Description

Overview

Ranpak is a packaging business focused on paper-in-the-box (cushioning, protective inserts, etc.), automation equipment (end-to-end box packing), and cold chain solutions (cold packs, temperature control box liners). What otherwise sounds like a boring, stable business has been hit by a handful of challenges in the last few years. In our opinion, these challenges are abating or have been fully resolved. Ranpak should soon be back on a path of incremental equity value improvement in the next couple of years. We see 73% upside over the next two years, representing a two-year 32% IRR.

Recent Events

Ranpak rode the e-commerce boom of COVID with robust packaging volumes and a correspondingly robust share price (peaked around $43 per share). 2022 was a wildly different story. Two key factors, aside from the collapse of equity multiples across the board, caused the shares to plummet from $40 to $3. First, distributors that cover about 85% of Ranpak’s volumes over-ordered in late 2021 and early 2022 only to be met with a severe drop in demand that created a massive channel inventory problem. Given revenue is determined by paper consumption for nearly all of Ranpak’s revenue, revenue declined YoY by about 15%. Second, paper prices spiked to historic levels due to energy prices rising, which put a ~900 bps headwind on gross margins. Investors worried this trend would not reverse and would impair EBITDA margins for years. These headwinds were complicated by a levered balance sheet.

Improvements in both areas are apparent in 2023. Gross margins have improved substantially and reached 2023 target levels in Q2 when management previously expected it to take until the end of the year. Volumes, while still challenged, have now cleared the channel inventory with the distributors indicating they are at less than pre-COVID levels. While these improvements are welcome, volumes are still challenged due to macroeconomic factors impacting end-client demand. The second half has far easier comps given how challenging 2022 was, but investors retain concerns about a pending 2024 recession and, reasonably, have not been willing to look beyond a couple of quarters given the choppy results of the last couple of years.

The Bigger Picture

Following the recent challenges, Ranpak is now operating on a much cleaner path to equity value improvement. Net leverage in Q2 2023 should have been the peak for 2023 and hopefully for the entire future of Ranpak as a public company. EBITDA improvement will driven by volumes and gross margin expansion now that raw material increases have abated. Further, Ranpak’s management team has been investing heavily in the business over the last few years: an ERP upgrade, expanded real estate, and building the automation and cold chain verticals. Prior to management taking this business over from the most recent private equity owners, it was purely a paper-in-the-box packaging business that was run with minimal growth capex and squeezed for free cash flow. Management did not back off these investments in the face of a more challenging 2022-2023 backdrop, but 2023 is the end of these major capital projects. Therefore, 2024 and beyond will be focused on gaining the expected returns from these investment and significantly increased free cash flows.

Management Incentives / Insider Ownership

Omar Asali (CEO) owns just over 5% of the shares and receives all his compensation in the form of equity awards upon short-term and long-term performance targets. Notably, his larger, long-term equity awards for 2023-2025 do not grant unless Ranpak returns to $125mm+ EBITDA.

JS Capital Management (Jonathan Soros) owns ~38.6%, and Soros Capital Management (Robert Soros) owns ~5.9%. These two anchored the SPAC that One Madison (Omar’s holding company also funded by the Soros family) used to acquire Ranpak from private equity ownership. The Soros investors have never sold shares and are long-term owners of the asset alongside Omar/One Madison.

Sources of Competitive Advantages

• Ranpak has been operating in the paper-in-the-box industry longer than anyone else. It built a formidable PPS (protective packaging solutions) market share in the US and Europe (just over 50% in both). Protecting this market share from erosion is distributor exclusivity. Ranpak distributors are contractually bound to only offer Ranpak paper products on a perpetual basis. Given the high market share possessed and the large distributors Ranpak has, it is unlikely that a competitor will unseat Ranpak’s status.
• Additionally, clients are highly sticky. Clients view the PPS machines as a utility that so long as they function well, there is little to no incentive to switch providers. Ranpak clients are happy with the performance and customer service from our channel checks. This would also require a client to switch distributors because distributors cannot offer another solution.
• Given Ranpak’s market share, its foray into automation should perform better than competitors, as Ranpak already has relationships with the end clients and major distributors. As these clients look to automate their packing stations, Ranpak is a trusted partner who already delivers dependable PPS solutions, and this can be expanded into automation equipment.
• Ranpak’s exposure to e-Commerce (1/3 of PPS revenue) has been a headwind in 2022 and 2023 but presents a long-term tailwind as growth returns and normalizes in that sector.
• Ranpak benefits from the global push to ESG, with Europe leading but the US following suit in regulation and consumer expectations on recyclability. Plastic inserts are not as environmentally friendly, and certain jurisdictions require paper over plastic. As Ranpak is the longest-operating paper provider in this industry, it stands to benefit further from this trend.
• The industry does not invite new competition given the high fixed costs and barriers to achieving sufficient ROIC at subscale levels of production. This allows Ranpak to compete against its known peers without the threat of new entrants.

Valuation

At 11X 2025E Adj EBITDA of $100m, the shares would be valued at $9.19, representing a two-year IRR of 32%. The implied enterprise value of $1.1B would still be 20-30% below our estimates of the value to a private buyer given historical private equity multiples and the demand from sponsors to own businesses like these.This is also well below the EBITDA the management needs to maximize their compensation. While we believe that target is a stretch at this point, acheiving $125m of EBITDA would likely result in a share price into the teens.

Catalyst

Q2 represented peak leverage

Q3 should show sequential gross margin improvement

2024 should show gross margin, volume, EBITDA and FCF improvement

Growth of cold chain vertical