Reynolds Consumer Products Inc. Q2 FY2021 Earnings Call

Ladies and gentlemen, thank you for standing by, and welcome to the Reynolds Consumer Products' Second Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. I would now like to hand the conference over to your speaker today, Mark Swartzberg. Thank you. Please go ahead.

Thank you. Good afternoon and thank you for joining us for Reynolds Consumer Products' second quarter 2021 earnings conference call. On the call today are Lance Mitchell, President and Chief Executive Officer; and Michael Graham, Chief Financial Officer.

Thank you, Mark. We delivered a good quarter in a challenging environment, thanks to the resilience and dedication of our team. We grew revenue 6% on top of last year's record second quarter revenues and despite estimating a two-percentage-point impact from shipment delays from import and other third-party suppliers. We grew both price and volume. We strengthened market shares across our business and we achieved our earnings forecast in the face of continuing pressure from rising commodity costs. Nonetheless, we are lowering our earnings guidance to reflect significant increases in commodity costs since we spoke with you last. Michael will walk through the drivers of this pressure and the pricing actions we are taking to offset material cost increases on an annualized basis. I'm committed to implementing price increases that fully offset material cost increases at a pace appropriate to market conditions. We will also talk about Revolution cost savings, which are tracking ahead of plan and remain another significant source of margin recovery.

Thanks, Lance, and good afternoon, everyone. I'll briefly review our second quarter results, then turn to our outlook. Revenues increased 6% on top of record second quarter revenues in 2020, and this was despite shipment delays from import and other third-party suppliers, having an impact of approximately two percentage points. Price and volume each contributed to the increase, reflecting pricing to offset commodity cost increases and the pickup in growth for Hefty Waste & Storage and Hefty Tableware, as everyday usage occasions remain strong and social gatherings increased. Adjusted EBITDA was $148 million, down 23% versus last year's adjusted EBITDA as price increases lagged material cost increases. Adjusted earnings per share for the quarter were $0.39. Turning to our segment results for the second quarter, there were two main drivers of our year-on-year performance; strong demand and material cost increases outpacing pricing implementation. In Cooking & Baking, net revenues grew 3% driven by price increases, partially offset by a volume decline. Adjusted EBITDA decreased 11% driven by lower volume as pricing actions fully offset increases in material and other costs. The volume decline was primarily due to lapping of last year's elevated consumption. As Lance told you, our branded foil dollar share is up versus year-ago levels, and I'm happy to add that this is an all-time high.

Thanks, Michael. As I turn it over to the operator for the question, I'd like to remind you that we ask that you ask one question and a follow-up and then rejoin the queue if you have additional questions. Operator?

Thank you. We'll now be conducting a question-and-answer session. Our first question today is coming from Rob Ottenstein from Evercore. Your line is now live.

Great. Thank you very much. So, I was wondering if you could give us a sense of the magnitude of the price increases that you're putting through in Q3, with particular color on waste bags and private label.

Thanks, Robert. Well, we've announced and raised prices at double-digit rates across our entire portfolio with these price increases. And we have announced increases across most of our portfolio. Most of the third quarter price increases have already been announced. And as Michael indicated, we expect the pricing to result in improvement in profitability as we enter the fourth quarter, and we expect the majority of the margin pressure arising from the lag between pricing and commodity increases to be behind us as we exit the quarter. Those price increases were across the product portfolio as I mentioned, including our store brands. These were double-digit to mid-double-digit, depending on the products and the product portfolio. Now in waste bags, in late June, we announced the second round of increases in waste bags. That increase goes into effect on August 30th. We are evaluating an opportunity for a third increase this year. As Michael said, the recovery in Waste & Storage will be dependent upon the easing of commodity rates, additional pricing or both. There are numerous factors that inform our pricing decisions. Those include consumer demand, strength of the category, retail price points, price gaps, consultation with our retail partners, and the competitive environment.

Just to clarify what you said in terms of double-digit rates across the entire portfolio with the three increases. So the double-digit is the cumulative amount of the three increases.

Yes. That includes all three of the increases. And as Michael indicated, three of our four segments cover the current outlook for the commodity costs.

Okay. And what have you seen in terms of retailers, their own pricing that they've been putting in and consumer's reaction to price increases?

The retailers have been increasing prices. Some of these increases are not yet reflected at retail. That's a retailer by retailer decision. And as we've indicated in our opening remarks, consumer demand and share remain strong.

Terrific. Thank you very much.

Thank you. Next question today is coming from Bill Chappell from Truist Security. Your line is now live.

Hey, this is Steven Wineburg on for Bill Chappell. I guess, as we head into 2022, are you guys comfortable with where your 3Q pricing actions played out given higher costs? Also, what should our expectations be for margins in 2022? Is there a potential return to 2019 levels or possible expansion given your history of proper recovery? Thank you.

Let me address the latter part of your question first. I don't want to jump ahead and talk about 2022 just yet. We're still in the process of evaluating the situation. This environment has been very dynamic and it's difficult to predict what will happen. We need a bit more information and time, and we'll be ready to discuss that during our Q4 results and also when we begin to talk about our guidance for 2021. Did I overlook any part of your question? I apologize if I did.

Yeah. Just talking about the comfortability of where your 3Q pricing actions are playing out, given the heightened cost increases.

I think we answered that both in the prepared earlier opening remarks as well as in my last answer. Based on the current indexes, we use IHS and CDI for resin, and we use the LME and the Midwest Premium for aluminum. Based on those forward curves and the pricing actions we've taken, we have in three of our four business segments achieved pricing that offsets those commodity costs.

Okay. Thank you.

Thank you. Next question today is coming from Lauren Lieberman from Barclays. Your line is now live.

Great. Thanks. Hi, everyone. I know I'm also in the press release today that you had mentioned challenges from supply chain, import delays, and third-party producers. So, I was hoping you could just elaborate a bit more on that. Has things opened up a bit, and what is your thought process on how that may or may not impede your ability to have product on shelves as you go into the second half of the year? Thanks.

Yeah. Some of the challenges, as I stated, have been the import delays. Those import delays were really isolated to a few core products. Some of the ones that have been impacted have been low-count sliders, plastic wraps, Reynolds Wrap pre-cut sheets, and foam dishes. Those are the primary ones that have been impacted and impacted a 2% challenge that affected our overall results.

And Michael, is that easing now? Or is that still a dynamic?

Yeah. It is abating now. It will slowly go away. We feel comfortable that things have caught up. We understand what it's related to. Many people were experiencing the ability to get orders out off the docks. As that improves, we enhance as well. That has already been considered in our strategy.

Okay. Great. I also wanted to know about third-party manufacturing. Is that domestic? If so, are there any plans to qualify other producers? Considering the current unprecedented times, should that be part of our planning and risk mitigation strategy moving forward?

Yeah. Lauren, I think it's important to note that the vast majority of our products, we have control over producing ourselves. The imports and third parties are not necessarily core to our total business, but they do represent part of how we go to market. Some are imports, some are domestics. In all cases, we are evaluating other parties to ensure we have a surety of supply both in the near-term and the long-term.

Okay. All right. Great. Thanks. I appreciate it.

Thank you. Our next question today is coming from Andrea Teixeira from JP Morgan. Your line is now live.

Andre, your line is live.

Maybe on mute.

Please re-queue. Our next question today is from Nik Modi from RBC. Your line is now live.

Yeah. Good morning, everyone. Sorry. Good afternoon. So, I guess, the question is kind of twofold. Lance, maybe you could just talk a little bit about the return of social gatherings and the impact on demand. And then, I guess, the secondary question is, given the dynamic nature of this COVID situation, if things really start to ramp and we start seeing more at-home behavior, do you think the supply chain is prepared for another surge in demand?

On the first question on social mobility and gatherings, that actually has a positive impact in a lot of aspects of our business. If you think about our Tableware business, particularly, that's a category where we saw growth in the second quarter from social mobility. Also, in everyday occasions like grilling with family and friends with Reynolds Wrap and Cooking & Baking as groups. As we head into the holiday season and have more normalized holiday occasions, we see the benefits of social gatherings, but we're also seeing everyday usage occasions also be a positive influence on consumer demand. So, it's a win-win. From a supply chain standpoint, we talked throughout last year that we were adding capacity without adding roofs, and that's largely completed. We have the capacity in place to continue to meet strong consumer demand. Some of that was because we took some non-commissioned lines and re-commissioned them. Although there are certain pockets and locations where we've faced some staffing challenges, across most of our plants and locations, we have been able to effectively staff our plants and hit high utilization rates. We've continued to improve our retailer stocks in most of our product lines.

Excellent. Thank you.

Thank you. Next question today is coming from Mark Astrachan from Stifel. Your line is now live.

Hey. Guys. This is Chris Armes on for Mark. I just wanted to start off with if you could talk about if you're seeing any volume impact from the multiple rounds of pricing, any change to that elasticity function relative to history. I know you guys talked about that on the last call as well.

We've been raising prices in a broadly inflationary consumer environment. As we indicated, we continue to see strong consumer demand in these categories, as well as our market shares are doing extremely well. In fact, Reynolds Wrap is at an all-time high. Some of these price increases are still to be reflected at retail. We'll continue to watch the momentum going forward and adjust accordingly if necessary. But to this point, we're very pleased with what we're seeing from continued consumer demand in an inflationary environment.

Got it. That's helpful. If I could follow up and maybe if you'd just give us a reminder how to think about these price increases the year after you take them. Are you mainly giving them back? Are you going to reinvest, or does it flow through if the inputs come back down?

Probably the best way to characterize this is to reflect upon what we experienced back in 2017, where we experienced some significant commodity increases and how we managed through that. During that period, we covered all the commodity costs through pricing and offset other inflationary pressures by leveraging our Revolution initiatives. This is a good indicator of what we would expect going forward here. We're pretty confident that we're well-suited to manage this and we've demonstrated our capability in taking pricing and benefiting from that in subsequent years.

Thanks, guys.

Thank you. Next question today is coming from Peter Grom from UBS. Your line is now live.

Hey, yeah, good afternoon. So, I just wanted to understand the top-line guidance for Q3 to a degree. Could you help us understand what it embeds from a pricing versus volume perspective? Do you expect volume growth? I know the comp gets much tougher there. And then, maybe more of a housekeeping question following up on Lauren's question, do you anticipate the 200 basis points negative impact from shipping delays and suppliers will reverse in Q3? And then lastly, on the top line, how much more room is there from a retail replenishment perspective? Thanks.

Let me start with the last part of your question; we do expect that the impact of the shipping delays to some degree will abate, but that's been baked into our overall guide. As it relates to the pricing increases and how we will fare moving forward on that, we feel pretty confident about those, and our ability to recover those has been proven in the past. So, I feel optimistic about our ability to manage through this.

Okay.

So as it relates to pricing increases, I think we've communicated that clearly. We feel pretty confident about those and our ability to recover significantly.

Regarding your last question on retailer replenishment, there has been significant progress in Q2, some going into Q3, and that's also baked into our guide. The revenue in Q3 is primarily price. We are not making a lot of volume growth assumptions in Q3 based on growth of volume. We had a strong year last year. Consumer demand remains strong, but the revenue guide for Q3 is primarily based on price.

Okay. Super helpful. And then, Lance, I just wanted to go back to comments you made in Q4 and again in Q1 around changes in category growth rates. I know you mentioned in your prepared remarks the Harris Poll and Numerator Polling around stronger category growth versus pre-COVID levels. I would love to get your perspective on anything that has changed in your view sequentially, as consumer behaviors change. Can you help quantify what you expect that new category growth rate to look like post-COVID? I think it was around 2% pre-COVID, so is the long-term expectation now 2.5%, 3%? Just anything that would be really helpful.

We haven't seen fundamental shifts in consumer behavior. Consumers in both our Harris Polls and our Numerator Polling indicate continued elevated usage of our products across our category. There hasn't been a fundamental shift from the previous seven polls that we've done throughout COVID. As far as the category growth, that's a bit difficult to predict. We said pre-COVID these categories were growing at 2% to 3%, and we expect after COVID for usage to be higher as people are cooking, baking, and spending more time at home.

Very helpful. Thank you so much.

Thank you. Our next question today is coming from Andrea Teixeira from JP Morgan. Your line is now live.

Thank you. My question is about the phasing of your guidance. Regarding the new guidance for the third quarter, how do you expect the third and fourth quarters to progress, especially with the timing of the price increases? I assume you're still anticipating a high single-digit growth on the top line. The fourth quarter presents easier comparisons, and as you mentioned, that's where we will start to see the benefits of the price increases.

What we're baking in the guide relative to resin prices is based on the curves from IHS and CDI, which have peaking in July and easing through the balance of the year for resin and aluminum stabilizing at the current rates. The difference between Q3 and Q4 is the shift in commodity costs, which has pushed back the recovery time. This is an annualized basis impact. Three of our four business segments have pricing measures in place that cover these costs on an annualized basis. However, timing lag poses a challenge with Q3, predominantly, and some aspects of Q4 versus the prior guide.

No, I understand that. But probably what's happening is you're assuming the phasing as the decline may not be effective fast enough, so we're not going to see the alleviation of those costs as quickly as desired. Is that the way we should be thinking?

Yes, the timing is key. If commodity prices stabilize, our recovery time will also stabilize at an annualized basis. However, the push out on the P&L is due to the gradual nature of the decrease of costs.

Thank you. I'll pass it on.

Thank you. We have reached the end of our question-and-answer session. I'd like to turn the floor back over to management for any further closing comments.

Thank you, everybody, for your questions. We sincerely appreciate your time this afternoon. Our revenue is growing, and we expect accelerating revenue growth over the balance of the year, driven by consumer demand, pricing, innovation, and our strengthened manufacturing and supply chain capabilities. I also want to particularly thank all of our employees for continuing to follow prevention measures and putting safety first, as we grow our business in a very exceptional time. Stay safe, stay well. Thank you.

Thank you. That does conclude today's teleconference. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today.