Ladies and gentlemen, thank you for standing by and welcome to the Reynolds Consumer Products Third Quarter 2022 Earnings Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there'll be a question-and-answer session. Please be advised that today's call is being recorded. I would now like to hand the conference over to your speaker today, Mark Swartzberg. Thank you. Please go ahead.

Good morning, and thank you for joining us for Reynolds Consumer Products third quarter 2022 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. 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 our Annual Report on Form 10-K and other reports filed from time to time with the Securities and Exchange Commission and our 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. We have also prepared a few presentation slides and additional supplemental financial information, which are posted on our website under the Investor Relations heading. This call is being webcast and an archive of it will also be available on the website. While we would like to answer all your questions during the question-and-answer session, in the interest of time, we ask that 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 earnings expectations in what continues to be a very dynamic environment. Third quarter highlights include the following: household foil and waste bag volume responded favorably to increased advertising, promotions and in-store features and displays. Reynolds and Hefty gained share in waste bags, household foil and disposable plates. Private label gained share in Presto close food bags and disposable party cups where we have a significant private-label presence. We implemented previously announced pricing to offset additional cost increases. We accelerated revolution cost savings while also implementing new programs for savings, and as a result we closed the gap between pricing and cost increases. Our category leadership and agility grow these achievements while setting the stage for substantial margin expansion and profit growth in the fourth quarter and 2023. Before talking about performance drivers, I'd like to share a few thoughts about the economic environment and our market position. We assume increased elasticities going forward, which contributes to our fourth quarter revenue expectations now being at the low-end of our previous range. That's obviously a headwind, but one of our strengths is our ability to adapt. As I said, we are pleased with how consumption is responding to our pickup in promotions, advertising and in-store features and displays. I think it's also worth remembering that our integrated brand and store brand model is a competitive advantage. Reynolds and Hefty represent a large share of our categories. And our private-label portfolio complements our brands in mobile categories. Finally, as we enter the holiday season and develop our plans for next year, it's important to note that increased cooking and working at-home have driven many of our categories to levels that are beyond those implied by the last three years of household formation. That's clear from our proprietary research and it's validated by the standard data. According to IRI, equivalent volumes of waste bags, disposable party cups, parchment paper, bake ware and slow cooker liners have all grown in excess of 5% from 2019. And some of these categories are now more than 10% larger than they were prior to the pandemic. Now let's turn to the main drivers of our performance: pricing, consumer demand, innovation and manufacturing and supply chain capabilities. In the area of pricing, recently announced increases in disposable tableware and waste bags have been implemented as planned in September and October, bringing annualized pricing to nearly $1 billion since mid-2020. We are reinvesting a portion of these increases in additional advertising and promotion, and consumer demand for our categories and product portfolio is responding to our increases. In household foil, in June, we began increasing promotions, features and displays and are allocating more advertising dollars to younger consumers. These measures have contributed to improving household foil trends along with increases in Reynolds Wrap share of the foil category. We and our retail partners also increased promotions further in October and plan to continue similar promotions this holiday season. In waste and food bags, Hefty share trends improved, and the share of private-label remains strong. In disposable tableware, we gained share and maintained a substantial discount to paper plates, while also implementing additional pricing on disposable plates. The third major contributor to our performance is innovation. In waste and storage, Hefty Fabuloso continues to grow strongly, nearing $110 million in annual retail sales for the quarter. We launched Hefty four and eight-gallon trash bags, re-roll and the new Ocean Water scent in the quarter. We introduced Hefty Slider Calendar Bags, which allow for better recording of refrigerator and freezer storage times and Hefty Made-to-Fit trash bags in the e-com channel. We saw further consumer and retail adoption of stand and fill private-label food bags. In cooking and baking, the Reynolds brands continue to benefit from innovation as Reynolds Wrap Nonstick Foil remains strong, Reynolds Kitchens Air Fryer liners and Reynolds Kitchens Butcher Paper help to build Reynolds presence in certain adjacency to household foil and other more established categories. We achieved growth within our portfolio of sustainable products, including Hefty ECOSAVE, which grew strong double-digits in the quarter, and Hefty Compostable Printed Paper Plates. Additionally, we launched a new food bag made from 20% renewable and Ocean materials. The fourth driver is the performance of our manufacturing and supply chain. The recent manufacturing and operational performance in the Reynolds Cooking and Baking segment has fallen short of our standards and historical results. Unplanned downtime in two of our plants has resulted in incremental manufacturing costs and impacted our ability to adequately supply non-retail customers. In response, we are implementing operational changes to improve reliability and efficiency. In addition, we have made changes to the cooking and baking organization with new members of management who possess extensive experience in operations and demonstrated business leadership. In terms of service, we have produced substantial improvements across Reynolds Consumer Products, reflecting the theme of target staffing levels and increased stability across our supply chain. Now, before I pass the call to Michael I'd like to leave you with the following. The economic environment remains dynamic, inflationary pressures continue and price elasticity continues to be uncertain. However, we are giving shoppers the trusted performance and additional value they seek in these uncertain times. In terms of business performance, the gap between our pricing and cost increases is closed, and we're positioned for margin expansion and earnings growth in the fourth quarter and 2023. That implies not only a return to earnings growth but also increased flexibility to invest in our categories and drive future innovation and consumption. I'm extremely proud of the RCP team and believe that we are well positioned to benefit from the actions we've taken over the last two years. With that, over to you, Michael.

Thanks, Lance, and good morning everyone. I'll start with a review of our third quarter results then turn to our outlook and why we are well positioned for margin expansion and earnings growth in the fourth quarter and in 2023. Net revenues in the third quarter were $967 million, an increase of 7% over third quarter net revenues of $905 million in 2021, driven by price increases, partially offset by a decline in volume. Adjusted EBITDA for the quarter was $116 million, down 12% versus last year's third quarter of $132 million, driven by lower volume and higher SG&A as price increases fully offset increases in material, manufacturing and logistics costs. Adjusted earnings per share for the quarter was $0.24. Turning to our segment performance, details are in our press release and in our 10-Q. However, I do want to cover a few key highlights. Pricing was up 14% driven by increases across our entire portfolio, offsetting all material, manufacturing and logistic cost increases. This increase was partially offset by a 7% decline in volume, reflecting a 7% increase in Hefty Tableware volume more than offset by a 14% volume decline in Reynolds Cooking and Baking at high single digit decline for each of Hefty waste and storage and Presto. When we reported our second quarter results, we shared our expectation of low to mid-single digit volume decline in the third quarter. This largely played out as anticipated with the exception being non-retail sales that were impacted by unplanned downtime in the Reynolds Cooking and Baking segment and to a lesser extent increases in waste bag elasticities. So let's unpack the volume performance for the third quarter compared to the prior year period. Reynolds Cooking and Baking volume decline of 14% was primarily driven by lower non-retail sales, which included related-party sales and last year's one-time sale of excess raw material. In addition, lower household foil shipments represented 3 points of this decline. Volume declined 9% in Hefty waste and storage, driven by elasticity and increased consumer activity outside of the home. Innovation was a key driver of Hefty’s outperformance of the waste bag category. Presto volume declined 8%, also driven by lower waste and food bag usage, partially offset by increased private label share of Presto close food bag. Hefty Tableware performance was strong with volume up 7% in the quarter, driven by continued growth within the club channel and share gains for Hefty disposable plates and private label plastic party cups across channels. Now before I go into our outlook, I would like to talk a little bit more about the performance we are seeing in cooking and baking. There are three key factors impacting the near-term profitability in this business: unplanned equipment downtime driving higher manufacturing costs and lower production volume. This lower production volume is impacting our ability to fulfill non-retail demand. In addition, as a result, we are experiencing a negative impact in terms of when lower cost of metal flows through to our P&L. As Lance discussed, we are implementing operational changes to improve reliability and efficiency in our cooking and baking operations. Now turning to our outlook. We now expect revenue growth of approximately 8% for the year along with gross profit in the low $800 million range. Adjusted EBITDA in the range of $560 to $575 million and adjusted EPS of $1.30 to $1.36 per share. Our updated guidance reflects reduced expectations for the comparatively low-margin reroll related party sales, as well as the pickup in elasticities in portions of our business. We also assume rates for key commodities are stable by comparison to the end of October levels. Other key assumptions for the year include depreciation and amortization of approximately $120 million, interest expense of approximately $75 million versus an estimated $70 million previously, driven by increasing market rates and an effective tax-rate of 25%, and capital spending of approximately $135 million to $140 million. In terms of the fourth quarter, additional elasticity in portions of our business changes our volume expectations to decline in the low to mid-single digits. We are on track for margin expansion and earnings growth in the fourth quarter driven by further recovery of cost increases as new pricing flows through and cost increases moderately. We also expect SG&A to increase, driven by advertising, investment in our operational improvements and compensation-related comparisons. Now before I turn the call back over to Mark and your questions, I want to leave you with a few thoughts on cash flow. Just as we are committed to returning to pre-pandemic profitability, we're equally focused on improving balance sheet efficiency and maintaining capital spending discipline to drive additional cash flow. We expect this to commence in the fourth quarter as we unwind from our normal seasonal peak in working capital earnings grow and commodity cost pressures ease. In terms of capital allocation, our priorities are unchanged and we intend to return to debt pay-down in 2023. In closing, while we continue to manage through a very challenging environment, I'm encouraged by the actions we've taken as well as the implications for our future results. With that, I will turn the call back over to you, Mark. Thank you.

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

At this time, we'll be conducting a question-and-answer session. Our first question comes from Bill Chappell with Truist Securities. Please proceed with your question.

Thanks. Good morning.

Good morning, Bill.

I just wanted to follow up on the cooking and baking profitability issue. I appreciate the comments, but I guess the leadership change maybe implies a little bit bigger or longer lasting issues, so maybe any color around that of when you think things can get back to where you want them to be and how long it would take?

Yeah. So as Lance stated in his remarks, the recent manufacturing and operational performance in Reynolds Cooking and Baking has fallen short of our standard and our historical results. So we've had demonstrated capabilities that are proven in the past. In terms of what's driving that, as I said in my remarks, it's unplanned equipment downtime. And this is driving higher manufacturing costs and lower production volume. That's impacting our ability to fulfill non-retail demand; it's also slowing down the flow-through of our lower cost of metal which has a significant impact to our Q4. While most of these issues are temporary in nature, we are implementing operational changes to address them all, and Lance spoke to that. So we do see this as being a temporary challenge that we're working through.

Got it. As a follow-up, when you mentioned returning to pre-pandemic profitability levels in 2023, is that referring to achieving that level within the year or as a run-rate during 2023? Thanks.

So it is within 2023; that's why we're talking about returning back to pre-pandemic profitability.

Got you. It will be a run-rate as we move through the year.

Yes.

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

Yes. Thanks and good morning, everyone. I guess two questions for me. One, if you can just give maybe a bit of background on what happened from a sales perspective relative to early September and your updated thoughts at that point relative to where results came in, kind of what progress through September and is that sort of directionally what we're hearing from an elasticity standpoint implied in the fourth-quarter commentary? And then, the main question is what drove the increase in promotion price gaps in waste bags and are you happy with where you are as volume declines worsened in the quarter and maybe give some expectations on where we go from here?

Thank you, Mark. September volume across our products and segments came in line with our forecast and our expectations. So there's really no difference from what we talked about at the Barclays Conference relative to the September results. We have, from a category standpoint in waste bags, implemented a Hefty waste bag price increase in September. The promotions we have added are off of a small base, and they are focused on quality, features and displays like end-caps, not just price points. The category itself is 7% larger than it was in 2019 year-to-date, but elasticity and reopening are driving some category declines versus year-ago levels. So our strategy remains as it has for many years, to support the category and our retail partners with a strong portfolio of branded and private-label products and drive Hefty as a brand operating with the best combination of value. That's benefited the category, and our portfolio requires continued adjustments to be successful. Hefty is outperforming the category. The last four weeks ending October 30 with the standard EQ category is down 8.5%, while Hefty is down 3.8%. And for the last 12 weeks, it's similar; the category is down 7.5%, and Hefty is down 3%. We're looking at EQ performance because looking at dollars in the category is really blurred by the price increases.

Our next question is from Rob Ottenstein with Evercore ISI. Please proceed with your question.

Great. Two questions please, one in the shorter-term on results, just maybe a little bit more detailed thoughts on the trend improvement on the foils. And then a little bit kind of forward-looking, can you give us just some way to think about the potential benefit to your business, with a more constrained consumer who may be thinking about trying to save money by eating more at-home and less at restaurants and how that's likely to play into your business? Thanks.

Yeah. I think both of those questions could really be answered in terms of what's happening with the foil category, what we're seeing from the promotional activity that we've taken. The pandemic has benefited cooking and baking behavior among consumers; people are in the kitchen more. We did a proprietary survey that indicates they are cooking more often, with younger consumers having come into the category and stayed in the category. Recently, because of the higher cost of eating out, they're coming back and eating at home more frequently than they were earlier in the year. Our category and our brands are responding to advertising and promotion, as we discussed in the prepared remarks. Now on the challenge side, we do see that the consumers are not leaving the category, but usage has dropped moderately compared to during the pandemic. There are other options available in the kitchen for meal preparation, which presents both an opportunity and a challenge; consumers are utilizing appliances beyond just a stove or grill, which include air fryers, instant pots, and slow cookers, for example. Overall, we're very pleased with how our promotions have responded and as we head into the holiday season, we've ensured that we have significant promotions in place and competitive price points across our category.

Thank you.

Our next question is from Andrea Teixeira with JP Morgan. Please proceed with your question.

Thank you. Good morning everyone. So my question is regarding your comment about the 7% increase from 2019 for the pandemic, especially for trash bags; and then I think for cooking and baking, you said some categories, I'm assuming it's cooking and baking, were above 10%. Is that a volume consideration? And if so, from a total spending standpoint, are you assuming there has been greater price elasticity, and on top of that you had service issues? Is that an indication that this is going to abate into the first quarter of next year? And if not, what is the scenario that would lead you to form that margin inflection you're assuming some volume recovery into 2023? In other words, what do you need to see in order to get the margin accretion? Is the pricing continue sticking or the $525 million in inflation abating? What needs to happen in order to achieve that? Thank you.

Let's talk about what's happening in each of the categories versus 2019 and how we've gone through the pandemic and are now in 2022. First of all, I'll just add some comments about the foil category in answering Bill's question. There are several factors driving the growth in the foil category; people are cooking more now than they were in 2019. Foil and parchment usage continues to be higher than pre-pandemic levels, and 70% of consumers are eating at home more in response to inflation, as I mentioned a moment ago. Importantly, we've achieved key price points for Reynolds Wrap; we stepped up promotions and have achieved price points below $5 across the other product lines. Private-label gaps in the category are returning to historical levels when Reynolds Wrap is on promotion. So we've achieved those price points, and we've introduced additional promotions in grocery, club, and dollar channels in October. Our retail partners also plan additional promotions leading into Thanksgiving and Christmas. Reynolds Wrap is responding better than the category, as a result in EQ performance versus the same period of 2019; Reynolds Wrap EQ was up 4.5%. Turning to waste bags, the trend of staying at home more frequently and working more frequently from home keeps waste bags healthier than they were prior to the pandemic. The category is strong versus 2019, with a 7% increase year-to-date reflecting consumers spending more time at home. Food bag consumption, on the other hand, is moderately down versus 2019 primarily driven by elasticity. So as we implement our playbook for foil and waste bags, we will do the same for food bags to get the price points correct. In disposable tableware, plastic party cups are up 9% versus 2019 levels, driven by increased everyday use at home. Disposable foam dishes are down versus 2019, but that's completely driven by supply constraints; we are selling as much foam dishes as we have supply. For our brand year-to-date, we're actually up 5%. We see the use of disposable tableware has been steady this year across the category. Heading into the holiday season, this may continue to be a key theme influencing consumer behavior, with the desire for convenience and minimizing cleanup during holiday gatherings, which factors into our forecast for the quarter. However, we are noticing elasticity picking up as we took a significant price increase in October on the tableware business, and we will be watching that closely.

That's helpful. And on the margin front, what needs to happen in terms of price elasticity and inflation cost into 2023, going back to Bill's questions?

As we communicated in our prepared remarks, we've closed the gap primarily through our pricing actions in tableware and waste bags that we took leading into Q4. With the easing of commodities, we anticipate an improved margin as we go into 2023 and Q4 as well.

Okay. That's super helpful. Thank you, Lance and Michael. I'll pass it on.

At this time, we will take our next question from Lauren Lieberman with Barclays. Please proceed with your question.

Great. Thanks. Good morning everyone. Lance, your prepared remarks and comments you've just gone through on category demand and the competitive dynamics are all very constructive. And so I wanted to just drill down and see if the operational challenges you've got in the Cooking and Baking segment, if that's really what you would attribute fourth quarter looking a little bit softer than prior expectations, and what that's really attributable to. I know you've said it's short-term and you're making changes, but how should we think about that? Does that bleed into ‘23 at all, or is it kind of a second half of ‘22 and then you think things should be back to normal from that non-retail and manufacturing side of things?

Lauren, I'll answer that one and add to it, Michael if you like. The driver of our Q4 EBITDA guide being lower is volume at $7 million, $8 million at the midpoint. The lower volume is primarily non-retail. We've discussed specific products in our prepared remarks of what non-retail is and some increased elasticities compared to Q3. It's driven primarily by an elasticity look at our volume in Q4 versus where we were in Q3 when we guided. The increased manufacturing costs are short-term, which we are offsetting with revolution and SG&A reductions.

Okay. All right. That's great. So as I look into ’23, you guys had previously spoken to mid- $900 million for gross profit dollars. That math correlates to pre-pandemic profitability with an assumption on volume. I'm guessing now with elasticity being a bit more significant than what you had previously expected, we should anchor to something a bit lower for gross profit level for ‘23.

Yeah. I think that's correct, but mid- $900 million are still in the ballpark. And clearly elasticities are greater than we anticipated and reported in Q2. We did give an indication that that was a watch out, so that is an overall concern. While it remains within the ballpark, I would say that it is a bit lower than we were originally thinking.

I'd add that we are working to identify additional revolution savings to mitigate and we'll obviously be more specific when we report in February.

Thank you for your insights. Regarding elasticity, historically, many models might not apply due to significant changes in pricing. How would you describe the current state of your elasticity models? Is the overall inflation affecting cross elasticity in a way that suggests a one-for-one dynamic in your forecast, or is it still slightly less than that?

Our categories have been moderately elastic historically with a defined range of 1 to 1.5 negative. Part of it may be the exception, but when pricing thresholds are crossed, that's more significant in our categories than the actual price gaps. That's why we're watching those price thresholds and adjusting accordingly. We're having success across most of our categories today. Our categories are defined as staples, need-based categories, and they respond to price changes accordingly within this moderately elastic range.

Okay. That's great. Thanks so much. I'll pass it on.

Our next question comes from Jason English with Goldman Sachs. Please proceed with your question.

Hey, good morning folks. Thanks for slotting me in. So lots of comments today about how volume in your categories is still elevated. I think you mentioned that daily use for certain categories is drifting off the highs, but still well above where we were pre-COVID. As you think forward, what’s the cadence, pace, and magnitude that you expect that to align as we go through next year?

We have not completed our plan for 2023. We're going through that process now; it would be premature for us to comment on what our outlook is for 2023 from a volume and elasticity standpoint. We certainly want to see how things develop in Q4 as we've gotten price points in place, and we're entering our holiday season which is significant for several of our categories. Once we get through that, we'll have a much better read on 2023 and the outlook for volume for that year.

Is it fair to say that that mid- $900 million guidance out there for gross profit assumes that not all of this volume sticks?

As Michael said, I think it's still in that neighborhood, but elasticity is greater than when we reported in Q2. We've got to work through that before we're able to update the mid- $900 million.

We have reached the end of our question-and-answer session. I would now like to turn the floor back over to Lance Mitchell for concluding comments.

Thank you for your questions and we appreciate your time this morning. I think our business is well-positioned for any economic environment, and we anticipate earnings growth in the fourth quarter and in 2023. I also want to thank all of our employees and our retail partners. They've been dedicated and contributing during these really challenging and dynamic times. Thank you everyone.

The conference has now ended. This concludes today's conference. Thank you for your participation. You may disconnect your lines at this time.