Q2 2024 Ranpak Holdings Corp Earnings Call

Operator: Ladies and gentlemen, this is your operator speaking. Today's conference call will resume momentarily. You will be placed on music hold until then. Thank you so much for your patience.

Speaker Change: Ladies and gentlemen, this is your operator speaking. Today's conference call will resume momentarily. You will be placed on music hold until then. Thank you so much for your patience.

Speaker Change: [inaudible] A film by A film by Sara Horvath A film by Sara Horvath A film by Sara Horvath

John: Thank you for standing by. My name is John and I will be your conference operator for today. At this time, I would like to welcome everyone to the Ranpak Holdings Second Quarter 2024 Earnings Call.

Speaker Change: All lights have been placed on mute to prevent any background noise.

Speaker Change: After the speaker's remarks, there will be a question and answer session.

Speaker Change: If you would like to ask a question during this time, simply press star followed by the number 1 on your telephone keypad.

Speaker Change: If you would like to withdraw your question, press star 1 again. As a reminder, this conference call is being recorded. Thank you. I would now like to turn the call over to Sara Horvath, General Counsel. Please go ahead.

Sara A. Horvath: Thank you and good morning, everyone. Before we begin, I'd like to remind you that we will discuss forward-looking statements as defined under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those forward-looking statements as a result of various factors, including those discussed in our press release and the risk factors identified in our Form 10-K and our other filings with the SEC. You should not place undue reliance on these forward-looking statements, all of which speak only to the company only as of today.

Sara A. Horvath: 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. Lastly, we'll be filing your 10-Q with the SEC for the period ending June 30, 2024. The 10-Q will be available through the SEC or on the Investor Relations section of our website.

Sara Horvath: Thank you and good morning everyone. Before we begin, I'd like to remind you that we will discuss forward-looking statements as defined under the Private Securities Litigation Reform Act of 1995.

Speaker Change: 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 at the SEC.

Speaker Change: 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.

RAMPAC: Ranpak assumes no obligation and does not intend to update any such forward-looking statements.

RAMPAC: You should not place undue reliance on these forward-looking statements, all of which speak to the company only as of today.

RAMPAC: The earnings release we issued this morning and the presentation for today's call are posted on the Investor Relations section of our website.

RAMPAC: 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.

RAMPAC: For financial information that is presented on a non-GAAP basis, we have included reconciliations to the comparable GAAP information. Please refer to the table and slide presentation accompanying today's earnings release.

RAMPAC: Lastly, we'll be filing your 10-Q with the FEC for the period ending June 30, 2024. The 10-Q will be available through the FEC or on the Investor Relations section of our website.

Speaker Change: With me today I have Omar Asali, our Chairman and CEO, and Bill Drew, our CFO. Omar will summarize our second quarter results and provide commentary on the operating landscape, and Bill will provide additional detail on the financial results before we open up the call for questions.

Omar Marwan Asali: Thank you, Sara, and good morning, everyone. I appreciate you all joining us today. Our second quarter financial results built on the momentum of the past three quarters and delivered mid-single-digit top-line growth with improved profitability driven by our fourth quarter in a row of higher volume. We have been focused on self-help in terms of winning new large accounts and becoming more efficient.

Speaker Change: Growth this quarter was largely driven by North America strategic account activity as the plastic to paper shift takes hold as well as strength in Asia Pacific.

Speaker Change: The plastic to paper shift transition that began in April drove a substantial portion of the volume growth in North America, as our strategic account activity ramped up throughout the quarter.

Speaker Change: We are pleased to see some of the public announcements regarding the plastic-to-paper shift that have been made by key players in the e-commerce space, and expect this to be the beginning of a sizable movement towards paper-based solutions.

Speaker Change: We applaud the efforts taking place to reduce the amount of plastic in supply chains and the positive impact it will have on the environment and key stakeholders.

Speaker Change: Europe and Asia-Pacific activity levels in the second quarter were less robust than North America with volumes increasing a little over 3%.

Speaker Change: Slower activity levels in the region were mainly driven by the manufacturing and industrial sectors.

Omar Marwan Asali: Geographically speaking, we have seen strength in Brazil, France, and the Netherlands, while Poland and Germany remain weaker. Overall, we expect some input cost pressure in the second half of the year, which we will look to offset in order to maintain our 37 to 38% target margin profile for the year. But we do expect some volatility as we approach the fall and winter seasons, and geopolitical headlines may move the market. With that, I will turn the call over to Bill for some financial details.

Speaker Change: The input cost environment was in line with the first quarter and provided a slight benefit to us year over year, although the mix of lower cushioning and higher void fill resulted in slightly lower gross margins.

Speaker Change: We're expecting to see some input cost increases begin to flow through the second half of the year as some producers in North America react to tighter supply and demand dynamics and increases in the RISD index.

Speaker Change: Overall, we expect some input cost pressure in the second half of the year, which we will look to offset in order to maintain our 37-38% target margin profile for the year.

Speaker Change: Energy pricing in Europe remains favorable, as storage levels in the region are above the five-year average. But we do expect some volatility as we approach fall and winter season, and geopolitical headlines may move the markets.

Speaker Change: At this point in the cycle, the inventory levels in the channel are tight, with distributors and end-users trying to minimize the amount of inventory carried due to increased carrying costs.

Speaker Change: If prices begin to rise, you could see some of this tightness reverse as customers will look to protect themselves from increases.

Speaker Change: With that, let me turn the call over to Bill for some financial detail.

Bill: Thank you, Omar. In the deck, you'll see a summary of some of our key performance indicators. We'll also be filing our 10-Q, which provides further information on Ranpak's operating results.

William E. Drew: We'll also be filing our 10-Q, which provides further information on Ranpak's operating results. Overall, net revenue for the company in the second quarter was up 5.9% year-over-year on a constant currency basis, driven by an 8.8% increase in volumes, offset somewhat by lower prices. North American net revenue increased 17.1% year-over-year with voids still driving out performance, offset slightly by decreases in cushioning and wrapping. Volumes were up approximately 20% versus prior year driven by strength in e-commerce related to strategic account activity ramp-up. The industrial sector in Europe remains challenged, impacting our cushioning business, which experienced the greatest headwinds.

Speaker Change: Growth in the machine field population continues to be lower this year due to a combination of lower activity levels related to industrial and manufacturing sectors, as well as our efforts to optimize our fleet.

Speaker Change: In Europe and APAC, net revenue on a constant currency basis was down 1% year-over-year driven by pricing headwinds in the PPS business that outweighed volume growth of 3.2% and increases in automation.

Speaker Change: The second quarter saw a bit of a step back in Europe compared to what we had seen in the previous few quarters when the general economic improvement was stronger.

Speaker Change: This is roughly in line with expectations, as we expected gross margin to be in line with Q4 throughout the year, but was pressured somewhat from less cushion in contribution versus the prior year.

Speaker Change: Maintaining our gross margin profile is a critical area of focus for us so we are committed to taking action to preserve it in the second half of the year.

William E. Drew: Majestic EBITDA increased 7.4% year-over-year to $20.4 million, implying a 22.8% margin driven by higher volumes and gross profit flow-through. We are extremely focused on continuing to improve the financial profile of the business and generating cash. We now have a fully invested platform that is world-class and will provide us with the insights and functionality to scale the business. We continue to make steady progress on our goal of deleveraging and reach 4.2 times at the end of the quarter, down from 4.6 times at 2023 year end and 5.7 times as of Q2 2023.

Speaker Change: Adjusted EBITDA increased 7.4% year-over-year to $20.4 million, implying a 22.8% margin driven by higher volumes and gross profit flow-through.

Speaker Change: We invested in working capital in the quarter to position ourselves well for the ramp and strategic account activity. We will work this down in the second half of the year to ensure we are managing our working capital efficiently and driving cash generation.

Speaker Change: We've taken actions to reduce our spend, which we expect will be felt in the third quarter, in order to continue to improve our financial profile and maximize profitability to drive cash generation.

Speaker Change: Capital expenditures for the quarter were $9.9 million driven by converter placement and investments related to our Malaysia production facility.

Speaker Change: For the remainder of the year, we expect capital expenditures to step down as many of our converter purchases were more heavily weighted in the front half of the year, as was our spend on the APAC production plant, which goes live in August .

Speaker Change: The Malaysia Go Live marks the end of our multi-year investment cycle related to the transformation of our digital and physical infrastructure.

Speaker Change: We now have a fully invested platform that is world-class and will provide us with the insights and functionality to scale the business.

Speaker Change: Moving briefly to the balance sheet and liquidity.

Speaker Change: We completed Q2 with a strong liquidity position, including a $65 million cash balance and no drawings on our revolving credit facility.

Speaker Change: As discussed in the Q1 call, we received €20 million in proceeds from a patent litigation settlement and sale of patents in the second quarter. We also made an additional investment in Pickle Robot in the quarter as their unloading robots gained traction in the marketplace.

Speaker Change: We continue to make steady progress on our goal of deleveraging and reach 4.2 times at the end of the quarter, down from 4.6 times at 2023 year-end and 5.7 times as of Q2 2023.

William E. Drew: We expect to build cash in the back half of the year, and particularly in the fourth quarter, as we enter into the traditionally stronger holiday season and volumes pick up, resulting in cash generation for the year. With that, I'll turn it back to Omar before we move on to questions.

Speaker Change: With that, I'll turn it back to Omar before we move on to questions.

Omar: Thank you, Bill. In closing, I'm pleased with the continued steady improvement in the business and delivering on our fourth consecutive quarter of volume growth.

Omar: I'm also pleased with the continued progress on our key commercial initiatives of driving strategic account activity and becoming the go-to player in end-of-line automation.

Omar: We continue to feel good about the overall trajectory of the business and outlook.

Omar Marwan Asali: We believe our team has done a good job positioning us well with key accounts in North America. We have box customization, automated dunnage insertion, visual quality inspection, void detection and analytics, pre-cubing analysis, robotic pad insertion, and more.

Omar: We believe our team has done a good job positioning us well with key accounts in North America.

Omar: The effects of this began to materialize in Q2, with North American volumes up 20%, and we expect to see additional strategic account benefits get layered in going into the fourth quarter, providing us with solid momentum in TPS for the remainder of the year and into 2025.

Speaker Change: We have box customization, automated dunnage insertion, visual quality inspection, void detection and analytics, pre-cubing analysis, robotic pad insertion, and more.

Speaker Change: We are finding more and more that we are separating ourselves from our competition by being able to provide value-added solutions that provide real insights into our customers' business.

Omar Marwan Asali: Our approach is about forging deeper and stickier relationships with our customers, based on some of these value-added solutions that I just mentioned. In Europe, although the macro is choppy, volumes continue to be up, and we expect to begin lapping our pricing headwinds in August, which will help the comparison for the remainder of the year. As Bill mentioned, our Malaysia plant will go live in August and will begin serving limited SKUs this year and fully ramp up capabilities in 2025 to serve the Asia-Pacific region.

Speaker Change: Our approach is about forging deeper and stickier relationships with our customers based on some of these value-added solutions that I just mentioned.

Speaker Change: In Europe , although the macro is choppy, volumes continue to be up, and we expect to begin lapping our pricing headwinds in August , which will help the comparison for the remainder of the year.

Speaker Change: Asia-Pacific is off to a strong start to the year, driven by Japan and Southeast Asia.

Speaker Change: As Bill mentioned, our Malaysia plant will go live in August and will begin serving limited SKUs this year and fully ramp up capabilities in 2025 to serve the Asia-Pacific region.

Omar Marwan Asali: We believe local production capabilities will provide us with additional sourcing options, as well as lower logistics and production costs that we can share with the market in order to drive growth. Our goal is to scale that region in PPS, and I'm optimistic that within a few years, we can potentially double the size of that region. We have identified areas of cost savings and have implemented measures to reduce run rate GNA by more than $5 million by the end of the year.

Bill: Our goal is to scale that region in PPS, and I'm optimistic that within a few years, we can potentially double the size of that business.

Bill: We believe we are well positioned for continued volume growth, even with a challenging operating environment.

Speaker Change: On the profitability side, the lower contribution from cushioning in the near term is putting some pressure on the margin profile, so we're taking steps to right-size our G&A to enhance the margin profile, even in the face of some macro headwinds.

Bill: We have identified areas of cost savings and have implemented measures to reduce run rate GNA by more than $5 million by end of the year.

Speaker Change: First, are the actions and announcements by large players in the U.S. to switch from plastic to paper.

Bill: We all recall the largest e-commerce player making such an announcement recently, and we believe many others in the industry will follow. We estimate near-term strategic account activity in North America could result in an additional $5-10 million annually in EBITDA for us.

Omar Marwan Asali: We estimate that near-term strategic account activity in North America could result in an additional five to ten million dollars in EBITDA. Second, we believe that volumes related to discretionary goods purchases and industrial activity will normalize after being in a slump for the past couple of years. A 50% recovery to pandemic peak levels, assuming current pricing and costs sold, could result in roughly another $10 to $20 million of additional EBIT. The bottom line is that our platform is fully invested in and is beginning to pay us back on our investments in terms of efficiencies, scale, and insights into the business. Regarding cash generation, 2024 concludes our investment cycle, and our CapEx spend will take a meaningful step down going forward.

Bill: Second, we believe that volumes related to discretionary goods purchases and industrial activity will normalize after being in a slump for the past couple of years.

Bill: A 50% recovery to pandemic peak levels, assuming current pricing and costs hold, could result in roughly another $10 to $20 million of additional EBITDA.

Bill: Third, we believe our automation business is inflecting, potentially turning it from an 8 million negative EBITDA profile to a positive contributor as it scales to become a high teens to 20% EBITDA margin business over time.

Bill: Bottom line is our platform is fully invested in and beginning to pay us back on our investments in terms of efficiencies, scale, and insights into the business.

Bill: Regarding cash generation, 2024 concludes our investment cycle and our CapEx spend will take a meaningful step down going forward.

Bill: Expected adjusted EBITDA growth, lower CapEx, and managing our working capital will enable us to get back to generating cash in 2024.

Speaker Change: Now, let's open it up for some questions. Operator?

Operator: Thank you. We will now begin our question and answer session. If you have dialed in and would like to ask a question, please press star followed by the number one on your telephone keypad. If you would like to withdraw your question, simply press star one again. As a reminder for everyone, please limit yourself to one question and one follow-up. We'll pause for a moment to compile the Q&A roster. Thank you. The first question comes from the line of Ghansham Panjabi from Baird; please go ahead.

Speaker Change: Thank you. We will now begin our question and answer session. If you have dialed in and would like to ask a question, please press star followed by the number one on your telephone keypad. If you would like to withdraw your question, simply press star one again. As a reminder for everyone, please limit yourself to one question and one follow-up. We'll pause for a moment to compile the Q&A roster. Thank you.

Bill: The first question comes from the line of Ghansham Panjabi from Bayard. Please go ahead.

Bill: Hi everyone, good morning. This is actually Josh Vesely on for Ghansham. Thank you for taking the question.

Speaker Change: Morning, Josh.

Omar: Morning, Omar.

Speaker Change: a year ago, sort of with some price reductions.

Speaker Change: in the marketplace in Europe .

Speaker Change: And, you know, we think the comp, the comparison, if you will, in the second half of the year

Speaker Change: will start getting easier from a pricing standpoint.

Omar: Our base business did grow, but obviously the majority of that 20% in volume has been with some of the new accounts.

Omar: that in the second half of the year.

Omar: We still have a number of wins, by the way, that are signed, the trials are over, they're closed accounts, so we're going to be in installing and servicing mode of these customers, so I'm expecting meaningful growth with new wins in the second half of the year, and we typically see a pickup just given the seasonality of our business.

Omar: And in the base case, so overall, if you put that, you know, in numbers, I think here today, globally, we've grown around 7%.

Speaker Change: We are still continuing to see the base business grow, and we're layering in these additional strategic accounts on top of it, and that's kind of been the mindset going into this year, right, is continue to grow the base business and layer in the strategic accounts on top of it.

Speaker Change: So cushioning tends to be, you know, a slightly higher margin business for us. By the way, as a company, the levels of margins we have in the different products are pretty close.

Speaker Change: We're not seeing attrition or account losses, we're not seeing customers go to competitors, but we are seeing with manufacturers and industrial players.

Speaker Change: a bit of a slowdown. Frankly, it's a little bit more pronounced in Europe than in other geographies.

Speaker Change: We continue to service these customers. We continue to be very bullish about about their outlook. You know, the rate environment and some of the macro aspects in the environment may impact how these companies

Omar: And we're pretty focused on, sort of, as these companies recover, that we maintain our market share with them.

Speaker Change: Awesome. Thank you both. I'll hand it off.

Ghansham Panjabi: Yes, thank you. Good morning, everyone. Morning. So Omar, Bill, maybe just as a kind of baseline, given the performance in the quarter and some of the tailwinds from the business winds and some of the headwinds in the cushioning business and softness in Europe, I just want to be clear, how is your view on revenue growth and EBITDA for the year changed relative to where you were three and six months ago?

Speaker Change: Yes, thank you. Good morning, everyone.

Speaker Change: It has not. If anything, our confidence has increased.

Speaker Change: Now, in Q2, it was a ramp-up period with some of them.

Speaker Change: Okay, I know that's helpful. And then, Omar, near the end of your prepared remarks, you gave kind of some potential EBITDA contributions between some of the large accounts.

Omar: Of those kind of measures, how much do you actually think you'll be realizing in calendar 24? And in particular, what is the current expectation for the automation kind of other equipment?

Speaker Change: Bill can can give a bit more more precision so on the cost savings exercise

Speaker Change: which was driven by a number of factors. One is we're looking at where the opportunities are and in areas where we had too much spend and are not expecting growth or had too much DNA we decided to basically reduce some costs there.

Bill: And that 5 million number I talked about, that is something we executed on in this quarter. You will see some impact of it this quarter. You will see a bigger impact in Q4. And then the annual run rate going forward would be the 5 million. So I think you'll see a nice...

Bill: a nice contribution from this quarter and then more in Q4. In terms of the strategic accounts...

Omar: Look, a lot of these are done. It's about us just installing, starting to sell product. These are no longer trials, etc. So our conviction...

Speaker Change: in our business, it's very important that we are fully ramped up and ready by the beginning of Q4 because that's peak season and that's what customers expect.

Speaker Change: So at a minimum, expect, you know, that quarter, you know, to fully contribute. But let me have maybe Bill give a bit more specifics.

Bill: Yeah, Adam, just on the strategic account wins, right, that $5 to $10 million, you know, for this year, as Omar mentioned, some of it is staged, right, so some of it is Q2, so we'll get a big chunk of that this year, and then others will be late Q3 into Q4 as those ramp up.

Speaker Change: Alright, that's all very helpful. I'll pass it on. Thank you.

Gregory William Palm: The next question comes from the line of Greg Palm from Craig Howlum Capital Group. Please go ahead.

Speaker Change: Thank you.

Speaker Change: The next question comes from the line of Craig Palm from Craig Hallum Capital Group. Please go ahead.

Speaker Change: Yeah, thanks, this is Danny Eggerich on for Greg today. I was hoping to maybe hit on strategic counts too. Obviously seems like activity has been really good, I guess.

Speaker Change: If you look back three months, is it safe to say that the conversion has maybe gone better than you were thinking at that time and you've seen kind of incremental volume gains from what you were expecting a few months ago?

Speaker Change: I think that's fair. I think, look, when you're winning some of these accounts and you're trying to forecast and trying to understand

Speaker Change: You know the business, we're doing the best we can.

Speaker Change: and the speed with which accounts have implemented solutions.

Speaker Change: and maybe the volume was a bit better than we expected. And we're clearly sort of in Q2 in the latter category. So some of these wins ended up being a bit more sizable than we expected.

Speaker Change: The ramp up and the customers pushing us to install and get going was a little bit faster. I will tell you, I feel great about how we're executing with these accounts.

Speaker Change: I get a lot of sort of feedback from from some of these large customers about

Speaker Change: Companies within the industry or customers kind of accelerating their plans or kind of spurring kind of an industry-wide shift from from a plastic to paper.

Omar Marwan Asali: 100% you're going to see more follow suit, and more companies are not just talking about it, but they're actually doing it. And more and more banks are thinking about that switch. And that's part of the closes that I mentioned that we're experiencing in Q3 where we're trying to service these accounts and ramp up. But I think you're going to continue to see a wave with large accounts and sizable brands and brand owners making the switch and embracing more paper solutions in our industry.

Omar Marwan Asali: And that's part of the conviction and the excitement that we're seeing in the North America market that we like. And we're anxious to sort of continue to deliver to some of these new customers. And frankly, some of them are existing customers that may have had different substrates and different products that they're using, and now they're announcing that they want to switch completely to paper and less on plastic.

Omar Marwan Asali: Got it makes sense. Maybe just one last one hitting on automation kind of took a sequential step down the quarter. Are we still thinking about that kind of 50% plus grower for this year?

Omar Marwan Asali: So we're expecting to have a very busy second quarter in our automation business, given recent bookings activity and given funnel activity. Okay, that's it.

Operator: And that does conclude the question and answer session. I would like to turn the floor back over to Bill Drew for closing remarks.

William E. Drew: Thanks, John, and thanks everybody for joining us today. Looking forward to catching up next quarter.

Speaker Change: Thanks, John , and thanks, everybody, for joining us today. Looking forward to catching up next quarter.