Q3 2021 Reynolds Consumer Products Inc Earnings Call
Greetings.
Looking to the Reynolds consumer products, Inc, third quarter, 2021 earnings call.
At this time all participants are in a listen only mode.
A question and answer session will follow the formal presentation.
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Please note this conference is being recorded.
I will now turn the conference over to your host Mark Schwartz Burke, Vice President of Investor Relations. Thank you you may begin.
Thank you good morning, and thank you for joining us on Reynolds consumer Products' third quarter 2021 earnings conference call on the call today are Lance Mitchell, President and Chief Executive Officer, and Michael Graham Chief Financial Officer.
Our agenda today Lance will focus on market conditions on our fundamentals and Michael will review our quarter and outlook together our remarks will be approximately 15 minutes then we'll open it up for your questions.
During the course of this call management may make forward looking statements within the meaning of the federal Securities laws. These statements are based on management's 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 Reynolds consumer products annually.
Port on Form 10-K, and other reports filed from time to time with the Securities and Exchange Commission and its press release issued this morning 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.
These note management's remarks today will focus on non-GAAP or adjusted financial measures reconciliations of GAAP measures to non-GAAP financial measures is available in the earnings release posted under the Investor Relations heading on our website at Reynolds consumer products Dot com.
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 this call is being webcast and an archive of it will also be available on the website well we would like to answer all of your questions. During the question and question and answer session.
At the time, we ask that you ask one question and a follow up and rejoin the queue. If you have additional questions and now I'd like to turn the call over to Lance Mitchell.
Thank you Mark we delivered another quarter in line with our expectations in spite of additional cost and supply chain challenges. Thanks to the hard work and dedication of our team.
We grew revenue, 10% on top of last year's record third quarter net revenues, including an approximate two percentage point benefit from a one time sale of excess raw materials in the quarter we.
We did so in spite of production disruptions of third party suppliers and continued import delays.
Our market shares remained strong across most of our products and we achieved our earnings forecast in the face of additional material labor and logistics costs and a more challenging environment for staffing and logistics services.
We are narrowing our earnings guide within our previous range to reflect the additional staffing and supply chain pressure as well as higher rates for key commodities versus July levels.
Michael will walk through those drivers of this pressure and the pricing actions, we are taking to offset material cost increases.
I remain firmly committed to implementing price increases to offset material cost increases at a pace.
The amount is appropriate to market conditions.
Michael will also talk through Revolution cost savings.
Which are tracking ahead of plan.
And remain a significant source of margin recovery.
Increased investment in automation is a major contributor to resolution cost savings.
Now, let's return to the top line.
We expect four factors to drive accelerating revenue growth for our CP in the fourth quarter.
Our consumer demand price increases innovation and expanded manufacturing and supply chain capabilities.
Together with our market share performance. We expect these drivers to remain a sustained source of long term growth.
First consumer demand.
Household use of our products remain elevated versus pre pandemic levels.
According to our latest Harris poll, which we conducted again in September.
Every day use of oil there is up more than fourfold versus pre pandemic levels.
And weekly use of waste bags food bags is up more than 30% versus pre pandemic levels in.
In addition, according to our fourth numerator poll. The overwhelming majority of respondents continue to expect to maintain or increase their foil waste bags and food bag use beyond 2021.
Our household penetration has increased from pre pandemic levels with 24 of 25 households, now, having one or more of our products.
This sets up our categories, our brands and our product portfolio for continued strong performance and Thats what were seeing.
On an omnichannel basis through October 10th.
Branded dollar share in foil waste bags, and disposable cups, and dishes is up versus year ago levels and improving sequentially.
These figures include e-commerce and in tracked channels, it's the same trend.
Brand dollar share in foil waste bags, and disposable cups and dishes.
Higher than year ago levels and improving sequentially.
We're also building on our e-commerce momentum e-commerce related sales are growing strong double digits.
Growth is broad based across RCP and major e-commerce retailers and.
And we continue to expand participating in third party marketplaces, while also testing and launching direct to consumer initiatives.
The next driver of our revenue growth was price.
Our third round of pricing actions was implemented as planned and a fourth round goes into effect during the first quarter of next year.
We expect sequential improvement in profitability in the fourth quarter and a pronounced improvement in profitability by the end of the first quarter of 2022 as a result of these increases.
This assumes key commodity rates stabilize.
Michael will speak more to the timing and results of our pricing actions in a moment.
I know that elasticity is also a topic of interest to all of you.
We're watching that closely given the amount of pricing across retail as you know historically our categories have demonstrated low elasticity by comparison to many consumer staple categories.
That remains the case and we factored our latest research on elasticity into our guide.
The third driver of our strong growth is innovation.
At the Fabulous so continues to exceed our expectations and drive volume. Thanks to help use quality consumer preference for Colgate Palmolive Fabulous of ascent and our sales and category management team's effectiveness partnering with our retail customers.
In fact.
Hefty fabulously will help drive hefty waste storage past $1 billion in annual retail sales for the first time in the quarter.
Cooking and baking results are also seeing a substantial benefit from new products strengthening our market position, bringing us into new adjacencies and expanding the scope of our sustainable offerings.
Notable Reynolds innovations include Reynolds wrap everyday non stick foil Reynolds wrap 100% recycled foil and Reynolds kitchens, unbleached and compostable parchment paper.
In tableware Eco save is now the number one sustainable brand and disposable tableware according to IRI.
And innovation in store brands also contributed to our strong performance across RCP categories, including share gains for our Presto unit in private label food bags.
I also hope that you saw the recent release of our ESG scorecard. The scorecard provides baseline metrics for evaluating our performance against the goals we announced in April.
Development and expansion of sustainable products is integral to our business.
We've introduced numerous sustainable product solutions and have more in the pipeline for introduction in 2022.
We're also on track to achieve our goal of a sustainable option all product lines by 2025.
Our fourth growth driver is expanded manufacturing and supply chain capabilities. The capacity additions. We undertook last year have allowed us to maintain strong market shares and retailer in stocks, where most of our products remain well above pandemic related lowes. These.
These and other improvements to our manufacturing and supply chain capabilities position us well in our categories.
Having said that we're not immune to the staffing and logistics related pressures across the economy and we are actively working to minimize related disruptions to production and shipment of our products before I pass the call over to Michael I'd like to leave you with the following.
Our business remains strong and we have a history of dependable volume earnings and cash flow we.
We have the brands the product portfolio category management team, the manufacturing and supply capabilities with pricing actions the cost savings and most of all the people to position us for substantial improvement in earnings growth when inflation moderates and over the long term.
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I look forward to our future growth and success for our company our partners and our shareholders.
With that over to you Michael.
Thanks, Lance and good morning, everyone. I will briefly review of third quarter results, then turn to our outlook and capital allocation priorities revenues increased 10% on top of the record third quarter revenues in 2020.
Reflecting pricing to recover increased costs strong underlying demand across our business and approximately two percentage points from a one time sale of excess raw materials.
Adjusted EBITDA was $132 million.
Down 31% to prior year as price increases lag increases in material labor and logistics costs, which was partially offset by lower SG&A.
Adjusted earnings per share for the quarter was 33.
Turning to our segment results for the third quarter. There were three main drivers of our year on year performance strong underlying demand for our categories and product portfolio.
This increases, which lags further commodity cost increases and higher labor and logistics costs, along with increased staffing and logistics challenges.
And Reynolds cooking and baking net revenues grew 15% with 11 percentage points coming from price increases with the remainder driven by a one time sale of excess raw materials.
Adjusted EBITDA decreased 11% as price increases lag that pace of commodity cost increases excluding.
Excluding the benefit of the onetime raw materials sale of the underlying volume was down 2% due to the lapping of last year's increased consumption.
We're happy waste and storage net revenues grew 13% driven by price increases and a 2% volume increase adjusted EBITDA decreased 43% as increases in material and labor costs outpaced price increases partially offset by higher volume.
Volume was up as household demand remained strong and our waist bag business continued to benefit from innovation.
For hefty tableware net revenues increased 2% driven by price increases, partially offset by a volume decline of 4% adjusted EBIT decreased 42% as price increases lag increases in material labor and logistics costs. We also saw labor shortages at third party suppliers.
<unk> continued to adversely impact volume, which more than offset the continued strength from higher everyday usage, social gatherings and innovation.
Finally for Presto products net revenues grew.
11% driven by price increases slightly offset by a 1% volume decline adjusted EBITDA decreased 50% as price increases lag increases in material labor and logistics costs.
<unk> volume was down 1%, reflecting important delays and lower business to business product sales for the quarter, partially offset by improving food bag category trends and improve presto private label food bags sure.
Now to our guidance, which we've updated versus our previously disclosed guidance followed by a few additional comments on our outlook.
We continue to expect high single digit revenue growth for the fiscal 2021 underpinned by pricing at home consumption increases and social gatherings innovation and retail replenishment, we estimate 2021 cost pressures to be in excess of $450 million and have updated.
Our outlook to reflect these pressures.
Rates for resins have not E. Since July as previously forecasted and alumina rates are higher versus July levels, as well labor and logistics costs also exceeded forecast since July.
The details of our guide for fiscal year 2021 are as follows net.
Net revenues to grow in the high single digits adjusted net income to be in the range of $321 million to $336 million adjusted EBIT to be in the range of $590 million to $610 million adjusted EBIT EPS to be in the range of $1 53 to $1 60.
Capital spending of approximately $145 million, which includes $25 million for the completed purchase of a manufacturing facility. We previously leased.
And net debt to be approximately $1 9 billion at December 31, 2021.
For the fourth quarter, we expect revenue growth in the mid to high teens, driven primarily by recent price increases and anticipated volume above Q4, 2020 levels and we expect sequential margin improvement both with but with continued short term earnings pressure primarily.
Driven by price increases implemented during the third quarter lagging increases in commodity labor and logistics costs. We also assumed progress mitigating staffing third party manufacturing and logistics related disruptions.
The details of our fourth quarter Guy are as follows net revenues to grow in the mid to high teens on $888 million in the prior year adjusted net income to be in the range of $93 million to $108 million adjusted EBITDA to be in the range of $170 million to $190 million.
And adjusted EPS to be in the range of 44 to <unk> 51.
We plan to provide our guidance for 2022 with the announcement of fourth quarter results in February Nonetheless, I thought it would be helpful to provide an update on some of the items. We reviewed last quarter in the area of pricing as Lance said, our fourth round of pricing to offset additional cost increases as being.
Implement our cross RCP.
The majority of the increases have been announced and go into effect in January assuming current rates of resin aluminum hold we will fully recover these higher commodity costs through pricing actions for Reynolds cooking and baking hefty tableware and presto by the end of the first quarter of 2022.
We could also see ongoing unfavorable gap between commodity costs and pricing for hefty waste storage moderate if we announce additional waist bag pricing or resin rates are lower than we're forecasting.
We're planning to return to a more typical level of trade promotion and advertising in 2022.
Investing in Revolution cost savings programs is being accelerated and it remains a major source of our funding for growth. We continue to expect more than 200 basis points of EBITDA margin from resolution of cost savings in 2021, and expect to grow Revolution dollar cost savings again in 2022.
We're investing approximately $25 million in automation related projects in 2021 and plan to invest more than double that in 2022, we expect spooling automation in our Louisville operations to contribute significantly to the increase at a total at a total of nearly $50 million in spending.
Over three years of 2021 through 2023.
This project is typical of automation related projects, providing an estimate a payback of less than three years.
Numerous additional automation and intelligent factory projects are also underway across RCP, including the installation of a high speed cutting equipment for cooking and baking line upgrades for hefty waste storage and Presto robotics and related line expansions for hefty tableware and other improved.
And equipment in line efficiencies throughout our operations.
Now before I turn the call back over to Mark and your questions I'd like to leave you with the following.
As Lance reviewed our business remains strong demand for our products is up our market shares are strong and our manufacturing and supply chain capabilities are strong and we are investing to strengthen them. Further nonetheless, it is important to remember that the environment for staffing and logistics related services.
Become more challenging and material cost increases have been difficult to predict with accuracy.
We consider this year's profit pressures temporary and expect sequential improvement in profitability in the fourth quarter. We also expect to return to pre pandemic.
Pandemic levels of profitability when inflation moderates.
As I previously said, we will fully recover these higher commodity costs through our pricing actions for Reynolds cooking and baking hefty tableware and presto by the end of the first quarter of 2022, assuming current rates for resin and aluminum pole.
And we remain committed to strong cash generation and disciplined capital allocation and investment in internal growth and upgrades to our cost structure and remain our top priority. We continue to focus on deleveraging with a target ratio of two to two five times EBITDA. We plan to continue returning excess cash flow to.
Shareholders through dividends, and we recently announced a quarterly dividend of <unk> 23 payable.
Payable on November 32021, and we continue to Opportunistically pursue bolt on M&A in our categories and Adjacencies domestically and internationally with that I'll hand, the call back over to you Mark. Thank you.
Thanks, Michael as I turn it over to the operator for questions I'd like to remind you that we ask that you ask one question and a follow up and then rejoin the queue. If you would.
Additional questions.
Operator.
Thank you at this time, we will be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad.
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Our first question comes from the line of Nik Modi with RBC capital markets. Please proceed with your question.
Yes. Thank you good morning, everyone.
I just had a quick clarification question just on the raw materials sale. If you could just provide some details around that.
And then the broader question is just on the price elasticity.
Talk about I haven't done a study I would be curious to hear kind of what the conclusion was of that end.
How do you see that.
Consumer and how they kind of draw down all of the cash sitting on given all the stimulus as we kind of move into 2020 'twenty. Two how do you think thats going to manifest in just the receptivity of pricing generally because it's not just in your categories. It's basically every category.
Yes, I'll take the first part of that on the raw materials. So we found ourselves long on on raw materials.
We really don't speculate in this space and so we decided to sell off those raw materials that we got market prices at that.
It was a nominal increase from a margin for nominal level from a margin perspective, but overall it was the best thing to do and is a prudent thing to do at that point in time.
And I will take the elasticity question Nick.
We've done an elasticity studies over the course of the history of our company and they always come back as these categories have relatively low last two city. There is no question. We're in a dynamic environment now that's different than we've seen historically.
And it did come back again with low elasticity, but as I said, it's dynamic so we're going to watch it very closely and we'll course, correct and adjust as necessary but.
Stimulus packages and consumer spending while it's factored into that study, it's not necessarily able to predict it any better than any of us. So we will we will have to course correct if necessary as we go forward.
And once if I could just follow up do you see the competitive situation playing out as you would've hoped or is there still some disconnect in terms of you guys moving versus some of your competitors across your categories.
Well, we've taken pricing across.
85% of our products as Michael indicated.
So.
As Michael also said the recovery in waste bags will be dependent upon the easing of commodity grades additional pricing or both there's numerous factors, we're going to consider in making those decisions consumer demand category strength retail price points.
And of course, working with our retail partners and the competitive environment.
Right now our focus on waste bags.
<unk> is exceeding our increased waistband capacity currently so as a result of our focus is on improving case mill and service to our retail partners.
Great. Thanks.
Our next question comes from the line of Rob Aten Stene with Evercore. Please proceed with your question.
Great. Thank you just first a.
Point of clarification.
Did I hear you say that you expect to get back to kind of normal margins at the end of Q1 2022, assuming.
No further cost increases.
I suspect it's market share gains that is driving that conviction.
Just kind of the follow up follow up question then.
If we stand back and say.
Longer term one.
Once we get into a normal environment.
Given all the gains that you've gotten from revolution, given your market share.
Trends given.
What looks like sustainably higher consumer demand.
Is there any reason why you won't be able to earn.
Materially more than what you did in 2019.
You get to a more stable environment. Thank you.
Yes, so just to clarify when we're talking about recovery. Our overall intent is that we feel by the end of Q1 that we will have full recovery from them on the commodity.
The increases that we've seen so that was it was not intended to be margin related it was full recovery from a Marty cost standpoint.
Obviously labor logistics continued to be a bit of a challenge and we're still working through that but.
We think we have a good plan to address that as well.
And Robert This is mark just to add to what Michael said that full recovery comment pertained to Reynolds cooking and baking to tableware and to Presto.
And what's going on with the rest of the business.
While the rest of the businesses is the hefty and I think we've talked about that quite a quite a bit and that have hefty portfolio. We have to be very mindful of what competition is doing from a pricing standpoint.
And so at this point in time, there is no further actions.
Were taken around pricing.
Just to add to that we've implemented mid single digits in the first quarter on hefty waste bags, 9% increase in August together, representing a 14% increase.
And those products.
And the competition is lagging.
Yes, okay.
Thank you very much.
Our next question comes from the line of Lauren Lieberman with Barclays. Please proceed with your question.
Great. Thanks.
Okay. That's great and then my father was I I do recall.
Having you guys having spoken in the past about there being like a magic price point and foil.
It was 499, maybe you know, but but that there actually was an element at least in the foil business of there being a magic price point that.
Laughs to see you know kind of kicked in above above that level.
You know incredibly increased demand in that in that category. So I'm. Just curious if you think that magic price point conversation goes out the window because of the the greater usage that you don't have full penetration you've you've had in that category through the pandemic.
Well, we've gone far enough to have the price for it now.
Price increases that we've already implemented.
Implemented rope, rather that price point was 399.
Long surpassed that in the last couple of months and you can see from the categories are shared data that is considered to be very strong. So out the window I think is a great farmer as a very inflationary environment now and it was different when we we cross that price with previously.
Okay. That's great. Thanks, so much.
Our next question comes from the line of Mark Astrakhan with Stifel. Please proceed with your question.
Yeah, Hey, thanks in morning, everyone.
I guess, just the start of a follow up.
Could you maybe comment on where price caps or today and whether private label is moving generally in unison with the multiple around the price that you've taken across relevant categories.
Yes, as you know we have a large percentage of our business is also store brands and the pricing that we've taken on ours as well as competitive store brands have been consistent with the brands. So in most categories. There has been a consistent price gap.
Maintained and most of these categories.
The exception may be waste bags that were watching that closely.
We have taken up as well as we've seen competition in <unk>.
Store brand waste bags take price increases more than the brands.
Got it okay. That's that's helpful. And then broadly speaking and maybe some of this is a is unknown b as a bit optimistic, but if we kind of look forward to next year and say in a perfect world Big spot rates for key inputs, either stay where they are even come down could you just remind.
How to think about this how much of the pricing it'll be for around I guess by getting your next year and key categories and how much of that sustains routines versus how much is given backing just reductions of price increase promotions et cetera.
Yeah, that's a very it's a very dynamic question because it really depends on where commodities you are at that point, but as we said historically.
The price increases that we take a commodity stabilizers or retreat modestly.
We don't reflect that in price decreases and in this environment. There are other offset that we've got to consider we have higher labor costs, we have higher logistics cause we have higher input costs, including energy and packaging.
And all of those I've got to be considered as part of the pricing equation as.
As we go forward even of commodities retreat.
Got it okay. Thank you.
Thank you.
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Please limit to one question and one follow up and returned to the queue.
Thank you. Our next question comes from the line of Bell Chapel with truly Securities. Please proceed with your question.
[laughter] Thanks, good morning.
You just.
As expected another question on on commodities and input inflation, just trying to understand how much of it right now is I.
I guess specific to the company thinking more like aluminum and how much of it is also more would you would you view is transitory we'd heard some other companies talk about kind of hurricane Ida affecting resin prices and and did that wood and shortages and stuff like that I I don't think you really alluded to that but just kind of maybe as you look.
At your basket, Yeah I'll bet.
You feel that does probably started to ease versus some of it being more I guess longer lasting than anything else.
I think it's very very difficult historically to accurately predict flower commodity costs.
If we were able to do so we price of that forecast versus the actual costs and that's what we're doing any across the vast majority of our product portfolio.
One thing is pretty certain.
<unk> is not going to retreat back to prepandemic levels.
I do see the modernization of stabilization occurring.
But in resin, but.
But we're not predicting a bit big pullback, we'll watch it closely of course.
And I've talked to all the major resin suppliers personally and they're not predicting a major pullback either.
An aluminum it's been very.
Dynamic and volatile.
It has almost doubled at one point versus prior year, it's retreated modestly in the last week.
But it's up substantially versus 2020 levels.
Okay, Great and then just.
Follow up kind of on the the upcoming holiday season, I feel like a year ago, you felt like the fewer family outings.
Wood I think it was would you know maybe you have a a benefit just because.
Pure big Big get Togethers and lots of smaller family outings would be a lift for your product. So how does how does that we characterize that coming to to this holiday season, I mean should there be this greater.
Occasion usage or you know is just how did how you're looking at that up from a volumes perspective. Thanks. Your yeah. You are correct. We did predict that in our prediction turned out to be incorrect. We did not see the kind of holiday gatherings, we historically seeing particularly for the cooking and baking products in 2000.
20.
So what we're seeing in 21 is a return to the more normal holiday gatherings in 2021.
Great. Thank you.
Our next question comes from the line of Andrea taxi out with J P. Morgan. Please proceed with your question.
Hi, Good morning, So you Lord Uhm, the past for the fourth quarter, but he got topline came in well ahead into me too.
Hi team. So can you break down a bit between volumes in pricing I saw an increase of inventory. So it seems that you are prepared to meet the higher demand.
But given it puts and takes off each of the divisions I think tape away I had this comps and cooking and baking as well in terms of volumes, but you have stuff comparison I seem to have to waste and storage. So how can we think about added to the the price increase that you took in that decision.
And how to think I see your chest.
I suggest discussing with you know from from a holiday perspective, how to think about the puts and takes thank you.
Yeah. So I I would you probably recall I did say that about $450 million, we've seen a $450 million increase and materials logistics and related cost.
Now $50 million of that is higher than what we anticipate in early August and so that 50 million is really driven by additional labor and Michelle aluminum cost.
And just the logistics costs, if I broke that out so about $30 million 50 as materials and the rest of it is labor and logistics.
So that's really the driver of why that.
That's challenging us further.
Right Yeah, that's helpful. Michael but then in terms of the top line.
The meat cheese and high teens I think came <unk> Ah came in way ahead of consensus in our numbers. So watching forms do you in terms of demand off the top line growth are you seeing early science from your retailer's that they are taking in way more inventory for for cooking.
And for a tableware normalizing, how we should be thinking and took at that you know into that number for the fourth quarter, but yeah before he answers Andrea could I just clarify are you asking about Q4.
Yes, Q4, Okay, Alright go ahead.
Oh I thought you were talking about the top line for Q3 words, a lot of that was driven by the excess aluminum sale.
Oh, Yeah, no no worries asked I wish I wasn't clear, it's more about like that forward looking the fourth quarter.
It's in it came in I had of course, you'll have the pressure that allowed to your EPS being being forward, but on the top of the wedding.
Yeah. So I just added Joe Joe bottom line I think.
Timing right. So there's no real change in a full year right.
So it's basically just a matter of timing a shift between Q3 and Q4.
Okay and in terms of demand you're not saying why are you just discuss that.
The holiday season or inventory levels that the retail how how we should be thinking of that.
It's still early in the quarter.
But our guide holds that we're seeing strong demand in the in the quarter compared to prior year, particularly in cooking and baking, but what Michael's saying is the headwinds on higher commodity cost logistics, Scott is approximately $50 million more than we've seen in early.
August.
Yeah, that's fine I'll pass it on thank you.
Our next question comes from the line of Wendy Nicholson What city. Please proceed with your question.
Hi, Good morning. My first question has to do with a comment about the sale of the excess raw materials I don't know if I've ever heard that before and it just strikes me as sort of a strange thing given the scarcity of of raw materials and and whatnot. So can you just give us a little bit more color of what that was was it was it a miss.
Match in terms of.
Raw materials, you had on hand versus what you were selling or or how did that come about.
Yeah, well it was primarily an aluminum space over over a period of time.
Accumulated more inventory of that overall space than we anticipated right and so typically when we have a situation where we have excess amount. If the market conditions are such that we could sell it at a at a margin even if it's a low margin will exit that because we don't we don't Wanna get into practice are speculating on and holding on.
Yes levels of imagery that can't be used in a reasonable amount of time.
Got it Okay fair enough and I guess, just the longer term and I apologize for the second question, but I think I'm near the end of the queue. So hopefully that's okay.
Michael what you said about sort of commodity environment, and rising prices aren't coming down anytime.
Anytime soon and how you're not taking pricing and hefty sorta given the competitive environment I'm. Just curious if you take a step back on you know for Reynolds in particular, just specifically you.
How long do you think it will take or or is it even in the cards for for you guys to get back to you know kind of a high twenties gross margin has something structurally changed do you think I mean, I don't I can't imagine do you or any of your competitors want to be structurally lower gross margin going forward, but if you're not taking enough.
Pricing to insulate margins had hefty what does it take for you to get back to that high twenties gross margin is that a two year event three year event or has something just changed thanks.
Before Michael answers at one thing I will just.
State is the math is going to change with these new <unk> and denominators moving around so much. So when we talk about high twenties, we need to calibrate less on percentages moron actual dollars Mike.
Michael Yeah. So so you know I overall I believe were taken all the right actions to return to Prepandemic profitability right. We've talked about we've talked about the fact that you know our pricing actions are in place to recover by the end of first quarter, assuming that you know, we don't see further increases and immature.
Zero cost. We're also we're also taking great cross extensive cost reductions across a portfolio and we're managing without it within our existing footprint, which is which is pretty critical right and that underpinned by automation innovation and continued to them as well as continued demand.
Currently there are three notable headwind that we have to overcome waste of storage rising costs in excess of current levels of pricing we've talked about that.
The labor market remains tight and then there's tight logistics conditions driving the efficiencies in rate increases. So we have to overcome those but overall I think we're we're well positioned in uhm and were taken all the rights steps and so just to put a fine point on that when when inflation stabilizes and the commodity cost stabilize.
We will return to the dollar gross margins because of the actions, we've taken and prices and increases in cost reductions.
Terrific. Thanks, so much.
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Our next question comes from the line of Peter Ground with you B S. Please proceed with your question.
Hey, good morning, everyone I hope you are doing well so.
Maybe just following up on Wendy's question regarding the margin recovery.
I know you mentioned <unk> margin should improve sequentially, but.
Coming from down 1200 basis points, you know that's a pretty wide range. So can you maybe help us understand the magnitude of the improvement and looking out the 22, because when do you actually anticipate gross margin expansion given the comments you made around pricing all setting commodities for three and the four divisions.
Yeah, I want to be I want to go back to Atlanta sat around gross margins riots overall.
You got a factor in the fact that you know there's a math.
Equation right all the pricing that we've taken so that's going to continue to challenge us from a gross margin perspective, right. So I just can't overemphasize that if you guys are building your models purely on on the margin perspective, you have to be cognizant of that.
And I will just add that all through fiscal 2021, we've been taking price increases sufficient to recover commodity increases, but it's been on a lag and assuming calmer. The current commodity costs will where they are right now.
Q1, 2022 pricing actions will see is fully recovered on 85% of our business.
And a similar statement could've been made in August with regard to Q3 pricing actions, but obviously commodities moved up from that point.
So when they stabilize as I said, a moment ago, we will have recover.
Got it and then maybe just asking on margins move more around SG&A, It's clearly been Ah nice tailwind this year so.
Just in theory like as if gross margin should improve like how should we think about some of the between the lions spending coming back.
Or do you think you kind of have found some efficiency that should gross margin them for over a gross profit dollars improve that you would actually see that flow through regenerating.
No I would say the 2021 was primarily a lot of belt tightening that we did and and is not necessarily something will repeat in 2022 and of course will provide that and more detailed with our guide in 2022.
Great. Thank you so much.
Our next question is a follow up from Rabat and seen with Evercore. Please proceed with your question.
Great. Thank you very much can you talk a little bit about the competitive dynamics on the waist bags side and you know compare that of how it's been over the prior years. It seems that there's a little bit of a change you know in that dynamic.
I don't know if whether it's around competitors looking to gain share keep share differences in what's going on in the channels are innovation, but it just it kind of feels like there's something a little bit different going on so maybe you can kind of help us understand that a little bit better and why that part of your business.
It should be lagging in terms of March in recovery.
Well as I said, we implemented to price increases it added up to 14%.
In the hefty waste bags.
And as a result, the price gaps while they vary by channel and most channels they've they've narrowed.
We.
We continue to watch this category very closely and as I as I also said where demand is exceeding our increased waistband capacity. So our focus right now and it's hefty waste bags is improving tasteful service to a retail partners.
Okay. Thank you.
Thank you ladies and gentlemen, we have reached the end of the question and answer session I went out to Nicole over to Lance Mitchell for closing remarks.
Thank you for your questions. We appreciate your time this morning, our revenues growing and we expect accelerating revenue growth and sequentially improving margins of the fourth quarter, driven by consumer demand pricing and innovation in our expanded manufacturing and supply chain capabilities I want to particularly.
We thank our employees for continuing to follow a prevention measures and putting safety first as we grow our business in this exceptional time.
Thank you and stay safe.
This concludes today's conference and you may disconnect. Your lines at this time. Thank you for your participation and have a wonderful day.