Q3 2020 Reynolds Consumer Products Inc Earnings Call
[music].
Ladies and gentlemen, thank you for standing by and welcome to the Reynolds consumer products third quarter 2020 earnings Conference call.
At this time all participants are in a listen only mode.
After the speakers present thanks.
There will be a question answer session.
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Please be advised that todays call is being recorded.
I would now like to hand, the conference over to your speaker today Mark Swartzberg. Thank.
Thank you. Please go ahead.
Good afternoon, and thank you for joining us on rentals consumer products third quarter 2020 earnings conference call on the call today are Lance Mitchell, President and Chief Executive Officer, and Michael Graham Chief Financial Officer during.
During the course of this call management may make forward looking statements within the meaning of the federal Securities laws. These.
These statements are based on managements.
Thats current expectations and involve risks and uncertainties that could cause actual results and outcomes to differ materially from those described in these forward looking statements.
Please refer to rentals consumer products annual report on form 10-K.
And other reports filed from time to time with the Securities and Exchange Commission and its press release issued this app.
For a detailed discussion of the risks that could cause actual results to differ materially from those expressed or implied in any forward looking statements made today.
Please note management's remarks today will focus on non-GAAP or adjusted financial measures a reconciliation of GAAP results to non-GAAP financial measures is available in the earnings release.
Posted under the into better relations heading on our website that Reynolds consumer products Dot com.
The company has also prepared a few presentation slides and additional supplemental financial information, which are posted on rentals web site under the Investor Relations heading this call is being webcast and an archive of it will also be available on the website.
I'd also like to note that.
We are conducting our call today from our respective remote locations.
As such there may be brief delays cross talk or other minor technical issues. During this call. We thank you in advance for your patience and understanding.
While 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 a follow.
Follow up and rejoin the queue. If you have additional questions.
And now I'd like to turn the call over to Lance Mitchell.
Thanks Mark.
Before we begin with.
With a surge of COVID-19 across our country I'd like to thank our employees for continuing to follow prevention measures and putting safety first although.
Please.
And on Veterans day, we also thank our many colleagues and all who serve our country men and women and their families who have made personal sacrifices to assure the security of our nation and our democracy.
For our agenda today, Mike will review, our strong quarter and outlook and.
Cover performance highlights brand performance, our near term priorities and fourth quarter demand.
Together, our remarks will be brief.
A good quarter requires very little explanation.
And then we'll open it up for questions.
We're very pleased with our quarterly results and the progress we're making against a.
Goals and initiatives, we established to position us for future growth and success.
Revenue was up strongly reflecting increased everyday use at home and the impact of new products.
Gross margin expanded substantially.
We invested significantly in advertising and.
Ill promotion and market research.
All of this together resulted in a $30 million increase in adjusted EBITDA, enabling us to increase our financial outlook for the year.
Turning now to our brands and businesses.
Three years ago, we set out to make Reynolds a billion dollar brand that.
Patel.
And I'm happy to tell you, we recently crossed that threshold growing 18% in the last 52 weeks or more than $150 million compared to 2019.
Rentals route well grew 17% over that period, and we saw even faster growth in parts of paper Platts.
The graft and wax and freezer paper.
Needless to say Reynolds brand strength and momentum is benefiting from our increases in capacity.
We're also seeing strong performance for half the.
The waste back category is large and growing strongly and the hefty brand continues to do very well.
Growing with the category.
According to Harris us households are using more than three and a half kitchen waste specs per week up from approximately two and a half bags per week prior to cobot.
Innovation has also picked up in the quarter and was led by our hefty tableware unit, which benefited from a non.
A number of new products, including eco save a new line of disposable tableware made of plant based materials, which is a 100% compostable.
Excellent service across our categories remains a priority.
And our Presto unit continues to grow with our retail partners and their brands, even with year to date headwind.
Of last year's exits of low margin business.
Our E Commerce business is also doing very well growing very strongly again in the quarter we.
We estimate our ecommerce shares to be equal to or better than our brick and mortar shares depending on the category.
Looking forward.
Our near term priorities remain employee health and safety maximizing the availability of our products and investment in our categories.
We remain vigilant as COVID-19, positivity rates increase nationally and our recordable injury rates remain very low and below year ago levels.
We continue to improve the availability.
Of our products in response to strong demand in stocks are improving and we continue to bring on more capacity than planned at the start of the year.
With most of it online by year end.
We are also increasing spending on advertising and promotion and market reach.
Research as consumer habits change and benefit our categories.
Weve previously called out significant second half increases in a NP due to timing.
For the year, we plan for MP to be up strong double digits. We're.
We are completing our plans for 2021.
But you can expect strong support for our brands next year, considering the favorable demand environment.
Most of US are spending more time at home and our research finds that.
The behavior that comes with this is a long lasting positive.
Repeat rates.
Among new users are.
Across our categories. In addition, according to numerator more than 80% of active users of our categories indicate they intend to maintain or increase elevated consumption of foil waste bags food bags and disposable tableware beyond 2021.
This is a paas.
Profit of four our categories and it means more innovation.
We have a strong new product pipeline.
We've invested in market research during the change in consumer behavior to aid in the development of new products.
We remain committed to our goal of 20% of our revenue from products that are less than three years old and we're excited.
At about the new product pipeline that we have heading in to next year.
Demand remains stronger than historical trends and as you saw in our release, we estimate a mid single digit net revenue increase in the fourth quarter.
After a stronger than expected third quarter households entered October with increased.
Leased inventory of our products and we anticipate smaller gatherings around the holidays.
This has reduced the need for promotions in contrast to last year's fourth quarter. When we did what we usually do step up promotions at the start of the quarter to build household inventory ahead of the holidays.
Additionally, we've.
We've seen some softening of business and restaurant items sold by certain retailers as restaurant restrictions have increased.
We remain firmly focused on leadership of our categories and I could not be more pleased that we're able to simplify daily life for consumers by meeting this is.
Aimed and fundamental shift in demand for our products.
We are aware of next year's comparisons and leaning into the opportunity with capacity innovation and investment.
I am confident our people and our priorities will allow us to deliver another year of strong performance.
I'll now turn it over to Michael to discuss our results.
For the quarter and our outlook.
Thanks, Lance and good afternoon, everyone Im really pleased with the results for the quarter.
Ill briefly walk through them, then wrap up with the outlook for the fourth quarter.
Net revenues in the third quarter of 2020 were $823 million compared to 741 million.
In the prior year the growth was driven by strong demand across all of our business segments, reflecting the continued increase in everyday use at home and the impact of new products net.
Net income increased to $113 million in the third quarter compared to $63 million in the prior year and adjusted.
Net income was $117 million for the third quarter of 2020.
The increase was primarily driven by higher revenue and lower interest expense, reflecting the lower interest rates and the capital structure that went into effect with the IPO.
Adjusted earnings per share for the quarter was 56 cents.
Since adjust.
Adjusted EBITDA for the third quarter was a.
The $192 million compared to $162 million in the prior year. The increase was primarily due to increased revenue and lower material and manufacturing costs, partially offset by higher advertising and personnel costs.
Turn.
Turning to our segment results.
Reynolds cooking and banking net revenues in the third quarter were $285 million compared to $256 million in the same period of last year.
The increase was primarily driven by increased consumer demand, partially offset by a decline in related party revenue.
But.
Adjusted EBITDA in the quarter was $63 million compared to $49 million in the prior year due to the revenue increase and lower material and manufacturing costs, partially offset by higher advertising costs.
For hefty waste and storage net revenues in the third quarter were $209 million compared to 185.
$5 million in the prior year.
The increase was primarily driven by increased consumer demand.
Adjusted EBIT in the quarter was $65 million compared to $51 million in the prior year due to the revenue increase and lower material and manufacturing costs, partially offset by higher advertising costs.
Perhaps.
Where net revenues for the segment were $192 million compared to $174 million in the prior year. The increase was driven by the impact of several new product introductions. In addition, we saw improved demand for business in restaurant items in comparison to the second quarter.
Adjusted.
Okay, but in the quarter was $43 million compared to $40 million in the prior year, primarily due to the revenue increase partially offset by increased advertising and logistics costs.
Finally, presto products net revenues were $136 million compared to $129 million in the prior year increase was primarily.
Driven by increased consumer demand.
Adjusted EBITDA in the third quarter was $28 million compared to $23 million in the prior prior year, primarily due to the revenue increase and lower material and manufacturing costs.
Now moving to our capital structure.
We continue to be very pleased with the cash generating.
The ability of our business.
And as US as of September Thirtyth 2020, we had a cash balance of $351 million in a total debt outstanding of $2.34 billion.
Subsidy subsequent to quarter end, we made an additional voluntary debt payment of $100 million continuing on our commitment to de leverage.
Commenting on our guidance for the fourth quarter and the year ending December 31 2020.
For fourth quarter of 2020, we expect net revenue growth to be mid single digits on net revenues of $835 million in the fourth quarter of 2019.
Increased logistics.
President and cobot related safety costs continue investment in categories with with another strong increase in and Pete.
And adjusted EBIT to be in the range of $195 million to 200 million.
Based on these expectations, we have increased our guidance and expect the following for the full year 2020.
Net revenue to be in the range of $3.24 billion to 3.26 billion adjusted EBITDA to be in the range of $715 million to $720 million.
Adjusted EPS to be in the range of $1.95 to $1.97 per share.
Net debt to be approximately 1.9.
At December 30, Onest 2020.
And consistent with our prior communications, we expect capital spending to be approximately 4% of net revenues.
Looking forward to next year.
The marketplace is dynamic and we're currently working through our plans we plan to provide additional detail of our expectations.
Based on the 2021 with the release of our fourth quarter results.
Overall, we are pleased to be operating in categories that are larger than what we anticipated at the time of IPO and we remain committed to cash returns, including a dividend payout ratio of approximately 50% of net income with.
With dividends growing over.
At the time and continued de leverage to net debt that is between two and two and a half times as a multiple of adjusted EBITDA.
With that I'll turn the call back over to Mark.
Thanks, Michael as I turn it over to the operator for the question I'd like to remind you that we ask that you ask one question and a follow up and then reach.
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One moment, please while we now poll for questions.
Our first question comes from Bill Chappelle Truest. Please proceed with your question.
Weaker.
Thanks, Good afternoon.
Yes first question looking at the Presto business.
Certainly good growth.
It was kind of half the rate of the year branded business. So I didn't know if you are seeing continued trade up consumers or if there was something else going on.
Just kind of explain that in.
And as we go through Cove it if in general as we've seen in other categories consumers going to trade more to branded in higher end.
Or their legs that if there is something else that I'm missing.
Hi, Bill actually there is two things occurring here. The first is there has been some moderate trade up to.
Two.
The brands across some of the most of our categories, but it has been moderate that remains significant difference in the growth rates between Presque Isle in the other segments is the fact that we're still lapping some of that low margin business that we intentionally exited and as we exit Q3 that is out.
Almost entirely behind us, but thats, a big big part of the percentage difference in the growth rates.
Between the different business segments.
Got it and then just as a follow up on the healthy people wear business that seem to be.
Downs back pretty nicely from Twoq results.
Anything today that we're getting out of the picnic season. So you have more normal kind of compares in many ways or is there something else going on there.
There's three dynamics occurring there the first.
As you may have picked up in the opening remarks that I talked about was the fact that we.
We know we saw some recovery.
In the restaurant business items, certainly not to prior year levels, but better than a very depressed Q2.
But the real driver was the fact that we had several new products that were successfully introduced and growing in the tableware business in Q3.
Murray and as you pointed out you don't have the labor day are rather the memorial day and fourth of July comparisons for holiday occasions, It's really only labor day in the Q3, which is not as a robust.
Holiday occasion for disposable tableware and the continued.
And the strength of our everyday use occasions for those products.
That's great. Thanks, so much for the color.
Thank you.
Thank you.
Our next question comes from Robert Ottenstein with Evercore ISI. Please proceed with your question.
Great. Thank you.
Pretty much.
Two questions.
The first one sales across the board were very strong, which isn't a surprise, but they did seem to be a good bit stronger.
Then than you had guided and obviously where consensus was and more in line with.
Very involved with you know what the track channels reflected which was not true the prior quarter. So I'm wondering if you can kind of help us sort of try to tie that together and and sort out the disconnect. If any thank you.
Thank you.
Three it may sound like we had a conservative guy today.
Sure you that's not the case, what we had was a very strong September.
One that fundamentally surprises from a strength standpoint, and if you remember we guided last I think September eight.
So that strong September really tipped the scales towards above the high end of our guide.
And our.
Research says it was really driven by two things.
The first is it was driven by consumers actually buying more in front of the holidays and preparing for the holidays early and the second was there was a resurgence in coated in some communities and states and so there was a stock up.
It certainly not like anything we saw in March and April, but more of a stock up occurring in.
In our categories is some pantries, we're we're loaded going into Q4.
Great Great and then I guess that explains a little bit of the.
Slightly lower growth in Q4.
My second question.
Question or follow up is.
And on the EBITDA implied guidance for Q4.
Which is a good bit lower than consensus it's lower than I think the IPO guidance initially and.
Implies.
You know a fair amount of March.
Perion contraction, so I'm just kind of you know interest.
Interested we've actually getting a lot of emails from investors Tonight on this why why the.
Margin contraction and lower EBITDA in Q4, given the fact that the sales guidance is still pretty strong.
A lot has changed since the IPO and I think the first thing is you already pointed out as some of Q4 revenue really came in Q3 as the preparation for the holidays occur earlier.
But I would I would also point out our topline guide is still better than.
Yes, with our IPO forecast and consensus is for Q4, but the EBITDA is a temporary impact of higher commodity costs.
You know that when we were going to be recovering those as we go into Q1, but we did see commodity costs increased primarily in resins in Q3.
With that we will see the impact of those in Q4, and we have numerous countermeasures that we have implemented going into Q1 that will ensure.
And sure that we get those back as we go into next year.
Also point out that we're leaning into advertising investments in Q4, and so appointed.
Laid it out in our opening remarks are double digit increases over prior year.
Got it thank you very much.
Yeah.
Thank you. Thank you.
Our next question comes from Jason English with Goldman Sachs. Please proceed with your question.
Hey, good evening guys congratulate.
Relations on another strong quarter.
Thank you Jason.
Lance It's I think certainly sense. Your optimism is you know you look to the fourth quarter, but as you look into next year and you mentioned your investment behind capacity innovation.
And MP.
What if you're wrong, what if what if the vaccine comes.
And a lot of behavior mean reverts to where it was before.
Of course corrections can you take at that point in time to avoid to avoid burning sliding out fast.
Well first of all we've done a lot of market research and according to our research and the numerous.
These are numbers that I just shared a lot of this consumer behavior is expected to stick more than 80% of users of our categories indicate they are they are they are going to maintain or increase elevated consumption of our products and according to thrive plan, 80% of households are going to wait to return to dining and restaurants.
Until 2022.
So and Weve seen changes in consumer behavior, and millennials and Gen. Z is towards recognizing that cooking is a healthier lower cost easier alternative that always take out at restaurants, and so we're seeing fundamental shifts in consumer.
The behavior.
And so our research makes us very optimistic that this is sustained and fundamental.
If it isn't the investments we've made in our our capacity are not new routes. They are you know as you will.
We heard from our capital investments, so we're trying to get 4% of our.
Revenue from a capital investment standpoint, so its not significant capital investments to get these.
These are new lines and capabilities for increased production.
And that's what we're bringing on is lower cost more efficient it's less labor.
From an automation standpoint alone.
Rather the payback won't be as quick as growth, we will get a payback on it and we'll be able to utilize that production equipment more efficiently.
That's really helpful. Good context, thanks, a lot I'll pass it on.
Yeah.
Thank you.
As a reminder to our audience if you'd like to ask a question. Please press star one on your telephone.
All keypad.
Our next question comes from Camilo casual Walton from Credit Suisse. Please proceed with your question.
Hey, guys good afternoon.
As it relates to capacity you just mentioned it briefly plan since you're adding capacity doesn't come at a big capital cost.
But.
I think from the prepared remarks, you mentioned the revenue on the categories are is higher than what you anticipated.
No.
What is the Capex tick.
Tick up a little bit higher perhaps than planned.
In order to support that.
That this higher kind of revenue base.
Hi, or Tam that we might be looking at.
Yeah, Yeah. Thanks, Camille you know I think we've shared with you guys in the past that our capex that takes expectations to be around 4% of our total sales.
That that increase is primarily related to the fact that we've added.
Additional capacity.
And as that capacity is on will come on stream, obviously with that comes Capex.
That get at your question or is there.
I mean, I guess, what they're saying Oh you.
To be clear, we are adding it was more about.
Okay got it.
Yeah.
To be clear, we are adding capacity and investing in capacity is higher than we had planned as we went into the year yeah.
Yeah. So so just just to add to that you know, we said 4% of revenue previously in our revenue increase so obviously, that's going to be a big driver of the overcrowding in June.
All right. Thanks.
Adelington.
Okay, Great and then as a follow up you mentioned briefly about commodity costs and recovering some of the.
Hit from higher commodity costs into one queue, how should we be thinking about maybe the basket of commodity cost more broadly over the course of next year.
Yeah. So you know I think.
So you think about it is like we we feel pretty good about the fact that we've been able to neutralize a higher resin costs.
You know, we do plan to recover the overwhelming road short majority of those cost to increase prices as.
As well as adjustments to our the level of promotions that we change.
But just keep in mind, you know you know our retailers our business partners. So as we think through that.
We look to balance the best.
The best for their business, our business and categories as well as the end consumer.
I think as you think about 2021 is there you know there.
He will be a a slight headwind because of the Q3 reduction that occurred in RASM, which then came back but otherwise we're looking it up fairly stable environment for commodities in 2021.
Okay got it thank you very much.
Thank you.
Our next question comes from Andrea Teixeira with JP Morgan. Please proceed with your question.
Hi, Thank you hi, good afternoon, I hope you all well so I just want to think about like more long term like if you step back.
Of your guidance of 7%.
There was implied says well for 2020 at the midpoint.
And then which is obviously very impressive but then you had the headwind from the western business that obviously you described.
We can make the math right its about 25% for the tip, where business is that as a percentage of sales, but I was just thinking.
Some of your other businesses, even in cooking and baking can probably the using smaller and smaller baskets for trucks or what.
What do you think what the headwind was that about two and 3% then may reverse obviously, it's not going to be Braskem for me, but it will be a tailwind for you in next.
Here thank.
Thank you.
Most of the tableware business and restaurant items.
Or just so I don't make select.
Mhm.
Yeah, it's a it's about.
It's roughly 50% of the total tableware business at our restaurant.
And business items, but.
Theres a gray crossover on some of those items some of those items are used for catering events.
As well as for home use occasion, so it's it's.
It's not a clear cut difference between what the business side of a restaurant item, an eight a. home use occasion item and disposable tableware.
But 50% of the revenue roughly in that business segment would skew towards that kind of use case.
No that's helpful.
And then do you think that you.
If you think about that business and you also had a a pipeline of innovation right that you called out.
Thank you and.
Three factors that you described but if you quit on a more normalized away would you say they also look for next year.
Could be positive or in other words, we will cycle for the worse.
And Conversely on the remaining of the business that is more home cooking right that is more a retailer she will.
You said that you're confident that you can lap those what makes you confident in terms of the cadence of innovation. So perhaps it would be interesting to see a more like for like growth of the traditional brands because of these.
What came so well has what has been coming for innovation.
Yeah.
I'd like to like I said in the opening remarks, a big piece of our tableware growth in Q3 was new product innovation and the continued growth of those so we are that plus our market research of everyday use occasions for disposable tableware it gives us confidence that.
With that that segment will continue to have opportunities for growth.
That's helpful. Thank you.
Thank you.
Our next question comes from Mark Astra Chen with Stifel.
Please proceed with your question.
Thanks.
Good afternoon, everyone.
I wanted to to incur related question, though as Mark will yell at me later.
Okay. I guess, one is in trying to reconcile fourth quarter. So mid single digit growth. We can all obviously look at the.
The track channel growth at least through the first.
Month of the quarter and has been.
Stronger as you mentioned some of it I guess through September that was stronger.
Ideally I'd like to have you walk us through a little bit of some of the other pieces that are a little less obvious you touched directionally in foodservice, but maybe talk about what expectations would be for that how big of an impact.
D. from shipments.
Shipments relative to retail takeaway, meaning channel soccer or restocking and get kind of anything else that would be pertinent.
Pertinent to to modeling and then sort of related to it.
Lance you had touched on the commentary about being aware comparisons.
For next year, but also continuing to talk about demand being above.
So perhaps if you can just touch high level on that obviously without getting into guidance for next year that could that'd be helpful.
Let me tackle the last question first.
Related to next year when I talk.
Locked about comparisons.
What we're being very mindful of the stock up period, which occurred in March and April where the consumers has significant amount of pantry loading in our categories during that period of time that won't necessarily repeat.
In 2020.
Anyone.
As you know as we look at the fourth quarter.
The big difference here is that we're really not promoting into the quarter like we normally would.
Normally we promote heavily to encourage stock up behavior, so that consumers.
Have those products on hand in their pantry for use during holiday cooking and baking occasions, primarily.
And then what we see is the logos those promoted events.
In products in Q1.
We don't anticipate that to be the the behavior. This year because were not.
Loading into it and what we're seeing from a shipment standpoint.
The mirrors that we do expect there to be some replenishment also in Q1 and later Q4 as retailers continue to replenish their inventory our in stocks are continuing to improve.
Month over month of most of our products of most of our retailers and so is that that will continue to ensure that the replenishment of the in stocks also contribute to shipments.
But without that promotional heavy up in Q4 is we do expect still growth over a prior year, where we.
The heavy promotions.
Great. That's helpful. Thank you.
Thank you.
Our next question comes from Lauren Lieberman with Barclays. Please proceed with your question.
Great. Thanks, so much.
You bet.
Ask a couple of times that capacity and I wanted to just shift the conversation on capacity to the hefty.
Jason storage business.
You had really strong volume growth it will be interesting to the track channels I guess I'd be curious if thats.
Similar in what you're seeing on on on track.
And your share gains or curious.
Yes, I know about an update on capacity and this is the uptake in demand and extended the timeline for you to kind of get back.
Caught up to where you want to be Ted can meet that consumer demand to expect to be out there in the initial phase opportunity. Thanks, yes.
Yes, we have eight across all of our product lines, but specific to happy So thats what you asked.
To conclude gradually adding capacity through the year and that means bringing on new production lines.
At existing manufacturing locations and these are new production lines.
So they have.
Then coming online throughout the year, we have more to go but we are keeping up with.
In stocks and have to be very very well at retailers.
The the in stock I believe I looked at the report earlier today was 96% in stock. So we're not all the way to bright where we want to be and expect to be at 98, and a half the 99%, but we're certainly and compare.
Person at the rest of the category doing very well and keeping up with this strong demand through our capacity additions.
I will also say that in untracked channels.
We're doing.
As well if not better from a growth standpoint, as you know we gained some new just distribution in untracked channels.
Panels and some of the on track sales, particularly ecommerce are growing a little faster than than brick and mortar and we're.
Our shares are stronger actually in that channel than they are in until.
Untypical track channels.
Great and now that you're in this advantage.
In stock position and the capacity build his.
Gotten to nearly bigoted, where where you want it to be.
Is there much in the way of incremental opportunity for shelf space or or new account wins.
The concern to fold into the conversation for 21.
So.
Certainly we were introducing some new products.
In that.
Innovation and the other half the waste that line of credit across all of our products. So from an innovation standpoint, we definitely are planning for continued growth as we go on to 21, and we do have some opportunities for continuing increase distribution.
Abuse and as a result.
Okay, all right great. Thanks, so much.
Yes.
Thank you.
There are no further questions at this time I'd like to turn the floor back over to management for any closing remarks and have.
Yes, I appreciate your time and attention today some real.
Excellent questions and so to close let's again extend our appreciation to the men and women who serve our country on this veterans day.
And as we head into the holidays, we hope that your celebrations are.
Meaningful and safe and thank you everybody have a good evening.
Real estate is in gentlemen. This concludes today's webcast you may now disconnect. Your lines at this time. Thank you for your participation and have a great day.
Thank you.
Hiring by the way are you.
Add that.
Thanks.