Hello, and welcome to the Ranpak Holdings Third Quarter 2023 Earnings Call. My name is Lauren, and I will be coordinating your call today. There'll be an opportunity for questions at the end of the presentation. [Operator Instructions] I will now hand you over to your host, Sara Horvath, Vice President, General Counsel and Secretary, to begin. Please go ahead.

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 presentation accompanying today's earnings release. Lastly, we'll be filing our 10-Q with the SEC for the period ending September 30, 2023. 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 third 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.

Thank you, Sara, and good morning, everyone. I appreciate you all joining us today. Our overall third quarter financial results demonstrate continued improvement from the start of the year as we saw an increase in volumes, sales and continued expansion in our gross margin profile in the quarter. The team has done a nice job executing on our initiatives this year and have proven resilient in a continued challenging operating environment. Volumes in the quarter were up 5% over the prior year as activity levels improved somewhat, but remain choppy from one month to the next. I am pleased to have the positive performance year-over-year, but I'm really focused on getting back to consistent higher growth and better execution. Generally speaking, the macro backdrop remains uncertain. Consumers' purchase of discretionary goods remains pressured by the preference for experiences and travel as a percent of wallet share, and consumer spend is increasingly impacted by inflationary pressures and the higher rate environment. Large account activity continues to move down the path of increased volumes in PPS and a meaningful step-up in automation in 2024. So we really like how we are positioned going into next year. We expect the inroads we have made will support and improve 2024 from a volume perspective and validate the improvements that we have made in our business over the past number of years. North America sales were up 4.5% in the quarter versus last year, driven by a mix of higher average selling price products and which were partially offset by a small decline in volumes in PPS. Similar to the first two quarters, I would characterize activity levels in the region as decent, but have remained at a fairly muted level since the start of the year. Manufacturing activity remains in contraction territory as businesses…

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 2.5% year-over-year to 142,000 machines globally. Cushioning systems declined 1.7%, while void-fill installed systems increased 4.3% and wrapping increased 2.3% year-over-year. We continue our fleet optimization efforts and are focused on minimizing CapEx spend on new converters by refabricating and refurbishing as many machines as possible. Overall, net revenue for the company in the third quarter increased 1.9% year-over-year on a constant currency basis, driven by higher volumes and slightly offset by pricing headwinds in our Europe and Asia reporting region due to lower input costs being shared with our customers. North American net revenue increased 4.5% versus the prior year, driven by a combination of new account activity and strength in void-fill. In Europe and APAC, net revenue on a constant currency basis was roughly flat at 0.2% year-over-year as volumes increased nicely from a year ago, partially offset by pricing get back. Cushioning was a bright spot in the region with most of our cushioning products outperforming year-over-year, and in particular, our Guardian solution, which is seeing continued solid adoption. Base volumes in Europe remained steady but have not demonstrated a material uptick due to the lower economic activity in the region. Automation sales increased year-over-year and represented approximately 6% of sales on a constant currency basis. Our solutions set of Cut'It!, AutoFill and Flap'it! continues to gain traction. We are excited to utilize our additional manufacturing capacity going into 2024. We made further progress on gross margin improvement in the quarter. Although our top line improved roughly 2%, the improved volumes and better input cost environment in the third quarter drove gross profit…

Thank you, Bill. In closing, we continue to make progress in a challenging environment. While we still have a lot of work to do financially to get us where I want to be, volumes appear to be stabilizing and turning upwards. Year-to-date, gross margins have improved dramatically and are close to target. I think we can do better on G&A using the tools we have invested in and we'll continue to keep that as an area of focus. We did a good job on cash, and we'll continue to keep a tight lid on CapEx now that we are exiting our major investment cycle. At this time, given the uncertainty that persists in the markets due to rates, inflation, student loan payments restarting and potential war in the Middle East, I believe it will be challenging to hit the low end of our adjusted EBITDA range. We're going to do everything we can to achieve it, and I believe we will meaningfully outperform last year. But to get to the level required to hit $76 million would require a lot of things to go right, and I just don't have the confidence in this environment. Disappointing, but I think that is the reality of the world that we're in. We do expect a strong finish in Q4, but it may not be enough to hit our range for the year. We've built a world-class infrastructure over the past couple of years, and I believe 2024 will be the year where a lot of the hard work and investments really start to show through. We expect that the large account activity we have been pursuing in PPS will start to show up in the order book as the transition from plastic to paper in North America takes off. Our automation infrastructure…

[Operator Instructions] Our first question comes from Greg Palm from Craig-Hallum Capital Group. Greg, please go ahead.

Yeah. Thanks, good morning, everybody. Maybe just starting off, a little bit more color on some of those closing comments, Omar, just on 2024. And I know the macro is outside of your control, but you highlighted a lot of trends that seem to be in favor of whether it's that reacceleration in automation, it sounds like the switch from plastic to paper, some of your bigger customers seems to be -- have some momentum. You've got no destocking headwinds. So a little bit of color on how you're thinking about 2024. And you talked about high single-digit to low double-digit growth. Was that specifically highlighting 2024 expectations? Or is that more long-term in nature?

Yeah. Good morning, Greg. I think the comment about the growth rates was a bit more, I would say, medium term in nature rather than specifically hitting 2024. What we are seeing in 2024 is very encouraging. It's the trends that you highlighted, large accounts, in particular, in the US. In many cases, we have trials, we have equipment. We're doing a lot of work with them about switching a big portion of their business and with some large accounts, all of their business away from plastic into paper. As you know, the cadence with our business is in Q4, people hesitate to switch given peak season. So that activity right now, which has been ongoing for trials, I assume will pick up in early 2024, and hopefully, will translate into closings at the beginning of the year. But the level of engagement with our large accounts and in our pipeline is very, very healthy. In automation, in this quarter, we had a record bookings quarter. So the largest bookings ever since we've entered the automation business. And that means this is equipment that now we're building in order to deliver to customers in 2024. So we're starting seeing actual visibility around orders and bookings from customers who want to basically order our equipment. And in many cases, these are large customers. If we execute and deliver, which we believe we will, these are customers that have many DCs and many facilities that we think our end-of-line solutions can roll into their added sort of facilities. So that's another reason for our excitement. So if I look at the mix of trial pipeline in PPS, if I look at the bookings for automation, all these are indicating healthy things. The hesitation we have, Greg, which is similar to any other company, is the macro environment and the backdrop. And frankly, the inconsistent environment where I feel every time we are making good progress, gaining market share, something happens in the environment, whether it's related to the rate or to geopolitics or to consumer sentiment, that just makes us a little bit cautious about where we're heading. But I think what I'm seeing in terms of our execution and the cadence for our own business, there is a lot to like. And I think all that bodes well for 2024.

Yeah, that's helpful. And automation specifically, are you -- when you talk about record bookings, are you talking about millions, tens of millions? And just to be clear, are these for sort of trials where you're putting them in [a DC or 2] (ph)? Or are these more sort of large scale in nature?

Yeah, I am talking in the multiple millions for just this quarter, which is a cadence we want to build on and close to tens of millions, let's say. So that's what we're seeing in bookings, again, in just one quarter, which should bode to very good growth in 2024. And we're seeing that trend continue, again with large customers and with medium-sized customers. And just to be exact, what I mean by bookings, these are orders and equipment purchased by customers that don't show in our revenue because we just booked the deal and we will be building now the equipment to deliver that solution, let's call it, sometime in 2024. In some cases, in the first half, in some cases in the second half. So it's a very good leading indicator of actual wins that we have that once we build the equipment will become revenue. So it's a bit better than just a pipeline or a trial.

Understood. Okay. And then just lastly, on the core PPS business. I know you talked about September trends. Can you give us kind of some sense of how trends were or have been in October? And it still sounds like you're expecting some sort of seasonal ramp in Q4, is that right?

Sure. Yeah. I mean look, and I mentioned it in the comments, this year has been inconsistent. I would say from what I'm seeing from our customers and our own activity, I'm pleased with how we're executing in Q2 and Q3 of this year. I think it's noticeably better than how we were executing in '22 and earlier in 2023. The challenge is the environment, given the choppiness and inconsistencies, honestly, it's very tough to book three robust months in a row. So in this particular quarter, July and August were very strong months, September was a little bit softer. In prior quarter, in Q2, if I recall properly, I think April was on the soft side, May and June picked up. So we're seeing that pattern where every quarter, there's a month or a few weeks of period of softness. To answer you on October, since we're at the end of October, October has been a strong month. Now hopefully, that's an indication of what November and December are going to be. And we're trying to ramp up and get ready for a busy season. But frankly speaking, the world changes and it changes sometimes pretty quickly, and we're trying to react to our customer needs. The one thing that I will tell you has been consistent around that period that I think other companies are seeing is no one is in the mood of building their inventory level and ordering and anticipating good activity. Everybody is being cautious. I would say we continue to see customers that prefer to almost run out of product and scramble last minute to get product versus carrying too much on their shelf. And that dynamic is making it very, very difficult to forecast. But I think we delivered an okay quarter despite a little bit of softness in September. And then October, as I said, is off to a strong start.

Okay. That’s really helpful. I’ll leave it there. Best of luck. Thanks.

Thank you, Greg.

Thank you. Our next question comes from Ghansham Panjabi from Baird. Ghansham, please go ahead.

Thank you, operator. Good morning, everybody. Omar, I just want to go back to the volume cadence throughout the third quarter, which obviously has been very choppy as you referenced in the second quarter as well. If you sort of set aside the macro, which is just the obvious and you kind of drill down into some of the micro details in terms of the supply chain, is it just the fact that maybe customers destock inventory aggressively previously and that's sort of been optimized and now we're just sort of reflecting just month-to-month volatility from a macro standpoint? Or what do you attribute that towards?

Yeah. I think destocking, Ghansham, and good morning, is largely behind us with very, very few exceptions. We're not seeing that as an issue anymore, frankly, globally. So that applies to APAC, to Europe and to US customers. I think what we are seeing is a little bit of nervousness in the company level, a little bit, obviously, and it's related to what's happening at the consumer level and industrial activity. And I think you're seeing some of that volatility where people do not want to carry a lot of product. And frankly, order patterns are a bit more conservative, and headlines don't help in that effort. So I think some of these factors are causing the quarterly activity, if you will, to be a little bit more inconsistent. Now within that, there are trends that we all know, Ghansham, that we see them manifesting themselves in our business. Smaller accounts and companies are struggling in this environment, larger accounts are getting bigger. In our business segments, we see in wrapping more softness and that's driven by certain retailers, let's say, in home furnishings or in consumer goods, in particular, the more durable expensive consumer goods where they might be adding a little bit of wrapping solution. We're seeing more softness in those. We're seeing the cushioning part of our business continue to perform and be very consistent. And in void-fill, frankly, it's a little bit dependent on what's happening in e-commerce. And not just broadly in e-commerce, because if it's e-commerce that's more grocery related and small items related, that's not typically where we play. If it's more the slightly more weighty items, if you will, that require our solutions, then that's where you see our product being consumed. So the reasons, honestly, varied, I would say, in void-fill and cushioning overall, we feel okay despite that volatility. In wrapping, this is the new reason why we've been innovating quite a bit and coming up with solutions to address market needs and price sensitivity from some of our customers. The softness has been a bigger disappointment and a bigger surprise for us.

And that softness is more pronounced on a monthly basis in North America or Europe? Or is it equally sort of distributed?

I would say probably a little bit more pronounced in North America than in Europe. And I would say, in Asia, depending on the country, there's quite a bit of monthly volatility. So what we see, in particular out of China, South Korea, et cetera, can be pretty pronounced in terms of volume. I would say Europe has been a little bit more consistent. And then certainly, places like Japan and Australia have had a better cadence.

Okay. And then just finally, as it relates to deleveraging, you made some comments in there about your commitment towards deleveraging, et cetera. You highlighted the liquidity that you have. But you have a couple of big tranches of debt coming up for renewal. And I think the swap expires in June of next year, which is going to increase your cash cost as well. So what is the strategy as it relates to deleveraging? Is it just based on EBITDA improvement and then some level of free cash flow conversion beyond that? Or how should we think about the phase towards your -- towards hitting -- the pathway towards hitting your target of under three times?

Sure. I think -- and I'll let Bill chime in with the details. The first step is EBITDA improvement. We believe by the end of this year, at the end of Q4, we will be at a high-4 handle, which is a meaningful move in the right direction. And we feel we -- given all the discussions and outlook, I said about 2024, we think that will continue to help us trend in the right way. And then obviously, next year, given the swap, as you discussed, we will be looking at optimizing depending on the cost of capital and the financing environment then. But we think through EBITDA growth, we could meaningfully go down from here in the very near term. But I'll let Bill chime in and then give you more detail.

Yeah, Ghansham, just on the deleveraging, right? I mean that's a top priority for us as an organization. So priority number one is continue to increase EBITDA and hit numbers, so continue each quarter to get that leverage ratio down. And when we get below that five turns, right, that will save us 25 bps on our interest expense just based on the leverage ratio. And then throughout next year, right, focus on cash maximization and get ourselves ready to hit the refinancing market. The maturity is June 26, right? So we've got some time, but we want to do it from a position of strength. So top priority for the organization is minimize CapEx. The nice thing is we are through the majority of our major investment cycle, right, between the ERP and IT investments as well as all the real estate investments, which are coming to an end this year with only a small part carrying over into next year. That will really help us focus on maintaining our cash balance and growing it as we exit next year.

Thanks so much.

Thank you. [Operator Instructions] Our next question comes from Adam Samuelson from Goldman Sachs. Adam, please go ahead.

Yes, thank you. Good morning, everyone.

Good morning, Adam.

Hi. So I guess, first, just going back to the cash flow discussion and that path to deleveraging. Can we talk about the free cash flow margins when you get to those target EBITDA margins, Omar, that you talked to earlier in the high 20s? What do you think kind of the CapEx to sales looks like at that run rate? What do you think the free cash flow, the EBITDA to free cash conversion actually looks like?

Sure. I'll let Bill take that one, Adam. But just -- I want to just reiterate again that as we get to that profile, and we have some scale in automation and some scale in cold chain, both of these businesses do not require the same upfront CapEx for our razor/razor blade business in PPS. So that will move the numbers a little bit to improve sort of the cash profile. But I'll let Bill walk you through it.

Yeah, Adam. I think the way to think about it, right, is that the PPS business, which we expect to continue to grow, as Omar mentioned, in that kind of high single-digit, low double-digit area, the CapEx as a percentage of sales, I think, in the near term should be in that high single digit to double digit, right? We're focused on a lot of refabrication and refurbishment of machines to minimize the converter spend. And then over the longer term, we would expect that to get back to close to that 10% to 12% of sales, right, for the PPS business just on the converter spend. Overall, right, as automation grows, that business, it's a bit of a different profile than the PPS business. The gross margins for that business should be in the high 20s, 30%, EBITDA margins of around 20%, high teens. But the nice thing about it is there's minimal CapEx, right? We're not investing in CapEx in order to grow that business outside of the facilities, which we've already done. So over time, the CapEx as a percentage of sales for that business should be low single digits. So if you think about your model over the next number of years, getting that CapEx as a percentage of sales down from the low double digits to kind of the mid- to high single digits is what we're planning for here. So if you think about kind of a 30% EBITDA margin, high 20s, 30% EBITDA margin minus the overall CapEx, you should be in the high teens area as a percentage of sales, if that helps you.

Yeah, it does. And then maybe just coming back to the core PPS business. And as you think about the installed base, the growth has slowed some more recently given economic conditions. But it's interesting that you're actually seeing some sequential declines in cushioning but you're not -- the most meaningful declines in throughput and pressure seems to be in wrapping. And I guess, just as you look at that wrapping footprint today, clearly, there's economic challenges with it and volume challenges with your customers and their sales. But is there any view towards some optimization of that installed base where you get to a point where you say, look, this is not as productive of an asset base as we intended when we made these investments, and we've got to right size kind of the placements at customers in a more significant way to drive the business forward?

I think we're constantly doing that, and we've had a big focus on that, Adam, the last number of quarters, and this is why Bill was referring to sort of the refabs and refurbishing some of the equipment. And we're doing some of that in retail. But the other thing that we're doing in retail, and this is what I was alluding to earlier for some of our wrapping customers, a big part of our solution has been helping retailers, if you will, ship from DCs and from their warehouse. And now we're introducing a number of products to help ship from store, whether it's just the back of the store or actually the front of the store. And these are very different type of converters, different type of equipment. If you're doing stuff in the front of the store, they tend to be a lot smaller, have a much smaller footprint to fit and have different frankly aesthetics. And we've been launching some of these things, and we continue to focus on that pipeline for the near term, i.e., in the next couple of quarters. So we think from a converter standpoint, you may see some pickup, if you will, of number of converters that are out there as we have that ship from store footprint. But per converter, these are a lot cheaper per unit cost for us, and we're hoping that they will be driving a lot more volume given what we're seeing from some of our retail customers. So it's a little bit of just changing the mix and the service that we're providing to some of the wrapping customers where we feel the last couple of quarters, our focus on what's happening in the warehouse and DCs has not been the optimal focus given the activity that some of these retailers are seeing and what they're trying to do in terms of optimizing their footprint and use the store to help with fulfillment.

Okay. I appreciate that color. I’ll pass it on thanks.

Thank you.

Thank you. We have no further questions. So I'll now hand back over to Bill Drew for closing remarks.

Thank you, Lauren, and thank you all for joining us today. We look forward to seeing you next quarter.

Thank you, everyone. This concludes today's call. Thank you for joining. You may now disconnect your lines.