Ranpak Q1 2024 Earnings Call Transcript

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May 2, 2024

There are 7 speakers on the call.

Operator

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 ks 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. RentPath assumes no obligation and does not intend to update any such forward looking statements.

Operator

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 a Form 8 ks 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.

Operator

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, 2024. The 10 Q will be available through the SEC or on the Investor Relations section of our website. With me today, I have Omar Azaleh, our Chairman and CEO and Bill Drew, our CFO. Omar will summarize our Q1 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.

Operator

With that, I'll turn the call over to Omar.

Speaker 1

Thank you, Sarah. Good morning, everyone. I appreciate you all joining us today. Our Q1 financial results were largely in line with our expectations as we experienced 4.4% top line growth and meaningfully improved profitability to start the year. We are pleased to report that we experienced our 3rd consecutive quarter of volume growth in PPS as activity levels continue to improve.

Speaker 1

While the overall operating landscape remains uneven, we are pleased to see continued moderate general improvement. Our gross margins on a constant currency basis improved by 400 basis points year over year and adjusted EBITDA margins improved 500 bps on a constant currency due to the favorable paper pricing environment compared to a year ago and higher volumes flowing through the complex. Overall, we are happy with the start of the year and believe it sets us on a path to achieve our targeted results for 2024. Consistent with much of our recent operating history, we expect the first half of the year will be a lower contributor to 20 24 top line performance compared to the back half as we expect more large account activity to ramp up as the year progresses and traditional seasonality to drive higher volumes in the second half of the year. North American sales were up 2.6% in the quarter versus last year, driven by improved void fill and automation sales year over year.

Speaker 1

At a more macro level, box shipments were flat to slightly up for the quarter, while freight and trucking data remains mixed. The industrial and manufacturing sector remains sluggish, while we are seeing some improvement in e commerce activity. The impacts of higher rates constraining housing activity and all of the spend that goes with it as well as inflationary pressures impacting consumer discretionary spend remain present. This has led to activity levels in North America being okay, but inconsistent from month to month. On a positive note, more recently we've seen improvements in consumer confidence.

Speaker 1

So hopefully that will inspire additional demand for goods. While that is the macro picture, we try to focus on driving outcomes that are within our control at Rampac, such as executing on our strategic account plan. We are pleased with our progress and optimistic that the ramp up in the plastic to paper shift provides us with solid volume momentum for the remainder of the year, while the macro hopefully stabilizes and improves. We said in our Q1 call last year that the plastic to paper shift was a longer sales cycle given the complexity of some of the organizations involved, but that we believe there was only a matter of time before the volumes start to reflect the shift in thinking. I'm pleased to say that in April, we're seeing a pickup in activity from our strategic account initiative, and many accounts are beginning the transition away from plastic.

Speaker 1

Europe APAC activity levels in the Q1 were solid with sales up 5.4% versus the prior year, driven by higher volumes in void fill and wrapping. Activity levels in the region continued to improve slowly, although manufacturing and industrial activity remained subdued, impacting cushioning utilization. Consumer confidence in the region has been improving since the end of the third quarter, but is still well below pre COVID levels. Geographically speaking, we've seen strength in Southern Europe in countries like Spain and Italy, as well as improvement in the U. K, while the central part of Europe that is more manufacturing heavy like Poland, Belgium and Germany are weaker.

Speaker 1

In APAC, Japan and Australia continue to be bright spots. The input cost environment provides us with a benefit for the first half of the year as paper pricing moved lower throughout the year before reaching a trough in Q4. We expect paper pricing in the first half of the year to be in line with Q4 as pricing flattened out to start the year. We are however seeing some producers in North America and Europe making a push to increase pricing as we get deeper into the year. Overall, we are targeting to maintain a gross margin in 2024 that is in line with our finish in 2023.

Speaker 1

So we're working closely with our vendors to plan accordingly and determine if we need to make pricing adjustments based on the commodity environment. The freight market has been roughly flat to start the year and in the U. S. Has remained favorable given the freight recession that has been present for the past 2 years. Freight market participants have struck a more optimistic tone recently, so we're monitoring that closely to see how potential improvement in freight level activity, along with rising tensions in the Middle East driving oil higher may impact pricing and availability.

Speaker 1

Inventory levels at our distributors and end users remain tight with many in our value chain in North America and Europe keeping tight lids on the amount of product on hand given the increased cost of capital and uneven environment. Destocking is no longer an issue, but we continue to watch inventories at our customers across the globe. Now with that, let me turn it over to Bill for some financial detail.

Speaker 2

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 Rambac's operating results. Machine placement increased 0.9% year over year to approximately 140,800 machines globally. Cushioning systems declined 0.9%, while void fill installed systems increased 1.3% and wrapping systems increased 1.8% year over year.

Speaker 2

Growth in the machine field population has been lower this year due to combination of lower activity levels generally, particularly related to industrial and manufacturing sectors in Europe, as well as 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 Q1 was up 4.4% year over year on a constant currency basis, driven by increased volumes and contribution from automation, offset by slightly lower price. North American net revenue increased 2.6% year over year with void fill and automation up versus the prior year, offset by decreases in cushioning and wrapping. Volumes were lower versus prior year driven by a softer March, but we expect those to pick up in the region as the year progresses driven by strategic account activity.

Speaker 2

In Europe and APAC, net revenue on a constant currency basis was up 5.4% year over year driven by void fill, wrapping and automation, offset by lower cushioning revenue as the industrial sector in Europe remains pressured. We are pleased to see the general continued recovery in this reporting unit as volumes increased 10% year over year and businesses begin to recover. We believe a part of the recovery we are seeing is due to the increased confidence stemming from the continued favorable natural gas pricing in Europe with Dutch net gas hovering around €30 per megawatt. There has been some volatility recently due to rising geopolitical tension, but we believe the amount of expected LNG capacity coming online and becoming available to Europe beginning in 2025 should help to keep a lid on pricing. Our gross profit increased 16.7% on a constant currency basis, implying a margin of 38% compared to 34% in the prior year.

Speaker 2

This is in line with expectations as we expected gross margin to be roughly in line with Q4 throughout the year. As Omar mentioned, we are monitoring the commodity environment closely and are extremely focused on maintaining the gross margin profile we thought to regain after 2022. Adjusted EBITDA increased 33.8 percent year over year to $20,200,000 implying a 22.8% margin driven by higher gross profit flow through and controlled G and A spend. We are pleased with the continued overall improvement in the financial profile and are optimistic as more volumes flow through the complex and automation grows, we will continue to work our way back towards an attractive high margin and cash generated profile. Capital expenditures for the quarter were $9,800,000 driven by converter placement and investments related to our Malaysia production facility.

Speaker 2

We are keeping tight controls on capital expenditures this year as we are moving beyond our infrastructure investment cycle that brought us world class technology platform and fully invested and funded physical infrastructure assets across the globe. Moving briefly to the balance sheet and liquidity. We completed Q1 with a strong liquidity position, including a cash balance of $55,000,000 to end the quarter and no drawings on our revolving credit facility. We continue to make steady progress on our goal of deleveraging and reached 4.4 turns at the end of the quarter, down from 4.6 times at 2023 year end and 5.7 times as of Q2 2023. We expect to build cash in the back half of the year as we enter the traditionally stronger holiday season and volumes pick up.

Speaker 2

The Malaysia production facility go live this summer marks the end of our multiyear infrastructure investment initiative and enables us to focus on getting the return on our investments as we scale our PPS and automation businesses. Our capital expenditure plans in 2024 are much more modest compared to recent prior years at less than $35,000,000 which we expect will enable us to generate cash in 2020 4 and help us deleverage further. Following quarter end, in April, we settled a litigation matter and sold 2 patents, which resulted in total cash proceeds of €20,000,000 bolstering our cash position and implying a pro form a leverage ratio of 4.1 times on a constant currency basis, including the additional cash proceeds. Based on our adjusted EBITDA guide and expected cash generation, we expect leverage to be below 4 turns on a constant currency basis by year end with an ultimate goal to get into 3 turns or below. We believe our recent commercial and financial progress along with focus on deleveraging and cash generation position us well to address our term loan maturities well before their maturities in June of 2026.

Speaker 2

Rambac has a long history in the credit markets from years of private equity ownership and I think would be well received by credit investors. For those of you who have spent time with us over the past few years, you know our goal is to have the cap structure not be a talk of conversation. This means a simple structure and a conservative leverage profile that addresses needs well in advance. With that, I'll turn it back to Omar before we move on to questions.

Speaker 1

Thank you, Bill. In closing, I'm pleased with the continued progress and Q3 in a row of volume growth. While the macro remains unclear, I believe our company specific drivers such as our strategic account activity and momentum in automation will enable us to continue to drive the top line and improve profitability. Driving volumes in PPS, scaling automation and generating cash are the top priorities that ramp back in 2024 and going into 2025. Automation continues to get the traction that we are seeking with large accounts as our systems are in facilities this year as the first step to larger follow through opportunities.

Speaker 1

We continue to anticipate revenue growth of more than 50% in automation this year and I continue to strongly believe the investments we have made in this area will be a critical growth driver and differentiator for RamPac in the upcoming years. Our long term objective remains to have a business that is steadily growing revenue in the high single to low double digit area, gross margins in the high 30% to 40% area and adjusted EBITDA margins in the high 20s to low 30s area with substantial cash being generated along the way. We have a strong platform in place supported by our state of the art digital infrastructure and facilities that can support our growth ambitions. With these multiyear projects behind us, the focus can be solely execution of our strategic initiatives and gaining efficiencies. I'm energized by what I see happening within Rambac and across the world.

Speaker 1

The team is invigorated by the narrower scope of objectives and what we all read about seemingly every day regarding the tailwinds related to the shift from plastic to paper and warehouse automation needs. This year's Earth Day theme is planet versus plastics and has a goal of raising awareness to drive a 60% plastic reduction by 2,040. There has been a plethora of great yet alarming content created this year that aims to promote widespread public awareness of the damage done by plastic to human, animal and all biodiversity's health. Earthday.org is also trying to achieve a phase out of all single use plastics by 2,030 and achieving that commitment at the United Nations Treaty on Plastic Pollution in 2024. At Rampac, we are extremely proud to be at the forefront of this movement and we are doing our part to deliver a better world.

Speaker 1

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

Speaker 3

Thank you. We will now begin the question and answer And your first question comes from the line of Greg Palm with Craig Hallum Capital Group.

Speaker 4

Thanks. This is Danny Eggerich on for Greg today. I was hoping to maybe just start with a little bit more on the strategic accounts. I guess it seems like it's improved, but how would you say your visibility into those accounts has changed over, say, the last couple of months? It seems like it's improved and does it feel like you're even more confident on kind of that second half step up, especially with the, I guess, comments on few of these accounts already beginning to transition away from plastic in Q2?

Speaker 1

Yes, sure. I feel and obviously, as I said, some of these conversations, in particular with very large sizable accounts, take some time. I said in our last quarter call that we expect things to start ramping up in early Q2. And as I said on the call today, in April, we're starting to see that. So I would say the level of activity in strategic accounts moving from trial, pipeline, funnel sort of early install activity to accounts purchasing our product, expanding the install and scaling up.

Speaker 1

That's starting to occur in this quarter, in Q2. We feel really good about the visibility that we have. Obviously, the macro environment is always a factor. But in terms of large accounts, in particular in the U. S.

Speaker 1

Making meaningful moves and switches from plastic to paper, that's occurring. And we think, frankly, every month starting in, again, the beginning of Q2, that, that ramp up will continue. So we feel we've made tremendous progress. And as we've said for a while, we're hoping that you're going to start seeing that in the volume and results starting in Q2 of 'twenty four.

Speaker 4

Got it. And then I guess just in terms of Q2, normal seasonality, kind of some moderate sequential growth. I guess as we think about that and some of these strategic accounts starting in Q2, I guess is it fair to say that there could be some incremental revenue on top of that typical seasonality there in Q2?

Speaker 1

I'll let Bill provide a bit more detail. But I would just say, where we are, again, we provided the guidance for the year. Early on. We're just sticking to that guidance. We feel pretty confident.

Speaker 1

I think I've said in the last quarter that we feel there's even upside. So that's how we continue to view the world. But I'll let maybe Bill provide a bit more color.

Speaker 2

Yes, Danny. I'd say typically what you see in Q2 is build in North America and then somewhat of a step down at times in Europe and APAC just given the seasonality. I think for us, we are expecting something similar like that to continue. But again, as Omar mentioned, we're expecting a little bit more of a 47%, 48% contribution to the top line first half versus back half, so getting back to that kind of cadence.

Speaker 4

Okay, that's helpful. Maybe one more for me on automation, I guess, maybe an update on the pipeline there, order activity. I don't know if I missed it, but how are the bookings this quarter? I know we've kind of been seeing record bookings over the last couple. So any additional color there would be helpful.

Speaker 1

Yes. Honestly, we continue to perform very, very well. In Q1, we did have another record booking. Our level of activity, our funnel activity is pretty high. We feel very confident that for the year, top line growth in automation globally will be north of 50%, which is important for us.

Speaker 1

And frankly, our visibility, as you can imagine, we're working with our funnel and our pipeline towards some 25 activity and that activity is looking good as we keep sort of ramping up our installed base and hopefully have more and more repeat customers, which is really important in automation, in particular with large customers. So I would say we're on track in automation, level of activity is good. Our bookings continue to be very healthy and we're pretty confident in the 50% plus growth profile this year.

Speaker 4

Okay, great. I will leave it there. Thanks.

Speaker 1

Thank you, Danny.

Speaker 3

Your next question comes from the line of Ghansham Panjabi with Baird. Please go ahead.

Speaker 5

Thank you, operator. Good morning, everybody.

Speaker 1

Good morning, Ghansham.

Speaker 5

Good morning. I guess, Omar, maybe stepping back a little bit, just from a macroeconomic standpoint, We saw what you did in the Q1 with North America, Europe and APAC, etcetera. But from an end market standpoint, adjusting for some of the new initiatives so on and so forth that you have underway, especially North America, how do you see the momentum across the end markets as you think about the regions globally?

Speaker 1

Yes. I think if from an end market standpoint, and this applies to North America and frankly, other geographies, we continue to see healthy trends and recovery in e commerce, Ghansham. We continue to see relatively decent activity with retailers doing more with shipping and sort of building their online capabilities. I think industrial activity is a little bit more uneven, frankly, the largest probably sluggishness we see are in markets like in Germany and Central Europe. I visited the regions a couple of times already this year.

Speaker 1

I do think CEOs are nervous in some of these markets given the macro backdrop, etcetera. But there's a lot of chatter in Europe about how important manufacturing and industrial activity is. And I'm expecting that we will start seeing some pickup and some improvement, whether it's driven by companies, by governments, by both, I don't expect Europe to just accept that their most important sector is going to be slow. So I think we're expecting that, that level of activity will become a little bit better. But there's no doubt what we're seeing some strength at is more around e commerce and around different areas in e commerce, whether you're seeing that in books and in publishing, whether you're seeing it in some level in beauty or in guys that are just general merchandise, that level of business feels a little bit better than where it was a few quarters ago.

Speaker 5

And then in terms of your market positioning, right, because you have a very strong first to market advantage. The markets have normalized. Your competitors, including those that sell different substrates, have been kind of reorganizing and trying to come back with some sort of fiber based offering for protective packaging, etcetera. Just your thoughts in terms of any change to competitive backdrop as you think about your major end markets?

Speaker 2

And then just lastly, in

Speaker 5

terms of raw material cost inflation, I mean, upstream pulp prices have picked up quite a bit. And I know you've been benefiting from some level of deflation and rightfully so just given how you came off the peak inflation cycle from a few quarters back. Just your thoughts in terms of the forward looking indicators for inflation specific to Rent Pack as well.

Speaker 1

Sure. So on the first point, Ghansham, and let's call it the competitive landscape, I really like where we are for a couple of reasons. 1, I am convinced we're in the right substrate And that gives us a competitive advantage. Paper and fiber based solutions are 100% of our thinking and execution, and we continue to see the shift from plastic to paper. Frankly, it's very pronounced in the U.

Speaker 1

S. Now. It's been pronounced in other geographies that I visited and that we've been seeing those trends there for a while. So I like how we're positioned there. I also like that our investment cycle is behind us from a strategic standpoint.

Speaker 1

Rampac is stable. We're in execution mode. We're very focused on driving key initiatives like driving PPS volume, driving automation, generating cash flow. I feel our team is focused. And our organization honestly has not been in a better spot in a long time than the spot that we're in right now.

Speaker 1

It's literally down to execution, execution, execution. And I think that sets us apart. I do see that in a lot of account activity, some of it large strategic account activity that we mentioned a lot on this call. Some of it is small and medium sized, where I feel our ability to win these accounts to expand our business with them is terrific. And I feel competitively we're very well positioned.

Speaker 1

I think the combination of PPS and automation is going to accrete a lot more value for us. We are truly a full service solution for end of line needs for automation. We're a full solution for PPS that's fiber based for needs for so many industries. And I think what we bring to the table to a lot our customers and I see it in our dialogue Ghansham, I think it's very compelling. And now it's up to us as a team to basically work our asset base and execute on the plan that's ahead of us.

Speaker 1

As far as your second question on inflation and pricing, I would say from a ramp up perspective, the first half of the year, we pretty much have very good visibility in terms of pricing and the environment and where our deals are from a commodity standpoint, and we feel very good about how we're positioned. We have secured supply for part of our needs for the second half of the year. We are negotiating other parts. I would say the landscape is a little bit shifting as we mentioned in the call where you're starting to see with consolidation in the paper industry with dynamic with geopolitical risks and the dynamic of frankly the switch to paper, you're starting to see some pricing pressure and increases. I feel very good, Ghansham, that we will be able to negotiate and secure the supply that we want in the second half of the year, given our size that we will be able to get sort of the cost structure that we want.

Speaker 1

And if there is a little bit of pressure from a cost standpoint, we will react from a pricing standpoint. So our expectations is that we will be able to deliver the margin profile that, as Bill said, we fought so hard to get to. And I think this is a year where we will be able to manage what happens in the landscape, but it may require a little bit more work in the second half of the year than in the first half. Does that give you a good sense?

Speaker 5

It does. It does. Thank you, Omar. Appreciate that.

Speaker 3

And your next question comes from the line of Adam Samuelson with Goldman Sachs. Please ask

Speaker 6

Yes. Thank you. Good morning, everyone.

Speaker 1

Good morning, Adam.

Speaker 6

Good morning. Maybe first something that, Bill you alluded to in the prepared remarks, just wanted to clarify. So there was a litigation settlement that €20,000,000 of cash that you received in April. Can you just maybe elaborate a little bit on that? Is there a tax impact on that?

Speaker 6

Just to

Speaker 2

make sure we're

Speaker 6

clear, not something that had been previously in any of the filings. So any additional color would be helpful.

Speaker 2

Sure, Adam. So this was a litigation matter that had been ongoing for a number of years just related to some patent infringement. So it was great to get this settled, get it behind us, get the cash proceeds in. At this point, right, the proceeds are gross. So we'll have the tax impact when we go to file our tax returns in the following year.

Speaker 2

But for now, that cash goes straight to the balance sheet. So it's nice to get some additional yield on that cash and be able to maximize liquidity ahead of any potential refinancing later this year.

Speaker 1

And Adam, just to add, the €20,000,000 settlement is €15,000,000 dollars settlement under litigation and about €5,000,000 on us giving them some rights to a couple of patents we have. So the total proceeds will be, as Bill said, is €20,000,000 but it's these 2 separate things that got us there. And then in terms of tax impact, obviously, that's something that we'll be assessing based on the 2 transactions that I outlined for the rest of the year. But this was a good this was a real good conclusion for us and we get to move on. And as I said a little bit earlier, just execute on our business plan and not have too many open matters.

Speaker 6

Okay. No, that's very helpful. And then, as we think about some of the strategic accounts, Omar, that are starting to kind of come to fruition in the core business in the Q2. How should we think about installed base trends rolling forward? Is that going to drive a pickup in void fill and in cushioning machine placements through the year?

Speaker 6

Or is there a little bit further decline before those start to reaccelerate?

Speaker 1

We have been laser focused, Adam, as you know about redeploying, refurbishing and working our asset base to the extent possible. And that continues to be our priority given in the last couple of years, we did feel that some accounts were over capitalized and the world changed and we needed to react and we continue to do that. So that's priority 1. With some of the large strategic accounts and as we're ramping those up, just given the scale of some of these accounts, redeploying and refurbishing, etcetera, may not be enough to meet the demands that we're seeing. So you will see some pickup that we've already planned for in Q1 because we're frankly ramping as we speak at some of these accounts.

Speaker 1

I don't think you're going to see something that's going to move the needle at 140,000 installed base. It will be maybe a modest increase from the last couple of quarters for us to fulfill the needs of these customers. But we're trying to be very, very prudent with our CapEx and how we fulfill these customer demands. And the beauty of some of these large accounts, Adam, is the efficiency per converter, the efficiency per machine given volume sometimes tends to be above what we've offered other customers just given sheer needs. So they tend to be pretty efficient from a CapEx standpoint.

Speaker 6

Okay. That's all very helpful color. I'll pass it on. Thank you.

Speaker 1

Thank you.

Speaker 3

That concludes our Q and A session. I will now turn the conference back over to Bill Drew for closing remarks.

Speaker 2

Thanks, Benjamin, and thank you everybody for joining us today. We look forward to catching up next quarter.

Speaker 3

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.

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Ranpak Q1 2024
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