Q4 2024 Reynolds Consumer Products Inc Earnings Call
Speaker Change: Greetings. Welcome to Reynolds Consumer Products, Inc. fourth quarter and full year 2024 earnings call.
At this time, all participants are in a listen-only mode.
Speaker Change: 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.
Speaker Change: As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mark Swartzberg, Vice President, Investor Relations. Thank you, sir.
Mark Swartzberg: Thank you, operator, and good morning, and thank you for joining us for Reynolds Consumer Products' fourth quarter earnings conference call. Please note that this call is being webcast on the investor relations section of our corporate site at ReynoldsConsumerProducts.com. Our earnings press release and investor deck are also available.
Mark Swartzberg: With me today on the call are Scott Huckins, our President and Chief Executive Officer, and Nathan Lowe, our Chief Financial Officer.
Mark Swartzberg: Following prepared remarks, we will open the call for a brief question and answer session.
Mark Swartzberg: Before we begin, I would like to remind you that this morning's discussion will contain forward-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.
Mark Swartzberg: please refer to the risk factors section in our SEC filings.
Mark Swartzberg: 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.
Mark Swartzberg: Reconciliations of certain of these gaps and non-gap financial measures are available in our earnings press release, investor presentation deck, and Form 10-K which can be found on the investor relations section of our site.
Now I'd like to turn the call over to Scott.
Scott Huckins: Thank you, Mark, and good morning, everyone. I am thrilled to be president and CEO of this great organization and have been looking forward to this call. In a few minutes, I will speak to what we are doing as a company and leadership team to make RCP even stronger.
Scott Huckins: To set the stage, let's start with a review of our results. Nathan will provide more detail in a few minutes.
Scott Huckins: The Reynolds and Hefty brands continue to build on their leadership positions in household foil, waste bags, food bags, disposable tableware, and many other categories.
Scott Huckins: Consolidated retail volume accelerated quarter-by-quarter and increased to one percent in the fourth quarter.
Scott Huckins: Profitability was in line with what we expected for the quarter and for the year.
Scott Huckins: We expanded margins in 2024, delivered earnings ahead of our initial expectations, and drove cash flow, paying down more debt than targeted at the start of the year.
Scott Huckins: In fact, 2024 represented the strongest profitability in our history outside of the COVID-fueled 2020 results.
Scott Huckins: As a result, we enter 2025 in a strong competitive position, along with very strong cash flows, AD leveraged, and very strong balance sheet.
Scott Huckins: and the opportunity to invest in a range of well-developed programs to improve growth, drive out costs, and produce more stable earnings growth.
Scott Huckins: This takes me to our plans for making RCP even stronger.
Scott Huckins: Reynolds Consumer Products is a great company, rich in history, rich in brands, rich in capabilities, and most importantly, rich in people.
Scott Huckins: people committed to winning safely with grit, creativity, resilience, teamwork, and leadership in everything we do.
Scott Huckins: I have great partners in Nathan Lowe and the entire leadership team and the transition we announced in October continues to go well and according to plan.
Scott Huckins: When I joined RCP as Chief Financial Officer in the fall of 2023,
Scott Huckins: I had completed a preliminary assessment of RCP strengths and opportunities.
Scott Huckins: Since then, my team and I have conducted a comprehensive analysis of our business and, in turn, developed a fact-based, well-resourced program of action to invest in growth, expand margins, and drive shareholder value creation.
Scott Huckins: Our business assessment confirmed a powerful collection of strengths along with a couple of areas of opportunity.
Our strengths are formidable.
Scott Huckins: Our brand and store brand business model is at the heart of all we do, allowing us to lead our categories each and every day.
Scott Huckins: Our national brands, Reynolds and Hefti, are billion dollar brands with significant brand equity that transcends their categories.
Scott Huckins: we have a significant opportunity to expand our brands into new categories.
Thank you.
Scott Huckins: We are accomplished in and committed to building out our portfolio of affordable, sustainable solutions.
Scott Huckins: Our customer base is a who's who of major retailers, spanning all major channels of retail distribution.
Scott Huckins: Our largest categories are stable, consistent, and generate significant profits and cash flows.
Scott Huckins: Our manufacturing footprint is cost competitive and U.S. centric, facilitating great service, dialogue and partnership with our customers.
Scott Huckins: Our cash flows and balance sheet are very strong, providing a position of strength from which to invest.
Our culture is one of safety, collaboration, innovation, and productivity.
Scott Huckins: and our business is run by a veteran leadership team with over 300 years of combined industry experience.
Scott Huckins: Areas that present opportunities include a diversified but somewhat volatile set of raw materials contributing to inconsistent earnings growth.
Scott Huckins: and secular headwinds that are small but cash generative phone plate business which now represents less than 10% of our revenue.
Scott Huckins: As a result of this assessment and the investments and work that are underway, my team and I are even more confident in the 2030 strategic vision and earnings algorithm we shared at our Investor Day in March of 2024.
Scott Huckins: We see an even stronger path to more consistent volume growth, more consistent earnings growth, including retail volume at or better than our categories, and leveraging our pricing power and other tools to recover increases in raw materials in 2025 and beyond.
Scott Huckins: The program of action we have begun implementing consists of work streams with dedicated leaders, processes, and resources going after a strong pipeline of opportunities for incremental growth
cost savings and ROI across our business.
Scott Huckins: The growth pillar consists of programs to drive more attractive organic retail volume and revenue growth, including workstreams to drive distribution wins, higher impact innovation, which is often a catalyst to new distribution,
Scott Huckins: entry into adjacent categories, and increased returns for RCP and our retail partners on promotional spending.
Scott Huckins: The cost pillar increases our focus on what were previously called revolution cost savings.
Scott Huckins: unpacking our entire supply chain from commodities to finished goods to advance our cost position, improve margins, and unlock additional growth opportunities from an even lower cost base.
Scott Huckins: In raw materials, for example, we are seeking longer-term pricing architectures to reduce volatility while maintaining our cost focus.
Scott Huckins: We have identified significant opportunities for reducing costs throughout our entire supply chain, from raw materials to manufacturing through to distribution.
Scott Huckins: Disciplined cost management, enhanced focus, and increased investment will allow us to unlock these opportunities and we are confident in our ability to expand margins over time.
Scott Huckins: The ROI pillar promotes and encourages more of a returns-based mindset in all aspects of our business.
Scott Huckins: We will be stepping up investment in RCP because we have the resources, balance sheet strength, and opportunities to invest more into the business, both for growth and for productivity.
Scott Huckins: We have identified several attractive capital investment programs, including several that are already in flight.
Scott Huckins: These investments, coupled with our productivity work, represent a source of incremental cost savings this year.
Scott Huckins: We have an opportunity to further increase automation in our plants in a macro environment characterized by higher employee wages in turnover compared with pre-pandemic levels.
We are also investing in opportunities to improve material processing.
Scott Huckins: This further strengthens our production capabilities while helping us deliver against key sustainability metrics.
Scott Huckins: And, as we increase automation and material processing capabilities, we not only drive down our plants production costs, but also increase production capacity.
Scott Huckins: And, as you would expect, we are flowing all capital investments through the returns-based capital allocation framework that we outlined at our Investor Day and in previous earnings calls.
Scott Huckins: Nathan will provide more context and color on this in his prepared remarks.
Scott Huckins: Finally, we are also adding a few key roles, along with some outside experts, to help us accelerate and drive these programs forward.
Scott Huckins: A handful of examples illustrate why we expect these programs to deliver increased growth, earnings and returns over time.
Scott Huckins: As I said, we expect a number of these programs to produce more distribution wins and increase benefits from product innovation.
Scott Huckins: Hefty Press to Close is a great example of how our leadership in one category segment, in this case private label food bags, can bring more value to an entire category along with added growth for one of our brands.
Scott Huckins: Hefty Press to close rapidly expanded distribution with a major retailer in 2024 and is in the process of rolling out nationally across major retailers in 2025.
Scott Huckins: We see similar opportunities to innovate in brands and store brands across the portfolio to drive new distribution and incremental value for our retail partners and consumers alike.
Scott Huckins: Our dedicated growth programs should also benefit from improved prioritization and focused resourcing.
An example is hefty scented waste bags.
Scott Huckins: Hefty was several years into gaining share of the waste bag category before introducing Hefty with Fabuloso Scents.
Scott Huckins: That trend continues, and Hefty Fabuloso waste bag retail sales now surpass $200 million.
Scott Huckins: This growth has been driven by consumer insights, our investments in our brands, and our effectiveness in leveraging our category leadership position to scale the extension.
Another example is air fryer liners.
Scott Huckins: These started gaining popularity shortly before the pandemic and have grown significantly since.
Scott Huckins: We have spent the time and resources since our initial trials adapting and sharpening our insights, product features, and retail positioning.
Scott Huckins: Today, Reynolds Kitchen air fryer liners are an example of premium innovation and growing strongly across the United States.
Scott Huckins: I mentioned a returns-based approach and mindset in the application of ROI-based trade spending as an area of increased focus for growth.
Scott Huckins: There is an opportunity here because we believe we can generate stronger ROIs for RCP and our retail partners with improved analytics, tools, and focus.
Scott Huckins: In the area of costs and capital spending, I'm really encouraged by the breadth of productivity opportunities across our portfolio and equally pleased that we have the experience and skill set deploying many of these technologies within our network.
Scott Huckins: Of course, all of this will require not only financial resources, but also discipline and hard work executing these programs to further improve RCP's growth, margins, and returns.
Scott Huckins: We expect incremental returns on our investments to start appearing late in the year and have set the following as our priorities for 2025.
Scott Huckins: Continue treating employees and company safety as our top priority and build further on our world-class safety performance.
Scott Huckins: accelerate growth through distribution wins and product innovation and build a more sustainable level of low single-digit growth into the future.
Execute cost savings to set the stage for margin expansion.
deliver a more stable earnings growth model.
Scott Huckins: and invest in people and develop our leaders to drive and support a growing business.
Scott Huckins: In closing, we are committing the resources to unlock even more of RCP's commercial and financial potential.
Scott Huckins: We have a great team executing the growth, cost, and ROI programs to deliver on this potential.
Scott Huckins: We look forward to driving revenue growth and margin expansion, increased earnings consistency, strong cash flows, and strong TSR as a result. Nathan, over to you.
Thank you, Scott, and good morning.
Nathan Lowe: It's truly an honour to be here with you today as I step into the role of Chief Financial Officer and mark my six year anniversary with RCP.
Nathan Lowe: I am excited to be part of a company with such a strong financial foundation and market position, committed to delivering long-term value for our shareholders.
We kicked off 2024 with several key objectives in mind.
Nathan Lowe: First, to protect and drive our volume by leveraging our competitively advantaged business model to lead our categories.
Nathan Lowe: Second, to deliver earnings growth by investing in our product portfolio and innovation, driving productivity improvements, maintaining disciplined cost management and unlocking additional cost savings.
Nathan Lowe: And third, we set out with the objective to increase our financial flexibility by reducing leverage to within our 2 to 2.5 times adjusted EBITDA target by year end.
I'm pleased to report we over-delivered on all fronts.
Nathan Lowe: Net revenues of $3,695,000,000 exceeded our initial guidance, reflecting sequentially improving retail volume as we drove our categories to better-than-expected performance.
Nathan Lowe: 2024 marked a year of strong earnings growth as we delivered 678 million of adjusted EBITDA representing a 42 million or 7% increase over 2023 and margin expansion of 140 basis points
Nathan Lowe: This was driven by lower operational costs, price pack architecture work on our tableware business and product portfolio optimization.
Nathan Lowe: Our four-year free cash flow of $369 million was also strong.
Nathan Lowe: benefiting from earnings growth and continued working capital discipline resulting in further deleveraging to within our stated target leverage range ending the year at 2.3 times trailing 12 months adjusted EBITDA.
Nathan Lowe: As a result of our successful focus on cashflow, we paid down $150 million of debt throughout 2024, with an additional 50 million paid in January of 2025, further increasing our financial flexibility.
Nathan Lowe: And adjusted earnings per share was $1.67, up 18% from $1.42 per share in 2023.
Now turning to the fourth quarter.
Nathan Lowe: Net revenues of $1,021,000,000 were above net revenues of $1,007,000,000 in the fourth quarter of 2023 and at the upper end of our guide.
Nathan Lowe: with retail volume growing 1%, consistent with overall category growth, in spite of a one-point headwind from product portfolio optimization.
Nathan Lowe: and all four business segments delivered accelerating volume in the quarter. Our Hefty Waste and Storage and Reynolds Cooking and Baking segments each delivered three points of volume growth in the quarter.
Nathan Lowe: Our Tableware segment delivered sequentially improving volume and share trends and our Presto business unit was flat on volumes after giving effect to product portfolio optimisation.
Nathan Lowe: Adjusted EBITDA of $213 million was, as expected, returning to historical quarterly phasing, and $25 million below adjusted EBITDA in the year-ago period, driven by anticipated higher operational costs.
Nathan Lowe: and lower pricing, including investments in price pack architecture, contributing to retail volume growth.
Nathan Lowe: Low-margin, non-retail revenues were stronger than expected, increasing $11 million but having a dilutive impact on margin percentages, worth roughly 75 basis points in the quarter and 50 basis points on the year compared with our initial outlook a year ago.
Nathan Lowe: and Adjusted EPS with $0.58 versus $0.65 per share in the fourth quarter of 2023.
Nathan Lowe: Overall, we delivered a Q4 result in line with our expectations.
Nathan Lowe: Looking forward, as Scott mentioned, our 2025 priorities include accelerating growth through distribution and innovation.
Implementing cost reductions and
Nathan Lowe: and investing in productivity and growth opportunities with an emphasis on capital spending returns, discipline and process.
Nathan Lowe: By focusing on these key priorities, we plan to deliver on our 2025 guide, enhance the stability of our earnings growth model, and invest to deliver against our strategy for the longer-term growth of RCP.
Nathan Lowe: Before I get into our 2025 guide, it's important to note that our adjusted earnings expectations for the year exclude approximately $25 million to $35 million of pre-tax cash and non-cash CEO transition costs.
and investments in strategic initiatives to drive future earnings growth.
Nathan Lowe: Targeted investments in strategic initiatives in 2025 are expected to accelerate delivery of the growth and cost-focused ROI programs that Scott reviewed.
Nathan Lowe: As he mentioned, we expect annualised returns on these investments to start benefiting results late this year.
Nathan Lowe: We expect 2025 net revenues to be down low single digits driven by retail revenue at or above category performance.
Nathan Lowe: Unpacking our revenue guide further, we are taking pricing actions where appropriate to cover increases in aluminum costs.
Nathan Lowe: We are assuming a relatively stable environment with continued pressure on the consumer, including a 2% overall decline for our categories.
Nathan Lowe: Down 2% category expectation is driven exclusively by our expectation of a double-digit decline for foam dishes.
Nathan Lowe: which represent a little less than 10% of our revenue and less than 5% of our earnings.
Nathan Lowe: We expect the balance of our categories to be generally flat.
Nathan Lowe: That said, we are confident in our retail volume performing at or better than category expectations for several reasons.
Our retail volume trends have been accelerating throughout 2024.
Scott Huckins: We are increasing investment behind the growth programs that Scott reviewed, motivated by our extensive work identifying significant incremental innovation and distribution opportunities for our brand and store brand business.
Scott Huckins: And some of our strongest performing products are in our non-foam tableware business.
demonstrating the advantage of our diversified product portfolio.
Scott Huckins: We expect full year 2025 adjusted EBITDA in a range of $670 million to $690 million.
Scott Huckins: And we expect adjusted earnings per share of $1.61 to $1.68 for the year, performing roughly in line with adjusted EBITDA, reflecting lower interest expense, but comping last year's one-time tax benefit in the second quarter worth 5 cents of EPS.
Some other considerations to keep in mind.
Scott Huckins: We see the year as having some level of headwinds, especially in the area of raw materials.
Scott Huckins: And we have a suite of proven tools, including pricing, to reduce the impact of these higher costs and deliver stable earnings across cycles.
Speaker Change: As Scott mentioned, we are working with key suppliers to extend the duration of pricing windows to help reduce earnings volatility.
Speaker Change: Finally, we have been following the tariff developments over the last several days, and we will all have a lot to learn as these developments unfold. As such, recently announced tariffs have not been factored into our guide.
Speaker Change: The first quarter, we expect net revenues to be down low single digits by comparison to first quarter 2024 net revenues of $833 million, which anticipates the shift of Easter into April by comparison to March of last year.
Speaker Change: We expect Adjusted EBITDA to be in a range of $115 million to $120 million by comparison to first quarter 2024 Adjusted EBITDA of $122 million.
Speaker Change: and adjusted earnings per share of 22 cents to 24 cents.
Turning to cash flow and capital allocation.
Speaker Change: We estimate free cash flow conversion of approximately 50% of EBITDA, consistent with what we said at our Investor Day, and net debt at the end of 2025 of approximately $1.4 billion.
Speaker Change: Disciplined capital allocation remains front of mind and we will continue to flow all decisions through our returns-based capital allocation framework.
Speaker Change: Now that we are inside our target leverage range, we have the flexibility to assess a greater number of opportunities to expand margins and drive growth.
Speaker Change: In the cost pillar, many programs are focused on automation in our facilities are even more attractive than they were previously given market wage rates and turnover compared with pre-pandemic levels.
Speaker Change: The cost of materials processing and sustainability related technologies have advanced and are more affordable, increasing our investment opportunities in this area as well.
Speaker Change: and of course seeing a lot of success in driving retail volume growth across our categories and we plan to continue investing to support that.
Speaker Change: We currently have in-flight projects driving a $20 million to $40 million step up in capital spending by comparison to 2024 capital spending and expect to generate strong free cash flow again in 2025.
Speaker Change: We also plan to continue expanding our pipeline of opportunities for future investment and will continue to look for the right M&A opportunities as well as organic entry into adjacent categories under the same capital allocation framework.
Speaker Change: In closing, we are proud of the strong progress we made in 2024.
Speaker Change: Our balance sheet, cash flows and capital allocation discipline position us very well for strong investment in our categories, growth and profitability, and we look forward to unlocking even more of RCP's potential in 2025 and over the long term.
With that, let's turn to your questions. Operator?
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 your line is in the question queue. You may press star 2 to remove your question from the queue.
Speaker Change: For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. As a reminder, please ask one question and one follow-up question. One moment while we poll for questions.
Speaker Change: Our first question is from Lauren Lieberman with Barclays. Please proceed.
Lauren Lieberman: Great, thanks. This is a lot more than I expected this morning and excited to kind of dig in over time. I was curious, maybe just starting very high level, if you could talk about what are the biggest
Lauren Lieberman: changes that this new program and plan sort of requires, whether it's from a cultural standpoint,
Lauren Lieberman: from an accountability, responsibility standpoint. Because a lot of these things, I think the work streams part was pretty clear, but when you think about the change in innovation and pursuing distribution, what is it that changes versus what you were doing before?
Thanks.
Scott Huckins: Good morning, Lauren. It's Scott. I'll start. Nathan will probably add on. I think what you're asking about is really what's the difference in approach. I think it's maybe a focus on the prioritization with which we're working on the top line. I'll start with that.
Scott Huckins: We see an opportunity to have a more targeted approach across the retail landscape.
Scott Huckins: looking for that growth. Two, we are attempting to more force-rank the innovation and build a resource model around that force-ranked innovation.
Scott Huckins: When we talk about the cost pillar, instead of a collection of projects, if you like, that are highly specific.
It would be more holistic or thematic.
So, for instance,
Scott Huckins: instead of maybe looking at one line in a plant, maybe that had had inferior performance and driving against that one example, we're looking at the total performance of that plant and the total cost of manufacturing and driving against those opportunities.
Scott Huckins: you might think of it as a bit more of a top-down than a bottoms-up approach in a holistic framework.
Scott Huckins: I would also add, unlike maybe where we were six years ago, our balance sheet is just a lot stronger than it was. As I mentioned in my prepared remarks, we now have a lot more flexibility to assess a greater number of opportunities to invest in driver tenants.
Lauren Lieberman: Okay, great. That's actually, that's really, for a not very targeted question, that was a very helpful, a very helpful answer. Wanted to also just ask quickly about, in a more micro way, the input cost expectations for this year. I know you mentioned at the end of the remarks, Nathan, you have the ability to price and so on, but just how should we think about inflationary expectations that are kind of built into the outlook?
Speaker Change: Yeah, I mean, like you heard, we didn't factor in any tariffs. We still have a lot to find out there, but from just the general environment, you could expect commodities to be a fairly significant headwind. If you just look at where we entered the year from a commodity rate perspective, it's up from that time 12 months ago.
Speaker Change: Again, as I said, we've got the usual suite of tools that we're deploying to offset that through productivity, pricing, and a number of other things.
Speaker Change: Okay, and final thing would be competitive environment in trash, you know, earlier this week.
Speaker Change: your major branded competitor kind of called out the category as highly promotional. So just, you know, curious about that. We are seeing it in Scanner as well, but it was interesting to see that your pricing in Waste and Storage was actually flat. So just curious if you could comment on the promotional environment particular to that category.
Speaker Change: Yeah, thanks Lauren. It's a it's a good question. I think maybe take a step back when when we think about 2024 as a whole relative to 2023 we anticipated
Speaker Change: an increase in in the promotional environment and that was in fact what we saw. Importantly though that that level of promotion looked a lot like pre-pandemic levels going back to 2019.
Speaker Change: You actually took my answer in the way you phrased your question.
Speaker Change: in terms of thinking about, you know, the reduced storage category looked no further than the price volume table in most recent reporting in Q4. It was flat, which suggests that that's not a step change from the previous Q4. So, you know, I think taken as a whole, the environment broadly was about as we would have expected last year.
Okay. Okay, great. I'll pass it on.
Thank you.
Speaker Change: Our next question is from Mark Astrakhan with CFL. Please proceed.
Yeah, thanks. Morning, everybody.
Speaker Change: I'll echo Lauren's comments. There's a lot to take in this morning. I guess maybe just to start relative to where we were in March at Investor Day.
Speaker Change: I get new management, old management kind of doing what they were doing for a long time. Was there something that you all were seeing?
as we headed into 25, whether it was...
category consumption, household formation, share
Speaker Change: that brought all of this change to the forefront, meaning that, you know, did you think that relative to where you were 10 months ago, was it possible the organization needed changes to hit the 2% and 4% sales and give it that algorithm? So that's the first question.
Speaker Change: I'll start, Mark. Good morning. I think that the key, as we look at this year, is re-ground on process. So we start each year with circana forecasts for the categories, just as we did a year ago.
Speaker Change: And what's noteworthy is the Turkana forecast, albeit a small part of the business or foam, are projected to be down double digits.
Speaker Change: The balance of the categories are projected to be roughly flat.
Speaker Change: So, I think with that backdrop, in the context of Investor Day, we spent a bunch of time thinking through, as we phrased it, strategic investments for 2025.
Speaker Change: really to play a bit of offense, both in capital, which Nathan covered, around productivity and materials handling and the plans.
Speaker Change: and on the P&L, if you like, across revenue growth management.
Speaker Change: cost pillars and an ROI focus. So I think that would be my attempt to give you current headset, not a different headset than yesterday, but I think, you know, a sharper focus based on that backdrop. But Nathan, chime in.
All right, I think he's going.
Nathan Lowe: Okay, and then I guess if we think about the output of all of these changes
you're guiding me down.
this year.
Speaker Change: But does that imply an acceleration from 25 to 30? I get that it's a long period of time. But the commentary that you talk about later this year is...
Nathan Lowe: And what we're all supposed to be looking for is more of a meaningful change or return to sales growth at or above algorithm. Same thing with a lot of momentum heading into 26. Is that the best way to kind of kind of judge all the success or progress?
Nathan Lowe: I think it's a fair recap. I mean, the way I think we're thinking about it, you know, just to give maybe a fuller picture, we see a challenged consumer, unchanged really from what we saw in 2024.
Nathan Lowe: We talked about category outlook with really phone being the call-out, the balance of the portfolio flat.
Nathan Lowe: We see, as Nathan commented on, an escalating raw material environment, which we're neutralizing through both pricing mechanisms and productivity.
Nathan Lowe: and then turning more to the balance of the year in the longer term. We're attempting to deploy capital smartly to drive returns and targeted investments if you like in the P&L or those strategic investments.
Nathan Lowe: to set the stage for growth and revenue and earnings in 26 and beyond. I think that's the most succinct way I could try to describe what's going through the management team's mind and prioritization.
Speaker Change: Got it. That's helpful. If I could squeeze just one last one in. 25 price volume, you know, within the sales algorithm and remind us how we should be thinking about elasticity with the pricing and the commodity outlook given what you talked about in terms of your outlook for households and growth in your categories. Thank you.
Thank you.
Speaker Change: Yeah, I'll give you a first start. I'm sure Nathan will add, but you know we talked about, and all of us can see, looking at the London Metals Exchange, the run-up in aluminum, and there are pricing actions in flight.
Speaker Change: Those pricing actions were designed very purposely with recognition about Thresholds that we know from historical experience create elasticity. It's not to suggest there's zero Elasticities, but we're very mindful of those key price points. So to summarize
Speaker Change: those pricing actions were designed to manage and stay within those key thresholds.
Speaker Change: As I said, it's a modest amount of pricing. We'll lean on other tools like productivity to help offset some of those costs as well. And if you just unpack the revenue guide, I'll go back to, we're assuming that the categories are down 2%, exclusively driven by a double digit decline in the phone category.
Speaker Change: So, in contrast, the rest of our categories are flat and we're really seeing a return towards more normal type of category growth rates and then we're anticipating delivering at or better than those category growth rates.
Got it. Thank you all.
Speaker Change: Our next question is from Rob Ottenstein with Evercore ISI. Please proceed.
Great, thank you very much. A bunch of follow-ups.
Speaker Change: First, just to get it out of the way and clarify things, you've mentioned the tariff word a couple of times.
You know, if...
Speaker Change: You know, we have the 25% on Mexico and Canada, and there's, you know, the retaliation, you know, likewise retaliation.
Speaker Change: and then what's going on with China, you know, how should we think about that? Is there a material impact if those go through, just to start things off?
Speaker Change: Good morning, Rob. I'll start, Nathan will add. I think the best place to start is just an assessment, you know, the current operating model to read around.
97% of our revenue is U.S. based.
Speaker Change: When we think about the production environment, 16 of our 17 manufacturing facilities are in the U.S.
Speaker Change: The facility that's not in the U.S. is in Canada. Its primary role is to service the Canadian marketplace.
Nathan Lowe: I'll turn to Nathan for maybe some context around sizing the inputs across the stack.
Nathan Lowe: I mean the commodity markets, I think it's worth noting, are often indirectly impacted so there's a lot to determine there and see how that settles out.
as for the more direct impacts to our business.
Nathan Lowe: purchases of raw materials and finished goods from the impacted geographies.
Nathan Lowe: represent a single-digit percentage of our overall COGS basket, so fairly de minimis in the scheme of things. Conversely, Scott said we're a US-centric manufacturer.
Nathan Lowe: So there are parts of our business that could benefit competitively from a sustained tariff environment if they impact our competitors disproportionately to us. But I think what we do know, we have a lot of resilience managing through these sorts of tariff environments, however they shake out.
Great, that's very helpful. Moving back to to waste bags.
Nathan Lowe: Can you talk I mean you touched on this a little bit in terms of promos going back to a little bit more normal level
Can you talk about, um...
Nathan Lowe: What's going on with private label? And then also in the context of, as you've noted, a tough consumer environment, how are you
you know, pivoting, using revenue growth management tools.
Nathan Lowe: to perhaps, you know, eke out a little bit of extra gains there, and what has this all meant to, you know, how have your discussions with retailers gone, and what is the, you know, the kind of the shelf space outlook in the upcoming resets?
Nathan Lowe: There's a lot there. I'll see if I can go in order. So I think first one was just in the category. The comment that I think I offered to a previous question was that the change in called the promotional levels in waste bags looked a lot like the change in promotional levels across our portfolio.
Nathan Lowe: When we think about the store brand, of course as you know, and all of you know, we participate both in the brand and store brand portion, or offerings, which we think is important.
is quite helpful.
Nathan Lowe: Interestingly enough, when we think about the private label branded mix in that particular category, brands took share from store brands versus a year ago's time.
Nathan Lowe: So hopefully that gives you a bit of a feel across the compare and contrast in waste bags and the balance of assets.
Nathan Lowe: Great and then just just one last question you mentioned early on actually one of your first comments
Thank you. Thank you.
was that you're looking at adjacencies.
Speaker Change: And so I'd love to get a sense on that in terms of is this more something that
you can do on an organic basis.
Speaker Change: sort of fund internally, or is this more M&A driven and you know, what kind of order of magnitude are we talking about here? Is this, you know, kind of very small incremental bolt-on type stuff or could this be of a much larger magnitude? Thanks.
Thanks.
Speaker Change: Thanks for the question. So, again, maybe just to re-ground, when we think about the categories that we operate in, as we shared it in yesterday, represents approximately a $40 billion TAM.
Speaker Change: offerings of the existing products penetrate about half of that TAM, again just to reframe.
Speaker Change: that the way in which we could enter categories adjacent to our own would be both through organic growth, meaning would, for example, the Reynolds or Hefty brands naturally travel into those categories organically?
Speaker Change: in addition we could also consider it would consider a bolt-on or tuck-in
Speaker Change: and I think the aspiration would be to do it responsibly.
Speaker Change: so that the first action or two we might take, if inorganic, would decrease.
Speaker Change: I think that would be the way we're thinking about it. But it remains clearly an opportunity, given that the TAM we're not participating in is roughly double the TAM we're in.
Thank you very much.
welcome
Speaker Change: Our next question is from Andrea Teixeira with JPMorgan. Please proceed.
Andrea Teixeira: Thank you, Operator, and good morning, everyone. So I was hoping to...
Andrea Teixeira: to kind of double-click on the prioritization of innovation and distribution. And I was hoping to see if you are embedding more investments in AEMP as a result of that.
Andrea Teixeira: It seems like from your guide that you're still assuming some expansion in EBITDA at the midpoint in terms of EBITDA margin. Perhaps if you can give us some color on how much you're thinking of gross margin evolution.
into 2025, and Nathan, you...
Andrea Teixeira: Also want to double-click on the aluminum cost, I understand, I appreciate all the...
Andrea Teixeira: the breakdown in terms of like the affected regions and the non-impacted regions that you source the commodity.
Andrea Teixeira: Given that it's a global commodity, wouldn't it affect, you know, the costs here as well? I mean, I was wondering if you can help us with hedges and or and I mean basically thinking about how
Andrea Teixeira: the tariff would impact you indirectly if any impact. Thank you.
Speaker Change: Good morning. Let me start with the two questions around innovation and ad spend. What we're attempting to relay is an approach of force-ranking the innovation.
Andrea Teixeira: really to ensure that we're putting the resources against the best ideas.
Andrea Teixeira: as simple as that sounds. In terms of advertisement or promotion levels, you would generally expect the 2025 advertising investment to be roughly consistent.
with what we saw last year, meaning in 2024.
Andrea Teixeira: We're certainly pleased with the returns we've seen on the ad investment, but we're always looking for opportunities to drive that further. An example of that would be in our Reynolds business.
Andrea Teixeira: going about ad campaigns on a more HALO basis, meaning inclusive of a variety of offerings, for example, in the Reynolds Kitchen portfolio.
rather than maybe a singular.
Andrea Teixeira: or product focused. So I think that's how we're thinking about, you know, the ad environment, the context of innovation, but I'll defer to Nathan on the balance of your questions.
Speaker Change: Yeah, so I think there's two more to go here. One was around gross margins. So as you can see, Andrea, we haven't provided that level of detail in our guide, but as you astutely pointed out, our EBITDA guide would contemplate a modest increase in EBITDA margins.
Speaker Change: The next one was around aluminum, but I really think you're asking more broadly around commodities. I think the point here is they've been moving around a lot.
Speaker Change: in response to the tariffs and we really need to see how they settle out.
Speaker Change: We've got a number of tools which could include derivative instruments, as Scott also pointed out earlier, where we're taking a view of taking long-term pricing windows with many of our key suppliers across commodities, and then the usual tools around pricing.
Speaker Change: and Productivity, which I noted are factored into our guide as well.
Speaker Change: That is helpful and then if I can so I'm assuming just to to clarify it does not include any of the shocks within guide because as you said like you you need to see how everything lands in guidance right so so your EBITDA and all the margins like that you're embedding our fields
Speaker Change: on an ongoing concern. Okay, the other question is more on the distribution, if I can squeeze.
Speaker Change: You talked about, over time right, obviously you've gained a lot of distribution over the years.
Speaker Change: But I was wondering if you can talk to us about, like, what are the white spaces, which we discussed back in March last year on the Annals Day, but I want to just double click on that as you go into.
Speaker Change: these planograms for the retailers going to 2025, how we should be thinking of the distribution opportunities ahead.
Speaker Change: Thank you, Andrea. I'll start. From a distribution standpoint, some of the highlights would include, for example, hefty press to clothes.
Speaker Change: That's an offering that started as a mass retailer in 2024. In 2025, we are rolling that out nationally to a series of retailers.
Speaker Change: In addition, if we pivot to a Reynolds cooking and baking business unit, we have some distribution wins in air fryer liners and parchment at the point that there are distribution opportunities.
Speaker Change: across the portfolio. And I think the complement to that would be innovation-led distribution opportunities we would anticipate.
Speaker Change: at the Fabuloso Extensions, our first entree flowing through from the Atacama Acquisition Sustainable Cutlery we will see in market in 2025. We will also bring some seasonal offerings in our core foil business.
Speaker Change: Probably more a reminder, we actually had a record number of innovation launches in our Presto business in 2024. We remain encouraged by that business's opportunity as well.
Very helpful. I'll pass it on. Thank you, Scott.
Speaker Change: As a reminder to star 1 on your telephone keypad, if you would like to ask a question, our next question is from Peter Graham with UBS. Please proceed.
Thanks, operator. Good morning, everyone. Hope you're doing well.
Speaker Change: So I was just hoping to get some more color on category growth, and I guess specifically, I would be curious what category growth was in the fourth quarter, because it seems like you had a really strong...
Speaker Change: exit rate, particularly after accounting for the optimization impact. And I guess what I'm really trying to understand in the context of what was a really strong quarter, have you seen a slowdown in category growth over the past month that's informing the 1Q outlook that's below the 4Q exit rate? Or is there something else that's really driving that?
Speaker Change: Good question. So I think if we look at the fourth quarter, in totality we had, as reported in the price volume table, 1% growth. A couple of factors going on as we're thinking about it.
Speaker Change: 2025 as we started with when we look across the year and again the building blocks of our process start with circana forecasts for the categories and again just to recap
Speaker Change: And all of the years from 2019 on, Eastern has been in the first quarter. In this particular year, it'll be in the second quarter. So there is some nuance in particular in the quarter Q1 relative to the full year.
Speaker Change: That's very helpful. And then just on the category growth, I mean, is your assumption that these kind of growth rates hold for the balance of the year or is there some sort of phasing that we need to consider, you know, maybe specifically would you anticipate maybe, you know, the film declines would be more pronounced in the first half relative to the back half?
Speaker Change: No, the intent was that the category forecast stood for the year as opposed to any any unique phase. I think the phasing would be more, as I mentioned a moment ago, more a function of the Easter shift as opposed to any other unique call-out.
Got it. Thanks so much. I'll pass it on.
Speaker Change: Our final question is from Brian McNamara with Kennecord Genuity. Please proceed.
Brian McNamara: Hey, good morning guys. Thanks for taking the questions. I think this is covered a bit in prior questions, but I'll try it a different way. What key factors are driving kind of that delay to category growth returning to kind of that average annual low single-digit pace you kind of outlined last March? I believe at the time you cited a more stable economic environment, increases in household formation, other long-term drivers of consumption.
Brian McNamara: I think the two different factors are shaping that. I think we've talked about foam between regulatory developments.
Consumer Preferences has been
Brian McNamara: Frankly, retailer preferences and strategies, those are all contributing to the downdraft and in the balance of the categories, I would just say it's one word, it's consumer.
Brian McNamara: When we think about the state of the consumer a year ago versus today, not a terrible amount has changed. And specifically, we point at consumer indebtedness, record levels of mortgage debt, record levels of credit card debt.
Brian McNamara: separate levels of auto debt and so we don't we don't see evidence uh as we sit here today for any catalysts that change that consumer narrative obviously that's not a permanent phenomenon but as we sit here today that's probably the simplest way to think about.
Brian McNamara: what might be muting, you know, an ordinary LSB type of category outlook away from foam.
Speaker Change: And can you please remind investors how and when the company takes pricing across its segment in light of potential tariff impact? We've gotten a lot of questions recently on the company's pricing power. I believe it's typically the last lever you like to pull after pack size adjustments, et cetera, but correct me if I'm wrong.
That's a great question.
Speaker Change: The key is, is we want to be thoughtful about pricing in the context of both price gaps thinking.
Speaker Change: brands versus store brands, but also absolute price thresholds. I think that's what you were
Speaker Change: you are probably getting at, and it's typical as Nathan was talking about, we kind of want to observe more sustained changes in the commodity input costs before taking price inaction.
Speaker Change: It's customary in the CPG space to see, for example, a quarter lag in those actions, but I think those are the variables that go into the pricing decision itself.
Speaker Change: And then the second part of that is we also want to continue to drive productivity across the manufacturing footprint to make a contribution against those headlines. And so it's the complement then of price and productivity to try to neutralize those factors rather than just there's a single tool called price.
Speaker Change: Great and then if I could just squeeze one last one in quickly that 25 to 35 million in CEO transition costs and other investments when I read the release it seemed pretty high and then when I was listening to the call it doesn't I'm just can you give me a little more color on how that that that kind of 30 million midpoint breaks down
Speaker Change: You bet. So roughly half of that would be truly CDO transition costs.
Speaker Change: The other half of it would be targeted investments, and again, those would be outside resources to assist in the development and acceleration of three topics. Revenue growth management on the top line.
Speaker Change: in particular, away from raw material sourcing and ROI-oriented investments like RGM and trade investment. That's, I think, a simple way to think about the distribution of those costs. And maybe finally,
Speaker Change: To be clear, we're anticipating these to be 2025, and so we're trying to be very purposeful and flagging as everybody understands. These are programs of investment to drive 2025 forward, so we're setting the stage for growth and margin expansion as we exit this year.
Great, really helpful. Thanks a lot.
Speaker Change: We have reached the end of our question and answer session. I would like to turn the conference back over to Scott for closing remarks.
Scott Huckins: Thank you operator and thank you everyone for your time today and your interest in our business. Our team is excited about the next chapter for RCP and we look forward to sharing our progress with you in the quarters and in the years ahead. Thank you.
Speaker Change: Thank you. This will conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.
Thank you, very much.