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Edited Transcript of PACK.N earnings conference call or presentation 5-Mar-20 1:30pm GMT

Q4 2019 Ranpak Holdings Corp Earnings Call

Mar 12, 2020 (Thomson StreetEvents) -- Edited Transcript of Ranpak Holdings Corp earnings conference call or presentation Thursday, March 5, 2020 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

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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 Ranpak's Fourth Quarter and Full Year 2019 Earnings Call. (Operator Instructions)

Please be advised that today's conference is being recorded. (Operator Instructions)

I would now like to hand the conference over to your speaker for today, Bill Drew, Ranpak's Chief of Staff. 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 an 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 of comparable GAAP information. Please refer to the tables 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 12 months 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-K with the SEC for the period ending December 31, 2019. The 10-K will be available through the SEC or the Investor Relations section of our website.

With me today, I have Omar Asali, our Chairman and CEO; and Trent Meyerhoefer, our CFO. Omar will summarize our fourth quarter results, provide an update on our growth strategies and issue our outlook for 2020 and beyond. Trent will provide additional detail on the financial results before we open up the call for questions.

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

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

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Thank you, Bill. Good morning, everyone. The fourth quarter was one of continued progress at Ranpak. We delivered a solid performance in the fourth quarter from a growth and profitability standpoint driven by better execution and an improved operating rhythm, while making significant progress on a number of key initiatives related to our business and capital structure.

Product innovation remained a focus with 2 meaningful product introductions in our core portfolio in the past few months. And we also introduced our first consumable offering to be sold on the shelf in retailers. We improved our digital footprint through the launch of our new and more dynamic website, which not only tells our story better but also provides us valuable insights into our business through increased analytics. We brought in additional talent to the team in operations, sales, engineering and marketing roles. From a capital structure improvement standpoint, we completed an oversubscribed equity raise which reduced our leverage profile and lowered our annual interest expense by more than $6 million, while also increasing our stock's float and trading liquidity.

It has been a busy few months while the team is responding well to the new mode of operating and embracing the ownership mentality that comes with being a shareholder. Engagement and enthusiasm levels are high. The additional talent and resources have invigorated the pipeline and results are beginning to show up in performance.

I'm also pleased to report that we had a strong finish to 2019, and investment in the business continues in 2020. The work on our new automation center in the Netherlands continues according to plan with the full opening expected to be in the spring. I'm eagerly anticipating the completion of our new facility so we can begin meeting the demand we're seeing in the marketplace for our automation products. This area remains one of the primary growth opportunities that I'm most excited about within Ranpak. I firmly believe we're only in the beginning stages of companies seeking to maximize efficiencies within their operations and reduce labor costs through automation.

Now a quick update on our expansion into retail. We're making great progress in this area with product offerings which provide consumers with an environmentally friendly alternative to bubble wrap. While still in early stages, we're encouraged by trials and feedback for some of our consumable products, which you can now find at select stores and online.

In the core business, I mentioned the 2 significant product launches over the past few months, and in fact, the biggest launches Ranpak has had in some time. We shipped our first Trident Void-fill machines to our U.S. customers in December, and I have to say the feedback has been even better than I expected. We're excited about the structured Void-fill solution, which makes us even more competitive against air pillows. And given the feedback and demand, we're evaluating increasing the number of machines we're planning to deploy in this upcoming year.

In Europe, we experienced similar levels of success with the launch of Guardian, our next-generation cushioning product. Like Trident, the feedback on Guardian has been quite positive and has generated a lot of excitement in our sales force. Guardian was rolled out in January, primarily across Europe with a few locations in Asia. And later this year, we'll be coming to the U.S. once we have completed the necessary paper production lines in our U.S. facilities to convert paper specifically tailored to work with this product.

Innovation is at the core of our business and will be the lifeblood of Ranpak at going forward. We will continue to ramp up our pace of innovation internally and work with customers on development opportunities. We've been adding to the engineering and design teams and also streamlining the process of converting ideas to actionable growth drivers. So continue to look for new ideas from us.

Turning the discussion now to fourth quarter highlights. We continued our solid bounce back in performance and are seeing a positive impact from our initiatives that we put in place since August. For the quarter, consolidated net sales on a constant currency basis increased 5.7% driven by broad-based increases in the core business in North America, Europe and APAC, offset slightly by automation, which as I mentioned is being temporarily impacted until the new center opens.

The North American team posted their largest sales quarter ever, with net sales increasing more than 7% year-over-year driven by increased Cushioning and Wrapping sales within our distributor channel. On a constant currency basis, for the quarter, net sales in Europe, APAC were up approximately 4% driven by growth across all product lines with particular strength in Void-fill and Wrapping, offset by a transient decline in automation.

Asia Pacific continued its steady growth trajectory but has been affected in recent quarters by trade disputes. More recently, new challenges have arisen due to the health concerns that began in the region and have spread throughout the world. Our team and their families are taking the necessary precautions to try and stay healthy. We appreciate the great work our team has been doing under stressful circumstances and are hoping relief can be found soon.

Pro forma adjusted EBITDA of $28.8 million was up 15.8% in constant currency terms year-over-year due to higher sales, better pricing and lower input costs, while our margin expanded by 320 basis points to 36.4% as the operating leverage of the business as the year progresses peaks in the fourth quarter.

Those are the high-level points on our finish to 2019. Now let's talk briefly about how I see the year ahead progressing. As I mentioned earlier, 2020 is a year of continued investment at Ranpak. Since I became CEO in August, we identified a number of areas that were not adequately staffed or invested in to capture the growth opportunities in the marketplace. Addressing this involves building out the sales team in the U.S., adding engineering resources, hiring operational expertise, in-housing automation production, filling out the finance function and upgrading technology resources across the company.

Given the length of the sales cycle and timing of these investments, I expect them to really have a meaningful impact on the top line beginning in the second half of 2020 and kicking in more fully in 2021. Our guidance for 2020 reflects this level of investment, which will likely impact EBITDA in the short term as we ramp up, but it will position us really well to achieve our longer-term growth goals. We will discuss the 2020 outlook further after Trent's remarks and provide a longer-term perspective as well.

With that, let me turn the call over to Trent, who will give you further details related to the quarter and the full year 2019.

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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 12-month period ended December 31, 2019, on a combined basis, reflecting a simple arithmetic combination of the GAAP predecessor and successor periods without further adjustment, and also pro forma for constant currency and purchase accounting adjustments in order to present a meaningful comparison against the corresponding periods in the 12 months ended December 31, 2018. As Bill mentioned, we'll be filing our 10-K, which provides further information on Ranpak's operating results.

Machine placement continued its steady increase in the quarter, up 7.3% year-over-year to over 104,000 machines globally. 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 32% year-over-year. Overall net sales for the company in the fourth quarter were up 5.7% year-over-year on an adjusted constant currency basis driven by strong performance in North America and continued solid performance in Europe and Asia, offset slightly by automation, which will pick up when we open our new facility and we can ramp up production. North America posted its best quarter of the year, growing above 7%, and bringing full year 2019 sales to a positive 1%, which is a nice recovery after a weak Q2.

For the quarter, combined sales in our Europe/Asia Pacific division increased almost 4% on a constant currency basis, bringing full year 2019 combined sales in those regions to nearly 10% 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 strength in Cushioning solutions and Wrapping.

As expected, the fourth quarter was our largest from a sales and EBITDA standpoint. We achieved significant operating leverage to finish the year as fourth quarter pro forma adjusted EBITDA increased 15.8% year-over-year, resulting in an EBITDA margin of 36.4%. This demonstrates the seasonal power in the business in the second half of the year and particularly in the fourth quarter.

Moving to the balance sheet and liquidity. We completed a successful public equity offering of $110 million in the fourth quarter. We applied 100% of the net proceeds to the USD portion of our term loan, which reduces our net leverage by more than a full turn to about 4.4x the midpoint of our 2020 guidance. By deleveraging, we achieved 25 basis points step down in the rate on our term loan to LIBOR plus 3.75% and reduced our cash interest expense for the upcoming year by more than $6 million to less than $25 million annually. We completed 2019 with a strong liquidity position, including a cash balance of $19.7 million and no draws against our $45 million revolving credit facility.

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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Thanks, Trent. Now on to discuss our guidance for 2020 and how we think about this business over the longer term. This year, on a constant currency basis, we are anticipating sales growth in the area of 6% to 10%, and adjusted EBITDA growth of 4% to 10%. The low end of our range reflects the uncertainty and the timing of the impact of the investments we have been discussing as well as the back-half weighing of our automation ramp. As far as what to expect in terms of the cadence of the year, the first quarter of 2019 was a very strong quarter due to the buy-ins in North America and Europe ahead of price increases. So the first quarter comparison will be more challenging. Second quarter 2019 felt the repercussions of those pricing actions, and thus, should be a more favorable comparison, largely evening itself out for the first half of the year. We are looking to our growth initiatives to ramp up in the second half of the year and, similar to 2019, expect to experience greater operating leverage as the year progresses.

Moving to thoughts on the longer term. We acquired this company because we see tremendous growth potential. We are on the right side of history in terms of sustainability. Our best-in-class paper products compete directly with many of the plastic and phone packaging materials that comprise the majority of the protective packaging landscape. According to recent research reports, plastic packaging is responsible for 45% of all plastic waste produced. That equates to over 140 million tons annually. A 2019 Kantar survey of 65,000 people indicated that globally, plastic pollution is the second largest concern for consumers behind climate change. The figures are staggering and getting more attention. We at Ranpak are fully committed to ensuring that every business is aware of the merits of using paper solutions in their supply chains. We just published Ranpak's first ESG impact report on our website. I encourage you to check it out as not only our Ranpak products doing good for the world, our organization as a whole scored extremely well on many key metrics including water usage, waste management and carbon footprint of our operations.

Given the quality of our products, sustainability tailwinds and market opportunities we see, our long-term growth targets for the company are 10%-plus per year in sales and EBITDA growth. Frankly, I'll be disappointed if it isn't meaningfully above that base rate as we execute on our business plan. We will get there by growing the core business through product innovation and increased marketing efforts, meaningfully ramping up automation and expanding our retail offering to become a substantial contributor to sales. I'm a meaningful owner of Ranpak, so you can be assured I wake up every day thinking about how to drive growth and create value for the shareholders of this company.

Thank you all again for joining our call. At this point, we'd like to open the discussion for questions. Operator, please open the line.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Greg Palm with 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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I guess I'll start with some commentary about some of the investments you're making, and I guess, the potential impact that could have on growth, which you alluded to. I mean Omar, if you could rank some of the areas of excitement and associated contribution in the second half and in the next year, what would be top of mind in your opinion?

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

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Yes, Greg. I think right now, top of mind for us is automation, where we expect our center to be open in April, so by next month, and all of our lines fully operating. We have a lot of demand. Every slot we have is pretty much taken. So I think you are going to see some impact from that in the second half of the year. And frankly, I will tell you, just for automation solutions, in particular, we get more inbound calls than our sales guys are making in terms of outbound calls.

Second after that is retail. The exciting piece about retail is that we are entering the moving season. So as we head into spring, and you'll see more demand for our products as we compete with bubble wrap and other wrapping solutions, we're going to be -- we're already online in a number of companies and sites, and then you're going to see an expansion in terms of our presence on the shelf. So these 2 areas are pretty big areas that I think you'll see some results in 2020 and then certainly in 2021.

Beyond that, I would say we're spending a lot of energy and resources in cold-chain. And that's something that we also expect to see some meaningful impact, but it will be sort of the third priority behind automation and retail. So there's a lot going on, and frankly, a lot of energy around these 3 initiatives.

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

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Makes sense. That's helpful. I guess in terms of that retail opportunity and specifically the shelf trials, can you maybe just update us there on where you are? I guess I've seen that product online, and you talked about it. It sounds like it's still sort of in trial phase, but at what point will you get some, meaningfully, expansion on the shelves there?

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

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I think the meaningful expansion is going to be happening later this month and in April in anticipation of the moving season. So towards the end of this quarter and the beginning of next quarter, you're going to see a nationwide rollout of our products in stores, and then you're going to see further investments in our online presence as well as the last thing I'll tell you is, as we speak, we are initiating a B2C campaign to educate the consumer about our products, which you will see that in the next 60 days or so.

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

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Okay. We'll have to keep our eyes out for that.

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

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So a lot of exciting stuff happening in retail that you will start noticing as you're shopping around.

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

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Yes. Okay, good. In terms of the new products, I think it's been some time since the company really had a new product cycle. So can you just talk a little bit about how that's changed the culture? I mean my guess is there's a renewed sense of excitement from the sales force, but wanted to at least get some feedback there.

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Omar Marwan Asali, Ranpak Holdings Corp. - Founder, CEO & Executive Chairman [9]

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Yes, sure. The company was working already before our acquisition on 2 products. The company has not innovated in a while. I would say, since taking over, we accelerated the investment in these 2 products. We launched the next-generation Void-fill product in December in North America. And I will tell you, tremendous enthusiasm by our distributors, our sales guys, our equipment is already out there. It's impacting sales positively already. So this is the structured piece of paper that, we think from a cost standpoint, is very, very competitive with airbags. And to me, I'm having now very high expectations for this product, we call it the Trident product, that I think is resonating in the marketplace later in the year. We will be taking that product to Europe and Asia.

At the same time in December and in January, we launched a next-generation cushioning product, and this does the same pads that our big equipment does at a much smaller footprint, which is what customers want, in particular, in Europe, where space is tight. And that's being rolled out right now. It's in a lot of trials. Again, early indications are very positive and expect us to bring that product to North America in the second half of the year. So we have 2 big product initiatives and launches that happened in the last number of months that we're excited about.

Important to highlight, Greg, we continue to hire engineers. We've been adding to our engineering team. We continue to hire R&D engineers as well. And some of them have started this year. Some of them have started late last year. But there's quite a bit of investment in human capital on the engineering side, outside of automation, where we also have been adding talent. And that hiring and that investment is, frankly, changing the tone inside the company about the innovation. So if you look at what we're doing at the core business and combine that with what we're doing in automation, in retail and in cold-chain, that can give you a sense of sort of the rhythm and the innovation spirit that we're building inside the company.

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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. The 10% target, which obviously is nicely higher than the company's historical growth rate, and you kind of mentioned that you'd be disappointed if it was not significantly higher than that. So trying to reconcile the difference, I mean, getting to the 10% and over long-term growth rate, does that imply, call it, material contribution from some new growth opportunities? Is it share gains? Does it imply an acceleration of market and industry growth? Just maybe a little bit more color on kind of how you get there.

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

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So I told you my views on automation and the demand. It's there, it's tangible. If we build these products, if we service these products, the demand is there, expecting we're going to execute and really grow there meaningfully. Retail is a new endeavor. We need to educate the consumer. We need to expand our presence, which you're going to see. So there, we're having a bit more modest expectations, and I hope we surpass those expectations. In the core business, we're already seeing our new products that were launched in the last couple of months and seeing them resonate. So we're building, again, reasonable projections for this year based on that innovation and then beyond. And cold-chain, as I said, is a little bit of -- it's behind some of the other innovation, so that's something that's also part of our calculus.

So yes, there's a lot of innovation, but it's phased out and that gives you the sense of why we came up with the guidance that we did this year, plus going forward. I feel very, very good that we're planting a lot of seeds to hit that guidance or surpass it in future years of double-digit growth. I will tell you, given the amount of investments we're doing in human capital in the company, I personally would be disappointed if we are just at that level than if we don't surpass it. Now for this year, in particular, and we just came up with our guidance for this year, there are a couple of things. One, as I mentioned, automation will ramp up and kick in, in the second half of the year. But two, the outbreak of the virus is weighing on us, to some extent, because we, frankly, don't know what we don't know. So I can't tell you where the world is going. Now unlike other companies, I will tell you -- and of course, we want relief, we want solutions, we want this virus situation to go away, but unlike other companies, 1/3 of our business is e-commerce, which benefits from parcels being shipped around and boxes being shipped around. And you can imagine just intuitively and what's happening in the world is there is more e-commerce. So it's benefiting that segment of our business. But it's not benefiting the industrial piece of our business.

So we have sort of a unique situation from a business standpoint where, as the number of parcels is increasing, that's a positive for Ranpak. But the overall impact of the economy, I'm not smart enough to tell you because I don't know where the situation is going, we're doing a lot of work every day. Priority #1 is the safety of our employees globally, including those in China who are working from home. And then we're working very closely with our suppliers and our supply chain continues to be terrific. We're managing it well. If there are delays, it's a couple of weeks delays, nothing meaningful. So we feel great there. And then in terms of demand for our product, in 1/3 of our business, demand is super robust because people don't want to go out and about and want to get parcel shipped to them. But we will -- in industrial activity, there's a negative impact. So putting all that together and some of the uncertainty is why we came up with the guidance that you saw for 2020.

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Operator [12]

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(Operator Instructions) There are no further questions at this time. I would now like to turn the call back over to management for final remarks.

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Omar Marwan Asali, Ranpak Holdings Corp. - Founder, CEO & Executive Chairman [13]

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Okay. Great. Thank you all again. We're excited about how we finished the year, and more importantly, are very excited about 2020 and beyond. We look forward to catching up with each and every one of you and updating you in future quarters. Have a great day.

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Operator [14]

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This concludes Ranpak's Fourth Quarter and Full Year 2019 Earnings Call. We thank you for your participation. You may now disconnect.