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Ranpak Holdings Corp (NYSE:PACK)
Q2 2020 Earnings Call
Jul 30, 2020, 8:30 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Ladies and gentlemen, thank you for standing by, and welcome to the Ranpak Holdings Corp. Second Quarter 2020 Earnings Call. [Operator Instructions] Please be advised that today's conference is being recorded. On the call with us today is Omar Asali, Chairman and CEO; Bill Drew, Interim CFO; and David Murgio, Chief Sustainability Officer and Corporate Secretary. [Operator Instructions] I would now like to hand the conference over to your speaker today, Chief Sustainability Officer and Corporate Secretary, David Murgio.
David Murgio -- Chief Sustainability Officer & Secretary
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 outlined in our most recent Form 10-K, subsequent Form 10-Qs and other filings 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 those 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 the 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's 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. Also, as we'll discuss in more detail later, due to the accounting treatment for the business combination we closed on June 3, 2019, we've also presented our results for the three and six months ended June 30, 2019 on a combined basis, reflecting a simple arithmetic combination of the GAAP predecessor and successor periods without further adjustment as well as any other adjustments as described. Lastly, we'll be filing our Form 10-Q with the SEC for the period ending June 30, 2020. 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 interim CFO. Omar will summarize our second quarter results, and Bill will provide some additional detail before opening up the call for questions.
With that, let me turn the call over to Omar.
Omar Marwan Asali -- Chairman & Chief Executive Officer
Thank you, David, and good morning, everyone. I'd like to start by thanking our team for their extraordinary efforts over the past few months and adapting so well to a rapidly changing environment. If you had asked me six months ago, if we could achieve the level of productivity and maintain efficiencies like we have so far this year with the majority of our employees working remotely, I would not have thought it possible. I've been impressed by the team's resolve, especially the team members who have been showing up to our manufacturing facilities every day. It's because of them, we have maintained our reputation as a reliable supplier and been able to keep up with the substantial demand we are seeing from many of our customers who continue to experience significant volume increases in their business. Our top priorities remain the safety and health of our colleagues as well as maintaining business continuity. We continue to operate under local health and safety guidelines and are taking strict precautionary measures as we start the process of bringing back staggered groups of employees to our offices.
From an operational perspective, our equipment and paper supplies remain uninterrupted, and our supply chain remains intact. We've managed the business exceptionally well and continue to advance our key initiatives while pivoting toward areas of greater near-term opportunity. Our reliability and innovation were on full display this quarter, and I'm extremely proud of our teams across the globe for the performance they put in. Execution and focus were terrific. And operating in this environment pushed us to develop new skills, utilizing technology that will become part of our playbook going forward, enabling us to be a faster-moving and more efficient company. I'm very pleased with the second quarter performance. We delivered strong results from a growth and profitability standpoint, driven by robust growth in Europe and Asia Pacific. The opening up of economies first in Asia Pacific and then in Europe, provided us with significant growth as demand remained elevated in e-commerce. Industrial activity has begun to return, albeit slowly and improved as the quarter progressed. Areas such as beauty, cosmetics, home decor, pet, consumer goods, electronics, toys, as well as medical supplies continue to experience substantial demand. North America initially faced some headwinds early in the quarter due to the lockdowns, but incrementally improved as the quarter progressed.
We're constructive on the outlook for North America as many of the improvement efforts and growth initiatives we have been implementing are beginning to have an impact as regions open up, and our sales teams are equipped with exciting new products. Our pipeline of trial activity is robust and the chatter in the market surrounding our new product introductions slated for the second half is very positive. The Trident launch is receiving exceptional feedback, and we're excited to introduce Guardian, our next-generation cushioning product in North America this quarter. We believe the smaller footprint of this machine, combined with a strong cushioning capabilities will be met by high demand. We're working on a number of other initiatives in cold-chain and other areas that are in trial phase currently, which we think will also be well received that I'll discuss in further detail in upcoming calls. In summary, we're excited and are expecting improved results in the second half in North America. Turning the discussion now to second quarter highlights.
For the quarter, consolidated net revenue on a constant currency basis increased 13.2%, driven by robust demand for void-fill and wrapping products, primarily in response to elevated e-commerce activity. North America net revenue decreased 5.4% year-over-year, primarily driven by lower cushioning sales as COVID impacted sales in the industrial end markets. Overall, performance in North America bottomed in April and sequentially improved as we got deeper into the quarter. June was our strongest month in the quarter in North America as a number of industrial players started opening up their facilities. On a constant currency basis, for the quarter, net revenue in Europe and Asia Pacific was up approximately 32%, driven by growth across all product lines with particular strength in void-fill and wrapping. Europe continues to be a real source of strength, fueled by solid execution, continued elevated e-commerce demand and sustainability. In Asia Pacific, we continue to see robust growth, driven by the boom in e-commerce and the economic recovery in China that is lifting the whole region.
Supply dynamics in the paper market remained favorable, providing a benefit to our gross profit for the quarter and should continue to be a tailwind for the remainder of the year. While our sales increased 13%, our cost of materials increased a little over 10%, providing an uplift to our profitability. In constant currency terms and pro forma for purchase accounting adjustments in the second quarter of 2019, adjusted EBITDA of $19 million was up 13.1% year-over-year due to higher sales and lower input costs, offset slightly by increased G&A due to continued investments in personnel compared to the second quarter last year. Those are the high-level points on our second quarter, which I believe was a strong one even in the face of challenging conditions. Again, I'm very proud of the team, and I'm looking forward to what we can achieve together given the steps we have taken to build a more dynamic organization, driven by innovation and customer focus. We've introduced two best-in-class products in the past six months and are keeping our foot on the gas with regards to innovation as that will enable us to drive growth and add value to our customers going forward.
With that, let me turn the call over to Bill, who will give you further details related to the quarter.
William E. Drew -- Interim Chief Financial Officer
Thank you, Omar. In our slide deck, you will see that due to the predecessor and successor periods and transaction adjustments for the business combination with One Madison, for the convenience of readers, we have presented the three month period ended June 30, 2019, on a combined basis.
This reflects a simple arithmetic combination of the GAAP predecessor and successor periods and is also pro forma for constant currency and purchase accounting adjustments in order to present a meaningful comparison against the corresponding periods in the three months ended June 30, 2020. We will be filing our 10-Q today, which provides further information on Ranpak's operating results. Machine placement continued its steady increase in the quarter, up 9.2% year-over-year to nearly 110,000 machines globally. Similar to recent quarters, cushioning systems grew in the mid-single digits, while void-fill installed systems increased nearly 8%. Our smallest product line, wrapping, is experiencing exciting growth, north of 33% year-over-year and becoming a meaningful contributor to our topline.
As Omar mentioned, overall net revenue for the company in the second quarter was up 13.2% year-over-year on a constant currency basis, driven by strong performance in Europe and APAC, offset slightly by North America, which experienced some headwinds in industrial end markets. On a pro forma basis for constant currency and purchasing accounting adjustments, gross margin for the quarter was 40.9% compared to 42.4% in the prior year. When examining our gross margin, it's important to note that as part of the business combination last year, there was a step-up in the value of our converter assets that took place in the fourth quarter. Within COGS, this resulted in an increase in depreciation expense as a percent of sales more than 230 basis points year-over-year from 8.7% to 11.1%, offsetting some of the benefit of the lower raw material costs. The increase in sales and cash profitability was consistent with growth in adjusted EBITDA, which rose 13% year-over-year, while holding margin flat at 28%. Savings on input costs were largely reinvested in personnel additions we've made taking the organization from 550 employees to over 600.
Interest expense for the quarter was approximately $5.5 million and should remain consistent for the remainder of the year as the majority of our interest exposure on our USD tranche is hedged. Capital expenditures for the quarter were $7.9 million, driven largely by increased placement of converters. In this environment, we are focusing on investing in areas of existing high demand and have put on hold some of the more discretionary capex items until conditions normalize. In areas of high demand, we are on offense and in areas that are more challenged, we have pulled back some of our near term investment. Moving to the balance sheet and liquidity. Our cash position remained strong at $22.6 million as of June 30. And our $45 million revolver is undrawn and fully available to us should we seek additional liquidity. Our leverage from a bank adjusted EBITDA standpoint was 4.4 times at the end of the quarter.
With that, I'll turn it back to Omar before we move on to questions.
Omar Marwan Asali -- Chairman & Chief Executive Officer
Thanks, Bill. To summarize, similar to the message in our last call, our business fundamentals, liquidity and financial position are strong. The team continues to execute well and take a balanced approach to operations. We're pleased with the performance in the first half of the year, a period that was challenging given the global pandemic. We continue to develop new offerings that we believe will further cement us as industry leaders.
Our customer value proposition is exceptionally strong and improving further each and every day. The initiatives we have implemented position us very well for the second half of the year and beyond. The three main growth drivers for this business, which are e-commerce, automation and sustainability, are fully intact and experiencing strong tailwinds. The penetration of e-commerce globally has accelerated meaningfully and I believe a substantial portion of this shift is likely a permanent change in consumer behavior. COVID is driving technology adoption and changing company behavior. Companies recognize the need for automation to maximize output of facilities while minimizing the number of orders. Sustainability remains a strong force and shows no signs of abating as pressure from consumers, employees, regulators and investors increasingly push corporations to improve the imprint they leave on the environment.
We feel very good about the trends we are seeing in these three areas and are investing behind them. In closing, a year ago, I sought to create a customer-centric organization that is data-driven and one where employees are owners and therefore, act accordingly. Instilling an ownership culture based around serving the customer is critical as it drives behavior and a sense of accountability, which, in turn, improves engagement and productivity. I'm very pleased to report that through investments in talent, innovation and technology, we have significantly improved our abilities to address our customers' needs.
Our investments in technology enable us to have faster access to more insightful and robust data. Our communications inside the company are clear and frequent. We continue to invest in the business and our people, bringing a new energy and excitement level to the Ranpak team. Our employees are now equity owners, leading to a difference in approach and mentality. We're simply building a strong foundation for Ranpak to excel and grow in the marketplace. With that, thanks again for joining us this morning.
I'll now open it up to questions. Operator?
Questions and Answers:
Operator
[Operator Instructions] Your first question comes from the line of Greg Palm with Craig-Hallum Capital. Your line is open.
Greg Palm -- Craig-Hallum Capital -- Analyst
Yeah, thanks. Good morning, Yes. Congrats on the good results here. So maybe more broadly, I guess, what are you seeing from new customers versus existing customers? Just trying to get a sense for whether the strength and the growth is coming from new or existing?
Omar Marwan Asali -- Chairman & Chief Executive Officer
It's a little bit of both. The biggest growth, obviously, is coming from anybody involved in e-commerce directly or indirectly. As the quarter went on, Greg, we started seeing some industrial existing customers open up facilities. So that provided some boost. And then the other thing, as we discussed in last quarter, we've had a pretty large pipeline of new customers with the shutdowns and lockdowns and so on. We have not been able to have our employees go in there and either install the equipment or start the initial sale process, etc. And as the quarter progressed, that changed as well.
So we started seeing more facilities open, frankly, in Asia, in Europe as well as in certain parts of the United States. And as these facilities were open, we were able to convert more of our pipeline into paying customers. And that trend continues up to today where we're having more success accessing facilities. So it's a mix of both. But the real robustness and boom continues to come from e-commerce part of the business.
Greg Palm -- Craig-Hallum Capital -- Analyst
Yes. Makes sense. Any way to maybe quantify what the growth is of that? And how much is e-commerce of the business now, I mean, in terms of mix of revenue?
Omar Marwan Asali -- Chairman & Chief Executive Officer
Direct e-commerce probably grew comfortably double digit, and that's a mix in void-fill and in wrapping. And then e-commerce activity of sort of rigs and mortars players, etc., experienced very, very high growth, but that's off a very small base. So if you look at our business, the largest grower was wrapping globally, followed by void-fill. And then cushioning, obviously, had a pretty difficult time, mostly in the United States with declines in double digit, but kept improving as the quarter went on, which was good to see.
Greg Palm -- Craig-Hallum Capital -- Analyst
Okay. What about automation? You mentioned that a couple of times, it sounds like there's obviously increased interest for that solution, given everything going on. I mean, are those still sort of pipeline talks? Are there trials? Are you deploying that system at customers yet? How should we think about the timing?
Omar Marwan Asali -- Chairman & Chief Executive Officer
Yes. So automation level of conversation and excitement is exceptionally high. We are dedicating a lot of resources there. This past quarter, again, given the pandemic, etc., not all facilities were opened. But as they opened up, we were able to deliver some equipment and realize some sales. The pipeline continues to grow. I think automation for the rest of the year could be limited by just how many facilities are open and our ability to physically deliver equipment. But as I look sort of to late in 2020 and 2021, we see just a tremendous pipeline of customer needs and automation. And the other thing I will tell you is we are investing heavily in innovation in that area to come up with even more products based on what we're learning from our customers and prospects. I feel automation is just going to be a phenomenal opportunity. And we have some very exciting things that we're working on that I think will be coming to market later this year and early in 2021.
Greg Palm -- Craig-Hallum Capital -- Analyst
Okay. Great. And I guess just last one. As far as capital allocation goes, maybe you can remind us what your near-term priorities are? And whether cleaning up the warrants is something of a near term priority? Or what the expectation is there?
Omar Marwan Asali -- Chairman & Chief Executive Officer
Yes. Our thinking has not changed. Dealing with the warrants at the right time is absolutely a priority. And then from a capital allocation standpoint, paying down debt and we're entering our busy season. So for the next six months, we expect to generate a lot of cash. And as I've said, for the last number of quarters, I hope that what you will see from us is a pretty clean cap structure with less debt and just common equity down the road. And that should sort of take the whole cap structure discussion off the table where we can just focus on the execution and fundamentals of our business. So both dealing with the warrants at the right time, Greg, as well as continuing to delever are our top priorities from a cap structure standpoint.
Greg Palm -- Craig-Hallum Capital -- Analyst
Very helpful. That's it for me. Thanks so much. Best of luck going forward.
Omar Marwan Asali -- Chairman & Chief Executive Officer
Thanks a lot.
Operator
[Operator Instructions] Your next question comes from the line of Stefanos Crist with CJS Securities. Your line is open.
Stefanos Crist -- CJS Securities -- Analyst
Good morning and Congrats on the quarter. Can we start maybe talking about the softness in North America, particular cushioning versus Europe and Asia, and maybe what do you think needs to happen for that demand to recover?
Omar Marwan Asali -- Chairman & Chief Executive Officer
Yes, I think, first, we need facilities open. It's as simple as that. With severe shutdowns in many locations, it obviously is impacting demand. And when you look at what's happening in North America, a lot of the weaknesses, if you look at it by region, was in the Midwest, in states like Illinois, Michigan, Indiana, as well as some of the southern states, Texas, Oklahoma, etc. frankly, driven a lot by just industrial activity, oil and gas market, as well as the auto sector and aerospace sector. And early in the quarter in April, that weakness was quite noticeable. As I said, as the quarter progressed, we started seeing some of these facilities open. We started seeing better patterns of ordering our consumables and that continued. So I think where we are today, I like what I'm seeing in terms of the recovery of the industrial activity. But with a big caveat, which is, as we all see the resurgence of the virus in certain states in the south and other parts of the country, that's the point that we're paying attention to and to see if that could have an impact. But what we're seeing are trends in the industrial channel that continue to improve.
Stefanos Crist -- CJS Securities -- Analyst
Got it. That makes sense. And I believe you briefly touched on those industrial end markets that are beginning to recover. Could you maybe give some more detail on those? And why those are doing better than other end markets?
Omar Marwan Asali -- Chairman & Chief Executive Officer
Yes. I think in sort of heavy machinery and sort of the auto market, in some areas, frankly, the improvement has been just opening the facilities. I'm not sure the improvement has been robust economic activity. So I think just the facilities being open is helping us. So that's one trend that we continue to see here, and frankly, it's a trend that is even better in Europe. So I think the activity in the auto market, the activity in some of the machinery players, the activity in some of the tooling businesses, all that is recovering.
The recovery is slow, but it is a recovery, and that's why we like what we're seeing. And I've always maintained for the second half of the year, if we see elevated e-commerce activity, not necessarily like what we saw in Q2, and see some recovery in the industrial channel, which is what my expectation is, then I'm expecting that we will have a very good period of performance for our company. So I like what I'm seeing in the marketplace. I like how we're positioned. But what we're watching is just sort of the path of the virus and see if that is going to have any negative impact that is unforeseen right now.
Stefanos Crist -- CJS Securities -- Analyst
Perfect, thank you. That's it for me.
Omar Marwan Asali -- Chairman & Chief Executive Officer
Thanks.
Operator
[Operator Instructions] No further questions at this time. I'll turn the call back over to our presenters for any closing remarks.
William E. Drew -- Interim Chief Financial Officer
This is Bill. Thanks, everyone, for joining us this morning. We look forward to speaking with you again next quarter. Take care.
Operator
[Operator Closing Remarks].
Duration: 24 minutes
Call participants:
David Murgio -- Chief Sustainability Officer & Secretary
Omar Marwan Asali -- Chairman & Chief Executive Officer
William E. Drew -- Interim Chief Financial Officer
Greg Palm -- Craig-Hallum Capital -- Analyst
Stefanos Crist -- CJS Securities -- Analyst
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