Q3 2022 Reynolds Consumer Products Inc Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the Reynolds consumer Products' third quarter 2022 earnings call. At this time all participants are in a listen only mode. After the speaker presentation there'll be a question and answer session.
If anyone should require operator assistance. Please press star zero on your telephone keypad. Please be advised that today's call is being recorded I would now like to hand, the conference over to your speaker today Mark. Thank.
Thank you. Please go ahead.
Good morning, and thank you for joining us for Reynolds consumer products third quarter 2022 earnings conference call on the call today are Lance Mitchell, President and Chief Executive Officer, and Michael Graham Chief Financial Officer.
For our agenda today, Lance will talk at the market conditions, and our fundamental and Mike will review our quarter.
Then we will 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 our annual report on Form 10-K, and other reports filed from time to time.
And Exchange Commission and our press release issued this morning for a detailed discussion of the risks there.
It 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 measures non-GAAP financial measures is available in the earnings release posted under the Investor Relations heading.
On our website at Reynolds consumer products.
We have also prepared a few presentation slides and additional supplemental financial information, which are posted on our website under the Investor Relations.
This call is being webcast and an archive of it will also be available on the website.
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 up and rejoin the queue. If you have additional questions.
Now I'd like to turn the call over to Lance.
Thank you Mark we delivered another quarter in line with our earnings expectation and what continues to be a very dynamic environment.
Third quarter highlights include the following.
Household oil and waste back volume responded favorably to increased advertising promotions and in store features and displays.
Reynolds had hefty gain share in waste bags household oil and disposable plates.
Private label gained share and press the closed food bags and disposable party cups, where we have a significant private label presence.
We implemented previously announced pricing to offset additional cost increases.
We accelerated resolution cost savings, while also implementing new programs for savings and as a result, we closed the gap between pricing and cost increases.
Our category leadership and agility.
These achievements, while setting the stage for substantial margin expansion and profit growth in the fourth quarter and 2023.
Before talking about performance drivers I'd like to share a few thoughts about the economic environment in our market position.
We assume increased elasticity is going forward, which contributes to our fourth quarter revenue expectations now being at the low end of our previous range.
That's obviously a headwind, but one of our strengths is our ability to adapt.
And as I said, we are pleased with how consumption is responding to our pickup in promotions advertising and in store features and displays.
I think it's also worth remembering that our integrated brand and store brand model is a competitive advantage Reynolds and hefty represent a large share of our categories and our private label portfolio complements our brands in multiple categories.
Finally, as we enter the holiday season and develop our plans for next year. It is important to note that increased cooking and working at home have driven many of our categories to levels that are beyond those implied by the last three years of household formation.
That's clear from our proprietary research and.
And it's validated by the scanner data.
According to IRI equivalent volumes of waste bags disposable party Cubs parchment paper bakeware and slow cooker liners.
All grown in excess of 5% since 2019.
And some of these categories are now more than 10% larger than they were prior to the pandemic.
Now, let's turn to the main drivers of our performance pricing consumer demand innovation in manufacturing and supply chain capabilities.
In the area of pricing recently announced increases in disposable tableware in waste bags had been implemented as planned in September and October bringing annualized pricing to nearly $1 billion since mid 2020.
We are reinvesting a portion of these increases and additional advertising and promotion.
And consumer demand for our categories and product portfolio is responding to our increases.
And household of oil in June we began increasing promotions features and displays and are directing more advertising dollars to younger consumers.
These measures have contributed to improving household oil trends along with increases in Reynolds Rev share of the oil category.
And our retail partners are.
Also increased promotions further in October and plan to continue similar promotions this holiday season.
And wasted food bags hefty share trends improve and a share of private label remains strong.
And the disposable tableware.
We gained share and maintain a substantial discount to paper plates, while also implementing the additional pricing on disposable place.
Third major contributor to our performance is innovation.
Waste <unk> storage FTE Fabulous, so continue to grow strongly nearing $110 million at annual retail sales in the quarter.
We launched <unk> gallon trash bags for Australia, and the new Ocean water cents in the quarter.
We introduced hefty slider calendar backs, which allow for better recording a refrigerator or freezer storage time, and happy may differ trash bags in the ecommerce channel.
And we saw further consumer and retail adoption of standard build private label food banks.
In cooking and baking the Reynolds brand continue to benefit from innovation as rentals Rep Nonstick, well remains strong rental kitchen air Fryer liners, and Reynolds kitchens, which are paper.
Helped to build rentals presence in certain adjacencies to household wealth and other more established categories.
And we achieve growth within our portfolio of sustainable products, including kept the eco save which grew strong double digits in the quarter.
Hefty postal credit paper plates.
And Additionally, we launched a new food bags made from 20% renewable plant in ocean materials.
The fourth driver is the performance of our manufacturing and supply chain.
The recent manufacturing and operational performance in the Reynolds cooking and baking segment has fallen short of our standards and historical results.
Unplanned downtime at two of our plants as a resulted in incremental manufacturing costs and impacted our ability to adequately supply non retail customers.
In response, we are implementing operational changes to improve reliability and efficiency in.
In addition, we have made changes to their cooking and baking organization with new members of management, who possess extensive experience in operations and demonstrated business leadership.
In terms of service, we have produced substantial improvements across Reynolds consumer products, reflecting the attainment of target staffing levels and increased stability across our supply chain.
Now.
I'll pass the call to Michael I'd like to leave you with the following.
The economic environment remains dynamic and inflationary pressures continue and price elasticity continues to be uncertain.
However, we are giving shoppers the trusted performance and additional value they seek in these uncertain times.
And in terms of business performance the GAAP.
Between our pricing and cost increases is closed and we're positioned for margin expansion and earnings growth in the fourth quarter and 2023.
That implies not only a return to earnings growth, but also increased flexibility to invest in our categories and drive future innovation and consumption.
I'm extremely proud of the RCP team and believe that we are well positioned to benefit from the actions we have taken over the last two years.
With that over to you Michael.
Thanks, Lance and good morning, everyone I'll start with a review of our third quarter results, then turn to our outlook and why we are well positioned for margin expansion and earnings growth in the fourth quarter and in 2023.
Net revenues in the third quarter were $967 million, an increase of 7% over third quarter net revenues of $905 million in 2021.
Driven by price increases, partially offset by a decline in volume.
Adjusted EBITDA for the quarter was $116 million down 12% versus last year's third quarter of $132 million, driven by lower volume and higher SG&A as price increases fully offset increases in material manufacturing and logistics costs.
Adjusted earnings per share for the quarter was 24 cents.
Turning to our segment performance details are in our press release and in our 10-Q, However, I do want to cover a few key highlights.
Pricing was up 14% driven by increases across our entire portfolio offsetting all material manufacturing and logistic cost increases.
This increase was partially offset by a 7% decline in volume, reflecting a 7% increase in hefty tableware volume more than offset by a 14% volume decline in Reynolds cooking baking and high single digit decline for each of hefty waste <unk> storage and Presto.
When we report our second quarter results, we shared our expectation of low to mid single digit volume decline third quarter.
This largely played out as anticipated with the exception being non retail sales that were impacted by unplanned downtime and the Reynolds cooking and baking segment and to a lesser extent increases in waist bag elasticity.
So, let's unpack the volume performance for the third quarter compared to prior year period.
Reynolds cooking and baking volume decline of 14% was primarily driven by lower non retail sales, which.
Which included Reroll related party sale in last year's onetime excess raw materials. In addition, lower household oil shipments represented three points of this decline.
Volume declined 9% in hefty waste in storage driven by elasticity and increased consumer activity outside of the home.
Innovation was a key driver of herpes outperformance of waste of the waistband category.
<unk> volume declined 8% also driven by a lower waste and food bag usage, partially offset by increased private label share of prestige closed schools bags hefty tableware performance was strong with volume up 7% in the quarter driven by continued growth within the club channel and.
Share gains for hefty disposable flame and private label plastic party cuts across channels.
Now before I go into our outlook I would like to talk a little more about the performance we're seeing in cooking.
Our three key factors impacting the near term profitability in this business.
Unplanned equipment downtime driving higher manufacturing costs and lower production volume.
This lower production volume is impacting our ability to fulfill non retail demand in.
In addition, as a result, we are experiencing a negative impact in terms of when lower cost metal flows through to our P&L.
As Lance discuss we are implementing operational changes to improve reliability and efficiency in our cooking and baking operations.
Now turning to our outlook, we now expect revenue growth of approximately 8% for the year along with gross profit in the low $800 million range adjusted EBITDA in the range of $560 to $575 million and adjusted EPS of $1 30 to $1 36.
Per share.
<unk> guidance reflects reduced expectations for the comparatively low margin Reroll and related party sales as well as a pickup in elasticity and portions of our business we.
We also assumed rates for key commodities are stable by comparison to the end of October levels.
Other key assumptions for the year, including depreciation and amortization of approximately $120 million interest expense of approximately $75 million versus an estimated $70 million previously driven by increasing market rates.
And an effective tax rate of 25% and capital spending of approximately $135 million to $140 million.
In terms of the fourth quarter additional elasticity in portions of our business changes our volume expectations to decline in the low to mid single digits.
We're on track for margin expansion and earnings growth in the fourth quarter driven by further recovery of cost increases as new pricing inflows through and cost increases moderate.
We also expect SG&A to increase driven by advertising investment and our operational improvements and compensation related comparisons.
Now before I turn the call back over to Mark and your questions I want to leave you with a few thoughts on cash flow just as we are committed to returning to pre pandemic profitability. We're equally focused on improving balance sheet efficiency and maintaining capital spending discipline to drive additional cash flow we.
This commenced in the fourth quarter as we unwind from our normal seasonal peak in working capital earnings grow and commodity cost pressures ease in terms of capital allocation. Our priorities are unchanged and we intend to return to debt Paydown in 2023.
In closing, while we continue to manage through a very challenging environment.
Encouraged by the actions, we've taken as well as the implications for our future results with that I'll turn the call back over to you Mark. Thank you.
Michael as I turn it over to the operator for your questions I'd like to remind you that you ask one question and a firewall and then rejoin the queue. If you have additional questions.
Later.
At this time, we'll be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question. Kim You May Press Star two if you would like to remove your question from the Kim.
For participants using speaker equipment, it may be necessary to pick up your handset before pressing the Turkey. One moment, please while we poll for questions.
Our first question comes from Bill Chappell with <unk> Securities. Please proceed with your question.
Thanks, Good morning.
Good morning Bill.
Hey, just wanted to follow up on the cooking and baking profitability issue I appreciate the comments, but I guess with the.
Our leadership change, maybe implies there's a little bit bigger or longer lasting issues. So maybe any color around that of when you think things can get back to where you want them to be and how long it would take.
Yeah. So as Lance stated in his remarks, the recent manufacturing operational performance run offs.
Cooking and baking <unk> fallen short of our standards and our historical results. So we've had demonstrated capabilities.
As proven in the past.
In terms of what's driving that as I said in my remarks, it's unplanned equipment downtime.
And this is driving higher manufacturing costs and lower production volume.
That's impacting our ability to fulfill our non retail demand. It's also slowing down a flow through of our lower cost metal, which has a significant impact to our Q4.
While most of these issues are temporary in nature.
We are implementing operational changes to address them, all and lance kind of spoke to that.
So we do see this as being a temporary challenge that we're working through.
We as it relates to the change with leadership, obviously, we brought in a person with significantly greater operational experience to help us manage through this.
Yeah.
Got it and then just as.
A follow up you might have touched this before but when you comment about returning to kind of pre pandemic profitability levels in 'twenty three is that.
I know youre, not giving guidance, but is that for 2023 or within our during 2023, you will reach that on kind of a run rate. Thanks.
Joe.
Is within 2023 is where we're talking about returning back to pre private equity profitability.
Okay.
Got you should be a run rate.
Through the year.
Yes.
Thank you thanks, so much.
And comes from Mark Astrachan with Stifel. Please proceed with your question.
Yes, thanks, and good morning, everyone.
I guess two.
Two questions from me one if you could just give maybe a bit of background on what happened from a sales perspective relative to <unk>.
Early September and your updated thoughts.
At that point relative to where results came in kind of what progress through September and is that sort of directionally. What we are hearing from an elasticity standpoint.
Implied in the fourth quarter commentary and then the main question is.
What drove the increase in promotion price gaps.
Waste bags and are you happy with where you are as volume declines worsened in the quarter and maybe give some expectations on where we go from here. Thank you.
Thank you Mark.
September volume across our.
Our products and segments came in line with our forecast and our expectation. So theres really no difference from what we talked about it.
Barclays Conference relative to the.
The September results.
We have from a from a category standpoint in waste bags, we implemented a hefty waist bag price increase in September .
And the promotions. We've added are off of a small base and they're focused on quality features and displays like untapped not just price points.
The category itself is 7% larger than it was in 2019 year to date.
But the elasticity and reopening or driving some category declines versus year ago levels.
So our strategy remains.
As to what it's been for many years support the category and our retail partners.
And with a strong portfolio of branded private label products.
And and drive hefty is a brown offering with the best combination of value.
That's benefited the category and our portfolio is.
And that requires continued adjustments to be successful.
Ft is outperforming the category the last four weeks ending October 30th.
The scan EQ the category is down eight and a half while <unk> is down three eight.
And for the last 12 with similar of the category is down seven and a half and half these down three and we're looking at EQ performance because looking at <unk>.
And the category is really blurred by the price increases.
Okay. Thank you.
Okay.
Our next question is from Rob <unk> with Evercore ISI. Please proceed with your question.
Great Great two questions. Please.
One in the shorter term on results, just maybe a little bit more detailed thoughts on the.
The trend in improvement.
On the foils.
And then a little bit kind of forward looking.
Can you give us just some way to think about the potential benefit to your business.
Hum.
A more constrained consumer who.
Maybe thinking about trying to save money by.
Eating more at home and less at restaurants, and how that's likely to play into your business.
Yes, I think both of those questions can really be answered in terms of what's happening with the foil category and what we're seeing from.
The promotional activity that we've taken.
The pandemic has benefited cooking and baking behavior and consumers people are in the kitchen more and we did a proprietary survey that they are cooking more often.
The younger consumers have come into the category and stayed in the category and.
And recently because of the higher cost of eating out.
They are coming back in the <unk> and the home more frequently than they were earlier in the year.
Our category and our brands are responding to advertising promotion as we've talked about in the prepared remarks.
Now on the challenge side, we do see the consumers are.
Not leaving the category look versus during the pandemic the daily usage has dropped moderately.
And there are some other options in the kitchen, which is an opportunity as well as a challenge they've got other.
Options for creating a meal appliances other than us Stover grill was.
Those include air Fryers, and hence the pods and slow cookers for example.
So overall, we're very pleased with how the promotions have responded and as we head into the holiday season.
We've really got a lot of promotions in place and got the price points in place for for the category.
Thank you.
Okay.
Our next question is from Andrea Teixeira with J P. Morgan. Please proceed with your question.
Thank you good morning, everyone. So my question is regarding <unk>.
Comment about.
About the 7% increasing from 2019.
For the pandemic, especially for trash bags, and then I think for cooking baking has had some categories on the songs cooking baking.
The above 10%.
Is that a volume consideration and if so from a total out spending from the consumer standpoint, like how are you I'm assuming again it has been a bigger.
Price elasticity and on top of that you had this service issues is that any indication that this is going to be abating and so the first part of next year.
And if not what is the scenario that would lead you to form that margin inflection you're assuming some volume recovery into 2023 in other words, what we need to see in order for you to get.
The margin accretion is that the pricing continuous taking.
Or at that.
<unk> hundred $25 million in inflation abating, what needs to happen in order to get there. Thank you.
Well, let's talk about what's happening in each of the categories.
Versus 2019, and as we've gone through the pandemic and as we're now in 2022 first of all I'll just add some of the comments I made about the foil category answering Bill's question.
There are several things that are driving the growth in the foil category people are cooking more now than they were in 2019 foil and parchment usage continues to be higher than pre pandemic levels and 78% of consumers are eating at home more in response to inflation as I mentioned a moment ago.
Importantly, we've achieved key price points for Reynolds wrap we've stepped up promotions have gotten below the $5.
Price point and have gotten that across the other product lines as well and private label gaps in the category of returning to historical levels.
When Reynolds wrap is on promotion.
So we've achieved those price points, we've introduced additional promotions and grocery club and dollar channels in October and our retail partners plan additional promotions, leading into Thanksgiving and Christmas.
So Reynolds wrap this responding better than the category as a result in <unk> as I mentioned across all of our categories, We're evaluating EQ performance versus dollar.
<unk> and Reynolds wrap EQ was up four 5% versus the same period in 2019. So that's the last 12 weeks ended October 30.
Turning to waste bags to stay at home more frequently trend in working more frequently from home was left waste bags healthier than it was primarily prior to the pandemic the category as strong versus 2019, it's up 7% year to date as I mentioned, reflecting consumer spending more time at home.
Foodbank consumption on the other hand is moderately down versus 2019, and thats, primarily driven by elasticity.
So as the playbook that we've been using for foil waste bags were going to be doing the same and feedbacks, yet the price points correct.
And disposable tableware plastic party cups were up 9% versus 2019 levels driven by increased everyday use.
At home.
Now disposable foam dishes are down versus 2019, but that's completely driven by supply constraints. We are selling as much foam dishes is as we have.
Supply and our brand year to date is actually up 5%.
We see the use of disposable tableware has been steady this year across the category and heading into the holiday season.
This may continue to be a key theme of driving consumer behavior.
Desire for convenience as well.
Keeping tourists to a minimum.
As well as holiday gatherings is factored into our forecast for the quarter, but we are seeing elasticity pick up as we took a significant price increase in October and the tableware business I'll be watching that closely.
Yeah, that's helpful and on the margin front, what needs to happen in terms of like price elasticity and inflation cost inflation into 2023 going back to Bill's question, Yes, as we said in our prepared remarks, we've closed the gap and we've closed the gap primarily through our pricing actions.
The tableware was the significant one as well as waste bags that we took that led into Q4.
So with that with the easing of commodities.
We will have a margin that as we go into 2023 and in Q4, as well will be improved and back to more normalized levels.
Okay. That's super helpful. Thank you Lance and Michael I'll pass it on.
As a reminder, if you'd like to ask a question. Please press star one on your telephone keypad.
Our next question comes from Lauren Lieberman with Barclays. Barclays. Please proceed with your question.
Great. Thanks, good morning, everyone.
Lance your prepared remarks, and the comments, you've just gone through on category demand and the competitive dynamics are very very constructive and so I wanted to just sort of boil it down and see that to ask if the operational chat.
<unk> got in the cooking and baking segment, if that's really what you would attribute fourth quarter looking a little bit softer than prior expectation you know what that's really attributable to and I know you said, it's short term and you're making changes, but how should we think about that does that bleed into 'twenty three at all or is it kind of a <unk>.
Second half of 'twenty, two and then you think things should be back to normal from that that non retail.
And manufacturing side kind of thing.
Laurent I'll answer that one and then you can add to it Michael if you like the driver of our Q4 EBITDA guide being lower is volume at $7 million to $8 million at the midpoint.
The lower volume is primarily non retail.
And.
As we've mentioned the specific products in our prepared remarks non retail is.
And some increase elasticities versus what we saw in Q3 so it's.
It's driven primarily by an elasticity look at our volume in Q4 versus where we were Q3, what we guided.
The increased manufacturing costs.
Our short term and offset by Revolution and SG&A reductions.
Okay, Alright, that's great so as I look into 'twenty three.
You guys had previously spoken to mid nine hundreds or gross profit dollars.
And that really being kind of the math on pre pandemic profitability with an assumption on volume.
I'm guessing now with <unk>.
Elasticity being a bit more significant than what you'd previously expected, we should anchor to something a bit lower when we think about that gross profit level for 2003.
Yes, I think thats.
Correct, but mid nine hundreds are still in the ballpark.
And.
Clearly elasticities are greater than we anticipated in our reported in Q2, we did kind of give you indications of that was a watch out so that is overall concern so.
I think the.
While in a ballpark I would say that it is a bit lower than we originally thinking.
Yeah.
Okay, Alright, that's great.
Yes.
We're working to identify additional revolution savings to mitigate.
We will obviously be more specific when we report in February .
Okay. That's great. Thank you so much.
On elasticity I guess.
What is historically and I know for a lot of categories that the historic models don't arent, even relevant because pricing has gone so so far beyond what's been the case historically.
So would you characterize that it is kind of what's been the case for your elasticity models and is it something about the kind of cross elasticity of overall inflation, that's making it a bit worse than you know we kind of like a one for one type dynamic now is what you're forecasting or something to fill a bit less than that.
Our categories have been moderately elastic historically with a defined range of one to one and a half negative.
It may be the exception.
One price.
<unk> holds or cross that's more significant in our categories then act.
Then the actual price gaps and so that's why we're watching those price thresholds and adjusting accordingly.
And having success in doing so across most of our categories today.
Our categories are defined as staples need given categories and reactive price change accordingly within this this moderately elastic range.
Okay. That's great. Thanks, so much I'll pass it on.
Our next question comes from Jason English with Goldman Sachs. Please proceed with your question.
Hey, good morning folks thanks for slotting.
So lots of comments today about how volume in your categories.
Still elevated I think you mentioned that daily use for some of your categories is drifting off the highs, but still well above where we were pre COVID-19.
Lance Michael as you guys think forward how much what's the cadence pace and magnitude that you expect that to online as we go through next year.
We haven't we have not completed our plan for 2023.
We're going through that process now it would be premature for us to be able to comment on.
What our outlook is for 2023 from a volume and elasticity standpoint, we certainly want to see how things develop in Q4 as we've gotten some price points in place and we're entering our holiday season, which is a.
Significant for several of our categories. Once we get through that we'll have a much better read on 2023 and the outlook for volume is that year.
Yeah.
Is it fair to say that that mid nine hundreds guidance out there for gross profit.
Assumes that not all of this volume sticks.
As Michael said I think it is still in that neighborhood, but elasticity is greater them when we reported in Q2.
So we've got a we've got to work through that before we're able to update that.
The mid nine hundreds.
Okay.
Alright, I'll stay tuned thank you I'll pass it on.
We have reached the end of our question and answer session I would now like to turn the floor back over to Lance Mitchell for concluding comments.
Thank you for your questions and we appreciate your time. This morning, I think our business is well positioned for any economic environment, and we anticipate earnings growth in the fourth quarter and in 2023.
I also want to thank all of our employees and our retail partners.
They've been dedicated in contributing during these really challenging and dynamic times.
Thank you everyone.
Okay.
The conference has now ended and use this concludes today's conference. Thank you for your participation you may disconnect your lines at this time.
[music].
Yes.
Yeah.
[music].
Okay.
[music].
Okay.
Yes.
Okay.
Okay.
[music].
Okay.
Okay.
Okay.
[music].
Uh huh.
[music].
Okay.
Okay.
[music].
Okay.
[music].
Yeah.
[music].
Okay.
Okay.
Okay.
Okay.
Okay.
[music].
Okay.
[music].
Okay.
[music].
Okay.
Okay.
Okay.
Yes.
Okay.
Yes.
Okay.
[music].
Okay.
Yes.
Okay.
[music].
Yes.
Yes.
[music].
Yes.
Okay.
[music].
Okay.
[music].
Yeah.
Yeah.
Okay.
Okay.
Okay.
Okay.
Okay.
Okay.
Okay.
Yes.
Okay.
Okay.
Yes.
Hum.
Sure.
Okay.
Okay.
Yeah.
[music].
Thanks.
[music].
Okay.
Okay.
[music].
Yes.
Yes.
Okay.
Okay.
[music].
Okay.
[music].
Okay.
[music].
Okay.
[music].
Okay.
Okay.
Yes.
Okay.
[music].
Okay.
Yes.
Yes.
Yes.
Yes.
Thank you.
[music].