Ranpak Holdings Corp. (NYSE:PACK) Q1 2023 Earnings Call Transcript May 6, 2023

Operator: Hello. My name is Jean-Louis. Welcome to the Ranpak Holdings Q1 2023 Earnings Call. [Operator Instructions] I would now like to turn the conference over to Sara Horvath, General Counsel.

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

You should not place undue reliance on these forward-looking statements, all of which speak to the company only as of today. The earnings release we issued this morning and the presentation for today’s call are posted on the Investor Relations section of our website. A copy of the release has been included in the 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 have included reconciliations to the comparable GAAP information. Please refer to the table and slide presentation accompanying today’s earnings release. Lastly, we’ll be filing our 10-Q with the SEC for the period ending March 31, 2023.

The 10-Q will be available through the SEC or on the Investor Relations section of our website. With me today, I have Omar Asali, our Chairman and CEO; and Bill Drew, our CFO. Omar will summarize our first quarter results and provide commentary on the operating landscape, and Bill will provide additional details on the financial results before we open up the call for questions. With that, I’ll turn the call over to Omar.

Omar Asali: Thank you, Sara, and good morning, everyone. I appreciate you all joining us. Our first quarter financial results were mostly in line with our expectations as we expected top line in the first half of the year to be more subdued with volumes projected to pick up more in the back half of 2023. We shared an update with you on our fourth quarter call that January and February top line results were tracking in line with 2021, and that is roughly how we finished the quarter. Our top line results of $84.8 million on a constant currency basis is just shy of the $85 million from 2021 and slightly above where we were in Q1 of last year. North America sales were up 1% in the quarter versus last year. I would characterize activity levels in the region as decent in the quarter, but not robust given the macro.

The manufacturing sector remains sluggish as evidenced in the PMI data and on the consumer side, e-commerce activity related to more discretionary purchases of goods remained slow as consumers allocate more to services and essentials. You can see this environment reflected in the trucking and container data where volumes are clearly down. I believe the impact of the higher rate environment, bank stresses and increasing unemployment concerns have impacted consumer confidence and warrant a cautious outlook in the near term in North America. While the shorter-term macro is a challenge on a positive note, we are making inroads with many key accounts that have historically been plastic only. These are longer sales cycle processes, but we can feel the momentum in discussions throughout these organizations shifting towards paper.

I believe it is only a matter of time before the volumes in North America start to reflect this. Europe and APAC activity levels in the first quarter were fairly solid with sales up 1% versus the prior year. From a regional perspective, within the reporting group, I would say Europe was stronger than Asia as we seem to be through the destocking that impacted us last year and the better-than-expected energy environment has improved confidence. I would not call it a robust environment there as I think many businesses and consumers are cautious given the continuing inflationary pressures and uncertain energy outlook, but I would characterize it as a solid baseline to operate from. In APAC, we had a strong start versus plan, but the outlook there is somewhat uneven with pockets of strength in places like Japan and Korea, and some weakness in Australia and China.

The environment remains a challenging one, where nowhere really feels robust right now. Overall, I would say the start to the year was stronger in all geographies with January and February results pretty solid and then activity levels softening towards the end of March and to the start of the second quarter. Our trial activity and customer engagement is solid. And while the short term is choppy, given the state of the world and the consumer, I do like what I’m seeing out of some larger accounts we are chasing. As a reminder, we have significantly more favorable comparisons in the second half of the year, which leads me to continue to be constructive on the outlook for the year, even with a slower start. While the top line outlook is not as robust as I would like, the input cost environment continues to be a positive surprise compared to our plan as the paper markets have remained favorable.

North America has seen some pricing improvement since the start of the year, but pricing remains higher than I would have anticipated under the circumstances, given the supply-demand dynamics, which to me would point to more pressure on pricing in our favor. In Europe, the better-than-expected energy environment has helped drive improvement in the paper markets to start the year. We have all seen how volatile energy can be and what extreme weather swings can do. So we continue to monitor the environment closely and are focused on derisking the remainder of the year as much as possible with our vendors who are able to lock in forward pricing. Overall, we feel good about continuing to claw back our gross margins throughout the year and our commitment to getting closer to our targeted gross margin profile.

Outside of favorable movements in energy, paper and logistics, inflationary pressures in labor and services persist globally, so we are making adjustments to areas of spend within our control until the operating environment provides better clarity. We’ve examined all of our forward spend and prioritized areas of need, while deferring areas that are not immediately required to support the business or do not provide near-term revenue-generating opportunities. We are laser-focused on productivity and doing more with what we have built over the past few years. I’m pleased to report we have opened up our new European headquarters in Eygelshoven. I want to congratulate our team on doing a fantastic job of making this transition as smooth as possible for our customers and our employees.

Our operations have not missed a beat. And as of April, our employees are all working out of that new facility. Our R&D and automation center in North America is on track to open this summer, providing us with the ability to manufacture automation equipment in the region and finally have a showroom in the region where we can bring prospective customers. I believe this will be a game-changer for our automation business in the U.S. market and will really help propel us to the next level. We completed the funding of these real estate capital commitments over the course of the next few months. Beyond that, we are focused on conserving capital and getting back to the cash-generating engine Ranpak has been known for since inception. We’re a small company, but we now have a state-of-the-art digital and physical infrastructure to aid us in running the business and serving our customers.

It is time for us to harvest what we have been investing in for the past number of years and drive efficiencies while being tighter on our capital spend. We’re taking a more targeted and focused approach to the business and prioritizing only those activities in the near term that can really move the needle. I’m extremely pleased with the quality of our team and our product pipeline and believe a focus on execution and enhancing productivity rather than expansion in the near term will deliver the best results. Now with that, let me turn it over to Bill for some financial detail.

Bill Drew: 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. Machine placement increased 3.8% year-over-year to over 139,600 machines globally. Cushioning systems declined 1%, while void-fill installed systems increased 5% and wrapping increased 7% year-over-year. Growth in the machine field population has been lower this year due to a combination of lower activity levels generally and our efforts to optimize our fleet. To maximize capital efficiency, we are focused on getting underutilized converters back and redeploying them to more productive areas. Overall, net revenue for the company in the first quarter was up 1% year-over-year on a constant currency basis, driven by increased price and contribution from automation, offset by slightly lower volumes.

North America net revenue increased 1% year-over-year with cushioning and void-fill up versus the prior year, offset by continued headwinds in wrapping. Cushioning demand remained fairly steady. While e-commerce activity as it relates to more discretionary merchandise remained lower due to inflationary pressures and the pull forward of purchases we have discussed previously. In Europe and APAC, net revenue on a constant currency basis was up 1% year-over-year with all categories up slightly in the quarter. Volumes were down slightly in the region year-over-year, but we are pleased with the base level of activity given the volatility of energy and remaining inflationary pressures in the region. Automation sales increased 6% year-over-year and represented approximately 5% of sales on a constant currency basis as we continue to get traction in the space with our box customization and automated dunnage solutions.

Our gross profit increased 15% on a constant currency basis, implying a margin of 34% compared to 29.8% in the prior year. The prior year comparison had some noise given the SAP go live in the first quarter where we experienced some inefficiencies, resulting in approximately 1.5 point drag on the margin. So if you take that into account, gross profit would be up approximately 8% on a constant currency basis. I think it’s helpful to point out the inflection in the gross margin profile and step up from the 28.1% margin experienced in Q4 2022 on a very similar revenue profile. We shared in our fourth quarter call, we expected the gross margin environment to steadily improve throughout the year as the benefits of the input cost environment improves.

We see this in Q1 as some of the paper benefits flow through beginning in February and March. Obviously, as more volumes flow through, the better pickup will be as we expect to absorb more overhead and get the greater benefit of lower pricing. Adjusted EBITDA declined 21% year-over-year to $15.1 million, implying a 17.8% margin, driven by higher G&A compared to the prior year. On an absolute basis, this is disappointing. But again, you can see the inflection from Q4 2022 where the adjusted EBITDA margin was 15.2%. As we get into the second half of the year, we expect to make up ground and generate a substantial amount of the adjusted EBITDA we plan to generate for the year. We expect that volumes should be higher due to the traditional seasonality of the business.

We will also be at a point where we expect that the destocking impact should be completely eliminated in all regions. Last year was very unusual for a variety of reasons, but in particular, the deviation from the usual revenue cadence of the year. Typically, we see the first quarter and second quarters being smaller contributors with the back half comprising up to 55% of revenue for the year. In 2022, our second quarter was our highest revenue contributor. Instead of seeing a step up in the second half of the year, we experienced less than 50% of the revenue being generated in the back half. Beyond the top line cadence, we also expect to have the greatest impact of paper price reductions in the second half as our costs increased steadily throughout 2022 and peaked in the fourth quarter.

Capital expenditures for the quarter were $11.8 million, driven by the funding of our real estate projects as well as converter placement. Moving briefly to the balance sheet and liquidity. We completed Q1 with a strong liquidity position, including a cash balance of $58.6 million to end the quarter and no drawings on our revolving credit facility. Our net leverage based on reported LTM adjusted EBITDA was 5.7x at the end of the quarter or 5.2x based on the definition of adjusted EBITDA in the credit facility. We are expecting leverage to peak in the second quarter as we fund our capital cadence related to real estate and go up against our most robust quarterly contributor last year, and we expect to begin our deleveraging path to adjusted EBITDA growth in the back half of the year.

I want to reiterate the message from the fourth quarter where we recognized the importance of maintaining a strong cash and liquidity position and are focused on returning to our targeted leverage ratio of 3x or less. After Q2, the major components of our near-term CapEx cycle will be complete outside of the Malaysia facility, which is roughly $2 million, enabling us to focus on cash generation and deleveraging. We’ve lowered our paper inventories to our target levels and converted the previous safety stock to cash. We remain extremely tight with converted CapEx and are pushing to get converters back from underutilized accounts so we can refabricate them and redeploy them to more productive accounts. As Omar mentioned, we will be hyper-vigilant on costs for the remainder of the year to put us in the best position to get our profitability metrics back on track.

With that, I’ll turn it back to Omar before we move on to questions.

Omar Asali: Thank you, Bill. In closing, I’m pleased with the improvements our company has made over the past few years and continue to believe our investments have put us on a sustainable long-term growth trajectory. We have a lot of work to do to get back to where we want to be financially, but I believe we are moving in the right direction. We are very well positioned to capitalize on the opportunities ahead of us from the global focus on sustainability as well as customers’ elevated interest in automation. We have developed various new offerings being released over the next 12 months in void-fill, wrapping, cold-chain and automation that we believe further establish us as industry leaders in these areas. We are pleased with our organic growth opportunities and ability to scale our existing business.

I firmly believe we are in the right spot and have the right team and tools to be successful. It has been a long journey to get to this point and one filled with a lot of change for the organization. Our employees transitioned from being a 45-year-old private company with a certain way of operating to being a public company, which obviously brings a different level of operating requirements. We also made up for years of underinvestment in systems, processes and people, which also brought about a whole new way of operating. At this point, I feel the company is finally in a spot where we can get back to basics without large distractions and really begin to execute on the vision. We’re confident in our strategy and believe we will unlock meaningful and profitable growth over the next number of years.

With that, let’s open the call up for questions. Operator?

Q&A Session

Operator: [Operator Instructions] Your first question comes from the line of Greg Palm from Craig-Hallum Capital Group.

Operator: Your next question comes from the line of Ghansham Panjabi of Baird.

Operator: Your next question comes from the line of Adam Samuelson of Goldman Sachs.

Operator: [Operator Instructions] A follow-up question from the line of Greg Palm of Craig-Hallum Capital Group.

Operator: There are no further questions at this time. I’ll now turn the call over to Bill for closing remarks.

Bill Drew: Thank you. And thank you all for joining us today. We look forward to speaking again following Q2.

Operator: Thank you. This concludes today’s conference call. You may now disconnect.