Q4 2023 Ranpak Holdings Corp Earnings Call
Participants
Sara Horvath; Vice President, General Counsel, Company Secretary; Ranpak Inc
Omar Asali; Chairman of the Board, Chief Executive Officer; Ranpak Inc
William Drew; Chief Financial Officer, Senior Vice President; Ranpak Inc
Ghansham Panjabi; Analyst; Robert W. Baird & Co Inc
Adam Samuelson; Analyst; Goldman Sachs & Company, Inc.
Danny Eggerichs; Analyst; Craig-Hallum Capital Group LLC
Presentation
Operator
Ladies and gentlemen, thank you for standing by. My name is Debre, and I will be your conference operator today. I would like to welcome everyone to the Ranpak Fourth Quarter 2023 earnings call. (Operator Instructions)
I would now like to turn the conference over to Sara Horvath, General Counsel. Please go.
Sara Horvath
Thank you and good afternoon, everyone. Before we begin, I'd like to remind you that we will discuss forward-looking statements as defined under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those forward-looking statements as a result of various factors including those discussed in our press release and the risk factors identified in our Form 10 K and our other filings filed with the SEC.
Some of the statements and responses to your questions in this conference call may include forward-looking statements that are subject to future events and uncertainties that could cause our actual results to differ materially from these statements.
Ranpak assumes no obligation and does not intend to update any such forward-looking statements. You should not place undue reliance on these forward-looking statements, all of which speak to the company only as of today. The earnings release we issued this afternoon and the presentation for today's call are posted on the Investor Relations section of our website.
A copy of the release has been included in the Form eight K that we submitted to the SEC before this call, we will also make a replay of this conference call available via webcast on the company website For financial information that is presented on a non-GAAP basis, we have included reconciliations to the comparable GAAP information. Please refer to the table and slide presentation accompanying today's earnings release. Lastly, we'll be filing our 10 K with the SEC for the period ending December 31st, 2023. The 10 K will be available through the SEC or on the Investor Relations section of our website.
With me today, I have Omar actually, our Chairman and CEO, and Bill Drew, our CFO. Omar will summarize our fourth quarter results, provide an update on our growth strategies and as to our outlook for 2020 for Phil will provide additional detail on our financial results before we open up the call for questions.
With that, I'll turn the call over to Omar.
Omar Asali
Thank you, Sarah, and good day, everyone. Thank you all for joining our call. We finished 2023 on a positive note as we build on the momentum from the third quarter and delivered our best quarter of the year. We saw continued general improvement in the operating environment in Europe and a more pronounced holiday season in North America compared to prior year.
Overall, the e-commerce, discretionary goods market and manufacturing sectors remained subdued. While we are starting to see general improvement across many of our end users and are encouraged by the seasonal uptick, more in line with historical patterns.
In the fourth quarter, consolidated net revenue on a constant currency basis increased 10%, driven by volume growth in our different regions as we saw improved order activity among larger e-commerce customers in the U.S. and generally improving conditions in Europe, the volume improvement seen in Q3 and Q4 helped drive 2023 full year net revenue up 1% on a constant currency basis, a welcome recovery from a slower start of the year.
Europe and in fact, finished on a strong note, up 12% on a constant currency basis, driven by 15% volume growth as ordering patterns continue to normalize and general sentiment in the region was stable. The improvement was broad-based as all PPS categories in the region were up year over year. Destocking activity is behind us and in many cases, distributors and end customers are working to keep as little inventory on hand as possible.
Our North America business also experienced an uptick to finish the year with sales up 8%, driven by improved volumes and contribution from automation sales full year results were up 2% in North America, driven by a larger contribution from automation and improved hotel performance, offset somewhat by a sluggish wrapping and cushioning environment.
Adjusted EBITDA of $24.4 million was up $11.5 million or 89% in constant currency terms year over year and resulted in a margin of 26%. The increase in adjusted EBITDA was due to higher sales volumes compared to a year ago, significant improvement in input costs and better absorption of our fixed G&A for the year adjusted EBITDA increased 14.5%, $76.5 million.
Overall, it was a quarter that turned out better than expected and helps us to finish a challenging year on a positive note. And generally speaking, we entered 2024 in a better operating environment than we experienced in 2023. Discretionary goods remained soft. While we are now two years into absorbing the pull forward in demand that impacted performance in '22 and '23.
Strategic account activity in North America is robust with key players announcing their commitment to eliminating plastic in their fulfillment centers over the next few years. We also have made substantial inroads with our automation business with key accounts that I think solidifies our position as a true automation player. Our distributors and end users are in tight inventory positions and are likely conservative in their positioning.
We continue to monitor the energy environment in Europe. It is far improved from a pricing perspective from a year ago. As such, nat gas is at EUR27 per megawatt, down from EUR300 at the peak and EUR80 at the start of 2023. This has led to a stable paper input cost environment in the region and improved overall sentiment. North America paper pricing also remained stable as we enter into 2024, having clawed back the majority of our gross margin profile that we had sacrificed in '22.
The regulatory environment continues to position us with a secular tailwind as extended producer responsibility regulation has been enacted or proposed in many states, including California, Colorado, main, Oregon, Maryland, New Jersey, Washington and Connecticut.
These laws have been in place in Europe for years, but are just gaining traction in the US will take you through our guidance for 2024 after Bill's remarks. But to summarize, we are focused on accelerating top line growth this year, double-digit adjusted EBITDA growth and working with the investments we have made to generate cash and delever.
Now here's Bill with more info on the quarter Thank you, Omar.
William Drew
In the deck, you'll see a summary of some of our key performance indicators. We'll also be filing our 10 K, which provides further information on the impact to operating results. Machine placement continued its increase, up 1.5% year over year to over 141,200 machines globally. Cushioning systems declined 1.4% void fill installed systems grew 2.6% and wrapping grew 2.3% year over year.
We continue our fleet optimization efforts to identify opportunities to move less productive converters in the field, up to higher utilization locations and furthered our efforts to refurbish, and we fabricate older converters for redeployment to save on CapEx.
Overall, net revenue for the Company in the fourth quarter increased 10% year over year to $93.9 million on a constant currency basis, driven by volume growth in all regions and increased automation sales, bringing full year results up 1% on a constant currency basis for the quarter.
In Europe and A-Pac reporting division nine revenue increased 12% on a constant currency basis. Better second half drove net revenue on a constant currency basis to finish up 1% for the year in the region, driven by volume growth and increased contribution from automation offset somewhat by pricing give-back due to raw material input cost relief after achieving our targeted margin profile.
North America also finished on a positive note, driven by better volumes and increased contributions from automation. Net revenue for the quarter was up 8%, which brought the full-year results in the region to growth of 2%. We are encouraged by what we see in the region and are looking forward to strategic account activity driving volume acceleration as the year progresses.
Reported gross margins of 37.7% for the quarter, improved more than 950 basis points versus the prior year. Input cost peaked and volumes were lower, resulting in an increase in gross profit on a constant currency basis of $11.5 million or 48% year over year.
Gross margins in the Europe and A-Pac reporting unit stayed flat with the third quarter at 39%, while North America was approximately 35.5%, although we do expect to have some upside going forward in North America as additional volumes flow through as we enter 2024 paper pricing has stabilized, although we have seen some market participants publicly vocal about their desire to raise price.
SG&A excluding RSU expense was in line with the previous two quarters at $26.7 million on a constant currency basis. Controlling our spend and leveraging our G&A investments are a top priority. We expect that as the volume environment improves, we will better absorb our overhead as you've seen in the fourth quarter as well as higher volume quarters in the past, headcount was roughly flat year over year. And on the personnel front, we have over 140 people dedicated to automation currently, obviously resulting in a substantial drag on our profitability profile.
As that business scales, we expect to have a much improved financial profile with our adjusted EBITDA margins on a consolidated basis, getting back to the mid to high 20% area overall, as a result of the improved sales volumes and improved gross profit in the fourth quarter. Adjusted EBITDA improved 89% in the quarter to $24.4 million on a constant currency basis or 26% adjusted EBITDA margin. This brings the full year's results to up 14.5% to $76.5 million on a constant currency basis, implying a 21.9% adjusted EBITDA margin for the year.
Moving to the balance sheet liquidity, we completed 2023 with a strong liquidity position, including a cash balance of $62 million and no drawings on our revolving credit facility, bringing our reported net leverage to 4.6 times on an LTM basis or 5.0 times according to the definition of adjusted EBITDA in our credit agreement. A recent peak for leverage was 5.7 times in the June quarter, and our short term target was to get below five turns.
By year end, we are pleased to make progress, but our ultimate goal remains to return to a leverage ratio of three turns or less. 2024 is a year where we expect to continue to grow our adjusted EBITDA and generate cash to delever. Major CapEx cycle of investing in digital and physical infrastructure is largely complete. The final remaining $1.5 million from Malaysia to be funded in 2024.
With that, I'll turn it to Omar.
Omar Asali
Thanks, Bill. This year was a pivot year, and I'm happy to report that we took critical steps required to position us well in 2024 and to scale Ranpak in '23, we successfully clawed back the majority of our gross margin profile after investing in our customer relationships during the significant input cost inflation of 22. We also made meaningful inroads with key strategic accounts in North America and PPS, which will show up beginning in the second quarter of this year.
I believe automation has hit the commercial inflection point we have been working towards as we have won key mandates for our auto fill and credit products that solidify ramp back as a top-tier automation player. We have completed the expansion of our production capabilities to be able to serve over $100 million annually in revenue.
We believe these signature wins will serve as a baseline for automation growth over the next few years and also be a strong signal to the market of the quality and robustness of our solutions. This is what we have been building towards in automation and are excited to be at a point where we believe the step change in the top line is here regarding guidance for the year.
On a constant currency basis, we're anticipating revenues of $370 million to $390 million, reflecting top line growth in the area of 6% to 12% and adjusted EBITDA growth of 5% to 16%, implying a range of $80 million to $89 million. Our top line growth for the year reflects our expectations of a slow but continuing return to a more normal operating environment.
As e-commerce buying patterns normalize and industrial activity remains somewhat pressured, we expect to achieve volume growth in PPS building on the momentum that started in the second half of the year and automation revenue to be up more than 50%. Our growth in adjusted EBITDA of 5% to 16% reflects the contributions from the expected top line increase and steady margin profile.
We expect that capital expenditures will step down as we exit our major investment cycle and be in the area of $35 million, enabling us to focus on cash generation and de-leveraging. Generally speaking, we believe this guidance reflects a level of conservatism and continued somewhat challenging near-term backdrop our bottom-up fundamental view is giving us more optimism.
Hence, we believe our guidance has some upside depending on the timing and speed with which key strategic accounts ramp up their plastics to paper shift. '24 is an inflection year for Ranpak in general and for automation in particular, I feel better about our company now than I have at any point in the past two years, we have solid momentum in the business with potential step-change opportunities in PBS. and automation about to kick in.
We have seen some of the largest e-commerce players publicly announced this year. They have begun a multiyear transition to eliminate plastic delivery packaging and replace it with paper. We are part of that switch. Industrial Automation is a mega theme in an environment where labor costs and other rising inputs, pressure margins, companies are willing to spend on projects that deliver an attractive ROI.
And we believe our underlying solution portfolio is able to deliver what customers need specifically in the form of reduced labor costs, reduced logistics costs and lower waste. We have the solutions people and facilities to scale this business and look to nearly double our sales and automation in '24. The input cost environment remains pretty balanced. North America added kraft paper capacity in '23 and pricing has stabilized in recent months.
Additional volumes should help us drive efficiencies and better absorb our overhead in 24, especially as strategic account activity really kicks in in the second half of the year in Europe, the energy markets have been favorable and we were able to emerge from winter without a large spike, an excessive draw on reserves. We believe that positions us well in 2024 to maintain our margin profile in Europe and Asia Pacific.
Expanding our presence in Asia Pacific is a key milestone for us this year, as we will go live with our Malaysian production facility this summer. A-pac is currently served out of Europe, which adds significant cost and lead time to getting product to our end users. This facility will enable us to take meaningful freight time and cost out.
We believe our go-to-market network and strategy in this region, coupled with our local manufacturing footprint, with the result in our ability to sell at much more attractive prices to fuel growth without negatively impacting our margin with the size of the economies there and growing importance of sustainability in places like Australia and Japan. We believe Asia Pacific should become a more meaningful contributor to our PPS. business globally.
Thank you all again, at this point, we'd like to open up the line for questions. Operator?
Question and Answer Session
Operator
Thank you. The floor is now open for your questions. (Operator Instructions)
Ghansham Panjabi, Baird.
Ghansham Panjabi
Hello, everybody. Omar, just kind of specific to fourth quarter, as you think back, maybe you can give us a sense of which end markets were better than perhaps your initial forecast. And then as it relates to the guidance for 2024 on an EBITDA basis, how should we sort of think about phasing and seasonality between the first half and second half?
Omar Asali
Sure. Thanks, Ghansham. I would say in the fourth quarter, the holiday season, in particular in the e-commerce was a little bit healthier than we had anticipated going into the quarter. Maybe we were a little bit too cautious given, you know, the prior year, we didn't see that seasonality uptick. And then in reality, what we saw, frankly, across different geographies in the U.S. in Europe and in Asia Pacific was a stronger holiday season.
So I think that really helped in terms of in terms of 2024 and seasonality, this is a year where we think the large accounts and strategic accounts that I've been discussing on a number of these calls are going to kick in in a meaningful way. I've mentioned in prior calls that we have a number of them in our trials and in our pipeline for I'm happy to report. As of now, we have been successful in converting some of these trials and pipeline into wins and closes. We're installing some of that equipment in this quarter.
And from a seasonality standpoint, I would expect that you're going to start seeing some pickup in the second quarter of 2024. And again, given some of these wins and given what we saw this past quarter, I'm expecting a pretty strong second half of the year, you know, based on both these wins and the switch from plastic to paper as well as the holiday and peak season later in the year.
Ghansham Panjabi
Okay. So would that by definition, imply an acceleration in the machine placement side to then as we progress?
Omar Asali
I think it'll play some, to be honest, we through our systems and through optimization and prefab and refurbishing we have been moving more equipment within our system than ever. So it may not be reflected in a lot of new CapEx and new equipment. I think you may see a number of these dispensers and converters being a little bit more optimized as Bill highlighted in the call, that's a pretty big initiative. And given the large investments we've done the last couple of years in converters. So the short answer is you'll see some incremental CapEx and new equipment, but you're also going to see some movement to optimize our network between existing converters and dispensers.
Ghansham Panjabi
Okay. That's fantastic to hear. And maybe a follow-up for Bill in terms of some of the moving parts build on free cash flow and also the swap expiration in June of 2024 and the impact on interest expense in the second half versus the first half?
William Drew
Yes, Ghansham, so you're asking about free cash flow expectations for '24?
Ghansham Panjabi
Yes, yes.
William Drew
So I think, Ghansham, the way that we think about if you look at the guide, the mid-range, we call it around $85 million or so for us, you know what? We've got pretty sizable cash balance that we're getting some nice income on. So we could include the interest income that we collect as well as the obviously the cash interest expense, we're looking at around $29 million, $30 million for 2024. Cash taxes, we would assume to be kind of in that mid single digits in millions and then from a working capital standpoint, a slight use, right? I think we'll be making some investments in working cap this year to invest in some of the strategic account activity that Omar highlighted. So kind of all in that gets you in the kind of double digit millions of free cash flow generation.
Ghansham Panjabi
Okay. Perfect. Thanks so much. Okay. I'll turn it over. Thanks a lot. That's very helpful.
Omar Asali
Thanks, Ghansham.
Operator
Adam Samuelson, Goldman Sachs.
Adam Samuelson
Yes, thank you. And good afternoon, everyone. So I guess my first question is going back to the point on maybe repositioning warm at converters and then you had in the past, I think it was the first time and it's really and a point I can see in the model where the installed base and especially the installed base and void fill, it actually decreased sequentially. So can you talk maybe or a little bit more about the magnitude of those actions? How much you're repositioning? Is it largely void filler, you're doing it in wrapping and cushioning as well.
And what is the expectation for installed base and installed base growth in 2024 in aggregate with I think you said $35 million of total CapEx, bill. So we have that I'd make just trying to tie the all those pieces together.
William Drew
So I mean, I would say the converter, prefabrication and refurbishment is a major initiative for us right. We want to make sure that we're maximizing free cash flow, especially in this environment. And I think with the number of converters that we deployed right over recent years, there's the ability for us to reposition a number of those.
So we're working actively with the sales team and also using the analytics that we've put in place in the past couple of years to really look at accounts, make sure that the way the deals were underwritten. If the performance isn't matching what was originally expected that we had those conversations and redeploying those converters elsewhere.
Then I think the team has been doing a good job with that. And I think the other things that you're probably seeing just in the placement account and the numbers is it's related to some of the macro activity, particularly in Europe on the commissioning side, right. You just seeing some of those accounts, right, that have been under pressure, right? So we're going and getting machines back from some of those more industrial areas that have just been hit harder by the last couple of years.
So I think it's an initiative that's across the board right across all categories to maximize our free cash flow. And we'll continue to do that and use the analytics to really make sure that we're maximizing the return on the capital that we've deployed as far as '24 goes, if you're looking for kind of a modeling estimate, I think for us, we're estimating kind of that mid-single digit growth in the installed base, if that helpful.
Adam Samuelson
And now that is. And maybe just a follow-up. As we think about pricing and kind of the confidence on the gross margin outlook, especially where you might have seen my tea kraft paper entire North America? I think Europe is it's been weaker and certainly the inflationary environment there with energy is has backed off and just help us think about your visibility on your kraft paper purchases and your ability to consistently price that up through the distribution. Our thing pre COVID pre Europe inflation business that operated on kind of annual kind of paper purchases. And I can't imagine you're getting fixed price paper paper purchases from your suppliers.
Omar Asali
Yes, I think that's right, Adam, what we are seeing in this environment and frankly, it's applying to different geographies. Obviously, our largest being Europe and in the US is pretty much we are coming up with agreements that on average, I would say are around six months in duration. So think of that as the price resets, you know, twice a year rather than the annual agreements that we used to have a couple of years ago, and that reset might be related to sort of some indexed pricing.
So in general, we feel pretty good about getting some visibility, even though it's not for the full year, it's not super volatile with a lot of frequent resets, if you will, now the tone out there in the market is look, obviously, the space now is facing a lot of consolidation and discussion around consolidation with the large corrugated and paper players. We're in close touch with all of our suppliers they continue to push that.
If we can do more volume, they're willing to work with us on price. And frankly, we think with some of the strategic account activity that we're that we're winning and hopefully we'll move the needle in 2024. We have been negotiating pricing, et cetera, to fulfill the rest of the year.
So I feel near term in both geographies in Europe and in the U.S., we're seeing some stability and pricing that I think hopefully will last throughout the year. But my guess is in the second half of the year, there will be a set of negotiations that we will have given the resets. And that depending on where the index pricing is, we'll see how the second half of the year plays out.
And then to your point on energy, I mean, that seems to be a lot more subdued in terms of volatility in Europe compared to where we were and from everything we're hearing, there's more supply coming to Europe from other sources that hopefully that energy stability will last for a while.
Adam Samuelson
That's helpful. And if I could just squeeze one more in on the on the automation equipment side, talking about 50% plus growth, which would be over $10 million. I mean, how much of that do you have in backlog today or that, how do you how would you frame the confidence level in that 50% growth just in terms of fixed fixed orders versus kind of you have the lead generation, but you have to convert those into orders and the timing of backlog conversion to orders?
Omar Asali
I would say the confidence is relatively high about that number. That's why we are comfortable sharing the way our business works. And obviously, you know, there is peak season and sort of early in the year, it's a bit different, but I think about once we get these orders and these bookings, you know, we're fulfilling those sometime in the next six to nine ensuing months.
So I would say our visibility for the next couple of quarters is pretty decent later in the year. We still need to increase our bookings now to help hit those numbers that are later in the year, given the six to nine month average period, if you will on. But I mean, last quarter, I think I mentioned we had record bookings from I mean, we continue to sort of have very, very elevated levels of bookings, which is increasing our confidence in hitting that number this year.
Adam Samuelson
That's a that's very helpful. I'll pass it on. Thank you.
Omar Asali
Thanks, Adam.
Operator
Greg Palm, Craig-Hallum Capital Group.
Danny Eggerichs
Thanks. This is Danny Eggerichs on for Greg today. Congrats on a good quarter. Good to see see the volumes kind of come back a little bit, I guess from maybe what you've seen in Q4 and quarter to date on the volumes of just overall visibility and sounds like you're pretty confident in the guide as well as those larger strategic accounts ramping in the second half. I guess does the macro have to improve much from here for you to feel pretty good about those or regardless you feel comfortable there? And then kind of any continuation and macro recovery provides even some potential upside from there?
Omar Asali
Yes. Let me start, it's Omar, and then I'll have maybe Bill will chime in. I would say for the micro and the fundamental picture that we see in our business, we really like. So whether that's volume trends, whether that's what we're seeing in gross margin and stability in our largest input cost, which is paper order, that's sort of the trial activity. The switch and from plastic to paper and our pipeline activity, all these are trending really well. I wouldn't say that we're banking on the macro environment to improve.
I would say we're seeing things maybe stay the same from a macro environment and probably given the macro environment, we've decided on, you know, to give a guide that we feel confident and by reflect a little bit of conservatism, not because of what we're seeing inside our business, but more because of what's happening, you know, all around us with the macro backdrop. So whether it's geopolitics, whether it's about where inflation is headed or interest rates, where are you now?
We don't have any unique insight or views. I think that's the stuff that's causing us to be a little bit cautious. So I would say we're assuming a macro environment that will go throughout the year. That's similar to where we are today. And if that's the case given the fundamentals that we're seeing in our business, we have very high confidence in our guide. Bill, I don't know if you have something to add.
William Drew
Yes. I mean, I can give a little bit more details as to how we're thinking about maybe the top line growth, if that's helpful. So just from a volume standpoint, at the low end of the guide, we're assuming kind of a low to mid-single digit volume growth with the high end being kind of mid to high single digit from automation, we're assuming roughly 2.5 to 3.5 points.
And then a little bit about the pricing headwind as what we've built in as we lap some of the pricing adjustments we made in the second half of last year. So from a volume perspective, with the strategic account activity that Omar mentioned, we were not baking in a meaningful improvement in operating activity. So I think for us. We feel like it'll continue to get better throughout the year, right, as the operating environment continues to slightly improve, which is kind of what we're seeing. And then this account activity kicks in.
Danny Eggerichs
Yes, that all makes that all makes sense. And maybe just touching quickly on kind of sustainability trends. It kind of feels like we're seeing more and more companies coming out with new initiatives or state regulations on, I guess from your seat, you feel like you're seeing that kind of accelerate and is there potential for overall sustainability to be a bigger driver this year may be relative glass?
Omar Asali
You know, I think I think and I highlighted it on the call, I think a extended producer responsibility laws and regulations that have been passed in a number of states. Probably most importantly, California are really playing an important role in having a number of these companies go maybe beyond the conversation around sustainability and start taking action. I really attribute that as a key driver to increasing some of our trial activity. And then obviously, once our equipment is there, it's up to us to prove ourselves on our solutions and hopefully convert these trials into closes.
So I think what you seeing in the U.S., in particular with the larger accounts, I believe a big driver behind the switch is driven by, you know, new regulations, discussions around these new regulations and maybe a bit more of a focus around sustainability. Now those rules have been enacted in Europe for a while, and we've seen the benefit of those over the last number of years.
The new thing that we're seeing is really that spike in discussion and activity in the US, which I think hopefully will give us a tailwind for the next number of years because many of these EPR. rules are going to start being implemented over the next number of years, which I think is good for us.
Danny Eggerichs
Yes, absolutely. I'll leave it there. Thanks.
Omar Asali
Thank you.
Operator
There are no further questions at this time. Mr. Bill Drew, I turn the call back over to you.
William Drew
Thank you, Debre, and thank you all for joining the call today. I look forward to talking about the Q1 with the next earnings call.
Operator
This concludes today's conference call. You may now.
