Ranpak Holdings Corp. (PACK) on Q1 2021 Results - Earnings Call Transcript
Operator: Good day and thank you for standing by. Welcome to the Ranpak Q1 2021 Earnings Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. Please be advised that today’s conference is being recorded. I would now like to hand the conference over to David Murgio, Chief Financial -- Sustainability Officer and Secretary. Please go ahead sir.
David Murgio: 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.
Omar Asali: Thank you, David. Good morning, everyone. As always, I hope everybody listening in and their families are staying healthy. 2021 is off to a very good start for Ranpak. The first quarter was a record quarter driven by the continued robust demand for our products in Europe and Asia. Our team coordinated globally to serve our customers in these regions and I’m incredibly impressed by the way our organization has come together. Once again, I must make a point to recognize in particular the hard work and contributions made by the Ranpak employees who have continued to show up every day to our manufacturing and converting facilities across the globe. Without them, we would not be able to place our equipment at a double-digit clip or achieve the outstanding topline growth we saw in the first quarter.
Bill Drew: Thank you, Omar. In the deck, you’ll see a summary of some of our key performance indicators. We’ll also be filing our 10-Q, which provides further information on the impacts of operating results. Machine placement continue its steady increase as we placed over 3,000 machines in the quarter, up 12.9% year-over-year to more than 120,000 machines globally. Consistent with recent performance, Cushioning systems grew 4.6%, while Void-Fill installed systems increased 13.5%. Wrapping continues its rapid expansion from 31.7% year-over-year is on the way to becoming a meaningful contributor to our topline. As Omar mentioned, overall net revenue for the company in the first quarter was up 31.2% year-over-year on a constant currency basis, driven by strong performance in Europe and APAC, as well as growth in North America. Net revenue for Cushioning and Void-Fill applications both increased more than 30% over the prior period and Wrapping continues its impressive growth improving more than 41% year-over-year. On a constant currency basis, gross margin for the quarter was 41.3%, compared to 42.3% in the prior year, with increased freight and production costs being the primary drivers of the slight pressure on margin. As Omar mentioned, freight costs globally are up due to rapidly ramping up of trade activity and congestion in shipping channels. While we do expect these trends to continue throughout 2021, we believe a portion of the pressure we experienced was transitory as some of our papers suppliers in North America experienced unplanned downtime due to company specific issues and severe weather in the Southern U.S. in February, which impacted their operations.
Omar Asali: Thank you, Bill. To summarize, I’m very happy with the exceptional first quarter results and the team’s ability to manage to unprecedented demand in Europe and APAC for this time of year. I’m also happy with how we are navigating supply chain challenges across the globe without missing a beat. I think the results speak for themselves and the team could be very proud of the strong start. That being said, it is only one quarter, and as I have shared with many of you in the past, we are more focused on achieving robust long-term growth rather than quarterly results to build shareholder value. With that long-term mindset and vision, we continue to capture the many tailwinds in our business. And although, we do not want to update our annual guidance based on any one quarter, given our advocacy for long-term thinking, it is fair to say that our current expectations for the remainder of 2021 are very strong and we expect to outperform our plan for the year. We remain enthusiastic given the positive macro environment and strong customer trends. But more importantly, we feel very confident about our ability as a company to deliver outcomes. That means that the world is still experiencing many uncertainties, especially as it relates to the vaccine rollout, the pandemic and economic conditions. As a team, our continuous expansion across the globe is paramount to our long-term vision and we feel very good about the momentum of our business in all regions. Demand is robust for all of our key product lines and we are getting good traction in our investment initiatives. Our brand building and stepped up digital marketing efforts are also taking hold and raising the awareness of the benefits of environmentally friendly protective packaging. Lastly, I hope you all saw our 2020 ESG Impact Report we published earlier this month. It provides new and updated performance metrics and context related to our environmental sustainability efforts, our commitment to our employees and communities and corporate governance. We also laid out aggressive targets and commitments for the next decade, namely, reduce our greenhouse gas emissions by 46, source and aggregate paper supply consisting of at least 75% recycled paper, also source 25% of our total supply from post-consumer waste or alternative faults, and lastly, sell 100% of our paper products at FSC certified. Our pledge is to attain all these goals by 2030. Like all aspects of our business, we are committed to constant improvements on our ESG journey and we will keep you updated as we hit these key milestones. With that, thank you again for joining our call. I’ll now open it up to questions. Operator?
Operator: Thank you. Your first question comes from the line of Greg Palm from Craig-Hallum. Your lines is now open.
Greg Palm: Yeah. Great. Thanks. Good morning, Bill. Hey, Omar, really good quarter here, so congrats on the results.
Bill Drew: Thank you.
Omar Asali: Thank you, Greg. Good morning.
Greg Palm: So I guess first question on geographies, Europe, APAC was clearly the standout again and maybe, I think, I asked the same question last quarter. But what exactly are you seeing in those regions? How much of the activity is driven by new customers versus entering new regions? You talked about some new distribution partners, but it’s -- the growth there’s just incredible? And then sort of vice-versa, North America is still lagging a bit in terms of growth, but it sounds like you’re still pretty confident that you’ll see an acceleration this year. So, anyways, a little bit of help on the geography differences would be great?
Omar Asali: Yeah. Sure. So let me start with Europe. It is a mix of existing customers, obviously, shipping more boxes, in particular, in the e-commerce area. It’s definitely new customers and folks moving away from plastics to paper. Just to give you an idea with new customers, 30% to 40% of them are telling us the main reason they switched is around sustainability and that number used to be less than 10% in Europe four years ago. So there is a clear trend that continues around sustainability and gaining market share with some of these new customers. And then this past quarter other than elevated e-commerce activity, we started seeing a pickup in industrial activity, some of the automotive players, some of the manufacturing guys, Nordic region, Germany, Netherlands, frankly, U.K., all contributed. In Asia-Pacific, we are expanding geographically. So that’s helping. We signed a few new distributors that’s also helping. But the big story is, frankly, countries like Australia, like Japan, like South Korea, continue to embrace our products and similar to Europe, it’s a lot of e-commerce activity but also activity around electronics, light manufacturing, light industrial guys for our light Cushioning product was pretty strong in many of those regions and that trend we continue to feel as in the early innings, Greg. Lastly on North America and the reason why I am confident and I’ve been saying that for -- publicly for a couple of months now is, all the leading indicators are trending in the right way. Our belief is North America is a few years behind Europe and we’re starting to see more and more accounts talk to us about sustainability. We see our trial activity. We see our pipeline. And just to give you something tangible, we also see the demand for our equipment. And what we’re seeing in North America is we’re accelerating the demand. The converters and equipment we thought we would need in Q4. We’re accelerating that to Q3. While we thought we were going to need in Q3 in North America, we’re accelerating that to Q2. So I think as the year progresses, you’re going to see some nice growth from North America, which I believe, is just a couple of years behind Europe, and over time, you’ll see that activity to come. So, overall, a lot of strong demand across the Board for our products and we think you should expect some meaningful pick up in North America as the year goes on.
Greg Palm: Great. Okay. That’s helpful commentary. And in term -- I think I -- we also understand that the sustainability factor here. I think what’s also equally interesting recently is what’s happened with some of these substrate costs, which you alluded to, I think, we’ve all kind of read about what’s happened in the resin market and all the shortages that folks are seeing. I mean, is this a potential catalyst to convert more customers from plastic to paper, any early signs that that’s going on?
Omar Asali: Absolutely. And the answer is that is a big catalyst and there are good early signs, which is increasing our confidence and sort of the rhythm and growth opportunity for our business for the rest of the year. Many resin-based competitors of ours have increased pricing a couple of times already. In some cases, many of them cannot secure supply and are telling customers, it’s going to take them a number of months and long lead-time to fulfill demand. We’re stepping into that. We’re leaning forward hard. We’re working operationally to make sure we can fulfill the demand for some of these new customers. The two key things that are helping us is, one, paper pricing is going up by not as much as resin and in many cases that’s helping us narrow the spread, if you will, where it exists. And then secondarily, given all the supply chain, all the procurement, all the work we’re doing from a manufacturing and ops standpoint, we are going to be using sort of our shorter lead-time to meet demand that we think are the customers out there want. So I expect that you will see continued market share shift from plastic to paper, in addition to sustainability reasons for some of these pricing, as well as just availability and capacity reasons, Greg.
Greg Palm: Yeah. Okay. And then last one, I just want to clarify the comments around the guidance. So is the thought that, based on what happened in Q1 and sort of what you see going forward that you’re withdrawing guidance or you’re just not updating it, it clearly sounded like you’re expecting to outperform what you laid out a couple months ago. So I just want to make sure we’re all clear on exactly what you meant there?
Omar Asali: Yes. Absolutely. So, look, the way we run the company, we have annual plans and we have three-year and multiyear plans as a management team that we’re going to target. We announced sort of our annual guidance last quarter. This quarter, clearly, we performed very well. I don’t want to be the company that keeps on updating guidance every quarter when we have an annual plan. I think we are comfortable saying just to be crystal clear. In this year, in 2021, given the start for the year, given what we’re seeing, given all the commentary and sort of the answers I provided to your questions. We believe we will meaningfully surpass our plan this year. But we don’t want to be in the business of continuously updating guidance. We are really just focused on driving outcomes and delivering numbers.
Greg Palm: Understood. All right. Thanks for all the color and best of luck going forward.
Omar Asali: I appreciate it. Thank you, Greg.
Operator: Thank you. Moving on, your next question comes from the line of Stefanos Crist from CJS Securities. Your line is now open.
Stefanos Crist: Omar and Bill, good morning, and congrats on a great quarter.
Omar Asali: Good morning, Stef. Thank you very much.
Stefanos Crist: First, could you give us a sense of the revenue growth that was driven by new product offerings like cold chain and the new Wrapping and that kind of stuff?
Omar Asali: Sure. Bill, do you want to take that?
Bill Drew: Yeah. Sure. Happy to. So, Wrapping as you can see from the converted placement, right, that continues to grow meaningfully. We’re also expanding our Geami offering, that’s getting great traction really globally. So, if you take a look at the contributions from those products on the topline, Wrapping, overall, I think was over 40% on the topline. So fantastic performance there and we think that there’s a real big opportunity to take that and expand it into retail. If you look on online, you can see the feedback that we’re getting from a number of our new retail offerings, which is going quite well. So coming from a small base, of course, but…
Omar Asali: And Stef, sorry, sorry, I think, Bill, we’re losing your line. Stef, what I would add also just on cold chain, since you’re asking about that. We continue to invest in that area and grow. We have a number of customers, frankly, the rhythm there is great. We are growing quite a bit. And what we’ve done in cold chin recently is we introduced some of our products outside of the U.S., in particular, in Europe and I plan on expanding that into some of our markets in Asia-Pacific. So stay tuned on that one. But some of these new products in cold chain and in other areas, I think, as the year progresses, should deliver some outsized returns for us.
Stefanos Crist: That’s great. Thank you. And then just final question, with rising paper prices, two years ago, you saw some pull-forward as customers increased their volumes. Are you experiencing that right now, maybe how are volumes looking in April so far. Could you give us some more color on that?
Omar Asali: I think what I will say is the strength of the beginning of the year continues. Our volumes and demand continue to be robust. I don’t think is people pulling forward demand, just given pricing. The -- if you look at just, what’s happening even in the corrugated industry, what’s happening in e-commerce and with the reopening of some economies and industrial activities stuff, there really is a surge in demand for our products. So it’s not people just pulling it forward given pricing. And we continue to see a lot, customers shipping more boxes, asking for more products and I expect in the near future, those trends will continue.
Stefanos Crist: That’s great. Great color on that. Thank you and congrats again.
Omar Asali: Thanks a lot. Appreciate it.
Operator: Your next question comes from the line of Alexander Leach from Berenberg Capital. Your line is now open.
Alexander Leach: Good morning, guys and congrats on what was a very strong quarter. My first question is sort of around industrial end markets picking up. How much of recovery was there versus pre-pandemic levels and how much more is left in the recovery in that particular end market?
Omar Asali: Yeah. I don’t think in the industrial channel, we’re seeing them quite at the level of pre-pandemic. I think what we’ve seen is a little bit of pent-up demand, given the declines and many of those companies and customers experience in 2021, I mean, in 2020. Obviously, towards the end of 2020 industrial activity started improving and then what we saw is significant growth in the first quarter. So there was a little bit of pent-up demand, but we’re not seeing industrial activity regional levels of pre-pandemic. So I think we will continue to see some nice tailwind with our customers there. And then in terms of your stack of industries, it really depends by geography. So you saw light manufacturing out of Asia, electronics out of Asia pick up real momentum this past quarter. In Europe, it was more sort of in automotive in some of the heavier machinery and industrial activity. In the U.S. a lot of folks in sort of general manufacturing, tools in smaller appliances. So we’re seeing things open up in a lot of different geographies. I think the tailwind is probably no different than what we’re seeing in GDP. I think it’s going to continue for a while until the world normalizes. But the level of industrial activity, as of this moment still has not reached pre-pandemic levels at least for our business.
Alexander Leach: Okay. Great. Thanks a lot. And as we sort of look out for the remainder of the year, what -- what’s your sort of capital allocation strategy and are you looking to do any acquisitions too?
Omar Asali: Our main focus is meeting our customer demand. So we are investing in the business, in our supply chain, to make sure we meet the demand, which right now, frankly, across the globe, is pretty strong. And as I said, in North America, we expected to ramp up meaningfully towards the end of the year. The other area that we’re investing in is making sure we get our equipment and automated solutions ready for the second half of the year. The demand there is really strong. You are not seeing that in the numbers because that’s equipment we’re going to deliver to customers in the second half of the year. But we are almost at capacity there already given what customers are asking us to do. So that’s our main focus. In addition to that, we are exploring a couple of -- what I would characterize a small tuck-in acquisitions that we think add to our solution, add to our technology, add to our team and we’re exploring some of these things between now and year end. And frankly, it’s along the same lines that we’ve discussed, historically, automation, cold chain. These are the opportunities where we continue to explore adding to our offering. But right now, priority one is meet customer demand, given how strong it is and given our expectation for the rest of the year. And then priority two add to our solutions to sort of expand our offering.
Alexander Leach: Okay. Great. That’s very useful. Thank you.
Omar Asali: Thanks, Alex.
Operator: Your next question comes from the line of Chris McGinnis from Sidoti. Your line is open.
Chris McGinnis: Yeah. Good morning. Thanks for taking my questions and congrats on the quarter.
Omar Asali: Thanks, Chris.
Chris McGinnis: I may have missed this, but was there any update on your production side and just kind of what your thought process or thinking is around demand as they progress throughout the year for that product line? Thanks.
Omar Asali: Bill, do you want to take that.
Bill Drew: Yeah. The question is around on automation. Sorry, I broke up a little bit. I am online.
Chris McGinnis: Yeah. Just the expectation…
Bill Drew: Okay. Yeah.
Chris McGinnis: … of it progresses through the year. Yeah.
Bill Drew: Yeah. So no, we’d like what we’re seeing on the automation side, the demand there is excellent, a lot of the conversations that we’re having, especially with the high volume and users that we have, it’s centered on automation, right? How do they make their businesses more efficient? How do they reduce the number of folks at the end of the line to improve the health and safety of other employees that are in their facility. So the demand there, I think, is really robust. And I think the feedback that we’re getting on on our product line is quite good as well. So we’re very optimistic about automation and that being a real contributor to us, especially in the second half of the year, when things open up a little bit more.
Chris McGinnis: And just around North America in the kind of the confidence, are those the trials are ending the periods or the conversations that you’re having are just improving as the economy opens up? And then, I guess, just what the -- just the fact that behind, it’s a few years behind where Europe is. Just the confidence is there, you’re going to be able to see that growth kind of continue to the North America market? Thanks.
Omar Asali: Yeah. Sure. In terms of our activity, it varies by account, size of the account, nature of that account. So typically it could be anywhere from a month or two months to something that takes a few more months. And what I will say about our trial activity in North America and why I feel confident about sort of the rest of the year, it’s really elevated across the Board. So early stage trials, trials in some cases that close, trials that are about to close. We continue to feel our successful percentage of closing is very high. And as these customers get on boarded, we deliver the equipment and they start ramping up. And sometimes it takes a few months for the ramp up in activity for these customers to have all their different warehouses and facilities as sort of paying customers and that’s what we’re seeing. And we also monitor the demand on our equipment and the demand for our equipment for the rest of the year is very robust, given the trial activity and the successful trials that we are closing. So we have quite a bit of data that is giving us that confidence, if you will, from a bottom up standpoint, customer-by-customer, region-by-region in North America and we feel good about that level of activity and we feel great about our sales organization. Now, top down, when you’re asking about sustainability and why do we think we’re a few years behind Europe? Honestly, when we have monitored the type of dialogue we’ve had with the European customers around sustainability, I said four years ago, 10% of those new customers were saying sustainability was the key reason why they switched to Ranpak. Today, it’s about 30% or 40%. We are seeing similar patterns where the percentage today it’s still low in North America of people who are calling sustainability as the main reason for talking to us. And we think that pattern will repeat itself, as we expect more and more dialogue with customers around the sustainability topic. So it will take some time. It may take the next whatever 12 months to ramp up a lot more sustainability dialogue. Our team is engaged with our distributors, with our customers, with end users, on all sources of discussions around environmental impact, end of life recycling, sustainability and that’s why I feel the pattern we saw in Europe is going to repeat itself potentially here in the U.S.
Chris McGinnis: Great. Yeah. Really appreciate the answer. Good luck on Q2.
Omar Asali: Thank you very much. Appreciate it.
Operator: There are no further questions at this time. I will now like to hand it back over to Mr. Bill Drew for any closing remarks.
Bill Drew: Great. Thank you. And thank you all for joining us today. We look forward to speaking with you again next quarter. Take care.
Operator: Ladies and gentlemen, this concludes today’s conference call. Thank you so much for your participation. You may now disconnect.
