Q4 2023 Ranpak Holdings Corp Earnings Call
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Ladies and gentlemen, thank you for standing by my name is Desert me and I will be your conference operator today.
Operator: Ladies and gentlemen, thank you for standing by. My name is Desiree, and I will be your conference operator. At this time, I would like to welcome everyone to the Ranpak 4th Quarter 2020. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer. If you would like to ask a question during this time, simply press the star followed by the number 1 on your telephone. If you would like to rejoin a question, again, press the star.
This time I would like to welcome everyone to the ran pact fourth quarter's 2023 earnings call.
All lines have been please 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 followed by the number one on your telephone keypad.
If you would like to withdraw your question again press the star one.
Sara A. Horvath: I would now like to turn the conference over to Sara Horvath, General Counsel. Thank you, and good afternoon. Before we begin, I'd like to remind you that forward-looking statements as defined under the Private Securities Litigation Reform Act of 1995 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 with the SEC. Some of the statements in response 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 those stated. Ranpak assumes no obligation and does not intend to update any such forward-looking statement.
I'd now like to turn the conference over to Sara Horvath General Counsel. Please go ahead.
Thank you and good afternoon, 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.
Sara A. Horvath: We should not place undue reliance on these forward-looking statements, all of which speak only to the company as of today. The earnings release we issued this afternoon and the presentation for today's call are posted on the Investor Relations section of our website. A copy of the release has been included in a Form 8K 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 have included reconciliations to comparable GAAP information.
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 afternoon and the presentation for today's call are posted on the Investor Relations section of our website a.
A copy of the release has been included in a form 8-K that we submitted to the SEC before this call.
We'll 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.
Sara A. Horvath: 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, 2023. The 10K will be available through the SEC or on the investor relations section of our website.
Please refer to the table and slide presentation accompanying today's earnings release.
Lastly, we'll be filing our 10-K with the SEC for the period ending December 31st 2023.
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 Marwan Asali: With me today, I have Omar Asali, 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 2024. 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, Sara, and good day, everyone.
I will summarize our fourth quarter results provide an update on our growth strategies and issue our outlook for 2024.
Bill will provide additional detail on our financial results before we open up the call for questions.
With that I'll turn the call over to Omar.
Thank you Sarah and good day, everyone. Thank you all for joining our call.
Omar Marwan Asali: Thank you all for joining our call. We finished 2023 on a positive note as we built on the momentum from the third quarter and delivered our best quarter of the year. We saw continued general improvement in the operating environment in Europe and a more pronounced holiday season in North America compared to prior years. Overall, the e-commerce discretionary goods market and manufacturing sectors remain subdued, but we are starting to see general improvement across many of our end users and are encouraged by the seasonal uptick more in line with historical patterns in the fourth quarter. Consolidated net revenue on a constant currency basis increased 10% driven by volume growth in our different regions, as we saw improved order activity among larger e-commerce customers in the U.S. and generally improving conditions in Europe.
We finished 2023 on a positive note as we built on the momentum from the third quarter and delivered our best quarter of the year.
We saw continued general improvements in the operating environment in Europe, and a more pronounced holiday season in North America compared to prior year.
Overall, the ecommerce discretionary goods market and manufacturing sectors remain subdued.
We are starting to see general improvement across many of our end users and are encouraged by the seasonal uptick more in line with historical patterns in the fourth quarter.
Consolidated net revenue on a constant currency basis increased 10% driven by volume growth in our different regions. As we saw improved order activity among larger e-commerce customers in the U S and generally improving conditions in Europe.
Omar Marwan Asali: The volume improvements seen in Q3 and Q4 helped drive 2023 full-year net revenue up 1% on a constant currency basis, a welcome recovery from a slower start of the year. Europe and APAC finished on a strong note, up 12% on a constant currency basis, driven by 15% volume growth as ordering patterns continued to normalize, and general sentiment in the region was stable. The improvement was broad-based, as all PPS categories in the region were up year over year. However, the stocking activity is behind us, and, in many cases, distributors and end customers are working to keep as little inventory on hand as possible.
The volume improvement seen in Q3, and Q4 helped drive 2023 full year net revenue up 1% on a constant currency basis.
And welcome recovery from a slower start of the year.
Europe and APAC finished on a strong note up 12% on a constant currency basis.
By 15% volume growth as the ordering patterns continue to normalize and general sentiment in the region was stable.
The improvement was broad based as all PPS categories in the region were up year over year.
Restocking activity is behind us and in many cases distributors and customers are working to keep as little inventory on hand as possible.
Our North American business also experienced an uptick to finish the year with sales up 8% driven by improved volumes and contribution from automation sales.
Omar Marwan Asali: Our North American business also experienced an uptick to finish the year, with sales up 8% driven by improved volumes and contribution from automation sales. Full-year results were up 2% in North America, driven by a large contribution from automation and improved voice health performance, offset somewhat by a sluggish wrapping and cushioning environment. Adjusted EBITDA of $24.4 million was up $11.5 million, or 89%, in constant currency terms year over year and resulted in a margin of 26%. The increase in adjusted EBITDA was due to higher sales volumes compared to a year ago, a significant improvement in input costs, and better absorption of our fixed GNA. For the year, adjusted EBITDA increased 14.5% to $76.5 million.
Full year results were up 2% in North America, driven by a larger contribution from automation and improved <unk> performance.
Offset somewhat by a sluggish wrapping and cushioning environment.
Adjusted EBITDA of $24 $4 million was up $11 5 million or 89%.
Constant currency terms year over year and resulted in a margin of 26%.
The increase in adjusted EBITDA was due to higher sales volumes compared to a year ago significant improvement in input costs and better absorption of our fixed G&A.
For the year adjusted EBITDA increased 14, 5% to $76 5 million.
Omar Marwan Asali: Overall, it was a quarter that turned out a bit better than expected and helps us to finish a challenging year on a positive note. Generally speaking, we enter 2024 in a better operating environment than we experienced in 2023. Discretionary goods remain soft, but we are now two years into absorbing the pull-forward in demand that impacted performance in 22 and 23. Strategic account activity in North America is robust, with key players announcing their commitment to eliminating plastic in their fulfillment centers over the next few years. We also have made substantial inroads in our automation business with key accounts that I think solidifies our position as a true automation player. Our distributors and end-users are in tight inventory positions and are likely conservative in their positions. We will continue to monitor the energy environment in Europe.
Overall, it was a quarter that turned out better than expected and helps us to finish a challenging year on a positive note.
Generally speaking, we enter 2024 and a better operating environment than we experienced in 2023.
Discretionary goods remains soft, but we are now two years into absorbing the pull forward in demand that impacted performance in 'twenty, two and 23.
Account activity in North America is robust with key players announcing their commitment to eliminating plastic and therefore filament centers over the next few years.
We also have made substantial inroads with our automation business with key accounts that I think solidifies our position as a true automation player.
Our distributors and end users our entire inventory positions and are likely conservative and their positioning.
We continue to monitor the energy environment in Europe.
Omar Marwan Asali: It is far improved from a pricing perspective from a year ago, as Dutch NatGas is at 27 euros per megawatt, down from 300 euros at the peak and 80 euros at the start of 2023. This has led to a stable paper input cost environment in the region and improved overall sentiment. North America paper pricing also remains stable as we enter into 2024, having clawed back the majority of our gross margin profile that we had sacrificed in 22. The regulatory environment continues to position us with a secular tailwind as extended producer responsibility regulation has been enacted or proposed in many states, including California, Colorado, Maine, Oregon, Maryland, New Jersey, Washington, and Connecticut. These laws have been in place in Europe for years but are just gaining traction in the U.S. We'll take you through our guidance for 2024 after Bill's remarks, but to summarize, we are focused on accelerating top-line growth this year, double-digit-adjusted EBITDA growth, and working the investments we have made to generate cash and deliver. Now, here's Bill with more info on the quarter. Thank you, Omar.
It is far improved from a pricing perspective from a year ago.
Such Nat gas is that 27 euros per megawatt down from 300 euros at the peak and 80 euros at the start of 2023.
This has led to a stable paper input cost environment in the region and improved overall sentiment.
North America paper pricing also remains stable as we enter into 2024, having clawed back the majority of our gross margin profile that we have sacrificed in 'twenty two.
The regulatory environment continues to position us with a secular tailwind as extended producer responsibility regulation has been enacted or proposed in many states, including California, Colorado Main Oregon, Maryland, New Jersey, Washington and cannot.
Okay.
These laws have been in place in Europe for years, but are just gaining traction in the U S.
We will take you through our guidance for 2024 after Bill's remarks, but to summarize we are focused on accelerating top line growth. This year double digit adjusted EBITDA growth and working with the investments we have made to generate cash and delever.
Now here's bill with more info on the quarter.
Thank you Omar and the deck Youll see a summary of some of our key performance indicators. We will also be filing our 10-K, which provides further information on <unk> operating results.
William E. Drew: In the deck, you'll see a summary of some of our key performance indicators. We'll also be filing our 10-K, which provides further information on Ranpak's operating results. Machine placement continued its increase, up 1.5% year-over-year, to over 141,200 machines globally. However, cushioning systems declined 1.4%, void-filled installed systems grew 2.6%, and wrapping grew 2.3% year-over-year.
Machine placement continued its increase up one 5% year over year to over 141200 machines globally.
Questioning systems declined one 4% void fill installed systems grew two 6% and wrapping grew two 3% year over year.
We continue our fleet optimization efforts to identify opportunities to move less productive burgers in the field to higher utilization locations and furthered our efforts to refurbish and re fabricate older converters for redeployment to save on Capex.
William E. Drew: We continue our fleet optimization efforts to identify opportunities to move less productive converters in the field to higher utilization locations, and we further our efforts to refurbish and refabricate older converters for redeployment to save on catbacks. Overall, net revenue for the company in the fourth quarter increased 10% year-over-year to $93.9 million on a constant currency basis, driven by volume growth in all regions and increased automation sales, bringing full-year results up 1% on a constant currency basis. For the quarter, in the Europe and APAC Reporting Division, combined revenue increased 12% on a constant currency basis.
Overall net revenue for the company in the fourth quarter increased 10% year over year to $93 $9 million on a constant currency basis, driven by volume growth in all regions and increased automation sales, bringing full year results up 1% on a constant currency basis.
For the quarter in the Europe, and APAC reporting division combined revenue increased 12% on a constant currency basis.
William E. Drew: The better second half drove net revenue on a constant currency basis to finish up 1% for the year in the region, driven by volume growth and increased contribution from automation, offset somewhat by price and give back due to raw material input cost relief after achieving our targeted margin profile. North America also finished on a positive note, driven by better volumes and increased contributions from automation. Net revenue for the quarter was up 8%, which brought the full-year results in the region to growth of 2%.
Better second half drove net revenue on a constant currency basis to finish up 1% for the year in the region driven by volume growth and increased contribution from automation offset somewhat by pricing get back due to raw material input cost relief after achieving our targeted margin profile.
North America also finished on a positive note driven by better volumes and increased contributions from automation net.
Net revenue for the quarter was up 8%, which brought the full year results in the region to growth of 2%.
William E. Drew: We are encouraged by what we see in the region and are looking forward to strategic account activity driving volume acceleration as the year progresses. Reported gross margins of 37.7% for the quarter improved more than 950 basis points versus the prior year. Land putting costs peaked, and volumes were lower, resulting in an increase in gross profit on a constant currency basis of $11.5 million, or 48% year-over-year. Gross margins in the Europe and APAC reporting units stayed flat with the third quarter at 39%, while North America was approximately 35.5%, although we do expect to have some upside going forward in North America as additional volumes flow through. As we enter 2024, paper pricing has stabilized, although we have seen some market participants publicly vocal about their desire to raise prices. SG&A, excluding RSU expense, was in line with the previous two quarters at $26.7 million on a constant currency basis. Controlling our spend and leveraging our G&A investments are a top priority.
We are encouraged by what we see in the region and are looking forward to strategic account activity driving volume acceleration as the year progresses.
Reported gross margins of 37, 7% for the quarter improved more than 950 basis points versus the prior year input cost peaked and volumes were lower.
<unk> and an increase in gross profit on a constant currency basis of $11 5 million or 48% year over year.
Gross margins in the Europe, and APAC reporting unit stayed flat with the third quarter at 39%, while North America was approximately 35, 5%. Although we do expect to have some upside going forward in North America as additional volumes flow through.
As we enter 2024 paper pricing has stabilized although we have seen some market participants publicly vocal about their desire to raise price.
SG&A, excluding our fuel expense was in line with the previous two quarters at $26 $7 million on a constant currency basis.
Controlling our spend and leveraging our G&A investments our top priority.
William E. Drew: We expect that as the volume environment improves, we will better absorb our overhead, as you have seen in the fourth quarter, as well as higher volume quarters in the past. Headcount was roughly flat year over year, and on the personnel front, we have over 140 people dedicated to automation currently, obviously resulting in a substantial drag on our profitability profile. As that business scales, we expect to have a much improved financial profile with our adjusted EBITDA margins on a consolidated basis getting back to the mid to high 20% area overall. As a result of the improved sales volumes and improved gross profit in the fourth quarter, adjusted EBITDA improved 89% in the quarter to $24.4 million on a constant currency basis, or a 26% adjusted EBITDA margin.
We expect that as volume environment improves we'll better absorb our overhead as you have seen in the fourth quarter as well as higher volume quarters in the past.
Head count was roughly flat year over year and on the personnel front, we have over 140 people dedicated to automation currently obviously, resulting in a substantial drag on our profitability profile.
Is that business scale, we expect to have a much improved financial profile with our adjusted EBITDA margins on a consolidated basis getting back to the mid to high 20% area overall.
As a result of the improved sales volumes and improved gross profit in the fourth quarter adjusted EBITDA improved 89% in the quarter to $24 4 million on a constant currency basis or 26% adjusted EBITDA margin.
This brings the full years results to up 14, 5% to $76 $5 million on a constant currency basis.
William E. Drew: This brings the full year's results up 14.5% to $76.5 million on a cost-to-concurrency basis, implying a 21.9% adjusted EBITDA margin for the year. Moving to the balance sheet and liquidity, we completed 2023 with a strong liquidity position, including a cash balance of $62 million and no drawings on a revolving credit facility, bringing our recorded net leverage to 4.6 times on an LPM basis or 5.0 times according to the definition of adjusted EBITDA in our credit agreement. A recent peak for leverage was 5.7 times in the June quarter, and our short-term target was to get below five turns by year-end.
Following a 21, 9% adjusted EBITDA margin for the year.
Moving to the balance sheet liquidity, we completed 2023 with a strong liquidity position, including a cash balance of $62 million and no drawings on our revolving credit facility.
Our reported net leverage to four six times on an LTM basis or five times. According to the definition of adjusted EBITDA in our credit agreement.
Our recent peaks for leverage was five seven times in the June quarter, and our short term target was to get below five turns by year end.
We are pleased to make progress, but our ultimate goal remains to return to a leverage ratio of three turns or less.
Omar Marwan Asali: We are pleased to make progress, but our ultimate goal remains to return to a leverage ratio of three turns or less. 2024 is a year where we expect to continue to grow our Justin-Ibida and generate cash to de-leverage. The major CapEx cycle of investing in digital and physical infrastructure is largely complete. The final remaining $1.5 million from Malaysia to be funded in 2024; with that, I'll turn it to Omar. Thanks,
2024 is a year, where we expect to continue to grow our adjusted EBITDA and generate cash to delever.
Major capex cycle of investing in digital and physical infrastructure is largely complete.
Final remaining $1 $5 million from Malaysia to be funded in 2024.
With that I'll turn it to Omar.
Thanks, Bill this year was a pivot year and I'm happy to report that we took critical steps required to position us well in 2024 and to scale ramp back.
Omar Marwan Asali: This year was a pivot year, and I'm happy to report that we took critical steps required to position us well in 2024 and to scale RANPAK. In 23, we successfully clawed back the majority of our gross margin profile after investing in our customer relationships during the significant input cost inflation of 22. We also made meaningful inroads with key strategic accounts in North America for PPS, which will show up beginning in the second quarter of this year. I believe automation has hit the commercial inflection point we have been working towards, as we have won key mandates for our autofill and cut it products that solidify Ranpak as a top-tier automation player. We have completed the expansion of our production capabilities to be able to earn over 100 million dollars annually in revenue.
In 'twenty three we successfully closed back in the majority of our gross margin profile.
After investing in our customer relationships during the significant input cost inflation of 22.
We also made meaningful inroads with key strategic accounts in North America, and PBS, which will show up beginning in the second quarter of this year.
I believe automation has the commercial inflection point, we have been working towards as we have one key mandates for our auto fill in credit products that solidify ramp back as a top tier automation player.
We have completed the expansion of our production capabilities to be able to serve over $100 million annually in revenue.
We believe these signature wins will serve as a baseline for automation growth over the next few years and also be a strong signal to the market of the quality and robustness of our solutions.
Omar Marwan Asali: We believe these signature wins will serve as a baseline for automation growth over the next few years and also be a strong signal to the market of the quality and robustness of our solutions. This is what we have been building towards in automation, and we are excited to be at a point where we believe the step change in the top line is here. Regarding guidance for the year, on a constant currency basis, we're anticipating revenues of $370 to $390 million, reflecting top-line growth in the area of 6% to 12% and adjusted EBITDA growth of 5-16%, implying a range of $80-89 million.
This is what we have been building towards an automation and are excited to be at a point, where we believe the step change in the top line this year.
Regarding guidance for the year on a constant currency basis, we are anticipating revenues of $370 million to $390 million, reflecting top line growth in the area of 6% to 12% and adjusted.
And EBIT growth of 5% to 16%, implying a range of $80 million to $89 million.
Our topline growth for the year reflects our expectations of a slow but continuing return to a more normal operating environment as e-commerce buying patterns normalize and industrial activity remains somewhat pressured.
Omar Marwan Asali: Our top-line growth for the year reflects our expectations of a slow but continuing return to a more normal operating environment as e-commerce buying patterns normalize and industrial activity remains somewhat pressured. We expect to achieve volume growth in PPS, building on the momentum that started in the second half of the year, and automation revenue to be up more than 50%. Our growth in adjusted EBITDA of 5% to 16% reflects the contributions from the expected top line increase and steady margin profile. We expect that capital expenditures will step down as we exit our major investment cycle and be in the area of $35 million, enabling us to focus on cash generation and deleveraging. Generally speaking, we believe this guidance reflects a level of conservatism and a continued somewhat challenging near-term backdrop.
We expect to achieve volume growth in PPS building on the momentum that started in the second half of the year and automation revenue to be up more than 50%.
Our growth in adjusted EBITDA of 5% to 16% reflects the contributions from the expected top line increase and steady margin profile.
We expect that capital expenditures will step down as we exit our major investment cycle and be in the area of $35 million, enabling us to focus on cash generation and deleveraging.
Generally speaking we believe this guidance reflects a level of conservatism and continued somewhat challenging near term backdrop.
Our bottom up fundamental view is giving us more optimism, hence we believe our guidance has some upside depending on the timing and speed with which key strategic accounts ramp up their plastic to paper shift.
Omar Marwan Asali: Our bottom-up fundamental view is giving us more optimism. Hence, we believe our guidance has some upside depending on the timing and speed with which key strategic accounts ramp up their plastic-to-paper shift. 24 is an inflection year for Ranpak in general and for automation in particular.
24, as an inflection year for ramp back in general and for automation in particular.
Omar Marwan Asali: I feel better about our company now than I have at any point in the past two years. We have solid momentum in the business with potential step change opportunities in PPS and automation about to kick in. We have seen some of the largest e-commerce players publicly announce this year they have begun a multi-year transition to eliminate plastic delivery packaging and replace it with paper.
I feel better about our company now than I have at any point in the past two years, we have solid momentum in the business with potential step change opportunities in bps and automation about to kick in.
We have seen some of the largest e-commerce players publicly announced this year they have begun a multiyear transition to eliminate plastics delivery packaging and replace it with paper.
Omar Marwan Asali: We are part of that switch. Industrial automation is a mega-theme in an environment where labor costs and other rising inputs pressure margins. Companies are willing to spend on projects that deliver an attractive ROI, and we believe our end-of-line solution portfolio is able to deliver what customers need, specifically in the form of reduced labor costs, reduced logistics costs, and lower waste. We have the solutions, people, and facilities to scale this business and look to nearly double our sales and automation in 24. The input cost environment remains pretty balanced.
Part of that switch industrial.
Automation is a mega theme in an environment, where labor costs and other rising input pressure margins.
Companies are willing to spend on projects that deliver an attractive ROI and we believe our end of life solution portfolio is able to deliver what customers need.
Specifically in the form of reduced labor costs.
We reduced logistics costs and lower waste.
We have the solutions people and facilities to scale this business.
And look to nearly double our sales in automation in 'twenty four.
The input cost environment remains pretty balanced North America added Kraft paper capacity in 'twenty, three and pricing has stabilized in recent months.
Omar Marwan Asali: North America added craft paper capacity in 2023, and pricing has stabilized in recent months. Additional volumes should help us drive efficiencies and better absorb our overhead in 2024, especially as strategic account activity really kicks in during the second half of the year. In Europe, the energy markets have been favorable, and we were able to emerge from winter without a large spike and excessive draw on reserves.
Additional volumes should help us drive efficiencies and better absorb our overhead in 'twenty four, especially our strategic account activity really kicks in in the second half of the year.
In Europe, the energy markets have been favorable and we were able to emerge from winter without a large spike in access of draw on reserves we.
Omar Marwan Asali: We believe that positions us well in 2024 to maintain our margin profile in Europe and Asia Pacific. Expanding our presence in Asia-Pacific is a key milestone for us this year, as we will go live with our Malaysian production facility this summer. APAC is currently served out of Europe, which adds significant costs and lead time to getting product to our end users.
We believe that positions us well in 2024 to maintain our margin profile in Europe and Asia Pacific.
Expanding our presence in Asia Pacific is a key milestone for us this year as we will go live with our Malaysia production facility. This summer.
APAC is currently served out of Europe, which adds significant cost and lead time to getting product to our end users.
Omar Marwan Asali: This facility will enable us to take meaningful freight time and cost out. We believe our go-to-market network and strategy in this region, coupled with our local manufacturing footprint, will result in our ability to sell at much more attractive prices to fuel growth without negatively impacting our margins. With the size of the economies there and the growing importance of sustainability in places like Australia and Japan, we believe Asia-Pacific should become a more meaningful contributor to our PPS business globally. Thank you all again.
This facility will enable us to take meaningful freight time and cost out.
We believe our go to market and network and strategy in this region, coupled with our local manufacturing footprint will result in our ability to sell at much more attractive prices to fuel growth without negatively impacting our margin.
With the size of the economies, there and growing importance of sustainability in places like Australia, and Japan, We believe Asia Pacific should become a more meaningful contributor to our PPS business globally.
Thank you all again at this point, we'd like to open up the line for questions.
Operator: At this point, we'd like to open up the line for questions. Operator. Thank you. The floor is now open to your questions. To ask a question this time, please press star, followed by the number one on your telephone. Pause for just a moment to compile the Q&A room. Your first question comes from the line of Ghansham Panjabi, operator. Hello, everybody. Omar.
Operator.
Thank you the floor is now open for your questions to ask a question at this time. Please press star followed by the number one on your telephone keypad.
For just a moment to compile the Q&A roster.
Your first question comes from the line of Ghansham Panjabi with Baird. Your line is open.
Thank you operator, Hello, everybody.
Omar just kind of specific to the fourth quarter. As you think back maybe you can give us a sense of which end markets were better than perhaps your initial forecast and then as it relates to the guidance for 2024 on an EBITDA basis, how should we sort of think about phasing and seasonality between the first half and second half.
Omar Marwan Asali: What do you think is the most important thing to keep in mind as we move into the next quarter? As you think back, you know, maybe you can give us a sense of which end markets were better than perhaps the initial forecast in the first half? Sure. Yeah, thanks, Ghansham. I would say in the fourth quarter, the holiday season, in particular for e-commerce, was a little bit healthier than we had anticipated going into the quarter. Maybe we were a little bit too cautious, given, you know, the prior year we didn't see that seasonality uptick. And then, in reality, what we saw, frankly, across different geographies in the U.S., in Europe, and in Asia Pacific, was a stronger holiday season.
Sure Yeah, Thanks, Ghansham I would say in the fourth quarter.
Holiday season in particular in the E Commerce.
Was a little bit healthier than we had anticipated going into the quarter, maybe we were a little bit too cautious given the prior year, we didn't see that seasonality uptick.
And then in reality of what we saw frankly across different geographies in the U S in Europe and in Asia Pacific.
It was a stronger holiday season, so I think that really helped.
Omar Marwan Asali: So I think that really helped. In terms of 2024 and seasonality, this is a year where we think the large accounts and strategic accounts that I've been discussing on a number of these calls are going to kick in in a meaningful way. I've mentioned in prior calls that we have a number of them in our trials and in our pipeline. Well, I'm happy to report, as of now, we have been successful in converting some of these trials and pipeline candidates into wins and closes.
In terms of in terms of 2024 and seasonality.
This is a year, where we think the large accounts and strategic accounts that I've been discussing on a number of these calls are going to kick in in a meaningful way.
I've mentioned in prior calls that we have a number of them in our trials and in our pipeline while I'm happy to report as of now we have been successful in converting some of these trials on pipeline into wins and closes we're installing some of that equipment in this quarter and from a seasonality standpoint.
Omar Marwan Asali: We're installing some of that equipment this quarter, and from a seasonality standpoint, I would expect that you're going to start seeing some growth in the second quarter of 2024. And again, given some of these wins and given what we saw this past quarter, I'm expecting a pretty strong second half of the year, you know, based on both these wins and the switch from plastic to paper, as well as the holiday and peak season later in the year. Okay, so would that, by definition, imply an acceleration on the machine placement side?
I would expect that youre going to start seeing some pick up in the second quarter of 2024.
And again, given some of these wins and given what we saw this past quarter I'm expecting a pretty strong second half of the year.
Based on both of these wins and the switch from plastic to paper as well as the holiday and peak season later in the year.
Okay, so with that by definition imply an acceleration in the machine placement side too then as we progress.
Omar Marwan Asali: I think it'll play some, to be honest. Through our systems and through optimization and refab and refurbishing, we have been moving more equipment within our system than ever. So it may not be reflected in a lot of new CapEx and new equipment. But I think you may see a number of these dispensers and converters being a little bit more optimized, as Bill highlighted in the call.
Will play some to be honest, we through our systems and through optimization and re fab and refurbish age we have been moving more equipment within our system than.
And then ever so it may not be reflected in a lot of new capex on new equipment. I think you may see a number of these dispensers and converters.
A little bit more optimized as bill highlighted in the call that's a pretty big initiatives.
William E. Drew: That's a pretty big initiative, given the large investments we've made the last couple of years in converters. So, the short answer is you'll see some incremental CapEx and new equipment, but you're also going to see some movement to optimize our network between existing converters and dispensers, be here, and maybe a follow-up for Bill in terms of... Some of the moving parts, Bill, on free cash flow and also the swap expiration in June of 2024, and Interest Expense on the second hour. Yeah, Ghansham, so you're asking about free cash flow expectations for 24? Yep.
Given the large investments we've done the last couple of years and converters. So the short answer is youll see some incremental capex and new equipment.
You are also going to see some movement to optimize our network between existing converters in dispensers.
Okay, that's fantastic to hear and maybe a follow up for bill in terms of.
Some of the moving parts Bill on free cash flow and also the swap exploration in June of 2024, and the impact on interest expense in the second half versus the first half.
Yes, ghansham, so you're asking about free cash flow expectations for 'twenty four yep Yep.
William E. Drew: Yeah, so I think Ghansham, the way that you know, we think about if you look at the guide, the mid range, you know, we call it around 85 million or so. For us, we've got a pretty sizable cash balance that we're getting some nice income on. So if you include the interest income that we collect, as well as obviously the cash interest expense, we're looking at around 29-30 million for 2024. Cash taxes, you know, we would assume to be kind of in the mid single digits in millions.
Yes, so I think ghansham the way that we think about it if you look at the guide the mid range call it around $85 million or so.
For us we've got pretty sizeable cash balance that were getting some nice income on so if you include the interest income that we collect.
As well as the obviously the cash interest expense, we're looking at around 29% $30 million for 2024.
Cash taxes, we would assume to be kind of in that mid single digits in millions.
And then from a working capital standpoint, a slight use right, but I think we'll be making some investments in working cap this year.
William E. Drew: And then from a working capital standpoint, you know, a slight use, right? Well, I think we'll be making some investments in working capital this year to invest in some of the strategic account activity that Omar highlighted. So kind of all together that gets you in the double-digit millions of free cash flow generation. Thank you so much. Okay, I'll turn it over. Thanks a lot.
To invest in some of the strategic account activity that Omar highlighted.
So kind of all in that gets you in the kind of double digit millions of free cash flow generation.
Okay. Okay perfect. Thanks, so much okay I'll turn it over thanks, a lot that's very helpful.
Operator: Thanks, guys. Our next question comes from the line of Adam Samuelson with Goldman Sachs. Your line? Yes, thank you, good afternoon everyone. Hi Adam.
Thanks Ghansham.
Our next question comes from the line of Adam Samuelson with Goldman Sachs. Your line is open.
Yes. Thank you good afternoon, everyone.
Hi.
Adam L. Samuelson: Hi, so I guess the first question is going back to the point about maybe repositioning more converters than you have in the past. I think this is the first time, and I can see in the model where the installed base, and especially the installed base in void fill, actually has. Can you talk a little bit more about the magnitude of those actions? Repositioning, is it largely void fill, or are you doing it in wrap?
I guess first question is going back to the point on maybe repositioning converters and then you had in the past singles for the first time in.
Really any point and I can see in the model, where the installed base and especially the installed base and void fill.
I had actually decreased sequentially.
So can you talk maybe a little bit more about the magnitude of those actions how much your.
Repositioning is it largely void fill or youre doing it and wrapping in cushioning.
William E. Drew: as well, and what is the expectation for installed base growth. 2024 in aggregate. I think he said 35.
As well in <unk>.
What is the expectation for our installed base and installed base growth in 2024 and in aggregate with I think you said $35 million of total Capex Bill.
William E. Drew: ...
William E. Drew: Yeah. Just trying to tie the... Sure, I mean, I would say the converter refabrication and refurbishment is a major initiative for us, right? We want to make sure that we're maximizing free cash flow, especially in this environment, and I think with the number of converters that we have deployed right over the last few years, there's the ability for us to reposition a number of those. So we're working actively with the sales team and also using the analytics that we put in place in the past couple of years to really look at accounts, make sure that, you know, the way that deals were underwritten, if the performance isn't matching what was originally expected, that we have those conversations and redeploy those converters elsewhere. And I think the team's been doing a good job with that. And I think, you know, other things that you're probably seeing just in the placement account, numbers that are, you know, related to some of the macro activity, particularly in Europe on the cushioning side, right? You're just seeing some of those accounts that have been under pressure, right?
Yes.
Just trying to tie all those pieces together.
Sure I mean, I would say the converter re fabrication and refurbishment is a major initiative for US right. We want to make sure that we're maximizing free cash flow, especially in this environment.
With the number of competitors that we deployed right over recent years theres the ability for us to reposition a number of those so we're working actively with the sales team and also using the analytics that we put in place in the past couple of years to really look at accounts make sure that.
The way the deals were underwritten in the performance isn't matching what was originally expected that we have those conversations and redeploying those converters elsewhere. Then I think the team has been doing a good job with that and I think other things that you are probably seeing just in the placement account.
Numbers as is related to some of the macro activity, particularly in Europe.
On the cushioning side Youre seeing some of those accounts right that had been under pressure right. So we're going in getting machines.
William E. Drew: So we're going back and getting machines back from some of those more industrial areas that have just been, you know, hit harder in the last couple of years. So I think, you know, it's an initiative that's across the board, right across all categories to maximize our free cash flow. And we'll continue to do that and use the analytics to really make sure that we're maximizing the return on the capital that we've deployed. As far as 24 goes, you know, if you're looking for kind of a modeling estimate, I think, you know, for us, we're estimating kind of that mid single-digit growth in the install base, if that's helpful. No, that is not true.
Machines back from some of those more industrial areas that have just been.
Hit harder by the last couple of years. So I think it's an initiative that's across the board right across all categories.
<unk> is our free cash flow.
And we will continue to do that and use the analytics to really make sure that we're maximizing the return on the capital that we've deployed as far as 20 forgoes, if youre looking for kind of a modeling estimate I think for US we're estimating kind of that mid single digit growth in the installed base.
Thats helpful.
No that is.
Adam L. Samuelson: Thank you. And maybe just to follow up as we think about pricing and the kind of the conference, and Outlook, especially where we might have seen, might see crap, entire North America, Europe, there, and many more. For more information, visit www.fema.gov.
And then maybe just a follow up as we think about pricing and kind of the confidence on the gross margin outlook, especially where.
You might have seen you might see Kraft paper and higher in North America, I think Europe has been weaker than certainly the inflationary environment. There with energy is has backed off.
Just help us think about.
Your visibility on on your Kraft paper purchases and your ability to.
Omar Marwan Asali: ... Just help us think about it. Visibility on your craft, set up, distribution, pre-COVID, are all up in place to operate it on.
Consistently price that up.
Through the through distribution, where.
Pre COVID-19 pre Europe inflation.
Omar Marwan Asali: Yeah, I think I think that's right, Adam. What we are seeing in this environment, and frankly, it's applying to different geographies, obviously, that are larger, being Europe and the U.S., is that we are pretty much coming up with agreements that, on average, I would say, are around six months in duration. So think that the price resets, you know, twice a year rather than the annual agreements that we used to have a couple of years ago. And that reset might be related to sort of some index pricing. So in general, we feel pretty good about getting some visibility, even though it's not for the full year. It's not super volatile with a lot of frequent resets, if you will.
It operated on kind of annual.
Paper purchases.
I can't imagine youre getting fixed price paper.
Paper purchases from your suppliers anymore.
Yes, I think Thats right Adam.
What we are seeing in this environment and frankly, it's applying to different geographies, obviously, our largest being Europe and the U S.
Bringing march we are coming up with agreements that on average I would say are around six months in duration, so think about the price resets.
Twice a year rather than the annual agreements that we used to have a couple of years ago.
And that reset might be related to sort of some index pricing.
So in general we feel pretty good about getting some visibility even though it's not for the full year.
It's not super volatile with a lot of frequent reset if you will know the tone out there in the market is look obviously the space now is facing a lot of consolidation and discussion around consolidation was the large corrugated and paper players.
Omar Marwan Asali: Now, the tone out there in the market is, look, obviously, the space is now facing a lot of consolidation and discussion around consolidation with the large corrugated and paper players. We're in close touch with all of our suppliers. They continue to push that if we can do more volume, they're willing to work with us on price. And frankly, we think with some of these strategic account activities that we're winning, and hopefully we'll move the needle in 2024. We have been negotiating pricing, etc., to fulfill the rest of the year. So I feel near term, in both geographies in Europe and in the US, we're seeing some stability in pricing that I think, hopefully, will last throughout the year. But my guess is, in the second half of the year, there'll be a set of negotiations that we will have given the resets.
We're in close touch with all of our suppliers.
They continue to.
Push that if we can do more volume.
They are willing to work with us on price and frankly, we think with some of these strategic account activity that we're that we're winning and hopefully will move the needle in 2024, we have been negotiating pricing et cetera to fulfill the rest of the year, So I feel near term.
Both geographies in Europe and in the U S. We're seeing some stability in pricing that I think hopefully will last.
Throughout the year, but my guess is in the second half of the year there'll be a set of negotiations that we will have given the resets and that depending on where the index pricing as we will see how the second half of the year plays out and then to your point on energy.
Omar Marwan Asali: And, you know, depending on where the index pricing is, we'll see how the second half of the year plays out. And then, to your point on energy, I mean, that seems to be a lot more subdued in terms of volatility in Europe compared to where we were. And from everything we're hearing, there's more supply coming to Europe from other sources, so hopefully that energy stability will last for a while. All of that you have in backlog today, or how would you frame the conference level in? You have lead generation. I would say the confidence is relatively high about that number. That's why we're comfortable sharing it.
That seems to be a lot more subdued in terms of volatility in Europe compared to where we were and from everything. We're hearing there is more supply coming to Europe from other sources that hopefully that energy stability will last for a while.
Okay. That's helpful and if I can just squeeze one more in on the on the automation equipment side.
Talking about 50% plus growth, which would be over $10 million I mean, how much of that do you have in backlog today or that.
How do you how would you frame the confidence level in that 50% growth just in terms of fixed fixed orders versus.
Kind of you have the lead generation, but you have to convert those into orders.
The timing of backlog conversion to orders.
Omar Marwan Asali: The way our business works, and obviously, you know, there is peak season and sort of early in the year, it's a bit different. But think about once we get these orders and these bookings, you know, we're fulfilling those sometime in the next six to nine months. So I would say our visibility for the next couple of quarters is pretty decent. Later in the year, we still need to increase our bookings now to help pay those numbers that are later in the year, given the six to nine month average period, if you will. But I mean, last quarter, and I think I mentioned we had record bookings. We continue to sort of have very, very elevated levels of bookings, which is increasing our confidence in hitting that number this year. That's very helpful. Thanks, Adam. The next question comes from the line of Craig Palm with Craig Halium Capital Group. Thanks, this is Danny Egerich on for Gregg today.
I would say the confidence is relatively high about that number thats why we are comfortable sharing the way our business works and obviously in all.
There is peak season and sort of early in the year, it's a bit different but I think about once we get these orders and these bookings.
Even our fulfilling those sometime in the next six to nine and so in months.
So I would say our visibility for the next couple of quarters is pretty decent later in the year, we still need to increase our bookings now to help those numbers that are later in the year given the six to nine months average period, if you will.
But I mean last quarter and I think I mentioned, we had record bookings.
I mean, we continue to sort of have very very elevated levels of bookings, which is increasing our confidence in hitting that number this year.
That's that's very helpful. I'll pass it on thank you.
Thanks, Adam.
Next question comes from the line of Greg Palm with Craig Hallum Capital Group. Your line is open.
Thanks This is.
Danny <unk> on for Greg today.
Danny Egerich: Congratulations on a good quarter. Good to see volumes kind of come back a little bit from maybe what you've seen in Q4 and quarter-to-date on the volumes, just overall visibility, and sounds like you're pretty confident in the guide, as well as those larger strategic accounts rampant in the second half. I guess, does the macro have to improve much from here for you to feel pretty good about them, or, regardless, you feel comfortable there and then kind of any continuation and macro recovery provides. Yeah, let me start. It's Omar.
Congrats on the good quarter good to see the volumes kind of come back a little bit I guess from maybe what you've seen in Q4 and quarter to date on the volumes.
Just overall visibility and it sounds like Youre pretty confident in the guide as well as those larger strategic accounts ramping in the second half I guess does does the macro have to improve much from here for you to feel pretty good about those are Ah regardless, you feel comfortable there and then kind of any continuation in macro coverage provides even.
Some potential upside from there.
Yes, let me let me start it's Omar and then I'll have maybe bill chime in I would say.
Omar Marwan Asali: And then I'll have maybe Bill chime in. I would say the micro and the fundamental picture that we see in our business we really like. So whether that volume trends, whether that's what we're seeing in gross margin and stability in our largest input cost, which is paper, whether that's sort of the trial activity, the switch from plastic to paper, and our pipeline activity. All these are trending really well.
The micro and the fundamental picture that we see in our business, we really alike, so whether that.
Our volume trends.
Whether that's what we're seeing in gross margin and stability in our largest input cost which is paper.
Or that sort of that trial activity the switch.
From plastic to paper.
And our pipeline activity all these are trending really well.
Omar Marwan Asali: I wouldn't say that we're banking on the macro environment to improve. I would say we're saying that things might stay the same from a macro environment. And probably given the macro environment, we've decided to give a guide that we feel confident in but that reflects a little bit of conservatism. Not because of what we're seeing inside our business, but more because of what's happening, you know, all around us with the macro backdrop. So whether it's geopolitics, whether it's about where inflation is headed or interest rates, where, you know, we don't have any unique insight or views, I think that's the stuff that's causing us to be a little bit cautious.
I wouldn't say that we're banking on the macro environment to improve.
I would say we are saying that things may be stay the same from a macro environment and probably given the macro environment, we have decided.
<unk>.
Give a guide we feel confident and bar reflects a little bit of conservatism not because of what we're seeing inside our business, but more because of what's happening.
All around us with the macro backdrop, so whether it's geopolitics, whether it's about where inflation is headed or interest rates, where you know.
We don't have any unique insight or views I think thats, the stuff thats, causing us to be a little bit cautious. So I would say, we're assuming a macro environment.
Omar Marwan Asali: So I would say we're assuming a macro environment that will go throughout the year that's similar to where we are today. And if that's the case, given the fundamentals that we're seeing in our business, we have very high confidence in our guidance. Bill, I don't know if you have something to add. Yeah, I can give a little bit more detail as to how we're thinking about maybe the top line growth, if that's helpful. So, just, you know, from a volume standpoint, at the low end of the guide, we're assuming kind of a low to mid single-digit volume growth with, you know, the high end being kind of mid to high single-digit. And for automation, we're assuming roughly two and a half to three and a half points.
That will go throughout the year, that's similar to where we are today and if thats. The case given the fundamentals that we're seeing in our business, we have very high confidence in our guide.
Bill I don't know if you have something to add yes, I mean, I can give a little bit more detail as to how we're thinking about maybe the top line growth if that's helpful.
So just from a volume standpoint at the low end of the guidance, we're assuming kind of a low to mid single digit volume growth with the high end being kind of mid to high single digit.
Automation, we're assuming roughly two five to three five points.
William E. Drew: And then a little bit of the pricing headwind is what we built in as we lapped some of the pricing adjustments we made in the second half of last year. So, you know, from a volume perspective, you know, with the strategic account activity that Omar has mentioned, we're not baking in, you know, a meaningful improvement in operating activity. So I think for us, you know, we feel like it will continue to get better throughout the year, right, as the operating environment, you know, continues to slightly improve, which is kind of what we're seeing. And then this account activity kicks in. Yeah, got it. That all makes sense.
And then a little bit of the pricing headwind is what we built in as we lap some of the pricing adjustments we made in.
In the second half of last year, so from a volume perspective with the strategic account activity that Omar mentioned.
We're not baking in.
A meaningful improvement in operating activity. So I think for US we feel like it'll continue to get better throughout the year as the operating environment continues to slightly improve which is kind of what we're seeing.
And then this account activity kicks in.
Yeah got it that all makes that all makes sense.
Omar Marwan Asali: Maybe just touching quickly on kind of sustainability trends. It kind of feels like we're seeing more and more companies coming out with new initiatives or state regulations. I guess from you guys, do you feel like you're seeing that kind of accelerate? And is there potential for, you know, overall sustainability to be a bigger driver this year, maybe relative to last? You know, I think, and I highlighted this on the call, I think extended producer responsibility laws and regulations that have been passed in a number of states, probably most importantly, California, are really playing an important role in having a number of these companies go maybe beyond the conversation around sustainability and start taking action. I really attribute that as a key driver to increasing some of our trial activity.
Maybe just touching quickly on kind of sustainability trends it kind of feels like we're seeing more and more companies coming out with new initiatives or are state regulations. I guess for me guys seat you feel like Youre seeing that kind of accelerate and is there a potential for <unk>.
Overall sustainability to be a bigger driver this year, maybe relative to last.
I think I think I highlighted on the call I think.
Extended producer responsibility laws and regulations that have been passed in a number of states probably most importantly, California are really playing an important role in having a number of these companies go maybe beyond the conversation around sustainability and start taking action I really attribute that.
As a key driver to increasing some of our trial activity and then obviously you once our equipment as there is up to us to prove ourselves on our solutions and hopefully convert these trials into closes. So I think what you were seeing in the U S. In particular with the larger accounts.
Omar Marwan Asali: And then obviously, once our equipment is there, it's up to us to prove ourselves and our solutions and hopefully convert these trials into closes. So I think what you were seeing in the US, in particular with the larger accounts, I believe a big driver behind the switch is driven by, you know, new regulations, discussions around these new regulations, and maybe a bit more of a focus on sustainability. Now, those rules have been enacted in Europe for a while.
I believe a big driver behind the switch is driven by.
New regulations discussions around these new regulations, and maybe a bit more of a focus around sustainability.
Now those rules have been enacted in Europe for for a while and we've seen the benefit of those over the last year.
Omar Marwan Asali: And we've seen the benefit of those over the last year or so. The new thing that we're seeing is really this spike in discussion and inactivity in the US, which I think hopefully will give us a tailwind for the next number of years because many of these EPR rules are, you know, going to start being implemented over the next number of years, which I think is good for us. Yeah, absolutely. All right, I'll leave it there. Thanks.
A number of years.
The new thing that we're seeing is really this spike in discussion and in activity in the U S, which I think hopefully will give us a tailwind for the next number of years because many of these EPR rules are going to start being implemented over the next number of years, which I think is good for us.
Yeah, absolutely alright, I'll leave it there thanks.
Thank you.
Operator: Thank you. There are no further questions at this time. Mr. Bill Drew, I turn the call back over to you. Thank you, Desiree, and thank you all for joining the call today. I look forward to talking about Q1 with you on our next earnings call. This concludes today's conference call.
There are no further questions at this time.
<unk> I'll turn the call back over to you.
Thank you Deb and thank you all for joining the call today I look forward to talking about Q1 with the next.
Our next earnings call.
This concludes today's conference call you may now disconnect.
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