REYN - NASDAQ

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. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] 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 now begin.

Thank you, operator. Good morning, and thank you for joining us on 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. With me on the call today are Lance Mitchell, our President and Chief Executive Officer; and Scott Huckins, our Chief Financial Officer. Following prepared remarks, we will open the call for your question-and-answer session. 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. Please refer to the Risk Factors section in our SEC filings. The company does not intend to update or alter these forward-looking statements to reflect events or circumstances arising after the call. During today's call we will refer to certain non-GAAP or adjusted financial measures. Reconciliations of these GAAP to non-GAAP financial measures are available in our earnings press release, investor presentation deck and on 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.

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. 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 in household essentials, providing consumers with new product benefits and expanding range of affordable sustainable solutions. We continue to recruit Gen

Thank you, Lance. Good morning, everyone. 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. 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. Consolidated revenues declined 1%, reflecting the retail revenue increase and a 2-point decrease in our low-margin non-retail revenues. 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. 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. On a year-to-date basis, retail revenues were $1.687 billion, while low-margin non-retail revenues declined to $77 million. Adjusted EBITDA of $294 million increased $62 million, driven by volume output and lower operational costs. Earnings per share was $0.69, up significantly from $0.40 last year. And we generated $183 million of operating cash flow, contributing to a reduction of net debt to 2.4x trailing 12 months adjusted EBITDA in Q2 and an additional $50 million voluntary principal payment made subsequent to quarter end. 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 billion to $3.670 billion compared to revenues of $3.756 billion in 2023. As a part of this guide, we continue to expect pricing to reduce revenue by approximately 1%. 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 2.5 point headwind from our low-margin non-retail business and optimization of our retail product portfolio. We are raising our full year adjusted EBITDA forecast to a range of $670 million to $685 million, compared to $636 million in 2023. The new outlook for the full year reflects flow-through of our second quarter performance, while 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. 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. 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 2023. Depreciation and amortization of approximately $125 million, increase expense of approximately $100 million. 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. 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. The building blocks include: a 1-point reduction due to pricing; a 2.5 point reduction to a 1.5 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; and a 2-point reduction from lower-margin non-retail volume and further optimization of the retail product portfolio. We forecast third quarter adjusted EBITDA in a range of $165 million 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. Of course, this guide implies what our expectations are for the fourth quarter. It is worth reminding that we expect to return to historical phasing of quarterly earnings in 2024 in contrast to last year when Reynolds Cooking & 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 bag as we transition to the in-sourcing of this product offering. In terms of capital allocation, our priorities are unchanged. 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, Circana recently expanded its MULO database to capture more of the total retail market for consumer goods. As such MULO+ captures substantially more of the total retail market for our products than Nielsen. In the second quarter, our overall categories were approximately 130 basis points stronger in MULO+ than in Nielsen track channels and as much as 3 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 Circana's MULO+ and Nielsen track channels, so that remains a limitation to visibility in syndicated scanner data. In closing, our second quarter results were above expectations and contributed to our strong first half of 2024 and increased side for full year 2024. Stability and strong execution remain major drivers of our performance and I am very pleased with our operational performance and disciplined cost management. 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. We are accelerating product innovation across our CP, representing significant added share and growth potential beyond 2024. We are leaning into Reyvolution cost savings and expect them to remain a major driver of margin and approximately one-third of our profit growth over the long-term and we are driving cash flow and plan to continue increasing financial flexibility to invest in strategic opportunities. With that, let's turn to your questions. Operator?

Thank you. We will begin question-and-answer session. [Operator Instructions] Our first question comes from Robert Ottenstein with Evercore. Please proceed with your question.

Great. Thank you very much and nice quarter guys. So, Scott, you mentioned that you're looking for a 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.

Hey good morning Robert, thanks for the question. So, the way we look at it is we start with the as-reported retail volumes and we make two adjustments. First we removed the effect of any product portfolio optimization and second particularly for Q2, Q3, the effect of the retail order timing differences. 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. The guide contemplates a sequential improvement year-over-year from Q2 to Q3, up 50 basis points and in turn, another sequential improvement 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 volume.

And then you mentioned that the categories moderately outperformed your expectations. 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. This is Lance. That is part of the equation yes. 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. But also recall that these categories are household essentials and they're convenient low-cost that people need every day.

Great. Thank you.

Our next question comes from Mark Astrachan with Stifel. Please proceed with your question.

Yes, 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 consumer-facing companies, could you just give an update on how things are going in 3Q or July so far?

Thanks, Mark. This is Lance. We've previously not commented on intra-quarter performance. But as you said given the concerns about the broader economy and the impact on company's 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 as we talked about sequential modest improvement in the core retail sales volume factored into our guide.

Got it. That's helpful. And then the comments Scott that 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 for some of those new tracked 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?

I'll start, Lance may add on. I think the structural observation is that MULO+ is obviously picking up more of the actual shopping behavior in the marketplace. As I think I shared in the prepared remarks we saw outperformance of about 130 basis points versus “Nielsen Track Channel”. An example would be in our foil business it was about three points better in MULO+ 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. 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 tracked channel observations. So hopefully that's responsive.

Got it. Okay. Thank you.

Our next question comes from Nik Modi with RBC Capital Markets. Please proceed with your question.

Thank you. Good morning, everyone. Lance, I think, you guys have been a lot more realistic about the economic situation and I think most companies across the consumer goods landscape. So I'm just curious on your take kind of what you guys are seeing. I mean do you think we've hit the bottom? Because depending on where we are in the ecosystem it seems like things are just getting worse I think echoing some of the comments made prior and some of the questions. So would love to get your perspective on that. And then just kind of dovetailing with that 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 I just wanted to get some of your perspective around kind of what you're seeing in the pricing promotion environment. Thanks.

Hi, Nik. We believe and we said this at the beginning of the year the consumers are under pressure. I said this in my prepared remarks declines in personal savings, record levels of household debt and SNAP fundings down significantly. But our category is the household essentials that are affordable and convenient and we're getting the benefit from people getting away from home less frequently. So we expect to continue outperforming our categories and we've maintained our category expectations in 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 no significant change. As far as promotional levels given the retail environment, it's returned to pre-pandemic levels and we've invested accordingly. About 20% of our product sales are on promotion, which is consistent with what we had in our plan and our guide. And I will tell you that in Q3 and Q4, 90-plus percent of the promotion is already locked. So it's something that we can forecast with accuracy.

Great. And if I could just ask one more follow-up on waste bags 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 to space. Just curious on kind of are you holding on to more space than you had anticipated? Any perspective around that would be helpful.

Well, let me start by saying that -- I'll go into a little more broad detail on the actual question. In the second quarter and year-to-date both Hefty and private label gained share. And as you know we're also a major player in private label waste bags. To answer your point specifically, our total points of distribution are up year-to-date double digits. 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. And we're really excited about a new ad campaign we have with John Cena. 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.

Excellent. Thank you. I’ll pass it on.

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

Thanks, operator. Good morning, everyone. I hope you're doing well. Scott, I was hoping to get some perspective on the gross margin progression from here. I know the full year outlook still calls for commodity costs that are stable. But I think you mentioned in your prepared remarks that you expect cost to modestly increase through the balance of the year. You also called out this $10 million headwind in 4Q. So would just be curious how we should be thinking about the gross margin progression in the balance of the year just given the strong first half? And then maybe building on that just bigger picture can you maybe just unpack in terms of what you're seeing across your key inputs, and how we should be thinking about maybe inflation at this stage looking out to 2025? Thanks.

You bet. 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 improvement in gross margin. And that's exactly what we continue to see and what is factored into the guide for our full year. 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 call it $10 million of cost speed absorbed in the fourth quarter. So that's my attempt to give you the rack and stack of gross margin. 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, started the year at $1. Q2 spiked significantly up to as high as about $1.20. As of yesterday it was back under $1. So that was the flag for the $10 million of flow-through or included in the flow-through for Q4. Resin on the other hand has drifted up consistently throughout the year, January and April and even this month. Both so importantly have been factored into our guidance. So we're aware of those changes in each of those underlying commodities and are expressly factored under the outlook.

Great. Super helpful. I'll pass it on.

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

Great. Thanks. Good morning guys. Just wanted to catch up a bit on Hefty Tableware. So I want 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 this quarter. So I just -- is it just comparisons? Or is it reflective of kind of increased investment in that segment to get the business going again? Thanks.

Thanks, Lauren. Yes, we're very pleased with the performance from a sales recovery standpoint in our tableware segment. Our tableware promotions were even more effective than we had anticipated in driving volume, but it also did affect to a limited extent, as expected, our margins. The Tableware and Reynolds Cooking & Baking are two seasonal businesses with significant holiday product promotions. Some different promotional programs and timing by comparison in the prior year also contribute to the timing benefit in the quarter. 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.

Our next question comes from Andrea Teixeira with JPMorgan. Please proceed with your question.

Thanks and good morning everyone. So I was hoping if you can comment a bit as you discussed the pricing on -- from a kind of category perspective promo. But I was hoping, given you were quite balanced with both branded and non-branded in 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 Hefty Tableware. 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-brand?

On Cooking & 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. And we're focused on Millennials and Gen

We think there's a modest improvement as a result of that was a factor given the nature of our products. They're for convenience as I said, a moment ago, as well as our effect of this and leading the category. But to your point quick service restaurant volumes are down 2% in the second quarter and that's a continued trend of low single-digit declines from the previous lapping of other quarters. 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. So it is a contributing factor. We don't think it's a significant factor but it's one of many factors of why we are outpacing our categories and why the category is performing better than we'd expected.

Yes. That's helpful. Thanks. And then second just going back to promotional issue is it – and maybe I'm just talking out loud, but is it more of the fact that you're in three or four categories in which there are duopolies and so the promotional level, it really depends on what your competitor or competitors do less about the overall kind of CPG promotional level. Is that fair? And that's kind of why you're not seeing or we're not hearing what a lot of your competitors or peers are saying?

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

Got it. Thanks so much.

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

Well thank you, operator, and thank you everyone for the gift in your time today. I want to take a moment to thank and congratulate the 6,000 Reynolds Consumer Product team members that are contributing to sets of our business every day. They are the ones who are making and reporting a successful quarter possible and continued growth in our company. My sincere gratitude to all of my teammates. And I ask you and them to continue to be safe. Thank you.