Q2 2022 Ranpak Holdings Corp Earnings Call
Okay.
Thank you I would now like to turn the call over to MS. Sara Horvath General Counsel you may begin the conference.
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 press release was that 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 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 June 32022.
The 10-K will be available through the SEC or on the Investor Relations section of our website.
With me today have Omar <unk>, our chairman and CEO and Bill drew our CFO .
<unk> will summarize our second quarter results and provide commentary on the operating landscape and 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 appreciate you all joining us.
We'd return to topline growth in the second quarter on a constant currency basis. We have now turned positive year to date on a constant currency basis against extremely challenging volume comparisons versus the first and second quarters, a year ago, where volumes were up more than 30% in each quarter.
Even in a normal operating environment, those would be meaningful challenges to surpass so with all the macro headwinds. We are currently facing to be positive on the top line on a constant currency basis.
Is the testament to the effort of the team as they continue to drive new business opportunities.
Unfortunately, the macro backdrop has deteriorated meaningfully since we spoke a few months ago and it's certainly more challenging than we initially anticipated.
The year has progressed, we have experienced less demand in certain end markets, particularly in E. Commerce as economies have opened up and spending patterns among consumers have shifted to more experiential areas, such as travel and restaurants, rather than purchasing goods to be delivered to their home.
This dollar shift has been further exacerbated by lower disposable income available to consumers due to increased tool and food costs eating into their budgets activity in Europe slowed down and the economic effects of the energy crisis on the continent are having an impact.
The quarter's performance in the region was also somewhat impacted by some distributors, reducing their levels of inventory to manage their working capital more tightly and uncertain economic environment and to reflect our shortened lead times.
On a positive note topline PPS results were up or flat in each region and we continue to see solid new business activity.
Trials and closes have ramped up over the past few months increasing sequentially in Q2 compared to Q1, which is an encouraging sign.
In North America sustainability is starting to gain traction as regulatory activities are gaining steam and companies are anticipating further changes down the road.
Shareholders are also increasingly using their voting power to advocate for less plastic in the supply chain ecosystem and holding companies accountable to hitting targets.
In June Canada, and the manufacturer and importation of single use plastics by the end of the year and a major effort to combat plastic waste and address climate change.
In the U S mail in Oregon have fast extended producer responsibility laws in 2021, and now we are seeing at least 10 more states, including California, and New York pursuing similar measures to hold producers accountable for end of life management of plastic packaging.
Notably on June 30, California passed the largest EPR law in the history of the United States and has another bill that is circulating which is focused mostly on e-commerce packaging.
While the details of the California, Bill are still being worked out and understood. The momentum is clear.
Voters legislators and shareholders want less plastic impacting our environment.
This stuff down momentum plus an increased focus on trial and close activity in the U S has helped to drive sequential improvement and closes in the second quarter compared to Q1, this year and being up meaningfully versus Q2 2021.
Closes in Europe in the second quarter trended upward from Q1 as well as the team has done a good job of driving activity in the field and converting new business wins, albeit at a slower rate compared to last year's frenetic pace.
In APAC trial activity improved from Q1 and saw a substantial increase of more than 50% versus the prior year, which was encouraging.
We are pleased to share with you that we have selected Malaysia as the new site for our APAC localization production facility.
With our APAC headquarters in Singapore, a little over an hour drive away, we feel Malaysia is better suited for us to established our production capabilities given our management proximity.
This will make us significantly more competitive in the region due to the lower production and logistics costs and will enable us to grow more rapidly in the region.
Given the change in site selection. This project will now be functional in 2023, rather than at the end of this year.
While we are facing some near term headwinds in our top line from lower economic activity due to the impacts of inflation and consumers adjusting their spending patterns as the economies open.
We are encouraged over the medium and long term by what we see in terms of momentum on sustainability, especially in North America, and our position as the market leader in paper based protective packaging, leading to more close activity.
As the year progresses, the impact of these closes should build and offset some of the year over year declines we see in the existing fleet due to market pressures.
I am pleased to share we have largely moved on from the operational issues, we experienced with our new ERP system in Q1 as the team did an excellent job of embracing the system and getting more comfortable in the new operating environment.
Lot of the heavy lifting on the operational difficulties, we had in Q1 have been worked through.
While it won't happen overnight.
Instead of initial troubleshooting, we are now in the phase of the project, where we can focus on becoming more efficient and begin extracting efficiencies by becoming better users of the system.
Our paper sourcing continued uninterrupted in all geographies in the quarter.
Our vendor relationships are strong and we believe we have the ability to continue to source of the paper, we need to fulfill our customer demand.
We have great relationships with our suppliers and our steady buyer of paper in good times and in challenging environments.
This has helped us secure additional funds from our supplier group as we continue to reduce paper acquired from Russia and have no plans to purchase from that mill beyond shipments received in July .
At this point, we are heavy on paper, particularly in Europe , given our cautious approach to insulate ourselves from possible disruptions in supply.
We will reduce that throughout the year to free up working capital.
We will be doing so at a measured pace given recent reports of energy restrictions on the continent.
They're all we feel very good about our sourcing plan for the remainder of the year.
With the remaining wildcard being the energy situation impact on metal production.
I am pleased with the ability to secure the supply of paper, but unfortunately like the rest of the industry. The cost of our key input Kraft paper remains elevated and has put pressure on our gross margins.
On the Q1 call. We shared that we took pricing in North America that more closely aligns our pricing to our cost towards the end of the quarter.
We are now in a better spot in North America in terms of price and cost, but have not gone so far as to attempt to completely recoup our margins at the site.
Given the weaker environment that has evolved over the past couple of months and pricing fatigue in the market.
We are in a holding pattern to see how things unfold on the price of the commodity.
We are optimistic that given the lower box shipments we have seen an increased paper supply coming online at the end of the year, we could see some stabilization and perhaps relief in pricing in the second half in North America.
In Europe , the energy price environment remains volatile and subject to substantial swings based on headlines regarding the impact that Russia, Ukraine War is having on gas supplies in the continent.
We discussed that we pushed through a price increase following the first quarter, but it was not enough to compensate for the increased gas price environment and counter it following the state and the start of the war and that our second quarter margins in Europe would remain under pressure.
We took additional pricing as of July one to improve our positioning and claw back some of the pressure we experienced for the first half of the year.
These actions have improved our price slash cost compared to what you saw in the first half of 2022.
Well not close the gap completely to get our margins back to where we have been historically until we get some relief on the paper side.
I think given the weaker operating environment pushing too much on price right now risks further hurting demand, which we are not willing to do.
While it is painful in the short term I expect the lower demand environment, we are seeing impact our topline beginning to flow through to the input costs. We believe that this guy.
Got a mismatch cannot persist indefinitely.
To be clear, we're not standing idly by on the margin front waiting for paper pricing to provide relief.
Our attacking costs throughout our P&L, making adjustments across the board to protect ourselves in this more challenging operating environment.
We have closely looked at all of our forward spending and investment plans to ensure we are deploying capital to the most productive areas. Our gross margins in the near term will largely be driven by our paper costs and pricing actions. So we have focused our efforts more on our G&A to achieve immediate cost savings.
We slowed our hiring velocity meaningfully and kept it focus on only these areas we deemed critical.
We have also reduced head count through targeted reductions, where we can consolidate roles or activities.
Or where warranted through performance reviews.
We have reduced our projected headcount spend for the remainder of the year by a net of $2 million when taking into account expected new hires and identified an additional $2 million in planned deferrals.
We have also removed approximately $2 million of planned discretionary spend from the remainder of the year.
We continue to optimize our spend and evaluate areas for further efficiencies.
We are monitoring the macro environment closely and are prepared to take further steps necessary to make sure our overhead costs are right sized for this environment.
There is no sugarcoating. It it is a challenging environment, where input costs remained elevated at the same time demand is lower.
Inflationary pressures in food fuel and now housing costs have reduced consumers buying power and eroded consumer confidence in both Europe and the U S to levels below the global financial crisis.
Rocketing gas prices and uncertain energy supply in Europe may lead to further slowdown or business closures manufacturing activity in the second half of the quarter clearly took a leg down as well as rising input costs and the increased wage spiral have driven company is to focus on reducing the opex.
And capital spend to protect their margins and balance sheets.
This lower overall activity level is impacting utilization of our existing fleet in the near term.
We believe the resilience of our model will come through again as they eventually lower economic activity should result in some commodity price relief.
We have a strong team who remains focused and resilient.
With that let me turn it over to bill for some financial detail for the quarter.
Thank you Omar in the deck, you'll 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 10, 4% year over year to over 136500 machines globally, another solid double digit performance, but at a lower rate than last year due to some slowing end market demand question.
Cushioning systems grew two 6% while void fill installed systems increased 11, 4% and wrapping increased a robust 21, 7% year over year.
Overall net revenue for the company in the second quarter was up 4% year over year on a constant currency basis, driven by positive price contribution offset by lower volumes of product shipped to the slower end market demand.
North American net revenue decreased three 9% year over year, largely driven by the timing of a chunky automation sales quarter last year, which detracted roughly three five points from the topline comparison.
Krishnan growth in North America was up double digits in the quarter, but the overall book of business was slower than anticipated in North America as e-commerce activity experienced a decline in usage compared to the significant activity we saw last year.
As Omar mentioned, we continue to see solid new business activities and are experiencing good momentum on the close front, which we believe should help performance in the back half.
In Europe , and APAC net revenue on a constant currency basis was up nine 5% year over year, driven by higher price in the region and partially offset by lower volumes and a record Q2 last year, driven by exceptional ecommerce demand and industrial bounce back.
Overall cushioning was a bright spot in the quarter up eight 6% on a constant currency basis as we continue to see strong demand for our offering as we can demonstrate real cost savings along with a much friendlier environmental footprint compared to things like phone.
OIBDA was up in the quarter as well, what we saw wrapping take a step back against a really challenging comparison.
Automation sales increased a little under 20% this quarter on a constant currency basis and represented approximately 5% of sales as we continue to make inroads with our automated tonnage solutions that reduce touches at the end of the line as well as our box customization solutions that reduce labor costs and reduce the cost of shipping boxes.
On a constant currency basis, our gross profit decreased 14, 4%, implying a margin of 32, 6% compared to 39, 7% in the prior year.
Excluding depreciation gross margins on a constant currency basis declined from 51% to 43, 8%.
The margin headwinds were driven primarily by increased input costs, which represented eight one points of pressure as well as increased depreciation which contributed 70 bps of pressure in the quarter.
We got some offset on the margin side through lower freight costs and better labor and overhead.
Overall, North American margins were down roughly five seven points in the quarter driven by increased material costs and depreciation.
Europe , and APAC was more challenging from margin standpoint down seven nine points on a constant currency basis as our material costs were up meaningfully without a corresponding price actions to offset the inflation and the border contributing roughly eight seven points of margin pressure.
Constant currency adjusted EBITDA declined 28, 9% year over year to $18 2 million, implying a 20% margin.
The decline was driven by lower gross profit coupled with higher D&A as we have added about 100 people to the organization over the past year to drive growth initiatives in PPS and automation as well as support our digital infrastructure transformation.
There are two key items within G&A I want to flag is that I think it is helpful. When looking at the year over year comparison.
One is the roughly $3 1 million in cloud computing implementation costs that increased to 700 <unk> amortization.
<unk> outside helps that will come down over the course of the year as we get stood up.
And the other is the <unk> performance share amortization of roughly $4 million per quarter, which was based on the roughly $25 share price at the time of the grant.
The LTI is strictly performance based invest on achieving EBITDA targets north of $135 million in years 2003 through 2025.
Capital expenditures for the quarter were $13 million driven largely by converter placement as well as some increased investment in technology infrastructure and our ongoing real estate projects.
Moving briefly to the balance sheet and liquidity on the cash side, our cash balance in the quarter was $59 2 million.
Lower profitability and significant investment in working capital and Capex in the quarter drove our cash balance lower but we expect that to level out as the year progresses as we turned the inventory we've invested in to start the year into cash.
Overall, our inventory levels are up $17 million compared to the same quarter last year. So we will look to work that down as the year progresses, and turn that to cash Fortunately, our inventories largely paper and converters. So we feel very good about our ability to reduce that level over time in normal course.
We've meaningfully dialed back our capex assumption to start the year and now anticipate spending roughly $50 million in capex compared to 75 million to start the year as we lowered our converter spend in a number of our real estate projects have been delayed due to supply chain issues or to us choosing a different location in the case of APAC localization.
Our net leverage based on our reported LTM adjusted EBITDA standpoint was just under three five times at the end of the quarter and $3. One times based on the definition of bank adjusted EBITDA in our credit facility with that I'll turn it back to Omar before we move on to questions.
Thank you bill because of the slower start to the year and a deteriorated macro landscape. At this time, we are updating our guidance for the remainder of the year.
To reflect a more challenging operating environment throughout the globe on a constant currency basis at our standard long term estimate of 1.15 U S. Dollar to the Euro we are anticipating revenues of $360 million to $375 million, reflecting top line decline in the area of one to five <unk>.
<unk>.
By estimated volume declines of more than 20% for the remainder of the year, given the challenging macro outlook, especially.
Especially in Europe .
We are also forecasting a difficult margin environment to persist for the remainder of the year, given lower volume expectations and the volatility in Nat gas market in Europe . So we have lowered our adjusted EBITDA forecast to a range of $75 million to $85 million on a constant currency basis.
Or a decline of 28% to 36% compared to 2021.
We feel this forecast adequately captures the downside risks we see in the market today.
Such as our expectation that the European economy will remain under a meaningful pressure due to the energy uncertainty and the continued impacts of inflation on the consumer and industrial companies.
At the same time this forecast does not reflect the occurrence of extremely significant disruptive events that we cannot predict such as a material escalation of the war with Russia broader geopolitical dislocation or the potential for business or mill shutdowns or closures, whether due to energy rationing or lack of.
Nat gas supply or in energy pricing environment that result in business activity being uneconomic.
We obviously are very disappointed in this update but we feel it is appropriate in this environment to focus on the downside and manage the business accordingly.
<unk> has a lot of structural tailwind is working for it over the medium and longer term, but unfortunately, the short term macro contains a number of headwinds impacting us that we must and will address.
I am confident in our people the quality of our business and our long term outlook.
We will get through this time period, as a leaner and more efficient company fully ready to take advantage of the growth drivers of e-commerce sustainability and automation as they returned to four.
We have healthy levels of cash on our balance sheet. We are very focused on protecting and building our cash position, we do not face any debt maturities until 2026, and we have zero drawn on our $45 million revolver.
In summary, we are in a strong liquidity position to withstand this challenging environment.
In light of our long term optimism for our business I am pleased to announce <unk> board of directors authorized a new three year common equity share repurchase program of up to $50 million.
The share repurchases will be exercised from time to time at prices the company deems appropriate subject to various considerations, including current market conditions, the companys liquidity position.
Future economic and earnings outlook.
We are pleased to put in place a program that provides additional flexibility for ramp back to strategically allocate capital and deliver value to shareholders.
With that let's open it up for some questions operator.
Okay.
At this time I would like to remind everyone. If you would like to ask a question. Please press Star then the number one on your telephone keypad.
Your first question comes from the line of Stefan I'll, Chris with CJ Securities.
Hey, good morning, Thanks for taking my questions.
Good morning.
You touched on this a little bit but could you just give a little more info on how we should think about customer inventory levels on paper.
Our lower expectations for the back half just because customers have been loading up on inventory and now were just waiting.
As demand has lowered or is there another dynamic there.
I would say it varies a little bit by by geography, but the common theme first across geographies has been weakness in E. Commerce at sort of the end user we are just seeing less parcels and less boxes being shipped.
The second the second piece, which is levels of stock at the distribution and the customer levels vary.
I would say in Europe , we started the year with given our lead times and given more optimism about the economy with many folks carrying higher levels of.
Of stock and that in the last six months that has come down.
We think there could be a little bit more pressure in the second half and hence the guidance in terms of level of.
<unk> of stock that some of these customers have.
And as our lead times in Europe have decreased and frankly as the economy and the backdrop has gotten a bit worse than many of our customers and distribution partners want to carry less working capital and less inventory than they think if the world recovers in Europe .
Given our short lead times, they can adjust very quickly.
In the U S. I would say in general from what we can tell the levels of inventory is it's fine I think both at end users and distribution. It doesn't look like at this moment, they're carrying a lot. So in the U S. The picture might be a bit better frankly, a big part of <unk>.
Our cautious outlook on the guidance is driven by a number of things we're seeing out of Europe .
Got it thank you for the color and if I could just ask one more.
I'm trying to make sense of the machine placement up 10% a year and then volumes coming down I understand there is some lag in placing a machine but <unk>.
Last quarter was also double digit machine growth. So can you just give us a sense of the dynamic there and maybe utilization for customers.
Yes.
Zinc, we are watching attrition very very closely and we are watching as you know our trials and close activity the bottom up numbers that we are seeing in our business.
Continue to be healthy this is sort of the conflicting signs that we're seeing where our attrition is low we're not losing business to competitors, we're not losing the business to plastics.
Our machine placement is decent our trial activity actually from a bottom up standpoint in many geographies is very healthy.
The challenge in our business is given the state of the world economy, given what's happening in E. Commerce, frankly, given our exposure to Europe and to Germany, we are seeing less fee per flow through our equipment.
Then Andy historical standards, our numbers we've seen.
So customers have the equipment they have the converters they are just that.
Throughput of boxes on parcels that they're shipping is a lot lower.
Thats impacting the utilization and our hope is that as a temporary phenomenon as the world stabilizes.
Given the lack of consumer confidence lack of business confidence in particular in Europe .
We are just seeing a lot less utilization and frankly, you're seeing less utilization in the e-commerce in the U S as well.
Thanks, so much.
Your next question comes from the line of Greg Palm with Craig Hallum.
Yeah.
Yeah. Good morning, Thanks for taking the questions I guess first I just wanted to kind of tie out the revenue and EBITDA guide for the remainder of the year. So I think if my math is right.
It implies that revenue will be up in the second half versus the first half you've talked about gross margins improving slightly and I think you alluded to maybe.
Opex being more.
Constrained than what it was elsewhere, yet youre not really seeing any leverage on the EBITDA line. So I'm just trying to tie that together I don't know if theres something else, we're missing or maybe there's some built in conservatism, but can you just go into that a little bit. Please.
Sure, Greg so with the with the back half.
We are forecasting sequential growth from the first half the second half, which is consistent with the seasonality.
Typically you would see that be more of a 45 55 split obviously, what we're implying is less of a step up in that.
Just given the headwinds that we're seeing now within Europe and.
Somewhat in North America as well.
So we're not expecting as big of a step up in the back half so.
Just doing the math right that implies.
Revenue in the back half to be down call. It.
Five to 10 points, depending on the part of the range.
The gross margin, depending on how things shake out and then with the volumes that flow through.
A slight improvement, but not much so.
We're looking at call it similar to Q2 levels, but maybe a slight step up but not dramatic things that could be where youre seeing the flow through on the EBITDA.
Where we're expecting some cost savings and in G&A to flow through.
But some of that will take a little bit more time, particularly in Europe and has taken a little bit longer to flow through there.
Hey, Greg.
Greg if I may.
<unk>.
Typically the most important leading indicator we have as a company.
As trials, which leads to close as we have certain percentage of success in that and it typically happens again within a certain window of time.
And that signal is very very positive for US right now and the natural question is if that signals very positive why isn't it reflected in our guidance and the reality and the biggest concern. We have is given the challenges we are seeing mostly in Europe , but we're seeing some of it in E. Commerce in America, we are not certain some of these.
Miles are going to convert into closes before peak season.
And we are not certain we're going to maintain that percentage in.
In terms of how the success of trials to closes. So we are just being deferential to what we're seeing in the macro world.
And largely it's driven by a lot of stuff frankly, we're hearing in in Europe .
And a big chunk of sort of the revised guidance more than two thirds of the decline.
<unk> to Europe .
Given the business and the consumer sort of state of mind, right now and given the uncertainty around energy.
So the uncertainty around energy is driving the pricing with our mills, which will impact our gross margin and Europe right. Now there is absolutely very little clarity around Nat gas and Nat gas supply and in particular is hitting economies that matter to us like Germany.
Yeah that makes sense I mean is it fair to say that you're erring on the side of being a little bit more conservatism in <unk>.
Terms of the guidance than you normally would just given all the uncertainty out there and then I guess just in terms of gross margin.
And the pathway to get back to that kind of high 30%, 40% level, what would need to happen to see that kind of level of improvement I mean, how much of that is literally driven by some of the input costs and energy prices over in Europe .
On the first point I would say we are trying to be as realistic as transparent as possible. So we're not trying to be super conservative or not super Conservative we are getting mixed signals and I would say the signals inside our business versus the signals from the macro environment.
Pointing in very different directions, and we're being deferential to the macro environment, given what we experienced that last six months.
So we wanted to put numbers that we feel comfortable with that reflect an elevated macro risk environment for a company that has a lot of exposure to Europe .
In terms of our margin what we need to happen is we need to understand the NRG dynamic in Europe .
Little bit better to understand sort of how that could impact our margin right now that elevated nat gas level, it's really impacting our suppliers and our mills and it's putting pressure on our margin by the way we're not sitting idly. We are working more with now mills that rely less on that again.
Yes, or that have switched their source of energy Europe is not sitting idle just being hostage to the energy dynamic out of Europe . The challenge is how much can they do in the next couple of quarters and given that such a short period of time, we have decided to be a little bit more cautious and not assume that.
Some of these mills are going to address the energy crisis. So we're assuming elevated levels of energy and elevated levels of input cost and thats whats reflected in our numbers. So I would say our numbers are our best guests in.
In terms of how we can operate.
Pretty tough environment, if that makes sense Greg.
Okay. It does and I guess my last one is a follow up to that just given what's happening over in Europe , right now and maybe some risk to general manufacturing if energy prices stay at these levels are you concerned at all about your ability to procure kraft in the second half or is that not a risk at this point.
We really have a very good plan and we have multiple options on securing paper, we feel very good just like we said earlier this year.
With the Russia dynamic as we switch we will secure paper, we feel very good about our procurement plans.
Despite different changes that may happen to the energy market.
There may be some options that are a little bit more expensive than others, but our focus is to meet our customer demands and make sure. They get the paper that they asked us for and we feel very good about our ability to do that for the rest of the year plus or Greg as Bill noted I think in our commentary we do have elevated levels of.
Tori in particular in Europe . So we're starting from a good position and I think we'll be able to navigate meeting our customers' demands for the rest of the year.
Okay, Alright, that's all thanks.
Thank you.
Your next question comes from Ghansham Panjabi with.
Hey, guys good morning.
Good morning, if we could just.
Omar and Bill.
Maybe you could just give us a bridge of the EBITDA from three months ago 115 to 125 on constant currency versus what it is now.
In terms of the various parameters volume price cost or whatever else.
Sure thing Ghansham, So that's where if we're looking at what's what's making up.
The revised.
The revised forecast on the on the EBITDA side.
They are still getting our view call. It 20 points of price, which is contributing obviously is a positive but youre looking at call. It <unk>.
32 points of volume.
That's really impacting the business and then another call it $19 20 in material costs, and then just G&A as well so.
Those are the kind of the various pieces, but largely driven by volume and material costs.
Okay and then in terms of if you look at 'twenty two versus 21, what does that net impact for the full year.
As it relates to price cost year over year that in theory.
You would get a get recapture at some point.
So we lost about call it seven points on our gross margin, Brian if youre looking at where we're thinking that.
That will that will end up versus where we were last year. So I think over time, we've done it we've done a good job of protecting on the gross profit per unit on the pallet basis, but we'll need to get that margin back.
Some of the pricing actions, we've taken in Europe .
It gets us a little bit closer and better on the web on the path to achieving that but until we get some stabilization I think on the on the energy side its tough to give a timetable I think in North America, we feel pretty good about our ability to continue to improve that margin over time, especially as volumes with pick up I think we're pretty well structured there Europe .
We're going to be the the.
The determining factor is how quickly we can do that.
Okay, and then in terms of the potential variances for I mean, obviously this year is a transition year.
But whereas we look at and you had some one offs with the ERP implementation.
Price cost and so on and so forth.
And our volume static scenario in 2023 year over year, including in Europe , what would the positive variances be rare.
Relative to the guidance that you have this year.
I mean, I think if you kind of just run some some some basic scenarios right. If you think about the machine placement, where we're looking to finish and then you just kind of do some.
Breath extrapolation going forward not not too aggressive from a continued machine placement in 'twenty, three and you get back to call. It 2019.
Revenue per machine levels that would get you back over plus the contribution from automation that will get you to north of $400 million pretty easily. So we think thats. A 29 2019 revenue per machine numbers are fairly.
A fairly conservative so you could see a step up.
If things normalize.
Okay, and then on EBITDA, but with that in place.
Depending on how quickly we can get the margin up the rate and how quickly we can recapture that margin on the gross profit side. If you were looking at even at 25% margin that would get you to call. It north of a 100 million of EBITDA. Okay.
Okay. Okay. That's very very helpful. And then maybe just finally a question for Omar in terms of the value proposition that the company has benefited from in terms of papers, a substrate and sustainability and so on and so forth has there been any change.
What the receptivity from a customer level, just given what's happening with all the things you cited affordability and so on and so forth, especially in Europe is there more pushback and more reluctance as it relates to paper as a substrate versus other alternatives or do you not see that.
At this point, we really are not seeing that we are not seeing people pressed us or even threatened to say hey, we're leaving you on cost or any other metric reliability et cetera to go to plastic that is not a big part of our problem.
We are seeing is literally just a slowdown.
In activity at our customers and then demanding less of our product.
So I don't think that sustainability story is changing and I would venture to say with the California law and some of the changes I think the U S is going to catch up it's going to take some time, it's going to take a few years, but I actually feel that sustainability story is intact.
<unk> is just the economic condition, we watch our accretion very very closely ghansham I am not seeing us loose to competitors in paper or certainly loose to plastic that's not really the theme. What are we are seeing from customers by the way to give you. The full picture as they are quite tired of price increases.
And this is why we decided to take it easy on further price increases and sort of where were taking the hit on margin I would say customers have added with price increases, but thats not just a paper issue. We are hearing the same in terms of customers buying plastic related products as well as just price increase fatigue.
There that is becoming more and more evident.
And what indicators Omar or are you looking at for Europe , specifically I mean is it just your confidence in.
Maybe the war some of the some of the issues with the war ease up or what what would you need to see to give you more confidence in Europe from a volume standpoint going forward.
I would like to see some stability around energy and energy.
Energy supply as well as pricing so to make sure as you can imagine in Europe in Germany, and other countries tremendous amount of industrial activity in manufacturing activity, you would need a reliable source of energy. They don't have it so I'm focused on watching how they manage that situation and then I am very folks.
In terms of discussions with.
Business leaders around their confidence and investing in their businesses and making sure that that sentiment is improving and then the last piece of it.
As you can imagine we do that globally not just in Europe, we're watching the trends around e-commerce quite a bit in Europe, despite the uncertain economic environment.
There is a big emphasis at the consumer level on travel on experiential stop and there is less purchasing of goods and this is another reason as we're entering the peak season, where we changed our guidance.
Based on what we're seeing it was very hard for us to assume a robust peak season in euro on the E Commerce front as we get into the holiday season. So we decided to be a little bit more cautious on that front basically it goes down to energy stability business confidence and consumer confidence.
Perfect. Thank you so much.
Thank you.
Your next question comes from the line of Adam Samuelson with Goldman Sachs.
Yes. Thank you good morning, everyone.
Got it.
I guess my first question.
Sorry for the clarification. So the adjusted EBITDA guidance that you gave is constant currency. So.
Your reported revenues.
<unk> will will be probably five or 6% lower than.
The constant currency, given kind of where the euro is sitting today.
Same kind of rough math on the adjusted EBITDA would be about $5 million less of.
EBITDA.
On each end.
If the euro holds at the current level of debt.
<unk>.
Kind of math.
Yes, that's correct.
Okay. So if we said I think we said.
<unk>.
The $80 million of U S dollar.
Adjusted EBITDA in that context.
Your interest expense.
Is it about <unk> is about 20.
Capex I think bill I heard you say about $50 million.
Kind of what's the revised expectation.
For this year.
Working capital has been a pretty large use of cash year to date.
And you alluded to.
Building up heavy.
Heavier stocks of paper to deal with the inflationary environment. So should we actually think that the company can generate free cash flow.
This year and any other kind of various items in the cash and that cash walk out would be helpful.
Yes, I think so if you look at the back half and what that implies Adam.
If you are talking about.
The Capex, we've done 23, so far this year, we're looking at another 25 to 27.
Another $10 million or so of interest expense.
That will have to pay out cash taxes should be in the low single digits and then.
Working capital and yet it's been used so far but hopefully should turn into a source as we work down that inventory and that will depend on the sourcing environment of paper in Europe . So we think in the back half right that should be roughly flat.
Ben Moore.
Free cash flow use right in the first half, but we think in the back half that should be roughly flat.
Okay.
Okay. That's that's helpful and then.
I guess I was just trying to think about the machine utilization and certainly the kind of economic realities in Europe are quite clear.
I guess it would be.
Interested if you went back in history when the company was private if there was any precedence.
Anywhere kind of machine kind of existing kind of placement utilization.
Same machine sales.
Sales on a volume side being.
Being down it would seem like over 30%.
Especially for the more challenged parts of the business.
In Europe , right now and so.
If there was if there is any evidence of that in history kind of when does that actually happen how quickly or how long does it take for that kind of machine utilization.
Yes.
Rebound on a volume basis, obviously, given the magnitude of inflation right now.
Sales is going to be exceptionally noisy.
Yes, Adam it's a great question.
Unfortunately, there isn't prior periods.
I had a similar setup because I think that the big difference between the prior periods. As you went from a fairly normal stable period of 2019, and then in 2020, particularly in the second half and last year the volumes per machine really ramped up so.
I think what you are getting as part of the reset associated with that and at the same time and economic downturn right. So it gets exacerbated so I think if you look at what we're implying from from a guide standpoint and.
The volumes per machine that we're implying.
At kind of 2019 levels of machine utilization.
And then we haircut those by 10 to 15 points, depending on depending on the product line.
Which we think makes sense because 2019 was kind of the last year, where it was more than normal year in terms of utilization.
Historical standards, and then you had really no substantial ramp us, particularly within wrapping Boyd felt even cushioning.
Pretty dramatic ramp on the pallet per machine basis.
Yes.
I mean, historically, including one at a time, where the company was private.
We have not seen any price increases.
And our input cost or or in our in our price increases that we're passing through that are similar to what we experienced the last 18 months and we have not seen utilization.
And drop in volume per machine and revenue per machine like this so these two aspects.
Basically IMU.
Going on right now, obviously, you listen and I don't want to just keep keep mentioning that as an excuse but a big part.
As the U S numbers are not are not super robust, but a big part of some of these drops as an environment in Europe and I was there last week that is just exceptionally difficult.
There were people just cannot plan ahead.
Okay.
I guess, we'll just we'll follow up on that and last question. I have is as you think about that machine kind of throughput and utilization, what's the level, where you would think about pulling machines from customers where they are in those machines are not earning the economic return that youre targeting for that to put capital.
We are doing that as we speak so we are watching.
<unk> revenue opportunities and volume needs for our customer we're trying to be careful because just like we are having a difficult time planning many of our customers are having a tough time planning and forecasting. So we're actually working with them constructively to understand are they experience are they experiencing that.
Right now that they think will recover what's their best guess on the recovery of volume. So this isn't just us saying it was a metric you have to hit it Mister customer we're trying to make sure that we're being customer centric and focused on their needs and from certain customers that are telling us. They think things are going to recover.
We will make sure they have the right level of equipment and number of equipment. So that we can help them given their recovery and so to hopefully help ourselves with more utilization so it varies by customer but across the company.
Part of the mandate that we are doing right now in light of the new World is focusing on the efficiency of our machines and if certain customers have way too much machines, let's.
Get them back and let's hopefully find a place to deploy these these machines. So these are this is.
It's something that we're doing as we speak.
Okay I appreciate that color I'll pass it on thank you.
Thanks.
And at this time there are no further questions.
Okay.
Thank you very much Lisa and thank you very much everybody for joining US today, you can see next quarter.
This concludes today's conference you may now disconnect.
Okay.
[music].