Ranpak Holdings Corp. Q2 FY2022 Earnings Call

Good morning, everyone. Before we begin, I’d like to remind you that we will discuss forward-looking statements as defined under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those forward-looking statements as a result of various factors, including those discussed in our press release and the risk factors identified in our Form 10-K and our other filings filed with the SEC. Some of the statements and responses to your questions in this conference call may include forward-looking statements that are subject to future events and uncertainties that could cause our actual results to differ materially from these statements. Ranpak assumes no obligation and does not intend to update any such forward-looking statements. You should not place undue reliance on these forward-looking statements, all of which speak to the company only as of today. The earnings release we issued this morning and the presentation for today’s call are posted on the Investor Relations section of our website. A copy of the press release has been included in the 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 June 30, 2022. The 10-K will be available through the SEC or on the Investor Relations section of our website. With me today, I have Omar Asali, our Chairman and CEO; and Bill Drew, our CFO. Omar will summarize our second quarter results and provide commentary on the operating landscape and Bill will provide additional details 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. We returned to top line growth in the second quarter on a constant currency basis. We have now turned positive year-to-date on a constant currency basis against extremely challenging volume comparisons versus the first and second quarters a year ago, where volumes were up more than 30% in each quarter. Even in a normal operating environment, those would be meaningful challenges to surpass. So with all the macro headwinds we are currently facing, to be positive on the top line on a constant currency basis is a testament to the effort of the team as they continue to drive new business opportunities. Unfortunately, the macro backdrop has deteriorated meaningfully since we spoke a few months ago and is certainly more challenging than we initially anticipated. As the year has progressed, we have experienced less demand in certain end markets, particularly in e-commerce as economies have opened up, and spending patterns among consumers have shifted to more experiential areas such as travel and restaurants rather than purchasing goods to be delivered to their home. This dollar shift has been further exacerbated by lower disposable income available to consumers due to increased fuel and food costs, eating into their budgets. Activity in Europe slowed down and the economic effects of the energy crisis on the continent are having an impact. The quarter’s performance in the region was also somewhat impacted by some distributors reducing their levels of inventory to manage their working capital more tightly in an uncertain economic environment and to reflect our shortened lead times. On a positive note, top line EPS results were up or flat in each region, and we continue to see solid new business activity. Trials and closures have ramped up over the past few months, increasing sequentially in Q2 compared to Q1, which is an encouraging sign. In North America, sustainability is starting to gain traction as regulatory activities are gaining steam and companies are anticipating further changes down the road. Shareholders are also increasingly using their voting power to advocate for less plastic in the supply chain ecosystem and holding companies accountable to meeting targets. In June, Canada banned the manufacture and importation of single-use plastics by the end of the year in a major effort to combat plastic waste and address climate change. In the U.S., Maine and Oregon have passed extended producer responsibility laws in 2021, and now we are seeing at least 10 more states, including California and New York, pursuing similar measures to hold producers accountable for end-of-life management of plastic packaging. Notably, on June 30, California passed the largest EPR law in the history of the United States and has another bill that is circulating, which is focused mostly on e-commerce packaging. While the details of the California bill are still being worked out and understood, the momentum is clear. Voters, legislators, and shareholders want less plastic impacting our environment. This top-down momentum plus an increased focus on trial and close activity in the U.S. has helped to drive sequential improvement in closures in the second quarter compared to Q1 this year and being up meaningfully versus Q2 of 2021. Closures in Europe in the second quarter trended upward from Q1 as well as the team has done a good job of driving activity in the field and converting new business wins, albeit at a slower rate compared to last year’s frenetic pace. In APAC, trial activity improved from Q1 and saw a substantial increase of more than 50% versus the prior year, which was encouraging. We are pleased to share that we have selected Malaysia as the new site for our APAC localization production facility. With our APAC headquarters in Singapore, a little over an hour's drive away, we feel Malaysia is better suited for us to establish our production capabilities given our management proximity. This will make us significantly more competitive in the region due to the lower production and logistics costs and will enable us to grow more rapidly in the region. Given the change in site selection, this project will now be functional in 2023 rather than the end of this year. So while we are facing some near-term headwinds in our top line from lower economic activity due to the impacts of inflation and consumers adjusting their spending patterns as the economies open, we are encouraged over the medium and long term by what we see in terms of momentum on sustainability, especially in North America and our position as the market leader in paper-based protective packaging, leading to more closure activity. As the year progresses, the impact of these closures should build and offset some of the year-over-year declines we see in the existing fleet due to market pressures. I am pleased to share we have largely moved on from the operational issues we experienced with our new ERP system in Q1 as the team did an excellent job of embracing the system and getting more comfortable in the new operating environment. A lot of the heavy lifting on the operational difficulties we had in Q1 have been worked through. While it won’t happen overnight, instead of initial troubleshooting, we are now in the phase of the project where we can focus on becoming more efficient and begin extracting efficiencies by becoming better users of the system. Our paper sourcing continued uninterrupted in all geographies in the quarter. Our vendor relationships are strong, and we believe we have the ability to continue to source the paper we need to fulfill our customer demand. We have great relationships with our suppliers and are a steady buyer of paper in good times and in challenging environments. This has helped us secure additional tons from our supplier group as we continue to reduce paper acquired from Russia and have no plans to purchase from that mill beyond shipments received in July. At this point, we are heavy on paper, particularly in Europe, given our cautious approach to insulate ourselves from possible disruptions in supply. We will reduce that throughout the year to free up working capital, but we’ll be doing so at a metric pace given recent reports of energy restrictions on the continent. Overall, we feel very good about our sourcing plan for the remainder of the year with the remaining wild card being the energy situation's impact on mill production. I’m pleased with the ability to secure the supply of paper, but unfortunately, like the rest of the industry, the cost of our key input, kraft paper, remains elevated and has put pressure on our gross margins. On the Q1 call, we shared that we took pricing in North America to align our pricing more closely to our cost towards the end of the quarter. We are now in a better spot in North America in terms of price and cost, but have not gone so far as to attempt to completely recoup our margins at this time. Given the weaker environment that has evolved over the past couple of months and pricing fatigue in the market, we are in a holding pattern to see how things unfold on the price of the commodity. We are optimistic that given the lower box shipments we have seen and increased paper supply coming online at the end of the year, we could see some stabilization and perhaps relief in pricing in the second half in North America. In Europe, the energy price environment remains volatile and subject to substantial swings based on headlines regarding the impact the Russia-Ukraine war is having on gas supplies in the continent. We discussed that we pushed through a price increase following the first quarter, but it was not enough to compensate for the increased gas price environment encountered following the start of the war, and that our second quarter margins in Europe would remain under pressure. We took additional pricing as of July 1 to improve our positioning and claw back some of the pressure we experienced for the first half of the year. These actions have improved our price-to-cost ratio compared to what you saw in the first half of 2022, but will not close the gap completely to get our margins back to where we have been historically until we get some relief on the paper side. I think given the weaker operating environment, pushing too much on price right now risks further hurting demand, which we are not willing to do. While it is painful in the short term, I expect the lower demand environment we are seeing to impact our top line and begin to flow through to the input costs. We believe that this kind of mismatch cannot persist indefinitely. To be clear, we’re not standing idly by on the margin front, waiting for paper pricing to provide relief. We are addressing costs throughout our P&L, making adjustments across the board to protect ourselves in this more challenging operating environment. We have closely reviewed all of our forward spending and investment plans to ensure we are deploying capital to the most productive areas. Our gross margins in the near term will largely be driven by our paper costs and pricing actions, so we have focused our efforts more on our G&A to achieve immediate cost savings. We slowed our hiring velocity meaningfully and kept it focused only on these areas we deem critical. We have also reduced headcount through targeted reductions where we can consolidate roles or activities or were warranted through performance reviews. We have reduced our projected headcount spend for the remainder of the year by a net of $2 million when taking into account expected new hires and identified an additional $2 million in planned deferrals. We have also removed approximately $2 million of planned discretionary spending from the remainder of the year. We continue to optimize our spending and evaluate areas for further efficiencies. We are monitoring the macro environment closely and are prepared to take further steps necessary to ensure our overhead costs are rightsized for this environment. There’s no sugarcoating it. It is a challenging environment where input costs remain elevated at the same time that demand is lower. Inflationary pressures in food, fuel, and now housing costs have reduced consumer buying power and eroded consumer confidence in both Europe and the U.S. to levels below the global financial crisis. Rocketing gas prices and uncertain energy supply in Europe may lead to further slow down our business closures. Manufacturing activity in the second half of the quarter clearly took a leg down, as well as rising input costs and the increased wage spiral have driven companies to focus on reducing operational expenses and capital spending to protect their margins and balance sheets. This lower overall activity level is impacting the utilization of our existing fleet in the near term, but we believe the resilience of our model will come through again as eventually lower economic activity should result in some commodity price relief. We have a strong team who remains focused and resilient. With that, let me turn it over to Bill for some financial detail for the quarter.

Thank you, Omar. In the deck, you’ll see a summary of some of our key performance indicators. We’ll also be filing our 10-Q, which provides further information on Ranpak’s operating results. Machine placement increased 10.4% year-over-year to over 136,500 machines globally. Another solid double-digit performance but at a lower rate than last year due to some slowing end market demand. Cushioning systems grew 2.6%, while void-fill installed systems increased 11.4%, and rapid increased a robust 21.7% year-over-year. Overall, net revenue for the company in the second quarter was up 4% year-over-year on a constant currency basis, driven by positive price contribution, offset by lower volumes of product shipped due to slower end market demand. North America net revenue decreased 3.9% year-over-year, largely driven by the timing of a chunky automation sale in the quarter last year, which detracted roughly 3.5 points from the top line comparison. Cushioning growth in North America was up double digits in the quarter, but the overall book of business was slower than anticipated in North America as e-commerce activity experienced a decline in their usage compared to the significant activity we saw last year. As Omar mentioned, we continue to see solid new business activities and are experiencing good momentum on the closed front, which we believe should help our homes in the back half. In Europe and APAC, net revenue on a constant currency basis was up 9.5% year-over-year, driven by higher prices in the region and partially offset by lower volumes against the record Q2 last year, driven by exceptional e-commerce demand and industrial bounce back. Overall, cushioning was a bright spot in the quarter, up 8.6% on a constant currency basis as we continue to see strong demand for our offering as we can demonstrate real cost savings, along with a much friendlier environmental footprint compared to things like foam. Void-fill was up in the quarter as well, while we saw wrapping take a step back against a really challenging comparison. Automation sales increased a little under 20% this quarter on a constant currency basis and represented approximately 5% of sales as we continue to make inroads with our automated tonnage solutions that reduce touches at the end of the line, as well as our box customization solutions that reduce labor costs and reduce the shipping costs of boxes. On a constant currency basis, our gross profit decreased 14.4%, implying a margin of 32.6% compared to 39.7% in the prior year. Excluding depreciation, gross margins on a constant currency basis declined from 50.1% to 43.8%. Margin headwinds were primarily driven by increased input costs, which represented 8.1 points of pressure, as well as increased depreciation, which contributed 70 basis points of pressure in the quarter. We got some offset on the margin side through lower freight costs and better labor and overhead. Overall, North American margins were down roughly 5.7 points in the quarter, driven by increased material costs and depreciation. Europe and APAC were more challenging from a margin standpoint, down 7.9 points on a constant currency basis as our material costs were up meaningfully with our corresponding price actions to offset the inflation in the quarter, contributing roughly 8.7 points of margin pressure. Constant currency adjusted EBITDA declined 28.9% year-over-year to $18.2 million, implying a 20% margin. The decline was driven by lower gross profit, coupled with higher G&A, as we added 100 people to the organization over the past year to drive growth initiatives in PPS and automation, as well as support our digital infrastructure transformation. There are two key items within G&A that I want to flag that I think are helpful when looking at the year-over-year comparison. One is the roughly $3.1 million in cloud computing implementation costs that included $700,000 of amortization and outside help that will come down over the course of the year as we get stood up. The other is the LTIP performance share in relation of roughly $4 million per quarter, which was based on the roughly $25 share price at the time of the grant. The LTIP is strictly performance-based to invest in achieving EBITDA targets north of $135 million from 2023 through 2025. Capital expenditures for the quarter were $13 million, driven largely by converter placement as well as increased investment in technology infrastructure and our ongoing real estate projects. Moving briefly to the balance sheet and liquidity. On the cash side, our cash balance at the end of the quarter was $59.2 million. Lower profitability and significant investment in working capital and CapEx in the border drove our cash balance lower, but we expect that to level out as the year progresses as we turn the inventory that we’ve invested in to start the year into cash. Overall, our inventory levels are up $17 million compared to the same quarter last year. So we will look to work that down as the year progresses and turn that into cash. Fortunately, our inventory is largely paper and converters, so we feel very good about our ability to reduce that level over time in normal course. We’ve meaningfully dialed back our CapEx assumption at the start of the year and now anticipate spending roughly $50 million in CapEx compared to the $75 million to start the year as we lowered our converter spend, and a number of our real estate projects have been delayed due to supply chain issues or to us choosing a different location in the case of APAC localization. Our net leverage based on a reported LTM adjusted EBITDA standpoint was just under 3.5 times at the end of the quarter and 3.1 times based on the definition of bank adjusted EBITDA and our credit facility. With that, I’ll turn it back to Omar before we move on to questions.

Thank you, Bill. Because of the slower start to the year and the deteriorated macro landscape, at this time, we are updating our guidance for the remainder of the year to reflect a more challenging operating environment throughout the globe. On a constant currency basis at our standard long-term estimate of USD 1.15 to the euro, we are anticipating revenues of $360 million to $375 million, reflecting a top line decline in the area of 1% to 5%, driven by estimated volume declines of more than 20% for the remainder of the year, given the challenging macro outlook, especially in Europe. We are also forecasting a difficult margin environment to persist for the remainder of the year given lower volume expectations and the volatility in natural gas market in Europe. So we have lowered our adjusted EBITDA forecast to a range of $75 million to $85 million on a constant currency basis, or a decline of 28% to 36% compared to 2021. We feel this forecast adequately captures the downside risks we see in the market today, such as our expectation that the European economy will remain under meaningful pressure due to the energy uncertainty and the continued impacts of inflation on the consumer and industrial companies. At the same time, this forecast does not reflect the occurrence of extremely significant disruptive events that we cannot predict, such as the material escalation of the war with Russia, broader geopolitical dislocation, or the potential for business or mill shutdowns or closures, whether due to energy rationing, a lack of natural gas supply, or an energy pricing environment that results in business activity being uneconomic. We are obviously very disappointed in this update, but we feel it is appropriate in this environment to focus on the downside and manage the business accordingly. Ranpak has a lot of structural tailwinds working for it over the medium and longer term. But unfortunately, the short-term macro contains a number of headwinds impacting us that we must and will address. I’m confident in our people, the quality of our business, and our long-term outlook. We will get through this time period as a leaner and more efficient company, fully ready to take advantage of the growth drivers of e-commerce, sustainability, and automation as they return to fore. We have healthy levels of cash on our balance sheet. We are very focused on protecting and building our cash position. We do not face any debt maturities until 2026, and we have zero drawn on our $45 million revolver. In summary, we are in a strong liquidity position to withstand this challenging environment. In light of our long-term optimism for our business, I am pleased to announce Ranpak’s Board of Directors authorized a new 3-year common equity share repurchase program of up to $50 million. The share repurchases will be exercised from time to time at prices the company deems appropriate, subject to various considerations, including current market conditions, the company’s liquidity position, and future economic and earnings outlook. We are pleased to put in place a program that provides additional flexibility for Ranpak to strategically allocate capital and deliver value to shareholders. With that, let’s open it up for some questions.

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

You touched on this a little bit, but could you just give a little more info on how we should think about customer inventory levels on paper? Are lower expectations for the back half just because customers have been loading up on inventory and now we’re just waiting because demand is lower? Or is there another dynamic there?

Yes, I would say it varies a little bit by geography. But the common theme first across geographies has been weakness in e-commerce, that sort of end user. We are just seeing less parcels and less boxes being shipped. The second piece, which is levels of stock at the distribution and the customer levels vary. I would say, in Europe, we started the year, given our lead times and given more optimism about the economy, with many folks carrying higher levels of stock and that in the last 6 months has come down. We think there could be a little bit more pressure in the second half and size in terms of level of stock that some of these customers have. And as our lead times in Europe have decreased. And frankly, as the economy and the backdrop have gotten a bit worse, many of our customers and distribution partners want to carry less working capital and less inventory. They think if the world recovers in Europe, given our short lead times, they can adjust very quickly. In the U.S., I would say, in general, from what we can tell, the levels of inventory are fine. I think both at end users and distribution. It doesn’t look like at this moment, they’re carrying a lot. So in the U.S., the picture might be a bit better. Frankly, a big part of our cautious outlook and the guidance is driven by a number of things we’re seeing out of Europe.

And if I could just ask one more. I’m trying to make sense of the machine placement up 10% a year and then volumes coming down. I understand there’s some lag in placing a machine, but last quarter was also double-digit machine growth. So can you just give us a sense of the dynamic there and maybe utilization for customers?

We are closely monitoring attrition and our activity regarding trials and closures. The basic metrics in our business remain robust. However, there is a contradiction where our attrition levels are low, and we aren't losing business to competitors or alternatives like plastics. Our machine placements are satisfactory, and trial activity in many regions appears strong. The challenge we face stems from the current global economic situation, trends in e-commerce, and our exposure to Europe and Germany. We are experiencing a reduction in the volume of paper processed by our equipment compared to historical benchmarks. Customers have the necessary equipment and converters, yet the volume of boxes and parcels they are shipping has significantly decreased, affecting utilization rates. We hope this is a temporary situation that will improve as the world stabilizes. Unfortunately, declining consumer and business confidence, especially in Europe, is contributing to low utilization rates, and we are also observing reduced utilization in e-commerce within the U.S.

Our next question comes from the line of Greg Palm with Craig-Hallum.

Yes. I guess first, I just wanted to kind of tie out the revenue and EBITDA guide for the remainder of the year. So I think if my math is right, it implies that revenue will be up in the second half versus the first half. You’ve talked about gross margins improving slightly. And I think you alluded to maybe operating expenses being more constrained than what it was elsewhere yet you’re not really seeing any leverage on the EBITDA line. So I’m just trying to tie that together. I don’t know if there’s something else we’re missing or maybe there’s some built-in conservatism. But can you go into that a little bit, please?

Sure, Greg. Yes. So with the back half, we are forecasting sequential growth from the first half to the second half, which is consistent with seasonality. I think typically you would see that be more of a 45-55 split. Obviously, what we’re implying is less of a step-up than that just given the headwinds that we’re seeing within Europe and somewhat in North America as well. So we’re not expecting a big step up in the back half. So just doing the math, that implies the revenue in the back half to be down, call it, 5 to 10 points depending on the part of the range. The gross margin, depending on how things shake out and the volumes that flow through, we’re expecting slight improvement, but not much. So we’re looking at, call it, similar to Q2 levels, but maybe a slight step up, but not dramatic. I think that could be where you’re seeing the flow-through on the EBITDA. We’re expecting some cost savings in G&A to flow through. But some of that will take a little bit more time, particularly in Europe; things take a little bit longer to flow through there.

Greg, if I may add. Typically, the most important leading indicator we have as a company is trials, which leads to closes. We have a certain percentage of success in that and it typically happens, again, within a certain window of time. And that signal is very, very positive for us right now. And the natural question is if that signal is very positive, why isn’t it reflected in our guidance? The reality, the biggest concern we have is given the challenges we are seeing mostly in Europe, but we’re seeing some of it in e-commerce in America, we are not certain some of these trials are going to convert into closes before the peak season, and we are not certain we’re going to maintain that percentage in terms of the success of trials to closes. So we are just being deferential to what we’re seeing in the macro world. And largely, it’s driven by a lot of stuff, frankly, we’re hearing in Europe. And a big chunk of sort of the revised guidance, more than two-thirds of the decline we’re attributing to Europe, given the business and the consumer sort of state of mind right now and given the uncertainty around energy. So the uncertainty around energy is driving pricing with our mills, which will impact our gross margin. And Europe right now, there is absolutely very little clarity around natural gas and natural gas supply, and in particular, it’s hitting economies that matter to us like Germany.

Yes. That makes sense. I mean, is it fair to say that you’re airing on the side of being a little bit more conservative in terms of the guidance than you normally would, just given all the uncertainty out there? And then I guess just in terms of gross margin and the pathway to get back to that kind of high 30s, 40% level, what would need to happen to see that kind of level of improvement? I mean, how much of that is literally driven by some of the input costs and energy prices over in Europe?

On the first point, I would say we are trying to be as realistic and as transparent as possible. So we’re not trying to be super conservative or not super conservative. We are getting mixed signals, and I would say the signals inside our business versus the signals from the macro environment are pointing in very different directions, and we’re being deferential to the macro environment, given what we experienced the last 6 months. So we wanted to put numbers that we feel comfortable with that reflect an elevated macro risk environment for a company that has a lot of exposure to Europe. In terms of our margin, what we need to happen is we need to understand the energy dynamic in Europe a little bit better to understand sort of how that could impact our margin. Right now, that elevated natural gas level is really impacting our suppliers and our mills and it’s putting pressure on our margin. By the way, we’re not sitting idly. We are working more with now mills that rely less on natural gas or that have switched their source of energy. Europe is not sitting idle, just being hostage to the energy dynamic out of Europe. The challenge is how much can they do in the next couple of quarters. And given that that’s such a short period of time, we’ve decided to be a little bit more cautious and not assume that some of these mills are going to address the energy crisis. So we’re assuming elevated levels of energy and elevated levels of input costs, and that’s what’s reflected in our numbers. So I would say our numbers are our best guess in terms of how we can operate in a pretty tough environment, if that makes sense.

It does. And I guess my last one as a follow-up to that. Just given what’s happening over in Europe right now and maybe some risk to general manufacturing if energy prices stay at these levels. Are you concerned at all about your ability to procure kraft in the second half? Or is that not a risk at this point?

We really have a very good plan, and we have multiple options on securing paper. We feel very good just like we said earlier this year. With the Russia dynamic as we switch, we will secure paper; we feel very good about our procurement plans despite different changes that may happen to the energy market. There may be some options that are a little bit more expensive than others, but our focus is to meet our customer demands and make sure they get the paper that they asked us for. And we feel very good about our ability to do that for the rest of the year. Plus Greg, as Bill noted, I think, in our commentary, we do have elevated levels of inventory, in particular, in Europe. So we’re starting from a good position, and I think we’ll be able to navigate meeting our customers’ demands for the rest of the year.

Your next question comes from Ghansham Panjabi with Baird.

Maybe you could just give us a bridge of the EBITDA from three months ago, $115 million to $125 million on constant currency versus what it is now, just in terms of the various parameters of volume, price cost, or whatever else?

So if we’re looking at what’s making up the revised forecast on the EBITDA side, you’re still getting in our view, call it, 20 points of price, which is contributing obviously as a positive. But you’re looking at, call it, it 32 points of volume that’s really impacting the business, and then another, call it, 19 to 20 material costs and then just G&A as well. So those are kind of the various pieces, but largely driven by volume and material costs.

If you compare 2022 to 2021, what is the overall effect for the entire year regarding the year-over-year price and cost changes that you expect to recover at some point?

So we lost about, call it, 7 points on our gross margin, right? If you’re looking at where we’re thinking that will end up versus where we were last year. So I think over time, we’ve done a good job of protecting on the gross profit per unit, right, on the pallet basis, but we’ll need to get that margin back. And I think with some of the pricing actions we’ve taken in Europe, it gets us a little bit closer and better on the path to achieving that. But until we get some stabilization, I think on the energy side, it’s tough to give a timetable. I think in North America, we feel pretty good about our ability to continue to improve that margin over time, especially as volumes would pick up. I think we’re pretty well structured there. Europe is going to be the determining factor, how quickly we can do that.

Okay. This year is clearly a transition year. Considering the one-time effects from the ERP implementation and the price costs, what would the positive variances be compared to your guidance for 2023, assuming volumes remain static year-over-year, including in Europe?

I mean I think if you kind of just run some basic scenarios, right, if you think about the machine placement where we’re looking to finish and then just kind of do some rough extrapolation going forward, not too aggressive, right, from a continued machine placement in ‘23, and you get back to, call it, 2019 revenue per machine levels, right? That would get you back over plus the contribution from automation. That would get you to north of $400 million pretty easily. So we think that the 2019 revenue per machine numbers are fairly conservative. So you could see a step up if things normalize.

And then on EBITDA, what would that imply?

Depending on how quickly we can get the margin up, right, and how quickly we can recapture that margin on the gross profit side. If you were looking at even a 25% margin, that would get you to, call it, north of $100 million EBITDA.

And then maybe just finally, a question for Omar, in terms of the value proposition that the company has benefited from regarding paper as a substrate and sustainability and so on and so forth. Has there been any change with that receptivity from a customer level just given what’s happening with all the things you cited, affordability and so on and so forth, especially in Europe? Is there more pushback and more reluctance as it relates to paper versus other alternatives? Or do you not see that at this point?

We are not seeing that. We are not seeing people press us or even threaten to say, hey, we’re leaving you on cost or any other metric, reliability, et cetera, to go to plastic. That is not a big part of our problem. What we are seeing is literally just a slowdown in activity at our customers and them demanding less of our product. So I don’t think the sustainability story is changing. And I would venture to say with the California new law and some of the changes, I think the U.S. is going to catch up. It’s going to take some time. It’s going to take a few years. But I actually feel the sustainability story is intact. The challenge is just the economic condition. We watch our attrition very, very closely, Ghansham. I am not seeing us lose to competitors in paper or certainly lose to plastic. That’s not really the theme. What we are seeing from customers, by the way, to give you the full picture is they are quite tired of price increases, and this is why we decided to take it easy on further price increases and sort of we’re taking the hit on margin. I would say customers are fed up with price increases, but that’s not just a paper issue. We are hearing the same in terms of customers buying plastic-related products as well. There is just price increase fatigue out there that is becoming more and more evident.

And what indicators Omar, are you looking at for Europe specifically? I mean is it just your confidence and maybe the war, some of the issues with the war ease up? Or what would you need to see to give you more confidence on Europe from a volume standpoint going forward?

I would like to see some stability around energy and both energy supply and pricing. So to make sure, as you can imagine, in Europe, in Germany and other countries, there's a tremendous amount of industrial activity and manufacturing activity; you need a reliable source of energy. They don’t have it. So I’m focused on watching how they manage that situation. And then I am very focused in terms of discussions with business leaders around their confidence and investing in their businesses and making sure that sentiment is improving. And then the last piece, obviously, as you can imagine, and we do that globally, not just in Europe, we’re watching the trends around e-commerce quite a bit. In Europe, despite the uncertain economic environment, there is a big emphasis at the consumer level, on travel, on experiential stuff, and there is less purchasing of goods. And this is another reason as we’re entering the peak season why we changed our guidance. Based on what we’re seeing, it was very hard for us to assume a robust peak season in Europe on the e-commerce front as we get into the holiday season. So we decided to be a little bit more cautious on that front. Basically, it goes down to energy stability, business confidence, and consumer confidence.

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

I guess my first question, to start with a clarification. So the adjusted EBITDA guidance that you gave is constant currency. So your reported revenues in dollars will be probably, what, 5% or 6% lower than the constant currency, given kind of where the euro is sitting today. And same kind of rough math on the adjusted EBITDA would be about $5 million less on each end, if the euro holds at the current level. Is that the right kind of math?

Yes, that’s correct, Adam.

Okay. So if we said $70 million to $80 million of U.S. dollar adjusted EBITDA in that context, your interest expense is about $20 million. CapEx, I think, Bill, I heard you say about $50 million was the revised expectation for this year. Working capital has been a pretty large use of cash year-to-date. And you alluded to building up heavier stocks of paper to deal with the inflationary environment. So should we actually think that the company can generate free cash flow this year? And any other kind of bridge items in the cash and that cash walk would be helpful.

Yes. I think so. If you look at the back half and what that implies, Adam, if you’re talking about the CapEx, right, we’ve done $23 million so far this year. We’re looking at another $25 million to $27 million, another $10 million or so of interest expense that we’ll have to pay out. Cash taxes should be in the low single digits. And then working capital, yes, has been used so far, but hopefully should turn into a source as we work down that inventory. And obviously, that will depend on the sourcing environment of paper in Europe. So we think in the back half, right, that should be roughly flat. It’s been more of a free cash flow use, right, in the first half. But we think in the back half that should be roughly flat.

Roughly flat. That’s helpful. I’m trying to consider the machine utilization, and the economic realities in Europe are quite clear. I’d be interested to know if there are any historical precedents from when the company was private regarding machine placement utilization. It appears that machine sales on the volume side are down over 30%, particularly in the more challenged parts of the business in Europe right now. If there is any evidence of this in history, when did it occur? How long does it typically take for machine utilization to rebound on a volume basis? Given the current magnitude of inflation, dollar sales will likely be exceptionally noisy.

Yes. Adam, it’s a great question. And unfortunately, there isn’t a prior period that had a similar setup, right? Because I think that the big difference between the prior periods is you went from a fairly normal stable period of 2019, and then in 2020, particularly in the second half and last year, the volumes per machine really ramped up. So I think what you’re getting is part of the reset associated with that and at the same time, an economic downturn, right? So it gets exacerbated. So I think if you look at what we’re implying from a guide standpoint, and the volumes per machine that we’re implying, we’re looking at kind of 2019 levels of machine utilization and then we haircut those by 10 to 15 points depending on the product line, which we think makes sense because 2019 was kind of the last year where it was more than a normal year, right, in terms of utilization, at least by historical standards. And then you had really substantial ramp-ups, particularly within wrapping, void-fill, even cushioning, had a pretty dramatic ramp on a pallet per machine basis.

I mean historically, including the times where the company was private, we have not seen any price increases in our input cost or in our price increases that we’re passing through that are similar to what we experienced in the last 18 months. And we have not seen a drop in volume per machine and revenue per machine like this. So these two aspects are basically new to what’s going on right now. Now obviously, listen, and I don’t want to just keep mentioning that as an excuse, but a big part that the U.S. numbers are not super robust, but a big part of some of these drops is an environment in Europe, and I was there last week that is just exceptionally difficult where people just cannot plan ahead.

So I guess just a follow-up and last question I have is as you think about that machine kind of throughput and utilization, what’s the level where you would think about pulling machines from customers, whether those machines are not earning the economic return that you’re targeting for that deployed capital?

We are doing that as we speak. So we are watching revenue opportunities and volume needs per customer. We’re trying to be careful because just like we’re having a difficult time planning, many of our customers are having a tough time planning and forecasting. So we’re actually working with them constructively to understand if they are experiencing a dip right now that they think will recover. What’s their best guess on the recovery of volume? So this isn’t just us saying, here is a metric. You have to hit it, Mr. Customer. We’re trying to make sure that we’re being customer-centric and focusing on their needs. And for certain customers that are telling us they think things are going to recover, we will make sure they have the right level of equipment and number of equipment so that we can help them during the recovery and hopefully help ourselves with more utilization. So it varies by customer, but across the company, part of the mandate that we’re doing right now in light of the new world is focusing on the efficiency of our machines. And if certain customers have way too many machines, we’ll get them back, and let’s hopefully find a place to deploy these machines. So this is something that we’re doing as we speak.

And at this time, there are no further questions.

Thank you very much, Lisa, and thank you very much, everybody, for joining us today. We’ll see you next quarter.

This concludes today’s conference. You may now disconnect.