Reynolds Consumer Products Inc. (NASDAQ:REYN) Q3 2023 Earnings Call Transcript

Reynolds Consumer Products Inc. (NASDAQ:REYN) Q3 2023 Earnings Call Transcript November 8, 2023

Reynolds Consumer Products Inc. beats earnings expectations. Reported EPS is $0.37, expectations were $0.36.

Operator: 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. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mark Swartzberg, Vice President of Investor Relations. Thank you, sir. You may begin.

Mark Swartzberg: 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 13. For our call, Lance will discuss our results, the macroeconomic environment and our category performance.

Mike will provide additional detail on the third quarter, our guide and capital allocation. Following prepared remarks, we will open the call for questions. Before we begin, I would like to provide a couple of 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 Form 10-Q. 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.

Lance Mitchell: Thank you, Mark, and good morning, everyone. Please join me and welcome being 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 and our guide. 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 & 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 food bag 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 and 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 cost and manufacturing productivity. As a result, our retail sales volume is stably growing in our 3 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 & 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 of 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, Kitchens air fryer liners in the U.S. and Canada, while increasing distribution of Reynolds Kitchen 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 & 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 bag share in the quarter driven by innovation. Our largest innovation over the last 3 years, Hefty Fabuloso was recently recognized by Setana previously known as IRI as the number three pacesetter brand for 2023 and ACV for both Fabuloso scents, Lavender and Lemon continue to increase.

Our Presto business gained additional share of store brand food bags, our third largest category, and Hefty introduced Hefty-branded Presto close food ags during the quarter. Hefty Presto 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 and harder recycled plastics, expanded to the Greater Cincinnati’s market in October. And we broke a major pickup in social media impressions with Hefty Cinema and Pumpkin Spice waste bags available for a limited time this fall and the reintroduction of Hefty in-house disposable plates in August. Zoo Pals online-only launch drone for the 3 billion social media prices for the Hefty brand, and we plan to extend the relaunch to other major channels in 2024.

Turning now to our disposable tableware segment. The Hefty Tableware team has done an exceptional job recovery profitability, and the Hefty 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 at 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 nonfood 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 will 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 and 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 recover 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 sustained 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 become CFO and until Michael’s retirement early next year.

I’d also like to stress 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, introduction and expansion of our Reyvolution program of business transformation initiatives, the successful listening as a publicly traded company and steady financial management through a period of unprecedented macroeconomic volatility. Michael, we’re a trusted friend. And I know that I speak for all of us at RCP, would I tell you that he will be missed as our business partner. Over to you.

Michael Graham: 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 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 by comparison to the third quarter of 2022 and improved leverage. Net debt to tolling 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 delever 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, which is unchanged at 4% lower volume. Consolidated retail volume for the year is estimated to be 2% below consolidated retail volume in the 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 improvement, and we are executing a movie identified revenue and cost savings. Other considerations regarding our annual guide consists of the following: commodity rates remain broadly consistent with our expectations when reporting second quarter results. Reyvolution 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 in reporting second quarter results and expect net debt of $1.8 billion at year-end compared to a range of $1.8 billion to $1.9 billion previously shared. This equates to an estimated 2.9 times net debt to trailing 12 months adjusted EBITDA ratio representing an improvement in end of Q3 and year-end. And our capital allocation priorities are unchanged: invest with discipline in automation, continued margin expansion and growth returning cash to our shareholders by maintaining our current dividend and further deleveraging to a target of 2 times to 2.5 times adjusted 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 3 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 deleverage 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 and 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 have shown to our team.

Finally, I’m confident that Scott and the entire RCP team will be very effective guiding rentals to 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.

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Q&A Session

Operator: [Operator Instructions] Our first question comes from Peter Grom with UBS. Please proceed with your question.

Peter Grom: Michael, I 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. I think last quarter, there’s always an expectation for non-retail sales to have an impact in the fourth quarter. But 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?

Lance Mitchell: I’ll start, and 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 decline. 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 4-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.

And we’re going to use the same playbook we’ve used with Reynolds Wrap at 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. So that’s the primary change in the revenue guidance on tableware.

Mark Swartzberg: 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.

Peter Grom: No, that’s really helpful. And then maybe just a follow-up. I wanted to ask about Hefty Waste & Storage. You touched on the innovation and share performance, and it was nice to see — so 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 really be curious how do you kind of see this dynamic evolving as you look out to the fourth quarter?

Lance Mitchell: Well, 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. Hefty, 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 in that, along with a refresh of our category expectations across all of our businesses was factored into our Q4 guide.

Operator: Our next question comes from Mark Astrachan with Stifel. Please proceed with your question.

Mark Astrachan: A couple of 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, any 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.