Reynolds Consumer Products Inc. (NASDAQ:REYN) Q1 2023 Earnings Call Transcript May 10, 2023

Reynolds Consumer Products Inc. reports earnings inline with expectations. Reported EPS is $0.08 EPS, expectations were $0.08.

Operator: Ladies and gentlemen, thank you for standing by, and welcome to the Reynolds Consumer Products First Quarter 2023 Earnings Call. [Operator Instructions] 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.

Mark Swartzberg: Thank you, operator. Good morning, everyone, and thank you for joining us on Reynolds Consumer Products’ First Quarter 2023 Earnings Conference Call. Please note that this call is being simultaneously webcast on the Investor Relations section of our corporate website at reynoldsconsumerproducts.com. Our earnings press release and accompanying presentation slides are also available on the site. With me on the call today are Lance Mitchell, our President and Chief Executive Officer; and Michael Graham, our Chief Financial Officer. For our call, Lance will focus his remarks on our first quarter performance, progress on the Reynolds Cooking & Baking recovery plan and what we are doing to drive results across our business.

Michael will review our first quarter financials and our outlook for the second quarter and the full year. Following prepared remarks, we will open the call for questions. Before we begin, I would like to provide a few reminders. First, this morning’s discussion may contain forward-looking statements based on current expectations and beliefs. These statements are subject to risks, uncertainties and changes in circumstances that could cause actual results and outcomes to differ materially from those described today. Please refer to our Risk Factors section in our SEC filings, including in our annual report on Form 10-K and our quarterly report on Form 10-Q. Please note that the company does not intend to update or alter these forward-looking statements to reflect events or circumstances arising after the call.

Second, during today’s call, we will refer to certain non-GAAP or adjusted financial measures. Reconciliations of these GAAP to non-GAAP financial measures are available in our earnings press release, investor presentation deck and Form 10-Q. Copies of which can be found on the Investor Relations section of our website. Now I’d like to turn the call over to Lance Mitchell.

Lance Mitchell: Thanks, Mark, and good morning, everyone. I will begin today with comments on our performance and what we are doing to drive stronger results across our business. Then I will turn the call over to Michael to elaborate on our results and our guide and followed by your questions. We exited 2022 with strong positions in our categories, restored profitability in 3 of our 4 business segments and implemented a comprehensive plan for returning Reynolds Cooking & Baking to historical levels of profitability. We executed that plan well in the first quarter, setting the stage for strong earnings growth for the year. We stabilized Reynolds Cooking & Baking operations by reducing operational inefficiencies. And the other 3 businesses, Hefty Waste & Storage, Hefty Tableware and Presto continue to operate at restored levels of profitability.

Before I speak to what we’re doing to drive improved results across our business, I’d like to review Reynolds Cooking & Baking segment more specifically from an operational, commercial and financial perspective. Operationally, we met our goals for stability in the quarter as we implemented the measures mentioned in our last earnings call, including cross-functional teams focus on critical asset efficiencies, increased technical expertise alongside key production assets and redesign of equipment reliability processes and practices. We’re also standardizing processes across operations in order to further ensure operational stability. We have now entered the next phase of our recovery plan, which is to rebuild margins driven by moderating material costs and improved operational efficiencies.

We’re also making continued progress in automation and recently installed our second new spooling line in our Louisville facility. Now while we’ve hit our goals for the first quarter, we still have work to do to fully restore production efficiencies and our cost position. Commercially, dollar and volume share for Reynolds Wrap is growing, reflecting strength with millennials and other key demographics. We’re back to on-air advertising and lifting trade support for Reynolds Wrap this summer, including Memorial Day and Fourth of July. And new products including Reynolds Kitchens Stay Flat Parchment Paper and Reynolds Kitchens Air Fryer Liners are expanding distribution, driven by strong consumer trial and adoption. Financially, profits are in line with our expectations for the quarter, driven by Reynolds Wrap share gains.

And we’re on track to attain our quarterly earnings targets and a return to profit consistent with historical levels in the second half of 2023. Reynolds Cooking & Baking is delivering against the plan we established at the start of the year, and we’re confident we will achieve the plan this year. So now let me turn to what we’re doing to drive continued momentum across our entire business. As you know, many super staples brands benefited from the pandemic. We participate in that trend, and we’ve gained additional brand share in 2023 as well. I mentioned the improving share trends for Reynolds. Hefty share Waste Bags also grew in the quarter. And in recent weeks, Hefty also delivered a solid gain in food bag share driven by innovation. I tribute much of our company’s strength to our integrated brand and store brand model, together with our role as a category adviser to the vast majority of our customer base.

Syndicated data makes it difficult externally to see how we’re doing on a combined brand and store brand basis. But I can tell you, we’re pleased with our category share trend as well as our performance within store brands. For example, store brand share of food bags is growing, and our share of that segment is also growing. Investment and innovation are driving strength, and we plan for that to continue. We’ve increased trade investment consistent with our plan and the results have achieved our expectations. Trade is driving volume and share, and we will continue to execute our plan to continue promotions around holidays and retailer key events. We’re advertising at pre-pandemic historical levels, which represents a higher investment than prior years.

Advertising spend was up in the first quarter versus a year ago, and we plan for increased advertising on top of last year’s increase versus 2021 levels. This is expected to translate not only into additional awareness, as I mentioned, Reynolds Wrap return to air advertising but also increases in household penetration. In new products, we’re strengthening our market position by elevating and expanding our categories while bringing value to consumers through sustainable solutions. Our Hefty Fabuloso waste bags continued to demonstrate momentum, driven by expanding distribution for Fabuloso Lavender and strong retailer adoption of the new Hefty Fabuloso with Lemon sense. Hefty EnergyBag, our partnership program for recycling and hard-to-recycle plastics continues to perform well and is being rebranded as Hefty ReNew.

Other sustainable solutions, including Hefty and store-branded waste bags made with 20% post-consumer recycled materials and Reynolds Kitchens Air Fryer Liners made with compostable unbleached paper, are performing well. Our new product pipeline is very strong. So look for more on that whenever you and your families are shopping and our future earnings calls. Our integrated brand and store brand model is a competitive advantage, and I’m pleased how our portfolio is performing at retail. But consumers are under pressure, and we’re watching volumes more closely than ever before for impacts from price elasticity and changes in consumer behavior. We believe our relentless focus on profitability puts us on track for strong earnings growth and financial performance in 2023.

With that, over to you, Michael.

Michael Graham : Thanks, Lance, and good morning, everyone. Our first quarter results were consistent with our expectations and provide us with a foundation for strong earnings growth and cash flow this year. Net revenues increased 3% versus the prior year as the price increases implemented last year more than offset a 2% volume decline. Net income and adjusted EBITDA declined versus the prior year as the anticipated increases in material and manufacturing costs in the Reynolds Cooking & Baking business as well as higher personnel costs, professional fees and advertising costs were partially offset by increased profitability in the rest of our businesses. In addition, net income was negatively impacted by higher interest costs due to increased interest rates.

We drove an improvement in cash flow compared to the first quarter of prior year in spite of the anticipated earnings decline. Working capital initiatives contributed to an improvement in cash conversion and we remain disciplined with our capital spending, including strategic investments in Reynolds Cooking & Baking operations, consistent with the plans for the year. For the full year of 2023, we are reiterating our previously provided guidance metrics. We expect net revenues to be flat, plus or minus 1%, with pricing flat to slightly up compared to net revenues of $3.8 billion in 2022. Adjusted EBITDA to be in the range of $605 million to $635 million and adjusted EPS to be in the range of $1.30 to $1.41 per share. Our key assumptions that underpin this guide include, continued execution of the Reynolds Cooking & Baking recovery plan which, as Lance said, is off to a strong start and further solid performance for Hefty Waste & Storage, Hefty Tableware and Presto.

Commodity rates are relatively stable versus the end of April levels. Commodity prices are certainly more stable than they have been, but the environment remains dynamic, including 2 polyethylene price increases in the first quarter. Another year of approximately 200 basis points of incremental margin from Reyvolution cost savings, where we continue to use these savings as potential sources of investment in our categories and business. Gross profit of approximately $920 million at the midpoint of our adjusted EBITDA guide and the same depreciation and amortization, interest expense, effective tax rate and capital spending estimates that we provided in our last earnings call. For the second quarter, we expect net revenue growth in the range of flat 2% on net revenues of $917 million in the prior year, including an approximate 2% increase from price.

Adjusted EBITDA to be in the range of $135 million to $145 million, up by comparison to the adjusted EBITDA of $118 million in the prior year period. And adjusted EPS in the range of $0.27 to $0.30 per share. Now we’ll turn to the phasing and the factors that drive our confidence in earnings growth in the second quarter and for the year. We are pleased with the progress we are making in Reynolds Cooking & Baking and are on track to achieve our quarterly margin targets in this business. Hefty Waste & Storage, Hefty Tableware and Presto are operating at restored levels of profitability. The level of pricing and margin already achieved in these businesses translates into restored margin in 2023. We have the retail momentum that Lance discussed and are investing to build on that, including increases in spending and trade and advertising.

Operational inefficiencies and carryover of the higher cost aluminum are expected to remain a headwind in Reynolds Cooking & Baking in the second quarter, but to a lesser extent than the first quarter. These headwinds are also expected to moderate during the quarter, contributing to our confidence in return to earnings consistent with historical levels for this business in the second half of the year. In terms of cash flows and capital allocation. As mentioned, cash conversion improved in the first quarter versus the same period last year. Multiple initiatives are in flight to drive further working capital improvements. We plan to remain disciplined in the area of capital spending as well. Together with the anticipated earnings growth, we expect these measures to enable us to pay down an additional debt this year.

And our capital allocation priorities are unchanged. With that, I’ll hand the call back over to you, Lance.

Lance Mitchell: Before we turn the call over to your questions, I know you would like to get an update on our CFO search following Michael’s decision to retire following the release of earnings for the fiscal year. Our search for Michael’s replacement is going well, and I’m confident in a smooth transition. We are looking at strong internal and external candidates, and we expect to announce Michael’s replacement before reporting fourth quarter results for the fiscal year. We plan for an appropriate period of overlap between the new CFO’s assumption of the role and Michael’s departure from RCP. Since we have nothing further to add on the CFO transition at this time, please hold off any questions on this topic. And with that, operator, let’s go to our first question.

Q&A Session

Operator: Thank you. [Operator Instructions] Our first question is from the line of Nik Modi with RBC Capital Markets.

Operator: Our next question is from the line of Rob Ottenstein with Evercore ISI.

Operator: [Operator Instructions] The next question is from the line of Lauren Lieberman with Barclays.

Operator: Our next question is from the line of Mark Astrachan with Stifel.

Operator: Next question is coming from the line of Andrea Teixeira with JPMorgan.

Operator: [Operator Instructions] The next question is from the line of Bill Chappell with Truist Securities.

Operator: The next question is from the line of Rob Ottenstein with Evercore ISI.

Operator: [Operator Instructions] Our next question is from the line of Brian McNamara with Canaccord Genuity.

Operator: At this time, we’ve reached the end of our question-and-answer session. I’ll turn the call over to Lance Mitchell for closing remarks.

Lance Mitchell: Well, thank you, operator, and thank you, everyone, for your questions and your interest in our business. I want to extend a sincere thank you to all of our employees and to our team that’s been focused on the execution of the Reynolds BU recovery plan. They’ve done an outstanding job, and I’m really proud of them. We’re off to a good start in 2023, and I look forward to updating you further throughout the year. Thank you.

Operator: Thank you. This does conclude today’s conference. You may disconnect your lines at this time. Thank you for your participation.