Q4 2022 Reynolds Consumer Products Inc Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to Reynolds consumer Products' fourth quarter 2022 earnings call.
At this time all participants are in a listen only mode.
After the speaker's presentation, there will 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 Schweitzer. Thank you.
Please go ahead.
Thank you operator, good morning, everyone and thank you for joining us on Reynolds consumer Products' fourth quarter and fiscal year 2022 earnings Conference call. Please.
Please note that this call is being simultaneously webcast on the Investor Relations section of the company's corporate website at Reynolds consumer products Dot Com our earnings press release and accompanying presentation slides are also available on the website with me on the call today are Lance Mitchell, our President and Chief Executive Officer, and Michael Graham, Our Chief Financial Officer.
Sir.
For our agenda. This morning, Lance will focus remark his remarks on fourth quarter performance and the Reynolds cooking and baking recovery plan as well as discussion of our performance drivers well, Michael will review, our fourth quarter and full year financials as well as our 2023 outlook.
<unk> prepared remarks, we open we will open the call for questions.
Before we begin I would like to provide a few reminders first this mornings discussion may contain forward looking statements based on current expectations and beliefs. These statements are subject to risks uncertainties and changes in circumstances that could cause actual results and outcomes to differ materially from those described today. Please.
Please refer to our risk factors section in our SEC filings, including our annual report on Form 10-K, and our quarterly report on Form 10-Q. Please note. The company does not intend to update or alter these forward looking statements to reflect events or circumstances arising after the call.
During today's call, we will refer to certain non-GAAP or adjusted financial measures reconciliations of these GAAP to non-GAAP financial measures are available in our earnings press release Investor presentation deck and Form 10-K copies of which can be found on the Investor Relations section of our website now I'd like to turn the call over to Lance Mitchell.
Thank you Mark.
Thanks to our people, our integrated brand and store brand business model.
And our unwavering commitment to category leadership.
We made strong progress on our key initiatives in 2022.
We entered 2023 with increased market share in our largest categories service returned to pre pandemic levels.
And profitability restored in three of our four business segments.
However, as.
As you can see from our fourth quarter results.
Reynolds cooking and baking business segments performance fell short of our expectations.
On our earnings call in November we reported that the Reynolds cooking and baking business segment entered the fourth quarter, having experienced periods of unplanned equipment downtime, resulting in additional manufacturing costs and impacting our ability to adequately supply customers.
Equipment reliability remained challenging in the fourth quarter driving inefficiencies in manufacturing cost higher than expected, while also driving continued higher aluminum costs.
These factors drove the EBITDA shortfall versus the expectations, we shared with you in November .
In addition.
We were successful driving Reynolds wrap share to the highest quarterly level for the year.
Also we'll consumption was weaker than expected also contributing to lower than anticipated net revenues for the quarter.
Now, let's turn to our plan to return Reynolds cooking and baking to historical levels of profitability.
And as I do so.
I want you to know that we enter 2023 with a thorough understanding of what has been impeding Reynolds cooking and baking margin recovery.
As well as the team and resources in place working to correct the issues impacting that business segment.
Key actions underpinning the Reynolds recovery plan include the following.
Management changes, including several key operational leadership roles.
Redesign of equipment reliability processes and practices, incorporating benchmarks and input from experts and operational excellence.
Return to pre pandemic preventive maintenance disciplines.
And new initiatives focused on improving operational excellence, including.
Implementation of condition based monitoring and predictive maintenance.
Cross functional teams focused on critical asset efficiencies.
Investments aimed at improving equipment reliability and performance.
<unk> technical expertise alongside key production assets.
We believe that these and all the improvements, we're making to the Reynolds cooking and baking operations will.
We will not only drive a major improvement in manufacturing efficiencies, but also a decline in our use of the higher cost supplemental.
Purchases of milled aluminum that I mentioned previously.
Michael will speak more to our expectations were phasing the Reynolds cooking and baking business segment earnings recovery.
Now, let's review key drivers of our performance overall.
Consumer demand innovation and manufacturing and supply chain capabilities.
First pricing.
We continue to selectively increased trade promotions, which are expected to be up in 2023 versus 2022 levels.
We also remain watchful commodity threats and the cost of aluminum and resin is up versus end of December levels.
On balance I would.
Describe the pricing environment is far more stable.
Then it was either last year or in 2021.
Second consumer demand.
Our categories have settled into a new normal and in 2023, we expect a return to household formation is our main driver of growth.
Set by Inflations continued impact on consumption and lapping of elevated demand in the first several months of 2022.
We also enter 2023 and a position of strong category leadership.
Consumption in many of our categories is up 5% or more since 2019.
And we have built market share in our largest categories and our multiple adjacencies over this period.
We've also gained additional share in these categories in 2022.
Reynolds rats market share gains accelerated in the second half of 2022, driven by promotions to keep price points.
And price gaps to private label and consumers' appreciation of Reynolds wrap performance advantages by comparison to private label foil.
In waste bags hefty as household penetration increase in 2022.
F D waist bag brand increased buyers in almost every generational group, especially among millennials.
And in disposable tableware ft again gained share in 2022, driven by disposable plates, including a rapidly growing hefty he can save lives.
Our third performance drivers innovation.
Innovation remained a major source of volume in 2022 and.
In 2023, we plan to continue leaning into the success by expanding distribution across a number of high velocity products. While also introducing multiple major new products and increasing our emphasis on sustainable solutions.
And Reynolds cooking and baking we plan to increase distribution of Reynolds wrap pitmaster foil and Reynolds kitchens air Fryer liners, among others, while also introducing rentals.
Reynolds kitchen stay flat parchment and other products designed to meet the increase in cooking and baking among young adults and other major segments of the population and licensed Orange. We plan further distribution gains for our portfolio hefty fabulous products, including new hefty four and eight.
Gallon draw strong trash bags, and we're excited to announce that hefty trash bags is launching new fabulous, so refreshing Lam and sat in the first quarter.
And dollar sales refreshing London is the number two set fabby lewisville multiple purpose cleaners, and lemon citrus scented waste bags are growing two times the rate of a larger waistband category.
We're also doing a lot in the area of sustainable solutions.
Reynolds kitchen, Butcher paper and waxed paper are now compostable.
Ft Eco safe continues to grow rapidly with additional strong growth expected driven by SKU expansion further distribution gains and continuing strong consumer demand.
Early results for the hefty can postal printing paper plates also gives us confidence in our expansion plans for this new solution.
And and waste storage a wide range of sustainable products are lined up for commercialization for.
For example, our recently launched private label food bags made from 20% renewable plant in Ocean materials is off to a strong start.
Manufacturing and supply chain is our fourth driver performance our entire organization is focused on the execution of the Reynolds cooking and baking business segment recovery plan.
In addition, we've expanded the scope of revolution cost savings, giving us confidence in another year of at least 200 basis points of incremental margin as a source of funds for reinvestment and margin expansion.
Legacy Revolution programs still have considerable runway and we are undertaking new procurement and operations related programs in 2023 as well.
Before I turn the call over to Michael in your questions I'd like to leave you with the following.
Our people have responded to the many opportunities and challenges in the last three years with exceptional resilience and resolve to serve our customers combat inflation and leverage our integrated brand and store brand business model to help consumers simplify their daily lives and make our business stronger.
Our market share.
Our category consumption levels and full recovery of pre pandemic profitability in three of our four business segments are proof points of our success.
Looking forward the Reynolds recovery plan is in place and I have the utmost confidence in our plan our ability to deliver a strong recovery of that segment's profitability.
I'm extremely proud of the entire RCP team and we look forward to earnings growth in 2023 and years to come.
With that over to you Michael.
Thank you Lance and good morning, everyone I'll start with a review of our full year 2022, and fourth quarter financial results before turning to our 2023 outlook and the actions, we're taking to return to pre pandemic profitability. This year for the fiscal year 2022, net revenues were a record $3 $8 billion of <unk>.
7% from $3 $6 million in the prior year.
Growth was driven by pricing up 13% taken in response to increased material manufacturing and logistics costs, and partially offset by lower volume.
Volume was lower driven by price elasticity and increased activity outside the home, which was partially offset by share gains in household foil waste bags disposable tableware and other categories.
Adjusted EBITDA was $546 million down 9% from $601 million in the prior year due to lower volume and higher advertising costs, partially offset by the time the timing of pricing actions to recover increased material manufacturing and logistics costs.
Operational inefficiencies and the Reynolds cooking and baking segment and continued supplemental purchase of Milton nominal.
Premium to our cost drove the even a disappointment versus our previously provided outlook lower household consumption together with higher cost aluminum also contributed to the earnings decrease.
Adjusted earnings per share for the year was $1 28 versus $1 59 in the prior year.
Turning to our fourth quarter results, we delivered a record net revenue of $1 $1 billion during the fourth quarter up 7% from the prior year's Q4 of $1 billion and in terms of profitability each of hefty waste storage hefty tableware and presto segments fully recovered to pre pandemic.
<unk> will also reporting record earnings with improvement with improvement driving a 10% increase in adjusted EBITDA to $200 million by comparison to under an $81 million in the prior year.
Operational inefficiencies and the Reynolds cooking and baking segment and continued supplemental purchases of milled aluminum at a premium to our cost drove the EBIT disappointment versus our previously provided outlook lower household foil consumption together with higher cost aluminum also contributed to the earnings <unk>.
Kris.
Adjusted earnings per share for the quarter increased 4% to 53 compared.
Compared to 51 in the prior period.
Unpacking, our volume performance elasticity and increase consumer activity outside of the home drove a 4% volume decline.
Driven by a 10% decrease in Reynolds cooking and baking wine.
However, all four segments did gain volume share in the largest categories in tracked channels driven by innovation strong retail partnership and service.
Ft, tableware, and Presto delivered volume increases in the quarter, driven by innovation and share gains.
Looking ahead I'll start with a summary of our earnings outlook for the full year 2023, followed by our expectations for the first quarter.
I will then turn to the topic, we all keen to discuss in more detail. Our key performance drivers are expectations for Reynolds cooking and baking and more information in the first quarter Guy and post first quarter expectations.
For the full year 2023, we expect continued pressure from elasticities, and our net revenues to be flat plus or minus 1% with pricing flat to slightly up on net revenues of $3 $8 billion in 2022.
We expect rates for key commodities to be relatively stable by comparison to the levels that we saw at the end of January .
We expect SG&A to increase to approximately $420 million driven by compensation related comparisons and increased investments in advertising and market research. We expect revolution related cost savings to be a source of approximately 200 basis points of incremental margin for reinvestment and.
<unk> contribution to margin expansion.
In 2022 Revolution growth initiatives were a source of approximately two percentage points of revenue and we expect a similar contribution from revolution growth initiatives in 2023.
Adjusted EBIT to be in the range of $605 million to $635 million, which is a low double digit to mid teen increase by comparison to results in the prior year and EPS to be in the range of $1 30 to $1 41 per share.
Other key assumptions for the year include depreciation and amortization of approximately $120 million interest expense of approximately $120 million as well and an effective tax rate of approximately 25% and capital spending of approximately $120 million to $130 million.
For the first quarter, we expect net revenues to be flat plus or minus 1% with pricing up mid single digits on net revenues of $845 million in the prior year period.
Adjusted EBITDA to be in the range of $75 million to $85 million down by comparison to adjusted EBIT of $112 million in the prior year period.
And EPS to be in the range of six to nine cents per share now.
Now, let's talk about the performance drivers and facing including the first quarter Guy.
We enter 2023 with margins benefiting from pricing alignment to the current cost environment inspect the significant improvement, which is evident in our fourth quarter results to drive adjusted EBITDA growth and margin expansion on an annual basis as well in terms of segment performance. We expect 2023 results to be driven by <unk>.
Continued solid performance for hefty waste storage, hefty tableware, and Presto and improving performance for Reynolds cooking banking as we move through the year.
Focusing on the first quarter volume comparisons are more challenging in the quarter and expect it to be a drag on year on year EBITDA growth. The major driver of the expected decline in year on year. Adjusted EBITDA is Reynolds cooking baking performance between Reynolds cooking and baking fourth quarter operational inefficiencies.
And continued supplemental purchase of mill to aluminum and a premium to our cost we expect limited if any EBITDA for Reynolds cooking and baking in the corner, obviously, our first quarter, where expectations are far short of what we normally expect for Reynolds continues banking profitability and with that in mind I thought it would be helpful.
To elaborate on the factors driving our confidence in earnings growth after the first quarter.
Each of our business segments is winning at retail and entered 2023 with increased share in our largest categories. We have.
In store display promotions and advertising plans in place to reinforce and build category leadership and profitability at all of our business segments pre pandemic profitability has already recovered in three business segments and the level of pricing and margin achieved in the fourth quarter translates into margin expansion.
<unk> for these businesses in 2023 after the first quarter, we expect to see a lot less reliance upon supplemental Milton nominal.
In turn resulting in a sizable improvement in average product costs.
And our other big headwind in Reynolds cooking banking is operational inefficiencies, we expect operational efficiencies to improve over the course of the first quarter and continued to improve during the second quarter driving a significant increase in earnings by comparison to the first quarter results.
And to return to pre pandemic profitability as we entered the third quarter.
Now before I turn the call back over to Mark and your questions I'd like to leave you with the following thoughts on cash flow, we remain committed to leading our categories driving progress towards recovering pre pandemic profitability across our business leading to stronger cash flows our increased emphasis on cash conversion benefited fourth.
Quarter results and we expect further cash flow gains in 2023, as we grow earnings further emphasized balance sheet efficiency and maintain capital spending discipline.
All of this is expected to drive returned to debt pay down this year.
And finally, our capital allocation priorities are unchanged with that I'll hand, the call back over tomorrow.
Thank you Michael as I turn the call over to the operator for your questions in the interest of time, we ask that you. Please ask one question and a follow up and then rejoin the queue. If you have additional questions operator.
Thank you if he would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate the line is in the question queue. You May press star two if he would like to remove your lines. Thank you and for participants using speaker equipment may be necessary to pick up the handset before pressing the start he is.
Our first question is from Lauren Lieberman with Barclays. Please proceed.
Thanks, so much good morning.
Yeah.
I guess [laughter].
Just sort of the kind of high level and appreciating you went through and kind of key bullets on this plan to recover.
And our cooking and baking business.
I guess upon first getting to know the company you know my assumption was this is going to be a great manufacturing operation.
Reynolds comes out of them.
Yeah packaging background that this isn't this isn't a manufacturing company and then my positive surprised with how well great marketers that the company is.
But now what we're finding is where there seem to be cracked is in the what I thought with core alright that the manufacturing so I just.
Knowing you you've offered words already on the plan to repair I just need to go back and understand a little bit better.
What's going on in terms of core equipment reliability is it a matter of Underinvestment in capital.
You might just I'm struggling with kind of what's broken down operationally because last quarter. When you had this downtime.
This temporary in nature and so yeah, there's something here that there wasn't a temporary was a misunderstanding of the issues that began in the third quarter. So just a little bit more color on all of that what would really be great. Thanks.
Lauren it's a very very fair question and very accurate.
We are a great manufacturing company.
The cost really goes back to the pandemic our focus during that period of time really strong demand from consumers, particularly for Reynolds wrap.
Included some swings in production rates that we'd never seen historically.
Compromised.
Our maintenance programs and therefore, our equipment reliability.
In addition, we paid attention to restore any element of production.
On preventive maintenance so.
So the resolution of that is to return to historically effective preventive maintenance disciplines, while also implementing multiple new initiatives, including the ones I mentioned in my prepared remarks.
I think it's also worth reminding that we have a very strong team.
Along with the input of some outside expertise that we brought on board. It gives us a high degree of confidence in the effectiveness of our plan.
The key here is the improvement in operational efficiencies.
Is that reduces the manufacturing costs, while also decreasing our reliance on supplemental purchases of milled aluminum.
We expect to proceed along the lines of Michael reviewed in his prepared remarks.
Our plan is very detailed and it has multiple elements to it I think that ultimately the key assumptions are that one we have a very firm grasp on the causes of the downtime.
Two a prescription amendments to the causes and three a team to apply that prescription.
I mentioned the confidence in our team and I'm equally confident in our understanding of the loss of efficiencies in our plan for fully reversing them.
Okay.
That's great. Thank you for that and then just in follow up.
In the release it was specifically did that youre not going to offer non-GAAP or adjusted.
Net income and EPS and sticking with EBITDA. So that's fine you know ebitdas cash. It's you know it's closer closer to cash, but any sort of perspective, you can offer on some of those non-GAAP adjustments or just maybe even why right is it because you don't yet know the cost.
Of restructuring and sort of rented along the.
The plan that you're detailing and you don't want to.
To put a number out there for the cost of the plan is that the key reason, we're moving away from adjusted EPS.
The reason, we're moving away from adjusted EPS and I'll, let Michael.
Great on this because there were no there was no trends transaction costs anymore.
So we don't expect there to be any adjustments to any of the.
GAAP measurements three years after the IPO.
So and as a matter of fact, our compensation is based on EBIT.
Our EBITDA based on the incentive plan so.
That that cognizant and release was primarily just to say, there's not going to be an adjustment period.
Okay, that's great.
Okay, Great that was a misunderstanding I was reading it and thinking is this about there being restructuring costs that can't be quantified, but it's rather that theirs.
The adjustments post IPO that's in the past.
That's great.
Right.
Okay. Thanks, I'll pass it on and get back in the queue at this time. Thank you.
Our next question is from Jason English with Goldman Sachs. Please proceed.
Hey, Hey, folks. Thank you for slipping me in.
A couple of questions first.
You you hinted that the issues you are seeing in our first quarter are going to bleed into <unk> with.
With comments like Gary lobby and elevated consumption through the first half comments like you or you're still working through the inefficiencies through the second quarter et cetera.
Can we just put a finer point on that and can you unpack what ray.
Are your expectations through the first half of the year, where the implicit second quarter.
Yeah. So as I said in my prepared remarks. After Q1, we have significantly less reliance on something.
Supplemental.
Resulting in lower average cost.
Operational efficiencies improve over the course of the over the course of first quarter.
Grew further in Q2, followed by a return to pre pandemic profitability in the second half.
I'm a bit more color on this you will see carryover of Q4's additional purchases for.
For supplemental supplemented by milled aluminum into Q1 also since Q1 is seasonally a smaller one of the profit impact will be more pronounced in the second quarter, which is the larger quarter.
Okay. Okay.
So, let's switch gears going back to sort of Lawrence angle or questioning there how can we go back to pre IPO days and I remember all the hype about here your shake and bake technique.
Of.
And this is starting to kind of form your own staff. So you don't have to go out there in the open market and buy this and you know I recall it being kind of knew it sounds like you've been doing this for a decade, it's something that you began to implement.
Really just a few years ago and it sounds like given that Youre now going back out to the market to buy this it sounds like thats. The thats the issue like this new approach that's still relatively young isn't working for you.
So do you have to kind of revisit that whole model. This whole shake and bake approach a millionaire and why should we have confidence that it's just a couple of tweaks on the preventative measures and you'll be back to Brian .
Shake and bake is about melting aluminum it's about melting.
Scrap aluminum.
Is that.
That production processes, and Hot Springs, Arkansas, as part of our aluminum melting facility and its 100% of operational.
What we're talking about here is the milling operations and we'll that.
That is the area we have the challenges that we're addressing so we're able to melt more aluminum the weekend mill and.
And so we have to buy billet aluminum from a third party.
That's.
That's the significant issue here that we're addressing there are two different.
Manufacturing processes that you're addressing.
That's helpful. Thank you I'll pass it on and like Laurent get back in the first time.
Our next question is from Camille Gerald Wala with credit Suisse. Please proceed.
Hey, everybody good morning.
So clearly something didn't go according to plan and cooking and baking it sounds like you've.
You have a grasp on what occurred is there are you able to put some perhaps some numbers around you know precisely what it cost obviously your guidance for <unk> EBITDA.
EBITDA for the segment gives us sense, but.
Did it cost $20 million of EBITDAR 40 million or can you just give a little bit of a read on what it might have a what's the expense might've been a little more one time.
Yeah, we've missed the guide by let's call it $20 million.
10 of that was volume.
Approximately five of it was the the metal purchases and the other five was the operations disruptions.
Thank you thank you for being so clear and.
You know typically we don't we don't ask for guide by segment or anything, but I think in this instance.
It might be helpful to just get a sense for the full year is now cooking and baking has made.
Between $202 50 of of Ebitdas.
As we're thinking about the full year for 23 or <unk>.
If you can at least give us a sense of where you expect it to end up with you know once we get past one.
Yeah, Youre right, we don't give guidance on individual segments.
We did try to be very clear about the cadence of the earnings recovery.
The cooking and baking segment.
Michael in his prepared remarks talked about Q1 being.
Breakeven EBITDA and then recovering the full profitability by.
The second half with.
Good progress in Q2 for.
For the full year that business segment will be better than it was in two.
2022.
It is a back half loaded.
Specific numbers, we're not going to guide specific numbers on segments.
Got it thank you I had to try.
Okay.
Our next question is from Tristan <unk> with Stifel. Please proceed.
Thanks, and good morning, everyone. This is Christian on for Mark.
Just have two questions first just on cash flow without working capital was dragged down by increased inventories. So what gives you confidence that working capital inventories can improve to get net debt to one eight to $1 9 billion as forecasted in your guidance and what's.
The reasonable expectation forecasts.
Cash flows from operations and I have a second question after that.
Yes, it's a big Big drivers you know obviously, a big part of it is returned to profitability within our cooking and baking you know we also see commodities as being stable. You know we have a number of revolution initiatives that we've talked about before and we've had a great track record in terms of driving that to the end and that.
Materializing in bottom line results beyond that we also have a number of working capital initiatives that we can continue to push inclusive and that obviously is just making sure that we manage our capex spending, but that's going to be supplemented by.
Very high focus on you know accounts payables as well as.
Managing inventory levels.
Okay. Thanks, and my second is just you mentioned an increase in A&P spend in 'twenty three and so how does that compare to pre pandemic levels is there a certain threshold where volume response.
<unk>.
This brings us back to historical levels of of advertising spending will be approximately $20 million higher than it was in 2022.
Thanks.
Our next question is from Andrea Teixeira with Jpmorgan. Please proceed.
Hi, This is silvana on for Andrea.
You did mentioned that you are expecting to see improvement of profitability by Q3 end of Q2 progressing them laid out all the foundation all but can you. Please go over the specific reasons like is it the timing of the commodities.
The.
Dressing the inefficiencies and our promotions and if you could please give us a sense of the kind of numbers. They are allocating to each of these reasons. Thank you.
Yeah, I did say that in my prepared remarks, we do expect we're going to see increased operational efficiencies throughout the quarter and obviously, a big part of that is going to be timing.
The actions we've put in place we do also see.
Commodities.
As I mentioned earlier commodities not being as much of a drag on overall business and we see the.
The lower.
Cooking and baking you know hum.
Beyond you'd better performance as we mentioned earlier.
The key drivers.
Thank you and promotions did not play a factor at all or.
Well you know.
It's minor in terms of the overall impacted overall I don't think that is a big.
A big factor.
Thank you for clarifying I'll pass it on.
Okay.
Our next question is from Peter Grom with UBS. Please proceed.
Thanks, operator, and good morning, everyone hope you're doing well so I wanted to ask about the profit outlook, but more just kind of what's embedded in terms of the commodity cost I think the release states that you are expecting spot rates from the from the end of January to hold.
Is that simply just being conservative or is there something that youre seeing that would kind of actually drive these spot rates to hold at current levels and then maybe just a follow up on that I mean, a lot of news around potential tariffs on Russia aluminum.
Any thoughts on how this may or may not impact your profit targets.
Let me ask answer the last question first we don't buy metal from Russia. So it won't not really doesn't have any impact to us.
Either way.
The first question remind me the first question again was.
Yes, just more around why are you assuming spot rates kind of hold I mean, I think most people are more of the view that.
Yeah, you could see some moderation in commodity cost from here, so just any thoughts on.
Yeah aluminum prices closed out the <unk> plus the Midwest premium closed out December at $1 29, It's now trading at a high dollar 46 to $1 50.
So we.
We've seen some already some increases in aluminum costs from where they closed out the year.
And polyethylene recently went up three cents a pound as it closed out January so.
We do see stability compared to what we saw in 2021 and 'twenty two in these commodity costs, but I think further declines.
Plus other inflationary costs are factored into our guide.
That's super helpful. And then I guess I just wanted to go back.
The commentary around gross profit.
<unk> returned to pre pandemic profitability in terms of gross profit dollars.
Michael I think back in July it was kind of this $950 million number.
In November the change in elasticity kind of shifted that.
Number lower so just you know I know.
It's kind of the gross profit recovery as more of a back half dynamic now, but just how should we be thinking about gross profit recovery for the full year just in the context of what you've outlined previously.
Previously.
Yeah. So I think the context you provide is accurate you know drivers we see gross profit being around $920 million now we did previous Guy did do we did previously give indication around $9 50, which we later lowered to around 930.
It's lower for Reynolds cooking, and baking banking and higher for the other business segments.
But net down Reynolds for Hum.
Reviewed operational efficiencies in the purchases of supplemental.
Supplemental milled aluminum at a premium those are big drivers of that and then the other business segments.
The other businesses as we entered 2023 day, they have healthy shares across the businesses.
<unk> strong performance and it's going to be a bit of an offset there. So the confidence is high.
And.
We move forward, but clearly it's been a drag primarily driven by the cooking and baking business.
Got it thanks, so much I'll pass it on.
As a reminder, the star one on your telephone keypad, if he would like to ask a question. Our next question is from Rob either.
We're seeing with Evercore ISI. Please proceed.
Great. Thank you very much maybe if you could talk a little bit about you had some initial comments that you expect trade promos to be up in 2023.
How should we think about that.
In the context of <unk>.
Still an inflationary environment still a lot of room to recover on the margins you guys are the category captains.
So how should we think about that state and it maybe maybe if you can reference you know percent of volume or sales that were sold on trade promos kind of pre pandemic you know at the bottom and kind of where we are now thank you.
Yeah, Robert we're talking about a 1% increase in trade year over year and most of that being in.
The segments that are.
Performing at.
Historical plus levels from a margin standpoint.
Trade promotions that we took in Reynolds were completed in Q4 and <unk>.
We maintain those levels.
But we may have to revisit that based on the fact that aluminum has gone up we may have to reduce some trade in and move some price points around but I think we've had a great track record of demonstrating across our business over the years evidenced recently by how we've managed share with rentals were up that we can manage trade to ensure that we get the right.
Price points and ensure that we get growth in share as a result, but we're not talking about a significant it's one point of revenue that we're talking about.
Great that's very helpful and clear thank you.
Okay.
Our next question is a follow up from Lauren Lieberman with Barclays. Please proceed.
Great. Thanks.
First one was just on that detail you offered earlier on the drivers of that EBITDA Miss the the 10 million from volume I was curious how much of that would you have to ask for more details of dirty great detail, but conceptually.
Was the result of the lower consumption.
Consumer takeaway or was some of that related to.
The production challenges in the foil business.
It was about it was high.
Yeah, It was almost exclusively consumer consumption related.
And a lot of it occurred in December time period from a.
Retailer replenishment from Thanksgiving and the December holidays. It just did not play out from a consumption standpoint, the way that we had forecasted our share actually went up in Q4.
So we are not a share issue was a category consumption issue that occurred from a consumer standpoint, and we have factored that into our guide as part of 2023.
Okay, Okay, and assuming that that consumption remains.
Well lower than historic trend or what you'd previously might've expected.
Slightly softer.
Driven by Elasticities, primarily.
Okay great.
Great and then so hefty so profitability kind of off the charts sorry.
Waste in storage I should be more specific.
Profitability, you know sort of unbelievably strong this quarter. Both in dollar terms in terms of EBITDA and then also on margin.
So maybe any update on kind of a the competitive environment and b.
Separate from the comments you've made on you know a little bit more trade promotion I think we had spoken previously about.
Just whether or not pricing would prove so sticky with easing in the raw material cost basket.
So yes, just any kind of thoughts there as we think maybe towards you know as you move into next year I'm going to assume this kind of 70 million.
EBITDA isn't a.
Run rate for the business so just.
Just kind of any thoughts there would be helpful to make sure. We all don't get ahead of ourselves on that business.
Well that that category has grown significantly since.
The pandemic right. So it's not as high as it was during the peak of the pandemic, but pre pandemic. This category is up.
And.
The pricing has been stable.
And I think all of us in the category has been focused on ensuring that we maintain profitability and not.
With a lot of not a lot of promotions, but ensuring that we get the right price points.
To ensure consumers continue to have high takeaway. So I think things are relatively stable in that category and Theres. No reason to believe that these profit levels cannot continue.
Okay, because it was a huge shock me if I look sequentially right.
Very material step up.
So would you say what we're seeing there is a combination of better resin cost swelling thrill.
Plus the higher pricing that's been enacted over the last the prior 18 months or so.
I think it's primarily been pricing that has been implemented across the category over the last.
Three quarters.
Okay.
Because there was a final increase that went in September October , but again just that.
Sequential jump in <unk>.
It would suggest it was much more sizable than prior rounds or get them to get them back to better coverage on stable.
Resin costs.
Resin costs came down some and then the pricing went up so we've crossed that threshold, where we're back to higher profitability.
Okay. Okay, alright, thank you.
Our next question is a follow up from Camilo Garik <unk> with credit Suisse. Please proceed.
Thank you thanks for taking a second.
I think you guys are in a better position than most on having a sense of the consumer in any shifting between private label and branded can you just give a sense of what youre seeing on.
From a consumer perspective is there is there.
Any trading down.
Is there.
The consumption, but.
Our decisions being made to you have to save dollars at the shelf any insight there would be useful.
Well in our categories.
Private label share was actually down in a number of our categories last year in the fourth quarter private label shares down in foil it's down in food bags, it's down and slow cooker liners oven bags for both the year and the quarter.
Q4.
And private label share in waste bags was was.
Down for the full year was up slightly in Q4, but the hefty brand was also up slightly in Q4.
We are seeing a higher private label in party cups plastic wrap.
And parchment paper.
And all of those are set partial paper, we have a very strong private label position. So those three segments. We are seeing some trade down. We've also seen some trade down in some channels to lower pack sizes, but not a shift from brand to private label.
As a reminder, the star one on your telephone keypad, if he would like to ask a question.
Our next question is a follow up from Jason English with Goldman Sachs. Please proceed.
Hey, guys. Thanks for let me double dip.
Michael You said you're in your guidance is not predicated on $920 million of gross profit. You had previously previously said you expected SG&A of 400 million that gets you to a $640 million EBITDA figure of about $20 million ahead of what you're actually guiding to.
So implicitly youre now expecting higher SG&A.
What's driving the higher SG&A outlook.
Yeah, the significant driver of the SG&A increase as the higher variable comp and.
An increase in advertising as you noted.
As well as our market research, but can you just.
A reminder to own.
Variable constant right.
Our variable comp is linked to our year over year earnings growth and as such as we expect to increase in earnings over the year with that we will become.
Higher.
<unk> expense that is a big driver.
So you are cutting your earnings outlook and raising your incentive comp outlook versus where you were in <unk>.
No I'm I'm I'm, telling are telling you that our incentive comp is linked to earnings progression right.
Forecast has that going up.
Okay and Thats the reason of SG&A, it's going from 400 to 420.
That's a big that's the largest driver.
Okay, and then on the volume outlook for sort of flattish on the year.
And youre coming in down mid singles.
What gives you confidence in the inflection to growth later in the year and is there any like reroll or anything that we're not going to able to see in the in the consumer linked data that would drive that.
You know as a company our volumes are up roughly 4% versus 2019 of course pricing has.
It has been taken over this period has been significant and implying some elasticity for a sustained period of time or.
At different points in 2022, our categories did return to pre pandemic elasticities and we're using those elasticity as I've mentioned in a previous question.
As part of our guide.
Our confidence in our assumptions on elasticity is based on a number of factors price increases are largely complete and assuming a more stable and easing commodity environment.
Consumer activity outside of the home is increasing versus the pandemic rates continuing at a relatively stable level in recent months.
Our categories and our portfolio's response trade and other forms of promotion has proven to be very effective.
And our plan levels of trade and advertising we've talked about.
<unk>.
We expect to have that impact.
Oh, okay. Okay. Thank you.
We have reached the end of our question and answer session I would like to turn the conference back over to Lance for closing comments.
Thank you all for your questions and we do appreciate your time this morning, we.
We have strengthened our competitive position over the last three years we've recovered.
Pre pandemic profitability of three of our four business segments, and we enter 2023 with a strong team and a robust plan for recovering Reynolds cooking and baking profitability.
Which will translate to even stronger performance for us overall.
I want to also thank our employers and our retail partners for their dedication and contributions during these challenging and dynamic times.
You.
Thank you. This does conclude today's conference you may disconnect. Your lines at this time and thank you for your participation.
Yeah.
Yeah.
Yes.
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