Reynolds Consumer Products Inc. Q3 FY2021 Earnings Call

Greetings. Welcome to the Reynolds Consumer Products, Inc. Third Quarter 2021 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Please note, this conference is being recorded. I will now turn the conference over to your host, Mark Swartzberg, Vice President of Investor Relations. Thank you. You may begin.

Thank you. Good morning and thank you for joining us on Reynolds Consumer Products' third quarter 2021 earnings conference call. On the call today are Lance Mitchell, President and Chief Executive Officer; and Michael Graham, Chief Financial Officer. For our agenda today, Lance will focus on market conditions and our fundamentals, and Michael will review our quarter and outlook. Together, our remarks will be approximately 15 minutes, then we will open it up for your questions. During the course of this call, management may make forward-looking statements within the meaning of the federal securities laws. These statements are based on management's current expectations and involve risks and uncertainties that could cause actual results and outcomes to differ materially from those described in these forward-looking statements. Please refer to Reynolds Consumer Products' annual report on Form 10-K and other reports filed from time to time with the Securities and Exchange Commission and its press release issued this morning for a detailed discussion of the risks that could cause actual results to differ materially from those expressed or implied in any forward-looking statements made today. Please note management's remarks today will focus on non-GAAP or adjusted financial measures. A reconciliation of GAAP measures to non-GAAP financial measures is available in the earnings release posted under the Investor Relations heading on our website at reynoldsconsumerproducts.com. The company has also prepared a few presentation slides and additional supplemental financial information which are posted on Reynolds' website under the Investor Relations heading. This call is being webcast and an archive of it will also be available on the website. We'd like to answer all of your questions during the question-and-answer session. In the interest of time, we ask you ask one question and a follow-up and rejoin the queue if you have additional questions. And now, I'd like to turn the call over to Lance Mitchell.

Thank you, Mark. We delivered another quarter in line with our expectations in spite of additional costs and supply chain challenges, thanks to the hard work and dedication of our team. We grew revenue 10% on top of last year's record third quarter net revenues, including an approximate 2 percentage point benefit from a one-time sale of excess raw materials in the quarter. We did so in spite of production disruptions at third-party suppliers and continued import delays. Our market shares remained strong across most of our products, and we achieved our earnings forecast in the face of additional material, labor, and logistics costs in a more challenging environment for staffing and logistics services. We are narrowing our earnings guide within our previous range to reflect additional staffing and supply chain pressure as well as higher rates for key commodities versus July levels. Mike will walk through those drivers of this pressure and the pricing actions we are taking to offset material cost increases. I remain firmly committed to implementing price increases to offset material cost increases at a pace and amount appropriate to market conditions. Michael will also talk through revolution cost savings, which are tracking ahead of plan and remain a significant source of margin recovery. Increased investment in automation is a major contributor to revolution cost savings. Now, let's return to the top line. We expect four factors to drive accelerating revenue growth for RCP in the fourth quarter. They are: Consumer demand, price increases, innovation, and expanded manufacturing and supply chain capabilities. Together with our market share performance, we expect these drivers to remain a sustained source of long-term growth. First, consumer demand. Household use of our products remains elevated versus pre-pandemic levels. According to our latest Harris Poll which we conducted again in September, everyday use of foil is up more than fourfold versus pre-pandemic levels, and weekly use of waste bags and food bags is up more than 30% versus pre-pandemic levels. In addition, according to our fourth Numerator poll, the overwhelming majority of respondents continue to expect to maintain or increase their foil, waste bag and food bag use beyond 2021. Our household penetration has increased from pre-pandemic levels, with 24 of 25 households now having one or more of our products. This sets up our categories, our brands, and our product portfolio for continued strong performance, and that's what we're seeing. On an omnichannel basis through October 10, branded dollar share in foil, waste bags, and disposable cups and dishes is up versus year ago levels and improving sequentially. These figures include e-commerce and in-track channels, it's the same trend, brand dollar share in foil, waste bags, and disposable costs and dishes are higher than year ago levels and improving sequentially. We're also building on our e-commerce momentum. E-commerce-related sales are growing strong double digits. Growth is broad-based across RCP and major e-commerce retailers, and we continue to expand, participating in third-party marketplaces while also testing and launching direct-to-consumer initiatives. The next driver of our revenue growth is price. Our third round of pricing actions was implemented as planned, and a fourth round goes into effect during the first quarter of next year. We expect sequential improvement in profitability in the fourth quarter and a pronounced improvement in profitability by the end of the first quarter of 2022 as a result of these increases. This assumes key commodity rates stabilize. Michael will speak more to the timing and results of our pricing actions in a moment. I know that elasticity is also a topic of interest to all of you. We're watching that closely, given the amount of pricing across retail. As you know, historically, our categories have demonstrated low elasticity by comparison to many consumer staple categories. That remains the case, and we factored our latest research on elasticity into our guide. The third driver of our strong growth is innovation. Hefty Fabuloso continues to exceed our expectations and drive volume, thanks to Hefty's quality consumer preference for Colgate-Palmolive Fabuloso scent and our sales and category management team's effectiveness partnering with our retail customers. In fact, Hefty Fabuloso helped drive Hefty Waste & Storage past $1 billion in annual retail sales for the first time in the quarter. Cooking & Baking results are also seeing a substantial benefit from new products, strengthening our market position, bringing us into new adjacencies and expanding the scope of our sustainable offerings. Notable Reynolds innovations include Reynolds Wrap's Everyday Non-stick Foil, Reynolds Wrap 100% Recycled Foil, and Reynolds Kitchen's unbleached and compostable partial paper. In tableware, EcoSafe is now the number one sustainable brand in disposable tableware according to IRI. And innovation on store brands also contributed to our strong performance across RCP categories, including share gains for our Presto unit and private label food bags. I also hope that you saw the recent release of our ESG scorecard. The scorecard provides baseline metrics for evaluating our performance against the goals we announced in April. Development and expansion of sustainable products is essential to our business. We've introduced numerous sustainable product solutions and have more in the pipeline for introduction in 2022. We're also on track to achieve our goal of a sustainable option in all product lines by 2025. Our fourth growth driver is expanded manufacturing and supply chain capabilities. The capacity additions we undertook last year have allowed us to maintain strong market shares, and retailer in-stocks for most of our products remain well above pandemic-related lows. These and other improvements to our manufacturing and supply chain capabilities position us well in our categories. Having said that, we're not immune to the staffing and logistics-related pressures across the economy, and we're actively working to minimize related disruptions to production and shipment of our products. Before I pass the call over to Michael, I'd like to leave you with the following. Our business remains strong, and we have a history of dependable volume, earnings, and cash flow. We have the brands, the product portfolio, the category management team, the manufacturing and supply capabilities, the pricing actions, the cost savings, and, most of all, the people to position us for substantial improvement and earnings growth when inflation moderates and over the long term. I look forward to our future growth and success for our company, our partners, and our shareholders. With that, over to you, Michael.

Thanks, Lance, and good morning, everyone. I will briefly review the third quarter results, then turn to our outlook and capital allocation priorities. Revenues increased 10% on top of the record third quarter revenues in 2020, reflecting pricing to recover increased costs, strong underlying demand across our business and approximately 2 percentage points from a one-time sale of excess raw materials. Adjusted EBITDA was $132 million, down 31% year-over-year as price increases lagged increases in material, labor, and logistics costs, which was partially offset by lower SG&A. Adjusted earnings per share for the quarter was $0.33. Turning to our segment results for the third quarter. There were three main drivers of our year-on-year performance: Strong underlying demand for our categories and product portfolio; price increases, which lagged further commodity cost increases; and higher labor and logistics costs, along with increased staffing and logistics challenges. In Reynolds Cooking & Baking, net revenues grew 15% with 11 percentage points coming from price increases with the remainder driven by a one-time sale of excess raw materials. Adjusted EBITDA decreased 11% as price increases lagged the pace of commodity cost increases. Excluding the benefit of the one-time raw material sale, the underlying volume was down 2% due to the lapping of last year's increased consumption. For Hefty Waste & Storage, net revenues grew 13%, driven by price increases and a 2% volume increase. Adjusted EBITDA decreased 43% as increases in material and labor costs outpaced price increases, partially offset by higher volume. Volume was up as household demand remains strong and our waste bag business continued to benefit from innovation. For Hefty Tableware, net revenues increased 2%, driven by price increases, partially offset by a volume decline of 4%. Adjusted EBITDA decreased 42% as price increases lagged increases in material, labor, and logistics costs. We also saw labor shortages at third-party suppliers continue to adversely impact volume, which more than offset the continued strength from higher everyday usage, social gatherings, and innovation. Finally, for Presto Products, net revenues grew 11%, driven by price increases, slightly offset by a 1% volume decline. Adjusted EBITDA decreased 50% as price increases lagged increases in material, labor, and logistics costs. Presto volume was down 1%, reflecting import delays and lower business-to-business product sales for the quarter, partially offset by improving food bag category trends and improved Presto private label food bag share. Now to our guidance, which we have updated versus our previously disclosed guidance followed by a few additional comments on our outlook. We continue to expect high single-digit revenue growth for fiscal 2021, underpinned by pricing, at-home consumption, increases in social gatherings, innovation, and retail replenishment. We estimate 2021 cost pressures to be in excess of $450 million and have updated our outlook to reflect these pressures. Rates for resins have not eased since July, as previously forecasted, and aluminum rates are higher versus July levels as well. Labor and logistics costs have also exceeded forecast since July. The details of our guide for fiscal year 2021 are as follows: net revenues to grow in the high single digits, adjusted net income to be in the range of $321 million to $336 million, adjusted EBITDA to be in the range of $590 million to $610 million, adjusted EPS to be in the range of $1.53 to $1.60, capital spending of approximately $145 million, which includes $25 million for the completed purchase of a manufacturing facility we previously leased and net debt to be approximately $1.9 billion at December 31, 2021. For the fourth quarter, we expect revenue growth in the mid- to high teens, driven primarily by recent price increases and anticipated volume above Q4 2020 levels. And we expect sequential margin improvement but with continued short-term earnings pressure primarily driven by price increases implemented during the third quarter lagging increases in commodity, labor, and logistics costs. We also seen progress in mitigating staffing, third-party manufacturing, and logistics-related disruptions. The details of our fourth quarter guide are as follows: net revenues to grow in the mid- to high teens on $888 million in the prior year, adjusted net income to be in the range of $93 million to $108 million, adjusted EBITDA to be in the range of $170 million to $190 million and adjusted EPS to be in the range of $0.44 to $0.51. We plan to provide our guidance for 2022 with the announcement of fourth quarter results in February. Nonetheless, I thought it would be helpful to provide an update on some of the items we reviewed last quarter. In the area of pricing, as Lance said, our fourth round of pricing to offset additional cost increases is being implemented across RCP. The majority of the increases have been announced and go into effect in January. Assuming current rates of resin and aluminum hold, we will fully recover these higher commodity costs through pricing actions for Reynolds, Cooking & Baking, Hefty Tableware, and Presto by the end of the first quarter of 2022. We could also see ongoing unfavorable gaps between commodity costs and pricing for Hefty Waste & Storage moderate if we announce additional waste bag pricing, or resin rates are lower than we are forecasting. We're planning to return to a more typical level of trade promotion and advertising in 2022. Investing in revolution cost savings programs is being accelerated and remains a major source of our funding for growth. We continue to expect more than 200 basis points of EBITDA margin from revolution cost savings in 2021 and expect to grow revolution dollar cost savings again in 2022. We're investing approximately $25 million in automation-related projects in 2021 and plan to invest more than double that in 2022. We expect spooling automation in our Louisville operations to contribute significantly to the increase at a total of nearly $50 million in spending over three years of 2021 through 2023. This project is typical of automation-related projects providing an estimated payback of less than three years. Numerous additional automation and intelligent factory projects are also underway across RCP, including the installation of a high-speed cutting equipment for Cooking & Baking, line upgrades for Hefty Waste & Storage, and Presto, robotics and related line expansions for Hefty Tableware and other improvements in equipment and line efficiencies throughout our operations. Now, before I turn the call back over to Mark and your questions, I'd like to leave you with the following. As Lance reviewed, our business remains strong. Demand for our products is up. Our market shares are strong. Our manufacturing and supply chain capabilities are strong, and we are investing to strengthen them further. Nonetheless, it is important to remember that an environment for staffing and logistics-related services has become more challenging, and material cost increases have been difficult to predict with accuracy. We consider this year's profit pressure to be temporary, and expect sequential improvement in profitability in the fourth quarter. We also expect to return to pre-pandemic levels of profitability when inflation moderates. As I previously said, we will fully recover these higher commodity costs through our pricing actions for Reynolds Cooking & Baking, Hefty Tableware, and Presto by the end of the first quarter of 2022, assuming current rates for resin and aluminum hold. We remain committed to strong cash generation and disciplined capital allocation. Investment in internal growth and upgrades to our cost structure remain our top priority. We continue to focus on deleveraging with a target ratio of 2x to 2.5x EBITDA. We plan to continue returning excess cash flow to shareholders through dividends and we recently announced a quarterly dividend of $0.23 payable on November 30, 2021. We continue to opportunistically pursue bolt-on M&A in our categories and adjacencies domestically and internationally. With that, I'll hand the call back over to you, Mark. Thank you.

Thanks, Michael. As I turn it over to the operator for the questions, 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. At this time, we'll be conducting a question-and-answer session. Our first question comes from the line of Nik Modi with RBC Capital Markets. Please proceed with your question.

Yes, thank you. Good morning, everyone. I just had a quick clarification question just on the raw material sale. If you could just provide some details around that. And then the broader question is just on the price elasticity. You talked about having done a study. I would be curious to hear kind of what the conclusion was of that. And how do you see the consumer and as they kind of draw down all of the cash that they've been sitting on given all the stimulus as we kind of move into 2022, how do you think that's going to manifest in just the receptivity of pricing generally, because it's not just in your categories, it's basically every category? Thanks.

Yes. I'll take the first part of that on the raw materials sale. We found ourselves long on raw materials, and we really don't speculate in this space. And so we decided to sell off those raw materials, so we got market prices at that. There was a nominal increase from a margin perspective, but overall, it was the best thing to do, and it's a prudent thing to do at that point in time.

And I'll take the elasticity question, Nik. We've done elasticity studies over the course of the history of our company, and they've always come back as these categories have relatively low elasticity. There's no question we're in a dynamic environment now that's different than we've seen historically, and it did come back again with low elasticity. But as I said, it's dynamic. So we're going to watch it very closely. We'll, of course, correct and adjust as necessary. But stimulus packages and consumer spending, while it's factored into that study, it's not necessarily able to predict it any better than any of us. So we'll have to, of course, correct if necessary as we go forward.

And Lance, if I could just follow up, do you see the competitive situation playing out as you would have hoped? Or is there still some disconnect in terms of you guys moving versus some of your competitors across your categories?

Well, we've taken pricing across 85% of our products, as Michael indicated. So as Michael also said, the recovery in waste bags will be dependent upon the easing of commodity rates, additional pricing, or both. There are numerous factors we're going to consider in making those decisions: consumer demand, category strength, retail price points, and, of course, working with our retail partners in the competitive environment. Right now, our focus on waste bags is that demand is exceeding our increased waste bag capacity currently. So as a result, our focus is on improving case fill and service to our retail partners.

Great, thanks.

Our next question comes from the line of Rob Ottenstein with Evercore. Please proceed with your question.

Great, thank you. Just first, a point of clarification. Did I hear you say that you expect to get back to kind of normal margins at the end of Q1 2022, assuming that no further cost increases, and I suspect it's market share gains that is driving that conviction? So that's just kind of the follow-up question. And if we stand back and think longer term, once we get into a normal environment, given all the gains that you've gotten from Revolution, given your market share trends, given what looks like sustainably higher consumer demand, is there any reason why you won't be able to earn materially more than what you did in 2019 when you get to a more stable environment? Thank you.

Yes. To clarify our discussion about recovery, we believe that by the end of the first quarter, we will fully recover from the increases in commodities that we've experienced. This was not meant to be about margins but rather about recovering from a cost perspective. Labor and logistics remain somewhat challenging, and we are actively addressing those issues, but we are confident in our plan to manage them.

And Mike and Robert, this is Mark. Just to add to what Michael said, that full recovery comment pertained to Reynolds Cooking & Baking, to Tableware, and to Presto.

And what's going on with the rest of the business?

Well, the rest of the business is the Hefty. And I think we've talked about that quite a bit in that Hefty portfolio, we have to be very mindful of what competition is doing from a pricing standpoint. And so at this point in time, there are no further actions that we're taking around pricing.

Just to add to that, we've implemented mid- to single digits in the first quarter on Hefty waste bags, a 9% increase in August, together representing a 14% increase in those products.

And the competition is lagging?

Yes.

Great. Thank you very much.

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

Great, thanks. I was curious about private label. And given the breadth of your portfolio, how you are thinking about or actually already communicating with retailers about if there's an inevitability that the pinch on the consumer wallet from such widespread inflation does cause some trade down. I just would love to hear how, if it's in prior cycles but what you can offer in terms of how your portfolio can fare given the private label participation that you have.

Yes. As we've talked about on numerous occasions, Lauren, over the last couple of years since we went public, these categories through these cycles have remained very stable from a percentage of brands and store brands. And part of that because it's already highly penetrated. Of course, we closely watch this and manage price gaps. But our studies show as part of the elasticity models that in the current environment that, that should hold going forward as well.

Okay, that's great. And then, my follow-up was I do recall having you guys having spoken in the past about there being like a magic price point in foil. And it's $4.99 maybe. But there actually was an element, at least in the foil business as there being a magic price point that elasticity kind of kicked in above that level. There's incredibly increased demand in that category. So I'm just curious if you think that magic price point conversation goes out the window because of the greater usage and household penetration you've had in that category through the pandemic.

Well, we've gone far enough past that price point now with the two price increases that we've already announced and implemented in Reynolds Wrap, and that price point was $3.99. We've long surpassed that in the last couple of months. And you can see from the category and our share data that it's continued to be very strong. So out the window, I think, is a great comment. It's a very inflationary environment now and that was different when we crossed that price point previously.

Okay, that's great. Thanks so much.

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

Yes. Hey, thanks, and good morning, everyone. I guess just to start as a follow-up. Could you maybe comment on where price gaps are today and whether private label is moving generally in unison with the multiple rounds of price that you've taken across relevant categories?

Yes. So as you know, we have a large percentage of our business is also store brands, and the pricing that we've taken on ours, as well as competitive store brands, have been consistent with the brands. So in most categories, there has been a consistent price gap maintained in most of these categories. The exception may be waste bags, and we're watching that closely. We have taken up, as well as we've seen competition in store brand waste bags take price increases more than the brands.

Got it. Okay, that's helpful. Looking ahead to next year, in an ideal scenario where spot rates for key inputs either remain stable or decrease, could you clarify how to approach this? How much of the pricing established through four rounds by the start of next year in key categories will be sustained versus how much might be reduced through lower prices or increased promotions?

Yes, that's a very dynamic question because it really depends on where commodities are at that point. However, as we've stated in the past, the price increases we implement, if commodities stabilize or decrease slightly, we do not reflect that in price reductions. In this environment, we have to take into account other factors. We are facing higher labor costs, higher logistics costs, and increased input costs, including energy and packaging. All of these factors must be considered as part of the pricing strategy moving forward, even if commodities decline.

Got it. Okay, thank you.

Our next question comes from the line of Bill Chappell with Truist Securities. Please proceed with your question.

Thank you. Good morning. I'm curious about commodities and input inflation. Specifically, how much of the current situation is unique to the company, particularly regarding aluminum? Additionally, what portion do you see as more transitory? We've heard from other companies about Hurricane Ida impacting resin prices and causing shortages. You didn't mention that, but as you examine your overall situation, how much do you anticipate easing versus what might persist longer term?

I think it's very difficult, historically, to accurately predict forward commodity costs. If we were able to do so, we'd price to that forecast versus the actual cost, and that's what we're doing across the vast majority of our product portfolio. One thing is pretty certain: Resin is not going to retreat back to pre-pandemic levels. We do see the modernization and stabilization occurring in resin, but we're not predicting a big pullback. We'll watch it closely, of course. And I've talked to all the major resin suppliers personally, and they're not predicting a major pullback either. On aluminum, it's been very dynamic and volatile. It is almost doubled at one point versus prior year. It's retreated modestly in the last week, but it's up substantially versus 2020 levels.

Okay, great. I wanted to follow up about the upcoming holiday season. Last year, you mentioned that fewer family outings might actually benefit your products because there were fewer large gatherings and more smaller family events. How do you see that shaping up for this holiday season? Should we expect more occasions for usage, or how are you approaching this from a volume perspective?

Yes, you're correct. We did predict that, and our prediction turned out to be incorrect. We did not see the kind of holiday gatherings that we've historically seen, particularly for the Cooking & Baking products in 2020. And so what we're seeing in '21 is a return to the more normal holiday gatherings in 2021.

Great, thank you.

Our next question comes from the line of Andrea Teixeira with JP Morgan. Please proceed with your question.

You reduced the EPS for the fourth quarter, but your revenue exceeded expectations in the mid- to high teens. Can you explain the breakdown between volumes and pricing? I noticed the inventory increase, indicating you were ready for higher demand. Considering the various factors for each division, Tableware and Cooking & Baking have their own comparisons, but Hefty Waste & Storage faces challenging comparisons. How should we interpret the impact of the price increase in that context? And how should we look at these factors from a holiday perspective?

Yes. I mentioned that we have observed a $450 million increase in materials, logistics, and related costs. Of that, $50 million is higher than our expectations from early August. This $50 million increase is primarily due to additional labor and aluminum costs, as well as logistics expenses. Specifically, about $30 million of that $50 million relates to materials, while the remaining amount is attributed to labor and logistics. This is the main reason we are facing further challenges.

Right. Yes, that's helpful, Michael. In terms of the top line, the mid-teens and high teens figures came in significantly ahead of consensus in our numbers. What factors inform your view on demand for top line growth? Are you noticing early signs from your retailers that they are taking in significantly more inventory for cooking? And how should we consider the normalization of tableware in relation to that number for the fourth quarter?

It's still early in the quarter, but our guide holds that we're seeing strong demand in the quarter compared to prior year, particularly in Cooking & Baking. But what Michael is saying is the headwinds on higher commodity costs and logistics costs is approximately $50 million more than we've seen in early August.

That's fair. I'll pass it on. Thank you.

Our next question comes from the line of Wendy Nicholson with Citi. Please proceed with your question.

Hi, good morning. My first question has to do with the comment about the sale of the excess raw materials. I don't know if I've ever heard that before, and it just as sort of a strange thing given the scarcity of raw materials and whatnot. So can you just give us a little bit more color of what that was? Was there a mismatch in terms of raw materials you had on hand versus what you were selling? Or how did that come about?

Yes. It was primarily in the aluminum space. And over a period of time, we accumulated more inventory in that overall space than we anticipated. Typically, when we have a situation where we have excess amounts and if the market conditions are such that we could sell it at a margin, even if it's a low margin, we'll exit that because we don't want to get in the practice of speculating and holding on excess levels of inventory that can't be used in a reasonable amount of time.

Got it. Okay, fair enough. Just looking at the longer term, and I apologize for asking a second question, but I think I'm nearing the end of the queue, so I hope that's alright. Michael, regarding what you said about the commodity environment and that resin prices aren't likely to decrease soon, along with your decision not to adjust prices in Hefty due to the competitive landscape, I'm curious about Reynolds specifically. How long do you believe it will take, or is it even possible, for you to return to a high 20s gross margin? Has something structurally changed? I can't imagine you or your competitors would want to be at a permanently lower gross margin moving forward. But if you're not raising prices enough to protect margins in Hefty, what will it require for you to achieve that high 20s gross margin again? Is that a two-year timeline, a three-year timeline, or has something fundamentally shifted?

Before Michael answers that, one thing I will just state is the math is going to change with these numerators and denominators moving around so much. So when we talk about high 20s, we need to calibrate less on percentages and more on actual dollars. Michael?

Yes. So overall, I believe we're taking all the right actions to return to pre-pandemic profitability, right? We've talked about the fact that our pricing actions are in place to recover by the end of Q1, assuming that we don't see further increases in material costs. We're also taking great extensive cost reductions across the portfolio. We're managing within our existing footprint which is pretty critical, right? And that's underpinned by automation, innovation, and continued demand. Currently, there are three notable headwinds that we have to overcome: Waste & Storage resin costs in excess of current levels of pricing. We've talked about that. The labor market remains tight and then there's tight logistics conditions driving the efficiencies and rate increases. We have to overcome those. But overall, I think we're well positioned and we're taking all the right steps.

So just to put a fine point on that, when inflation stabilizes and the commodity costs stabilize, we will return to the dollar gross margins because of the actions we've taken in prices and increases and cost reductions.

Terrific. Thanks so much.

Our next question comes from the line of Peter Grom with UBS.

Good morning, everyone. I hope you are doing well. So maybe just following up on Wendy's question regarding the margin recovery. I know you mentioned 4Q margin should improve sequentially. But coming from down 1,200 basis points, that's a pretty wide range. So can you maybe help us understand the magnitude of the improvement? And looking out to '22, when do you actually anticipate gross margin expansion given the comments you made around pricing offsetting commodities for three of the four divisions?

I want to return to what Lance mentioned about gross margins. Overall, it’s important to remember that there’s a calculation involved in all the pricing changes we’ve implemented. This will continue to pose challenges for our gross margin. Therefore, if you're constructing your models solely based on margin, you need to take this into consideration.

And I'll just add that all through fiscal 2021, we've been taking price increases sufficient to recover commodity increases, but it's been on a lag. Assuming the current commodity costs hold where they are right now, our Q1 2022 pricing actions will see us fully recovered on 85% of our business. A similar statement could have been made in August with regard to Q3 pricing actions, but obviously commodities moved up from that point. So when they stabilize, as I said a moment ago, we will have recovered.

Got it. And then, maybe just asking on margins more around SG&A; it's clearly been a nice tailwind this year. So just in theory, like if gross margin should improve, like how should we think about some of the between-the-line spending coming back? Or do you think you kind of have found some efficiencies that should gross margin improved or gross profit dollars improved that you would actually see that flow through to earnings?

No, I would say that 2021 was primarily a lot of belt tightening that we did, and it's not necessarily something that we will repeat in 2022. And of course, we'll provide that in more detail with our guide in 2022.

Great. Thank you so much.

Our next question is a follow-up from Rob Ottenstein with Evercore. Please proceed with your question.

Thank you very much. Can you discuss the competitive landscape for waste bags and how it compares to previous years? It seems like there might be some changes in that area. I'm curious if it's related to competitors trying to gain or maintain market share, channel differences, or innovation. It feels like there is something different happening. Could you help us understand this better and explain why that segment of your business is lagging in margin recovery?

Well, as I said, we implemented two price increases that added up to 14% in the Hefty waste bags. As a result, the price gaps, while they vary by channel, in most channels, they've narrowed. We continue to watch this category very closely. As I also said, demand is exceeding our increased waste bag capacity. Our focus right now in Hefty waste bags is improving case billing service to our retail partners.

Great. Thank you.

Ladies and gentlemen, we have reached the end of the question-and-answer session. I will now turn the call over to Lance Mitchell for closing remarks.

Thank you for your questions. We appreciate your time this morning. Our revenue is growing, and we expect accelerating revenue growth and sequentially improving margins in the fourth quarter driven by consumer demand, pricing, innovation, and our expanded manufacturing and supply chain capabilities. I want to particularly thank our employees for continuing to follow prevention measures and putting safety first as we grow our business in this exceptional time. Thank you, and stay safe.

This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.