Good morning. My name is Rob, and I will be your conference operator today. At this time, I would like to welcome everyone to the Ranpak Holdings Corporation Third Quarter 2022 Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instruction] Thank you, Sarah Horbach, General Counsel. You may begin your conference.

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 in 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 press 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, 2022. 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, Sarah, and good morning, everyone. I appreciate you all joining us this morning. As expected, the third quarter was a challenging one at Ranpak as the headwinds we discussed on our Q2 call impacted results and macro weakness intensified throughout the globe. The global consumer remains under pressure due to inflationary headwinds related to fuel, food and energy impacting personal budgets and reducing disposable income. Adding to the challenges, spending patterns remain firmly in favor of experiences and travel rather than in e-commerce as many consumers pull forward their goods purchases during the pandemic. More recently, the impact of rapidly rising rates on household network and rising housing costs is having an impact on confidence and reducing willingness to spend on discretionary items. Overall, we expect e-commerce and the consumer to remain under some pressure in the near term. But as we exit the year and head into 2023, we will begin to lap the short-term pattern shift from the purchase of goods to experiences and expect e-commerce to ultimately return to growth. Due to the share shift from brick-and-mortar with the timing and trajectory of a recovery impacted by the near-term macro headwinds. While the environment certainly remains challenging, we have been developing new products that are ideally suited for the e-commerce environment, which we believe can improve the velocity of our bounce back and get us back on a trajectory for growth we have been working towards. In July, we communicated that we expected the energy crisis in Europe to worsen and its impact on the economy to become more pronounced. The ramifications of skyrocketing energy prices are flowing through the economy at this time, and we expect headwinds to persist until alternative energy supplies can be from up, and the continent has a viable path…

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 in the quarter increased 7.3% year-over-year to approximately 138,500 machines globally. Solid placement performance but at a lower rate than earlier in the year due to slower market conditions. Cushioning Systems grew 1.4% in the quarter, while Void-fill installed systems increased 8.1% and Wrapping increased 14.6% year-over-year. Overall, net revenue for the company in the third quarter was down 12% year-over-year on a constant currency basis, driven by lower volumes due to slower end market demand, offset somewhat by positive price contribution. North American net revenue decreased 10.5% year-over-year, largely driven by lower Void-fill and Wrapping sales as e-commerce activity was lower compared to the prior period. In Europe and APAC, net revenue on a constant currency basis in the third quarter was down 13% year-over-year, driven by lower volumes and partially offset by higher price in the region. Overall, general economic weakness in the region and the allocation of disposable income to travel and experiences rather than e-commerce, weighed on results as all categories were down in the quarter. Sentiment in the region remains extremely poor as consumers and businesses are tightening their belts in anticipation of a painful winter due to the energy crisis. Automation sales increased a little under 10% this quarter on a constant currency basis and represented approximately 5% of sales as we continue to make inroads with our automated solutions that enable customers to accelerate the packaging output, reduce operating costs and improve the sustainability profile of their operations. Our COGS in the quarter remained under pressure compared to a year ago due to inflationary headwinds largely related to paper pricing.…

Thank you, Bill. Overall, as I think about where we are now versus a few months ago, I would say the 2 biggest changes are, first, the war has escalated to another level with the blowing up of the North Stream pipeline and destruction of the bridge connecting Crimea to Russia. And second, the Fed has been much more aggressive in its efforts to combat inflation. The rate increases in hawkish rhetoric resulted in significant increases in the cost of capital, leading to massive wealth destruction in the capital markets and higher funding costs for businesses and consumers. The dollar has reached 20-year highs, causing issues for global trade and potentially leading to more financial instability across the globe. This is happening at a time when most indicators I can see in our business suggest inflation is rolling over and the economy in the U.S. is meaningfully weaker. Freight and logistics costs are substantially lower. The job market is not nearly as hot as it was a year ago, and our key input costs have stabilized and appear to be heading lower. Overall, I would say the North American market deteriorated more than I was expecting going through the second half of the year. Activity levels over the past couple of months have been softer across the board, but particularly related to e-commerce, as I think consumers are stretched. Paper pricing in the region has stabilized and begun to roll over in my view, as overall demand for paper and corrugated is lower and substantial kraft paper supply is coming online at the end of this year and into next year. We're working with various mills on testing their capabilities and are pleased with the quality of product coming to market. As a result of the environment and increased industry…

[Operator Instructions] And your first question comes from the line of Ghansham Panjabi from Baird.

I guess first question on the machine placement, which is obviously very strong at 7% plus in the third quarter. How are you sort of managing the placement cadence with the world that we have today while also ensuring that you have acceptable return thresholds, just given the way you place the machines at no cost to customers?

Sure. And as you may recall, Gansham, the cost to the end user is nothing, but our distribution partners do pay us a monthly fee for the machines. The way we've been thinking about it is -- it's, frankly, new business opportunities despite the weak environment has been pretty decent. Our trial activity is high throughout the year and kept improving as the year progressed. Our wins have been real. What has been different is the ramp-up period with some of these new customers is a bit longer than what we've seen historically. And in some cases, the trial period is a bit longer. So what's going on is we are placing more and more machines that I would say the revenue is a little bit delayed. And in a year where these new opportunities, new revenue is delayed a little bit and your existing accounts are consuming less paper and less volume, that double hit has really impacted revenue per machine quite a bit. We are very, very focused on some of the wins that we've had and that the ramp-up period will play as we expected. And I suspect that in the following months, you're going to see meaningful improvement in that metric as some of these wins ramp up get to, let's call it, normalized volumes. And we're not expecting crazy volumes given the world that we're in, but more normalized volumes, which I think will help showcase how displacement has been appropriate.

Yes, that's helpful. And then for my second question, I was just going to ask on as you kind of think back to this year, I mean, obviously, a lot of different things occurred. You had the SAP implementation, you had price cost that was hugely unfavorable and in the macro environment, et cetera. As you think about 2023, is it less so about price cost and maybe that actually flipping positive? And then we just go back to what we normally worry about, which is the macro -- how are you approaching this -- how are you approaching the outlook for 2023 at this point?

Sure. Well, at this point, in terms of the SAP implementation, I expect that to deliver quite a bit of benefit for us. It already started in the last couple of months, and it will continue, and this is important because it's driving efficiencies, productivity measures, better measurement and faster measurement of KPIs, et cetera. So I think that implementation as we speak and going forward, is going to be a tailwind. In terms of price volume as well as cost dynamics, I think the initial benefit we're going to see is going to be on the cost side. It is evident in the U.S., given the increase in capacity is somewhere along 8% or so of increase in annual production volume on the kraft side that I think that supply/demand will help us get better pricing. In terms of Europe, what we're seeing so far is the stability to modest declines. The reason these declines in pricing for us are not more material, it's frankly related to the energy market. Nat gas has just been very volatile. So today, it's much better than where it was a few months ago, but it's going to depend on what kind of winter we have and who knows whether prices spike from here or they stay where they are or go down. And given that lack of visibility, I think mills have sort of been disciplined speaking to the existing pricing formula. So depending on nat gas, we may see some relief, but the weakness in Europe in volume in terms of corrugated and kraft players, that's going to also help us. So overall, as I look at '23, I think there is a real case to be made that on the COGS side, and our biggest input there is paper that we're going to see some relief, maybe meaningful relief in America, and let's call it, modest relief in Europe. On the volume side, well, the first thing is given the top of year we've had this year, as we lap, we're going to have easier comparisons. We really have invested quite a bit this year in new products and these new products, many of them are coming to market later this year and early in 2023, and that should impact our volume as well. In terms of our pricing to our customers, I suspect we're going to hold these prices until we get more clarity. I would not be surprised if we get a lot of relief in terms of our COGS and our paper supply. If we pass some of that to our customers as well, given the inflationary spikes the last couple of years. So if you put this whole picture together, we feel 2023 is going to be materially better than 2022, which has been a tough year for us.

Okay. And just a car a question for Bill. Bill, the currency adjusted you're referring to on EBITDA was roughly -- was $1.9 million. Is that right for the third quarter?

Yes, Ghansham, that's correct. And so just for reference in the release and in the presentation. We've got the new format, which we'll break it out and give you the exact impact on the EBITDA. And then we also, at the end, provided the product on that as well, just so you can have some accountability.

Okay. Great. See you in the conference next week. Thank you.

Your next question comes from the line of Greg Palm from Craig-Hallum Capital.

I guess I just wanted to first follow up on that previous dialogue. I mean is there any way you can just sort of quantify what the headwind, the price volume or the price headwind has been this year? I think, Omar, maybe you just said that you expect 2023 to be materially better than 2022. I'm guessing you meant on sort of a margin EBITDA basis. But just any way to quantify what that headwind has been this year, all else equal, if everything maybe starts to normalize in 2023?

Sure. I'll start, and then I'll turn it over to Bill to give you maybe more precise numbers. But I think the headwind in the past, call it, 10 months or so. And you're right, I was referring to gross margin and EBITDA in terms of my outlook for 2023 is probably somewhere between 600 to 800 bps that hit our margin, mostly frankly, going to paper mills. And many of them that report publicly, I think you'll see they're up 500 to 800 bps this past year in terms of gross margin. So given the energy situation given earlier on in the year, supply/demand dynamic when demand was still decent and supply was a bit more limited, you effectively have that much of gross margin, leave our complex and go into the mills and the suppliers. But again, I'll have Bill maybe give you more precise numbers.

Sure. Yes, Greg, Omar, was actually right in line. So it was year-to-date, the hit to gross margin has been about 720 basis points based on just material cost alone. We've gotten a little bit of help on the labor and overhead. But between the materials cost being 720 bps, automation, about 1 point and then depreciation to over another point to get to [indiscernible] year-to-date. If you look at where we're working the quarter though, the headwinds, as we mentioned in the earlier remarks, was less onerous as we're beginning to lap some of these increases, which really started to ramp up in Q3 and Q4 of last year. So in the quarter, it was about 500 basis points of a headwind. So the rate of change is improving there.

Understood. Okay. That's helpful. And do you expect that you can recoup most or all of that in 2023? I know super uncertain environment still. And I guess just talking specifically about Europe, if we assume that gas prices don't spike up again, is there any reason why you wouldn't see a greater relief in kraft paper prices over there just given the dramatic change just in the last month or 2 of prices over there in gas?

So on the second question, Greg, if it stays at these levels or improves a little bit, we will get meaningful relief you're spot on in terms of pricing and that will help our margin profile quite a bit. The reason we are not sort of counting on that is, frankly, we are in no position to say what type of winter Europe is going to have or where nat gas is going to end up. Every time we got relief the last few months, it was followed by a spike. So we're more just taking a wait and see approach. But if we assume prices stay here, if we assume winter is reasonable, then yes, you can assume we will get much better relief than what we're talking about. Now as far as recouping all of sort of the margin erosion that we experienced this year, I would say I'm more comfortable saying, I believe based on what I know right now, we will recover most of it. I'm not sitting here counting on recovering all of it. I do think we will deliver a much stronger margin profile in 2023, and that the majority of what you saw us give up this year, we will be able to recover.

Got it. I mean is it as easy as just trying to figure out the implied EBITDA margin for this year and adding 400 to 500 basis points next year. Is that sort of what the math implies?

I think directionally, that's correct, math. And the reason I get there is, obviously, we talked about paper and paper supply and costing. So that's the biggest factor for us given how big paper is in our COGS. But things like freight, trucking, container costs, ballet costs -- all these things are trending the right way, giving us some relief. And then we have been just very disciplined in this new world on our SG&A. So if you add it all up, I think directionally, you're right, Greg.

Okay. All right. I'll leave it there. Best of luck.

Your next question comes from the line of Adam Samuelson from Goldman Sachs.

So I guess, I wanted to come back to the volume question a little bit. And you provided some context earlier, Omar, around some of the newer placements having lower productivity, lower throughput. But I guess, how are you -- a, how are you evaluating the payback and ROI potential of those placements if they're taking less volumes than maybe placements 2 or 3 years ago did? And then just more broadly, I mean, the volumes in total down 27% in the quarter with installed base that's up kind of the installed base that's been in place for longer than a year. Clearly, the paper per machine is down pretty considerably. Just do you think that's purely just destocking on the part of your distributors and customers, such that the end consumption is not down anywhere near that level? Or what do you think the -- what confidence do you have that you're seeing a stabilization in paper throughput?

Sure. And Adam, I'll start and then also have Bill chime in. There's no doubt in the volume declines, a big chunk of it, not all of it, continues to be destocking, and we are trying our best to triangulate with our distribution partners where they are in that cycle. We believe in the majority of our geographies as we speak now. The bulk of that is behind us. There's still a couple of pockets where we think there may be some destocking, but take it took us a long time, almost 9, 10 months to get here, but destocking is largely behind us, and that's a big chunk of the 27 points. It's not the only piece, the other piece is frankly just weaker economic activity in e-commerce as well as in some industrial customers, in particular, in Europe, in e-commerce, in the Nordic region, in places like Poland and Germany, the declines have been quite severe. We have some facilities that were running 7 days a week, 24 hours that today run a few hours a day and 4, 5 days a week in places like Poland and Eastern Europe that are close to the war, and that has really impacted volume. And again, Bill can give you more specific math. So that's the volume picture. In terms of how it relates with machine placement and how we think about it, effectively, the payback now is a little bit prolonged by a few months. as some of these customers ramp up. So if you look at our placement in the last, I'm going to call it 6 months, it's been decent. In many cases, we're putting converters either new facilities for existing customers or new customers. And we know from them that it's going to take them a…

I think you covered the big things, right? I think the math is from the existing base when you've got 100 -- you come into the year with 130,000 machines in the field, yes, your new placements are up. But when you've got 130,000 already out there and you're placing 7,000 year-to-date, when the volumes are down at the existing account base, it's tough to overcome that math, right? So the volumes are down meaningfully at a number of end users, particularly in the e-commerce and you can see that in the Void-fill and the Wrapping numbers in particular, really driving that, which is impacting, obviously, the growth for this year. The data that we have implies that right now, the pallets per machine are down below where they were in 2019 levels, we wouldn't expect that to persist over the longer term. We would expect some sort of a bounce back. It's just, I think, where we are right now between the destocking and the lower consumption with the demand pull forward in Void-fill and Wrapping that's been painful for us this year. But as far as overall new machine placement, the one thing that I'll emphasize is we are very discerning about the new machine placement. We want to make sure we're getting paid back adequately on the capital that we put out there. That capital is precious to us. So we want to make sure that we're getting the adequate returns there. We're also pushing folks in the field to have the conversations with their distributor partners and their end users to understand, is there anything structural in the business to indicate that they may not need as many machines that they currently have, right? Do they get a number of machines last year. thinking that their business was going to continue on the same trajectory as was in 2021. And maybe do we take some of those machines back and deploy them elsewhere. For us, that would be a much more efficient use of capital. And that's really a big area of focus for us right now.

Okay. That's all helpful color. If I could just ask a follow-up on the price/cost question. And really, just thinking historically, the company would procure the large majority of its kraft paper on an annual basis so you had good visibility to your paper cost for the following kind of 12 months. Do you think that you actually go back to that kind of procurement and pricing strategy into 2023? Or given kind of some of the macro uncertainty, especially in Europe that it might be difficult to secure volumes at a fixed price for 12 months?

So as we speak, Adam, we're negotiating our 2023 agreements. And in many cases, we will be pushing for annual. I will tell you, just knowing the way the world is working right now and how volatile energy is. I suspect we might succeed in maybe having, call it, a 6 months arrangement with some mills and that we revisit in 6 months depending on pricing, et cetera. I think expecting all mills to agree to annual agreements would be unrealistic. Some will. It depends on their energy stability and their energy situation and some, as you know, might be vertically integrated and so on. But I think in general, expect that in 2023, there will be maybe one reset or something along these lines. At least that's what we're attempting to do.

Got it. That's all really helpful color. I'll pass it on.

Your next question comes from the line of Stefanos Crist from CJS Securities.

Can you just talk about what you're seeing in the competitive environment versus other paper providers as well as plastic?

So from my seat, I am not seeing a switch from paper to plastic. Plastic has also gone up in pricing. You hear cases here and there. It's nothing out of the ordinary. I don't think we're seeing a reversal of the trend. And I know a lot of people love to talk about that, and are customers willing to pay for sustainability? That has not been a problem, certainly not one that is noteworthy. In terms of paper competition, paper competition is increasing. We've been in a good space and a good industry before this year and competitors are trying to innovate and add to their solutions. That's something that we're fully aware of. And frankly, we're investing, we're innovating. We're adding a lot of new products, and we think we're ahead of the curve. In terms of our market share within the paper segment Stef, it continues to be stable. We don't see us losing accounts. We don't see big attrition. We see volume declines at our existing accounts, but we're not seeing attrition where accounts are saying, "I'm switching away. And by the way, our wins are bigger than our attrition. But the problem is, as I said, our wins are now slow to sort of get to the level of volume that we would like to see. So the overall picture for us in terms of our market share feels somewhat stable. It's just we as a company are over-indexed, frankly, to e-commerce and to Europe, and these have not been good places to be in the majority of this year. And that's the stuff that I think has hurt our volume a little bit more.

That's great color. And just a follow-up. Can you just talk about the visibility you have for the holiday season? I know we're already a month into Q4, but do those deliveries for your customers, are they starting already? Or are you just having conversations? Just how should we think about that?

It's tough to predict the holiday season. I'll be honest with you, because it's still relatively early. Yes, we have some visibility from the month of October, but November and December are really important months. And this year, forecasting has been very, very difficult. We're optimistic about the peak season. But I would say given the world that we're in and how quickly things change, I'd rather just wait and see how the next few weeks evolve before we see sort of the real volume trends and so on. So I think it's tough to give you a clear answer. I think it's too early in the peak season Stef.

And there are no further questions at this time. Mr. Bill Drew, I'll turn the call back over to you for some final closing remarks.

Thank you, Rob, and thank you all for joining us today. We'll see you next quarter.

This concludes today's conference call. Thank you for your participation. You may now disconnect.