Q4 2022 Ranpak Holdings Corp Earnings Call
Hello, and thank you for standing by my name is Regina and I will be your conference operator today at this time I would like to welcome everyone to the ran pack Holdings Corporation fourth quarter 2022 earnings 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 would like to ask a question. During this time simply press Star then the number one on your telephone keypad. If he would like to withdraw your question Press Star One again I would now like to turn the conference over to Sara Horvath General Counsel. Please go ahead.
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.
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 Pakistan, 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.
Copy of the release has been included in our form 8-K that we submitted to the SEC before this call.
We will also make a replay of this conference call available via webcast on the company website.
For financial information that is presented on a non-GAAP basis. We've included reconciliations to the comparable GAAP information.
Please refer to the table and slide presentation accompanying today's earnings release.
Lastly, we'll be filing our 10-K with the SEC for the period ending December 31 2022.
The 10-K 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 fourth quarter results provide an update on our growth strategies and issue our outlook for 2023.
I 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. Thank you for joining us today.
We had a challenging fourth quarter, leading to a weak finish to a very frustrating year.
Our team battled headwind after headwind throughout the year, culminating in a disappointing last quarter.
Soft consumer and business demand.
Biting interest rates inflationary pressures switch in spending from hard goods to experiences and volatile energy markets, especially in Europe took its toll on our business.
Despite our best efforts, we could not translate our activities into better results.
We are determined to do so in 2023.
I fully expect us to deliver better results as a company.
The quarter started off fairly in line with expectations, but deteriorated as we got into the thick of the holiday season.
Unfortunately, much of the bump in activity that we typically see in the fourth quarter did not materialize in 2022.
Making the situation worse. It also appeared many customers were intent on finishing the year lead with as little inventory on hand as possible.
And shipments into the new year, which exacerbated the already lower demand environment.
Consolidated net revenue on a constant currency basis decreased 22% driven.
Driven by pressure in both regions as they really weak holiday season, with low industrial activity unfolded across the globe.
Compared to a massive Q4 2021.
From a full year perspective, net revenue was down 9% on a constant currency basis.
Driven largely by the weakness we experienced in the second half.
And APAC finished on a softer note relative to Q3 down 23% on a constant currency basis.
Performance in the region was driven by lower economic activity as well as destocking activity.
Net revenue on a constant currency basis was down 9% for the year.
Given by pressure in old PPS product lines as Destocking meaningfully dragged on results and uncertainty due to the war inflation energy and the general economy created a cautious industrial and retail operating environment.
Our North America business also experienced meaningful softness to finish the year with sales down 21% driven by pressure in void fill and dropping as e-commerce activity meaningfully surprised to the downside.
Full year results were down 8% in North America, driven by a reset of the void fill and wrapping business. After an outsized 2021 and were only partially offset by growth in cushioning.
Many of the new business wins, we achieved throughout the year were much slower to get ramped up and unfortunately were not enough to offset the general malaise in the areas of e-commerce that we serve.
Adjusted EBITDA was $12 9 million was down 64% in constant currency terms year over year and resulted in a margin of 15%.
Our decline in EBITDA was due to lower sales volumes compared to a year ago exactly.
Exacerbated by higher input costs inventory revaluations and the investment in personnel.
The year adjusted EBITDA was down 43% to $66 8 million.
Overall it was.
As of quarter end, a year that was fraught with many headwinds the impact of many of these were further exacerbated by some of the investments we made to enhance the business over the long term, but left us more vulnerable to these disruptions in the short term.
We went live with a sophisticated new ERP platform as war, and then energy crisis and golf our largest geography.
Ending our forecast and causing us to meaningfully adjust our paper sourcing.
Our input cost skyrocketed to what we believe are unsustainable levels.
If our largest customers invested in too much inventory and then quickly have targets to work it down to a conservative level to reflect the uncertain economic environment. While at the same time general consumption behavior shifted from the purchase with great experiences as I've already stated as economies opened up.
One being the Destocking Pete.
Fortunately as we enter 2023.
Current operating environment from what we experienced in 2022.
As many of these headwinds in particular, our input costs, and Destocking, where unique events and have grown from headwinds to tail wins already this year.
Some of the pressure we experienced the finished 22 has translated into a more robust start to the year than we were anticipating.
From a topline perspective.
January and February combined are where we were in January and February of 2021, which was peak activity levels for wrap back.
Of course, it comes with a lower margin profile than 2021, given we are at the beginning of the move down in paper pricing.
But I thought it was relevant to share what we are currently seeing.
Now do I think the demand environment has completely turned around and is back to breaking records no.
Of course, I don't expect 2023 to 2021, but I also don't believe the weakness you saw in our Q4 results reflects the operating environment.
My opinion, even get together with the start of 'twenty three is more appropriate to get a feel for the trajectory of the business.
Given the jewelry and the nature of Q4 results I think it is important to share some color on the start to the year.
We will take you through our guidance for the rest of 2023 after Bill's remarks, but to summarize we are focused on getting back to growth this year, improving our execution of margin profile.
And finishing many of the investments we have been discussing for the past couple of years and beginning to harvest some of the benefits.
While I am deeply disappointed in 'twenty two I do not believe it's an accurate depiction of where we are or where we are going as a company.
Now here's bill with more important 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-K, which provides further information on <unk> operating results.
Machine placement continued its increase, albeit at a slower rate at four 4% year over year to over 139100 machines globally.
Cushioning systems increased <unk>, 3%.
So we'd fill installed systems grew five 3% and wrapping continued its expansion growing eight 3% year over year.
Net placements slowed down a bit to finish the year as activity was lower and we have been actively trying to retreat machines from the field that we believe are being underutilized with the goal of ideally refurbishing them and putting them back out in the field eventually improving utilization and saved on Capex.
Overall net revenue for the company in the fourth quarter was down 22% year over year on a constant currency basis, driven by a softer finish to the year in all regions and full year results were down 9% on a constant currency basis.
For the quarter combined revenue in our Europe , and APAC reporting division decreased 23% on a constant currency basis full year 2022, combined revenue in those regions to a decline of 9% on a constant currency basis.
Finish to the year was weaker than anticipated at December significantly reduced activity relative to years past.
North America had a challenging quarter as the holiday season is weaker than anticipated at many of our ecommerce and users leading to a decline of 22% versus the extremely robust quarter in the prior year.
Bringing full year results to a decline of 8% in the region.
For the quarter most of the pressure was in the wrapping void fill areas well cushioning was down slightly.
Reported gross margins of 28, 1% for the quarter were lower versus 35, 6% in the prior year as the flow through of less volume drove the majority of the decline in our margin offset by approximately mid single digit points of price.
We also experienced approximately one five points of pressure due to inventory related items, including the markdown in the carrying value of paper inventory in Europe , as lower energy costs flow through the industry landscape driving paper pricing lower.
We believe the fourth quarter will be the trough in profitability as many of the gross profit headwinds that play in 2022 are beginning to dissipate or moving the other direction. This includes paper pricing freight and logistics energy among others.
SG&A for the quarter on a reported basis declined $7 $7 million year over year, largely due to lower <unk> expense.
We have continued to make progress sequentially. However, as our Q4 compensation and benefits were 11% lower than our Q2 peak.
Obviously, given the environment, we are keeping a tight lid on spending and only investing in areas that we feel control we moved the needle.
As a result of the lower sales volumes and additional costs absorbed in the fourth quarter adjusted EBITDA declined 64% in the quarter to $12 9 million on a constant currency basis or 15% margin.
Bringing full year results to down 44% to $66 8 million, implying a 19% margin.
Unlike most years, where the fourth quarter is the most robust from an EBITDA contribution standpoint. Unfortunately, it was our weakest quarter by far driven largely by the deterioration we saw in demand as the quarter went on particularly in December as well as the peak in our input costs.
Moving to the balance sheet and liquidity, we completed 2022 with a strong liquidity position, including a cash balance of $62 8 million and no drawings on our revolving credit facility, bringing our net leverage to five three times on an LTM basis were $4 eight times. According to the definition of adjusted EBITDA in our credit agreement, which again maxes out at $9 one.
Times, leaving us significant room to weather the storm.
While we have substantial room to maneuver, we recognize the importance of maintaining a strong cash and liquidity position and are focused on rapidly returning to our targeted leverage ratio of three turns or less.
Fortunately, we entered 2022 with a strong balance sheet, which provides room to navigate the environment and invest in working capital absorb some short term pain and margins to maintain strong customer relationships and fund key initiatives that we believe will maximize value in the longer term.
We are at a point now where our near term Capex investment cycle will end following the completion of our facility and the negative P&L impact of key investments will abate and hopefully start to pay dividends.
We've made good progress on converting our paper inventories into cash in North America, and we'll continue to make progress on this front in Europe .
And our safety stock level on converters enable us to take a more measured approach on converter spend in 2023.
The paper price environment begins to benefit us in Q1, and while there was a lag of us passing through pricing on the way up we expect there to be a lag on the way down as we recapture some of the margin we consciously let go up temporarily to preserve customer relationships.
Before I turn it back to Omar I wanted to provide an update on where we are in our year end audit and Form 10-K filing process.
We've been working closely with our new auditor KPMG to close out the year and are nearly complete.
The changes in our digital infrastructure environment, such as the new ERP system, which we transitioned in Q1 and that we have discussed previously on these calls resulted in a host of new processes that have to be evaluated at year end.
Because of this delay we filed a form <unk> 25 with the SEC. This morning.
The audit process is nearly complete and we expect to file our 10-K by March 31 and.
And the Form 10-K, we do intend to report a number of categories material weaknesses in our internal control over financial reporting such as ineffective general it controls that had a pervasive impact on our various other controls over their financial reporting process much of which stems from the transition to the new ERP and HR ecosystem.
As a result, we will report that our internal control is.
Reporting and therefore, our disclosure controls and procedures were not effective at December 31 2022.
We plan on Remediated these issues as promptly as possible and want to make clear that the effectiveness of these control processes are not expected to result in any changes to the financial information.
For the year ended December 31, 2022 included in today's release with that I'll turn it back to Omar before we move onto questions.
Thank you bill over the past year, we made a strategic decision to invest in maintaining relationships and accelerating share gains to hopefully emerge with more momentum as market headwinds lessen.
In 'twenty three.
We anticipate benefiting from these measures and have focused our remaining investment to focus on only those areas that are critical drivers to maximize value of this year and beyond.
This year on a constant currency basis, we are anticipating revenues of $365 million to $385 million, reflecting topline growth in the area of 6% to 12%.
And adjusted EBIT dollar growth of 14% to 29%, implying a range of 76 to 86 million.
Our topline growth for the year.
Our expectations of a return to volume growth as we lap the destocking that we experienced throughout 'twenty, two as well as increased demand driven by new products.
Our growth in adjusted EBITDA of 14% to 29% reflects.
It reflects the contributions from the expected volume increase as well as positive operating leverage that we expect to come from gross margin improvements due to a more favorable input cost environment.
23 is a pivotal year in trading for ramp back as we will finish the bulk of the infrastructure investments we have been discussing putting our platform for growth and expansion fully in place by year end.
The most important of which is our digital transformation, which is largely complete and then the benefit harvesting phase right now.
We concluded the renovation of our global headquarters in car court in 'twenty, two and by Middle of 'twenty. Three we will have a new European headquarters in the Netherlands, a new automation R&D and production facility in Connecticut.
As well as paper production operations in Malaysia.
These projects have been a tremendous undertaking by the team over the past couple of years and put a lot of stress on the organization.
But I believe they were essential in order for us to achieve our outsized goals.
All of which I continue to believe our bigger than when I first joined the company. Although the financial results of 22 are frustrating I firmly believe we are a significantly better company than we were a few years ago.
Our systems and access to data are night and day of R. R.
Our processes have improved considerably and are documented and repeatable rather than drybulk knowledge.
The talent levels of the team across the organization are also better and are enabling us to pursue opportunities that two years ago, we would not have been able to chase.
Do you think about the terribly disappointing year of 2022, and how you get comfort that 'twenty, three and beyond will be far better outcome.
I think it is helpful to identify the key headwinds that really drove that performance.
Status is of each one going into 'twenty three.
First.
We went live with a brand new sophisticated ERP system in the first quarter of 'twenty two.
We now have a year under our belt and the new operating environment.
We made great strides throughout the year, and we will continue to get better and get more efficient turning our transition into <unk> into.
So a way to enhance performance and extract efficiencies.
On the demand side there are a few factors that provide some encouragement.
Destocking.
Distributors and end users across the globe went into 'twenty, two with products unheard that reflected the COVID-19 stimulus induced hypo demand environment the.
The distribution model made it tricky to have good visibility throughout the year on customer inventory levels and sell through of products, which really impacted our forecasting.
This destocking period was further exacerbated by the market slowdown in the overall macro environment across the globe uncertainty due to the war in Ukraine.
At a point now where we can confidently say more normal ordering patterns arbitrarily and the overwhelming majority of Destocking has been exhausted.
In fact, we believe any distributors ended the year at a markedly lower inventory position.
So not to have a lot of products on their books at year end.
Exacerbating the weak finish to the year.
This I believe has contributed to our seeing January and February being in line with where we were in January and February of 'twenty, one from a topline perspective.
Next is the great e-commerce reset consumers spent two years sitting at home with excess savings being deployed to the consumption of goods in 'twenty two that changed dramatically consumers were free to travel again and enjoy experiences they create and those last two years.
Many of the more expensive more durable larger items that are PPS solutions are used to protect.
Had been ordered and delivered and the years prior.
It's hard to call the bottom or something like that assess consumer behavior is always tricky, but I think we are much closer to the point, where normal buying and replacement batteries for these types of goods will reemerge.
Also the general inertia of E. Commerce continues as many of our customers continue to open new facilities to become more efficient and ask us to help them as they expand.
Sure.
Our churn and attrition throughout this challenging period has been relatively low by.
By investing in our customers. We believe we were able to preserve and sustain an outsized portion of our existing book of business.
While it was painful from a margin perspective.
I believe we will bounce back faster because of the strategy we employed.
Sustainability, and the massive inflationary environment and disrupted supply chains sustainability took a backseat to cost efficiencies as the area of focus for procurement teams.
As the environment stabilizes I can confidently say the focus on sustainability is coming back with vigor and that wave in North America is becoming much more wheels.
We have positioned ourselves well to benefit so I'm looking forward to this renewed focus.
On the cost side, it really comes down to Kraft paper and energy.
Kraft paper prices in North America, and Europe increased dramatically in 'twenty, one 'twenty two due to outsized demand on the unstable energy environment in Europe .
While most other commodities rolled over a meaningfully in the back half of 'twenty to Kraft paper remained resilient weighing on our gross margins.
This is finally changing as the supply demand environment in the U S splitting pressure on the paper market and lower energy and wastepaper prices in Europe is weighing a kraft paper there as well.
The greatest headwind, we faced in 2002 by far from a cost perspective has turned into a tailwind for us going into 'twenty three.
We expect to be able to achieve meaningful cost savings compared to 22.
This is what we are seeing on the ground already and gives us the most confidence in a more robust profitability profile in 'twenty three.
Energy.
Energy prices in Europe are down 80% from where they peaked over the summer.
This could obviously change very quickly and there will be certainty I can provide is there will be volatility in European energy markets.
But from where we sit now compared to where we were going into the winter.
In Europe in general are at a far better position.
We haven't baked in this environment persisting throughout the year.
If this environment holds there would be upside to our plan.
Finally automation.
Automation is something that we've been talking about for the past number of years. We're at a point now where we have the right products, we have the right team.
We will have the facilities by mid year, and we are building a pipeline to scale.
We believe that as we exit 'twenty three automation will begin breaking even on a run rate basis and no longer be a drain on EBITDA.
Context automation was a $6 million range on EBITDA in 'twenty, two and we expect it to be a total headwind of $4 million into a suite.
Getting into the black on automation would be a game changer for us and significantly improve our ability to get our financial profile back on the trajectory we desire.
That is 30% EBIT margin in PPS high teens to 20% EBIT margins for automation and lowering our capex as a percentage of overall sales.
Obviously, the macro environment in the short term has its challenges and what could happen around the world is unknown.
We believe the first half will reflect these weaker activity levels, but we do expect a more normal operating environment to emerge as 23 unfolds.
Europe seems to be adapting well to living with the uncertainty that the war has produced and a more normal operating rhythm has been established.
New business activity in the U S is quite strong and we expect key wins to kick in as we get deeper into 'twenty three.
Overall I'm disappointed by 'twenty two.
But I am extremely focused on getting back on track in 'twenty, three and maximizing value for our shareholders.
All of the key drivers of our business are very much intact and will propel our business forward.
<unk> largest small or investing in e-commerce opening of new facilities and trying to become more efficient.
Labor remains expensive in a short supply.
<unk> PPS on automation solutions help companies address these needs.
Sustainability front some of the largest brand owners in the world are driving the moves to reduce the use of single use plastics and move towards biodegradable and recyclable materials.
This is a global phenomenon and one that is picking up a lot of Steve in North America.
Many companies have made public commitments regarding their sustainability goals. Most if not all will fall short of these commitments and ramp that can help them bridge that gap.
Thank you all again at this point, we'd like to open up the line for questions.
Operator.
At this time I would like to remind everyone in order to ask a question simply press star one on your telephone keypad. Our first question will come from the line of Ghansham Panjabi with Baird. Please go ahead.
Thank you good morning, guys.
Would you be able to bridges.
2022, adjusted EBITDA using your definition constant currency of $67 million versus the $81 million midpoint for 2023 between volume price mix.
And anything else you want to call out.
Sure Omar you want me to.
I'll take that one or.
Yes go ahead bill.
Sure. Thanks Ghansham.
For 'twenty three I think what we're looking at from a volume price price makes automation standpoint.
At the low end volumes, we would assume to be kind of minimal volume growth rate at the high end youre talking mid single digits.
Youll get a little bit of price low single digit just from some of the carryover from some of the <unk>.
Pricing that we took in the first half of last year, and then automation, we're expecting to contribute kind of low single digit.
Part of the growth on the topline.
Okay got you.
And then as we look at our model if you average EBITDA between for.
21, and 'twenty, two you pretty much get to the baseline levels of 2019 and 2020.
Even with machine placements being around 40% higher than <unk>.
2019 average levels I know a lot of things have impacted you and others over the past 12 months, but how do you sort of see machine placements trending over the next couple of years in context to the operating environment that we basically have it correct.
Yes, Ghansham I think in the last couple of years as you've identified there is just.
Lot of noise there was.
Excess usage during COVID-19 than frankly I think.
Excess underutilization. So we invested in machines, we invested the machines, placing them at new customers.
We kept the number of fleet at existing customers.
We are very focused on making sure that we're optimizing the amount of equipment at existing customers right now.
We want to be careful where you don't want to reduce that number of machines drastically. If you think some of the issues the customers are facing.
Due to temporary weakness or temporary softness you want to make sure that you are providing the right service level to these to these customers. So we are trying to get a better sense of what normalized utilization is for some of these machines.
Our belief in the current environment, given what we've endured with destocking given the general malaise in the economy, given the weakness in E Commerce The war in Europe et cetera.
Our machines will be utilized at a much higher level at our existing customers, but we need some of these issues to be resolved them to pass through and we will be watching that in the upcoming months pretty closely to make sure that that thesis has played out on our biggest config conviction right now is <unk>.
Around destocking.
Which we believe our customers started the year at very low levels of inventory, we think about what the finite event that was painful in 'twenty, two and that alone should help and will help utilization of some of these machines.
The answer is we are watching it closely we are going to be pretty prudent when we're placing new machines that new customers, we're going to optimize existing customers.
Given all the noise in the last couple of years, we don't want to overreact real quickly and hurt our business full recovery standpoint.
Very comprehensive thank you.
Your next question will come from the line of Adam Samuelson with Goldman Sachs. Please go ahead.
Yes. Thank you good morning, everyone.
Omar.
Maybe following on that kind of line of questioning a little bit can you.
I have tried to train.
Size the impact of Destocking, both in the fourth quarter and in 2022 as a whole and then maybe disaggregate kind of the volume declines in paper consumables that you reported with between kind of destocking lower throughput of existing machines the growth in the in the in the <unk>.
Stall base and kind of trying to think about that in context of 'twenty three guidance that I think was low to mid single digit.
Volume volume growth.
Sure.
You want to take that.
Sure so for the Destocking last year.
In Europe , obviously, you had a pretty substantial impact and far bigger than we anticipated going into the year.
I think we would put probably the European volume pressure related to Destocking was probably in the call it 40% 50% of the volume decline.
A decline that we had last year, so moving away from that going into this year I think will be a nice lack of a headwind right turning into a tailwind I think where we're being a little cautious is just on the overall environment right.
In terms of seeing what happens is as the economy, hopefully improves with the lower energy environment in Europe .
Okay.
And I guess as we think about the installed base and do you kind of made the point earlier not trying to do anything rash kind of too hasty on.
Pulling machines from mix from from existing customers kind of help us from here delineates kind of what would what would it take to think about a more significant kind of change in the in the installed base.
<unk> confidence that you have that.
The utilization of that of that installed base is going to is going to improve.
I mean, Adam I think the next few quarters and watching the data closely.
It will be key.
As we are representing to you.
We're confident destocking is behind us.
We will be watching that we're not seeing any pressure related to that because if we're seeing any pressure related to that then that means our basic assumption about.
Consumption in rates of consumption are incorrect.
And what we are considering as lean levels of inventory may not be as lean and that would certainly change our calculus. The second thing that we're watching and frankly, it's already happening and this is why we made a little bit of comments.
January and February is just stabilization.
Utilization of our equipment. So you had a very tough year in Europe last year, you had industrial activity come down you've had e-commerce activity come down in certain geography geographies very drastically in the Nordic region and eastern Europe.
Dramatic declines and frankly in a place like Germany, which is our biggest market. We saw some dramatic declines we're seeing that reverse this year already so a continuation of that will prove our thesis that maybe being a little bit patient with these converters.
Is the right approach if we see a change in that in the next quarter or two then I think we would be reassessing the quantum of converters that exists that some of these customers. We are applying a lot of discipline on any new converters that we're putting in the field.
And we've seen just a lot of volume pressure with our existing guys.
Mentioned these on some prior calls you've had some e-commerce facilities either closed a lot of days during the week or in some cases opened a few hours a day. So you've had some dramatic rules and we're seeing some of that normalize.
That surely it normalizes should lift the volume per converter and frankly year to date, that's what we're seeing but to give us more confidence that we're on the right course, we just want to see that continue for the next couple of quarters because at the end of the day data for the last 70 days is just not enough.
So we will wait and see we will assess it we're watching it very very closely.
Data shows something different we will react accordingly.
But I believe the strategy, we're taking in terms of taking care of the customers, making sure. They have the right equipment for quote unquote normalized levels I think thats a strategy that's going to be a wise strategy. That's frankly no different than the strategy. We took in the second half of last year.
Passing all price increases despite the pressure that we were facing in order to protect our customer base and to make sure that they stay with us and as the world reverses hopefully that will accrue to our benefit.
I think the short answer to your question is just watching the next couple of quarters.
Okay. That's very helpful and if I could just sneak a couple quick modeling ones.
What's the the SG&A assumed in the constant currency EBITDA guidance and what's the expectation for Capex for 2009 three.
So for Capex, we're looking at about $55 million this year Adam.
So I think.
About $25 million of that is related to the real estate infrastructure investments as well as some other onetime projects.
Such as some some pelletizing robots things like that that can help us improve.
Efficiency within the operations and then call it the other $30 million of that is going to be related to.
Converters.
Okay, and then the SG&A and then on the G&A. So I would assume call. It operating SG&A to be call. It 24, 25% of sales right. So that would exclude call. It the L tip and cloud amortization expense.
Okay, Alright, that's that's very helpful I'll pass it on thanks.
Once again, Brian a question simply press Star One your next question will come from the line of Greg Palm with Craig Hallum Capital Group. Please go ahead.
Yeah. Good morning, Thanks for taking the questions just diving a little bit deeper on what Youre seeing in January and February can you give us some sense on what volumes.
We're in those two months either.
Maybe relative to 'twenty, one levels would be helpful.
Sure I can take that Nomura.
So from a topline perspective, right Omar mentioned that were in line with 2021 levels.
Obviously, we've taken some price right since 2021, so call. It in the second half of 'twenty. One throughout 2022, we did take a good amount of price to keep up with the Kraft paper.
Cost increase so volumes versus 'twenty, one through the first couple of months are down call. It about 23 points, but.
If you look at it kind of by a different geography.
In North America, they are up versus 'twenty, one, but where do you see the decline would be.
In the Europe , and APAC region, which obviously had.
Massive demand.
When a lot of it started.
In 2021, but overall just from a volume standpoint in that region right, it's still above.
Obviously last year and the years prior to 'twenty one.
Got it okay.
Just thinking about the guidance for the year and all the puts and takes I'm just kind of curious maybe you can just give us some sense on what exactly the underlying assumptions are I mean are you.
Assuming that what Youre seeing in January and February continues meaning it gets.
Better since seasonality.
Suggest that are you thinking that what youre seeing in January and February is maybe just.
A little bit of a benefit from push outs in Q4, and maybe it doesn't improve as much throughout the year I'm just trying to get a sense for.
What what the guidance really assumes.
Hey, Greg maybe I can start with just some general comments, then I'll have I'll have bill given his input.
I would say January and February benefit a little bit obviously from a very weak December in particular, so we're not necessarily just assuming that that is changing the world and all of a sudden the demand story is going to be different for the rest of the year I would say from a top line standpoint macros.
Standpoint.
As bill outlined with the growth rates, we are not assuming anything robust out there.
We are seeing Destocking, we have very high confidence and that's behind us and that will give us some relief that gives us a lot of confidence in the in the numbers that we're outlining for this year.
And the second thing that gives us a lot of confidence that it's not 100% reflected but a big part of it is our paper pricing and what's happening in the energy market in Europe now.
We're not assuming that energy is just going to be stable, but what we're seeing in Kraft paper and we're negotiating these things. So we have visibility for the upcoming few months and quarters, we are seeing quite a bit of help.
On the Cogs side for US I've said in the past that we probably gave up in 'twenty to something along the 1000 basis points in our gross margin.
Were hoping to recover half of that in 'twenty, three and as the year progresses, we expect to continue to recover more from from the input cost side.
And we have quite a bit of confidence based on what we're seeing.
That will be achievable. So so the two things that you see that give us confidence in the in the guidance are Destocking and then Kraft paper cost.
We are not making assumptions that e-commerce is going to reset to fantastic levels. This year, we're certainly not making assumptions about the economy, rip roaring or any of that stuff.
The economy improves that will be added to our to.
So our plan and our guidance.
But I think what we've took into consideration the stuff that we have very high confidence.
That we can achieve.
Bill I don't know if you want to add a few comments.
Sure I think just.
One on maybe a little color on the cadence right I think we are expecting probably the first half of the year to be more subdued relative to the second half just given the environment that rent.
And also just.
Do you think about last year, and how 2022 unfolded.
The volumes in the second half of 2022.
Where were meaningfully lower than in the first half right and given the seasonality. That's really unusual so usually you kind of have the opposite effect, where there's a step up in a lot of that was driven by by Europe and then towards the end of the ended the year.
North America as well.
So I think if you think about 2023 I would say the first half.
Probably the debt.
Lower from a top line perspective, as well as <unk>.
Margin rate, we expect the margin to improve steadily throughout the year.
As we get more of the benefits from the paper pricing and if you think about just paper pricing last year right. It continue to increase throughout the year right. So Q1 of last year.
This was the lowest paper pricing that we had right with a peaking in Q4, so as we lap that particularly in the second half of the year, that's when where you get more of a margin benefit, but we do expect Q1 again to be better margin than what we saw certainly in Q4.
Okay. That's helpful.
Omar specifically, you mentioned Kraft, but what have you seen specifically in terms of Kraft paper pricing by region versus where it was end of year.
Okay.
So in Europe .
Obviously.
There was tremendous pressure given given the energy market and in <unk>.
You can see sort of what Nat gas is done in Europe .
And sort of Europe entering the winter pretty concerned, but now looking much better that has really enabled a number of mills to hedge at lower prices.
And that has enabled us to negotiate better pricing for the upcoming couple of quarters. So I believe we're on track to recover if you will be the numbers that I talked about which is recovering hopefully 500 bps out of that thousand bps and Europe is a big driver of that in America.
Obviously, you'll ask about energy explore about supply demand a number of new mills that are coming online a lot of capacity coming online as the volumes for corrugated and volume for paper and the general economy.
A little bit weaker.
Where we are.
To negotiate with our vendors better pricing for the upcoming quarters in many of these cases. These do pricing Greg are not starting on Jan one.
Starting in some cases on fab one in March one so they were a little bit.
The first quarter, but then as bill as Bill mentioned that'll help us more as the year progresses.
So these are these are situations, where we've already negotiated supply already negotiated pricing I would say in America, it's supply demand picture.
That's helping us in Europe , it's largely energy.
And thats, helping us.
This is why we feel pretty good about recovering a meaningful part of the gross margin.
Okay, Great and then last one for Bill I appreciate the upfront disclosure regarding the material weakness so that doesn't come as a surprise to everybody, but I missed a little bit of commentary can you just maybe maybe repeat exactly what happened.
Yes, sure and we will have a full description in section nine of the 10-K when it comes out but.
I think at a high level 2022 had a lot of changes too.
Systems processes reports that are used.
And the audit process I would say the biggest things that we encountered in our 2022 year end audit were related to <unk> right. So the general it controls some access issues.
And the knock on effects that all of those had on the other controls which made them an effect that unfortunately so.
We will be enhancing policies and procedures, obviously to improve the environment is something that we take incredibly seriously.
It's disappointing taking a step back after having two years of a clean audit, but we're going to make sure that we address the situation as promptly as possible.
We will have some recruiting in some key positions that will that will help and accounting and other support functions as well.
Invest in some additional tools to help with some of the access provisioning and monitoring so.
We're going to we're going to work hard for dresses.
Okay Alright.
Alright, I'll leave it there thanks.
We have no further questions at this time I will hand, the conference back over to Bill for any closing remarks.
Thank you Regina and thanks, everybody for joining US today, we look forward to catching up next quarter.
Ladies and gentlemen that will conclude today's meeting. Thank you all for joining you may now disconnect.
Please wait the conference will begin shortly.
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