Q3 2022 Ranpak Holdings Corp Earnings Call
Yes.
Good morning, My name is Rob and I'll be your conference operator today at this time I'd like to welcome everyone to the ran pack Holdings Corporation third quarter 2022 results conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session if you'd like to.
I ask a question during this time simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question again press. The star one. Thank you Sara Horvath General Counsel you May begin your 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.
Ram pack assumes no obligation and does not intend to update any such forward looking statements you.
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.
Copy of the press release has been included in a form 8-K that we submitted to the SEC before this call.
We will also make a replay of this conference call available via webcast on the company website.
For financial information that is presented on a non-GAAP basis. We've included reconciliations to the comparable GAAP information. Please refer to the table and slide presentation accompanying today's earnings release.
Lastly, we'll be filing our 10-Q with the SEC for the period ending September 32022.
The 10-Q will be available through the SEC or on the Investor Relations section of our website.
With me today, I have Omar <unk>, our chairman and CEO and Bill drew our CFO .
I will summarize our third 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 this morning.
As expected the third quarter was a challenging one it ramp back as the headwinds we discussed on our Q2 call impacted results and macro weakness intensified throughout the globe.
The global consumer remains under pressure due to inflationary headwinds related to fuel food and energy impacting personal budgets and reducing disposable income.
Adding to the challenges spending patterns remained firmly in favour of experiences and travel rather than the e-commerce as many consumers pull forward their goods purchases during the pandemic.
More recently <unk>.
Back of rapidly rising rates on household net worth and rising housing costs as having an impact on confidence and reducing your willingness to spend on discretionary items overall.
Overall, we expect e-commerce and the consumer to remain under some pressure in the near term.
But as we exited the year and head into 2023.
We will begin to lap the short term pattern shift from the purchase of goods to experiences and expect e-commerce to ultimately return to growth.
Due to the share shift from brick and mortar with the timing and trajectory of a recovery impacted by the near term macro headwinds.
While the environment certainly remains challenging.
We have been developing new products that are ideally suited for the ecommerce environment, which we believe can improve the velocity of our bounce back and get us back on a trajectory for growth we have been working towards.
In July we communicated that we expected the energy crisis in Europe to worsen and its impact on the economy to become more pronounced.
The ramifications of Sky Rocketing energy prices are flowing through the economy at this time and we expect headwinds to persist until alternative energy supplies can be firmed up and the confidence has a viable path forward without Russia and natural gas.
While governments have been slower to take action and securing new sources of energy that we would all like many companies in the region are taking the matter into their own hands and switching their key energy inputs from natural gas to oil and coal, which is helping to reduce demand and weak storage targets ahead of the winter.
Pricing for natural gas has remained extremely volatile moving meaningfully one way or the other based on the headline of the day the.
The ultimate impact of this environment has on business and the consumer is difficult to forecast. So we are staying in close touch with our vendors and customers to share information and plan accordingly.
We feel very confident in our papers. So what we're seeing as we have reallocated, our bi and taken steps to reduce risk.
<unk> status as a reliable buyer of paper has helped us secure access to the tons we need.
For some regional color North American results were disappointing as lackluster ecommerce activity persisted throughout the quarter impacting voicemail and dropping while of course, you didn't was down modestly due to slower activity.
New business activity continues to be solid, though and at levels in line with Q2, which is encouraging.
Just areas of demand continue to be in our cushioning solutions, which we are working hard on fulfilling the converter demand.
In Europe , and APAC performance vary throughout the region and country by country.
Fortunately I believe a substantial portion of the destocking activity that has impacted us throughout the year has largely been work through although some pockets still persist in the Nordic region and Australia.
The biggest detractors in the quarter were in Germany, Poland, and Australia, with Germany, and Poland, largely driven by the macro on Australia impacted by lower e-commerce activity combined with Destocking.
Bright spots in the reporting unit can be found in Japan, which was up nicely year over year and continues to be a source of new business wins, as well as Austria, Switzerland, and Spain, which outperformed.
The macro backdrop is difficult, but certain areas that have been headwinds for us all year are starting to show some signs of improvement driven by improved availability and lower commodity costs.
Rates for Ocean containers have dramatically improved.
Tracking spot rates and availability in North America.
We believe the momentum for paper pricing relief in North America continues to build as additional capacity is coming online and the lower demand for corrugated products improved availability.
Pricing of a number of commodities, including OCC pulp and lumber has meaningfully improved and inflationary metrics such as service and manufacturing PMI prices power prices and rents have begun to rollover.
Many of these should help drive improved input costs for our business going into next year.
While we would welcome external factors such as these I just mentioned improving we have been focused on helping ourselves through expense reduction and greater efficiencies and new product development to drive demand.
Our G&A expense reduction effort I discussed last call as being executed and starting to flow through.
Over the past number of months, we have implemented plans to reduce head count by approximately 10% across the globe.
And reduced discretionary spend where possible.
Some of these benefits are yet to be realized due to local notification requirements, but we should see the bulk of the savings on a run rate basis by year end.
On the efficiency front, we are getting better with the new systems everyday.
And believe it will be an important tool to support our ability to extract manufacturing efficiencies as we grow our business.
Our new facilities in the Netherlands in Malaysia, which opened in 2023 should also enable us to operate in a more efficient and lower cost manner.
Netherlands facility combined three facilities into one.
And Malaysia provides us with the lower cost local platform to service the APAC region.
What I'm most excited about though is the work we have been doing on the new product side, we have meaningful introductions coming in the near term on the voice, so wrapping cold chain and automation front.
We believe the introduction of these new products will help us drive demand gain market share and get back on the path to growth.
Now I'll turn it to bill for an overview on the financial results.
Thank you Omar and the deck Youll see a summary of some of our key performance indicators.
Also be filing our 10-Q, which provides further information on <unk> operating results.
Machine placement in the quarter increased seven 3% year over year to approximately 138500 machines globally.
Solid placement performance, but at a lower rate than earlier in the year due to slower market conditions.
Questioning systems grew one 4% in the quarter, while void fill installed systems increased eight 1% and wrapping increased 14, 6% year over year.
Overall net revenue for the company in the third quarter was down 12% year over year on a constant currency basis, driven by lower volumes due to slower end market demand offset somewhat by positive price contribution.
North American net revenue decreased 10, 5% year over year, largely driven by lower void fill and wrapping sales and e-commerce activity was lower compared to the prior period.
In Europe , and APAC net revenue on a constant currency basis in the third quarter was down 13% year over year, driven by lower volumes and partially offset by higher price in the region.
Overall general economic weakness in the region and the allocation of disposable incomes traveling experiences rather than E. Commerce weighed on results as all categories were down in the quarter.
Sentiment in the region remains extremely poor as consumers and businesses are tightening their belts and anticipation of a painful winter due to the energy crisis.
Automation sales increased a little under 10% this quarter on a constant currency basis and represented approximately 5% of sales as we continue to make inroads with our automated solutions that enable customers to accelerate the packaging output reduce operating costs and improve the sustainability profile of their operations.
Our Cogs in the quarter remained under pressure compared to a year ago due to inflationary headwinds largely related to paper pricing.
Cause headwinds combined with the lower sales resulted in a gross profit decline on a constant currency basis of 29%, implying a margin of 31, 6% on a constant currency basis compared to 39, 1% in the prior year.
Excluding depreciation gross margins on a constant currency basis declined year over year from 49, 2% to 42, 2% during the third quarter.
The margin headwinds were driven primarily by increased material costs, which represented five three points of pressure increased automation, which negatively impacted margins by 120 basis points as well as increased depreciation, which contributed 50 basis points of pressure in the quarter, while freight as well as labor and overhead provided some relief.
On a positive note in Europe , and APAC gross profit per unit improved versus the prior year for the first time in 2022 as paper prices in the region stabilized and pricing actions helped to close the gap.
Material cost headwind on margins in the region improved from the eight seven points of pressure in the second quarter four nine points in the most recent period.
More work to do on this front, but a step in the right direction.
Constant currency adjusted EBITDA for the quarter declined 41, 8% year over year to $16 6 million, implying a 19, 7% margin on a constant currency basis.
The decline was driven by lower gross profit coupled with G&A that was higher than a year ago, but down sequentially as our cost saving initiatives are flowing through.
We are of course, continuing to evaluate for areas of efficiencies and cost savings, but overall, we are more lean and efficient company than we were earlier this year.
Within G&A again, I think thats helpful to point out for the year over year comparison directly to $4 million in cloud computing implementation costs that include 700 cave amortization as well as hyper care outside help as well as the <unk> performance share amortization of roughly $4 million per quarter.
Based on the roughly $25 share price at the time of the grant.
The Alta strictly performance based and that's on achieving EBITDA between $130 million to $150 million in years 2023 through 2025.
One housekeeping note on the non-GAAP reconciliation.
Based on feedback from a number of the research analysts we adjusted the presentation of the non-GAAP reconciliation to provide the P&L without currency adjustments and to include one line item shown on the constant currency adjustment to get to adjusted EBITDA.
We previously provided each line item adjusted for constant currency and some folks had they would prefer to see it in this newer format.
Reference and ease of comparability. We included the older format at the end of the earnings release as well hopefully this new approach will be helpful.
Capital expenditures for the quarter were $11 5 million converter spend was $6 3 million in the third quarter of 2022 down from $11 million in the third quarter of 2021, and approximately $8 5 million per quarter in Q1, and Q2 of this year.
Other capex for the quarter was $5 2 million driven largely by increased investment in technology infrastructure, and our ongoing real estate infrastructure projects.
Moving briefly to the balance sheet liquidity.
Cash and cash equivalents improved in the quarter to $61 3 million as of September 30th.
As communicated in last quarters call, we have been tightening up the working capital management related to inventory and our capex spend on converters.
We achieved adequate levels of safety stock and the majority of converters and in some cases are above targets, which we are evaluating given the weaker economic environment.
As well the quick inventory position will enable us to slow converter capex spend in the upcoming quarters preserving cash.
We will work down this position over time to lower safety stock levels, given the lower demand environment, and we'll be discerning and new placement to.
To make sure we are optimizing utilization of the fleet.
Our debt structure is comprised of first lien term loan facility due in 2026 that is split into two tranches.
One tranche of $250 million denominated in USD and is L. Plus 375, we have two interest rate swaps in place on this tranche to manage rate exposure.
$200 million of swap at 2.09% through June 2024, and $50 million of swapped at one 5% through June of 2023.
We also have a euro tranche of approximately 136 million euros outstanding in an effort to hedge the cash flows coming from Europe .
This tranches that Euribor plus 275% is floating.
We have zero drawn on our 45 million revolving line of credit, which expires in June 2024.
Our annual cost of interest at today's level and incorporating the swaps. We have in place is just over $20 million USD.
Our net leverage based on reported LTM adjusted EBITDA on a constant currency basis was three nine times at the end of the quarter.
From a covenant standpoint, our bank adjusted EBITDA leverage ratio was three four times.
The primary covenants of note, we have no debt or a maximum first lien leverage ratio of nine one times, which is a springing covenant, which only comes into play if we use more than 35% of our revolving facility.
And then excess cash flow calculation that we perform at the end of the calendar year and requires us to dedicate our percentage of excess cash flow generated an annual period to debt pay down first lien leverage ratio is about four turns.
Based on our expectations for the remainder of the year and the deductions related to Capex and working capital taken into the calculation. We do not currently anticipate having to pay down any additional debt as a result of the test.
Summarize because I think it is important to make clear we have more than $100 million liquidity, no near term maturities and substantial headroom underneath any leverage covenants. We believe we have plenty of runway to make it through this macro environment with that I'll turn it back to Omar before we move on to questions.
Thank you Bill overall as I think about where we are now versus a few months ago I would say the two biggest changes are first the war has escalated to another level with the blowing up after the Nord stream pipeline and destruction of the bridge connecting quite me at the Russia and second.
The fed has been much more aggressive in its efforts to combat inflation.
The rate increases in hawkish rhetoric resulted in significant increases in the cost of capital leading to massive wealth destruction in the capital markets and higher funding costs for businesses and consumers.
The dollar has reached 20 year highs, causing issues for our global trade and potentially leading to more financial instability across the globe.
This is happening at a time when most indicators I can see in our business suggest inflation is rolling over and the economy in the U S. It's meaningfully weaker freight.
Freight and logistics costs are substantially lower the job market is not nearly as hot as it was a year ago.
A key input costs have stabilized and appear to be heading lower.
Overall, I would say the north American market deteriorated more than I was expecting going into the second half of the year.
The activity levels over the past couple of months have been softer across the board but.
Particularly related to E Commerce, I think consumers are stretched.
For pricing in the region has stabilized and become to rollover and my view is overall demand for paper and corrugated is lower and substantial Kraft paper supply is coming online at the end of this year and into next year.
We're working with various metals on testing capabilities and are pleased with the quality of product coming to market.
As a result of the environment and increased industry supply.
We expect paper pricing to become a tailwind going into next year, which we believe should enable us to claw back some of the margin. We let go off temporarily spicing reach levels that we did not believe are sustainable given the backdrop.
We're extremely focused on being aggressive to drive volumes and claw back or margin.
We believe we are well positioned to do so given new business activity levels low products, we're introducing and efficiencies to be gained through our digital transformation as well as paper pricing relief.
Europe is roughly in line to slightly worse than where I thought we would be at the end of July with the economic backdrop deteriorating further as natural gas spike again to extreme levels as flows were completely shut off Hawaii, Russia, and the north stream pipeline was attacked.
Fortunately the storage levels targets have been hit ahead of schedule as industry activity has been lower and LNG shipments have really ramped up.
Pricing is still elevated but is less than half of the extreme levels experienced in August .
Activity levels, while not robust remained resilient in my opinion, given everything going on in the region and the Destocking we have endured.
Spent a lot of time in the region recently and I'm in close contact with the team on the ground to keep up also on how the energy crisis and war is impacting our suppliers customers and the overall economy.
Business. Most end users is down meaningfully and all are very focused on cost and minimizing spend in the current environment.
We feel good about our stable of paper suppliers in the region and our ability to continue to access the product we need.
<unk> supply has been completely reallocated to other vendors in the region and we have put in a great deal of effort to adjust our paper buys to minimize the risk of supplier disruption for this year and into 2023.
We have reduced our exposure to German mills and allocated more resources to those mills, we feel are best positioned to weather a choppy environment. This winter.
A substantial amount of Virgin paper sourced from mills that are self sufficient from an energy standpoint, and we have spread out our recycled paper purchases across vendors in different countries with a focus on those vendors in countries that's suited to endure the energy crisis.
Paper pricing in the region has been flat recently, albeit at high levels. We have seen some recycled paper suppliers start to offer lower prices, though are some of the inputs such as waste paper has come down recently.
Not dramatic moves, but a good sign.
We're also aware of some Virgin vendors sitting on a couple of months of inventory due to a slower economy.
This has not flowed through to pricing at the moment and I am sure. The mills will do their best through maintenance and shutdowns to preserve price, but I find this to be a good data point.
The overall environment is a testing one while we believe we are well positioned to endure the economic weakness and continue investing in the areas that will drive growth and maximize value over the longer term such as automation and cold chain.
I think it would be a mistake to pause on our investments here, particularly automation.
So I believe that is the biggest opportunity at ramp back over the next five to 10 years.
We updated our guidance last quarter to reflect our expectations of the new reality, we still believe we are able to achieve the lower end of our adjusted EBITDA range. However, due to some additional pressure in Europe , and a considerably weaker U S market compared to a few months ago. We.
We expect our top line results to be slightly below the low end of what we provided.
The rapidly changing environment, and the distribution model, which limits our visibility somewhat to end user activity has made forecasting more difficult than usual.
Obviously, we are not happy with the results, but I assure you. We are laser focused on getting ourselves back on the path to achieving the results, we know ramp back as capable off.
While the near term macro environment is a challenge I am optimistic about our path forward.
Our input costs are moving in our paper in North America and have stabilized in Europe .
We are near the end of the Destocking that has plagued us all year in Europe and APAC.
We have taken steps to reduce G&A, while still investing in the business.
We have done a complete digital transformation of the business and are now 10 months into our largest technology upgrades, which will start to show some benefits through efficiencies related to procurement production and planning.
We have made key investments in new products that will begin to contribute in 2023.
Overall, we've endured a myriad of headwinds this year, including our new systems go live in Q1.
The usual largely have been absorbed as we exit 2022 and menu will be neutral to positive for us next year, while our comparisons become much more favorable.
We just celebrated the <unk> anniversary of <unk> founding and October .
Business had a fantastic history with a long track record of growth profitability and cash generation.
We remain very confident in our outlook.
Now, let's open the call up for some questions operator.
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.
And your first question comes from the line of Ghansham Panjabi from Baird. Your line is open.
Hey, guys good morning.
Good morning Ghansham.
Morning, Omar I guess first question on the machine placement, which is obviously very strong at 7% plus in the third quarter.
How are you sort of managing the placement cadence.
The world that we have today.
Also ensuring that you have acceptable return thresholds.
Just given the.
The way you place the machines at no cost to customers.
Sure.
And as you may recall ghansham.
The cost to the end user is nothing but our distribution partners do pay us a monthly fee for the machines.
The way we've been thinking about it is frankly more business opportunities despite the weak environment.
Spin.
Pretty pretty decent our trial activity is high throughout the year and kept improving.
<unk> progressed, our wins have been real what hasnt been different.
Is the ramp up period with some of these new customers.
Longer than what we've seen historically and in some cases the trial period is a bit longer so what's going on as we are placing more and more machines that I would say that revenue is a little bit delayed.
And in a year, where these new opportunities new revenue as the Lady that move it.
And your existing accounts on consuming less paper and less volume.
Double hit has really impacted revenue per machine quite a bit.
We are very very focused on some of the wins that we've had and that the ramp up period.
As we expected and I suspect that Dan in the following months Youre going to see meaningful improvement in that metric as some of these lands ramp up get to let's call. It normalized volumes that were not expecting crazy volumes given the world that we're in a lot more normalized volumes, which I think.
We'll help showcase how displacement has been appropriate.
Okay. That's helpful. And then for my second question I was just going to ask on <unk>.
Think back to this year I mean, obviously a lot of different things occurred you had the SAP implementation you had.
Price cost that was usually in favorable.
And then the macro environment et cetera, as you think about 2023.
Is it less so about price cost and maybe that actually flipping positive and then we just go back to what we normally worry about which is the macro.
How are you approaching this how are.
How are you approaching the outlook for 2023 at this point.
Sure at this point in terms of the SAP implementation I expect that to deliver quite a bit of a benefit for us and it already started in the last couple of months.
We'll continue on this is important because it's driving efficiencies productivity measure is better better measurement and faster measurement of Kpis et cetera. So I think that implementation as we speak and going forward is going to be is going to be a tailwind in terms of price volume and as well as.
Cost dynamics I think the initial benefit we're going to see is going to be on the cost side. It is evident in the U S. Given the increasing capacity somewhere along 8% or so increase.
Annual production volume.
On the craft side that I think about supply demand will help us get better pricing in terms of Europe , what we're seeing so far.
Stability to modest declines the reason these declines in pricing for us are not more material is frankly related to the energy market.
Nat gas has just been very volatile when today its much better than where it was a few months ago, but it's going to depend on what kind of winter, we have and who knows whether prices spike from here or are they stayed where they are or go down and given that lack of visibility I think mills have sort of been disciplined sticking some existing pricing formula.
So depending on that gas, we may see some relief, but the weakness in Europe .
And volume in terms of corrugated in craft.
Players that's going to also help us so overall as I look at 'twenty. Three I think there is a real case to be made that on the Cogs side on our biggest input. There is paper that we're going to see some relief maybe meaningful relief in America, and let's call it modest relief.
In Europe .
On the volume side, while the first thing is given the tough year, we've had this year.
As we lap we're going to have easier comparisons.
We really have invested quite a bit this year in new products and these new products. Many of them are coming to market. Later this year and early in 2023 and that should impact our volume as well in terms of our pricing to our customers I suspect we're going to hold these prices until we get more clarity.
Not be surprised if we get a lot of relief.
In terms of our Cogs in our paper supply if we pass some of that to our customers as well given the inflationary spikes. The last couple of years. So if you put this whole thing together.
We feel 2023 is going to be materially better than 2022, which has been a tough year for us.
Okay, and just a clarification for a question for Bill Bill you currency adjust your you're referring to on EBITDA. It was roughly $1 9 million is that right for the for the third quarter.
Yes, that's correct and so just for reference in the release and in the presentation.
We've got the new format, which will break it out and give you the exact impact on the EBITDA and then we also at the end provided.
Product format as well as the second half.
Okay.
Great Theatre Conference next week. Thank you.
Thank you.
Your next question comes from the line of Greg Palm from Craig Hallum Capital. Your line is open.
Hey, good morning.
Everyone I guess I just wanted to first follow up on that previous dialogue. I mean is there any way you can just sort of quantify what the headwind the price volume or the price headwind has been this year I think Omar maybe you just said that you expect 2023.
To be materially better than 2022, I'm guessing you meant on sort of a margin EBITDA basis, but just any way to quantify what that headwind.
Has been this year all else equal if if if everything starts to normalize in 2023.
Sure. Good morning, Greg I'll start and then I'll turn it over to Bill to give you maybe more precise numbers, but I think as a headwind in the past call. It 10, 10 months or so and Youre right I was referring to gross margin and EBITDA in terms of my outlook for 2023.
It's probably somewhere between 600 to 800 bps.
Our margin.
Mostly frankly going to paper mills and many of them that report publicly I think youll see theyre up 500 to a 100 bps. This past year in terms of gross margin.
Given the energy situation given earlier on in the year supply demand dynamic win when demand was still decent on supply was a bit more limited you effectively have that much of gross margin at least are complex and go into the metals on the suppliers, but again I'll have bill maybe give you.
More precise numbers.
Sure, Yes, Greg Omar was was actually right in line. So it was a year to date.
Gross margin has been about 720 basis points based on just material cost alone.
We've gotten a little bit of help on the labor and overhead.
But.
Between the materials costs being 720 bps automation.
At one point and then depreciation.
Where we are.
Great.
If you look at where we were in a corner.
Now as we mentioned in the earlier remarks.
With less onerous as we're beginning to lap some of these increases which really started to ramp up in Q3 and Q4 of last year. So in the quarter. It was about 500 basis points of a headwind. So the rate of change is improving there.
Understood Okay.
That's helpful.
And.
Do you expect that you can recoup most or all of that in 2023, I know super uncertain environment still and I guess, just talking specifically about Europe , if we assume that gas prices don't Spike up again is there any reason why you won't see.
Greater relief in Kraft paper prices over there just given the dramatic change just in the last month or two of prices over there and gas.
So on the second question, Greg if it stays at these levels or improves a little bit.
We will get meaningful really if youre spot on in terms of pricing and that will help our margin profile quite a bit and the reason we are not sort of counting on that and frankly, we are in no position to say what type of winter Europe is going to have or where in that gas is going to end up every time, we got released.
Last few months.
Followed by a spike so were more just taking a wait and see approach, but if we assume prices stay here. If we assume a winter as reasonable then yes, you can assume we will get much better in relief.
And then what we're talking about.
As far as recouping.
All of sort of the margin erosion that we experienced this year I would say I'm more comfortable saying I believe based on what I know right. Now we will go we will recover most of it.
Sitting here counting on recovering all of it I do think we will deliver and much stronger margin profile in 2023 and that the majority of what you saw us give up this year, we will be able to recover.
Got it I mean is it as easy as just you know.
Trying to figure out the implied EBITDA margin for this year.
Adding Florida 500 basis points next year or is that sort of what the math implies.
I think Directionally, that's correct math.
And the reason the reason.
I get there and obviously, we talked about paper and paper supply in costing so thats the biggest factor for us given how big paper incident Cogs.
Things like freight.
Truckee container cost solid costs.
All these things are trending the right way, giving us some relief and then we have been just very disciplined in this new world.
Our SG&A. So if you add it all up I think directionally, you're right Greg.
Okay, all right I'll leave it there best of luck. Thanks.
Thank you.
Your next question comes from the lineup Adam Samuelson from Goldman Sachs. Your line is open.
Yes. Thank you good morning, everyone.
Good morning, guys. Good morning, So I guess I wanted to come back to the volume question, a little bit and you provided some context earlier Omar around some of the newer placements having.
Lower productivity.
Throughput, but.
I guess how are you a how are you evaluating the payback in ROI potential of those placements if theyre, taking less volumes than maybe placements two or three years ago did and then just more broadly.
Many of the volumes.
In total down.
27% in the quarter with installed base, that's up kind.
Kind of the installed base, that's been in place for longer than a year.
Clearly the paper machine is down pretty considerably.
I'm just.
Do you think thats purely just destocking on the part of your your distributors and customers such as at the end consumption is not down anywhere near that level or.
What do you think.
What confidence do you have that youre seeing a stabilization in paper throughput.
Sure I'll.
I'll start and then also have bill chime in.
There is no doubt in the volume declines and big chunk of it not all of it continues to be Destocking.
And we are trying our best to apply annually with our distribution partners, where they are in that cycle. We believe the majority of our geographies as we speak now.
The bulk of that.
And us and there is still a couple of pockets, where we think there may be some destocking.
It's taken us give us a long time almost 910 months.
These pumps stocking is largely behind us and Thats, a big chunk of that 27 points, it's not the only piece the other fees.
It's frankly, just weaker economic activity in e-commerce as well as installed.
Industrial customers in particular in Europe .
Commerce, and the Nordic region, and places like Poland, and Germany. The declines have been quite severe we have some facilities that were running seven days a week 24 hours that today Ron.
A few hours a day five days a week.
In places like Poland in Eastern Europe that are close to the war and that has really impacted.
Volume and again Bill can give you more specific math. So that's the volume picture in terms of how it relates with machine placement and how we think about it.
Actively that payback now is a little bit prolonged by a few months.
As some of these customers ramp up so if you look at our placement in the last.
I'm going to call it six months, it's been decent in.
In many cases, we're putting converters, either new facilities for existing customers or new customers and we know from them that is going to take them a little bit of time to ramp up why.
In some cases, Adam they're working through inventory of other products that used to use that they still have severe destocking.
Airbags or.
Or bubble on demand or stuff like that before they switch and we're putting our solution in there and the reason we're putting it in there is when you win a mandate and customers are saying companies the equipment im going to start incrementally switching.
Will we are comfortable delaying our ramp up by a few months in order to sort of win that account, but if you look at the impact of that from a volume standpoint.
It is delaying the ramp up one and then two it's increasing our payback by by a few months.
And the combination of that is hurting the revenue per machine. So if what im saying is correct. This thing is going to correct itself in the next few months, where some of these new accounts are going to ramp up and get to the levels that we think are appropriate given the number of shipments that theyre doing and thus we decided to place.
The number of machines. So we think that's a temporary thing.
We think the Destocking is largely behind us with a few exceptions. So these two things should help us going forward.
One thing that is still unclear given the macro backdrop existing accounts, where is the right normal level of volume for them or.
Over the last few months sort of exhibiting too much pressure and we're going to normalize better volume with these accounts or is that the new normal.
Given the macro economy, and where people want to spend that piece with existing accounts is the harder piece to forecast or predict but we think in the other two pieces are.
I'm going to start helping us in the near future.
Bill I don't know if you want to add something.
And I think you covered the big things right I think the math from the existing base.
When you've got 100, you come into the year with 130000 machines in the field, yes, new placements are up but.
When you've got 130000 already out there and you're placing 7000 year to date.
When the volumes are down to the existing account base, it's tough to overcome that math right. So.
Volumes are down meaningfully in a number of end users, particularly in the E Commerce and you can see that in the void fill and wrapping numbers in particular.
Really driving that which is impacting.
The growth for this year.
The data that we have implies that right now the pounds per machine or down.
Below where they were in 2019 levels, we wouldn't expect that to persist over the longer term, we would expect some sort of a bounce back. It's just I think where we are right now between the destocking and the lower consumption with the demand pulled forward invoice, Phil and wrapping that.
We have been painful for us this year.
But as far as overall, new machine placement, the one thing that I'll emphasize.
Emphasize is we are very discerning about the new machine placement, we want to make sure we're getting paid back adequately.
On the capital that we put out there that capital is precious to us. So we want to make sure that we're getting the adequate returns. There. We're also pushing folks in the field to have the conversations with their distributor partners and their end users to understand you know is there anything structural in the business to indicate.
That they may not need as many machines that they currently have right today to date.
The number of machines last year thinking that their business was going to continue on the same trajectory as within 2021, and maybe do we take some of those machines back and deploy them elsewhere for us that would be a much more efficient use of capital.
And that's really a big area of focus for us right now.
Okay. That's all helpful color, if I could just ask a follow up on the price cost question and really just thinking historically the company would procure.
The large majority of its of its Kraft paper on an annual basis and so you had good visibility of your paper cost for the following.
12 months do you think.
If you actually go back to that kind of procurement and pricing.
Strategy into into 2023, or given kind of some of the macro uncertainty, especially in Europe that it might be difficult to secure.
Volumes.
Fixed price for 12 months.
So as we speak Adam we're negotiating our 2023 agreements and in many cases, we will be pushing for annual I will tell you just knowing the way the world is working right now on how volatile energy units.
I suspect we might succeed and may be having.
I'll call that a <unk>.
Six months arrangement with some mills and we revisit in six months, depending on pricing et cetera.
Thank you.
<unk> all mill state REIT to annual agreements would be unrealistic some will.
Hands on their energy stability in their energy situation and some as you know might be vertically integrated and so on but I think in general expecting that in 2023, there will be maybe one.
Reset or something along these lines at least that's what we're attempting to do.
Got it that's all that's all really helpful color I'll pass it on thank you.
Thanks, a lot.
Your next question comes from the line of Stefanos Crist from CJS Securities. Your line is open.
Hey, good morning, Thanks for taking my questions.
Morning.
Can you just talk about what youre seeing in the competitive environment versus other paper providers as well as plastic.
So from my seat I am not seeing a switch from from paper to plastic plastic has also gone up and pricing you use cases here and there is nothing out of the ordinary.
I don't think were seeing a reversal of that trend.
A lot of people love to talk about that in.
Are customers willing to pay for sustainability that has not been a problem certainly not one that is noteworthy.
In terms of paper competition.
Competition is increasing we have been.
Good space in a good industry before this year and competitors are trying to innovate and add to their solutions.
That's something that we're fully aware of and frankly.
We're investing we're innovating, we're adding a lot more products and we think we're ahead of the curve.
In terms of our market share within the paper segment.
Yes. It continues to be stable, we don't see us losing accounts, we don't see big attrition, we see volume declines.
At our existing accounts.
We're not seeing attrition, where accounts are saying I'm switching away.
By the way our wins.
Are bigger than our attrition.
The problem is as I said, our wins are now slow to sort of get to the to the level of volume that we would like to see.
So the overall picture for us in terms of our market share.
Feel somewhat stable. It's just we as a company are over indexed frankly to e-commerce into Europe and these have not been good places to be and the majority of this year and that's the stuff that I think has hurt our volume.
A little bit more.
That's great color. Thank you.
And just a follow up can you just talk about the.
The visibility you have for the holiday season, I know, we're already a month into Q4, but do those deliveries for your customers.
Are they starting already or are you just having conversations how should we think about that.
Okay.
It's tough to predict the holiday season, I'll be honest with you because it's still relatively early yes, we'd have some some visibility from the month of October .
In November and December are really important months and this year forecasting has been very very difficult. We are optimistic about the peak season, but I would say yes.
Given the world that we're in and how quickly things change I'd, rather just wait and see how the next few weeks evolve.
Before we see sort of the real volume trends.
And so on.
So I think it's tough to give you a clear answer I think it's too early in the peak season staff.
Makes sense, thanks for taking my questions.
And there are no further questions at this time, Mr. Bill Drew I'll turn the call back over to you for some final closing remarks.
Thank you Rob and thank you all for joining US today, we'll see you next quarter.
This concludes today's conference call. Thank you for your participation you may now disconnect.
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