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spk03: Greetings, and welcome to the Reynolds Consumer Products, Inc. second quarter 2024 earnings 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 star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mark Schwartzberg, Vice President of Investor Relations. Thank you, sir. You may begin.
spk10: Thank you, Operator. Good morning, and thank you for joining us for Reynolds Consumer Products' second quarter earnings conference call. Please note that this call is being webcast on the investor relations section of our corporate website at ReynoldsConsumerProducts.com. Our earnings press release and presentation slides are also available. With me on the call today are Lance Mitchell, our President and Chief Executive Officer, and Scott Huckins, our Chief Financial Officer. Following prepared remarks, we will open the call for a question and answer session. Before we begin, I would like to remind you that this morning's discussion will contain forward-looking statements which 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 the risk factors section in our SEC filings. The company does not intend to update or alter these forward-looking statements to reflect events or circumstances arising after the call. During today's call, we will refer to certain non-GAAP or adjusted financial measures. Reconciliations of these GAAPs and non-GAAP financial measures are available on our earnings press release, investor presentation deck, and form 10-Q, which can be found on the investor relations section of our site. Now I'd like to turn the call over to Lance.
spk11: Thank you, Mark, and good morning, everyone. Our business is performing well. We had our best second quarter earnings in our history as a public company with the exception of the pandemic-fueled second quarter of 2020. We exceeded our second quarter revenue guide, increasing retail revenue 1% as we outperformed our categories and the categories moderately outperformed our expectations. We continue to drive product innovation and household essentials, providing consumers with new product benefits and expanding range of affordable, sustainable solutions. We continue to recruit Gen Z and millennial consumers who now represent the majority of the U.S. workforce. We identified and unlocked additional revolution cost savings in our ongoing commitment to reduce operational costs. And we delivered earnings exceeding our second quarter and first half objectives, further demonstrating the advantage of our business model and the effectiveness of our people in a dynamic consumer environment. Before I review each business's performance, I'd like to first comment on our retail trends overall, our product innovation pipeline, and our plans for driving revolution cost savings. We drove sequentially improving retail trends in the second quarter and did so in an environment characterized by declines in personal savings, record levels of household debt, and decreases in year-to-date SNAP funding. Our products are affordable and convenient. making eating at home even more attractive when away-from-home consumption is pressured. And we're doing a very good job leveraging our business model and category leadership together with our retail partners. We're also accelerating innovation across RCP, increasing speed to market, expanding the range of brand and store brand products to be introduced over the next three years, and adding to our growing portfolio of sustainable offerings, putting us well on track to achieve our commitment for providing sustainable solutions in all of our categories by 2025. This doesn't happen overnight, and it reflects our success in R&D, upgrading innovation processes, further prioritization of new products, commercial potential, and our ongoing work with our retail partners to deliver on opportunities that consumers value. Considering our trends, our competitive advantages and the programs that we are implementing to continue leading our categories, we expect further moderate improvement in our retail volumes on a like-for-like basis in the second half after adjusting for shipment timing and product portfolio optimization. And in terms of operational excellence, we've identified significant revolution savings beyond 2024 in each of our businesses in the areas of procurement, manufacturing, and supply chain. These savings continue to represent a major source of earnings growth and funds for reinvestment in our categories and leadership positions. I'll now review our performance and outlook by business. The Reynolds cookie and baking business delivered another strong quarter, and we're building on the business's commercial, operational, and financial success. Reynolds graph gained additional share in the household oil category. Reynolds Kitchen's parchment continued to grow, reflecting the strength of the brand, successful innovation, and consumers' increasing usage of parchment for cooking and baking. We drove additional recruitment of younger cooks with our Chef's Kiss multiple product advertising campaign, and we maintained a high level of operational stability and advanced new plans to increase production efficiencies. It is also worth noting that Reynolds is the only vertically integrated aluminum foil manufacturer in the U.S., a significant competitive advantage, providing us with a high level of control over quality, continuity of supply, and cost. Our hefty Impresto waste and storage bag businesses continue to perform well in the second quarter, and the outlook for these businesses is strong. We delivered sequential improvement in our waste and food bag sales volumes, Product innovation remained a major driver of growth, reflecting a number of new products, including the successful expansion of Heptree Ultra Strong with Coastal Plastics, additional Hepti-Fabuloso scents, and the launch of Hepti-Compostable press-to-close food bags. And for our store-brand food bags, BioBay sandwich bags made with 20% plant and ocean materials and half-gallon storage and freezer bags continued the sequential improvement in Presto's volume. Presto is on track to launch a record number of new products this year. Turning now to our disposable tableware segment, the initiatives we put into place earlier this year are proving effective. Volume trends continue to improve with a decrease of 1% in the second quarter compared to declines of 6% in the first quarter and 8% in the second half of last year. The improvement was broad-based, reflecting improvement in plates and party cups, and was driven by a number of factors, including target trade promotions, lower pack counts at competitive price points, increases in cross-portfolio promotion, and the disposable tableware category continues to be under pressure, but trends are sequentially improving, and we have a high degree of confidence in the initiatives we're implementing to drive sales across our portfolios. Before turning the call over to Scott, I'd like to reiterate that our business operates with a competitive advantage by providing both brands and store brands, and we have a high level of confidence in the plans and actions we're taking to continue driving our categories, increasing earnings, and investing in the long-term growth. Scott, over to you.
spk09: Thank you, Lance. Good morning, everyone. As you saw in our press release, we delivered a strong first half of 2024. with our second quarter above expectations and very consistent with the priorities that we outlined at the beginning of the year. Second quarter retail revenues increased 1% to $892 million and exceeded our expectations. As Lance noted, we outperformed our categories, and the categories moderately outperformed our expectations. Consolidated revenues declined 1%, reflecting the retail revenue increase in a two-point decrease in our low-margin non-retail revenues. Our Q2 adjusted EBITDA increased by $22 million to $172 million, driven by manufacturing volume output and lower operational costs, partially offset by higher incentive compensation costs and a modest increase in advertising. And our earnings per share was 46 cents up 14 cents from the second quarter of 2023, reflecting EBITDA growth, lower interest expense from paying down debt, and lower income tax expense, as we discussed on last quarter's call. On a year-to-date basis, retail revenues were $1,687,000,000, while low-margin non-retail revenues declined to $77,000,000. Adjusted EBITDA of $294 million increased $62 million, driven by volume output and lower operational costs. Earnings per share was 69 cents, up significantly from 40 cents last year. And we generated $183 million of operating cash flow, contributing to a reduction of net debt to 2.4 times trailing 12 months adjusted EBITDA in Q2 and an additional $50 million voluntary principal payment made subsequent to quarter end. Now turning to our guide. To reflect our strong second quarter performance, we are raising our full year 2024 revenue outlook to a range of $3,590,000,000 to $3,670,000,000. compared to revenues of $3,756,000,000 in 2023. As a part of this guide, we continue to expect pricing to reduce revenue by approximately 1%. We expect retail volume to perform at or better than our categories at a rate of minus one point to plus one point. And we expect a two and one half point headwind from our low-margin non-retail business and optimization of our retail product portfolio. We are raising our full-year adjusted EBITDA forecast to a range of $670 to $685 million, compared to $636 million in 2023. The new outlook for the full year reflects flow-through of our second quarter performance while maintaining our outlook for the second half. which, as Lance said, includes modest sequential improvement in our retail volume after adjusting for shipment timing in the second and third quarters. And we are increasing our full year 2024 earnings per share forecast to a range of $1.65 to $1.71 per share. Other key assumptions incorporated into our full year 2024 forecast are as follows. We expect continued stability in commodity markets and our costs to modestly increase through the balance of the year. SG&A remains materially unchanged compared to SG&A in 2023. Depreciation and amortization of approximately 125 million. Interest expense of approximately 100 million. Effective tax rate in the third and fourth quarters of approximately 24% resulted in a tax rate of just over 22% for the year. Turning to the third quarter, we are introducing our Q3 revenue guide in the range of $885 million to $915 million versus $935 million in the third quarter of 2023. The building blocks include a one-point reduction due to pricing, a two and one-half point reduction to a one-half point increase from retail volume, including the reversal of approximately $15 million benefit from retailer orders shifting from the third quarter into the second quarter, and a two-point reduction from lower margin non-retail volume and further optimization of the retail product portfolio. We forecast third quarter adjusted EBITDA in a range of 165 to 175 million, representing a modest increase over third quarter 2023 adjusted EBITDA, net income to be in the range of 82 million to 90 million, and earnings per share in a range of 39 cents to 43 cents versus 37 cents in the year-ago period. Of course, this guide implies what our expectations are for the fourth quarter. It is worth reminding that we expect a return to historical phasing of quarterly earnings in 2024, in contrast to last year when Reynolds Cooking and Baking's fourth quarter benefited from particularly strong and expected levels of production resulting from recovery initiatives. In the fourth quarter, we also anticipate an approximately $10 million increase in combined costs from the flow-through of aluminum purchased during the second quarter when spot market prices were higher than they are today, and premiums paid for cooking bag as we transition to the insourcing of this product offering. In terms of capital allocation, our priorities are unchanged. We continue to estimate free cash flow of over $300 million for the full year and expect net debt leverage to remain within our target of two to two and a half times adjusted EBITDA. Before wrapping up and speaking to long-term earnings drivers, I want to briefly discuss scanner data. As you know, Sercana recently expanded its MULO database to capture more of the total retail market for consumer goods. As such, Moolo Plus captures substantially more of the total retail market for our products than Nielsen. In the second quarter, our overall categories were approximately 130 basis points stronger in Moolo Plus than in Nielsen track channels and as much as three points higher in certain categories. It is also important to remember that a large portion of our business is store brands labeled as such in Cercanus Moolo Plus and Nielsen tract channels, so that remains a limitation to visibility in syndicated scanner data. In closing, our second quarter results were above expectations and contributed to our strong first half of 2024 and increased guide for full year 2024. Stability and strong execution remain major drivers of our performance, and I am very pleased with our operational performance and disciplined cost management. And in terms of the long term, we plan to continue leading our categories by leveraging our business model and investing in our product portfolio. We are accelerating product innovation across RCP, representing significant added share and growth potential beyond 2024. We are leaning into revolution cost savings and expect them to remain a major driver of margin in approximately one-third of our profit growth over the long term. And we are driving cash flow and plan to continue increasing financial flexibility to invest in strategic opportunities. With that, let's turn to your questions. Operator?
spk03: Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. We ask that analysts limit yourself to one question and a follow-up so that others may have an opportunity to ask questions. You may re-queue if you have additional 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 Robert Attenstein with Evercore. Please proceed with your question.
spk07: Great. Thank you very much. And nice quarter, guys. So, Scott, you mentioned that you're looking for a moderate improvement in retail volume in the second half on a like-for-like basis. Can you just kind of take us through the various building blocks behind that? Thank you.
spk09: Good morning, Robert. Thanks for the question. So, when we look at it, we start with the as-reported retail volumes, and we make two adjustments. First, we remove the effect of any product portfolio optimization. And second, particularly for Q2, Q3, the effect of any retail order timing differences. That remainder, if you like, call it kind of core or base retail volume. We improve sequentially from Q1 to Q2, call it 150 basis points. The guide contemplates a sequential improvement year over year from Q2 to Q3, call it 50 basis points. And in turn, another sequential improvement, Q3 to Q4, again, roughly 50 basis points. And the intent of that original comment in the prepared remarks was to make clear exactly that point. It's important to look at that bottom line core retail volume.
spk07: And then you mentioned that the categories moderately outperform your expectations. Do you think that's a direct result of a somewhat weaker consumer who's just not going out as much? and is therefore likely to continue going forward through this difficult period?
spk11: Robert, I'll take that one. This is Lance. That is part of the equation, yes. We have seen with the pressure on out-of-home dining and the costs, we've seen people going back and eating more at home. But also recall that these categories are household essentials. And they're convenient, low-cost, that people need every day.
spk02: Great. Thank you. Our next question comes from Mark Asterton with Steeple.
spk03: Please proceed with your question.
spk08: Yeah, thanks, and good morning, everybody. I guess, firstly, just given what's going on in the broader economy and a lot of commentary that's not necessarily positive out of a lot of consumer-facing companies. Could you just give an update on how things are going in 3Q or in July so far?
spk11: Thanks, Mark. This is Lance. We previously not commented on interim quarter performance, but as you said, given the concerns about the broader economy and the impact on companies' performance, I think it's important we make that exception for this quarter. Our July performance was right in line with our expectations. And consumer takeaway in our categories was also in line with our expectations throughout July. And recall, we have, as we talked about, some sequential modest improvement in the core retail sales volume factored into our guide.
spk08: Got it. That's helpful. And then the comments that you had made about the new scanner data channels, I think we've seen similar things. for your business and for others as well in terms of the outperformance for some of those new track channels, club online, et cetera. I guess I'm curious for your business, what do you think is driving it? How sustainable is it? Just remind us if there's any margin differential on those channels versus legacy. And just lastly, and related to that, is there any differential in your exposure from brands versus private label for those customers?
spk09: I'll start, Linz. Linz may add on. I think the structural observation is that Moolah Plus is obviously picking up more of the actual shopping behavior in the marketplace. As I think I shared in prepared remarks, we saw outperformance of about 130 basis points versus quote-unquote Nielsen track channel. An example would be in our foil business, it was about three points better in Moolah Plus than what Nielsen would have revealed. So it's hard to explain why those indexes are different other than just pointing out the obvious that it's a broader cross-section of consumer behavior. I think your second question got into margins, and we wouldn't call out any significant difference or material difference in margin profile of the difference between those two track channel observations. So hopefully that's responsive.
spk02: Got it. Okay. Thank you. Our next question comes from Nick Modi with RBC Capital Markets.
spk03: Please proceed with your question.
spk01: Thank you. Good morning, everyone. Lance, I think you guys have been a lot more realistic about the economic situation than I think most companies across the consumer goods landscape. So I'm just curious on your take, kind of what you guys are seeing. I mean, do you think we've hit the bottom? Because depending on where we are in the ecosystem, you know, it seems like things are getting worse. I think, you know, echoing some of the comments made prior and some of the questions. So we'd love to get your perspective on that. And then, you know, just kind of dovetailing with that, you know, promotions, I guess, you know, have been ramping pretty broadly, but you guys were able to, you know, still put up flat pricing overall and, you know, even up in some cases. So just wanted to get some of your perspective around kind of what you're seeing in that, in the pricing promotion environment. Thanks.
spk11: Nick, we believe, and we said this at the beginning of the year, that consumers are under pressure, and I said this in my prepared remarks, there are declines in personal savings, records of, you know, record levels of household debt, and SNAP funding is down significantly. But our categories are household essentials that are affordable and convenient, and we're getting the benefit from people eating away from homeless frequently. So we expect to continue outperforming our categories and we've maintained our category expectations the second half. So we haven't changed our outlook for the second half from a category standpoint. And we believe that it's modestly going to improve, but not those significant change. As far as promotional levels, you know, given the retail environment, it's, it's returned to pre pandemic levels and. We've invested accordingly. About 20% of our product sales are on promotion, which is consistent with what we had in our plan and our guide. And I will tell you that in Q3 and Q4, 90 plus percent of the promotions are already locked. So it's something that we can forecast with accuracy.
spk01: Great. And if I could just ask one more follow-up on, you know, bag, waste bags, you know, in terms of what the shelf space dynamic is. I mean, obviously Clorox has been coming out of the cyber attack trying to get back space. Just curious on kind of are you holding on to more space than you had anticipated? Any perspective around that would be helpful.
spk11: Well, let me start by saying that Clorox I'll go into a little more broad detail in the actual question. In the second quarter, year-to-date, both hefty and private label gained share. And as you know, we're also a major player in private label waste bags. To answer your point specifically, our total points of distribution are up year-to-date double digits. And looking forward, our price points are in a good place, and we're happy with the price gaps. Our promotional calendar, as I said a moment ago, is strong and it's locked. And we're really excited about a new ad campaign we have with John Cena. So we've been successfully growing our brand and store brands in this category for the last eight years. And we see that continuing going forward.
spk02: Excellent. Thank you. I'll pass it on.
spk03: Our next question comes from Peter Grom with UBS. Please proceed with your question.
spk05: Thanks, operator. Good morning, everyone. Hope you're doing well. Scott, I was hoping to get some perspective. on kind of the gross margin progression from here. I know the full year outlook still calls for commodity costs that are stable, but I think you mentioned in your prepared remarks that you expect costs to modestly increase through the balance of the year. You also called out this $10 million headwind in 4Q. So we'll just be curious how we should be thinking about the gross margin progression in the balance of the year, just given the strong first half. And then maybe, you know, building on that, you know, just bigger picture, can you maybe just unpack in terms of what you're seeing across your key inputs and how we should be thinking about maybe inflation at this stage, looking out the 25. Thanks.
spk09: Evan, thanks for the question. Good morning. So I think the most important part of the gross margin story is when we introduced the full year guide, I think the takeaway was around a 200 basis point improvement in gross margin. And that's exactly what we continue to see and what is factored into the guide for a full year. As we break down margin performance between Q3 and Q4, we have a little bit of expansion in Q3, a little bit of contraction in Q4. You hit it, and I took that in my prepared remarks for that reason, to highlight about $10 million of costs being absorbed in the fourth quarter. That's my attempt to kind of give you the rack and stack of gross margin. In terms of the underlying commodities, the core two would be, of course, resin and aluminum. They have different characteristics. Aluminum has been extremely volatile. I'll use quoted LME fundamental exchange prices. Start of the year at $1. Q2 spikes significantly up to as high as about $1.20. As of yesterday, it was back the flag for the $10 million to flow through or include in the $10 million to flow through for Q4. Resin, on the other hand, has drifted up consistently throughout the year, January and April and even this month. Both, though, importantly, have been factored into our guide, so we're aware of those changes in each of those underlying commodities and are expressly factored into the outlook.
spk02: Great. Super helpful. I'll pass it on.
spk03: Our next question comes from Lauren Lieberman with Barclays. Please proceed with your question.
spk12: Great. Thanks. Good morning, guys. Just wanted to catch up a bit on hefty tableware. So wanted to just kind of get a status report on some of the turnaround efforts there. And then in particular, margins did take a step down this quarter. So I just, you know, is it comparisons or is it reflective of kind of increased investment in that segment to get the business going again? Thanks.
spk11: Thanks, Lauren. Yes, we're very pleased with the performance from a sales recovery standpoint in our tableware segment. Our tableware promotions were even more effective than we'd anticipated in driving volume, but it also did affect, to a limited extent, as expected, our margins. The tableware in Reynolds Cooking and Baking are two seasonal businesses with significant holiday product promotions. So different promotional programs and timing by comparison the prior year also contributed a timing benefit in the quarter. As a reminder also, we have a really strong private label business in the tableware category and private label took share in these categories in Q2.
spk02: Our next question comes from
spk03: Andrea Tixeria with JP Morgan. Please proceed with your question.
spk00: Thank you, Alfreda, and good morning, everyone. So I was hoping to, if you can comment a bit, as you discuss the pricing from a kind of category perspective and promo, but I was hoping, given your height balance with both branded and non-branded and store brands, if you can comment on the trade-downs and how you're seeing consumers and how You're employing RGM. You mentioned some of the promotions kind of yielded better than anticipated just now on the hefty tableware. So I was wondering if you're seeing a stabilization of that potential down trade or how within your portfolio you're seeing the dynamics between brands and on-brand.
spk11: Thank you, Andrea. Private label, sales volume is back to 2019 levels we saw an increase in brands through the pandemic and now that we've seen that resource there's been a modest increase in private label in some of our categories and we're benefiting from those increases as well as driving some brand share at the same time the gaps between brands and private label really depend on the category and it provide the strong foundation for how we're implementing our promotional programs and driving our volume above category forecasts. So we're managing that margin very effectively. We've demonstrated that by the stronger than expected profitability in Q1 and Q2. I encourage you to look at our PRESTO margins and year-to-date in Q2 as well. And it really reflects our success in providing retail partners the category insights and products they need, along with consumers' need for the right combination of performance, reliability, and value. And as I mentioned in my prepared remarks, Presto is on track to launch a record number of new products, which also contributes to margin performance in the store brand categories.
spk00: That's helpful, Lance. But one of the things that I remember since the IPO, right, there was the price point, especially for aluminum, which you don't have private label, right? So you just have your brand, right? So I was hoping to see how do you, it seems like you commented before the price gaps in healthy, how we should be thinking as you explore potentially packs, anything into the holidays, especially for the baking side of the business, like anything you can share, as you said, you have a lot of innovation coming up for Presto, but I was hoping to see if the cooking and baking, which is a high profitability business for you, if we're seeing kind of that business. And again, I give a lot of praise for what you have done since last year, kind of stabilizing that, stabilizing the price points, but just hoping to see if you're seeing specifically cooking and baking, um, things kind of like settle in price points. And as you look at that, look into the balance of the year. Thank you.
spk11: On cooking and baking, the Reynolds Wrap brand specifically has gained share points throughout this year. So we're very satisfied that we've got the right price gaps and we've got the right promotional programs and advertising to go. And we're focused on millennials and Gen Zs that are advertising on use occasions. So the fact that we're gaining share and the fact that we've got the right price gaps, we are well positioned as we go into the holiday season for cooking and baking. Partial paper is growing at double digits. We've got a very strong brand share in that category, and we're pleased with the performance there. So it's really about focusing on continued use occasions to grow the entire category.
spk02: Super helpful. Thank you.
spk03: As a reminder, if you would like to ask a question, please press star one on your telephone keypad. Our next question comes from Bill Chappelle with True Securities. Please proceed with your question.
spk06: Thanks. Good morning. A couple bigger picture questions. You know, when you look at the, what we've heard from food service weakness from McDonald's or Lamb Weston or others over the past couple months, Do you think your business is kind of benefiting from the consumer shift to home? Is that directly reflected in that, or am I making too much of that?
spk11: We think there's a modest improvement as a result of that. It was a factor given the nature of our products. They're affordable and convenient, as I said a moment ago, as well as our effectiveness in leading the category. But to your point, quick service restaurant volumes are down 2% in the second quarter. And that's a continued trend from low single-digit declines from the previous lapping of other quarters. And we believe one of the factors contributing to this is the higher rate of inflation in food away from home. So for the last 52 weeks, the CPI for food away from home is up 4% versus 1% for food at home. So it is a contributing factor. We don't think it's a significant factor, but it's one of many factors of why we've are outpacing our categories and whether categories performing better than we'd expected.
spk06: That's helpful. Thanks. And then second, just going back to the promotional issue, is it, and maybe I'm just talking out loud, but is it more of the fact that you're in three or four categories in which they're duopolies? And so the promotional level is really depends on what your competitor or competitors do. less about the overall kind of TPG promotional level. Is that fair? And that's kind of why you're not seeing, or we're not hearing what, what a lot of your competitor or peers are saying.
spk11: Our promotional programs are primarily focused on working with our retail partners to ensure the total category grows. So when we put our promotional programs together, it's a category management plus a retail discussion and really in partnership with our retail partners to determine what the promotional programs will be for the quarters ahead. And as I mentioned a moment ago, it's usually six months in advance. So we're already locked in most of the promotions for Q3 and Q4.
spk02: Got it. Thanks so much. There are no further questions at this time.
spk03: I would now like to turn the floor back over to Lance Mitchell for closing comments.
spk11: Well, thank you, operator, and thank you, everyone, for the gift of your time today. I want to take a moment to thank and congratulate the 6,000 Reynolds Consumer Product team members that are contributing to the success of our business every day. They're the ones who are making a reporting a successful quarter possible and continued growth in our company. My sincere gratitude to my teammates. And I ask you and them to continue to be safe. Thank you.
spk03: This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
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