Labor in North America seems to have stabilized as we are getting more applications than in the past and more skilled employees, albeit at higher wages.
We implemented a price increase in March in North America, and I will say pricing power in North America remained strong although not quite at the level. We experienced in 2021 were increases went through with minimal if any resistance.
Moving to Europe , and APAC. After a slow start we finished the quarter strong and began to hit our stride in March with sales up double digit year over year.
The macroeconomic outlook in Europe has deteriorated since the start of the conflicts and I'm seeing some headwinds as record commodity prices and natural gas and elevated oil prices impact industrial activity and consumer sentiment.
E Commerce remains elevated but there hasnt been a slowdown in activity there as disposable income stake a hit from inflationary pressures and consumers are spending more on services and experiences.
I am optimistic, though as we continue to see positive results into April which is great to see given the uncertainty in that part of the world.
I spent two weeks last month with our team in Europe to try to get a better sense of the status of the region and I will say I came away from the visit encouraged.
While there is greater variability in pickups due to the truck driver shortage, we are still seeing solid demand for our products.
Albeit not at a growth levels, we experienced last year.
And although the sentiment readings are down every restaurant airport and hotel I went to was packed with no availability, which I thought was an encouraging sign of the resilience of the European consumer.
We continue to win new business in E Commerce, automotive and manufacturing at a good clip.
Though the pace of wins is slower than we were accustomed to and cost savings is increasing in importance compared to a year ago.
That being said given the macro environment the range of possible outcomes in Europe its wide at the moment.
The tailwind of substrate shift and automation demand in the business are powerful.
But so is the potential impact sustained high energy prices will have on industrial production and consumer behavior in Asia. It is more of a mixed bag as we are seeing pockets of strength in other areas that are slower as inflation is having an impact in the region and E. Commerce is not as elevated as it was in early 2021.
Japan and Korea were lighter early in Q1, following a really strong Q4, but those areas appear to be bouncing back now.
China has had a strong start to the year, but recent lockdowns on slowdowns and growth will have an impact on the near term performance there.
We have had a number of key wins recently in the region, where we have been able to leverage our multinational relationships with E Commerce cosmetics, three PL and semiconductor companies within the region to further penetrate other parts of APAC.
From where we sit currently with our pipeline for the quarter. We are looking at solid improvement in the region and are optimistic about the rest of the year.
APAC is the region that tends to be more back end loaded given the festivals in Asia in the early part of the year and E Commerce.
And the combined Europe APAC region profitability in the near term will be impacted by the significantly higher energy prices on paper production costs.
We took price in April but given the lead time, we provide to our customers that increase does not cover the energy shock following the invasion of Ukraine.
To counteract the margin pressure from the energy shock, we plan to implement further actions in June in the form of pricing or surcharges or both which combined with our April pricing actions, we expect will improve our margin profile as the year progresses.
As our pricing structure will be right sized to reflect the new environment.
We're also mindful of our customers in this environment and they need to be a good partner in challenging times.
As I mentioned earlier the paper market is evolving quickly. So we do not want to overcorrected on what could be a shorter term dislocation given what we're seeing with more Russian paper going to APAC, and China and freeing up some of the paper from Western European Mills to be used more locally.
Overall ramp back is fortunate that we are starting from a position of robust margins low leverage and strong liquidity and that we have the ability to invest some of our margin in the short term to help our customers.
Since I have joined ramp back I have feature customer Centricity and this is an opportunity for us to demonstrate that albeit in a balanced fashion to ensure we arent absorbing the entire it.
I think this will be rewarded in the long term with loyalty and additional chair.
It's important to know the coordinated global government and commercial response to Russia has not impacted our ability to serve customers to date.
We continue to receive shipments from all of our suppliers in March and April as they continue to produce and ship paper to us.
We are however, working with our supplier group to obtain additional tons as we take steps to reduce and ultimately eliminate our exposure to Russian mills going forward given the geopolitical landscape.
For surety of supply and reliability. We feel this is a prudent approach even though this requires more working capital in the short term as we are carrying roughly twice our normal paper as well as greater expense relative to our original forecast.
Our greatest priority is serving our customers uninterrupted. So we are committed to making sure. They have a positive experience with ramp back.
I do want to make clear, though we are working tirelessly to minimize the cost headwind of changing course and finding offsets.
Moving onto automation, our vision and plan here is unchanged as we continue to invest meaningfully behind us endeavor.
We have been adding exceptional talent to this area with a particular focus on engineering as of late.
The team continues to grow as we are ramping up and accelerating our hiring activity to expand our presence as our 42 is behind this opportunity only becomes stronger.
The need for efficiencies and labor reduction is only gaining steam as wage growth accelerates and labor availability is scarce.
This is a global phenomenon that is picking up steam being driven by next generation E Commerce fulfillment centers and three pls.
Our product line menu, serving underlined needs is one of if not the most robust in the industry, especially when you take into account our partnerships with nickel and copper.
We are really pleased with the way our offerings are being received and optimistic about our ability to make further inroads into space.
We are tracking to our goals in automation for 2022, and believe 2023 will be an important inflection point for our business.
Now with that let me turn it over to bill for some financial detail.
Thank you Omar and the deck Youll see a summary of some of our key performance indicators will also be filing our 10-Q, which provides further information on <unk> operating results.
Machine placement increased 11, 4% year over year to over 134500 machines globally, another solid double digit performance, but at a lower rate than recent history through the machine placement being suppressed due to the SAP rollout.
Cushioning systems grew three 5%, while void fill installed systems increased 11, 9% and wrapping increased a robust 25, 9% year over year.
Overall net revenue for the company in the first quarter was down one 3% year over year on a constant currency basis, driven by lower volumes of product shipped due largely to ACP golar the associated.
The inefficiencies of getting up and running and the macro environment in Europe impacting some of our ability to catch up in March.
North American net revenue increased 10% year over year with all categories up for the year in particular outperformance in cushioning and wrapping.
We are really pleased with what we're seeing in cushioning and this area is getting a lot of traction as industrial customers are seeking cheaper alternatives to foam and more surety of supply.
<unk> also contributed nicely to the top line, albeit at a lower rate given some of our e-commerce vendors experienced supply chain shortages and overall online activity was a bit lower due to economy is opening up and more dollars being spent on services and experiences rather than goods.
The overall top line growth was driven by pricing actions over the past year as volumes were down in the first two months of the quarter for the reasons previously mentioned, but encouragingly turned positive in March as we exited on a strong note.
In general we are pleased that even with the go live of TPS categories were up year over year.
In Europe , and APAC net revenue on a constant currency basis was down six 9% driven by lower volumes in the region.
By higher price year over year.
Europe and APAC are up against an extremely challenging comparison is <unk> 21 was a record quarter that benefited from numerous tailwind that drove exceptional volume growth.
At that time E. Commerce is the only option in most geographies industrial activity was recovering from depressed levels paper pricing was extremely favorable and the region and sustainability tailwind for driving paper adoption.
With that context, and all the challenges we experienced in Q1, we are impressed with the way the team managed to improve throughout the quarter and meaningfully narrowed the gap to Q1 'twenty one.
Cushioning was the biggest detractor in the quarter on an absolute basis as in Q1, 'twenty, one which are outsized demand due to industrial activity catching up from being down meaningfully due to the pandemic.
We also saw challenging comparisons in voids on ramping of E. Commerce activity was more normalized, albeit at a higher level compared to Q1 'twenty one.
Automation sales more than doubled year over year and represented almost 5% of sales on a constant currency basis as we continue to get traction in the space with a box customization and automated dunnage solutions.
Automation is one area, where we have seen some supply chain disruptions for key components, but we have a solid plan for the year and are doing everything in our power to minimize disruptions and keep projects moving.
Our gross profit decreased 28, 8% on a constant currency basis, implying a margin of 29, 8% compared to 41, 3% in the prior year.
Excluding depreciation gross margins declined from 51, 7% to 39, 7%.
The margin headwinds were driven by increased input costs, particularly in Europe without timely corresponding pricing offsets to SAP.
Lower volumes, resulting in unabsorbed overhead and the increased contribution from automation to overall sales as we ramp up that business.
Overall, North American margins were down roughly two five points in the quarter, but meaningfully improved in March due to better absorption and pricing actions going into effect.
Europe , and APAC with more challenging from a margin standpoint down 16, one points as energy prices impacted our material costs without any corresponding price actions to help in the quarter automation contributed 8% of sales in the region compared to 3% prior and we had lower PPS volumes year over year.
Energy prices reflected in paper costs contributed approximately four points of impact and automation distracted by three two points as we get this business up to scale.
Higher volumes and better absorption in March to improve margins by roughly four six points and this is prior to any pricing actions having gone in place.
As a reference at our pricing actions in North America, and Europe , and insulated for the entire quarter gross margins overall would have been two six points higher to 32, 4%.
Adjusted EBITDA declined 31, 8% year over year to $19 1 million, implying a 22, 8% margin.
The decline was driven by lower gross profit coupled with increased G&A as we continue to add talent to the organization to drive growth initiatives in PPS and automation as well as support our digital infrastructure transformation, increasing salary head count by more than 150 year over year as well as increased IP systems cost.
Overall, the key areas, we are investing in this year it automation engineering and procurement those are immediate areas. We are focused on to help us achieve our growth objectives.
Given the macro uncertainty other areas that we had previously planned on ramping up or being met with a higher hurdle rate.
Capital expenditures for the quarter were $9 $8 million driven largely by conferred replacement as well as some increased investment in technology infrastructure and our ongoing real estate projects.
Moving briefly to the balance sheet liquidity and the cash side, our cash balance in the quarter was $80 5 million.
More of our sales being backend loaded in March as well as investments in working capital and Capex in the quarter drove our cash balance lower but we expect that to level out with more normalized sales and our cash to build in the second half of the year.
Our net leverage based on reported LTM adjusted EBITDA was a solid three eight times at the end of the quarter.
This environment has emphasized what a valuable tool a strong balance sheet as we've been putting ours to work recently and a number of ways. We've.
We've invested in working capital in an effort to ensure adequate supply of converters and paper for our customers. We are also making upgrades to our key infrastructure to run the business and serve customers better and it has also enabled us to make strategic investments for the short term and margin to help our customers.
While much of our discussion is usually focused on growth. This is a business that has really attractive margins and generate substantial cash.
We're using that financial profile to our advantage right now to make investments that will pay off over the next number of years.
With that I'll turn it back to Omar before we move on to questions.
Thank you Bill in closing, while we are not pleased with our financial results in Q1, I want to emphasize a few things one.
The team did a fantastic job and put in a tremendous amount of effort that cannot be overlooked.
Second Q1 is our seasonally smallest quarter of the year. So while Q1 results are painful we are going to do everything in our power to claw that deficit back for the remaining nine months of the year, which historically are larger contributors to our annual performance.
If you look at it on a two year stack, even with the headwinds of four at the new ERP system implementation, our adjusted EBITDA is up versus Q1 of 2020.
Third we exited Q1 in a far better position and feel good about our ability to continue to grow our topline and improve our margin profile throughout the year.
Beyond the April price increase we implemented we will be taking additional actions in Europe to offset the energy impact fourth as I have said in the past we at <unk> are very focused on our annual and multi year plans.
For the greater good and to invest in the future, we will have certain quarters, where our financial results take a step back due to noise related to our future investments.
They do not change the quality of our business and are required to achieve our desired multi year trajectory.
We are a company that is still building scale in some areas. So certain disruptions in investments may have a magnified short term effect.
It is important to highlight that we do not take these investment decisions.
Surely results slightly.
The people in our boardroom, including myself represent roughly 50% of the stock of rat pack.
Every decision made as to maximize the value of ramp back over the long term for shareholders.
Sometimes this requires some short term pain as we experienced in Q1.
Upgrading our digital infrastructure was a critical investment for us and one I would do all over again as it was necessary for ramp back to succeed on.
Far bigger stage.
The timing of our upgrade coupled with the outbreak of war and resulting energy shock is unfortunate and put us in a position where we're coming from behind on the margin front, but.
But I am confident in our ability to claw our way back to the financial profile, we are all accustomed to the.
The macro uncertainty in Europe clouds things for the near term, but we have an excellent team and a strong leading position to weather the landscape and emerge stronger.
We have work to do on gross margins in Europe , but we will address those and feel confident in our ability to continue to improve as the year progresses.
Because of the slower start to Q1 at this time, we are updating our guidance for the remainder of the year.
Our top line remains unchanged, although we believe we will likely be on the lower end of the range given the changed landscape.
This year on a constant currency basis at our standard estimate of 1.15 U S. Dollar to the Euro we are anticipating revenues of $425 million to $445 million, reflecting topline growth in the area of 13% to 18%.
Given the margin pressures to start the year.
And lower volume expectations due to the uncertain outlook in Europe .
We have lowered our adjusted EBITDA forecast to a range of $115 million to $125 million on a constant currency basis.
Or negative two 5% to positive 6% compared to 2021 wider than our historical ranges, we believe that the potential range of outcomes in Europe warrants, some additional cushion and flexibility.
We're confident in our forecast are working day and night to hit our goals.
With that let's open it up for some questions operator.
Thank you at this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad.
We will take our first question from Ghansham Panjabi at Baird.
Thank you and good morning.
Omar and Bill.
Good morning.
Can you just give us a more specific view on what youre seeing for paper volumes, thus far in <unk> and how you see that dynamic unfolding for the back half of the year.
I'm, just trying to get a better sense of how youre thinking about EBITDA between the second quarter and the second half of the year is there any lingering impact from ERP.
<unk> et cetera.
So sure so on ERP I would say we have made.
<unk> critical improvements I'm not going to say as of today, we're at 100% of where we are.
Certainly we are north of 90, or 95% and I believe by end of the quarter by by June 30, or so.
Our ERP muscle is going to be where we want it to be and hopefully we would be getting benefits out of the system, which is what we're all focused on.
In terms of volume.
I would say in April it's been a decent months ERP has not been an issue.
So which is which is a good thing again, we're not perfect with the new system by significantly better and Thats a good continuation of what we saw in March.
Europe in particular.
<unk> had a stable month, we're up but it's largely based on price not volume yet Ghansham. My expectation is we will deal with the pricing issue, maybe a surcharge of this quarter to position us well by the end of the quarter to recover on the margin front.
Europe .
Im not expecting robust volume, but I am expecting decent volume out of Europe , although that statement is subject to nothing dramatically changing on the waterfront, which is very tough for me to handicap and from everything we're seeing with our trials with our pipeline we are expecting a pretty good.
Second half of the year.
Although I will tell you our growth this year in light of what happened in Q1 is probably going to be predominantly price.
Not volume driven.
And the last thing that I'll say ghansham, sorry, just to give you some sense.
We did increase the number of converters out there and Thats always a good leading sign for our business.
All that happened or a big portion of that happened towards the end of the quarter. So the number of converters increased but these converters, we're not out in the field producing paper, that's something that's going to be helping us in Q2 and in the second half of the year.
Thanks, so much that's very comprehensive.
My second question I mean can you just give us a sense on the same sort of dynamic specific to machine shipments to a very very strong in the first quarter irrespective of some of the challenges you highlighted.
Do you see machine placements unfolding for the rest of the year and maybe you could just give us some some level of quantification on the backlogs relative to historical averages.
Yes.
Bill <unk> take that one sure so machine placements as you pointed out ghansham. They were still solid in Q1, which is great to see that as Omar said was pretty backend loaded right as we're kind of getting.
Getting our feet underneath us on that system and getting machine shipped so a lot of that happened in March So you didn't really get.
The flow through on the paper side.
When discussing the outlook with the teams in the different regions across the world.
<unk> for additional machines in trials and close activity is solid so we feel good about continuing to place machines at a good clip throughout the year will be as robust as last year, where it was kind of in the mid teens.
Probably not just given some of the uncertainty, but we still feel good about the demand that's out there for continued placements.
Okay and just one final one for me what the June price increase catch up where you need to be on price cost.
It will get us it will get us very close so we're expecting margins to continue to improve throughout the year right. So Q2 will still have some pressure obviously just given the timing of the increase going into place in Europe , but in Q3 and Q4, we expect those margins to get back closer to where we historically have been.
Okay very good thanks, so much.
Next we'll move to Adam Samuelson at Goldman Sachs.
Yes, Thank you and good morning, everyone.
Good morning, Adam.
Good morning, So I guess my first question is I'm trying to disaggregate the volume.
The performance in the quarter a little bit.
Just thinking about.
Your installed base was up 11% year over year in the period. When this paper volumes were down 21, so kind of on a.
Same store kind of like for like.
Installed base your paper volumes are down closer to 30.
I guess I'm trying to understand.
I understand kind of the trajectory from here how much of that paper decline will be directly attributed to the ERP issue.
How much would you.
Attribute to software customer activity, particularly in the ecommerce space.
And.
Maybe I'll start there there are some follow ups.
Yeah.
Yes, I think.
I think let me start with a high level Bridge and then and then I'll have bill.
Bill will walk you through some detail, but as I think about the quarter and I know ERP certainly it was a big deal.
<unk> combined with <unk>.
War happening in our biggest street.
And impacting March wasn't was a pretty tough combination and obviously, that's what we did not see at the beginning of the quarter.
But as I look at our numbers at our topline and this will flow through into into obviously volume and enter your questions on demand.
We probably have something around $3 1 million of buy in given the ERP downtime at the beginning of the year.
So that impacted this quarter, where people bought some in December .
The trucker issue in Ukraine, or the Ukrainian I should say trucker issues basically moving back to the country to join the war. It's something obviously, we did not know we did not anticipate and that impacted us by more than $2 million in March we.
We also have some customers in March in Eastern Europe , Poland et cetera delayed some orders that were in our book and that was north of $2 million as well.
And then as Bill said, we Couldnt take pricing action. Given you know we were implementing a new system and that probably impacted us by by another $3 million or so for the quarter. So if you add these up you'll get to more than $10 million that was predominantly a hit.
In Europe , we gave them both.
ERP as well as the whole trucker issue and delayed delayed.
Delayed orders issue.
Given given the war.
What we are seeing is obviously some of these numbers are starting to normalize.
I do think on the demand side in particular in E. Commerce. It remains at a high level the growth rates are not like what we saw last year and frankly, what it is very tough for us to assess is that the new normal level in E Commerce and <unk> stay at these levels or is.
Further weakness that we may see going.
On in particular in Europe .
If consumer sentiment changes.
That's the piece, that's a lot harder for us to assess and Thats, what we tried to reflect in our updated guidance.
And give a broader range on EBITDA, because it's very tough to handicap that impact in the U S. I would say traditional e-commerce guys.
Have had decent volumes with us not huge we continue to see okay pickup in activity in retailers doing more in their e-commerce business, they're starting off a smaller base.
Bill I don't know if you want to add something.
Sure so.
Adam just to give you a sense of how we're thinking about the rest of the year, which I think will give you a little bit more normalized view right we are expecting.
At the at the low end of our range right lower volumes in each quarter compared to 2021, launching and then topline making that up on price.
And this is going to be largely driven just by lower utilization of the machine base rates. So we're kind of baking in high single digit low double digit declines in utilization per machine, which will be offset by of course, the pricing as well as the increased machine placement so.
So I do think a big chunk of what you saw that 21% decline in Q1 big chunk of that was driven by just getting up to speed on the ERP system and then you did have some some.
Some impacts as we stated from some lower e-commerce activity as some folks in North America had supply chain shortages, which seem to be resolved and then just generally a bit lower activity on the ecommerce front as as things have opened up.
Alright that color is really helpful.
And.
I guess.
Maybe if I'm thinking about how.
Taking all of those points, Phil and thinking about that in the context of your annual revenue constant currency revenue guidance, which is.
It is unchanged at a range that youre kind of saying more at the low end is it obviously there was the impact in the first quarter, but is the expectation on volume utilization.
Through the installed base for the rest of the year come down offset by higher price I'm, just trying to think about how.
Given the first quarter performance and where we are this.
How we're still holding that constant currency revenue guidance fairness.
Yes, Thats correct Adam.
Okay, and then just a clarifying question just because youre reporting youre, giving guidance on a constant currency basis at a $1 15 euro the euro was about one.
Six today.
So in practice you reported.
Results.
In dollars relative, especially relative to where you were in.
At the end of February Thats.
45% lower given your euro exposure in the move in the currency.
That's the right framing.
Yes, I think just for a rule of thumb about five points.
Makes sense, so if youre thinking about guidance at spot rate you'd be at call. It 405 and $1 10.
On the low end and call for 2008 120 at the high end.
And we've used the 105.
Since since we've gone public that's been kind of the average over the past five years, it's been the average over the past year. So theres been a lot of volatility obviously in the in the currency and actually if I look at the forecast for what's out there for next year.
Just if I pull up the.
<unk> FX or FX XC screen on Bloomberg kits at one one side as well so we feel like it's a good barometer to give folks some view of that.
The business just kind of on a stable currency basis.
Okay.
As you will recall echelon. Thank you.
We'll move next to Stephane as Chris <unk> at CJS Securities.
Hey, good morning, Omar Anvil.
Good morning.
I just wanted to clarify on one of the previous questions just on the revenue guidance.
Can you just give us your thoughts on on pricing and volume and how that's changed since you initially gave the guidance.
Sure. So on the on the volume side, when we were going into the year. We were originally looking at.
Volumes in the mid to high single digits right.
Obviously, that's come down given the first quarter and then what we're seeing in terms of uncertainty in the European region.
Pricing, obviously has gone up right in terms of our expectations. We originally were not baking in.
Any sort of energy surcharge. So those are kind of the two moving pieces there and I think we've also dialed down probably the assumed machine placement just given the macro in Europe , obviously, if there's a resolution.
Resolution sooner than that that can ramp back up with.
With additional volume and growth in the back half of the year, but that's not what we're planning on.
Got it thank you.
Can you just give us a status update on the three new facilities just given supply.
Constraints are those still on target on your on your targets to be.
Completed so so the Connecticut facility for automation is very much on target and our automation plan is intact and expectations for this year remain the same and we continue to see the same robust demand.
Our new facility in Europe is also on target and that will combine automation in our bps business and that will be ready end of the year, maybe beginning of next year, our localized plan in China, we are revisiting that.
In light of the new geopolitical World I suspect, we will be localizing in the region.
Revisiting a few details in that precise geography of where we want to be so thats going to be delayed a little bit.
Got it thank you.
And next we'll move to Alexander Lee Bahrenburg capital markets.
Hi, guys. Thanks for taking my questions.
Could you start with giving us.
Yes, some more detail on the lower volumes, we experienced this quarter.
Can you quantify what was attributable to downtime.
'twenty, one touch point and figure it out in the quarter, how much was attributable to Russia, and then how much is attributable to some.
Lower customer demand in the European region.
Sure happy to so adult.
Mark mentioned trait.
There was some buying in the fourth quarter related to the SAP implementation, where customers were purchasing ahead in case of any disruptions. So we'll put that at around $3 million a little bit more than that in terms of top line.
The variability and pick up some of the.
Truck driver availability issues in.
In Europe , we would estimate that to be around $2 million in top line impact and then some of the push outs right with distributors.
Deciding that they that they wanted to take products in April rather than in May we put that at around $2 million as well just given what we saw unfolding throughout the month, maybe a little bit higher.
And then that plus kind of the pricing impact of the delayed implementation.
That would all kind of total up to around $10 million in top line.
Okay, great and.
How do we think about sort of price stickiness.
Given that's what's really driving.
Growth for you guys. This year is there any risk to the top line that there was some normalization and presto.
Sorry, Alex can you can you ask that one again.
How do we think about price stickiness, given us what's driving growth and full year 2022.
And the rest of the top line. If there is some normalization in price on a more long term.
I think as we think about it and frankly, we've been in discussions with our customers and this is largely.
Focus on Europe .
Energy situation is not ramp back specific.
So what's happening with Nat gas and the.
The elevated levels, it's impacting pretty much every player.
In Europe , whether it's an industrial player or frankly, the consumer as they were consuming.
Energy in their own home.
And our customers we've been speaking openly with them about passing through some of that unusual activity.
And again, we may do it in the form of a price increase and or a surcharge.
And we would do it transparently, where if the energy market eases, if things improve in Europe on that front, we're happy to pass along the savings down the road. So I think the driving force behind it being energy driven being driven by what's happening with the war.
<unk> makes it makes it more sticky people understand that now the question is what's going to happen with with soda ash demand and consumer sentiment in Europe and honestly, that's very tough.
Tough to assess as you can tell from what we're telling you about.
Our guidance for the rest of the year, we're not assuming a robust Europe , we're not assuming that we maintain volume or productivity of our converters. So we're trying to be a little bit cautious, but thats going to depend on the trajectory.
That happens into content and with the war and frankly, that's not just a relevant point for Europe .
Things get materially worse, it could impact the rest of the globe as well so.
That's something that we're watching but I think the nature of what's driving our price increase which is predominantly the energy situation.
Given our communication with our customers with our distributors and end users we feel they understand it and it will be it will be sticky and we are all sort of hoping for.
A more stable future for us and for them, where these prices become a bit more rational.
Okay, and if I could just fit one more in.
You mentioned.
So there was a bit of a lag with implementing price increases so.
This came in at six and a half.
In the quarter.
How much more of an increase of price should we expect for the remaining three quarters of the year.
Yes, Alex just from competitive reasons right, we don't want to get too specific in terms of any plans.
But.
Ill tell you that we are focused on just getting back to our margin profile right as we exit the year and we'll be able to see.
Structure different increases as we need to in order to achieve that so.
Whether it's through a surcharge that Omar mentioned as well as other.
Price increase just on traditional paper price increase will be looking to both of those mechanisms to make sure that we're calling back our margin as we exit the year Q3, and Q4 in a much better spot.
I would triangulate, our thinking without giving specifics as expect in this quarter you will see some improvement.
And the margin profile and that in the second half, but we will get pretty close to our historical margin profile. That's what we're solving for.
Okay, great. Thank you guys.
And next we'll move to Greg Palm at Craig Hallum.
Yeah. Good morning. Thanks.
I guess, just starting off I mean, I understand some of the impacts in Europe , I mean, obviously a lot of that it's outside your control, but looking back at Q4. Your commentary certainly didn't imply that there were I guess any major disruptions associated with the ERP implementation of those comments were back in late February So I'm still trying to reconcile.
That.
Are you expecting maybe a bigger ramp in March because even if I adjust for.
Call it the $10 million of impacts there were still quite a bit of shortfall relative to expectations. So just trying to tie that out.
Yes, basically the summary, Greg as we were expecting.
And much better March in Europe in particular, we had a good March and when I say good March compared to where we started from an ERP standpoint, but.
Certainly the war and its impact.
Our plan so when we when we went live in January we expected every month in the quarter would get better our plan worked out more or less in North America of course, I'm not going to tell you. It worked out precisely exactly with the numbers we anticipated.
And off and that gives you a sense of what we were expecting and North America ended up delivering.
Top line growth of course, largely driven by <unk>.
By price, but.
Given implementing annual ERP system in delivering that we were feeling pretty good about what we delivered in North America, we had the same exact expectation.
In Europe .
And then obviously when we.
When we gave our Q4 sort of earnings report.
It's very early in the war it was very tough to assess where the war is taking us.
And we have the view that we would be delivering results that were sort of inline with expectations for a company that implemented an ERP system.
Clearly when we spoke in that earnings call. We did not know a lot of drivers were originally from Ukraine on are not going to show up.
Yes.
We're starting to see what our customers are going to do with delaying orders et cetera. So we're trying to give you a sense of the numbers.
But a lot of things happened that changed the landscape with the war.
It really hurt our business in March.
And that clearly had an impact on our plan in terms of how we envision implementing ERP.
Yeah, no that makes sense in terms of supply you mentioned youre still receiving product I think from all suppliers have you made any meaningful changes over the last few months I mean, I don't know where you're forced to purchase on the spot market at all due to those supply disruptions I know you've got some exposure to Russia, Russia specific.
Yes.
We are we did make some changes we continue to make some we're not done with our changes on the supply side I will tell you. The following on supply side, we still are getting some paper from Russia, we expect to continue to do that it's decreasing.
And I expect that to change materially based on our plan in the second half of the year, where would we would be getting a lot less paper.
From there.
We're getting paper from other sources some European players some other international players, helping our European business.
I feel pretty good about our plan from everything I'm hearing from all of our discussions with different suppliers and mills I do not anticipate running into issues in terms of securing paper supply and that's something I know that I said back in February so when the war started obviously.
Our Russian customer exposure is de Minimis and then our Russian Mil exposure was a meaningful number but from everything we know we are not nervous about securing supply now at some level, we have to adjust pricing and it might be that we're paying slightly more and if we do then we will deal with that in our in <unk>.
Our price increases et cetera.
By securing supply for the rest of the year given what we're seeing.
And reducing.
The Russian exposure is not going to be an issue.
Okay. That's good to hear I guess last one you talked a lot about the negative impacts of what's going on across the energy markets and those costs I mean curious if you've thought about the I don't know maybe the positive driver that could become for increased adoption of paper in lieu of resin just given.
Resin costs have continued to increase given what's going on in the energy markets and any thoughts on that or is it sort of too early to know.
I think it's a little bit too early to know I will tell you. We watch very very closely sort of how we compare to the resin market.
And I've had some folks sort of ask are we are we worried with paper increases.
We are at a competitive disadvantage we are not seeing that what we're seeing is more akin to what you are.
<unk>, which is the <unk>.
Plastic in resin market.
Also has pricing and inflationary pressure.
How it all shakes out.
It's really tough to tell I do think some of the actions and the pain that we've taken and I alluded to that in my comments I'm, hoping will lead to us getting benefit from a market share standpoint.
But frankly, Greg just just given the quarter that we have given the different issues with implementing <unk> system with the uncertainty with war et cetera, we have decided.
I'll do what we can to gain market share to improve on the volume front, but let's not put it as our base case, if you know what I mean.
Yup I got it alright, well, thanks, and best of luck going forward.
Thank you.
And that does conclude our question and answer session. At this time I will turn the conference back over time presenters for any closing remarks.
Thank you and thanks, everybody for joining US today, we look forward to speaking again next quarter.
And that does conclude today's conference. Thank you for your participation you may now disconnect.
Okay.
[music].
Yeah.