Greetings, and welcome to Reynolds Group's Second Quarter 2020 Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. .

It is now my pleasure to introduce your host, Tom Degnan. Please go ahead. .

Thank you, Stacy. Good morning, everyone. On the call with me this morning are Allen Hugli, RGHL's CFO; John McGrath, who is the CEO of Pactiv's Foodservice Business and Food Merchandising business; John Rooney, CEO of Evergreen; and Mike King, CEO of Graham Packaging. .

Today, I'm going to cover COVID-19 from a high level and then the CEOs will give you more detail. I will share with you the group's refinancing activities and then comment briefly on the potential IPO of the group. The CEOs will each give more color on the quarter and the year-to-date numbers.

And Allen Hugli will cover the financial highlights and share more detail on the RGHL debt transactions. We will then take your questions. .

COVID-19 continues to have a major impact on our day-to-day operations. We have 16,000 employees. And year-to-date, we have had 500 positive -- approximately 500 positive tests. The impacts include the health and safety of our employees, the ability to run our plants, impact on our customers and our sales to them.

We're managing our way through the pandemic, but our financial results have been negatively affected. .

We believe that we have adequate liquidity. After our recent refinancing initiatives, we have approximately $1.2 billion of cash on hand, and we have no major debt repayments due until 2023. .

Regarding the designation of Graham Packaging as an unrestricted subsidiary and relating -- related financing activities, in July, after quarter end, we announced a series of transactions. We completed a stand-alone financing of Graham Packaging.

Graham Packaging is now an unrestricted subsidiary under RGHL's financing arrangements and is no longer part of these arrangements. The net proceeds of the Graham Packaging financing, along with some cash on hand, are being used to repay approximately $2.2 billion of RGHL borrowings. .

Recently, we confidentially filed a registration statement with the SEC relating to a potential IPO of the group. Graham Packaging will be distributed from the group prior to an IPO. RGHL post-IPO will be known as Pactiv Evergreen Inc. There is no assurance that the IPO will be completed.

And I am advised that legally, I'm not at liberty to say anymore on this subject at this time. .

The financials. RGHL revenue for the quarter was $1.57 billion, down 13% from 2019. EBITDA for the quarter was $250 million, down 16% from 2019. Year-to-date revenue at $3.26 billion was down 9% from 2019, and year-to-date EBITDA at $514 million was down 8% from 2019. And as I said, the CEOs will give you more color on this. .

So I'll now turn the call over to John McGrath, and he'll cover Pactiv's Foodservice and Food Merchandising businesses.

John?.

Thanks a lot. Yes, thanks a lot, Tom. So today, I'll start by extending again my deepest gratitude to all of our employees who have worked incredibly hard to keep Pactiv running through this COVID-19 pandemic. More than ever, I'm proud to work alongside the people who make up this organization. .

Our #1 priority has been to keep our employees safe, and this has been and continues to be the foundation of every decision that we make. The highest measures of safety are in force as we work to serve the many families relying upon our products to safely transport food and beverages during these challenging and unprecedented times.

My deepest condolences and thoughts go out to those who are affected by the coronavirus and their loved ones. .

We continue to follow all CDC guidelines regarding the cleaning of our facilities and the safeguarding of our employees in all of our factories and warehouses.

We have employed third-party professional cleaning crews to disinfect our facilities and continue to follow the social distancing, personal protective equipment and physical screening protocols to ensure a work -- safe work environment. .

We also have continued to employ our enhanced pay practices to ensure no employee has to decide whether to report to work or stay at home should they be symptomatic. Additionally, all employees can perform their -- any employee that can perform their job function remotely will continue to do so for the foreseeable future.

We'll continue these practices until we determine it is safe to return to our normal ways of working. .

Foodservice and Food Merchandising. .

Let's start with Foodservice. In Q2 2020, Foodservice revenue decreased by 28% to $405 million. This decrease was driven by lower sales volume due to market contraction from the impact of the COVID-19 pandemic.

We also passed through raw material cost decreases to our contracted customers as well as adjusting our non-contracted customer pricing downward to comprehend the lower material costs. Last 12 months revenue decreased by 10% to $1.954 billion due to many of the same reasons already stated. .

Q2 2020 adjusted EBITDA decreased to $43 million. Excluding the impact of the change in lease accounting, adjusted EBITDA decreased to $35 million. This decrease was primarily driven by lower sales volumes due to COVID-19.

We also experienced significant increases in our manufacturing costs due to plant shutdowns for COVID-19-related cleaning and the lost fixed cost absorption associated with lower production volumes as well as higher labor costs to cover increased COVID-19-related absenteeism.

Additionally, we experienced an unfavorable impact from raw material hedges. This decrease was partially offset by favorable logistics costs. Last 12 months adjusted EBITDA decreased by 20% to $284 million. Excluding the impact of the change in lease accounting, last 12 months adjusted EBITDA decreased by 25%. .

We expect our Foodservice business to continue to be impacted through the duration of COVID-19 shelter-in-place orders. Most significantly impacted will be our hot and cold drink cup businesses as people stay home versus commuting to work, mirroring the softness in quick-serve restaurant channels.

Our takeout and delivery container business is and should continue to improve as people continue to stay away from dine-in restaurants and consume meals at home. Our sales to lodging, tourism, recreation, leisure, schools and universities and business and industry will all be down, partially offset by health care. .

With the decline in cup sales, we have repurposed the idled assets and are making products geared to increase takeout and delivery -- takeout and food delivery where we are seeing a lift in volume. .

We believe that April was a trough as sales volume continues to pick up throughout the quarter, with June volumes returning to a more normalized state. The rebound of our Foodservice volume will be predicated on the economy reopening and staying open.

June's uptick in volume was driven by foodservice distributors and chain restaurants anticipating restrictions being lifted. However, with many states and cities and municipalities regressing, we will continue to monitor the situation. .

Additionally, we are in the process of launching many new products within our EarthChoice brand of sustainable offering, supporting our ESG initiatives and goals. .

Let's now move to Food Merchandising. Q2 2020 revenue increased by 1% to $348 million. This increase was driven by favorable pricing and product mix and was partially offset by lower sales volumes due to COVID-19 as well as unfavorable foreign currency impact. Last 12 months revenue increased slightly to $1.394 billion. .

Now turning to EBITDA. Adjusted EBITDA for the quarter increased by 14% to $65 million or 13% when adjusting for IFRS lease accounting changes. This increase was driven by favorable pricing and product mix, lower manufacturing costs and lower logistics costs, partially offset by COVID-19-related sales volume and foreign exchange impacts.

Last 12 months adjusted EBITDA increased by 9% to $251 million or up 5% when adjusted for IFRS. .

Our Food Merchandising business has seen a benefit from the shift in consumer eating habits, more food consumed at home versus away from home driven by COVID-19. However, while some segments of supermarkets and food processors are up significantly, others are lagging.

Packaging for meat, poultry, eggs and fresh produce have increased, while packaging for bakery items due to fewer social events and self-serve food bars, which have been eliminated in most supermarkets, are down. Additionally, our business in Mexico is experiencing some of the same COVID-19 issues prevalent in the U.S.

We continue to work with the major retailers to provide new and innovative packaging concepts to facilitate home meal replacement in the form of prepackaged entrees and meal kits. And similar to Foodservice, we've repurposed assets to accommodate this shift. .

Across all of Pactiv, our success will be driven by our ability to react to the evolving consumer eating trends in both the short and long term. We have the breadth of products and track record of innovation to be ahead of the curve with the right products. There is upside for us in COVID recovery. .

I'll now turn it over to John Rooney to discuss Evergreen. .

Okay. Thanks, John. Just some headlines before I get into the specific numbers in the presentation. First of all, our volume in total is down primarily due to COVID-19. Earnings declined quarter-to-quarter primarily due to volume and price, not due to mill operations decline. .

Our mill operational performance quarter-to-quarter, the decline, began to flatten, with slight period improvement in 1 of the 2 mills, the mill in Canton, North Carolina, but we have larger leverage in our second mill, the one in Pine Bluff, Arkansas.

Our packaging business continues to perform very well both domestically and internationally, commercially and operationally. .

Specific to COVID-19, COVID-19 has resulted in a favorable mix change in our packaging business inasmuch as school milk is down, but highly branded specialty dairy and plant-based dairy substitutes like soya milk, almond milk and oat milk are up 18%. .

COVID-19 incident rates across our business were an order of magnitude, better than industry comparatives through late June. But since late July, our incident rate saw a spike similar to U.S. averages. .

Overall, our workforce has been very proactive and done a great job. Temperature measurement, masks, social distancing, extremely thorough incident investigations. And the vast majority of our employees on quarantine are on quarantine due to close-contact investigation precautionary actions, not because they have tested positive to COVID-19.

Direct COVID-19 costs in the quarter, pure spend items, were about $2 million. .

Turning to the specifics in the presentation, starting with volume. We had a $41 million revenue decrease quarter-to-quarter. Of that $41 million revenue decrease, $37 million was in lower sales volume. Of that $37 million in lower sales volume, $17 million adverse in paper and likewise a $17 million adverse in external board.

Secondly, of the total $41 million in revenue decrease, there was $5 million in lower pricing, part of it adverse in paper and part of it in external board. .

Turning to EBITDA. We were down $11 million in the quarter-to-quarter. And of the $11 million, $11 million was due to lower sales volume, paper and external board; $11 million due to lower pricing, again paper and external board. $7.7 million negative was in operations cost.

But of the $7.7 million in operations costs, $4.7 million was due to paper mill outage timing, $2 million was due to COVID-19 direct spend, and about $1.8 million adverse was pure operations driven primarily by the 2 paper mills, offset favorably by our converting operations.

Lastly, somewhat offsetting that was $20 million in favorable input costs, split between fiber, resin and energy. .

I hand it over to Mike King. .

Thanks, John. So it's John and John both. And I'm going to start with COVID-19 and how the pandemic has been impacting Graham Packaging through our quarter. .

So Graham Packaging continues to operate as an essential business, and we remain fully operational. I couldn't be more proud of how our teams have responded with dedication and commitment in keeping much needed products on the store shelves.

Our primary responsibility and goals have been to provide an environment where our teams continue to feel safe, they continue to be protected. And as we work to provide our customers or in our -- in the communities with products they need, our people feel that responsibility. .

We continue to operate under best practices in our facilities. We do follow the CDC guidelines, as mentioned in the other businesses. This includes the requirement for our teams to wear facemasks, stay socially distanced.

We continue to provide consistent communication at all levels of our business, reinforcing the need for these safety measures both in and out of the workplace.

We take temperatures 15 minutes prior to shift start, through shift and post-shift as well as enforce frequent hand washing and have established social distancing limitations in all of our facilities. .

We do provide all of our employees, as done in the other businesses, with personal protective equipment. There's been an increased cost in -- also incurred in our business for this, but we've been able to offset that with other levers within the business to afford that. .

In calls prior, you may have heard me talk about our various transformational initiatives. We've continued to keep those projects moving forward and on a pace with capital spending that allows us to deliver to the planned time lines.

Largely due to the creativity and dedication of our team members working remotely and from our facilities, we've been able to continue to keep the pace we need despite COVID.

This includes our network optimization projects as well as our new warehouse management system initiative, our intelligent factory program and several other of our cost reduction initiatives. .

In terms of the markets we serve, we have experienced some increased demand in food, beverage, household, laundry. As people continue to stay home, eat more at home with kids home from school, the increased levels of hygiene and sanitation and cleaning, increased washing of clothes, all these things have given us lift in our end markets.

However, we've also seen an offsetting decline in our packaged automotive oil business, which has through Q2 seen historic lows, nearly 50% of the volumes through Q1 and then Q2, while a slight rebound. We do anticipate that softness to continue through the rest of the year.

Based on these dynamics, however, we have net-net experienced flat volume year-over-year, year-to-date and for the Q. So our food and other essential businesses have offset the declines we've seen in our packaged oil business in other words, and we continue to perform well. .

Despite the constantly evolving dynamics of our markets today, we have been focused on and are delivering our mission of profitable growth over the LTM period. Through this period, we have retained all of our existing base business that has been up for renewal.

And we've also been successful in securing new growth business that is core to our strategy for many of our vertical businesses. Quite simply, we are growing the top line as well as the bottom line. .

Finally, we will continue to closely monitor changes in all of our end markets. There is certainly a degree of uncertainty with continued regionally based regulation changes as well as, as mentioned by the other guys here, changes in -- increased spikes in anticipation of that, that many of our customers are expecting increased demand.

And we're taking proactive steps to continue to add capacity and to be able to fulfill these demands. .

With that, I'd like to turn our attention to the quarterly results. For the second quarter of 2020, our revenue of $426 million is down $37 million or 7% over the same period in 2019. That decline in revenue was primarily driven by declines in our input costs or regime, which has been passed through favorable -- passed through to our customers.

And unfavorable foreign currency impacts have also come through slightly. For the last 12 months, revenue decreased by 8% to $1.85 billion. On a year-to-date basis, our revenue of $940 million is $72 million or 7% lower than the same period in 2019.

Again, the majority of this decline is also driven by lower resin costs, which we passed through to our customers as well as a slight unfavorable foreign currency. .

In terms of EBITDA, for the second quarter of 2020, our adjusted EBITDA of $96 million, excluding the change in lease accounting, is $9 million or 10% better than the second quarter of 2019. When including the impact to the change in lease accounting, our adjusted EBITDA is $104 million and is $9 million or 9% better than the same period of 2019.

The increase in EBITDA was primarily driven by lower manufacturing costs and lower raw material input costs. .

For the last 12 months, adjusted EBITDA increased by 11% to $384 million. Excluding the changes in lease accounting, the LTM adjusted EBITDA increased by 6% to $352 million. On a year-to-date basis, our adjusted EBITDA of $188 million, excluding these changes in lease accounting, is $14 million or 8% better than the same period in 2019.

Including the impacts of the changes in lease accounting, our EBITDA is $204 million. It is $14 million or 7% better than the same period in 2019.

Again, the increases in EBITDA have been driven again by lower manufacturing costs and lower raw material costs, which continue to be partially offset by the declines in pricing due to contractual movements. .

And with that, I will hand it over to Allen Hugli. .

Thanks, Mike. So in summary, revenue for the group for the quarter was approximately $1.6 billion, down 13% from the same period last year. This was primarily due to lower volumes. Year-to-date revenue at $3.3 billion was down 9%. And on an LTM basis, revenue was approximately $6.8 billion. .

Adjusted EBITDA for the quarter was $250 million, down 16% on Q2 last year. We have reported pro forma adjusted EBITDA for the LTM period of $1.126 billion. A full reconciliation is attached as an appendix to this presentation. .

Capital expenditure for the quarter at $101 million was down $61 million on the same period last year. This decrease was primarily due to discontinued operations and the reassessment of certain projects in the current environment. .

In August, after quarter end, Graham Packaging raised $1.985 billion of new indebtedness. The net proceeds after deducting fees, expenses, OID were transferred to a subsidiary of RGHL in the RGHL borrowing group. At this time, Graham Packaging and its subsidiaries were designated as unrestricted subsidiaries under the RGHL borrowing arrangements.

The net proceeds, along with some cash on hand, are being used to repay approximately $2.2 billion of RGHL indebtedness. .

And with that, I'll hand it back to Tom. .

Thank you, Allen. And Stacy, we're ready to take some questions. .

[Operator Instructions] Our first question comes from Richard Kus with Jefferies. .

So first for me, on the Foodservice business, could you give us a little bit more specific on what you saw in terms of volumes, maybe give us a volume number for the overall quarter and then talk about the progression over the quarter -- over the course of the quarter?.

John, you want to take care?.

I'll take that, Tom. .

Yes. .

So starting in April, our volume was off 39%. May, it was off 26%. June, it was off 4%. So for the quarter, it was off 23%. .

Got you. And are the expectations that, that could inflect positively here as you look at Q3? Or I know you made some comments about June being maybe a pull forward of demand as some of these distributors are changed/restocked.

How do you see that progressing?.

Yes. What I would say is based on what we saw in July that there was some pull forward in June because our July volume was off a little bit more than it was in June.

We think, though, as this thing levels out here -- this is -- it's really going to be predicated on, do these states and cities and municipalities, do they go backwards? If they're in stage 3 or stage 4 of their opening phase, if they start dropping back phases, that's going to have some impact. .

But as -- if we can put that off to the side just for a second, the part of our business that we're going to still see impact is what I'll call our noncommercial foodservice. So to give you an example, I was -- unfortunately, I was at a Hampton Inn over the weekend. And normally, they have breakfast in the morning.

And it's served on all disposables, and a lot of that's our disposables. And they had that whole operation shut down. .

So things like that, things like stadiums not opening, business and industry cafeterias, people aren't going to work. So those noncommercial segments, which typically represent about 20% to 22% of our business, we see those right now at only around 50%.

So I would think that unless something changes that we should see an impact of 10% to 15%, call it, on the volume side, I think the takeout and delivery business will somewhat offset the downside in cups, not fully, but we're really encouraged by what we're seeing as more and more restaurants are offering takeout and delivery.

And as indicated, we repurposed some of our cup manufacturing assets so we can capture that demand. .

Got it. Okay. That makes a lot of sense. And then within that, you talked about the stuff that's soft.

Are there big margin differences among those products for you guys? What's the best way to think about the mix impact there?.

Yes. I would say overall, if I were to -- if I had a choice to sell cups or takeout and delivery containers, I'd rather sell takeout and delivery containers. .

Got you. Okay. And then to switch gears to the Evergreen business here for a second. Can you give me a sense of -- and I know the operational improvement -- or excuse me, the production inefficiencies really weren't that big of an issue this quarter.

Can you give me a sense of what normalized performance should be in that business? Or how much you have lost on the production efficiencies? And how much you think you can get back to get back to normal?.

Yes. So my comments on the period-to-period is as we were -- we've been in decline. And my comments are -- is that we look to flatten that, only slight improvement in one mill.

In total, if we take our worst point and compare it to our best point over a multiple of years, the number of opportunity improvement across mill operations is north of $60 million, less than $70 million. .

[Operator Instructions] Our next question comes from Roger Spitz with Bank of America. .

First, can you give the volume changes for the other 3 businesses? You gave 23% down for the quarter for Foodservice.

What about Merchandising, Evergreen and Graham from a volume standpoint?.

Yes. So on Food Merchandising, April would have been down 1% in volume. This is year-over-year. May, down 13%. And the big driver of that was, if you think about May, that's when most of the graduations and other kinds of celebrations take place. And we saw our bakery packaging business just almost dry up completely. It was just a phenomenal occurrence.

June volumes came back to plus 5%, so -- year-over-year. So for the quarter, we were down 4% but up 5% in June, and it looks like that phenomenon continued in July. .

So for Graham -- sorry, John, are you done?.

Go on. .

Right. For Graham Packaging, our year-to-date volume in pounds is essentially flat year-over-year and same with our units. From a quarter-to-date, our volume in pounds is slightly down. Our year-over-year is down 1% and unitary-wise, we're flat. Again, all -- it's really one of our end markets.

Our automotive market, as I highlighted during the call, is soft, and it's being offset by the strength we're seeing in our food and essential businesses. .

Got it. Just so I understood and heard that, so year-to-date, your volume is down 1%.

What was it down in Q2 year-over-year?.

In total, out of that -- in total, we're flat. It's essentially 0. It's down slightly, less than 1%. .

Okay, okay.

And Evergreen?.

For Evergreen, in total, in a quarter comparative, we're down about 6%. Within that, board is down about 5%; paper about 10%; and cartons, meaning the packaging part, up about 2%. .

Perfect.

And Allen, for the -- can you provide Reynolds RP basket at June 30 pro forma for the Graham Packaging transaction?.

Allen?.

Sure. It's about $506 million. .

Perfect. And do you intend to file Graham's financials with the SEC? And I guess it -- while you own it 100%, I guess it looks like we may get more of the same where you have one call and broken up financials between them, if that's correct.

But what do you intend to do with the separate disclosure of Graham?.

The Graham notes won't be SEC registered. I don't think we will be filing them. I think they can just be filed with the lenders or on the -- yes, at lenders' website. While it is part of RGHL, I mean the numbers will certainly be included in what we report here. .

Got it.

And then finally, on Food Merchandising, was the manufacturing costs lower? Was that driven by better fixed cost absorption? Or was it something else?.

Yes. So this is year-over-year. We had some -- during the quarter last year, we had some onetime issues that didn't recur. So it was actually a good month manufacturing. We're somewhat less impacted by COVID-19-related costs in our food merchandising plants than we were in our foodservice plants.

Primarily in the foodservice plants, the ones that are in and around the Chicago area were the hardest hit. In fact, 65% of all of our COVID cases are from our plants that are in and around the Chicago area. So now back on Food Merchandising, it was just a comparison -- better comparison year-over-year. .

Got it. .

Excuse me, Roger, just before, I wasn't clear. I mean Graham Packaging go forward will have a separate call for its lenders. Its results will be consolidated in Reynolds Group while it's a subsidiary, but they will have a separate call for its lenders. .

Next question comes from Travis Edwards with Goldman Sachs. .

Just 2 quick questions for me. One is just on the CapEx side. I know we've seen CapEx come down a bit, and you talked a little bit about projects that have been, I guess, taken off-line, either deferred or canceled. I was wondering if you could just elaborate a little bit more on what projects, I guess, have been delayed.

And then as we think about, yes, the go forward, what does catch-up CapEx look like? And is there incremental investment to, yes, I guess, catch up as we get into -- or sort of come out of the COVID-19 environment?.

Allen, I'll talk a little and then you can jump in.

In terms of CapEx, what we did was the projects that had started in the main, what we also did, the ones that were the best ones in the costs down and return and automation, the ones that got delayed were some of the more longer term to implement intelligent factory-type projects, which were very expensive, take a while to get done and the benefit would be out in the out years a bit.

So we decided to put those off a little. .

And I would say, given whatever our results due to COVID are, however they're affected, they're very easy to start back up again and get into. So I don't think we missed anything really critical. We just have some upside in the future years coming by getting back on those higher spending things. .

If anybody else has anything else they want to add to that, including Allen, just jump in. .

No, I've got nothing, Tom. .

Okay. .

Awesome. It sounds like you can turn those levers and off fairly easily.

Second one, I can appreciate maybe a little preliminary, but just with stand-alone refinance completed as well as the IPO filing, and I appreciate you can't speak to that, but was just wondering if -- as you think about the balance sheet, is there any changes in more or less conservative approach to managing the balance sheet? I know you talked about leverage targets in the past kind of 4.5x.

Does that shift? Does that change with sort of the shakeup of the businesses? Or is that all consistent still?.

Allen, do you want to take that?.

Sure. I think in an IPO context, you would expect relatively lower leverage. Just what that number is, I don't know if we can talk about. But I suspect that there's a potential improvement in the leverage going forward if we go down the IPO path, that is. .

I would like to turn the floor over to Tom Degnan for closing comments. .

Okay. Well, thank you, everybody. I hope you all stay safe and look forward to speaking with you again in the near future. That's it. Thank you. Bye-bye. .

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation..