Ranpak Holdings Corp. (PACK) on Q2 2021 Results - Earnings Call Transcript
Operator: Good day and thank you for standing by. Welcome to the Ranpak Q2 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 your speaker for today, Mr. David Murgio.
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 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.
Omar Asali: Thank you, David and good morning everyone. Our team continued its momentum and performed extremely well in today's environment. Our strong results were underpinned by the continued hard work and resilience of the global Ranpak organization. Teams in all regions of the world are communicating well and coordinating to efficiently manage the business and its record demand for our products and longer lead times and shipping and supply chains. We're seeing exceptional demand for our products and working tirelessly to fulfill our rapidly growing customer needs. The men and women in our facilities producing paper and assembling our equipment has been the bedrock of our success throughout COVID, and I want to as I do in each quarter, express my sincere appreciation to them all. We continue to pay close attention to local health surrounding our facilities to ensure we maintain the safety and health of our colleagues, while maintaining business continuity. We follow local health and safety guidelines as we bring back staggered groups of employees to our offices. Our terrific start to the year for Ranpak continued in the second quarter. Our results for the quarter were exceedingly strong and well rounded with success occurring in multiple key areas. We expect to have a record year at Ranpak both financially and strategically, meaningfully surpassing our original 2021 guidance and entering 2022 well-positioned to achieve our multi-year growth objectives of double-digit top line growth.
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 Ranpak’s operating results. Machine placement continued its strong trajectory in the quarter of 12.9% year-over-year to nearly 124,000 machines globally. Cushioning systems grew 3.6%, while void-fill installed systems increased 14.1%, and wrapping increased to robust 29.6% year-over-year. Overall, net revenue for the company in the second quarter was up 29.1% year-over-year on a constant currency basis, driven by excellent top line performance in Europe and APAC, as well as North America. In Europe and APAC, from a geographic standpoint, growth is most robust in eastern and southern Europe, while Middle East and Africa performed strongly as well. In North America, from a regional standpoint, we experienced growth in all regions with the Midwest, Central, Southeast, and Mexico as particular bright spots. Across our business sectors such as food and beverage, electronics, home furnishing, and contributed to grow as many existing customers opened new locations and expanded their relationship with Ranpak. Also, overall, in our PPS business, all categories were up meaningfully with cushioning up 39.5%, void-fill up 17.3%, and wrapping up 48.8% on a constant currency basis. Our gross profit increased 25% on a constant currency basis, slightly behind our sales growth due to the impact of higher material and overhead, as well as freight costs versus the prior year, offset by improved margin automation sales and lower depreciation as a percentage of sales, implying a gross margin of 39.7% in the quarter, compared to 40.9% in the prior year. The increase in sales was surpassed by growth and adjusted EBITDA, which rose 34.7% year-over-year, improving margins to 29.3%, compared to 28% in the prior year.
Omar Asali: Thank you, Bill. To summarize, we've had an exceptionally strong first half of the year. I'm proud of the team and the results and I'm excited to continue to build on our momentum. It is great to see the balanced contributions across all regions and the continued progress we are making in our investment initiatives. We expect to achieve a record annual performance for Ranpak in 2021 and to finish the year with Ranpak well-positioned for the next phase of growth. To give you some insights into how we are thinking about the next chapter. I wanted to highlight a few projects we're working on to drive our global expansion. Given the strong demand we are seeing in Asia Pacific, we will be establishing a manufacturing presence in the region through localizing production in China with operations beginning in 2022.
Operator: Your first question comes from the line of Greg Palm of Craig-Hallum Group.
Greg Palm: Yeah, thanks. Good morning. Congrats on the results here.
Omar Asali: Good morning, Greg.
Greg Palm: I wanted to start off by, you know, thinking about some of the trends that you are seeing. I think last quarter, you pointed to sustainability is becoming a more important driver for customers switching from plastic to paper based solutions, at least in Europe. And it looks like we saw a pretty big improvement in the growth rate in North America this quarter. So, do you think sustainability is becoming a bigger, bigger talking point here or is that just more of a byproduct of improved execution in the region?
Omar Asali: I think right now it's a little bit of both, Greg. There's no doubt we have better cadence and rhythm in the North American market as a company, and that's a contributing factor. You know, after a couple of years of investing in the team and organization, there is no doubt we are also seeing a more tailwind from sustainability in the U.S. You know, I think the issues with end of life for plastics and single use plastics in particular, continue to get a lot of traction globally. And it is a big factor in some of the and some of the closest we've had in the U.S. I would say it continues to feel like early days. And we are, you know excited about where we are. And we're hopeful that that's going to become a bigger tailwind in North America, you know, in the next few quarters, and hopefully the next few years. But the sustainability tailwind is certainly a contributing factor.
Greg Palm: Yeah, makes sense. In terms of margins, looks like it was down a little bit quarter-over-quarter, assuming some of that may just have to do with mix knowing that North America is lower margin, but I think you did allude to, maybe an increase in, you know, supply chain related costs, input costs. I mean, it seems like we're an environment where everything is going up. So, how are you thinking about pricing in the wake of everything going on?
Omar Asali: Yeah, I think we are, as you know, we're very focused on maintaining our financial profile. What you've seen in the quarter mix was a part of it, you know, both from product, as well as from geography standpoint. You know, the global issues that we all know, they apply to us freight issues, labor issues, certain lead time issues, I would say where we sit, we feel pretty good that we can pass these price increases to the customers. We've done some of that, we continue to do that, given the robust demand environment. You know, we think and frankly, given the global issues of supply chain and pricing, our customers are not surprised when they see some of these price increases from us. So, we feel very good about maintaining our financial profile in this strong demand environment, Greg.
Greg Palm: Do you envision it getting worse from here in upcoming quarters or should it start to improve?
Omar Asali: I would say, our visibility between now and year-end is more or less the same. So, similar challenges, similar issues that we feel pretty good, we can manage. I think in 2022, my personal prediction for what it's worth is I think some of these pressures may ease up as all companies and different players in the supply chain are accustomed to sort of the New World. And hopefully over time, and this will depend obviously, on what happens with the pandemic and with COVID. As the world stabilizes, you know, there are less unusual reopening related items, if you will, that are creating some of these pressure points. But between now and December, we expect more or less the same, and we feel very good about maintaining our financial profile in this period.
Greg Palm: Okay, good. I guess just last one, you know, I wanted to spend just a minute or two on automation, because it's obviously a theme that's built in. But you know, Omar, what's your long-term vision, if you want to call it that on what end of line fulfillment or manufacturing looks like? And you know, maybe just sort of bucket how Ranpak may fit in with that vision?
Omar Asali: Yeah, I think our vision is, you know, end users with high volume will continue to, sort of look for more automated solutions, less reliance on labor, our solutions are not designed to eliminate labor completely. They're designed to add efficiency, reduce the number of people you need for your end of line, and rely more on smart equipment, smart machines, to do those functions well, and to do them with tremendous speed. I honestly think the next couple of years are going to be a unique time in history for the opportunity in that space, as more folks look for fulfillment and logistics. And the role I envision aspiring is being a leader in the space, not just in providing the best equipment, but hopefully the smartest equipment. And this is why we've been laser focused for the last year and a half or making sure we're building our AI knowledge, machine learning knowledge, computer vision knowledge, robotic capability, and I feel great about where we are today. And now it's up to us as a team to execute, but we have all the key pieces in place, Greg.
Greg Palm: Okay. Makes sense. I'll leave it there. Thanks and good luck.
Omar Asali: Thank you.
Operator: Your next question comes from the line of – .
David Murgio: Hello, operator.
Operator: Your next question comes from the line of the Stefanos Crist from CJS Securities.
Stefanos Crist: Good morning, Omar and Bill, congrats on the quarter.
Omar Asali: Good morning, Stef.
Stefanos Crist: Good morning, Stef.
Stefanos Crist: I just wanted to touch on the SG&A up a little bit year-over-year to really bridge that increase, is that all automation or, you know, how should we think about that?
Omar Asali: No, Stef, I think, you know, in SG&A this quarter right there with the offering, obviously, in May. So, there was some professional fees that were in there, and then also some additional RSU expense related to, you know, us outperforming our plan. So, we had to catch up on that.
Stefanos Crist: Got it. Can you just quantify how much that was and how much it would have been without?
Omar Asali: There was probably a 2 million to 3 million.
Stefanos Crist: Got you. And then on the CapEx, it seems pretty high just in terms of per machine, and you talked about increasing inventory. Do you count CapEx just buying machines and not placing them yet? How should we think about that?
Omar Asali: Yeah. When we buy machines and have them placed into our inventory, and they're ready to being deployed into the field that's going to be included in our CapEx.
Stefanos Crist: Got it. So, it's not an issue of just parts getting more expensive.
Omar Asali: No, I mean I think, you know, with supply chain, right, you have to do a little bit more on the freight side and then, you know, with the demand that we're seeing to fulfill customer's needs, sometimes you have to speed that up a little bit. So, getting the machine to North America into Europe, you know, is a little bit more expensive right now, but you know, over time that's a normal .
Bill Drew: Stef, one of the things to highlight and you're alluding to it in your question is, obviously, we're entering our busy season with the second half of the year. And just we want to make sure, given the robust demand, we're ready. And we've had a lot of success globally with a lot of closes in the last six months. And these closes by definition will require equipment, as some of these customers scale and sort of implement our solutions in more facilities. So, part of part of that CapEx is getting ready for ramping up for the peak of our business.
Stefanos Crist: Perfect, that makes sense. Thanks so much. Will jump back in the queue.
Bill Drew: Sure.
Operator: Your next question comes from the line of Alexander Leach of Berenberg Capital.
Alexander Leach: Good morning, guys. Congrats on the quarter.
Omar Asali: Good morning, Alex.
Alexander Leach: Just on the topic of CapEx, how do we think about it on a more medium-term basis, you know, you guys have mentioned a number of projects and initiatives that you're planning on implementing over the next couple of years, the China facility and potentially more M&A going forward, as something you’ve discussed previously, you know, how we think about CapEx towards 2022, and 2023? Is it going to increase as a proportion of sales?
Omar Asali: I think, Alex, let me give you the high level and then I'll have Bill chime in. At a high level, the main driver will be investing in our equipment and converters that drive our growth. Then clearly, we have, you know, maintenance CapEx that you're familiar with. And in addition to that, for the next, let's call it 18 months or so, given our real estate expansion plans, and expanding our capacity that will be that added aspect to CapEx. The dollars associated with that last beat are going to be relatively modest. And you know, Bill can give you a better sense about each facility. We're not talking about huge amounts of capital to either expand our footprint or get these facilities ready. And that's going to position us for further growth. But outside of that, once we're done with these projects, expect more of a normalized CapEx, but frankly, as we grow as a percentage of sales, CapEx will be coming down. But you know, I'll let Bill chime in with a bit more specificity.
Bill Drew: Yeah, Alex, if you're looking for some color on the real estate projects that Omar outlined earlier, you know, I think you can ballpark it in less than 20 million area. These are projects that we feel like, you know, we’ll be funding out of our cash flow generation. So, we'll have plenty of dry powder to deploy for growth initiatives as well.
Alexander Leach: Okay, great. And then just thought to sort of clear in my head for the remainder of the year, from your press release, it sounds like you guys are expecting a step down from the sort of 30% year-over-year revenue growth largely due to sort of better comparables in H1 of 2020 and tougher comparables and H2 2020. How do we think about revenue for the first year?
Bill Drew : Yeah. Alex, I don't think we've quantified what to expect in the next six months other than saying we're expecting a record year, obviously, Q3 and Q4, of last year, where we're very robust. And we frankly expect, you know, very strong performance in the next two quarters to finish the year. So, you know, we're less focused on what percent of growth we deliver each quarter, and more on the cadence of our business and sort of how we're going to finish the year and obviously, how we position ourselves for 2022. But I think the rest of this year, we're expecting you know, a very strong finish to the year.
Alexander Leach : Pretty good. Thanks guys.
Bill Drew: Thank you.
Operator: Your next question comes from the line of Ryan Danisavage with Sidoti & Company.
Ryan Danisavage: Ask a quick question, as a follow up with automation, and where are you seeing the most constructive talks of customers in terms of end-markets? And is anything holding you back and initiatives of automation around the global supply chain?
Omar Asali : Around the global supply chain, you know, there are some modest lead times and delays on certain parts. I would not say, it's holding us back, I will say it's just causing us to do more work to deliver things on time, which is similar to our PPS business, just supply chain in general requires, you know, more precise management and more hard work, if you will. In terms of where we're seeing opportunities, I would say e-commerce players, retailers, a couple of industrial opportunities, and a lot of PPPL. These areas need a lot of help in moving more boxes, more parcels, you know, out of the door. And we're spending a lot of time in these sectors around different automation solutions.
Ryan Danisavage: Thanks for that. And just one more, North America results were obviously very strong, can you just talk about the conversations you guys are having in North America? Is it from newer existing customers and what is the product offering they would be most interested in?
Omar Asali: We have had, and again, this is something I've said publicly for a while, given the investment we made in the sales organization. In the last few months, we've had a number of successful closes, and as you know, once we close in a new account, you know, it takes a little bit of time for some of these accounts to ramp up. So, in Q2, we saw a number of the successful closes become, you know, meaningful paying customers. So, we are winning new business, we're winning new accounts. And the leading indicators as we speak in our business in terms of pipeline trials, etcetera, continues to be very robust in North America. So, part of the growth is new business that we've been winning in some cases is folks that are experiencing growth themselves. In other cases, as we mentioned, it's folks making the decision to have more sustainable packaging solutions. And we fit that well. My expectation as we sort of go forward, is you will continue to see a number of these new closes ramp up and sort of increase the level of activity. And then the second piece in North America is we've had a number of existing accounts, opening new facilities, expanding their physical footprint, and we were the natural partner for them, as they've expanded their business.
Ryan Danisavage: Thanks, appreciate it.
Operator: At this time, I'm showing no further questions. I will turn the call back over to Bill.
Bill Drew: Thank you. And thank you all for joining us today. We look forward to speaking to again for Q3.
Operator: Thank you. This concludes today's conference call. You may now disconnect.
