Q1 2020 Earnings Call
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Ladies and gentlemen, thank you for standing by and welcome to the Reynolds consumer products first quarter to that 2020 earnings conference call.
At this time, all participants or any listen only mode.
After the speaker presentation there'll be a question and answer session to ask a question. During this session you Juanita Prestart one on your telephone.
Please be advised that today's call is being recorded.
Require any further assistance please press stars zero I.
I would now like to having a conference over to your speaker today Mark Schwartzberg. Thank you and please go ahead.
Thank you and good morning. Thank you for joining up on Reynolds consumer products first quarter 2020 earnings conference call on the call today, or Lance Mitchell, President and Chief Executive Officer, and Michael Graham Chief Financial Officer.
And Lo Senior Finance director and Chris Mayor Halter, Vice President corporate controller in principle accounting office. There will also be available for Q. and I.
During the course of this call management, they make forward looking statements within the meeting of the federal security flaws deep statements are based on management current expectations that involve risks and uncertainties that could differ materially from actual events and those described to me forward looking statements. Please refer to Reynolds consumer product annual report on for 10 K. Another report.
Out from time to time with the Securities and Exchange Commission and it's press release issue. This morning for detail discussion of the risks that could cause actual results a different materially from those expressed or implied in any forward looking statements made today.
Nope management's remark today will focus on non gap or adjusted financial measures reconciliation up capris, all non got financial measures. It's available in your earnings release. The company has also prepared a few presentation slides and additional supplemental financial information, which are posted on Reynolds website under the Investor relations heading.
Call is being web cat in an art art type of it will also be available on the website.
I also like to note that we are conducting our call today from our respective remote locations.
Such there maybe brief delays cross talk or other minor technical issues. During this call. We thank you in advance for your patience and understanding why we would like to answer all of your questions. During the question and answer session. In the interest of time, we ask that you ask one question and rejoined the Q. If you have a follow up and now I'd like to turn the call over.
The last Mitchell.
Thank you Mark.
We're pleased and excited to have you joined the rental team.
Good morning, everyone.
Today I like to start bike, but it's getting my deepest gratitude to all of our employees who've worked incredibly hard to keep Reynolds consumer products running.
The code with 19 pandemic.
More than ever I am proud to work alongside the people make up this organization.
Our number one priority has always been to keep our employees say.
And this has been and continues to be the foundation of all the decisions we make.
The highest measures of safety are worse as we work just serve the many families relying upon our products in these challenging and unprecedented times.
My deepest condolences and thoughts go out to those were affected by the grown a virus and their loved ones.
I'd also like to extend my sincere gratitude to medical staff and frontline workers.
Putting those in a central businesses like ours.
Who are working tirelessly.
Save lives and support the economy.
Reynolds plays an important role for family and now we're than ever.
Living their lives at home.
Prioritized when the safety of our employees and simultaneously, making our products accessible for families. In the current environment has been a company wide challenge.
I commend our entire team for working hard to make both of these goals attainable.
I would now like to take a moment to discuss what we have done from an operational standpoint in response to the virus.
We've implemented rigorous deep cleaning processes in all of our facilities.
Processes have been changed to enable physical distancing.
Our safety and operations teams have analyzed reduced potential touch points, where possible, including door handles kind clocks and more.
We're providing protective gear to all of our employees.
And we've implemented frequent handwashing in sanitizing protocols as well as making temperature checks.
In the event that employees have experienced cobin 19 symptoms, we're providing the night 14 days are paid sick leave.
Including for those who are self isolated as a result of being in close contact with a cold in 19 patient.
Hourly F.B.T. policies had been amended to accommodate healthcare.
Child care and other family indeed.
And we are covering all cobin 19 testing fees as well as waving co pays for Tele medicine healthcare visits.
All of our employees are able to do so have shifted to working remotely and we continue to support for them during the transition.
Our employee assistance program has a wide variety of resources to help our employees and their families navigate the change the gate the changes that they're experiencing as a result of Cobra night.
Including new work environment.
Uncertainty.
It was stress and anxiety.
Breathing financial concerns and more.
Used to the program is entirely confidential, but some of our employees who attended the real time Webinars day that they have found a program to be helpful. During this difficult time.
Are cross functional taskforce continues to proactively respond to the changing environment on a daily basis and assess risk levels.
Leads communications and recommend policy changes.
As local state and federal recommendations continual ball, we're implementing any new safety measure that it's not already in place.
We are fortunate that the products produced at our facilities are considered essential in supporting people eating in their homes and keeping their homes sanitary and then our 5000 employees are able to keep their jobs and paychecks.
It is important.
That we are doing that we what we can give back to our local communities, who support us we've donated trash bags. The government task forces and hospitals safely dispose of P.P.E.M.T. communities.
We had a limited number of bands 95 respirator mass located in our <unk> Reynolds wrap plans the type that are in short supply for health care providers.
We elected to donate them to first responders in the community.
The mass are being used by paramedic suit transport suspected coded 19 patients.
Help covert 19 relief, we're working with other companies to investigate ways to use our manufacturing assets.
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There are several projects that look to supplement disposable proponents used with P.P.E. respirators feel out contaminant.
These are temporary stopgap measures to help.
Where we can.
While while there are shortages and we're glad to be able to donate material and expertise that could make a difference.
These collaboration not only help provide you to components for P.B.E.. They also provide real time learning and rapid prototyping and innovation.
What are the things I'm, especially proud this year is it three weeks ago, we fully transition to an independent S.A.P. system known internally as project Sapphire.
And E.R.P. system migration is challenging under any circumstance.
In addition to consisting of multiple technical solutions.
Considerable testing on training must occur across all functional areas to reduce operational risk.
When covert 19 emerged we looked at all options, including delaying the project.
We determined that the project was right and that any delay recreate more risk not less.
In order to put safety purse.
A team quickly retool the original plan.
To be deliberately entirely remotely.
Delivering it you are a few system remotely to the first of all of us.
It's also a credit too careful planning that we were able to successfully implemented this project remotely.
Are strong customer relationships.
I've also been in central to manage isn't that complexity arising from the implementation of that system.
Hand in hand, with substantial pick up from consumer demand.
I'd also like to share what we have been seeing in terms of consumer behavior.
Are categories experience, an increase in both purchase and usage in March and April.
I've been mainly by covert children place requirements as well as the Easter and Passover holidays.
The purchased behavior with C. with increases in dollar sales across all channels and elevated in home usage is practically our custom Harris poll.
The poor highlights that well over half of consumers are cleaning cooking baking doing yard work and organizing more often.
Then compared to three months ago.
And then about two thirds predict they will maintain the higher level of engagement.
80 per cent of consumers indicate there a cookie more meals and the majority say the are generating more trash and using disposable paid where the ease the burden of cleaning dishes.
People are increasing their use of our products because they are at home or.
Unusual and engaging in activities, where a product categories play a role.
You Commerce as also focus.
Our products are shell stable, and most or cost effective to shipped directly to consumers.
Makes us well positioned for growth in online demand.
Approximately 30 per cent of shoppers in our categories. They they are buying online for the first time.
In the past three month with a majority of this group, saying they'll continue to buy a lot.
That translates into a sizable pick up on our online sales growth.
Details of which we hope to share after thoroughly evaluating trends and non track channels.
In any case.
As we told you in March or logistics infrastructure is designed to accommodate increases and E. commerce related sales.
Since the start of the surgeon consumer demand, we experienced in March I've seen employs across various departments in regions at Reynolds come together to address the challenge of beating the sharpest demand increase we've seen in our history.
Because of their hard work and ability to adapt quickly our shipments for the quarter were strong.
Although we currently do not have the capacity to maintain the same level supply going forward.
Were adamant and finding profitable ways to increase capacity.
So I mentioned before our competitive advantages are brought portfolio branded and store branded products.
In comparison to our competitors only focus on one or two products in the category. We are a one stop shop or waste food storage cooking and tape where products.
Because we make it easier for retailers and align with their strategies, we enjoy long-term partnerships with retail senior leadership for joint business planning.
We have deep consumer insights across the aisle and the ability to offer the retailer support if they choose to expand their categories.
No one else in the household products I'll approaches the retailer the way that we do.
While we're making adjustments to individual tactics over the course of time, our core strategy and values for me.
We continue to make progress on each of our five focus strategies for 2021, putting safety first because families are the priority.
To.
Transforming our business and creating it stand alone company.
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Creating products that people love.
For achieving world class service and champion are categories, and five creating a culture in which we listen learn a ball and excel.
As a consumer staples business, we believe that we are well positioned to the categories in which we participate.
Board, we continue to serve as category advisors to our customers.
Grow renew an innovative products and drive shareholder returns Ribalance capital allocation.
Because of our resilience to economic cycles wrong brand awareness and loyalties from families across the United States.
Suitability for E. Commerce.
Reynolds consumer products as well position for continued attractive growth in 2020 it'd be on.
I turned over to Michael discuss our results for the quarter and our outlook.
Thanks laughs and good morning, everyone I like an echo lance's comments in thinking or toys with just done a tremendous job navigating our company to to implications of this pandemic.
It is this level of commitment that elevates the pride it I have and being on the rentals consumable products team.
With this sad I won't now spent a few minutes, revealing or financial results for the quarter.
Total net revenues and first quarter of 2024 730 million compared to 665 million into prior year.
We performed ahead of our expectations in January and February followed by a significant benefit from Cobin 19 related demand in March differently volume was lower in the first quarter of 2019 due to the unusually high demand at four order of 2080.
This increase is partially offset by the accident certain low margin.
Storebrand it business prior year as well as lower pricing.
Net income for the first quarter of 2020 was 26 men compared to 17 million in the first quarter of last year No. Justin net income was 63 million for the first quarter of 2020 to increasing net income was primarily driven to do too strong volume previously mentioned in lower interest expense, reflecting the.
Reflecting the capital structure that went into effect with R.I.P.O.
These were partially offset by one time tax expense associated with the legislation change from the cares X.M.I.P.O. transaction related costs, both of which have been excluded from the computation of our adjusted net income in the first quarter of 2020.
Adjust the E.P.S. for a quarter was 30 cents per share.
Adjusted EBITDA was 135 million in the first quarter of 2020 compared to 110 million into per year.
Crease was primarily due to increased volume and lower material and manufacturing costs.
Now now I will discuss the results of our segments.
For rentals cooking and baking net revenue to first quarter was 243 million compared to 230 million in the same period of last year. This increase was primarily driven by increased consumer demand associated with the cobot 19 pandemic. In addition, lower volume in the first quarter of choose dies and 19.
Was due to an unusually high demand in a fourth quarter of 2018.
Lower pricing as a result of lower material costs increased trade promotions, partially offset the volume increases.
Adjusted even a quarter was 40 million compared to prior Europe 18 million as the impact of higher volume along with lower material manufacturing costs.
This was partially offset by the impact of lower price.
For hefty wasting storage net revenues in the first quarter were 192 million compared to 165 million in the prior year.
The increase is primarily driven by covert 19 relating demand as well as growth.
What's the existing customers driven by increased marketing investments, an unusually soft and the unusually soft quarter for 2019.
Adjust the even in the quarter was 55 million compared to 39 million and a prior year, primarily driven by the higher sales as well as lower material manufacturing cost now moving on to hefty table.
Net revenues for the segment were 178 million compared to 164 million that prior year.
Increase was largely driven by cope at 19 related demand, which was partially offset by increased trade promotion span.
Adjusted EBITDA was flat compared to prior year at 35 million at the favorable impact of increased volume was offset by unfaithful product mix and increased trade promotion span.
Finally, the pressed a product stagnant at net revenues that were flat compared to prior year at 127 million.
The increasing demand because a covert 19 was offset by the impact of <unk> of the exit of certain low margin store branded business in during the 2019 period.
Adjusted to even in the first quarter was 23 million compared to 20 million and acquire a year, primarily driven by lower material manufacturing costs.
I will now take a moment to focus on the impact of the care sack to our financials or March 27, 2020 Cares Act was enacted in response to the covert 19 pandemic.
<unk> tax law changes under the act included increasing the limitation prayed additional expenses of interest for 2019 in 2020, we expected to deferred tax assets are they carry forward applicable to the rentals from the R.G.H.O. group upon its IPO will be less such we recorded a discrete income.
Tax expense of 23 million tribute to the right down to deferred tax asset in connection with the tax law change.
Now moving to our capital structure as of March 31st 2020, we had a cash balance of 200 million in total debt outstanding 2.4, or 5 billion.
Adjust it net cash from operations was 19 million for the quarter compared to adjusted net cash huge in operations of 1 million for the prior year cap X. was 23 man with a quarter compared to 15 million for the prior year.
I wouldn't now like comment on our guidance for the fiscal year ending December 31st 2020.
We expect adjusted EBITDA to be in the range of 695 to 715 million.
Adjusted net income to be in the range of 388 to 403 million.
Adjusted earnings per share to be in a range of $1.85 to $1.92 per share.
Net debt to be in the range of 1.9 to 2.1 billion.
This is a positive revision to our guidance we communicate in March and ends provided in the context of our business facing a high degree of uncertainty going for it.
Flex January and February performance ahead of our expectations in a sizable benefit we saw from Combet 19 related demand in March and no changed or adjusted EBITDA expectations for the rest of the year.
Also reflects changes to assumptions behind the performance, we expect to the rest of year, including what we know about April.
Demand remains elevated due primarily to the pandemic, but it's magnitude in duration remains uncertain as a result, the greatest challenge, we face because our ability to maintain the level supply needs to keep up with this increased demand we are adding necessary capacity as quickly as possible do staffing when capital investments to accommodate the increased.
Yeah.
Guidance as soon as our ability to execute <unk>.
We have incorporating a reduction in expected demand for the table, where products, which typically benefit from the nationwide family gatherings, such as Memorial day, and fourth of July and higher operational costs are rising from safety in cold blood related measures.
We've reduced estimated interest expense to reflect the lower interest rate environment and finally, it's important to know that we assume no significant disruption to operations supply chain or retail <unk> 2020.
As we undertake capacity additions and make others decisions with consequences B.R. 2020, we maintain a healthy degree at prudence in doing so time will tell how much of this pandemic producers in the way of sustain changes in our at home consumption at this juncture, we expect to cope at 19 related volume increases.
We are experiencing in 2022 challenge our ability to show a year over year improvement and then adjust to either though in 2021.
Therefore, we encourage those of you keeping models beyond 2020 to factor are caution into your estimates as we look ahead, we believe that our business model as well positioned to drive attractive returns in the long term our expectations and focus areas sure that this happens are.
Average annual volume growth in both single digits.
Continued investment to support margin expansion.
Even the growth of low to mid single digits.
<unk> single digit net income would grow annually as we do leverage.
Dividend payout ratio of approximately 50 per cent of net income.
What's that I'll turn it back tomorrow.
Thanks, Michael as I turn it over to the operator for the question I'd like to remind you that we ask you ask one question I rejoined the Q. If you have a follow up.
But that over to you operator.
As a reminder to ask a question you will need separate star one on your telephone.
Drier question press, the pound key or the Husky. Please stand by while we can <unk> roster.
You go first question comes from the line of Andrea <unk> from J.P. Morgan.
Oh, well and welcome Mark. So my question is on top line can you <unk> consumer panels indicates our consumption and you are aprons shipping.
So you mention demand remains elevated in some of your new <unk> 18 retail shop side to clean it so I believe.
He also had some distribution games in trash bag, so actually the balance of the year, So and it's emotional think a quarter you may not be able to and they now have being able to cut those but how do you expect that to to have all for the <unk>.
They are given that.
50 at this point and and how shouldn't be thinking of promotions onto the balance in just a clarification aren't that good then I think my coal headsets reiterated.
Payout Formula is bad likely they're amazing you can't see that any indication that we might see higher ticket seventh already.
Well, we should be thinking about happening potential for the following years. Thank you.
Thank you address the.
Regarding the April shipments as you might expect the the longer Selter and home restrictions in place the longer we expect to see demanded elevated levels.
That said, we really prefer not to comment on specific months or periods that haven't been reported that can confirm that our latest <unk> April and be honest, but backward into our our guidance update.
And of course, the Nielsen reports and track channel.
Oh I think are also very indicative.
Of the kind of take away that we're seeing as well as the increase so points of distribution are challenged and most of our product is not demand and supply as Michael indicated his remarks.
Adding capacity is what we're focused on both for staffing.
And capital investments, but those will not happen immediately.
And we shift.
More into one that we have the capacity to be able to continue.
Regarding the dividend, we don't expect any change the dividend.
Policy and the amount going forward, but certainly if that changes we will change that in our guidance.
That's how for a number and the promotional environments can you comment a little bit how you're saying for the <unk>.
I'm sure.
<unk> investments like it is for everybody in the category the mix of both.
M.E.D.L.P. support annual incentives.
Traditional high low promotions.
You know for the last four weeks traits been down in all of the categories, primarily driven by retailers cancelling events.
But going forward do the strong demand for our product.
And in some cases, the vantage continuity of supply until we're able to add more capacity, which is particularly thrilled on waste bag.
We anticipate ongoing lower traditional trade spending.
That doesn't mean that we're making any changes to our pricing strategy.
Tray dollars will likely shift to E.D.L.P. or annual incentives.
However, we don't insist that anticipate either a decrease or increase in total dollar credit is best.
But from our current levels.
Thankfully.
Thank you.
You go next question comes from the line of.
Camille car Twyla with credit Suisse.
Everybody could morning.
Well I'll stick to the one question rule and which is the primary question I've been getting you know from the morning is you know the delivery of the.
<unk> much higher than expected top line downloaded.
And you didn't highlight the there are significant amount of additional cost as well as you. Some increased trade spend them such can you maybe talk a little bit about our those cost or some of those costs, perhaps temporary at the moment, because obviously, an unanticipated spike in top line and perhaps they can fade over the course of the year, where the the <unk>.
Rich from the top lines at the bottom line will look look a bit different as we as we go through the course of the year tours or are there are these more permanent changes rare.
I this rate of growth given the stress on the system, we shouldn't really expect the fixed costs leverage to to flip through.
Thank you.
Sure I think what you referred to as our gross margin I think first.
Well I'd say that you need to adjust the gross margin for 4 million dollar unrealized has lots of two one.
And when you do that are gross margin would be in line with what we'd expected.
Beyond what we see beyond that we saw the impact lower costs, which is offset by lower pricing on some operating costs related to cope with 19.
Those those operating costs and covert 19 really were only for a couple of weeks in March.
And those will continue forward, we're doing things for example, like shutting down production lines in between shift changes and cleaning them, so that and and we have.
Individuals.
Working more overtime.
A combination of all those events with it the cleaning costs and the you know keeping the physical distancing throughout our plans is adding costs to our manufacturing operations. In addition, we're seeing higher logistic stuff, but I don't mean transportation costs, I'm, referring to warehousing and managing of of our our logistics organizations.
That's useful thank you.
Thank you.
You go next question comes from the line of Mark <unk> people.
Thanks in the morning, everybody I'm just wanted to ask a bit about gross margin. So how how should we be thinking about flowed through from.
What's now materially lower input costs, whether it's aluminum now we're presumably in in the future rather than a maybe.
So updated on just timing and how to think about the flow through from the rest in peace and so how does the input costs piece effect.
Margins I assume it's more back half weighted so maybe if you could talk a bit about that and then magnitude of the cost that camillus just referring to how do we think about that as as an offset thank you.
Thank you market morning, I'm going to turn that question it over to nape of low he is not a lot of our financial analysis and really built the models as we've looked at our our forward projections and he has the command of the details I think will be more insightful than the top line I just provided.
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Yeah. Thank you answer thanks, I, probably worthwhile I'm packing the C. one pot effect question <unk>, just adding onto what Ladd said about 4 million dollar unrealized hedge loss.
Tonight that was 11 million dollar unfavorable swing.
Yeah.
Yeah, I'm going to middle Dave <unk>.
Commodities, we we have seen recent increases in most an arcade commodities you're actually yeah.
In the case about nine resin, which is probably after laying it quite as down in April following elevated crossing into first quarter to be now back to where it starts it'd be good.
As you know, we maintain physical aluminum hedge by carrying inventory of the commodity.
Take some time to lower costs to work their way through happy now. So we had a fair idea of what they learned them costs would be flying through out <unk>, Let me say how unusual gardens.
In a mixed bag in other resins in terms of once you have to one result that said, we do expect more materials to be a modest title wind up some nice to vaccinate commodities for the rest rest yeah. If the current codes home.
And we'd affected that into how gardens also I remember like I said, probably has a line has not yet decrease from December.
Entirely and it will take about three months to fly throughout you know.
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[noise] [noise] you go next question comes from the line of Lauren Lieberman That's park place.
Great. Thank the morning.
I was hoping for more talk a little bit.
About yeah, okay, well, because we knew in terms of information into combined company by talk that you could offer on how this portfolio me well perform you know you know recession tend not to.
Stay at home dynamics pay insurance, some kind of panel Hey, Dave has that also between brand in in private label introspection.
Right well since our C.P. was a forum.
It 10 years ago, it's not operated through a recessionary in an environment.
But those that came from the legacy companies that formed RCP report that the company's perform well during a recessionary environment.
And we sell everyday household products generally benefit from consumer spending more time at home, which we see during a recession as well as shelter in place.
We haven't seen any trading down to private label in fact, it's been the opposite most of our categories.
But you know some of that is due to just on shelves availability, we are well positioned in all of our categories that there's a trend in that direction given that we're you know evenly split between branded in private label sales.
Of course key commodity prices is they can just talked about generally dropping recessionary environment as well and we.
We would expect that to be a potential as part of our our overall forward duck improvements.
Okay, and if you talk about the need for incremental capacity is it possible to reallocate capacity you have between private liberal and branded hit that possibly a kind of near term and more capital light it's last last sticky.
<unk> the problem or no.
There is a lot interchange ability there it does require some modifications in some of our manufacturing equipment, but they're not capital intensive.
So there is there is a lot of flexibility to switch back and forth.
And most of our products.
<unk>.
Okay. Thank you.
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I'm showing up for their questions at this time I would now like to turn they'll call back Overkill.
Man spectral for closing remarks.
Well, thanks to everyone for joining the call today and all your questions and closing I just want to say that in today's challenging environment seeing what our team has been able to accomplish.
Give them, even greater faith in our long term potential.
And thank you for your interest in Reynolds consumer products, they say if everyone.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating and you may now disconnect.
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