This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk03: 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 RANPAC Holdings Corporation third quarter 2022 results conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, again press the star one. Thank you. Sarah Horvath, General Counsel, you may begin your conference.
spk01: 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 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. RAMPAC 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 8K 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 Asli, 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.
spk05: 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 RAMPAC. 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 pulled forward their goods purchases during the pandemic. More recently, the impact of rapidly rising rates on household net worth 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 firmed up and the continent has a viable path forward without Russian natural gas. While governments have been slow to take action in securing new sources of energy than we would all like, many companies in the region are taking the matter into their own hands and switching their key energy inputs from natural gas to oil and coal, which is helping to reduce demand and meet storage targets ahead of the winter. Pricing for natural gas has remained extremely volatile, moving meaningfully one way or the other based on the headline of the day. The ultimate impact this environment has on business and the consumer is difficult to forecast, so we are staying in close touch with our vendors and customers to share information and plan accordingly. We feel very confident in our paper sourcing as we have reallocated our buy and taken steps to reduce risk. Our status as a reliable size buyer of paper has helped us secure access to the tons we need. For some regional color, North American results were disappointing as lackluster e-commerce activity persisted throughout the quarter, impacting voice fill and wrapping, while cushioning was down modestly due to slower activity. New business activity continues to be solid, though, and at levels in line with Q2, which is encouraging. Biggest areas of demand continue to be in our cushioning solutions, which we are working hard on fulfilling the converter demand. In Europe and APAC, performance varied throughout the region and country by country. Fortunately, I believe a substantial portion of the destocking activity that has impacted us throughout the year has largely been worked through, although some pockets still persist in the Nordic region and Australia. The biggest detractors in the quarter were in Germany, Poland, and Australia, with Germany and Poland largely driven by the macro, and Australia impacted by lower e-commerce activity combined with destocking. Bright spots in the reporting unit can be found in Japan, which was up nicely year over year and continues to be a source of new business wins, as well as Austria, Switzerland, and Spain, which outperformed. The macro backdrop is difficult, but certain areas that have been headwinds for us all year are starting to show some signs of improvement, driven by improved availability and lower commodity costs. Freight rates for ocean containers have dramatically improved, as have tracking spot rates and availability in North America. We believe the momentum for paper pricing relief in North America continues to build as additional capacity is coming online and the lower demand for corrugated products improves availability. Pricing of a number of commodities, including OCC, pulp, and lumber, has meaningfully improved, and inflationary metrics such as service and manufacturing PMI prices, car prices, and rents have begun to roll over. Many of these should help drive improved input costs for our business going into next year. While we would welcome external factors such as these I just mentioned improving, We have been focused on helping ourselves through expense reduction, greater efficiencies, and new product development to drive demand. Our G&A expense reduction effort I discussed last call is being executed and starting to flow through. Over the past number of months, we have implemented plans to reduce headcount by approximately 10% across the globe and reduce discretionary spend where possible. Some of these benefits are yet to be realized due to local notification requirements but we should see the bulk of the savings on a run rate basis by year end. On the efficiency front, we are getting better with the new systems every day and believe it will be an important tool to support our ability to extract manufacturing efficiencies as we grow our business. Our new facilities in the Netherlands and Malaysia, which open in 2023, should also enable us to operate in a more efficient and lower cost manner. The Netherlands facility combines three facilities into one, And Malaysia provides us with the lower cost local platform to service the APAC region. What I'm most excited about, though, is the work we have been doing on the new product side. We have meaningful introductions coming in the near term on the void fill, wrapping, cold chain, and automation front. We believe the introduction of these new products will help us drive demand, gain market share, and get back on the path to growth. Now, I'll turn it to Bill for an overview on the financial results.
spk04: Thank you, Omar. In the deck, you'll see a summary of some of our key performance indicators. We'll also be filing our 10Q, which provides further information on Rampax 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 contributions. 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 their 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. The COGS headwinds combined with the lower sales resulted in a gross profit decline on a constant currency basis of 29%, implying a margin of 31.6% on a constant currency basis compared to 39.1% in the prior year. Excluding depreciation, gross margins on a constant currency basis declined year over year from 49.2% to 42.2% during the third quarter. The margin headwinds were driven primarily by increased material costs, which represented 5.3 points of pressure, increased automation, which negatively impacted margins by 120 basis points, as well as increased depreciation, which contributed 50 basis points of pressure in the quarter, while freight, as well as labor and overhead, provided some relief. On a positive note, in Europe and APAC, gross profit per unit improved versus the prior year for the first time in 2022, as paper prices in the region stabilized and pricing actions helped to close the gap. Material cost headwind on margins in the region improved from the 8.7 points of pressure in the second quarter to 4.9 points in the most recent period. More work to do on this front, but a step in the right direction. Constant currency adjusted EBITDA for the quarter declined 41.8% year-over-year to $16.6 million, implying a 19.7% margin on a constant currency basis. The decline was driven by lower gross profit, coupled with G&A that was higher than a year ago, but down sequentially as our cost-saving initiatives are flowing through. We are, of course, continuing to evaluate for areas of efficiencies and cost savings, but overall, we are a more lean and efficient company than we were earlier this year. Within G&A, again, I think it's helpful to point out for the year-over-year comparison, there are roughly $2.4 million in cloud computing implementation costs that include $700K of amortization, as well as hyper-care outside help, as well as the LTIT performance share amortization of roughly $4 million per quarter, which is based on the roughly $25 share price at the time of the grant. The LTIT is strictly performance-based, invests on achieving EBITDA between $130 and $150 million in years 2023 through 2025. One housekeeping note on the non-GAAP reconciliation. Based on feedback from a number of the research analysts, we adjusted the presentation of the non-GAAP reconciliation to provide the P&L without currency adjustments. and to include one line item showing the constant currency adjustment to get to adjusted EBITDA. We previously provided each line item adjusted for constant currency, and some folks said they would prefer to see it in this newer format. For reference and ease of comparability, we included the older format at the end of the earnings release as well. Hopefully, this new approach will be helpful. Capital expenditures for the quarter were $11.5 million. Converter spend was $6.3 million in the third quarter of 2022. down from $11 million in the third quarter of 2021 and approximately $8.5 million per quarter in Q1 and Q2 of this year. Other CapEx for the quarter was $5.2 million, driven largely by increased investment in technology and infrastructure and our ongoing real estate infrastructure projects. Moving briefly to the balance sheet and liquidity, cash and cash equivalents improved in the quarter to $61.3 million as of September 30th. As communicated in last quarter's call, We have been tightening up the working capital management related to inventory and our capex spend on converters. We achieved adequate levels of safety stock in the majority of converters, and in some cases are above targets, which we are evaluating given the weaker economic environment. This well-equipped inventory position will enable us to slow converter capex spend in the upcoming quarters, preserving cash. We will work down this position over time to lower safety stock levels given the lower demand environment, and we'll be discerning a new placement is to make sure we are optimizing utilization of the fleet. Our debt structure is comprised of a first lien term loan facility due in 2026 that is split into two tranches. One tranche of $250 million is denominated in USD and is L plus 375. We have two interest rate swaps in place on this tranche to manage the rate exposure. $200 million is swapped at 2.09% through June of 2024, and $50 million is swapped at 1.5% through June of 2023. We also have a euro tranche of approximately 136 million euros outstanding in an effort to hedge the cash flows coming from Europe. This tranche is at euro board plus 375 and is floating. We have zero drawn on our 45 million revolving line of credit, which expires in June of 2024. Our annual cost of interest at today's level and incorporating the swaps we have in place is just over 20 million USD. Our net leverage based on reported LPM adjusted EBITDA on a constant currency basis was 3.9 times at the end of the quarter. From a covenant standpoint, our bank adjusted EBITDA leverage ratio was 3.4 times. The primary covenants of note we have in our debt are a maximum first lien leverage ratio of 9.1 times, which is a springing covenant which only comes into play if we use more than 35% of our revolving facility. And an excess cash flow calculation that we perform at the end of the count of the year and requires us to dedicate a percentage of excess cash flow generated in the annual period to debt pay down for a first lien leverage ratio above four terms. Based on our expectations for the remainder of the year and the deductions related to CapEx and working capital taken in the calculation, we do not currently anticipate having to pay down any additional debt as a result of the test. To summarize, because I think it's important to make clear, we have more than $100 million in liquidity, no near-term maturities, and substantial headroom underneath any leverage covenants. We believe we have plenty of runway to make it through this macro environment. With that, I'll turn it back to Omar before we move on to questions.
spk05: Thank you, Bill. Overall, as I think about where we are now versus a few months ago, I would say the two 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 and 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 craft 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 supply, we expect paper pricing to become a tailwind going into next year. which we believe should enable us to claw back some of the margin we let go off temporarily as pricing reached levels that we did not believe were sustainable given the backdrop. We're extremely focused on being aggressive to drive volumes and claw back our margin. We believe we are well positioned to do so given new business activity levels, new products we're introducing, and efficiencies to be gained through our digital transformation as well as paper pricing relief. Europe is roughly in line to slightly worse than where I thought we would be at the end of July, with the economic backdrop deteriorating further as natural gas spiked again to extreme levels as flows were completely shut off by Russia and the Nord Stream pipeline was attacked. Fortunately, storage-level targets have been hit ahead of schedule as industry activity has been lower and LNG shipments have really ramped up. Pricing is still elevated, but is less than half of the extreme levels experienced in August. Activity levels, while not robust, remain resilient in my opinion, given everything going on in the region and we have endured. I've spent a lot of time in the region recently, and I'm in close contact with the team on the ground to keep a pulse on how the energy crisis and war is impacting our suppliers, customers, and the overall economy. Business at most end users is down meaningfully, and all are very focused on cost and minimizing spend in the current environment. We feel good about our stable of paper suppliers in the region and our ability to continue to access the product we need. Our Russian supply has been completely reallocated to other vendors in the region, and we have put in a great deal of effort to adjust our paper buys to minimize the risk of supplier disruption for this year and into 2023. We have reduced our exposure to German mills and allocated more resources to those mills we feel are best positioned to weather a choppy environment this winter. A substantial amount of virgin paper is sourced from mills that are self-sufficient from an energy standpoint, and we have spread out our recycled paper purchases across vendors in different countries with a focus on those vendors and countries best suited to endure the energy crisis. Paper pricing in the region has been flat recently, albeit at high levels. We have seen some recycled paper suppliers start to offer lower prices, though, as some of the inputs, such as waste paper, have come down recently. Not dramatic moves, but a good sign. We're also aware of some virgin vendors sitting on a couple of months of inventory due to a slower economy. This has not flowed through to pricing at the moment, and I'm sure the mills will do their best through maintenance and shutdowns to preserve price, but I find this to be a good data point. The overall environment is a testing one, but we believe we are well positioned to endure the economic weakness and continue investing in the areas that will drive growth and maximize value over the longer term, such as automation and cold chain. I think it would be a mistake to pause on our investments here, particularly automation. as I believe that is the biggest opportunity at RAMPAC over the next 5 to 10 years. We updated our guidance last quarter to reflect our expectations of the new reality. We still believe we are able to achieve the lower end of our adjusted EBITDA range. However, due to some additional pressure in Europe and the considerably weaker U.S. market compared to a few months ago, we expect our top-line results to be slightly below the low end of what we provided. The rapidly changing environment and the distribution model which limits our visibility somewhat to end-user activity has made forecasting more difficult than usual. Obviously, we are not happy with the results, but I assure you, we are laser-focused on getting ourselves back on the path to achieving the results we know RAMPAC is capable of. While the near-term macro environment is a challenge, I'm optimistic about our path forward. Our input costs are moving in our favor in North America and have stabilized in Europe. We are near the end of the destocking that has plagued us all year in Europe and APAC. We have taken steps to reduce G&A while still investing in the business. We have done a complete digital transformation of the business and are now 10 months into our largest technology upgrades, which will start to show some benefits through efficiencies related to procurement, production, and planning. We have made key investments in new products that will begin to contribute in 2023. Overall, we've endured a myriad of headwinds this year, including our new systems go live in Q1. These will largely have been absorbed as we exit 2022, and many will be neutral to a positive for us next year, while our comparisons become much more favorable. We just celebrated the 50th anniversary of Rampax founding in October. This business has a fantastic history with a long track record of growth, profitability, and cash generation. We remain very confident in our outlook. Now, let's open the call up for some questions. Operator?
spk03: At this time, I would like to remind everyone, in order to ask a question, press star, then the number 1 on your telephone keypad. And your first question comes from the line of Gansham Punjabi from Baird. Your line is open.
spk07: Hey, guys. Good morning. Morning, Gancho. Morning, Omar. 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, but while also ensuring that you have acceptable return thresholds, just given the way you place the machines at no cost to customers?
spk06: Sure.
spk05: And as you may recall, Ganshum, 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, 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, uh and your existing accounts are consuming you know less paper and less volume that double hit has really impacted revenue per machine quite a bit we are very very focused on 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 in the following months you're going to see meaningful improvement in that metric as some of these winds 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.
spk07: Yeah, that's helpful. And then for my second question, I was just going to ask on, you know, 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 the macro environment, etc. As you think about 2023, is it less so about price cost and maybe that's actually flipping positive and then we just go back to what we normally worry about, which is the macro? How are you approaching the outlook for 2023 at this point?
spk05: Sure. Well, at this point, in terms of the SAP implementation, I expect that to deliver quite a bit of benefits 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 somewhere along 8% or so increase in annual production volume on the craft side that I think that supply-demand will help us get better pricing. In terms of Europe, what we're seeing so far is stability to modest declines. The reason these declines in pricing for us are not more material is frankly related to the energy market. You know, 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 sticking to the existing pricing formula. So depending on that gas, we may see some relief. But the weakness in Europe in volume in terms of corrugated and craft 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 COG 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 type of year we've had this year, you know, 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.
spk07: Okay, and just a clarification for a question for Bill. Bill, the currency adjuster you're referring to on EBITDA was roughly 1.9 million, is that right, for the third quarter?
spk04: Yeah, Ganshan, that's correct. And so just for reference in the release and in the presentation, we've got the new format, which will break it out and give you the exact impact on the EBITDA. And then we also, at the end, provided the product format as well, just so you can have some ease of accountability.
spk07: Okay, great. See you at our conference next week. Thank you.
spk00: Thank you.
spk03: Your next question comes from the line of Greg Palm from Craig Hallam Capital. Your line is open.
spk02: Hey, morning, everyone. I guess I just want to do first follow up on that previous dialogue. I mean, is there any way you can just sort of quantify, you know, 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 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.
spk05: Good morning, Greg. I'll start and then I'll turn it over to Bill to give you maybe more precise numbers. But I think the headwind, 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. It's 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 margins. 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
spk04: sure yeah greg uh omar was was was actually right right in line so it was a year to date the hit to gross margin has been about 720 basis points based on just material cost alone um you know we've gotten a little bit of help on the the labor and overhead um but uh you know between the materials cost being 720 bits automation um about one point um and then depreciations to pull over another point investment to where we are today here today um if you look at where we were in 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.
spk02: 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 craft paper prices over there just given the dramatic change just in the last month or two of prices over there in gas?
spk05: 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 NatGas 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 the 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.
spk02: Got it. I mean, is it as easy as just, you know... trying to figure out the implied EBITDA margin for this year and adding four to 500 basis points next year. Is that sort of what the math implies?
spk06: I think directionally that's correct math.
spk05: 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 cards. But things like freight, you know, trucking, container costs, pallet 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.
spk02: Okay. All right, I'll leave it there. Best of luck. Thanks. Thank you.
spk03: Your next question comes from the line of Adam Samuelson from Goldman Sachs. Your line is open.
spk08: Yes, thank you. Good morning, everyone. Good morning, Adam. Good morning. So I guess I want 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, A, how are you evaluating – the payback and ROI potential of those placements if they're taking less volumes than maybe placements two or three years ago did. And then just more broadly, 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. Do you think that's purely just destocking on the part of your distributors and customers? It's at the end, consumption's not down anywhere near that level? Or what confidence do you have that you're seeing a stabilization in paper throughput?
spk06: Sure.
spk05: 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. You know, the bulk of that is behind us. There's still a couple of pockets where we think there may be some destocking, but, you know, it took us a long time, almost nine, ten months, to get here, but this stocking 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, in Germany, the declines have been quite severe. We have some facilities that were running seven days a week, 24 hours, that today run a few hours a day and four or five 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 six months, it's been decent. In many cases, we're putting converters at either new facilities for existing customers or new customers. And we know from them that it's going to take them a little bit of time to ramp up. Why? In some cases, Adam, they're working through inventory of other products they used to use that they still have. So they're restocking, you know, airbags or bubble on demand or stuff like that before they switch. And we're putting our solution in there. And the reason we're putting it in there is when you win a mandate and customers are saying, come place the equipment, I'm going to start incrementally switching, we are comfortable delaying our ramp up by a few months in order to sort of win that account. But if you look at the impact of that from a volume standpoint, it's delaying the ramp up, one. And then, two, it's increasing our payback by a few months. And the combination of that is hurting the revenue per machine. So if what I'm saying is correct, this thing is going to correct itself in the next few months where some of these new accounts are going to ramp up and get to the levels that we think are appropriate given the number of shipments that they're doing. And that's how we decided to place the number of machines. So we think that's a temporary thing. We think the destocking is largely behind us with a few exceptions. So these two things should help us going forward. The one thing that is still unclear is given the macro backdrop, existing accounts, where is the right normal level of volume for them? Are the last few months sort of exhibiting too much pressure and we're going to normalize at better volume with these accounts? Or is that the new normal given, you know, the macro economy and where people want to spend that piece with existing accounts? is the harder piece to forecast and predict. But we think the other two pieces are going to start helping us in the near future.
spk04: Bill, I don't know if you want to add something. I think you covered the big things, right? I think the math is, you know, from the existing base, you know, when you've got 100 and you come into the year with 130,000 machines in the field, Yeah, 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. um really driving that um which is you know impacting obviously the the growth for this year um you know the the data that we have implies that right now the pounds per machine are down um you know 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 pulled forward in in void fill and wrapping that's uh 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, you know, that they may not need as many machines that they currently have, right? Did they, you know, get a number of machines last year thinking that their business was going to continue on the same trajectory as was in 2021? And, you know, 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.
spk08: Okay. That's all helpful, Collier. 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 craft paper on an annual basis, and so you had good visibility to your paper costs for the following 12 months. Do you think that you actually go back to that procurement and pricing strategy into 2023, or given some of the macro uncertainty, especially in Europe, that it might be difficult to secure a volumes at a fixed price for 12 months?
spk05: 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, you know, call it a six-month arrangement with some mills and that we revisit in six 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.
spk08: Got it. That's all really helpful, Collar. I'll pass it on. Thank you. Thanks a lot.
spk03: Your next question comes from a line of Stephanos Christ from CJS Securities. Your line is open.
spk09: Hey, good morning. Thanks for taking my questions. Morning, Seth. Can you just talk about what you're seeing in the competitive environment versus other paper providers as well as plastic?
spk05: 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 that trend. I know a lot of people love to talk about that and, you know, our customers willing to pay for sustainability. That has not been a problem, certainly not one that is noteworthy. In terms of paper competition, you know, 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. um that's something that we're fully aware of and and frankly we're investing we're innovating we're adding a lot new products and we think we're ahead of the curve um in terms of our market share within the the paper segment uh step it continues to be stable we don't see us losing accounts we don't see big attrition we see volume declines um at our existing accounts but we're not seeing attrition where accounts are saying i'm switching away and by the way our our wins are are bigger than our attrition uh but the problem is as i said our wins are now slow to sort of get to the to the level of volume that 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.
spk09: That's great color. Thank you. And just to 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? Are you just having conversations? How should we think about that?
spk05: 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 You know, 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 stuff.
spk06: Makes sense. Thanks for taking our questions.
spk03: 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.
spk04: Thank you, Rob, and thank you all for joining us today. We'll see you next quarter.
spk03: This concludes today's conference call. Thank you for your participation. You may now disconnect.
Disclaimer