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Ranpak Holdings Corp (NYSE:PACK)
Q3 2020 Earnings Call
Nov 6, 2020, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Ranpak Holdings Corp. Third Quarter 2020 Conference Call. [Operator Instructions] [Operator Instructions]. [Operator Instructions].

I would like to now hand the conference over to your speaker today, David Murgio, Chief Sustainability Officer. Please go ahead.

Analyst

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 most recent annual report on Form 10-K and our other filings with the SEC. Some of the statements and responses to your questions in this conference call may include forward-looking statements that are subject to future events and uncertainties that could cause our actual results to differ materially from those statements. Ranpak assumes no obligation and do 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 release has been included in a Form 8-K that we submitted to the SEC before this call. We will also make a replay of this conference call available via webcast on the company 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. Also, as we will discuss in more detail later, due to the accounting treatment for the business combination we closed on June 3, 2019, we've also presented our results for the three and nine months ended September 30, 2019, on a combined basis reflecting the simple arithmetic combination of the GAAP predecessor and successor periods without further adjustment as well as any other adjustments as described. Lastly, later today, we'll be filing our 10-Q with the SEC for the period ending September 30, 2020. The 10-Q 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 third quarter results, and Bill will provide some additional detail before opening up the call for questions.

With that, I'll turn the call over to Omar.

Omar Asali -- Chairman and Chief Executive Officer

Thank you, David, and good morning, everyone. I hope everybody listening in and their families are staying safe and healthy. This quarter, I, again, would like to begin by thanking everyone at Ranpak, and in particular, those who work in our manufacturing and converting facilities across the globe. While many members of our team continue to work remotely, the foundation of our success this year amid challenging conditions has been the women and men who show up each and every day in our factories. Because of their relentless efforts and resolve, we have been able to continue to serve our customers effectively throughout the world. At a time when many businesses are grappling with so many disruptions, our customers have been able to consistently rely on receiving their products from Ranpak. Not only are we providing them with the solutions they already know and value, but we also have been providing our distribution partners with new and innovative products to help them grow their business. The execution and focus have been terrific in a rapidly changing environment. And I'm extremely proud of the team for their extraordinary efforts. As the number of cases is increasing in many areas of the world, we continue to encourage everyone in our organization to be vigilant. We require our team to follow proper safety measures to ensure their own health as well as those around them.

Our top priorities this year have been the safety and health of our employees and customers as well as proactively managing our global supply chain to ensure uninterrupted supply to our customers. We believe we have executed well on these goals. In addition to our essential workers at the converting facilities remaining in place, we brought back staggered groups to our offices this summer. But today, given the rising cases, for our office workers, we remain largely a remote working population. We are closely monitoring conditions and will continue to adjust accordingly while not losing focus on achieving our operating objectives. We have taken a balanced approach to the business this year. We're focused on areas with the greatest near-term opportunities while continuing to drive forward initiatives that position Ranpak well for 2021 and beyond. The strength of our core business positions us well. We are fortunate that we can pursue new and large opportunities that require investment such as automation and cold chain while still achieving strong results. We view this as a winning combination for creating sustained shareholder value over the long term. From an operational and supply chain perspective, COVID has had minimal delays on our equipment and has not disrupted our paper supplies. Operations at each of our global facilities continues uninterrupted with the greatest constraints currently being labor and capacity for certain product lines to meet the strong demand we are experiencing, particularly in Europe.

While we have been able to navigate successfully thus far our existing network, we are taking steps to diversify our supplier base and add additional production capacity in Europe. We're very pleased with the progress we are making. We also have been working well as a global team to satisfy demand in various parts of the world in the most efficient manner. I'm very impressed with the global collaboration I'm seeing across the company. The resilience of our business model and diversity of our portfolio served us well in the third quarter and year-to-date, whether it is geographic split, our diverse product offering or the variety of end markets and customers we serve. Our business is well balanced and contains many levers for us to achieve our goals. While some areas of our business such as Cushioning have been under pressure, Wrapping and Void-fill continue to outperform and drive growth. We're excited to have been on offense again this quarter by focusing on winning new business and rolling out new products. I'm happy with the strong results of the third quarter as the team continued to execute and advance key Ranpak initiatives. Similar to the drivers of the second quarter performance, robust growth in Europe and Asia Pacific drove the top line. Much like it was the first area impacted by COVID, Asia Pacific continues to show signs of a normalization of trends, which is encouraging.

From a product line and end market perspective, industrial activity has been slowly improving and e-commerce demand for our Wrapping and Void-fill products remains elevated. Areas such as beauty, cosmetics, food and beverage, home furnishings, omnichannel activities for retailers and warehousing and third-party fulfillment have been and continue to be key growth drivers for Ranpak this year. North America delivered sequential improvement with new products such as Trident, Guardian and new recycled paper types driving discussions as of late and providing good momentum. Regionally, you have seen greater activity in the Northeast and Southeast with the middle of the U.S. slower to return. We remain constructive on the outlook for North America going into year-end and expect momentum to continue to improve given the activity as of late. Also recently, I'm pleased to share that in the cold chain market, we won a sizable account in North America in the food and beverage sector. Revenues from this cold chain customers start this month. This is a direct validation of our R&D efforts that we pivoted to at the beginning of the pandemic to focus on the cold chain market. I'm expecting a meaningful contribution from our cold chain business starting in 2021 as we invest and innovate in this important market segment. Turning the discussion now to third quarter highlights. For the quarter, consolidated net revenue on a constant currency basis increased 8.1% to $76.1 million, driven by robust demand for Void-fill and Wrapping, primarily in response to continued growth in e-commerce activity.

North America net revenue returned to growth, increasing 1% year-over-year, primarily driven by growth in Wrapping and offset somewhat by continued lower sales into industrial markets. Overall, North America continues its sequential improvement, but still lags what we are seeing in Europe and Asia. Best-in-class new products are driving encouraging activity. New post-consumer paper offerings as well as new product introductions continue to garner great feedback from customers. In the third quarter in North America, we recently launched the next-generation of our AccuFill and Autofill automation technology, which I think has great potential. For some background on how this works, our tower sensors scan the box coming down the line, determine the block size and volume of objects in the box and then compute the amount of paper needed to fill the void. Our sensors communicate with our converters to dispense the optimal amount of paper into the box, enabling our customers to decrease their environmental footprint and supply chain costs. Our solutions range from automation equipment that reduces your labor needs to solutions that fully automate and eliminate your end-of-line labor needs. On a constant currency basis over the quarter, net revenue in Europe and Asia Pacific was up approximately 15%, driven by growth across all product lines with particular strength in Void-fill and Wrapping.

Performance in Europe continues to be strong, fueled by solid execution of geographic expansion initiatives, continued elevated e-commerce demand and significant sustainability tailwinds. In Asia Pacific, we saw continued strength in demand from e-commerce customers in places like Australia and South Korea as well as the continued economic recovery in China. Automation has been the area of our business most impacted by COVID as travel restrictions have made it challenging to install new equipment and conduct in-person demonstrations for new customers. To provide some context around automation's impact this quarter. If you were to look at sales, excluding automation, net sales would have increased 10.4% year-over-year. Although COVID has presented a challenge within automation in 2020 for equipment delivery, we took decisive action to utilize this time to advance the development of our next-generation box customization machine, the EVO two. This positions us well for the next phase of building automation. I'm pleased to share we have recently placed our first EVO two prototype out in the field in Europe, and it is receiving excellent feedback. Automation is going to be a key driver of growth for us going forward. So I'm really pleased that the team in Europe was able to turn this challenging period during the pandemic into a long-term foundation for innovation and advancement. Despite the near-term physical disruptive effects resulting from COVID, our activity level in automation is strong. Our current order book of business and our near-term pipeline are very healthy.

The overall demand for our automation products is robust, and our level of customer dialogue is hyperactive. This positions us well for outstanding growth in 2021 in automation. In addition to our in-house advancement, we completed a small acquisition in October, which broadens our product portfolio and service capability. For approximately EUR one million, Ranpak acquired from a manufacturer in Finland the exclusive rights to the IP and associated assets that offer automatic height-reduction machines as well as wedge and document insertion technologies. These products will be a nice bolt-on to our existing automation offering. In constant currency terms and pro forma for purchase accounting adjustments in the third quarter in 2019, adjusted EBITDA of $23.7 million was up 7.7% year-over-year due to higher sales and lower input costs, offset slightly by increased G&A and production various costs due to investments in personnel and ramping up of newer product lines. I also would like to highlight that we streamlined our capital structure this quarter by eliminating our outstanding warrants and converting all of them to shares. We had previously communicated that our top two priorities for our capital structure are deleveraging and having a capital structure that consists simply of long-term debt and common equity. Following our deleveraging transaction in late 2019, removing the overhang from the warrants was top on our list of priorities for our capital structure. Feedback from the investment community during the exchange has been quite positive. Those are the high level points on our strong third quarter performance. In short, we ensured employee safety, maintained our business operations at a high-quality level, invested for future growth and streamlined our capital structure.

With that, let me turn the call over to Bill, who will give you further details related to the quarter.

William Drew -- Senior Vice President and Chief Financial Officer

Thank you, Omar. In the deck, you'll see a summary of some of our key performance indicators. With convenience to readers, we presented the comparison of the three month period ended September 30, 2020, pro forma for constant currency and purchase accounting adjustments in order to present a meaningful comparison against the corresponding period. We'll also be filing our 10-Q today, which provides further information on Ranpak's operating results. Machine placement continued its steady increase as we placed over 3,000 machines in the quarter, up 10.6% year-over-year to 113,000 machines globally. Consistent with recent performance, Cushioning systems grew 3.4%, while Void-fill installed systems increased 10.1%. Our smallest product line, Wrapping, continues its rapid expansion, growing 34.6% year-over-year and is on the way to becoming a meaningful contributor to our top line. As Omar mentioned, overall net revenue for the company in the third quarter was up 8.1% year-over-year on a constant currency basis driven by strong performance in Europe and APAC and improving conditions in North America. On a pro forma basis for constant currency and purchase accounting adjustments, gross margin for the quarter was 39.3% compared to 44.2% in the prior year. As a percentage of sales, depreciation expense within COGS increased 300 bps year-over-year to 10.4% due to the step-up in value of converter assets that took place in the fourth quarter of last year.

Beginning next quarter, that comparison will be apples-to-apples. Production variance and costs associated with automation ramp-up and expansion of product lines adversely impacted gross margin by approximately 200 basis points, but we believe these are temporary in nature and will normalize going forward. On a cash basis, our gross margins were largely in line with our recent performance. Regarding our largest input cost, kraft paper, supply and demand in the paper space remained fairly balanced at this time so we do not anticipate material changes to our input costs in the near term. In the quarter, adjusted EBITDA grew 7.7% year-over-year, while margin held roughly flat at 31%. In 2020, we have used savings on raw material input costs to invest in R&D, systems and additional personnel, including many focused on automation, bringing total head count up to 615 globally. We are pleased with our ability so far to grow our profitability closely in line with our sales while simultaneously investing meaningfully in the business, positioning us well for the future. Cash interest expense for the quarter was approximately $5.5 million and should remain consistent for the remainder of the year as the majority of our interest exposure on our USD tranche of our term loan is hedged. Capital expenditures for the quarter were $6.8 million, driven largely by increased placement of converters.

As demand has been robust, especially within Wrapping and Void-fill, we have been actively growing our installed base throughout the year and placing converters across the globe. Moving to the capital structure and liquidity. During the quarter, we successfully tendered for and exchanged 100% of the $20.1 million previously outstanding warrants. We changed these warrants into 4.4 million shares, which helped simplify our capital structure while improving float and liquidity, all key priorities for us. Our cash position grew $8.6 million in the quarter to over $31 million as of September 30, and a $45 million revolver is undrawn and fully available to us should we seek additional liquidity. Our leverage from a bank-adjusted EBITDA standpoint was 4.3 times at the end of the quarter.

With that, I'll turn it back to Omar before we move on to questions.

Omar Asali -- Chairman and Chief Executive Officer

Thank you, Bill. To summarize, I'm very happy with the achievements and improvements our company made in the third quarter and year-to-date. Our fundamentals and financial position are strong, and our innovation pipeline is exciting. Our pipeline of new business opportunities is robust. Every day, I challenge the team to improve and make Ranpak a better company and corporate citizen than the day before. A few months ago, we joined The Board Challenge as a pledge partner to add more diversity to our Board challenge as a Charter Pledge Partner to add more diversity to our Board and encourage other companies to do so. As you have seen, we announced yesterday that Pam El will join our Board. Pam was formerly Chief Marketing Officer at the NBA. She brings more than 30 years of experience in global marketing and modernizing of brands. I'm very proud to welcome Pam to our Board and look forward to her contributions. Lastly, while COVID has certainly presented new challenges for us, we continue to execute and lay the groundwork to achieve our longer-term growth objectives, both organically and through accretive acquisitions. E-commerce, automation and sustainability remain key to our growth algorithm, and I believe Ranpak is extremely well positioned to expand with these forces reshaping the global economy. With that, thank you all again for joining our call.

I'll now open it up to questions. Operator?

Questions and Answers:

Operator

[Operator Instructions] Your first question comes from the line of Greg Palm from Craig-Hallum Capital. Your line is now open.

Greg Palm -- Craig-Hallum Capital -- Analyst

Yes. Thanks. Morning Omar and Will. Congrats on the really good quarter here. I guess, just starting off, the growth in Europe and APAC really stood out to us. It sounds like it was really across-the-board. I mean I can't imagine that's all end market growth over there. So presumably, it's potentially some new customers and maybe you're taking share. Can you just go into a little bit more detail on what you're seeing?

Omar Asali -- Chairman and Chief Executive Officer

Yes, sure. I think you're right. It is a mix of factors. Let's start in Europe. Certainly, we're seeing more activity with existing customers in e-commerce, and frankly, that continues given what's happening with the pandemic. But in Europe, in particular, we've seen a nice market share gain with a number of large accounts moving away from other substrates, from plastic offerings, and looking for our solutions. We've got a number of customers that have reached out to us, asking us to come and help them in their warehouses and their businesses. So you're seeing a shift away from plastic to paper. In Asia Pacific, it's frankly a mix of e-commerce, like I mentioned, in terms of certain geographies, Australia, South Korea. But we are clearly seeing pretty good activity in China, and there's a lot more normalization in the whole Asia Pacific region versus the rest of the world. So -- as I said, they were first to get into the sort of the pandemic and the rhythm and the economies there seemed to have stabilized quite a bit, so that's helping our business. And the activity in both geographies continues to be very robust.

Greg Palm -- Craig-Hallum Capital -- Analyst

Yes. Good. And in terms of North America, can you talk about maybe the cadence of how demand trended through the quarter, what you're seeing in October? Any positive impact in the October month or November just from e-commerce? You had Prime Day, you had a bunch of other online sales events, Walmart+ is launching here. And what are you seeing here specifically?

Omar Asali -- Chairman and Chief Executive Officer

Sure. So let me start with industrial activity, then I'll talk about e-commerce and retail. Industrial activity. As the year has progressed, activity has improved in the U.S. It's been uneven, but it continues to improve. And certainly, in Q3, it was better than what we saw in Q2. Some geographies are stronger than others. We continue to see some weakness in the Midwest and some weakness in the central part of the country. The Coast seem to be doing a little bit better. So that's one aspect. But as we speak, industrial activity continues to improve in the U.S., which is a great sign for us and we expect that to continue. In terms of e-commerce activity, it honestly has been super robust. Our expectation is that's going to continue. We don't think that's going to change even in 2021. You asked about a number of accounts, pretty much all the large retailers are in discussions with us about doing more in e-commerce and then in their online fulfillment.

And they are investing quite a bit, and many of them have said that publicly, in new DCs, new warehouses. They want to increase their level of sales online and we are a beneficiary of that. One leading indicator, and this is why I'm excited about what I'm seeing in the U.S., is obviously the number of trials and the pipeline that we have. And that has continued to trend very, very well as the year has gone on and it continues to be at a very high level. So I think expect e-commerce activity to continue to be robust. Expect industrial activity to continue to recover and hopefully stabilize.

Greg Palm -- Craig-Hallum Capital -- Analyst

Great. And then the cold chain customer you commented on, thought that was interesting. How big of an opportunity could that be? And then to be clear, is this a direct-to-consumer application? What can you share?

Omar Asali -- Chairman and Chief Executive Officer

It is the direct-to-consumer. It is a sizable opportunity. We are generating revenue as we speak. This was really important for us as a company. As you would recall, early in the pandemic, we pivoted to investing more in R&D and innovation in cold chain. We created our prototype, put it out in the marketplace. We got great feedback. We continue to invest behind that technology. We continue to look to add talent and hire more people for our cold chain business, which I'm quite excited about. And I think you will continue to see us gain traction. I wanted to highlight this opportunity, one, because it is of meaningful size; and two, just to show that when we're investing in R&D and innovation, we are getting some traction. And now we're getting into a place where we want to execute better in cold chain.

And I think cold chain is going to be hopefully something that's pretty important for us in 2021 and beyond. If you think about our business, and I've discussed automation quite a bit, we have used this year to invest heavily in automation. And automation is a little bit ahead of cold chain for us. And I'm expecting very strong growth in automation in 2021 and cold chain is behind. So these are two areas of growth where Ranpak has invested a lot of capital and resources that I think are going to start bearing fruit in the upcoming year, and I like where we are today.

Greg Palm -- Craig-Hallum Capital -- Analyst

Okay. Thanks for the color there. And I guess last one. Bill, you talked about some impact to gross margins. I was not writing fast enough, but I think you mentioned that you're expecting that pressure to ease going forward. Did I hear that right?

William Drew -- Senior Vice President and Chief Financial Officer

Yes. That's correct, Greg. So we had 300 bps of impacts due to the step-up in depreciation related to the converter assets in the fourth quarter of last year. So that will normalize going forward next quarter. And then we just had some reclass of overhead from G&A to COGS this quarter. But on a cash margin basis, our performance is largely in line with historical. So we expect that to normalize in the fourth quarter going forward.

Greg Palm -- Craig-Hallum Capital -- Analyst

Got it. Reclass. Okay. That's what I missed. Okay. Good. I'll leave it there. And that's a lot going forward.

William Drew -- Senior Vice President and Chief Financial Officer

Thanks a lot, Greg.

Operator

Your next question comes from the line of Stefanos Crist from CJS Securities. Your line is now open.

Stefanos Crist -- CJS Securities -- Analyst

Good morning and congrats on the quarter.

William Drew -- Senior Vice President and Chief Financial Officer

Good morning, Stefanos. Thank you.

Stefanos Crist -- CJS Securities -- Analyst

So machine placement growth was fantastic, almost 11%. Are you still seeing any roadblocks from facilities maybe wanting to social distance? Or are those mostly out of the way?

Omar Asali -- Chairman and Chief Executive Officer

I think they are mostly out of the way. There is certainly certain situations where some companies are still waiting and maybe preferring that not to have too many visitors or our technicians and engineers on their premises. But by and large, it's a very different rhythm today versus a few months ago. But obviously, we are watching because, as we all have seen, the number of cases in the U.S. and in Europe is increasing. And what would that mean, we will see. But right now, I would say a lot of the big closures, et cetera, delays in trials, it feels better today than a few months ago, Stef.

Stefanos Crist -- CJS Securities -- Analyst

For sure.Thank you. And I'll just squeeze in one more. You briefly mentioned that now that the warrants are out of the way, can you talk about what your biggest priorities are? Is it just reducing debt or -- you made a small tuck-in. Really, what are your biggest priorities near term?

Omar Asali -- Chairman and Chief Executive Officer

I mean I would put them in three buckets. One is execution. We have a lot of initiatives that we're working on that we think can deliver outstanding growth. So execution in our core business, converting the trials, I talked about, into closes; execution and automation; building the cold chain business and executing on that, that is a very important priority. The team is quite energized. We feel very, very good. We like the competitive landscape. We really like the feedback we're getting from our customers. We like the feedback we're getting from our trials. So that is our top priority. In terms of our cap structure, we will continue to monitor things. We've done a lot. We've delivered. We have removed the warrant overhang. But we're also very focused on building a real public company and -- that has a pretty simple cap structure, that has the right amount of flow, liquidity, etc.

So that's something that we are watching. And these are really sort of the big areas. In terms of acquisitions, we are opportunistic. We watch what's out there. We did the small tuck-in, in Europe that, I think, is a really nice tuck-in that's going to pay dividends very, very quickly. But at the same time, we are value-sensitive. And we see a lot of organic potential for growth. So the hurdle for M&A is high for us. It has to be the right strategic fit, the right business at the right valuation. And we're watching everything closely out there. When we see something that checks these boxes, we will execute on it. But the level of energy, the number of initiatives we have at the company is high, and we feel pretty good in terms of ending the year and getting ready for 2021.

Stefanos Crist -- CJS Securities -- Analyst

Perfect, that makes sense. Thanks both and congrats again.

Omar Asali -- Chairman and Chief Executive Officer

Thanks a lot, Stef.

William Drew -- Senior Vice President and Chief Financial Officer

Thanks, Stef.

Operator

[Operator Instructions] Your next question comes from the line of Chris McGinnis from Sidoti & Company. Your line is now open.

Chris McGinnis -- Sidoti & Company -- Analyst

Hey, good morning. Thanks for taking my questions. I just wanted to ask, just looking at the automation, you talked about some pretty robust conversations and expectations and -- or at least solid growth in 2021. Can you just talk -- is that more with new customers? Is that driving new customers to you? Can you just talk a little bit about who's taken those -- that product? Thank you.

Omar Asali -- Chairman and Chief Executive Officer

Yes. Thanks, Chris. That's a great question. It's actually both. It's existing customers and it is new customers. I think in today's world, fair to say, given what companies have seen with pandemic, and frankly, with labor issues globally, when you talk to customers about automated solutions, whether they are semi-automated and they reduce the number of labor or whether they are fully automated and they eliminate the need of labor in certain tasks, customers' eyes light up. I mean they are very focused on that. It's something that improves their speed, their reliability. It's something that helps them handle any contagion issues in the pandemic. So the level of activity and discussion is terrific. It is with existing customers that buy our product, that know us as a reliable vendor, that like what we've done to them in their business and say, hey, look, to the extent you have more automated solutions, I want to explore those conversations because I have a certain level of trust and confidence in Ranpak.

And we are pursuing those. And then there's a set of new customers that, historically, we haven't accessed because they were looking for automated solutions from day one and their warehouses may have been more on the newer side and more automated. And the more we invest in automation and in R&D and robotic arms and so on, more of these conversations are opening up for us. So it's honestly a mix. A lot of it is existing customers asking for more solutions. But a meaningful piece of it is also new customers, and it's enabling us to really expand our pipeline and our channel and go-to-market strategy.

Chris McGinnis -- Sidoti & Company -- Analyst

Great. I appreciate that. And then just one quick follow-up. I know you highlighted Europe as a successful kind of implementation. Is that also kind of, on a geographic basis, pretty diverse?

Omar Asali -- Chairman and Chief Executive Officer

Sorry, what's the question again?

Chris McGinnis -- Sidoti & Company -- Analyst

Just that -- those conversations you're having on the automation, just when you think about it on a geographical basis, is that diverse as well?

Omar Asali -- Chairman and Chief Executive Officer

It is absolutely diverse. So it's a lot in Europe. It's a lot in North America with a lot of the big names that you would know. And then in certain geographies, in Japan, for instance, and in Australia, we have a number of automation conversations as well as South Korea. But the biggest two markets in terms of our conversations are Europe as well as the U.S.

Chris McGinnis -- Sidoti & Company -- Analyst

Great. Appreciate taking my questions and good luck in Q4.

Omar Asali -- Chairman and Chief Executive Officer

No Problem. Thanks, Chris.

Operator

Your next question comes from Matt Dell Orfano from Discovery Capital. Your line is now open.

Matt Dell Orfano -- Discovery Capital -- Analyst

Hey, guys. Thanks for all the explanation on the quarter. I was wondering if you could spend just a few minutes putting the pieces together. The investment that you've made this year has been obviously very appropriate, well-timed and robust, combining with sort of the depreciation, et cetera. When we think forward to next year, how do I think about the operating leverage coming through, both on the gross margin and the operating line? Because there's just a lot there on the gross margin investment, on your investment in technology, in people, the normalization of the acquisition. So there's -- I don't want to be -- I just -- it would be very helpful if you could clarify putting those pieces together because the directionality seems very robust, but I don't want to go overboard. So please, any help there would be appreciated. Thanks.

Omar Asali -- Chairman and Chief Executive Officer

Sure, Matt. Thanks for the question. I'll kick it off and then I'll have Bill chime in. So I would say in our core business, we invested a lot. We invested in R&D. We invested in adding a number of people that we think were critical to helping us grow. We, frankly, did a lot of investment in the sales organization in North America and we're starting to see that, again, pay us some reward. So expect in 2021, I think in our core business, we'll start seeing some operating leverage. We still have some investments we want to do and I suspect we will continue to do that early in 2021. But as the year progresses, I would expect operating leverage there. In automation, this was a huge year of investment in Europe. I suspect next year, we will do some investments in the U.S. to just expand our human capital to add, again, more sales talent, maybe a bit more engineering. I'm always looking for top-notch engineers in the company. So I think automation is going to have a pretty strong year in 2021. I wouldn't expect huge operating leverage given the investments we'd like to do in the U.S. And then cold chain is behind in terms of it's the area that requires some investment.

But it looks extremely promising, and I think it's going to drive quite a bit of growth. If you put, in my mind, these pieces together, overall, you're going to see I think decent operating leverage because, obviously, the core piece of our business is the largest piece. The other pieces are small. They continue to require some investment, and I think these investments are going to pay off very handsomely. The last piece I will tell you in automation, in particular, and this was related to the prior question, as we invest there, automation is very adjacent to our core paper business. A lot of these investments are not just yielding more equipment sale and more robotic arm sales, they are yielding more accounts that are buying more of our paper and more of our consumable because they're looking for a lot more solutions from Ranpak. So the investment in automation is paying back in two ways: in the sale of equipment as well as in helping our core business. Bill, I don't know if you want to chime in on this question.

William Drew -- Senior Vice President and Chief Financial Officer

Sure. I think it's a great question. And as Omar mentioned, we are investing in a number of areas, so automation and retail are smaller businesses for us that are ramping up. So those are a slightly lower margin profile than the core paper business, but we think that they're highly complementary and also don't have that same capex component so they contribute really well to free cash flow. But I think you'll see some operating leverage within the core paper business. And then also, we'll be investing some of that, though, in growing these smaller businesses to drive the top line.

Matt Dell Orfano -- Discovery Capital -- Analyst

Got it. Okay. That's very helpful context. And so just taking a step back and bigger picture, the right way to think about it is we've made a big investment this year. We will start -- that investment will yield over the next 18 to 24 months. The next investment in the coming year is material, but slightly smaller and that will yield over the following 18 to 24 months. So as I build up my cohorts of sort of capital and think through returns on capital over time, we get the benefit of that increased leverage and return coming through in the next 12 months is when we start to see it. And the incrementals will be higher if I model out the next couple of years is the right way to think about it. And we'll see that the returns from consumables that are the -- that have been born from this investment start coming through in the same time periods. Is that the right way to think about it, very big picture? Incrementally smaller investments, but larger cohorts of profitability coming through?

Omar Asali -- Chairman and Chief Executive Officer

I think that is absolutely the right way to think about it, Matt. So I think that's a very fair way to think about what we're trying to do.

Matt Dell Orfano -- Discovery Capital -- Analyst

Great. Thanks guys, I appreciate the help. Thank you.

Omar Asali -- Chairman and Chief Executive Officer

Thanks a lot.

Operator

Your next question comes from the line of Greg Palm from Craig-Hallum Capital. Your line is now open.

Greg Palm -- Craig-Hallum Capital -- Analyst

Yeah, thanks for taking a follow-up. So, I thought some of the comments on new customers was interesting and wanted to dive into that a little bit more. I mean it sounds like there's lots of trials, lots of activity going on. I guess I would have thought, given where we are with COVID and still a lot of facilities locked down and whatnot, that getting in front of a new customer may have been more challenging than what it could have been. So curious if that's been an impact, and it doesn't sound like it's been huge, but assuming we all open up at some point, curious what your thoughts are in terms of new customer growth when that happens?

Omar Asali -- Chairman and Chief Executive Officer

Sure. I mean, I'll share with you my perspective, Greg. 2020 is just an unusual year where, normally, if you look at our trials, in general, the trial-to-close period and the percentage of trials that close successfully for us and historically, for a number of years it's been exhibiting certain patterns, this year is different where some trials have gone a bit longer because of lockdowns and physical limitations, et cetera. So that's one change that has occurred this year. And then as the world opened up a little bit, and we'll see where the world is in the next few months, we've seen some conversion of those into closes. Typically, Q4 is our peak time and the number of trials and the ability to access certain places becomes a bit limited because everybody is focused on the peak season.

What we are seeing in e-commerce is demand is so robust. They need more and more solutions and they're trying for things to help -- customers are trying for ways to help productivity, including this peak season. So I'm not sure this existing trial pipeline that we see in this Q4 is going to persist in future years. But 2020 is an unusual year and it's giving us certain opportunities, and we have been nimble enough to capture these opportunities, and frankly, we're reacting to our customer needs. But I think the way to think about it is we feel really great about our pipeline, our trials. It's probably a bit higher than what you would expect in a normal Q4, if that makes sense.

Greg Palm -- Craig-Hallum Capital -- Analyst

Yes. It does. And the cold chain customer, can you confirm that whether that was an existing customer of the company or is that a brand new customer?

Omar Asali -- Chairman and Chief Executive Officer

It was a small existing customer where we really didn't have sort of the right footprint in terms of thermal or any discussions like that, which is important to them. And now this is going to become a meaningful customer, and it's opening up our dialogue with other customers in cold chain.

Greg Palm -- Craig-Hallum Capital -- Analyst

Okay, great. All right, thanks.

Omar Asali -- Chairman and Chief Executive Officer

Thanks, Greg.

Operator

There are no further questions at this time. I will turn the call back over to the presenter.

David Murgio -- Chief Sustainability Officer and Secretary

Okay. Well, thank you, everyone, for joining us today. We look forward to speaking again to update you on our fourth quarter and full year results.

Operator

[Operator Closing Remarks].

Duration: 42 minutes

Call participants:

Omar Asali -- Chairman and Chief Executive Officer

William Drew -- Senior Vice President and Chief Financial Officer

David Murgio -- Chief Sustainability Officer and Secretary

Analyst

Greg Palm -- Craig-Hallum Capital -- Analyst

Stefanos Crist -- CJS Securities -- Analyst

Chris McGinnis -- Sidoti & Company -- Analyst

Matt Dell Orfano -- Discovery Capital -- Analyst

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