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Edited Transcript of PACK.N earnings conference call or presentation 7-Nov-19 1:30pm GMT

Q3 2019 Ranpak Holdings Corp Earnings Call

Nov 17, 2019 (Thomson StreetEvents) -- Edited Transcript of Ranpak Holdings Corp earnings conference call or presentation Thursday, November 7, 2019 at 1:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Omar Marwan Asali

Ranpak Holdings Corp. - Founder, CEO & Executive Chairman

* Trent M. Meyerhoefer

Ranpak Holdings Corp. - Senior VP & CFO

* William E. Drew

Ranpak Holdings Corp. - Chief of Staff

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Conference Call Participants

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* Gregory William Palm

Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst

* Imran Ahmed

Blackstone Alternative Asset Management L.P. - MD

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to the Ranpak conference call. (Operator Instructions)

I would now like to hand the conference over to your speaker today, Bill Drew, please go ahead.

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William E. Drew, Ranpak Holdings Corp. - Chief of Staff [2]

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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 S-4 registration statement filed with the SEC in connection with the business combination and our other filings 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 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.

Also, as we will discuss in more detail later, due to the accounting treatment for the business combination we closed on June 3, we've also presented our results for the quarter on a combined basis, reflecting a simple arithmetic combination of the GAAP predecessor and successor periods without further adjustment as well as any other adjustments as described. Lastly, we'll be filing our 10-Q with the SEC for the period ending September 30, 2019. The 10-Q will be available through the SEC or on the Investor Relations section of our website.

Now with me today, I have Omar Asali, our Chairman and CEO; and Trent Meyerhoefer, our CFO. Omar will summarize our third quarter results, touch on our markets, growth strategies and provide an update on our outlook for the remainder of the year. Trent will then 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.

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Omar Marwan Asali, Ranpak Holdings Corp. - Founder, CEO & Executive Chairman [3]

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Thank you, Bill, and good morning, everyone. Welcome to Ranpak's third quarter conference call. We appreciate the opportunity to update you on our results and want to thank you all for your interest in the company.

For those of you who are new to Ranpak, we have been in the paper protective packaging business since 1972. Our mission is simple, to deliver sustainable packaging solutions that improve supply chain performance and costs and to support a variety of growing business needs globally. We are the leader in environmentally-friendly protective packaging solutions, with more than 102,000 machines placed at end users across more than 50 countries. Our application experience, packaging machines and paper consumables deliver protective packaging solutions that play a critical role in the operations of our customers' business. Our systems are fast, reliable and protect valuable goods being transported. And of increasing importance, our packaging products are all 100% curbside recyclable.

As we look at our current addressable protective packaging market, estimated at about $7 billion, we believe that paper will increasingly be viewed as an attractive alternative to environmentally-destructive foam, plastic and bubble wrap alternatives. At this time, European businesses are more focused on the environmental impact of their supply chain choices than their North American counterparts. We are, however, beginning to see the tides change in North America as more and more companies and their employees focus on the footprint that their operations and supply chain have on the environment. Increasingly, the favorable recyclability profile of our packaging solutions are a tailwind for us, given the wave of awareness sweeping the globe against plastic solutions.

I'm going to start today on Slide 4. First, let me highlight that we are pleased with our solid performance this quarter. Some of the actions we took during the third quarter led to the significant improvement from our prior quarter. While there's still work to be done, we have reengaged on the growth pattern Ranpak has historically delivered and made real organizational improvements in a short period of time. Each of our key areas delivered, and the results reflect rapid progress in refocusing on our customers, improving the operating rhythm of the company and our execution speed for initiatives. We've increased the frequency and quality of communication and collaboration internally as well as with our distributors and end users. The energy and effort level has been great to see, and I'm very proud of the way the team has embraced the changes implemented since I became CEO in August.

Ranpak is evolving through a new culture of performance, accountability and an ownership mentality among all employees. And while transformation doesn't happen overnight, the new mode of operating is beginning to show up in results. We have some good momentum, and we are all determined to continue it.

Innovation activity is at full speed, and we are excited that in just a few weeks, we will be introducing our first wave of next-generation products. In North America, we will be unveiling our new and improved Void-fill machine, which makes us even more competitive against air pillows.

We're excited to launch our next-generation Cushioning system in Europe and Asia this quarter as well, with the larger rollouts occurring throughout next year.

Our expansion into retail is underway with some exciting new products in our Wrapping line that you will hear more about later this year and in Q1.

Automation remains a key area of focus as many companies are looking for ways to reduce labor and improve efficiency. To better serve our customers and be more fully coordinated with core business, we have consolidated our automation manufacturing footprint from France to the Netherlands, the home of our European headquarters.

In the first half of next year, we will be opening a new Ranpak automation center in Heerlen, enabling us to expand our in-house automation manufacturing capabilities and showcase our growing automation portfolio. I recently visited the new Heerlen facility, and I'm very excited about the prospects for this business. We believe there are a lot of opportunities to grow this area organically, and it is also an area we are seeking to grow through acquisitions.

Turning now to the third quarter highlights on Slide 5. We had a solid bounce back in performance and are seeing a positive impact from our initiatives we discussed last quarter. It is the beginning of the transformation of Ranpak to a more nimble and faster organization. So far, I like what I see. We continue to expand our global machine footprint with the number of machines placed up steadily in the quarter by 7.5% year-over-year. And we continue to focus on optimizing machine placement to increase throughput and utilization.

For the quarter, consolidated net sales on a constant currency basis increased 8.8%, driven by broad-based increases across the core business in North America, Europe and Asia Pacific as well as in automation. North American net sales for the quarter increased 1.5% year-over-year, driven by increased activity in our distributor channel. On a constant currency basis, for the quarter, net sales in Europe and Asia Pacific were up 16%, driven by a broad-based growth across all product lines and sales activity that returned to more normalized growth levels following the Q1 buy-in that impacted the second quarter.

Asia Pacific continued its growth trajectory but has been impacted by trade issues we have all been reading about. The team in APAC has done a great job winning new accounts and growing the business in the face of a more challenging macro backdrop. That being said, we continue to see excellent growth potential in the region and are working towards improving our capabilities in the area to serve a growing customer base.

Automation was a solid contributor to the top line as more automated box sizing machines were sold in the quarter. We continue to be encouraged by the sales pipeline for this business and the market opportunity for us to grow. Although it is a small percentage of sales currently, we envision automation being a meaningful portion of the revenue portfolio in a few years. That is the future of packaging and where Ranpak will play a leading role. The state-of-the-art facility we will be opening will really get us started on the right path to making automation a significant contributor to the portfolio.

The pricing initiatives we took to offset 2018 paper price increases were in effect in the quarter and resulted in pro forma gross margin improvements by 220 bps, up to 44.2%. As discussed in the previous call, we believe paper pricing will be more favorable for us going into 2020, given the increased supply of paper coming to the market.

Pro forma adjusted EBITDA of $22 million was up 6.9% in constant currency terms year-over-year, and we're pleased to report that margins expanded by almost 300 basis points from the second quarter of 2019 to 31.3%.

We have been investing in the business through the additional hiring of sales and operations personnel as well as increasing our focus on R&D to drive the top line in future periods, which adversely impacted our margin comparison year-over-year by 60 bps. We believe as these additions season, we will attain the operating leverage we desire to maintain our attractive margin profile going forward.

As we discussed last call, our business typically grows as the year progresses, with the fourth quarter historically being the largest contributor to sales, resulting in a higher margin profile for the business in the back half of the year.

On our last call, we shared with you some of our near-term growth initiatives. We've been making progress deepening the penetration of our Geami Wrapping solution into the retail channel. This quarter and into next year, we will be expanding further into the omnichannel retail space with this line as more retailers seek alternatives to foam and bubble. Bubble wrap alone is a $2 billion-plus market. So it's a very large and important opportunity for us.

We also spoke about our intentions to raise our profile through more impactful marketing, branding and partnerships. In the past months, we have stepped up our partnership efforts and joined the Sustainable Packaging Coalition, the Association for Sustainable Manufacturing, also known as MERA, and the Plastic Pollution Coalition. We are thrilled to partner with these organizations and believe in the great work they are doing to raise awareness, improve our environment and reduce the impact plastic and foam have on our ecosystem.

As the leader in environmentally-friendly protective packaging, we feel it is critical for Ranpak to be an active voice in getting the message out that businesses and consumers have effective options for protective packaging beyond resin-based solutions, and that by using Ranpak, businesses can operate in a cost-efficient manner while helping the environment.

As an initial step, I have been periodically publishing sustainability-related thought pieces on LinkedIn, and we are excited to announce that next month, you will see our newly designed website. It will portray a fresh, more modern image, provide our customers with better access to information and provide us with useful data to help build our sales pipeline. Along that vein, we continue to work to ramp up our digital content, so stay tuned for that.

As we look to the remainder of the year, we're encouraged by the activity we see. The growing importance of sustainability shows no signs of abating in Europe, and our team there continues to execute at a high level. In North America, we have taken steps to improve performance as we have added to the sales force to improve coverage, engage in deeper dialogue with our distributors and end users to better understand their needs and ways to expand their relationship.

Our priorities, focus and strategy are clear. It is up to us to continue to perform at a high level, and I now feel like we have the team to do that.

We are committed to achieving our previously stated goal of $90 million to $95 million pro forma adjusted EBITDA for 2019. Third quarter performance was a better representation of the quality of the business, and we believe we have the resources and plan in place to achieve a strong fourth quarter.

With that, let me turn the call over to Trent, who will give you further details related to the quarter.

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Trent M. Meyerhoefer, Ranpak Holdings Corp. - Senior VP & CFO [4]

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Thank you, Omar. Turning to Slide 6, you'll see a summary of some of our key performance indicators. Due to the predecessor and successor periods and transaction adjustments for the business combination with One Madison, for the convenience of readers, we have presented the 3- and 9-month periods ended September 30, 2019, on a combined basis, reflecting a simple arithmetic combination of the GAAP predecessor and successor periods without further adjustment and also provide a pro forma for constant currency and purchase accounting adjustments in order to present a meaningful comparison against the corresponding periods in the 3 and 9 months ended September 30, 2018. As Bill mentioned, we'll be filing our 10-Q shortly, which provides further information on Ranpak's operating results.

Machine placement continued to grow nicely in the quarter and is up 7.5% year-over-year to more than 102,000 machines globally across 50 countries. Cushioning and Void-fill installed systems continue to grow in the mid-single digits and our smallest product line, Wrapping, is growing nicely, north of 25% year-over-year. As Omar mentioned earlier, we are excited about what is ahead for our Wrapping line, driven by home furnishing, omnichannel retail and cold chain applications.

Overall, net sales for the company in the third quarter were up 8.8% year-over-year on a constant currency basis, driven by strong performance in Europe and Asia and improved performance in North America. For the quarter, combined sales in our Europe, Asia Pacific division increased 16.1% on a constant currency basis, bringing year-to-date combined sales growth in those regions to 11.2% on a constant currency basis. Europe and Asia continued their solid performance, with broad-based growth across all categories versus the prior year, driven particularly by the strength in Cushioning and Wrapping. When evaluating the performance of the business, we believe isolating moves in currency gives a more accurate picture of the fundamentals. That being said, the performance of the euro versus the dollar was a headwind of approximately 2.5% year-over-year on actual reported results. We are pleased with Europe and Asia's performance year-to-date as it continues to demonstrate strength in a more mature but expanding market in Europe and a rapidly growing but challenging macro environment in APAC.

North American combined sales were up 1.5% for the quarter, driven by increased Cushioning and Wrapping sales and increased distributor activity. Void-fill in North America experienced some headwinds due to increased focus by some customers on void reduction efforts, but certainly to a lesser extent than in the second quarter. We believe our next-generation Void-fill machine, which we will be rolling out this quarter, will provide a boost to the Void-fill business in North America and really help us compete even better against air pillows going forward.

Moving on to the cost side and margin profile on Slide 7. Improved pricing and lower paper costs relative to a year ago resulted in gross margin improvement of 220 basis points in the quarter to 44.2%. Year-to-date pro forma gross profit is up 30 basis points to 43.1%. We continue to like the trends we are seeing overall in the paper markets and believe pricing will be more favorable for us in 2020.

Omar mentioned earlier that we have been investing in the business in terms of adding sales and operations personnel. We see exciting opportunities to grow our business globally, so we have been adding customer-facing resources to make sure we can take advantage of the opportunities in front of us. We feel good about the additions we have made, and that at this time, we are able to compete really well and drive the business to a new level. As these personnel additions mature within the company and increasingly contribute to the top line, we are confident we will get the return from these hires to be accretive to our margins.

The additional senior management, sales and operations personnel drove a pro forma SG&A expense increase of $2.3 million or 16.8% to $15.8 million in the 3 months ended September 30, 2019, from $13.5 million for the comparable period in 2018, adjusting to a constant currency in both periods.

We also continue to invest in R&D, which is up 33% year-to-date versus 2018. We continue to place a strong emphasis internally on new product introduction and speeding up the time to market for products we are excited about. Innovation plays an important role in sustaining customer relationships and growing market share. Year-to-date 2019, we have invested around 90 basis points of our sales in R&D versus about 70 basis points in 2018.

To summarize on margins, we are pleased with the improvement we saw quarter-over-quarter to north of 31% for our pro forma adjusted EBITDA margin and are looking forward to getting increased operating leverage once the additions we have made season. The fourth quarter generally is our largest quarter from a sales and EBITDA standpoint, so we expect to finish the year strong and improve our margin profile due to increased operating leverage.

Capital expenditures for the combined quarter were $7.8 million, bringing full year CapEx to $22 million as we increased the installed base by 7.5% year-over-year. One great attribute of our business model is the ability to flex capital spending in response to changes in market conditions. Our machines typically require a short lead time of only 8 to 12 weeks to ramp up or scale down according to demand, helping to maintain a strong cash flow generation profile.

Moving on to the balance sheet and liquidity on Slide 9. Our debt of USD 378 million and EUR 140 million is unchanged from the second quarter. This is all first-lien term loan at LIBOR plus 400 basis points, with a step-down to LIBOR plus 375 basis points once we delever below 5x.

In the third quarter, we entered into a new swap on $50 million of our USD debt and extended the term on our previously swapped $200 million to lock in lower rates, which reduced our blended cost of debt to 5.5% from just under 6% previously.

We completed the third quarter of 2019 in a strong liquidity position, including a cash balance of $13.6 million and no draws against our $45 million revolving credit facility. As we have previously communicated, we are very focused on deleveraging through a combination of growth and debt pay down to lower our cash interest expense and free us up to invest more in the business. We believe the right long-term leverage level for this business in the public markets is 3.0 to 3.5x.

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

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Omar Marwan Asali, Ranpak Holdings Corp. - Founder, CEO & Executive Chairman [5]

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Perfect. Thank you, Trent. In closing, we're proud of the improvements our company has made in the third quarter. While I'm pleased with the return to organic growth globally, I'm particularly pleased by the improvements we have made to the speed of execution and operating rhythm since I expanded my role in August. With the additional resources we have added to the team, we believe we are now well-positioned as the clear market leader in environmentally-friendly protective packaging solutions. We remain confident that we have the right platform to grow both organically and through acquisitions. As we continue to scale the company, our mission at Ranpak remains steadfast. That is, to focus on our customers' needs and provide the best environmentally-friendly packaging solutions on the market.

We appreciate the time you've taken to join us today and your continued interest in Ranpak. We look forward to speaking with many of you very soon. Next week, we will be attending the Craig-Hallum and Morgan Stanley conferences, so please stop by if you happen to be in New York or in Boston.

Thank you all for joining us. At this point, we'd like to open up the line for questions. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of Greg Palm from Craig-Hallum Capital.

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Gregory William Palm, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [2]

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Congrats on the results here.

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Omar Marwan Asali, Ranpak Holdings Corp. - Founder, CEO & Executive Chairman [3]

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Thank you, Greg.

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Gregory William Palm, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [4]

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Just starting off with the top line results. Obviously, very sharp bounce back relative to Q2. So I mean looking back on the prior quarter, anything else that you can add that makes you increasingly confident that what we saw in Q2 was really just an anomaly?

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Omar Marwan Asali, Ranpak Holdings Corp. - Founder, CEO & Executive Chairman [5]

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Yes. Greg, it's Omar. I think in Q2, what we saw is a little bit of miscommunication with some of our big customers. We spent this past quarter spending a lot of time having dialogue with our large customers, doing a voice of customer survey with our mid-tier and smaller customers and really garnered a lot of feedback. And that's the feedback that gave us, frankly, confidence that Q2 was an anomaly. As we started talking to our customers and understanding their needs, the demand for our product is there. And that's always the hardest thing. So they really want more paper solutions. There's a lot of customers that are substituting from plastic to paper. I think the misstep that we had at Ranpak was, frankly, not being very responsive to some of our customer needs, not communicating well and then doing a price increase that was poorly timed, as we discussed.

So given the dialogue we've had with the customers in the last 4, 5 months, I remain very confident that Q2 was an anomaly. You're seeing that in the results in Q3. We continue to see very robust demand for our products, and that's why we're hiring and growing in order to meet that increasing demand. And the tone with the customers, the tempo, the operating rhythm of the business, it all feels much better than what we saw in Q2.

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Gregory William Palm, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [6]

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Yes. Good to hear. That's helpful. And sounds like a busy end of year coming up. In terms of the retail trials that you talked about, is that with 1 customer? Is that with multiple customers? Is this sort of the ship-from-store transition? And I guess, from a new product launch standpoint, how should we be thinking about the materiality of those in terms of increasing your competitiveness versus not only the paper-based competitors, but also the resin-based materials as well?

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Omar Marwan Asali, Ranpak Holdings Corp. - Founder, CEO & Executive Chairman [7]

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Yes, sure. Great questions there. So first, we are focused on both retail opportunities being, frankly, on the shelf and online as well as ship-from-store. Ship-from-store is very natural for us, given what we do. I mean we help companies ship from DCs and fulfillment centers and warehouse and shipping from store, logistically for us, it's not that different. So that's a natural extension. And that dialogue is happening as we speak. We are building a nice pipeline, and we feel pretty good about that.

In terms of the trials on the shelf, we are having conversations, as you can imagine, with more than one large retailer. So think about some of the big nationwide retailers, and we're having dialogue with many of them. The stages of these dialogues vary. So some are pretty advanced. Some are still sort of in the earlier stage of discussions. I expect that you will see trials in terms of our product on the shelf later this year, early next year and then more of a nationwide rollout. So I think the materiality of retail will impact our top line more in 2020. You'll see some modest results in 2019 in Q4, but this really has been a project that we're very focused on in terms of positioning ourselves well for retail opportunity for 2020.

As far as plastic versus paper, I mean the market in retail is predominantly plastic. So as there any modest even substrate switch, we should be in a very good position to capture market share. And some of these markets, Greg, on the retail side are pretty sizable. So these are pretty large markets, whether in bubble wrap, et cetera. So for us, we don't need to gain a whole lot of market share to move the needle, given our size.

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Gregory William Palm, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [8]

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Got it. Okay. One for Trent here. Margins really improved nicely from Q2. Just curious how much of that is related to the pricing initiatives that you've been talking about versus something else, i.e., cost optimization or just overall execution?

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Trent M. Meyerhoefer, Ranpak Holdings Corp. - Senior VP & CFO [9]

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I would say it was predominantly, Greg, related to some of the improved pricing, a little bit of some cost work done. But as Omar talked about in the opening comments, we've still been investing in the business. So while we've done a few things to help on the cost side, a lot on the margin improvement, it was a tougher environment to drive a lot of other cost environment while we're getting our sales up. So the bulk of it was related to kind of the improved pricing, a little bit of cost control and a little bit of some smarter execution. But we see a lot more operating leverage opportunity going forward into next year in terms of -- as we spend a little bit more time here, we get some return on the investments we've made on the front-end side of the business and we start taking a little bit more time and effort on some of the operating side activities to help the operating leverage going into 2020.

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Gregory William Palm, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [10]

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Okay, great. Last one for me, and I'll cede the floor. Omar, going back to some of your initial commentary and some answers. I mean under your leadership, with all of these resources at your disposal, what do you think are the largest near- and long-term opportunities for the company? I mean what are you most excited about going forward?

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Omar Marwan Asali, Ranpak Holdings Corp. - Founder, CEO & Executive Chairman [11]

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Obviously, first, the -- our core business, we are on the right side of history in terms of paper versus resin-based products. I continue to think the core engine will give us very nice growth. The opportunities that I'm excited about outside of the core business are really retail, that we discussed; automation, which I think is a gigantic opportunity in the market. We continue to hear from all of our large customers that are looking for more automation solutions, and we do have the capability to do that. And that's why we are building our center in Heerlen and investing heavily in engineering talent and sort of technical talent. And then the last piece that I'm excited about is in cold chain, which enables us to enter a whole new market. So there are a lot of levers of growth that I see in the company. It's about us as a team executing and frankly, prioritizing and sequencing some of these opportunities right. And I like the tempo of the organization now. I like the rhythm, and I feel pretty good about where we're sitting and the opportunities that we see.

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Operator [12]

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(Operator Instructions) There are no further questions at this time. I turn the call back over to the presenters.

We do have a question from Imran Ahmed from Blackstone.

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Imran Ahmed, Blackstone Alternative Asset Management L.P. - MD [13]

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Nice job on the quarter. I just had a quick question on understanding what your CapEx trajectory is likely to look like going forward.

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Trent M. Meyerhoefer, Ranpak Holdings Corp. - Senior VP & CFO [14]

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I would say -- Imran, this is Trent. Our CapEx trajectory, I would say, is fairly consistent with what we've seen over the past few years. We can invest in the core business and the growth initiatives that Omar is discussing without a dramatic change in CapEx in terms of nominal dollars or as a percent of sales. So we might make some little tweaks within how it's allocated within the businesses, but in terms of the overall profile, CapEx should remain fairly consistent with what you've seen.

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Omar Marwan Asali, Ranpak Holdings Corp. - Founder, CEO & Executive Chairman [15]

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Yes. I think -- Imran, it's Omar. I think just to add to Trent's commentary, roughly expect us to be steady at around 10% and that would be -- 10% of sales. And half of that would be around growth initiatives and half of it would be maintenance. Now there will be some substitution within those, but the quantum should stay steady.

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Imran Ahmed, Blackstone Alternative Asset Management L.P. - MD [16]

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Got it. Understood. And with respect to your growth initiatives, are all of them expected to be in the same gross margin profile or at least revenues generated from growth, are those expected to be in the same gross margin profile as the existing core business?

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Omar Marwan Asali, Ranpak Holdings Corp. - Founder, CEO & Executive Chairman [17]

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I think it depends on the opportunities. Some of the gross margins in automation might be a little bit lower. But as we look at our EBITDA margin, we expect the EBITDA margins to stay very similar across some of these businesses. And if you look at our free cash flow, we expect actually free cash flow yield to improve, in particular, as we do more in consumable and in retail that don't require a lot of CapEx.

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Operator [18]

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There are no further questions at this time. I turn the call back over to the presenters.

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William E. Drew, Ranpak Holdings Corp. - Chief of Staff [19]

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Okay. Great. Thank you all for joining us today. We appreciate your interest in Ranpak and look forward to joining you again to discuss our fourth quarter results.

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Operator [20]

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This concludes today's conference call. You may now disconnect.