Yahoo Finance Ranpak Holdings Corp. (NYSE:PACK) Q1 2024 Earnings Call Transcript
Ranpak Holdings Corp. (NYSE:PACK) Q1 2024 Earnings Call Transcript May 4, 2024
Ranpak Holdings Corp. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Welcome to the Ranpak Holdings First Quarter 2024 Earnings Call. My name is Benjamin and I'll be your operator for today's call. [Operator Instructions] As a reminder, the conference is being recorded. I'll now turn the call over to Sara Horvath, General Counsel. You may begin, Sara.
Sara Horvath: 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 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 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 a Form 8-K that we submitted to the SEC before this call. We will also make a replay of this conference call available via webcast on the company website. For financial information that is presented on a non-GAAP basis, we have included reconciliations to the comparable GAAP information. Please refer to the table and slide presentations accompanying today's earnings release. Lastly, we'll be filing our 10-Q with the SEC for the period ending March 31, 2024.
The 10-Q will be available through the SEC or on the Investor Relations section of our website. With me today, I have Omar Asali, our Chairman and CEO; and Bill Drew, our CFO. Omar will summarize our first quarter results and provide commentary on the operating landscape and Bill 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.
Omar Asali: Thank you, Sara. Good morning, everyone. I appreciate you all joining us today. Our first quarter financial results were largely in line with our expectations as we experienced 4.4% top line growth and meaningfully improved profitability to start the year. We are pleased to report that we experienced our third consecutive quarter of volume growth in PPS as activity levels continue to improve. While the overall operating landscape remains uneven, we are pleased to see continued moderate general improvement. Our gross margins on a constant currency basis improved by 400 basis points year-over-year and adjusted EBITDA margins improved 500 bps on a constant currency due to the favorable paper pricing environment compared to a year ago and higher volumes flowing through the complex.
Overall, we are happy with the start of the year and believe it sets us on a path to achieve our targeted results for 2024. Consistent with much of our recent operating history, we expect the first half of the year will be a lower contributor to 2024 top line performance compared to the back half as we expect more large account activity to ramp up as the year progresses and traditional seasonality to drive higher volumes in the second half of the year. North American sales were up 2.6% in the quarter versus last year, driven by improved void-fill and automation sales year-over-year. At a more macro level, box shipments were flat to slightly up for the quarter, while freight and trucking data remains mixed. The industrial and manufacturing sector remains sluggish, while we are seeing some improvement in e-commerce activity.
The impacts of higher rates constraining housing activity and all of the spend that goes with it as well as inflationary pressures impacting consumer discretionary spend remain present. This has led to activity levels in North America being okay but inconsistent from month to month. On a positive note, more recently we've seen improvements in consumer confidence, so hopefully that will inspire additional demand for goods. While that is the macro picture, we try to focus on driving outcomes that are within our control at Ranpak such as executing on our strategic account plan. We are pleased with our progress and optimistic that the ramp-up in the plastic to paper shift provides us with solid volume momentum for the remainder of the year while the macro hopefully stabilizes and improves.
We said in our first quarter call last year that the plastic-to-paper shift was a longer sales cycle given the complexity of some of the organizations involved but that we believed it was only a matter of time before the volumes start to reflect the shift in thinking. I'm pleased to say that in April, we're seeing a pickup in activity from our strategic account initiative and many accounts are beginning the transition away from plastic. Europe, APAC activity levels in the first quarter were solid, with sales up 5.4% versus the prior year, driven by higher volumes in void-fill and wrapping. Activity levels in the region continue to improve slowly, although manufacturing and industrial activity remains subdued, impacting cushioning utilization.
Consumer confidence in the region has been improving since the end of the third quarter but is still well below pre-COVID levels. Geographically speaking, we've seen strength in Southern Europe in countries like Spain and Italy as well as improvement in the U.K. While the central part of Europe that is more manufacturing heavy like Poland, Belgium and Germany are weaker. In APAC, Japan and Australia continue to be bright spots. The input cost environment provides us with a benefit for the first half of the year as paper pricing moved lower throughout the year before reaching a trough in Q4. We expect paper pricing in the first half of the year to be in line with Q4 as pricing flattened out to start the year. We are, however, seeing some producers in North America and Europe making a push to increase pricing as we get deeper into the year.
Overall, we are targeting to maintain a gross margin in 2024 that is in line with our finish in 2023. So we're working closely with our vendors to plan accordingly and determine if we need to make pricing adjustments based on the commodity environment. The freight market has been roughly flat to start the year and in the U.S. has remained favorable given the freight recession that has been present for the past 2 years. Freight market participants have struck a more optimistic tone recently. So we're monitoring that closely to see how potential improvement in freight level activity, along with rising tensions in the Middle East, driving oil higher may impact pricing and availability. Inventory levels at our distributors and end users remain tight, with many in our value chain in North America and Europe keeping tight lids on the amount of product on hand given the increased cost of capital and uneven environment.
Destocking is no longer an issue but we continue to watch inventories at our customers across the globe. Now with that, let me turn it over to Bill for some financial detail.
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 increased 0.9% year-over-year to approximately 140,800 machines globally. Cushioning systems declined 0.9%, while void-fill installed systems increased 1.3% and wrapping systems increased 1.8% year-over-year. Growth in the machine field population had been lower this year due to a combination of lower activity levels generally, particularly related to industrial and manufacturing sectors in Europe as well as our efforts to optimize our fleet. To maximize capital efficiency, we are focused on getting underutilized converters back and redeploying them to more productive areas.
Overall, net revenue for the company in the first quarter was up 4.4% year-over-year on a constant currency basis, driven by increased volumes and contribution from automation, offset by slightly lower price. In North America, net revenue increased 2.6% year-over-year, with void-fill and automation up versus the prior year, offset by decreases in cushioning and wrapping. Volumes were lower versus prior year driven by a softer March but we expect those to pick up in the region as the year progresses driven by our strategic account activity. In Europe and APAC, net revenue on a constant currency basis was up 5.4% year-over-year, driven by void-fill, wrapping and automation, offset by lower cushioning revenue as the industrial sector in Europe remains pressured.
We are pleased to see the general continued recovery in this reporting unit as volumes increased 10% year-over-year and businesses begin to recover. We believe a part of the recovery we are seeing is due to the increased confidence stemming from the continued favorable natural gas pricing in Europe with Dutch Nat gas hovering around €30 per megawatt. There has been some volatility recently due to rising geopolitical tensions but we believe the amount of expected LNG capacity coming online and becoming available to Europe beginning in 2025 should help to keep a lid on pricing. Our gross profit increased 16.7% on a constant currency basis, implying a margin of 38% compared to 34% in the prior year. This is in line with our expectations as we expected gross margin to be roughly in line with Q4 throughout the year.
As Omar mentioned, we are monitoring the commodity environment closely and are extremely focused on maintaining the gross margin profile we sought to regain after 2022. Adjusted EBITDA increased 33.8% year-over-year to $20.2 million, implying a 22.8% margin driven by a higher gross profit flow-through and controlled G&A spend. We are pleased with the continued overall improvement in the financial profile and are optimistic as more volumes flow through the complex and automation grows, we will continue to work our way back towards an attractive high-margin and cash-generative profile. Capital expenditures for the quarter were $9.8 million, driven by converter placement and investments related to our Malaysia production facility. We are keeping tight controls on capital expenditures this year as we are moving beyond our infrastructure investment cycle that brought us a world-class technology platform and fully invested and funded physical infrastructure assets across the globe.
Moving briefly to the balance sheet and liquidity. We completed Q1 with a strong liquidity position, including a cash balance of $55 million to end the quarter and no drawings on our revolving credit facility. We continue to make steady progress on our goal of deleveraging and reached 4.4 turns at the end of the quarter, down from 4.6x at 2023 year-end and 5.7x as of Q2 2023. We expect to build cash in the back half of the year as we enter the traditionally stronger holiday season and volumes pick up. The Malaysia production facility go live this summer marks the end of our multiyear infrastructure investment initiative and enables us to focus on getting a return on our investments as we scale our PPS and automation businesses. Our capital expenditure plans in 2024 are much more modest compared to recent prior years at less than $35 million which we expect will enable us to generate cash in 2024 and help us deleverage further.
Following quarter end, in April we settled the litigation matter and sold 2 patents which resulted in total cash proceeds of €20 million, bolstering our cash position and implying a pro forma leverage ratio of 4.1x on a constant currency basis, including the additional cash proceeds. Based on our adjusted EBITDA guide and expected cash generation, we expect leverage to be below 4 turns on a constant currency basis by year-end, with an ultimate goal to getting to 3 turns or below. We believe our recent commercial and financial progress along with a focus on deleveraging and cash generation positions us well to address our term loan maturities well before their maturities in June of 2026. Ranpak has a long history in the credit markets from years of private equity ownership and I think would be well received by credit investors.
For those of you who have spent time with us over the past few years, you know our goal is to have the cap structure not be a topic of conversation. This means a simple structure and a conservative leverage profile that addresses needs well in advance. With that, I'll turn it back to Omar before we move on to questions.
Omar Asali: Thank you, Bill. In closing, I'm pleased with the continued progress and third quarter in a row of volume growth. While the macro remains unclear, I believe our company-specific drivers such as our strategic account activity and momentum in automation will enable us to continue to drive the top line and improve profitability. Driving volumes in PPS, scaling automation and generating cash are the top priorities at Ranpak in 2024 and going into 2025. Automation continues to get the traction that we are seeking with large accounts as our systems are in facilities this year as the first step to larger follow-through opportunities. We continue to anticipate revenue growth of more than 50% in automation this year and I continue to strongly believe the investments we have made in this area will be a critical growth driver and differentiator for Ranpak in the upcoming years.
Our long-term objective remains to have a business that is steadily growing revenue in the high single to low double-digit area, the gross margins in the high 30% to 40% area and adjusted EBITDA margins in the high 20s to low 30s area, with substantial cash being generated along the way. We have a strong platform in place supported by our state-of-the-art digital infrastructure and facilities that can support our growth ambitions. With these multiyear projects behind us, the focus can be solely on execution of our strategic initiatives and gaining efficiencies. I'm energized by what I see happening within Ranpak and across the world. The team is invigorated by the narrower scope of objectives and what we all read about seemingly every day regarding the tailwinds related to the shift from plastic to paper and warehouse automation needs.
This year's Earth Day theme is Planet versus Plastics and has a goal of raising awareness to drive a 60% plastic reduction by 2040. There has been a plethora of great yet alarming content created this year that aims to promote widespread public awareness of the damage done by plastic to human, animal and all biodiversities' health. Earthday.org is also trying to achieve a phase-out of all single-use plastics by 2030 and achieving that commitment at the United Nations treaty on plastic pollution in 2024. At Ranpak, we are extremely proud to be at the forefront of this movement and we are doing our part to deliver a better world. With that, let's open the call up for some questions. Operator?
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