Description

Business Overview

Ranpak is the market leader in paper protective packaging with 50%+ market share in the US and Europe. The company employs a razor/razor blade business model, whereby it retains ownership of its proprietary paper dispensing machines while selling high-margin paper consumables. Customers pay little to no cost on the machine so long as they purchase above a minimum level of consumables.

Founded in 1972 in Ohio, Ranpak was the pioneer of paper-based packaging. Throughout the 80s and 90s, the Company built a strong network of exclusive distributors, including virtually all the major packaging distributors in the US and Europe.

Ranpak's exclusive distributor network is its main source of competitive advantage. Ranpak distributors are prohibited from selling or promoting any competing paper packaging solutions. The exclusivity agreements are bulletproof and are monitored for compliance. Relationships are strong with 75% of distributors having a tenure of >15 years. Through its distributor network, Ranpak serves a fragmented user-base of SMBs. Ranpak services large-volume customer accounts directly (~10% of sales).

Paper based secondary packaging competes with other substrates such as air pillows, bubble wrap and foam. Paper has been steadily gaining share as it is perceived as more sustainable and creates a better unboxing experience for consumers. Paper also acts as a better shock absorber than other substrates, which has driven adoption within industrial end markets.

There is substantial runway for adoption of paper packaging. Within industrial packaging applications, we estimate paper penetration to be around 30% in the US and Europe. Within e-commerce, we estimate paper penetration to be around 50% in the US, and 80% in Europe.

Ranpaks solutions include:

·         Void Fill Solutions (40% of sales) – Void-fill systems covert paper to fill empty spaces in packages and protect objects by reducing its movement during shipping and transit.

·         Wrapping Solutions (11% of Sales) – Wrapping systems create a protective paper mesh to wrap around fragile items. This is basically a paper-based alternative to bubble wrap. The solution is more aesthetically pleasing than bubble wrap, performs better in drop tests, and takes up less space on the warehouse floor.

·         Cushioning Solutions (43% of sales) – Cushioning solutions crimp paper into heavy duty cushioning pads. Largely tied to industrial end markets.

·         Automation (6% of sales): end-of-line equipment that automates manual tasks such as packing, box-sizing, loading/unloading.

End markets are diversified, but we can roughly think of the 50% of end markets tied to e-Commerce, and 50% tied to industrial end markets.

2023 end markets by industry: e-Commerce (30%), Industrial (13%), Automotive Aftermarket (9%), Warehousing/Transportation (7%), Electronics (8%), Machinery (6%), Home Furnishings (5%), Other (23%)

The customer base is sticky. ~75% of Ranpak’s end users are SMBs that purchase less than $10,000 of paper annually. Once the machines are incorporated into the factory/warehouse workflows, customers don’t really think about changing them. Historically, Ranpak has had no problem passing through price increases to end users. 2022 was obviously an exception as the extreme movements of natural gas prices drove kraft paper prices up sharply.

The unit economics of Ranpak’s paper packaging solutions are very attractive. A typical void fill machine will generate $1,900 in consumables revenue a year. At 40% gross margin, each machine is generating $760 gross profit per year, versus initial capex of ~$600 per machine. The useful life is 10+ years with minimal maintenance capex.

Current Setup

Ranpak is coming off two depressed years following the COVID e-commerce boom/bust and outbreak of the Russia/Ukraine war. The Company did $76mm EBITDA in 2023 (vs. $95mm in 2019). Over the next two years, we think Ranpak has a clear line of sight to achieving $120mm in run-rate EBITDA as channel volumes and input prices normalize, and as new wins start rolling onto the P&L. Timing of hitting this target is uncertain given recession fears, but we expect fundamentals to continue recovering even if macro conditions remain weak which should support equity value.

Margin recovery is underway - Paper prices spiked to historic levels following the outbreak of the Russia/Ukraine conflict, but has since stabilized. Kraft paper accounts for 80% of Ranpak’s input costs. Natural gas is the primary input for kraft paper. Ranpak historically had no problems passing through pricing increases but the magnitude of the increases in 2022 meant that Ranpak absorbed the bulk of it. The supply environment today is much more favorable. Natural gas prices have declined over 80% from its peak in 2022, European natgas storage levels are at highs, and new LNG terminals are coming online. New kraft paper mills have also come online to supplant Russia paper mills (20% of Ranpak’s European supply was from Russia). We are modeling an additional 250bps in margin recovery (+$14mm EBITDA vs. 2023). There could be further upside particularly if a ceasefire were to occur and Russia paper supply is reintroduced into the market.

Channel destocking is behind us and volumes are ticking up – Ranpak’s void fill and wrapping segments (~45% revenue) are emerging from a two-year hangover from the COVID e-commerce boom when distributors over-ordered packaging from Ranpak and were stuck with a glut of inventory. Channel inventory is now at a trough and we expect volumes to recover even in a weaker macroeconomic backdrop. We estimate current consumable volumes per machine are 25% below 2019 levels. A return to normalized volumes would yield incremental EBITDA of $20mm. We don’t expect this to occur at once, as distributors remain cautious on inventory levels given macro uncertainty. But volumes are ticking up. We think even a partial recovery in the near term will have an outsized impact on the bottom line given the large increase in install base. Since 2019, Ranpak has increased its install base of machines by 40%.  Longer term, eCommerce growth remains attractive, growing at LDD% in the US and HSD% in Europe.

Amazon announcement potentially expedites broader shift of plastic to paper – In June, Amazon announced its intention to fully eliminate plastic packaging in North America by year end. Prior to the announcement, around 40% of Amazon’s packaging was air pillows. Amazon’s shift to paper will drive $5 to $10mm in incremental EBITDA for Ranpak. The full run-rate will hit in 2025. We think this announcement could be a catalyst for e-commerce retailers to follow suit on an accelerated timeline, which would represent further upside for Ranpak. Paper packaging remains underpenetrated in US e-Commerce (~50%) when compared to Europe (~80%).

Automation business is inflecting – Ranpak’s automation solutions are gaining commercial traction and could prove to be a large and profitable segment for Ranpak. Over the past five years, Ranpak has spent over $50mm in capex building out its manufacturing and service facilities in the US and Europe. The investment cycle has concluded and the teams have been hired. Recent new customer wins, combined with Ranpak’s distribution advantage give us confidence that Ranpak will be a formidable player in this new industry. Competition is primarily small private companies that do not have established distributor and customer relationships. Ranpak did $21mm in automation sales in 2023, and is projecting 50%+ growth this year. Bookings in Q2 were up 100%+ y-o-y. Industry growth is TBD given we are at the starting line, but customer interest in automation products is high and management expects the business to grow to become multiples larger than its current size. We think this business will approach breakeven in 2025 (currently -$8mm) and become a meaningful contributor to EBITDA beyond that.

Competitive concerns easing – There was concern by private equity buyers around competitive risk as Pregis and Storopack started to make a push into paper packaging in 2018/2019, coming to market with shiny new machines. This led to Ranpak ultimately going public via a SPAC instead. We think these concerns have largely abated. After initial success in converting their existing accounts from plastic to paper, competitors have found it difficult/impossible to penetrate Ranpak’s exclusive distributor network. Distributors are unwilling to jeopardize their existing book of business with Ranpak, for the promise of more business with Pregis/Storopack. In addition to distributor exclusivity, Ranpak enjoys incremental scale advantages in sourcing and servicing costs (install base density).

Valuation

We value Ranpak at 11.0x forward EBITDA, in line with multiples the company has transacted historically. Pregis was acquired in 2019 at 11.5x.

11x on 2025E EBITDA of $110mm gets us to $10.25/sh. Or 42% up from current prices in <18 months.

Catalyst

Gross margin recovery

Volume recovery as channel destocking turns from headwind to tailwind

Automation growth