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: Ladies and gentlemen, thank you for standing by. My name is Desiree and I will be your conference operator today. At this time, I would like to welcome everyone to the Ranpak Fourth Quarter 2023 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. [Operator Instructions] I would now like to turn the conference over to Sara Horvath, General Counsel. Please go ahead.
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 at 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.
We 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 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-K with the SEC for the period ending December 31, 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 Asali, our Chairman and CEO; and Bill Drew, our CFO. Omar will summarize our fourth quarter results, provide an update on our growth strategies, and issue our outlook for 2024. 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, and Good day, everyone. Thank you all for joining our call. We finished 2023 on a positive note as we built on the momentum from the third quarter and delivered our best quarter of the year. We saw continued general improvements in the operating environment in Europe and the more pronounced holiday season in North America, compared to prior year. Overall, the e-commerce discretionary goods market and manufacturing sectors remain subdued, but 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 improvements 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 APAC finished on a strong note, up 12% on a constant currency basis, driven by 15% volume growth as ordering patterns continued 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. De-stocking activity is behind us and in many cases distributors and then 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 void-fill performance, offset somewhat by 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% to $76.5 million. Overall, it was a quarter that turned out a better-than-expected and helps us to finish a challenging year on a positive note. Generally speaking, we enter 2024 in a better operating environment than we experienced in 2023.
Discretionary goods remain soft, but 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 Dutch 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 remains 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, Maine, Oregon, Maryland, New Jersey, Washington, and Connecticut. These laws have been in place in Europe for years, but are just gaining traction in the U.S. We'll 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 the investments we have made to generate cash and delever.
Now here's Bill with more info on the 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-K, which provides further information on Ranpak’s 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 to higher utilization locations, and further that our efforts to refurbish and refabricate 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.
A factory line of workers working together to assemble protective packaging solutions.
For the quarter in the Europe and APAC reporting division, combined revenue increased 12% on a constant currency basis. The better second-half drove net revenue on a constant currency basis to finish up 1% to 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, with input costs 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 APAC reporting unit stayed flat with a 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 have 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 a 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 and liquidity, we completed 2023 with a strong liquidity position, including a cash balance of $62 million and no drawings on a 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 5 turns by year-end. We are pleased to make progress, but our ultimate goal remains to return to a leverage ratio of 3 turns or less. 2024 is the 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 in 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've won key mandates for our auto fill and cut it products that solidify Ranpak 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 deleveraging. Generally speaking, we believe this guidance reflects a level of conservatism and continue 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 rich key strategic accounts ramp up their plastic 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 PPS and automation about to kick in. We have seen some of the largest e-commerce players publicly announce this year they have begun a multi-year 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 end of line 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 craft 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 and 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.
APAC 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, will 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?