Ranpak Holdings Corp. Q1 FY2022 Earnings Call

Good morning. My name is Audra and I will be your conference operator today. At this time, I'd like to welcome everyone to the Ranpak Holdings First Quarter 2022 Earnings Call. Today's conference is being recorded. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. At this time, I'd like to turn the conference over to Sara Horvath.

Thank you, and good morning, everyone. Before we begin, I would 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 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 of 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'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. Lastly, we'll be filing our 10Q with the SEC for the period ending March 31st, 2022. The 10Q 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.

Thank you, Sara. And good morning, everyone. I appreciate you all joining us this morning. Our first quarter financial results were disappointing. However, despite a slow start to the year, we remain confident in the outlook for our business and believe our financial performance will meaningfully improve as the year progresses. Our confidence is built on the fact that the key detractors this quarter were derived from a combination of two distinct events, namely: our go-live with the new ERP system in January, which I consider to be a one-time impact, coupled with the abrupt start to war in Europe, which commenced in late February and quickly reshaped the operating landscape, which we are adapting to. In our fourth-quarter call, we shared that we recently made one of the most important investments in Ranpak history when we implemented SAP. So far, the system is functioning as advertised with layers and dimensionality far beyond what we previously had access to and providing us with data that we believe will lead to greater efficiencies and streamlined processes for Ranpak. It is also a system that we knew going in was highly complex and takes users time and dedication to truly understand and properly utilize. Over the past three months, the team has done a good job getting up the learning curve of the system and has embraced the new way of operating at Ranpak. We have dedicated a tremendous amount of internal and external resources to the project and sought to address any major areas of risk with the project and set ourselves up for success. When you make such a dramatic shift in the way you operate, even with substantial planning, training, and resources, it takes some time for a workforce to really operate the system and become efficient users. It was a slow start, but the strides have been great during the Hypercare period. At the pace of improvement we are experiencing, I believe we will begin to see more efficiencies flow through in the second quarter of the year, and we will be able to identify opportunities for cost savings and improvements as the year progresses. While the first quarter figures are not where we want them to be, we exited March leaps and bounds better with the new system than where we began. Many of the issues that impacted our top-line performance in Q1 that were related to our SAP transition were resolved by the end of Q1. Because of the dislocation to begin 2022, I want to make it clear that I do not believe the first-quarter results are indicative of where we are as a company, and I'm confident about our outlook over the medium and longer term, as I believe Ranpak is extremely well-positioned for the structural shifts in how the world does business. The macro outlook has changed since the start of the year. But our key drivers of our long-term growth initiatives of automation and sustainability remain very much intact. To make a finer point on the impacts of the SAP transition, I want to highlight a few details. Point 1: We had scheduled downtime to start the year due to cutting over to our new system. Our operations were down for the first 10 days of the year due to the cutover, where we were not producing or shipping product nor entering orders in the system. This resulted in the modest buy-in I mentioned in the fourth quarter, which we estimated to be around $3 million, as well as substantial unabsorbed overhead estimated to be more than $1 million as our plants were inactive during this specific period. Point 2: Inefficiencies due to working in the new system related to processing orders, planning production in the new inventory management system, and getting product shipped. Whether it was taking customer orders, receiving inbound goods, making paper, loading trucks, or inventory planning, all processes were different and took a bit longer in the new system initially, leading to production inefficiencies. Point 3: Margin dislocation due to delayed price increases driven by the SAP implementation. Due to the complexity of the go-live, we discussed on the fourth-quarter call that our pricing actions to offset continued input cost pressure were delayed from when we normally would have taken additional price. We needed to get the system up and running and make sure we had good data in place before pushing through our latest price increases. This obviously created a dislocation in our pricing and cost structure given the inflation we continue to experience from the fourth quarter and in the case of Europe, which accelerated more meaningfully in Q1. Outside of SAP, the other key area that impacted our results was the changing macro landscape in Europe due to the invasion of Ukraine. This manifested itself directly for us in a few ways with the largest being lack of trucker availability and increased energy costs. Lack of trucker availability in Europe in March resulted in increased variability around customer pickups. Given the large number of truck drivers from Ukraine and many of them leaving their jobs to go back to their countries to join the fight, we had numerous instances of products not being picked up on schedule, leading to inefficiencies, as well as greater-than-normal product left on the dock at the end of the quarter, negatively impacting our performance. Energy costs in Europe continued their increase from the fourth quarter and drove substantial increases in the cost of paper we purchased in the quarter. Natural gas prices elevated meaningfully at the end of 2021 due to storage levels, which created a drag on margins in the fourth quarter. This continued into Q1 and was exacerbated further following the invasion of Ukraine. To provide some context, Dutch natural gas averaged just under €100 per megawatt hour in the first quarter of '22, with a peak close to €212 in March. This compares to an average of €18 per megawatt hour in the first quarter of '21, a fivefold difference. To give you a sense of how unprecedented this is, from 2005 to 2020, natural gas has averaged around €19 and had a maximum price of €30 in 2008. The world, particularly Europe and Ranpak, are operating in a completely new environment due to this conflict, and adjustments needed to be made. Bill will provide some additional context on the impacts of those headwinds in the financial section, but I think it's important to make clear that the system utilization inefficiencies dramatically improved throughout the quarter, and we exited March with a significantly improved operating cadence that continued through April. We started the year with very specific plans to implement a new ERP system, but we were planning for doing business during times of peace. We ended the quarter with a newly robust ERP system implemented but are now adjusting to doing business during times of war. Our paper suppliers in Western Europe were hit hardest this past quarter, and both our suppliers and we now have better plans on how to navigate the disrupted paper and energy markets. The market is already beginning to adapt as we are seeing shifts in how paper supply flows throughout the world. Part of the relief in the upcoming quarters we believe will occur as less Russian paper is sold into Western Europe and instead is redirected to Asia, especially China. Western European paper that would have been sold into Asia and China are being replaced by this Russian supply, freeing up Western European paper to stay more local to meet the demand in the European markets where we operate. Again, the results for Q1 are not what we wanted them to be, but given the complexity of our ERP implementation and the fact that we did so in one year on budget and on a global basis while most people were working remotely, I'm pleased with the hard work and dedication of our employees who helped us achieve all of this while delivering almost flat results on the top line and, more importantly, positioning us extremely well starting in Q2 of this year. Moving on from the implementation and the war in Ukraine, I think it'll be helpful to give some color on the business activity and what we are seeing in the different regions. Demand for our products was solid in the quarter and activity levels became more robust as the quarter went on, particularly in North America, which even with all the inefficiencies, had double-digit top-line growth year-over-year driven by a strong March. We saw the quarter evolve a bit in North America as it started slower at some larger end-users experienced supply chain issues, leaving them without products to ship, and Omicron impacted customer visits. But the momentum built throughout the quarter and March showed really strong activity levels, both on the sales side and the new customer pipeline growth with particular interest in automated solutions. I'm optimistic about the traction we are getting in North America and believe it will be a solid growth driver this year. Many of you have heard me say repeatedly that sustainability, in particular, is a large driving force behind this momentum and I believe we have assembled the team and offering that can capture meaningful opportunities to drive results. Consumer spending remains strong due to continued wage growth, low unemployment, and a strong consumer balance sheet. Obviously, the impact of rising inflation in food and commodities will be something to keep a close eye on. But for now, we are seeing good activity and some opportunities to really expand our business in North America. We are well-stocked on converters as we have meaningfully improved our sales and operations planning in North America and invested in safety stock to better insulate ourselves from potential supply disruptions. Container market pricing has come down approximately 20% since the end of February in a welcome sign of improvement in the global freight market, but the recent lockdowns in China lead me to believe the stabilization could be short-lived. On a more local level in North America, freight markets have improved as spot rates have come down and trucks are more widely available. Labor in North America seems to have stabilized, as we are getting more applications than in the past, and more skilled employees, albeit at higher wages. We implemented a price increase in March in North America and I will say pricing power in North America remains strong, although not quite at the level we experienced in 2021 where increases went through with minimal if any resistance. Moving to Europe and APAC. After a slow start, we finished the quarter strong and began to hit our stride in March with sales up double-digit year-over-year. The macroeconomic outlook in Europe has deteriorated since the start of the conflict and I am seeing some headwinds as record commodity prices in natural gas and elevated oil prices impact industrial activity and consumer sentiment. E-commerce remains elevated, but there has been a slowdown in activity there as disposable incomes take a hit from inflationary pressures, and consumers are spending more on services and experiences. I'm optimistic though, as we continue to see positive results into April, which is great to see given the uncertainty in that part of the world. I spent two weeks last month with our team in Europe to try to get a better sense of the status of the region, and I will say I came away from the visit encouraged. While there is greater variability in pickups due to the truck driver shortage, we are still seeing solid demand for our products, albeit not at the growth levels we experienced last year. And although the sentiment readings are down, every restaurant, airport, and hotel I went to was packed with no availability, which I thought was an encouraging sign of the resilience of the European consumer. We continue to win new business in e-commerce, automotive, and manufacturing at a good clip, although the pace of wins is slower than we were accustomed to and cost savings are increasing in importance compared to a year ago. That being said, given the macro environment, the range of possible outcomes in Europe is wide at the moment. The tailwinds of substrate shifts and automation demand in the business are powerful, but so are the potential impacts sustained high energy prices will have on industrial production and consumer behavior. In Asia, it is more of a mixed bag as we are seeing pockets of strength and other areas that are slower as inflation is having an impact in the region, and e-commerce is not elevated as it was in early 2021. Japan and Korea were lighter early in Q1 following a really strong Q4. But those areas appear to be bouncing back now. China has had a strong start to the year, but recent lockdowns and slowdowns in growth will have an impact on the near-term performance there. We have had a number of key wins recently in the region where we have been able to leverage our multinational relationships with e-commerce, cosmetics, 3PLs, and semiconductor companies in the region to further penetrate other parts of APAC. From where we sit currently with our pipeline for the quarter, we are looking at solid improvement in the region and are optimistic about the rest of the year. APAC is the region that tends to be more back-end loaded, given the festivals in Asia in the early part of the year and e-commerce. In the combined Europe-APAC region, profitability in the near term will be impacted by the significantly higher energy prices on paper production costs. We took price in April, but given the lead time we provide to our customers, that increase did not cover the energy shock following the invasion of Ukraine. To counteract the margin pressure from the energy shock, we plan to implement further actions in June, in the form of pricing or surcharges, or both, which combined with our April pricing actions, we expect will improve our margin profile as the year progresses. Our pricing structure will be right-sized to reflect the new environment. We're also mindful of our customers in this environment and the need to be a good partner in challenging times. As I mentioned earlier, the paper market is evolving quickly. So we do not want to overcorrect on what could be a shorter-term dislocation given what we are seeing with more Russian paper going to APAC and China and freeing up some of the paper from Western European mills to be used more locally. Overall, Ranpak is fortunate that we're starting from a position of robust margins, low leverage, and strong liquidity, and that we have the ability to invest some of our margins in the short term to help our customers. Since I joined Ranpak, I have reached customer-centricity. And this is an opportunity for us to demonstrate that, albeit in a balanced fashion to ensure we aren't absorbing the entire impact. I think this will be rewarded in the long term with loyalty and additional share. It's important to know the coordinated global government and commercial response to Russia has not impacted our ability to serve customers today. We continue to receive shipments from all of our suppliers in March and April as they continue to produce and ship paper to us. We are, however, working with our supplier group to obtain additional tons as we take steps to reduce and ultimately eliminate our exposure to Russian mills going forward, given the geopolitical landscape. For surety of supply and reliability, we feel this is a prudent approach even though this requires more working capital in the short term as we are carrying roughly twice our normal paper, as well as greater expense relative to our original forecast. Our greatest priority is serving our customers uninterrupted, so we are committed to making sure they have a positive experience with Ranpak. I do want to make clear though, we are working tirelessly to minimize the cost headwind of changing course and finding offsets. Moving on to automation, our vision and plan here is unchanged as we continue to invest meaningfully behind this endeavor. We have been adding exceptional talent to this area with a particular focus on engineering as of late. The team continues to grow as we are ramping up and accelerating our hiring activity to expand our presence, as our fortitude behind this opportunity only becomes stronger. The need for efficiencies and labor reduction is only gaining steam as wage growth accelerates and labor availability is scarce. This is a global phenomenon that is picking up steam, driven by next-generation e-commerce fulfillment centers and 3PLs. Our product line serving end-of-line needs is one of, if not the most robust in the industry, especially when you take into account our partnerships. We are really pleased with the way our offerings are being received and optimistic about our ability to make further inroads in the space. We are tracking to our goals in automation for 2022, and believe 2023 will be an important inflection point for our business. Now, with that, let me turn it over to Bill for some financial detail.

Thank you, Omar. In the deck, you'll see a summary of some of our key performance indicators. We'll also be filing a 10Q, which provides further information on Ranpak's operating results. Machine placement increased 11.4% year-over-year to over 134,500 machines globally. Another solid double-digit performance, but at a lower rate than recent history due to the SAP go-live. Cushioning systems grew 3.5%, while Void Fill installed systems increased 11.9%, and Wrapping increased 25.9% year-over-year. Overall, net revenue for the company in the first quarter was down 1.3% year-over-year on a constant currency basis, driven by lower volumes of product shipped largely due to the SAP go-live, the associated inefficiency of getting up and running, and the macro environment in Europe impacting some of our ability to catch up in March. North American net revenue increased 10% year-over-year, with all categories up for the year and particularly strong performance in cushioning and wrapping. We're really pleased with what we're seeing in cushioning as this area is gaining traction as industrial customers seek cheaper alternatives to foam and more surety of supply. Void-fill also contributed nicely to the top line, albeit at a lower rate, given some of our e-commerce vendors experienced supply chain shortages. Overall, online activity was a bit lower due to economies reopening and more dollars being spent on services and experiences rather than goods. The overall top-line growth was driven by pricing actions over the past year as volumes were down in the first two months of the quarter for the reasons previously mentioned, but encouragingly, turned positive in March as we exited on a strong note. In general, we're pleased that even with the go-live, all categories were up year over year. In Europe and APAC, net revenue on a constant currency basis was down 6.9%, driven by lower volumes in the region, offset somewhat by higher prices year over year. Europe and APAC face extremely challenged comparisons as Q1 '21 was a record quarter that benefited from numerous tailwinds that drove exceptional volume growth. At that time, e-commerce was the only option in most geographies. Industrial activity was recovering from depressed levels, paper pricing was extremely favorable in the region and sustainability tailwinds were driving paper adoption. With that context and all the challenges we experienced in Q1, we are impressed with the way the team managed to improve throughout the quarter and meaningfully narrow the gap to Q1 '21. Cushioning was the biggest driver in the quarter on an absolute basis, as in Q1 '21, we saw outsized demand due to industrial activity catching up from being down significantly due to the pandemic. We also saw challenging comparisons in Void-Fill wrapping as e-commerce activity was more normalized, albeit at high levels compared to Q1 '21. Automation sales more than doubled year-over-year and represented almost 5% of sales on a constant currency basis as we continue to gain traction in the space with our box customization and automated solutions. Automation is one area where we have seen some supply chain disruptions for key components. But we have solid plans for the year and are doing everything in our power to minimize disruptions and keep projects moving. Our gross profit decreased 28.8% on a constant currency basis, implying a margin of 29.8% compared to 41.3% in the prior year. Excluding depreciation, gross margins declined from 51.7% to 39.7%. The margin headwinds were driven by increased input costs, particularly in Europe, without timely corresponding pricing offsets to SAP lower volumes resulting in unabsorbed overhead and the increased contribution from automation to overall sales as we ramp up that business. Overall, North America margins were down roughly 2.5 points in the quarter but improved meaningfully in March due to better absorption and pricing actions going into effect. Europe and APAC was more challenging from a margin standpoint, down 16.1 points as energy prices impacted our material costs without any corresponding price actions to help in the quarter; automation contributed 8% of sales in the region compared to 3% prior, and we had lower volumes year-over-year. Energy prices reflected in paper costs contributed approximately four points of impact, and automation attracted by 3.2 points as we get this business up to scale. Higher volumes and better absorption in March helped to improve margins by roughly 4.6 points, and this is prior to any pricing actions having gone in place. As a reference, had our pricing actions in North America and Europe inflated for the entire quarter, gross margins overall would have been 2.6 points higher to 32.4%. Adjusted EBITDA declined 31.8% year-over-year to $19.1 million, implying a 22.8% margin. The decline was driven by lower gross profit coupled with increased G&A as we continue to add talent to the organization to drive growth initiatives and PPS automation, as well as support our digital infrastructure transformation, increasing salary headcount by more than 150 year-over-year, as well as increased IT systems costs. Overall, the key areas we're investing in this year are IT, automation, engineering, and procurement. Those are immediate areas we're focused on to help us achieve our growth objectives. Given the macro uncertainty, other areas that we previously planned on ramping up are being met with higher hurdle rates. Capital expenditures for the quarter were $9.8 million, driven largely by converter placement as well as some increased investment in technology infrastructure in our ongoing real estate projects. Moving briefly to the balance sheet liquidity and the cash side, our cash balance at the end of the quarter was $80.5 million. More of our sales being back-end loaded in March, as well as investments in working capital and CapEx in the quarter, lowered our cash balance but we expect that to level out with more normalized sales and our cash to build in the second half of the year. Our net leverage based on reported LTM adjusted EBITDA was a solid 3.0 times at the end of the quarter. This environment has emphasized what a valuable tool a strong balance sheet is; we have been putting ours to work recently in a number of ways. We have invested in working capital in an effort to ensure an adequate supply of converters and paper for our customers. We are also making upgrades to our key infrastructure to run the business and serve customers better, and it has enabled us to make strategic investments for the short term and margin to help our customers. While much of our discussion is usually focused on growth, this is a business that has really attractive margins and generates substantial cash. We're using that financial profile to our advantage right now to make investments that will pay off over the next number of years. With that, I'll turn it back to Omar before we move on to questions.

Thank you, Bill. In closing, while we are not pleased with our financial results in Q1, I want to emphasize a few things. One, the team did a fantastic job and put in a tremendous amount of effort that cannot be overlooked. Second, Q1 is our seasonally smallest quarter of the year. So while Q1 results are painful, we are going to do everything in our power to claw that deficit back for the remaining nine months of the year, which historically are larger contributors to our annual performance. If you look at it on a two-year stack, even with the headwinds from the new ERP system implementation, our adjusted EBITDA is up versus Q1 of 2020. Third, we exited Q1 in a far better position and feel good about our ability to continue to grow our top line and improve our margin profile throughout the year. Beyond the April price increase we implemented, we will be taking additional actions in Europe to offset the energy impact. Fourth, as I have said in the past, we at Ranpak are very focused on our annual and multi-year plans. For the greater good and to invest in the future, we will have certain quarters where our financial results take a step back due to noise related to our future investments. They do not change the quality of our business and are required to achieve our desired multi-year trajectory. We are a company that is still building scale in some areas, so certain disruptions and investments may have a magnified short-term effect. It is important to highlight that we do not take these investment decisions or quarterly results lightly. The people in our board room, including myself, represent roughly 50% of the stock of Ranpak. Every decision made is to maximize the value of Ranpak over the long term for shareholders. Sometimes the journey may require some short-term pain, as we experienced in Q1. Upgrading our digital infrastructure was a critical investment for us, and one I would do all over again as it was necessary for Ranpak's success on a far bigger stage. The timing of our upgrade, coupled with the outbreak of war and resulting energy shock is unfortunate and has put us in a position where we are coming from being behind on the margin front, but I am confident in our ability to claw our way back to the financial profile we are all accustomed to. The macro uncertainty in Europe clouds things for the near term, but we have an excellent team and a strong leading position to weather the landscape and emerge stronger. We have work to do on gross margins in Europe, but we will address those and feel confident in our ability to continue to improve as the year progresses. Because of the slower start to Q1, at this time, we're updating our guidance for the remainder of the year. Our top line remains unchanged, although we believe we will likely be on the lower end of the range given the changed landscape. So this year, on a constant currency basis at our standard estimate of $1.15 to the euro, we are anticipating revenues of $425 million to $445 million, reflecting top-line growth in the area of 13% to 18%. Given the margin pressures to start the year and lower volume expectations due to the uncertain outlook in Europe, we have lowered our adjusted EBITDA forecast to a range of $115 million to $125 million on a constant currency basis, or a decrease of 2.5% to an increase of 6% compared to 2021. Wider than our historical ranges, we believe that a potential range of outcomes in Europe warrants some additional cushion and flexibility. We're confident in our forecast and are working day and night to hit our goals. With that, let's open it up for some questions.

Thank you. We'll take our first question from Ghansham Panjabi at Baird.

Thank you, good morning, Omar and Bill.

Good morning.

Can you just give us a more specific view on what you're seeing for paper volumes as far in 2Q and how you see that dynamic unfolding for the back half of the year? I'm just trying to get a better sense of how you're thinking about EBITDA between the second quarter and the second half of the year. Is there any lingering impact from ERP on 2Q, etc?

So regarding ERP, I would say we have made critical improvements. I'm not going to say, as of today, we're at 100% of where we are, but certainly we're north of 90% or 95%. I believe by the end of the quarter, around June 30, our ERP muscle is going to be where we want it to be, and hopefully we would be getting benefits out of the system, which is what we're all focused on. In terms of volume, I would say in April, it's been a decent month. ERP has not been an issue, which is a good thing. Again, we're not perfect with the new system, but significantly better. And that's a good continuation of what we saw in March. Europe, in particular, had a stable month. We are up, but it's largely based on price, not volume yet. My expectation is we will address the pricing issue, maybe a surcharge this quarter to position us well by the end of the quarter to recover on the margin front in Europe. I'm not expecting robust volume, but I'm expecting decent volume out of Europe. Although that statement is subject to nothing dramatically changing on the war front, which is very tough for me to handle. From everything we're seeing with our trials and our pipeline, we are expecting a pretty good second half of the year. Although I will tell you that our growth this year, in light of what happened in Q1, is probably going to be predominantly price-driven, not volume-driven. Lastly, I will say, Ghansham, sorry, just to give you some sense, we did increase the number of converters out there, and that's always a good leading sign for our business. A large portion of that happened toward the end of the quarter, so the number of converters increased, but these converters were not out in the field producing paper. That's something that's going to help us in Q2 and then the second half of the year.

Thanks so much, that's a very comprehensive note. For my second question, can you just give us a sense of the same dynamic specific to machine shipments, which were very strong in the first quarter, despite some of the challenges you highlighted? How do you see machine placements unfolding for the rest of the year? And maybe you could just give us some level of quantification on the backlogs relative to historical averages?

Sure. Machine placements, as you pointed out, Ghansham, they were still solid in Q1, which is great to see. As Omar said, this was pretty back-end loaded, right? As we were getting our feet underneath us on that system and getting machines shipped. So a lot of that happened in March, so you didn't really get the flow-through on the paper side. Just when discussing the outlook with the teams in the different regions across the world, demand for additional machines and trials and close activity is solid, so we feel good about continuing to place machines at a good clip throughout the year. It might be as robust as last year, where it was in the mid-teens, probably not just given some of the uncertainty, but we still feel good about the demand that's out there for continued placements.

And just one final one for me. Will the June price increase catch you up where you need to be on price-cost?

It will get us very close. We're expecting margins to continue to improve throughout the year. Q2 will still have some pressure, obviously, just given the timing of the increase going into place in Europe. But in Q3 and Q4, we expect those margins to get back closer to where we historically have been.

Yes. Thank you. Good morning, everyone.

Good morning, Adam.

My first question is about breaking down the volume performance for the quarter. I noticed that your installed base increased by 11% year-over-year, yet paper volumes declined. On a like-for-like basis, your paper volumes are down by nearly 30%. I'm trying to grasp the future trajectory. How much of the paper decline can you directly link to the ERP issue? How much do you attribute to reduced customer activity, especially in the e-commerce sector? I’ll stop there and have some follow-up questions.

I want to start with a broad overview before having Bill provide more details. Reflecting on the quarter, the ERP issues played a significant role, especially with the conflict in our largest region affecting March, which created a challenging situation. This was not something we anticipated at the start of the quarter. Looking at our figures, we estimate about $3.1 million in lost revenue due to ERP downtime at the beginning of the year, which impacted this quarter, particularly with some purchases made in December. The trucking challenges in Ukraine also took us by surprise and cost us over $2 million in March. Additionally, some customers in Eastern Europe, such as Poland, delayed their orders, which amounted to over $2 million as well. As Bill mentioned, we couldn't raise prices while implementing the new system, likely costing us around €3 million for the quarter. When you add these figures together, it exceeds €10 million, primarily affecting our European operations due to both the ERP challenges and the trucking issues along with delayed orders. We are starting to see some normalization in these numbers. On the demand side, especially in e-commerce, it remains robust, although growth rates are not as high as last year. It is challenging for us to determine if this is a new normal for e-commerce or if we might experience further downturns, particularly in Europe if consumer confidence wavers. This uncertainty is reflected in our revised guidance and the broader EBITDA range we provided, as it is difficult to predict these impacts. In the U.S., traditional e-commerce partners had decent volumes with us, though not significant. We are noticing a moderate increase in activity among retailers focusing more on their e-commerce operations, although they are starting from a smaller base. Bill, would you like to add anything?

Sure. Adam, just to give you a sense of how we're thinking about the rest of the year, which I think will give you a little bit more normalized view. We are expecting at the low end of our range lower volumes in each quarter compared to 2021 largely. The top line is making that up on price. This is going to be largely driven just by lower utilization of the machine base. So we're baking in high single-digit, low double-digit declines in utilization per machine, which will be offset by, of course, the pricing as well as the increased machine placement. So I do think a big chunk of what you saw, that 21% decline in Q1, was driven by just getting up to speed on the ERP system. We also had some impacts, as we stated, from lower e-commerce activity, as some folks in North America had supply-chain shortages, which seem to be resolved, and then just generally a bit lower activity on the e-commerce front as things have opened up.

Hi, guys. Thanks for taking my questions. Could you start with giving us some more detail on the lower volumes you experienced in the first quarter? Can you quantify what's attributable to SAP and downtime out of the 21.3% down in the quarter? How much was attributable to Russia, and then how much was attributable to some lower customer demand in the European region?

Sure, Alex, I'm happy to. As Omar mentioned, there was some buy-in in the fourth quarter related to the SAP implementation, where customers were purchasing ahead in case of any disruption. We estimate that to be around €3 million in top-line line variability. The truck driver availability issues in Europe, we would estimate at around €2 million. Then on some of the push-outs with distributors deciding that they wanted to take products in April rather than May, we've put that at around €2 million as well, just given what we saw unfolding throughout the month. It may have been a little higher. Then that, plus kind of the pricing impact of the delayed implementation would all total up to around €10 million in top-line.

Great. And how do we think about price stickiness, given that's what's really driving growth for you guys this year? Is there any risk to the top line if there was some normalization in price in the longer term?

Sorry, Alex, can you ask that again?

How do you think about price stickiness, given the struggling growth and full-year 2022? And if there is any risk to the top line at some normalization in price in the longer term?

As we think about it, frankly, we've been in discussions with our customers, and this is largely focused on Europe. The energy situation is not Ranpak specific, so what is happening with natural gas rates and elevated levels are impacting pretty much every player in Europe, whether it's industrial players or frankly consumers as they consume energy in their own homes. We have been speaking openly with them about passing through some of that unusual activity. Again, we may do it in the form of a price increase and/or a surcharge, and we would do it transparently. If the energy market eases, if things improve in Europe on that front, we're happy to pass along the savings down the road. I think the driving force behind it being energy-driven makes it stickier, and people understand that. The question is, what's going to happen with demand and consumer sentiment in Europe? Honestly, that's very tough to assess. As you can tell from what we're telling you about our guidance for the rest of the year, we're not assuming a robust Europe. We're not assuming that we maintain volume or productivity of our converters. We're trying to be a little cautious. But that's going to depend on the trajectory that happens on the continent. With the war, frankly that's not just a relevant point for Europe. If things get materially worse, it could impact the rest of the globe as well. So that's something that we're watching. The nature of what's driving our price increase, which is predominantly the energy situation, given our communication with our customers, with our distributors, and end-users, we feel they understand it. It will be sticky, and we are all hoping for a more stable future for us and for them where these prices become a bit more manageable.

If I could just fit one more in. You mentioned there's a bit of a lag with implementing price increases. So price came in at 16.5% in the quarter. How much more of an increase in price should we expect for the remaining three quarters for the year?

From a competitive standpoint, we don't want to get too specific in terms of any plans. But I will tell you that we are focused on just getting back to our margin profile. We will be able to structure different increases as we need to, in order to achieve that, whether through a surcharge that Omar mentioned, as well as other price increases just on traditional paper. We'll be looking to both of those mechanisms to make sure that we're calling back our margin as we exit the year.

The way I would triangulate our thinking without giving specifics is to expect some improvement in the margin profile in this quarter. In the second half, we will get pretty close to our historical margin profile. That's what we are solving for.

Morning. Thanks. I guess, just starting off, I understand some of the impacts in Europe. Obviously, a lot of that is outside your control, but looking back at Q4, your commentary certainly didn't imply that there were, I guess, any major disruptions associated with the ERP implementation, and those comments were back in late February, so I'm still trying to reconcile that. Were you expecting maybe a bigger ramp in March? Because, even if I adjust for the call it, the €10 million of impacts there were still quite a bit of shortfall relative to expectations, so just trying to tie that out.

Yes. In summary, we anticipated a much stronger March in Europe, and while March was positive compared to our ERP starting point, the war had a significant negative impact on our plans. At the beginning of the year, we believed each month of the quarter would show improvements. This strategy worked fairly well in North America, even if the results weren't exactly what we anticipated. North America achieved growth, primarily driven by price, and we held similar expectations for Europe. When we reported our Q4 earnings, the war was just starting, making it difficult to predict its effects. We had expected to meet our targets as a company implementing an ERP system. We were unaware that many of our drivers from Ukraine would not be available, which complicated our understanding of how our customers would handle delayed orders. Unfortunately, the war changed circumstances in ways that negatively impacted our business in March, affecting how we planned to implement the ERP system. We did make some changes. We continue to make some. We're not done with our changes on the supply side. I will tell you the following: on supply side, we still are getting some paper from Russia. We expect to continue to do that. It's decreasing, and I expect that to change materially based on our plan in the second half of the year, where we would be getting a lot less paper from there. We're getting paper from other sources, some European players, some other international players helping our European business. I feel pretty good about our plan. From everything I'm hearing from all our discussions with different suppliers and mills, I do not anticipate running into issues in terms of securing paper supply. At some level, we have to adjust pricing, and it might be that we're paying slightly more. If we do, then we will deal with that in our price increases, etc. By securing supply for the rest of the year, given what we're seeing is reducing the Russian exposure is not going to be an issue. I think it's a little bit too early to know. I will tell you we watch very closely how we compare to the resin market. I've had some folks ask whether we're worried about paper increases that we are at a competitive disadvantage. We are not seeing that. What we're seeing is more akin to what you are saying, which is both the plastic and resin market also has pricing and inflationary pressure. How it all shakes out is really tough to tell. Some of the actions and the pain we've taken on, I alluded to that in my comments, I'm hoping will lead to us getting benefit from a market share standpoint. But frankly, just given the quarter that we have had and the different issues with implementing a new system, with the uncertainty around the war, we have decided we'll do what we can to gain market share and improve on the volume front. However, let's not put it as our base case, if you know what I mean. Thank you. And thanks, everybody, for joining us today. We look forward to speaking again next quarter.

And that does conclude today's conference. Thank you for your participation. You may now disconnect.