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spk04: Greetings, and welcome to the Reynolds Consumer Products third quarter 2023 earnings conference call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press the star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mark Flexberg, Vice President of Investor Relations. Thank you, sir. You may begin.
spk07: Thank you, operator. Good morning, everyone, and thank you for joining us on Reynolds Consumer Products' third quarter 2023 earnings conference call. Please note that this call is being recorded and webcast on the investor relations section of our corporate website at ReynoldsConsumerProducts.com. Our earnings press release and accompanying presentation slides are also available. With me on the call today are Lance Mitchell, our President and Chief Executive Officer, Michael Graham, our Chief Financial Officer, and Scott Huckins, who recently joined RCP and becomes Chief Financial Officer on November 13th. For our call, Lance will discuss our results, the macroeconomic environment, and our category performance. Michael will provide additional detail on the third quarter, our guide, and capital allocations. Following prepared remarks, we will open the call for questions. Before we begin, I would like to provide a couple reminders. First, this morning's discussion may contain forward-looking statements based on current expectations and beliefs. These statements are subject to risks, uncertainties, and changes in circumstances that could cause actual results and outcomes to differ materially from those described today. Please refer to our risk factors section in our SEC filings, including in our annual report on Form 10-K and our quarterly report on Form 10-Q. Please note that the company does not intend to update or alter these forward-looking statements to reflect events or circumstances arising after the call. Second, during today's call, we will refer to certain non-GAAP or adjusted financial measures. Reconciliations of these GAAP to non-GAAP financial measures are available in our earnings press release, investor presentation deck, and 410Q, copies of which can be found on the investor relations section of our site. Now I'd like to turn the call over to Lance.
spk09: Thank you, Mark, and good morning, everyone. Please join me in welcoming Scott Huckins. Scott comes to RCP at a great moment in our history of our company, when our brands, our market position, and financial profile are strong and getting stronger. He is with us on the call today as part of the transition plan. I'll begin by discussing our results. Then I will turn to the macroeconomic environment our performance in our largest categories, and what we're doing to improve the volume trends in disposable tableware. After that, I'll turn the call over to Michael to provide more detail on the quarter in our guide. The RCP team continues to perform very effectively in a dynamic, challenging economic environment, and I'm extremely proud of all that we've accomplished. We've delivered net revenues and earnings at the upper end of our expectations for the quarter. We expanded EBITDA margin more than 500 basis points in each of our businesses, reflecting effective execution of our plans to increase share across RCP, continued disciplined investments in our business, and additional successful implementation of the Reynolds Cooking and Baking Recovery Plan. WE CONVERTED HIGHER EARNINGS INTO SIGNIFICANT CASH FLOW, RESULTING IN OUR DELEVERAGING MORE QUICKLY THAN PREVIOUSLY ANTICIPATED. WE INTRODUCED THE HEFTY BRAND IN PRESS TO CLOSE FOOTBACK CATEGORY AND INCREASED LOYALTY WITH GEN Z AND MILLENNIALS. AND FOLLOWING QUARTER END, WE ACQUIRED A COMPANY THAT IS A RESEARCH-DRIVEN BUSINESS WHICH WILL ALLOW US TO ACCELERATE PRODUCTION AND COMMERCIALIZATION OF AFFORDABLE high-quality sustainable products, and material blends. As you know, U.S. households are facing significant economic challenges, including inflation and rising interest rates and other headwinds, which have impacted sales volume across consumer staples. We continue to respond to these challenges by adapting and innovating to meet consumers' needs, leveraging our unique business model, including brands and store brands, executing planned increases in promotion and advertising, and continuing strong management of costs and manufacturing productivity. As a result, our retail sales volume is stable and growing in our three largest categories, and we are implementing actions to improve disposable tableware trends. We are also benefiting from continued consumer shifts to untracked channels. As a reminder, a large portion of our business is not tracked. I will now review our performance by business segment. The Reynolds cooking and baking team has done an outstanding job executing the Reynolds recovery plan while also increasing market share. Volume, operational, and gross profit objectives set at the start of the year were met for the third quarter in a row. Our primary foil production facility, located in Louisville, has stabilized at historical production rates, and extensive work continues to further increase efficiencies to expand margins. Reynolds Wrap continued to drive the household foil category, our second largest category, retaining the first half significant share gains and increasing share nearly 300 basis points in the quarter. We increased household penetration for Reynolds Wrap among all major demographics while also raising aided and unaided awareness for Reynolds foil and parchment among millennials. And we expanded distribution of Reynolds Kitchen's air fryer liners in the U.S. and Canada while increasing distribution of Reynolds Kitchen's stay-flat parchment paper with Smart Grid nationally. Reynolds now surpasses $1 billion in annual retail sales, and we have the capabilities, share strength, and plans to grow Reynolds cooking and baking volume and margins. Our waste and food bag businesses are also performing well, driven by the Hefty brand and our integrated brand and store brand model. Hefty retail sales are growing and continue to climb towards $2 billion led by sales of waste bags, our largest category. Hefty acquired additional waste bags here in the quarter driven by innovation. Our largest innovation of the last three years, Hefty Fabuloso, was recently recognized by Cercana, previously known as IRI, as the number three pace setter brand for 2023, and ACB for both Fabuloso scents, lavender and lemon, continued to increase. Our Presto business gained additional share of store brand food bags, our third largest category, and Hefty introduced Hefty branded press-to-close food bags during the quarter. Hefty press-to-close food bags come in multiple sizes and offer consumers the features and reliability of the Hefty brand. Hefty Renew, our community-based program to aid curbside recycling of hard-to-recycle plastics, EXPANDED TO THE GREATER CINCINNATI MARKET IN OCTOBER. AND WE DROVE A MAJOR PICKUP IN SOCIAL MEDIA IMPRESSIONS WITH HEFTI CINNAMON PUMPKIN SPICE WASTEBAGS, AVAILABLE FOR A LIMITED TIME THIS FALL, AND THE REINTRODUCTION OF HEFTI ZOOPAL'S DISPOSABLE PLATES IN AUGUST. ZOOPAL'S ONLINE-ONLY LAUNCH DROVE MORE THAN 3 BILLION SOCIAL MEDIA IMPRESSIONS FOR THE HEFTI BRAND and we plan to extend the relaunch to other major channels in 2024. Turning now to our disposable tableware segment. The HEPTI tableware team has done an exceptional job recovering profitability, and the HEPTI brand is holding share in the category. In recent months, the team has also done extensive research to identify opportunities to improve tableware volume trends in response to elasticity pressures which are impacting the entire category. As a result, we have begun implementing comprehensive plans to improve tableware's top-line performance, drawing on proprietary consumer insights and extensive experience aligning with our retail partners on pack sizes and promotions that hit key retail price points. Here are some of the highlights of those plans. We've increased advertising of hefty party cups and disposable plates, to bring in lapsed and lost users, reminding them we'll do the dishes in addition to showcasing the party cups used for crafting and other non-food occasions. We're modifying features and displays based on very encouraging results from a new feature we recently trialed. We are adjusting counts while still providing consumers the value they seek from large pack sizes. Disposable plates, for example, We can make small reductions to pack counts and plate size, allowing for reductions in everyday retail pricing. And we are adjusting key pack sizes, promoted price points. It'll take time to realize an improvement in disposable tableware volume trends. We have a high level of confidence in that improvement based on the advantages of our brand and store brand model, our experience managing our categories, together with our retail partners, in our previous implementation of proven plans to drive product growth. We began in 2023 committed to driving our categories, expanding margins and increasing cash flow in a challenging macroeconomic environment, and we've been very successful doing that. We recovered margins across RCP and anticipate further margin expansion. We're paying down debt faster than initially expected, we are increasing share in the vast majority of our business, and we are implementing proven plans to improve trends in disposable tableware. All this adds up to being very well positioned for further deleveraging and for sustaining volume and earnings growth beyond 2023. Now, before I hand the call over to Michael, I would like to remind you that Michael will remain in an advisory role to the company after Scott becomes CFO and until Michael's retirement early next year. I'd also like to express my gratitude to Michael for his many years of service to the company. We've accomplished a lot together, including the growth of Reynolds Consumer Products, the introduction and expansion of our revolution program of business transformation initiatives, the successful listing as a publicly traded company, and steady financial management through a period of unprecedented macroeconomic volatility. Michael, you're a trusted friend, and I know that I speak for all of us at RCP when I tell you that you will be missed as our business partner. Over to you.
spk08: Thank you, Lance. I really appreciate the kind words, and good morning, everyone. I'll start by reviewing third quarter results and then turn to our guide. Net revenues were the at the upper end of our guide reflecting a 1% increase in pricing and volume consistent with our expectations. Execution and consistency were strong as each business generated over 500 basis points of EBITDA margin improvement. We demonstrated strong balance sheet discipline, including reductions in working capital, primarily driven by strong inventory management. As a result, we grew operating cash flow by nearly $200 million, and improved leverage. Net debt to trailing 12-month adjusted EBITDA decreased from 3.8 times at the end of 2022 to 3.1 times at the end of September. And we made an additional voluntary debt payment of $100 million subsequent to the quarter end. As a reminder, our term loan is a floating rate facility. We have hedged approximately 55% of the floating rate risk, affording us flexibility to deliver without penalty while providing protection and predictability in this volatile interest rate environment. Turning to our guide, we've raised the full year earnings expectations to the upper end of our previous range, reflecting better than expected third quarter results and unchanged earnings expectations for the fourth quarter. Our net revenue estimate for the year is now 2% lower than prior year net revenues, consisting of 2% higher pricing, prior year. In the fourth quarter, we expect stable to growing retail volume in aluminum foil, waste bags, and food bags, and lower disposable tableware volume, resulting in a consolidated retail volume decline of 2% to 4%. Our fourth quarter earnings estimates are unchanged in spite of the lower fourth quarter revenue estimates. This is due to our mix improving, and we are executing a newly identified revolution cost savings. Other considerations regarding our annual guide consist of the following. Commodity rates remain broadly consistent with our expectations when reporting second quarter results. Revolution cost savings are now estimated to be slightly in excess of our prior estimate of 200 basis points of incremental margin. Gross profit is expected to be approximately $935 million at the midpoint of our guide, representing an increase on our previous estimate. There are no significant changes to the annual depreciation and amortization, interest expense, effective tax rate, and capital spending estimates that we provided in our last earnings call. Turning to our capital allocation, we are deleveraging faster than anticipated when reporting second quarter results and expect net debt of $1.8 billion at year end compared to a range of $1.8 to $1.9 billion previously shared. This equates to an estimated 2.9 times net debt to trillion 12 months adjusted EBITDA ratio representing an improvement in the end of Q3 and year end. And our capital allocation priorities are unchanged. Invest with discipline in automation, continue margin expansion and growth, return cash to our shareholders by maintaining our current dividend and further deleveraging to the EBITDA and pursue bolt-on acquisitions consistent with our marketplace position and core competencies. Overall, our business is strong and getting stronger. Our volumes stable to growing in our three largest categories, and we are implementing plans to improve top-line performance in our tableware business. We have additional opportunities to expand margins, and our cash flows are strong, giving us the opportunity to accelerate the leverage while investing in the future of our company. Now, before I turn the call back over to the operator, I would like to acknowledge that this will be my last earnings call with you. It's truly been a pleasure working with the incredible team here at Reynolds Consumer Products. I'm immensely proud of the remarkable progress we've achieved together over the years. In addition, a special thank you to the analysts and investor community for the trust and confidence you've shown to our team. Finally, I'm confident that Scott and the entire RCP team will be very effective guiding Reynolds through the company's next phase of growth. As we turn to our Q&A, we ask that you direct your questions to Lance and me as Scott remains in an advisory role to the company. With that, operator, please open the call for questions.
spk04: Thank you. At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press star two if you would like to remove your question from the queue. We ask that you limit yourself to one question and a follow-up so that others may have the opportunity to ask questions. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Our first question comes from Peter Gorm with UBS. Please proceed with your question.
spk02: Thanks, operator, and good morning, everyone. Hope you're doing well. Michael, you know, wish you the best of luck moving forward, and thank you for all the help over the years. And Scott, congratulations, and looking forward to working with you. So, I wanted to ask about the 4Q revenue guidance, which was a bit weaker than expected, especially on the retail volume front. Last quarter, there's always an expectation for non-retail sales to have an impact in the fourth quarter. I may be mistaken, but I think the expectation was for retail volume to return to growth. Can you maybe just talk about what's changed versus August? And while I wouldn't expect any official commentary on 24 just now, but I do think it would be helpful to understand how you see volume performance evolving, kind of given the weaker exit rate. Thanks.
spk09: I'll start. I'll let Michael add to my comments. The change in the revenue guide is primarily the tableware business and non-retail. In the retail, in the tableware business, we are seeing volumes declines. However, it's worth reminding everyone that we're seeing an 800 basis point increase in the EBITDA margins in that business. Tableware is a more discretionary item than our other categories, and we've taken the most pricing up in that category than we have other categories, up over 30% on a four-year basis versus high teens in our other businesses. And we started and completed those increases later than we did in our other categories. So we've now crossed some key elasticity thresholds, knowing that we may have to address the volume impact. We're going to use the same playbook we used with Reynolds Wrap. Hit the right price points, get the promoted activity right, and drive the overall category growth. Nonetheless, it's going to take some time to see the full benefit of those actions as it did with Reynolds Wrap, and we've gone through that previously.
spk06: So that's the primary change in the revenue guide.
spk07: And Peter, this is Mark. I'll just add to what Lance said to remind you that our non-retail business is a very low margin business. So while it's impacting the top line, it's not having any really very significant effect on our earnings expectations versus where we were a few months ago.
spk02: No, that's really helpful. And then maybe just to follow up, I wanted to ask about hefty waste and storage. You touched on the innovation and share performance, and it was nice to see the volume mix return to growth this quarter. But There's obviously been a lot of disruption in the category with your largest branded competitor. Did this impact your results at all in the quarter? And I just would be curious, how do you kind of see this dynamic evolving as you look out to the fourth quarter?
spk09: First, I want to start by saying I would never wish a cybersecurity incident on any company and particularly on a competitor. It's very disappointing to hear that happening to any business across our country. Hefti was, as you mentioned, was already driving volume and share in waste bags prior to Clorox's cybersecurity incident. There was some benefit in the latter part of Q3, which is continuing into Q4. That, along with a refresh of our category expectations across all of our businesses, was factored into our Q4 guide.
spk06: Thanks so much. I'll pass it on.
spk04: Our next question comes from Mark Astrakhan with SQL. Please proceed with your question.
spk09: Yeah, hey, good morning, everybody. A couple questions for me. One, just starting on M&A, not trying to make too much out of it, but it's kind of notable considering your history. What are you trying to get out of the acquisition? Is it commercialization, technology, R&D, know-how, et cetera? signaling on more willingness for M&A, or was it just opportunistic and partly because of Michael's comments on the deleveraging faster than anticipated? That's question one. Thank you. Hi, Mark. Thanks. Yeah, no, our capital allocation strategy has not changed. We saw a very unique opportunity with this acquisition. This company creates unique and novel raw materials that enhance performance and performance compostability. They manufacture reusable plant-based products and develop technologies and partnerships in a circular economy, which aligns with our FD Renew Recycling Program and our sustainable product development. So we saw this as a unique opportunity to enhance our research and development opportunities in sustainable products. And as I said, but that doesn't change. Our primary focus is on de-levering. Got it. And maybe just a related question to that, and then the second question. So is there any change in your thinking about how to think about that specific avenue, the sustainability of what you're selling, or is it just a part of the course sort of thing? And then the second real question is just how to think about the balance between Gross margin expansion, obviously very good in the quarter, probably continues to be good. Reinvestment, which was increased, and just a flow-through to adjust the DEPA doc. Thank you. I'll answer the first part of the question. I'll ask you to repeat the second one so Michael can answer it. But our focus has always been on, if you look at our ESG scorecard, on having sustainable product solutions across our product portfolio. We have a goal to ensure that consumers have a choice of a sustainable product across all of our categories by 2025, and we're well on our way to achieving that goal. So this is part of developing those sustainable product options for consumers. And could you repeat the second part of your question for Michael? Yeah, it was basically just about thinking about the balance between gross margin expansion, reinvestment, and adjusted EBITDA growth.
spk08: Yeah, so when you think about a gross margin expansion, we are expecting continued improvement into the future. We do expect additional gross margin expansion driven by the full year of cooking and baking improvements, additional mix and revolution cost savings. So that is our expectation going forward. So, you know, you should look to see continuation of And then the second part of that question, we related specifically to what again? Can you?
spk09: Yeah, just what do you do with that incremental gross profit? How do you think about reinvestment? How do you think about flow through to EBITDA?
spk08: Well, you know, our priority continues to be, you know, deliver and pay down debt. You know, anything beyond that would be dealt with on an opportunistic basis. But, you know, and We'll continue to invest in this business, but our priority is to pay down debt and deliver, as we indicated previously.
spk06: Okay. Thanks.
spk04: Our next question comes from Lauren Lieberman with Barclays. Please proceed with your question.
spk03: Great. Thanks. Good morning. One question I had on Tableware, you walk through the plans for, you know, kind of resuscitating the business and using that existing playbook that's worked. But I was wondering if there's an opportunity to reset profitability or business product mix within Tableware as you're doing this. Are there segments of that business that are more profitable than others? Sort of is there like a broader kind of, you know, reset opportunity within that business as well as you're, you know, putting in this resuscitation plan?
spk09: Yeah, without getting into specific details beyond what I said in the prepared remarks, the answer to that question is yes. We have restored profitability across all of the products, which gives us the flexibility to invest in all those actions I talked about, which is features and displays, adjusting counts, and increasing advertising and promotional activity.
spk03: Okay. And then if I shift to the hefty food bag launch, and I apologize, I don't know if you covered this to a great extent in the prepared remarks. I'm sorry if you did because I was on another call. But I was just curious about, you know, just early reads from retailers on shelf space there, if it's incremental, if this is a, you know, replace slider bags with press to close, but just how that kind of fits into the product lineup. and the decision to add this to the portfolio?
spk09: It is to add another brand to the press to close category. At this point in time, there's only one brand in the category, and much like we've successfully been in the food bag category with both brands and store brands, there's three brands in the slider category. So we saw an opportunity through our category management team's insights and development to add a brand to the press-to-close category. We just launched it recently, and it's too early to get a read on the revenue success that we project. We'll have that when we put our 2024 plan together.
spk03: Okay. And then final thing, sorry, was just, you know, at our conference, you had spoken to 2024 volumes kind of slattish as a good starting point for expectations. Now that we know about the pressure in tableware, and I guess continued on the non-retail side of things, just curious how much of that's driving that thought process on flattish volumes. Should we think about Hefty and Reynolds Cooking and Baking as having some growth and then their bacon offset from tableware and non-retail?
spk09: Well, we are in the middle of our planning process for next year, and We'll have more to share in our volume expectations when that's complete. Certainly, we're operating in a very dynamic macroeconomic environment, and I'm pleased with our performance in our largest categories. As you heard my prepared remarks, our retail volume is stable and growing in household foil, waste bags, and food bags, and that's better than many CPGs in their largest categories, driven by many factors, including our innovation, you know, our leverage of our brand and store brand business model and successful category management with our retail partners. As commodities and costs have stabilized, our tableware business has achieved levels of profitability, as I mentioned a moment ago, on key items. It gives us the flexibility to adjust retail prices and price packs together with our retail partners and Those actions will require time to drive improvement, and I'm confident they will, and that will be factored into our 2024 planning.
spk03: Okay, great. Thanks so much.
spk04: As a reminder, if you would like to ask a question, please press star 1 on your telephone keypad. Our next question comes from Jason English with Goldman Sachs. Please proceed with your question.
spk01: Hey, good morning, folks. Thanks for slotting me in. And I have to apologize in advance. Like Lauren, I'm stretched in multiple directions, so I may ask questions that you've already addressed. And if that's the case, well, my apologies. It's great to see the robust margin recovery on Reynolds Cooking and Baking. You, however, still are well below kind of the 20% level EBITDA level that you were hovering at, plus minus, for quite a few years there. Is that a reasonable number to get back to, or just because of the numerator-denominator effect of how much price you put in the system, should we be looking to level off at a lower margin than that? And if so, what is that right margin, and when do you think you'd be able to get there?
spk08: Yeah, Jason, it's a great question. You know, we're still in the midst of working through our plan. I mean, so I think we're going to pause and give you an answer on that in a lot more detail in January.
spk07: And morning, Jason. Mark here. And what I would add to what Michael said is that as you've seen, and really it's been a story all year in 2023, you've seen margin expansion in each of our businesses. And as Lance just mentioned, we're pleased with what we've achieved. As you know, our earnings expectations for the year have come up as we've moved through the year. So we think we're going into the planning cycle in a very good place to be starting that exercise.
spk01: I would absolutely agree from the perspective and outside of looking in. Turning to the waste and storage business, I think it was Mr. Astrakhan earlier who asked the question around Clorox's disruption and the benefit that's occurring to you. You mentioned you saw some benefit late in the third quarter. How long should we expect these benefits to continue? And said differently, I imagine some of that disruption is giving you an opportunity to secure maybe a higher share of promotional and merchandising programming than you otherwise would have had. Is that the case, and how far out have you been able to secure the higher share?
spk09: I think it would be premature for us to comment on that as we're developing our 2024 plan, how sticky these gains have been on a sustained basis. We'll wait to see, and we'll plan accordingly.
spk06: Understood. Thank you. I'll pass it on.
spk04: Our next question comes from Andrea Teixeira with JP Morgan. Please proceed with your question.
spk00: Thank you. And Michael, I would like to congratulate you in the next chapter of your life and thank you for all the patience along the way. And Scott, welcome and looking forward to working with you. My question is on the balance between your branded and private label offerings. And I understand that you have And correct me if I'm wrong, you had alluded to that, I think, in the second quarter that you had a contractual price reduction in trash bags in the Q4 because of just the resin price flowing through. So I wondered, number one, if that's correct, and number two, if you're looking to do any adjustments to the price of hefty trash bags given that given that the price gap will likely widen, and what your experience with tableware has been in terms of price elasticity, or conversely, because you probably got more velocity given your competitors' issues. Is there anything we should be thinking of? And again, thinking of how you've been able to recover your, it was impressive, 800, I think, basis points improvement in gross margin, if you wanted to reinvest a little bit more in promo or that is the level that you feel is appropriate in terms of price points and price gaps. Thank you.
spk09: To your first point about the private label pricing in waste bags, it's been stable and has not changed. We didn't make any changes in private label pricing on waste bags. And resin has stabilized, but we haven't seen, nor do we expect, significant decreases there. So our pricing strategy remains as it has been. We've restored the margins to a level that we were satisfied with. We believe that we can continue to grow from this point forward.
spk00: Thank you for clarifying that. Go ahead.
spk08: I was going to say, I think one of your questions was there about our path to continued gross margin expansion. I did speak on this earlier, but We do expect to see continued gross margin expansion as we get the benefit of the full year benefits from the Reynolds cooking and baking improvements. And in additional, you know, we do see, you know, mix being favorable. And obviously we have revolution cost savings that, you know, we're still working through. But, you know, we've demonstrated in the past that we've managed revolution projects pretty well. And you should expect to see that going forward.
spk06: Thank you both. I'll pass it on.
spk04: There are no further questions at this time. I would now like to turn the floor back over to Lance Mitchell for closing comments.
spk09: Thank you, operator, and thank you everyone for your questions and your interest in our business. I'd also like to just say thank you again to Michael Graham for his contributions to our company. We're going to miss his business partnership. I also want to really extend a sincere thank you to everyone on the RCP team. They're the reason that we're doing and performing so well. And finally, I'd like you to all mark your calendars for Wednesday, March 20th, 2024. We will be in New York City on that day for an investor day.
spk06: I hope to see you all then. Thank you.
spk04: This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
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