Q2 2024 Reynolds Consumer Products Inc Earnings Call

Greetings and welcome to the Reynolds Consumer Products Inc. Second Quarter 2024 earnings call. At this time, all participants are in a listen-only mode.

Operator: Earnings Call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mark Swartzberg, Vice President of Investor Relations. Thank you, sir. You may begin.

A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad.

As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mark Swartzberg, Vice President of Investor Relations. Thank you, sir. You may begin.

Mark Swartzberg: Thank you, operator. Good morning and thank you for joining us for Reynolds Consumer Products second quarter earnings conference call. Please note that this call is being webcast on the investor relations section of our corporate website at ReynoldsConsumerProducts.com. Our earnings press release and presentation slides are also available.

Mark Swartzberg: With me on the call today are Lance Mitchell, our President and Chief Executive Officer, and Scott Huckins, our Chief Financial Officer. After their prepared remarks, we will open the call for a question and answer session.

Speaker Change: With me on the call today are Lance Mitchell, our President and Chief Executive Officer, and Scott Huckins, our Chief Financial Officer.

Speaker Change: Following prepared remarks, we will open the call for a question and answer session.

Speaker Change: Before we begin, I would like to remind you that this morning's discussion will contain four looking statements which are subject to risks, uncertainties, and changes in circumstances that could cause actual results and outcomes to differ materially from those described today. Please refer to the risk factors section in our SEC filings.

Speaker Change: The company does not intend to update or alter these forward-looking statements to reflect events or circumstances arising after the call.

Mark Swartzberg: During today's call, we will refer to certain non-GAAP or adjusted financial measures. Reconciliations of these GAAP and non-GAAP financial measures are available in our earnings press release, investor presentation deck, and Form 10-Q, which can be found in the Investor Relations section of our site. Now, I'd like to turn the call over to Lance.

Speaker Change: During today's call, we will refer to certain non-GAAP or adjusted financial measures.

Speaker Change: Reconciliations of these GAAP and non-GAAP financial measures are available on our earnings press release, investor presentation deck, and Form 10-Q , which can be found on the investor relations section of our site. Now I'd like to turn the call over to Lance.

Lance Mitchell: Thank you Mark and good morning everyone. Our business is performing well. We had our best second quarter earnings in our history as a public company with the exception of the pandemic-fueled second quarter of 2020.

Lance Mitchell: We exceeded our second quarter revenue guide, increasing retail revenue 1% as we outperformed our categories and the categories moderately outperformed our expectations. We continue to drive product innovation and household essentials, providing consumers with new product benefits and an expanding range of affordable, sustainable solutions. We drove sequentially improving retail trends in the second quarter and did so in an environment characterized by declines in personal savings, record levels of household debt, and decreases in year-to-date SNAP funds.

Lance Mitchell: We exceeded our second quarter revenue guide, increasing retail revenue 1% as we outperformed our categories and the categories moderately outperformed our expectations.

Lance Mitchell: We continue to drive product innovation and household essentials, providing consumers with new product benefits and expanding range of affordable, sustainable solutions.

Lance Mitchell: We continue to recruit Gen Z and millennial consumers who now represent the majority of the U.S. workforce.

Lance Mitchell: We identified and unlocked additional revolution cost savings and our ongoing commitment to reduce operational costs.

Lance Mitchell: Then we delivered earnings exceeding our second quarter and first half objectives, further demonstrating the advantage of our business model and the effectiveness of our people in a dynamic consumer environment.

Lance Mitchell: Before I review each business's performance, I'd like to first comment on our retail trends overall, our product innovation pipeline, and our plans for driving revolution cost savings.

Lance Mitchell: We drove sequentially improving retail trends in the second quarter and did so in an environment characterized by declines in personal savings, record levels of household debt, and decreases in year-to-date SNAP funding.

Lance Mitchell: Our products are affordable and convenient, making eating at home even more attractive when away-from-home consumption is pressured.

Lance Mitchell: And we're doing a very good job leveraging our business model and category leadership together with our retail partners.

Lance Mitchell: We're also accelerating innovation across RCP, increasing speed to market, expanding the range of brand and store brand products to be introduced over the next three years, and adding to our growing portfolio of sustainable options. This doesn't happen overnight, and it reflects our success in R&D, upgrading innovation processes, further prioritizing new products, commercial potential, and our ongoing work with our retail partners to deliver on opportunities that consumers value. The Reynolds cookie and baking business delivered another strong quarter, and we're building on the business's commercial, operational, and financial success. We drove additional recruitment of younger cooks with our Chef's Kiss multiple product advertising campaign.

Lance Mitchell: We're also accelerating innovation across RCP.

Lance Mitchell: Increasing speed to market, expanding the range of brand and store brand products to be introduced over the next three years, and adding to our growing portfolio of sustainable offerings.

Lance Mitchell: Putting us well on track to achieve our commitment for providing sustainable solutions in all of our categories by 2025.

Lance Mitchell: This doesn't happen overnight and it reflects our success in R&D, upgrading innovation processes, further prioritization of new products, commercial potential, and our ongoing work with our retail partners.

Lance Mitchell: to deliver on opportunities that consumers value.

Lance Mitchell: Considering our trends, our competitive advantages, and the programs that we are implementing to continue meeting our categories, we expect further moderate improvement in our retail volumes on a like-for-like basis in the second half after adjusting for shipment timing and product portfolio optimization.

Lance Mitchell: And in terms of operational excellence, we've identified significant revolution savings beyond 2024 in each of our businesses in the areas of procurement, manufacturing, and supply chain.

Lance Mitchell: These savings continue to represent a major source of earnings growth and funds for reinvestment in our categories and leadership positions.

Lance Mitchell: And now we'll review our performance and outlook by business.

Lance Mitchell: The Reynolds cookie and baking business delivered another strong quarter, and we're building on the business's commercial, operational, and financial success.

Lance Mitchell: Reynolds-Graf gained additional share in the Household Oil category.

Lance Mitchell: Reynolds Kitchen's parchment continued to grow, reflecting the strength of the brand, successful innovation, and consumers' increasing usage of parchment for cooking and baking.

Lance Mitchell: We drove additional recruitment of younger cooks with our Chef's Kiss multiple product advertising campaign. And we maintained a high level of operational stability and advanced new plans to increase production efficiencies.

Lance Mitchell: And we maintain a high level of operational stability and advance new plans to increase production efficiency. Our Hefti and Presto waste and storage bag businesses continued to perform well in the second quarter, and the outlook for these businesses is strong. Product innovation remained a major driver of growth, reflecting a number of new products, including the successful expansion of HETRI UltraStrong with coastal plastic. Presto is on track to launch a record number of new products this year.

Lance Mitchell: It is also worth noting that Reynolds is the only vertically integrated aluminum foil manufacturer in the U.S., a significant competitive advantage, providing us with a high level of control over quality, continuity of supply, and cost.

Lance Mitchell: Our Hefti and Presto waste and storage bag businesses continue to perform well in the second quarter, and the outlook for these businesses is strong. We delivered sequential improvement in our waste and food bag sales volumes.

Lance Mitchell: Product innovation remained a major driver of growth, reflecting a number of new products, including the successful expansion of HETRI ultra-strong coastal plastics,

Lance Mitchell: Additional Hefty Fabulosa Scents and the launch of Hefty Compostable Press-to-Close Food Bags.

Lance Mitchell: And for our store-brand food bags, bio-based sandwich bags made with 20% plant and ocean materials.

Lance Mitchell: and half-gallon storage and freezer bags continue the sequential improvement in Presto's volume. Presto is on track to launch a record number of new products this year.

Lance Mitchell: Turning now to our disposable tableware segment, the initiatives we put into place earlier this year are proving effective.

Scott Huckins: Volume trends continue to improve, with a decrease of 1% in the second quarter compared to declines of 6% in the first quarter and 8% in the second half of last year. The improvement was broad-based, reflecting improvement in plates and party cups, and was driven by a number of factors, including target trade promotions and lower pack counts at competitive price points. Second quarter retail revenues increased 1% to $892 million and exceeded our expectations. As Lance noted, we outperformed our categories, and the categories moderately outperformed our expectations.

Lance Mitchell: Volume trends continue to improve with a decrease of 1% in the second quarter compared to declines of 6% in the first quarter and 8% in the second half of last year.

Lance Mitchell: The improvement was broad-based, reflecting improvement in plates and party cups, and was driven by a number of factors, including target trade promotions, lower pack counts at competitive price points,

Lance Mitchell: increases in cross-portfolio promotion, and the disposable tableware category continues to be under pressure, but trends are sequentially improving and we have a high degree of confidence in the initiatives we're implementing to drive sales across our portfolio.

Lance Mitchell: Before turning the call over to Scott, I'd like to reiterate that our business...

Scott Huckins: operates with a competitive advantage by providing both brands and store brands and we have a high level of confidence in the plans and actions we're taking to continue driving our categories, increasing earnings, and investing in the long-term growth. Scott, over to you. Thank you, Lance. Good morning, everyone.

Scott Huckins: As you saw in our press release, we delivered a strong first half of 2024 with our second quarter above expectations and very consistent with the priorities that we outlined at the beginning of the year.

Scott Huckins: Second quarter retail revenues increased 1% to $892 million and exceeded our expectations.

Scott Huckins: As Lance noted, we outperformed our categories, and the categories moderately outperformed our expectations.

Scott Huckins: Consolidated revenues declined 1%, reflecting the retail revenue increase and a two-point decrease in our low-margin non-retail revenue, partially offset by higher incentive compensation costs and a modest increase in average selling prices. And our earnings per share was $0.46. On a year-to-date basis, retail revenues were $1,687,000,000, while low-margin, non-retail revenues declined to $77,000,000.

Lance Mitchell: Consolidated revenues declined 1% reflecting the retail revenue increase in a two-point decrease in our low-margin non-retail revenues.

Lance Mitchell: Our Q2 adjusted EBITDA increased by $22 million to $172 million, driven by manufacturing volume output and lower operational costs, partially offset by higher incentive compensation costs and a modest increase in advertising.

Lance Mitchell: And our earnings per share was $0.46, up $0.14 from the second quarter of 2023, reflecting EBITDA growth, lower interest expense from paying down debt, and lower income tax expense as we discussed on last quarter's call.

Lance Mitchell: On a year-to-date basis, retail revenues were $1,687,000,000 while low-margin non-retail revenues declined to $77,000,000.

Scott Huckins: Adjusted EBITDA of $294 million increased $62 million, driven by volume output and lower operational costs. Now turning to our guide, to reflect our strong second quarter performance, we are raising our full year 2024 revenue outlook to a range of $3,590,000,000 to $3,670,000,000. We expect retail volume to perform at or better than our categories at a rate of minus one point to plus one point. And we expect a two and one half point headwind from a low margin, non-retail business and optimization of our retail product portfolio.

Lance Mitchell: Adjusted EBITDA of $294 million, increased $62 million, driven by volume output and lower operational costs.

Lance Mitchell: Earnings per share was $0.69, up significantly from $0.40 last year.

Lance Mitchell: And we generated $183 million of operating cash flow, contributing to a reduction of net debt to 2.4 times trailing 12 months adjusted EBITDA in Q2.

Lance Mitchell: and an additional $50 million voluntary principal payment made subsequent to quarter end.

Lance Mitchell: Now turning to our guide. To reflect our strong second quarter performance, we are raising our full year 2024 revenue outlook to a range of $3,590,000,000 to $3,670,000,000.

Lance Mitchell: compared to revenues of $3,756,000,000 in 2023.

Lance Mitchell: As a part of this guide, we continue to expect pricing to reduce revenue by approximately 1%.

Lance Mitchell: We expect retail volume to perform at or better than our categories at a rate of minus one point to plus one point.

Lance Mitchell: And we expect a two and one-half point headwind from our low-margin, non-retail business and optimization of our retail product portfolio.

Lance Mitchell: We are raising our full year Adjusted EBITDA forecast to a range of $670 to $685 million, compared to $636 million in 2023.

Scott Huckins: The new outlook for the full year reflects flow-through of our second quarter performance, all maintaining our outlook for the second quarter, which, as Lance said, includes modest sequential improvement in our retail volume after adjusting for shipment timing in the second and third quarters. And we are increasing our full year 2024 earnings per share forecast to a range of $1.65 to $1.71 per share. Other key assumptions incorporated into our full-year 2024 forecast are as follows.

Lance Mitchell: The new outlook for the full year reflects flow-through of our second quarter performance.

Lance Mitchell: All maintaining our outlook for the second half, which, as Lance said, includes modest sequential improvement in our retail volume after adjusting for shipment timing in the second and third quarters.

Speaker Change: And we are increasing our full year 2024 earnings per share forecast to a range of $1.65 to $1.71 per share.

Speaker Change: Other key assumptions incorporated into our full year 2024 forecast are as follows.

Scott Huckins: We expect continued stability in commodity markets and our costs to modestly increase through the balance of the year. SG&A remains materially unchanged compared to SG&A in 2020, depreciation and amortization of approximately $125 million, and interest expense of approximately $100,000. The effective tax rate in the third and fourth quarters of approximately 24% resulted in a tax rate of just over 22% for the year. Turning to the third quarter,

Speaker Change: We expect continued stability in commodity markets and our costs to modestly increase through the balance of the year.

Speaker Change: SG&A remains materially unchanged compared to SG&A in 2023.

Speaker Change: depreciation and amortization of approximately $125 million.

Speaker Change: Interest expense of approximately $100 million.

Speaker Change: Effective tax rate in the third and fourth quarters of approximately 24% resulted in a tax rate of just over 22% for the year.

Scott Huckins: We are introducing our Q3 Revenue Guide in the range of $885 million to $915 million versus $935 million in the third quarter of 2020. We forecast third quarter adjusted EBITDA in a range of $165 to $175 million, representing a modest increase over third quarter 2023 adjusted EBITDA, net income to be in the range of $82 million to $90 million, and earnings per share in a range of $0.39 to $0.43 versus $0.37 in the year-ago period.

Speaker Change: Turning to the third quarter.

Speaker Change: We are introducing our Q3 Revenue Guide in the range of $885 million to $915 million versus $935 million in the third quarter of 2023.

Speaker Change: The building blocks include

Speaker Change: A one point reduction due to pricing.

Speaker Change: A two-and-one-half point reduction to a one-half point increase from retail volume, including the reversal of approximately $15 million benefit from retailer orders shifting from the third quarter into the second quarter.

Speaker Change: and a two-point reduction from lower margin non-retail volume and further optimization of the retail product portfolio.

Speaker Change: We forecast third quarter adjusted EBITDA in a range of $165 to $175 million, representing a modest increase over third quarter 2023 adjusted EBITDA.

Speaker Change: Net income to be in the range of $82 million to $90 million and earnings per share in a range of $0.39 to $0.43 versus $0.37 in a year ago period.

Scott Huckins: Of course, this guide implies what our expectations are for the fourth quarter. It is worth reminding that we expect a return to historical phasing of quarterly earnings in 2024, in contrast to last year, when Reynolds Cooking and Baking's fourth quarter benefited from particularly strong and expected levels of production, resulting from recovery initiatives. In the fourth quarter, we also anticipate an approximately $10 million increase in combined costs from the flow-through of aluminum purchased during the second quarter when spot market prices were higher than they are today and premiums paid for cooking bags as we transition to the insourcing of this product offer. In terms of capital allocation, our priorities are unchanged.

Speaker Change: Of course, this guide implies what our expectations are for the fourth quarter.

Speaker Change: It is worth reminding that we expect a return to historical phasing of quarterly earnings in 2024 in contrast to last year when Reynolds Cooking and Baking's fourth quarter benefited from particularly strong and expected levels of production resulting from recovery initiatives.

Speaker Change: In the fourth quarter, we also anticipate an approximately $10 million increase in combined costs from the flow-through of aluminum purchased during the second quarter when spot market prices were higher than they are today.

Speaker Change: and premiums paid for cooking bags as we transition to the insourcing of this product offering.

Speaker Change: In terms of capital allocation, our priorities are unchanged.

Scott Huckins: We continue to estimate free cash flow of over $300 million for the full year and expect net debt leverage to remain within our target of 2 to 2.5 times adjusted EBITDA. Before wrapping up and speaking to long-term earnings drivers, I want to briefly discuss scanner data. As you know, Cercana recently expanded its MULO database to capture more of the total retail market for consumer goods. As such, MUMO Plus captures substantially more of the total retail market for our products than nails.

Speaker Change: We continue to estimate free cash flow of over $300 million for the full year and expect net debt leverage to remain within our target of 2 to 2.5 times adjusted EBITDA.

Speaker Change: Before wrapping up and speaking to long-term earnings drivers, I want to briefly discuss scanner data.

Speaker Change: As you know, Cercana recently expanded its MULO database to capture more of the total retail market for consumer goods.

Speaker Change: As such, MoonwellPlus captures substantially more of the total retail market for our products than Nielsen.

Scott Huckins: In the second quarter, our overall categories were approximately 130 basis points stronger in MULO plus than in Nielsen tract channels and as much as three points higher in certain categories. It is also important to remember that a large portion of our business is store brands labeled as such in Cercanus Mula Plus and Nielsen Track Channel, so that remains a limitation to visibility in syndicated scanner data.

Speaker Change: In the second quarter, our overall categories were approximately 130 basis points stronger in MULO plus than in Nielsen track channels, and as much as 3 points higher in certain categories.

Speaker Change: It is also important to remember that a large portion of our business is store brands labeled as such in Cercanus, Moola Plus, and Nielsen track channels, so that remains a limitation to visibility in syndicated scanner data.

Speaker Change: In closing, our second quarter results were above expectations and contributed to our strong first half of 2024 and increased guide for full year 2024.

Speaker Change: Stability and strong execution remain major drivers of our performance and I am very pleased with our operational performance and disciplined cost management.

Speaker Change: And in terms of the long term, we plan to continue leading our categories by leveraging our business model and investing in our product portfolio.

Speaker Change: We are accelerating product innovation across RCP, representing significant added share and growth potential beyond 2024.

Speaker Change: We are leaning into revolution cost savings and expect them to remain a major driver of margin in approximately one-third of our profit growth over the long term.

Speaker Change: And we are driving cash flow and plan to continue increasing financial flexibility to invest in strategic opportunities.

Mark Swartzberg: With that, let's turn to your questions.

Speaker Change: With that, let's turn to your questions, operator.

Operator: Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. We ask that you limit yourself to one question and a follow-up so that others may have an opportunity to ask questions.

Operator: You may recur if you have additional questions. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the start button. One moment, please, while we poll for questions. Our first question comes from Robert Ottenstein with EdraCore. Please proceed with your question.

Speaker Change: Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press star 2 if you would like to remove your question from the queue.

Speaker Change: We ask that analysts limit yourself to one question and a follow up so that others may have an opportunity to ask questions. You may re-cue if you have additional questions.

Speaker Change: For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.

Speaker Change: Our first question comes from Robert Ottenstein with PedraCore. Please proceed with your question.

Robert Ottenstein: Great, thank you very much and nice quarter guys. So Scott, you mentioned, you know, that you're looking for moderate improvement in retail volume in the second half on a like-for-like basis. Can you just kind of take us through the various building blocks behind that? Thank you.

Speaker Change: Good morning, Robert. Thanks for the question. So when we look at it, we start with the as-reported retail volumes.

Unknown Executive: That remainder, if you like, call it kind of core or base retail volume. We improved sequentially from Q1 to Q2, so call it 150 basis points. The guide contemplates a sequential improvement year over year from Q2 to Q3, call it 50 basis points. And, in turn, another sequential improvement from Q3 to Q4, again, roughly 50 basis points. And the intent of that original comment in the prepared remarks was to make clear exactly that point. It's important to look at that bottom line core retail.

Speaker Change: That remainder, if you like, call it kind of core or base retail volume, we improve sequentially from Q1 to Q2, call it 150 basis points.

Speaker Change: The Guide contemplates a sequential improvement year-over-year from Q2 to Q3, about 50 basis points, and in turn, another sequential improvement, Q3 to Q4, again, roughly 50 basis points.

Speaker Change: And the intent of that original comment in the prepared remarks was to make clear exactly that point. It's important to look at that bottom line core retail volume.

Speaker Change: And then you mentioned that the categories moderately outperform your expectations.

Unknown Executive: Do you think that's a direct result of a somewhat weaker consumer who's just not going out as much and is therefore likely to continue going forward through this difficult period? Robert, I'll take that one.

Speaker Change: Do you think that's a direct result of a somewhat weaker consumer who's just not going out as much and is therefore likely to continue going forward through this difficult period?

Lance Mitchell: That is part of the equation. Yes, we have seen with the pressure on out-of-home dining and the cost. We've seen people going back and eating more at home. But also recall that these categories are household essentials, and their convenient, low cost is what people need every day.

Lance Mitchell: Robert, I'll take that one. That's Lance.

Lance Mitchell: Robert, I'll take that one. This is Lance. That is part of the equation, yes. We have we have seen with the pressure on out-of-home dining and the costs, we've seen people going back and eating more at home.

Speaker Change: But also recall that these categories are household essentials.

Speaker Change: and their convenient, low cost that the people need every day.

Operator: Our next question comes from Mark Astrachan with Stiefel. Please proceed with your question.

Robert: Thank you.

Speaker Change: Our next question comes from Mark Astrachan with Steeple. Please proceed with your question.

Mark Astrachan: Thanks and good morning everybody. I guess, firstly, just given what's going on in the broader economy and a lot of commentary that's not necessarily positive out of a lot of facing companies, could you just give an update on how things are going in 3Q or in July so far?

Mark Asterton: Thanks and good morning everybody. I guess firstly just given what's going on in the broader economy and

Mark Asterton: and a lot of commentary that's not necessarily positive out of a lot of.

Mark Asterton: Consumer Facing Companies. Could you just give an update on how things are going in 3Q or in July so far?

Lance Mitchell: Thanks, Mark. This is Lance.

Mark Asterton: Thanks Mark, this is Lance. We previously not commented on intra-quarter performance but as you said given the concerns about the broader economy and the impact on companies performance

Lance Mitchell: We have previously not commented on intra-quarter performance, but as you said, given the concerns about the broader economy and the impact on companies' performance, I think it's important we make that exception for this quarter. Our July performance was right in line with our expectations, and consumer takeaway in our categories was also in line with our expectations throughout July and recall. We have succinct, as we talked about, sequential, modest improvement in the core retail sales volume factor into our guide.

Mark: I think it's important we make that exception for this quarter.

Speaker Change: Our July performance was right in line with our expectations and consumer takeaway in our categories was also in line with our expectations throughout July .

Speaker Change: And recall, as we talked about, sequential modest improvement in the core retail sales volume, factored into our guide.

Mark Astrachan: That's helpful. And then the comments you made about the new scanner data channels. I think we've seen similar things for your business and for others as well in terms of the outperformance of some of those new track channels, Club, Online, et cetera. I guess I'm curious, for your business, what do you think is driving it? How sustainable is it? Just remind us if there's any margin differential on those channels versus legacy. And just lastly, and related to that, is there any differential in your exposure from brands versus private label for those customers?

Speaker Change: got it that's helpful and then

Speaker Change: The comments, Scott, that you had made about the new scanner data channels, I think we've seen similar things for your business and for others as well in terms of the outperformance for some of those new track channels, Club, Online, etc. I guess I'm curious for your business.

Scott Huckins: I'll start, Lance. Lance may add on later.

Lynn: All-Star Lens may add on. I think the structural observation is that Moolo Plus is obviously picking up more of the actual shopping behavior in the marketplace.

Scott Huckins: I think the structural observation is that Moolo Plus is obviously picking up more of the actual shopping behavior in the marketplace. As I think I shared in prepared remarks, we saw a performance of about 130 basis points versus Nielsen Track Channel. An example would be in our FOIL business; it was about three points better in Moolo Plus than what Nielsen would have revealed. So it's hard to explain why those indexes are different other than just point out the obvious that it's a broader cross-section of consumer behavior.

Lynn: Nielsen Track Channel.

Scott Huckins: I think your second question got into margins, and we wouldn't call out any significant difference or material difference in the margin profile of the difference between those two track channel, you know, observations. So hopefully that's what's responsible.

Speaker Change: I think your second question got into margins and we wouldn't call out any significant difference or material difference in margin profile of the difference between those two track channel you know observations so hopefully that's that's responsive.

Mark Astrachan: Got it. Okay. Thank you.

Speaker Change: Got it. Okay. Thank you.

Operator: Our next question comes from Nick Modi with RBC Capital Markets. Please proceed with your question.

Speaker Change: Our next question comes from Nick Modi with RBC Capital Markets. Please proceed with your question.

Nick Modi: Thank you. Good morning, everyone.

Nick Modi: The Consumer Goods Landscape, so I'm just.

Nick Modi: Curious on your take kind of what you guys are seeing. I mean, do you think we've

Nick Modi: Hit the bottom because, you know, depending on where we are in the ecosystem, you know, it seems like things are getting worse.

Speaker Change: I think, you know, echoing some of the comments made prior and some of the questions, so we'd love to get your perspective on that. And then, you know, just kind of dovetailing with that, you know,

Nick Modi: Lance, you know, I think you guys have been a lot more realistic about the economic situation than I think most companies across Promotions, I guess, have been ramping pretty broadly, but you guys were able to still put up flat pricing overall and even up in some cases. So just wanted to get some of your perspective around kind of what you're seeing in that, in the price promotion environment. Thanks.

Lance Mitchell: Nick, we believe, and we said this at the beginning of the year, that consumers are under pressure, and I said this in my prepared remarks, there are declines in personal savings, record levels of, you know, record levels of household debt, and staff funding is down significantly. So we expect to continue outperforming our categories, and we've maintained our category expectations for the second half. So we haven't changed our outlook for the second half from a category standpoint, and we believe that it's modestly going to improve, but not a significant change.

Speaker Change: But our categories are household essentials that are affordable and convenient and we're getting the benefit from people eating away from home less frequently.

Speaker Change: So we expect to continue outperforming our categories and we've maintained our category expectations the second half So we haven't changed our outlook for the second half from a category standpoint

Speaker Change: And we believe that it's modestly going to improve, but not no significant change.

Lance Mitchell: As far as promotional levels are concerned, given the retail environment, it's returned to pre-pandemic levels. We've invested accordingly. About 20% of our product sales are on promotion, which is consistent with what we had in our plan in our guide.

Speaker Change: As far as promotional levels, given the retail environment, it's returned to pre-pandemic levels, and we've invested accordingly.

Speaker Change: Product sales are on promotion which is consistent with what we had in our plan and our guide.

Nick Modi: Great. And if I could just ask one more follow-up question on, you know, bag waste bags, you know, in terms of what the shelf space dynamic is. I mean, obviously Clorox has been coming out of the cyber attack trying to get back space. Just curious if you are holding on to more space than you had anticipated? Any perspective around that would be would be

Speaker Change: Thank you.

Speaker Change: bad waste bags you know in terms of

Speaker Change: What the shelf space dynamic is. I mean, obviously Clorox has been coming out of the cyber attack trying to get back space. Just curious on kind of are you holding on to more space than you had anticipated? Any perspective around that would be helpful.

Lance Mitchell: Well, let me start by saying that, and I'll go into a little more broad detail in the actual question.

Speaker Change: Well, let me start by saying that, um, I'll go into a little more broad detail in the actual question. In the second quarter near to date, both hefty and private label gained share. And as you know, we're also a major player in private label waste bags.

Lance Mitchell: In the second quarter near to date, both Hefty and Private Label gained share. And as you know, we're also a major player in Private Label waste fat. To answer your point specifically, our total points of distribution are up double-digits. And we're really excited about our new ad campaign we have with John Cena. So we've been successfully growing our brands and store brands in this category for the last eight years.

Speaker Change: To answer your point specifically, our total points of distribution are up year-to-date double digits.

Speaker Change: And looking forward, our price points are in a good place and we're happy with the price gaps. Our promotional calendar, as I said a moment ago, is strong and it's locked.

Speaker Change: And we're really excited about our new ad campaign we have with John Cena.

Speaker Change: So we've been successfully growing our brand and store brands in this category for the last eight years and we see that continuing going forward.

Speaker Change: Excellent. Thank you. I'll pass it on.

Speaker Change: Our next question comes from Peter Grom with UBS. Please proceed with your question.

Operator: Thanks, operator. Good morning, everyone. Hope you're doing well. Scott, I was hoping to get some perspective. This is kind of a gross margin progression from here. I know this is what your outlook still calls.

Peter Grom: Thanks, operator. Good morning, everyone. Hope you're doing well. Scott, I was hoping to get some perspective.

Peter Grom: on kind of the gross margin progression from here. I know this is where your outlook still calls.

Speaker Change: For commodity costs that are that are stable, but I think you mentioned in your remarks that you expect

Speaker Change: Scott Huckins, Mark Swartzberg, Michael Graham, Scott Huckins, Mark Swartzberg, Scott Huckins,

Speaker Change: In terms of what you're seeing across your key inputs and how we should be thinking about maybe inflation at this stage, looking at the 25. Thanks.

Speaker Change: Eva, thanks for the question. Good morning. So I think probably the most important part of the gross margin story is when we introduced the full-year guide, I think the takeaway was around a 200 basis point.

Speaker Change: Improvement and Gross Margin and that's exactly what what we continue to see and what is factored into the guide for a full year.

Speaker Change: As we break down margin performance between Q3 and Q4, we have a little bit of expansion in Q3, a little bit of contraction in Q4. You hit it, and I took that in my prepared remarks for that reason to highlight.

Speaker Change: Call it $10 million of costs being absorbed in the fourth quarter. So that's my attempt to kind of give you the rack of facts of gross margin.

Speaker Change: In terms of the underlying commodities, the core two would be, of course, resin and aluminum. They have different characteristics. Aluminum has been extremely volatile. I'll use quoted LME fundamental exchange prices. Start of the year at a dollar.

Speaker Change: Q2 spiked significantly up to a size about $1.20. As of yesterday, it was back under $1.00. So that was the flag for the $10 million to flow through for Q4.

Speaker Change: Resin, on the other hand, has drifted up consistently throughout the year, January and April and even this month. Both, though importantly, have been factored into our guide, so we're aware of those changes in each of those underlying commodities and are expressly factored into the outlook.

Speaker Change: Great, super helpful. I'll pass it on.

Speaker Change: Our next question comes from Lauren Lieberman with Barclays. Please proceed with your question.

Lauren Lieberman: Great, thanks for coming in guys. I just wanted to catch up a bit on hefty tableware. So I wanted to just kind of get a status report on some of the turnaround efforts there. And then in particular, margins did take a step down.

Speaker Change: this quarter. So I just you know, is it just comparisons? Or is it reflective of kind of increased investment in that segment to get the business going again? Thanks.

Unknown Executive: Thanks, Lauren. Yes, we are.

Unknown Executive: Thanks, Lauren. Yes, we're very pleased with the performance from a sales recovery standpoint on our tableware segment.

Speaker Change: Thanks, Lauren. Yes, we're very pleased with the performance from a sales recovery standpoint in our tableware segment.

Speaker Change: Our teamwork motions were even more effective than we'd anticipated in driving volume, but it also did affect, to a limited extent, as expected, our margins.

Speaker Change: The tableware and Reynolds cooking and baking are two seasonal businesses with significant holiday product promotions, so different promotional programs and timing by comparison the prior year also contributed to the timing benefit in the quarter.

Speaker Change: As a reminder, also, we have a really strong private label business in the tableware category, and private label took share in these categories in Q2.

Speaker Change: Our next question comes from Andrea Teixeira with JP Morgan. Please proceed with your question.

Unknown Executive: Thank you, Alfredo, and good morning, everyone. So I was hoping to see if you could comment a bit as you discuss the pricing from a kind of category perspective and promotion, but I was hoping to give you a height balance with both branded and non-branded and store brands. If you can comment on the trade-downs and how you're seeing consumers and how you're employing RGM. You mentioned some of the promotions kind of yielded better than anticipated just now on the half-to-table wear. So I was wondering if you're seeing a stabilization of that potential down trade or how, within your portfolio, you're seeing the dynamics between brands and non-brands.

Andrea Teixeira: Thank you, Alfredo, and good morning, everyone. So I was hoping to see if you can comment a bit as you discuss the pricing on from a kind of category perspective and promo, but I was hoping, given your height balance with.

Speaker Change: Both branded and non-branded and store brands. If you can comment on the trade downs and how you're seeing consumers and how.

Speaker Change: You're employing our GM you you mentioned some of the promotions kind of you did better than anticipated just now

Speaker Change: I was wondering if you're seeing a stabilization of that potential downtrade or how within your portfolio you're seeing the dynamics between brands and on-brand.

Speaker Change: There's been a modest increase in private label in some of our categories and we're benefiting from those increases as well as driving some brand share at the same time.

Unknown Executive: And we're benefiting from those increases as well as driving some brand share at the same time. The gaps between brands and private label really depend on the category, and that provides a strong foundation for how we're implementing our promotional programs and driving our volume above category forecast. So we're managing that margin very effectively, demonstrated by the stronger than expected profitability in Q1 and Q2. And as I mentioned in my prepared remarks, PRESTO is on track to... and the store brand categories.

Speaker Change: The gaps between brands and private label really depend on the category, and it provides a strong foundation for how we're implementing our promotional programs and driving our volume above category forecasts.

Speaker Change: So we're managing that margin very effectively.

Speaker Change: We've demonstrated that by the stronger than expected profitability in Q1 and Q2.

Speaker Change: And as I mentioned in my prepared remarks, PRESTO is on track.

Speaker Change: launched a record number of new products which also contributes to margin performance in the store brand categories.

Lance Mitchell: That's helpful, Lance. But one of the things that I remember since the IPO, right, there was the price point, especially for aluminum, which you don't have private label, right? So you just have your brand, Reynolds.

Unknown Executive: How should we be thinking as you explore potentially PACS, anything for the holidays, especially for the baking side of the business, like anything you can share. As you said, you have a lot of innovation coming up for Presto, but I was hoping to see if cooking and baking, which is a high-profitability business for you, if we're seeing kind of that business. And again, I give a lot of praise for what you have done since last year, kind of stabilizing that, stabilizing the price points, but just hoping to see if you're seeing specific in cooking and baking, things kind of like saddle in price points and as you look at the outlook into the balance of the year. Thank you. I'm cooking and baking the Reynolds Wrap brand specific...

Speaker Change: How we should be thinking as you explore potentially PACS, anything into the holidays.

Speaker Change: Especially for the baking side of the business, like anything you can share.

Speaker Change: If you're seeing specifically cooking, baking.

Speaker Change: things kind of like saddle in price points and as you look at the outlook into the balance of the year. Thank you.

Unknown Executive: In cooking and baking, the Reynolds Wrap brand specifically has gained share points throughout this year. So we're very satisfied that we've got the right price gaps and we've got the right promotional programs and advertising to go with them. And we're focused on Millennials and Gen Zs that are advertising on usage occasions. So, the fact that we're gaining share and the fact that we've got the right price caps, we are well positioned as we go into the holiday season for cooking and baking.

Speaker Change: On cooking and baking, the Reynolds Wrap brand specifically has gained share points throughout this year, so we're very satisfied that we've got the right price gaps.

Speaker Change: And we've got the right promotional programs and advertising to go. And we're focused on Millennials and Gen Zs that are advertising on use occasions.

Operator: As a reminder, if you would like to ask a question, please press star 1 on your telephone key. Our next question comes from Bill Chappell with True Securities. Please proceed with your question.

Speaker Change: As a reminder, if you would like to ask a question, please press star 1 on your telephone keypad.

Bill Chappell: What we've heard from Food Service Weakness from McDonald's or Lamb Weston or others over the past couple months. Do you think your business is kind of benefiting from the consumer shift to home? Is that directly reflected in that, or am I making too much of that?

Speaker Change: Yeah, when you look at the

Speaker Change: We think there's a modest improvement as a result of that with the factor given the nature of our products you know, they're affordable and convenient as I said a moment ago as well as our effectiveness in leading the category, but

Speaker Change: And we believe one of the factors contributing to this is the higher rate of inflation in food away from home. So for the last 52 weeks, the CPI for food away from home is up 4% versus 1% for food at home.

Lance Mitchell: So it is a contributing factor. We don't think it's a significant factor, but it is one of many factors why we are outpacing our categories and why the category is performing better.

Speaker Change: More the fact that you're in three or four categories in which they're duopolies And so the promotional level is really depends on what your competitor or competitors do

Lance Mitchell: Our promotional programs are primarily focused on working with our retail partners to ensure the total category grows. So when we put our promotional programs together, it's category management plus a retail discussion and really in partnership with our retail partners to determine what the promotional programs will be for. And as I mentioned a moment ago, it's usually six months in advance, so we're already locked into most of the promotions for Q3 and Q4.

Speaker Change: Our promotional programs are primarily focused on working with our retail partners to ensure the total category grows. So when we put our promotional programs together it's a

Speaker Change: a category management plus a retail discussion and really in partnership with our retail partners to determine what the promotional programs will be for.

Speaker Change: And as I mentioned a moment ago, it's usually six months in advance, so we're already locked in most of the promotions for Q3 and Q4.

Speaker Change: Got it. Thanks so much.

Operator: There are no further questions at this time. I would now like to turn the floor back over to Lance Mitchell for closing comments.

Lance Mitchell: Well, thank you, operator, and thank you, everyone, for the gift of your time today. I want to take a moment to thank and congratulate the 6,000 Reynolds Consumer Products team members that are contributing to the success of our business every day. And I ask you and them to continue to be safe. Thank you.

Speaker Change: And I ask you and them to continue to be safe. Thank you.

Operator: This concludes today's teleconference.