Reynolds Consumer Products Inc. (NASDAQ:REYN) Q1 2024 Earnings Call Transcript

Reynolds Consumer Products Inc. (NASDAQ:REYN) Q1 2024 Earnings Call Transcript May 8, 2024

Reynolds Consumer Products Inc. beats earnings expectations. Reported EPS is $0.23, expectations were $0.22. Reynolds Consumer Products Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Greetings, and welcome to the Reynolds Consumer Products, Inc. First Quarter 2024 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mark Swartzberg, Vice President of Investor Relations. Thank you, sir. You may now begin.

Mark Swartzberg: Thank you, operator. Good morning, and thank you for joining us on Reynolds Consumer Products' first quarter earnings conference call. Please note that this call is being recorded and webcast on the Investor Relations section of our corporate website at reynoldsconsumerproducts.com. Our earnings press release and presentation slides are also available. With me on the call today are Lance Mitchell, our President and Chief Executive Officer; and Scott Huckins, our Chief Financial Officer. For our call, Lance will review our business performance and the actions we are taking to continue leading our categories followed by Scott, who will review our first quarter results and our outlook. Following prepared remarks, we will open the call for your questions.

Before we begin, I would like to provide a couple of 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 the 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.

Lance Mitchell: Thank you, Mark, and good morning, everyone. We're off to a strong start in 2024. We continued to lead our categories delivering retail volume at the high end of our guide, which reflects the strength of our integrated brand and store brand business model. We continue to launch a robust line of innovative products and our focus remains steadfast on offering sustainable alternatives across our product categories. We're delivering results from our Reyvolution program and continue to develop further opportunities. And we outperformed our first quarter guide delivering strong earnings growth. We have a high level of confidence in our plans and actions that we're taking to lead our categories, drive earnings growth and continue to increase our financial flexibility.

Before I get into the specifics of each business, I'd like to first comment on the consumer environment. When we reported results in February, I spoke to volume as being under pressure across the consumer staples sector. During the quarter, demand was modestly better than expected in some of our categories and share gains also contributed to our retail performance, reflecting the strength of our integrated business model. However, factors, including reduced consumer savings, increasing credit card debt, continued inflationary pressure and elevated interest rates, continue to pressure consumption in our categories. In this context, we're not complacent. We ended the year expecting ongoing consumer pressure and we're taking actions that we planned to drive our categories, our profitability and additional financial flexibility.

Our actions are wide-ranging and include the following; as category advisors, we are in ongoing dialogue with our retail partners and constantly evaluating and adjusting our joint plans to meet their needs and the needs of our consumers. We're investing in compelling and impactful omni-channel and multi-product advertising and we're actively managing proven price, pack and architecture plans to drive volume in our categories. Our innovation pipeline has been a key contributor to sourcing incremental volume and as strong as it's ever been. We have a robust lineup of branded innovation, which recently received top ratings from a third-party review. For our Presto business, we will have more product launches in 2024 than any other year since RCP and Presto came together, and we're on track for offering sustainable solutions in every product line by 2025.

We're very excited about the innovations that we're bringing to the market. And we're driving productivity and Reyvolution savings and procurement, manufacturing, supply chain and other areas of our business as an additional lever for earnings growth and reinvest it back into the business. I'll now review our performance outlook by business. The Reynolds Cooking & Baking business is performing very well and we're building on the operational commercial and financial success that we drove in the first quarter. Reynolds continue to grow share in household foil where it gained three share points in 2023, and we're driving significant growth in the rapidly expanding parchment paper category, which remains a focus area of innovation. Innovations such as Reynolds Kitchen Stay Flat Parchment are doing well and we look forward to unveiling our plans for commercialization of our number of new sustainable solutions across the portfolio in the future.

We continue to recruit millennial and Gen Z consumers to our products and categories. As a part of our new Chef's Kiss marketing campaign targeting young cooks, we launched a multiproduct advertising campaign with influencers highlighting products in Reynolds' portfolio which is amplified in digital and social channels. As we reviewed at our Investor Day, new processes and technologies are in place and proven to be very effective in supporting operational stability. Finally, Reynolds' position as the only vertically-integrated aluminum foil manufacturer in the United States is a significant competitive advantage, providing us with a high level of control over quality, continuity of supply and other attributes of our leading market position.

Our Hefty and Presto Waste & Storage bag business continue to perform well in the first quarter, and we're executing comprehensive plans to drive further commercial and financial success. The quarter featured a number of commercial highlights including Hefty's continued outperformance of our branded waste bags, sequential improvement in private label food bags and continued strength from product innovation. Looking forward, we expect product innovation to remain a major source of volume growth. Hefty Fabuloso reached $180 million in annual retail sales over the last 12 months and we expect further distribution gains from new sense and sizes. We're introducing new sustainable product solutions including Hefty Ultra Strong Coastal. Coastal just began shipping and is made with 35% recovered materials including 10% coastal materials.

And Hefty and Presto waste and storage bags are off to a strong start leveraging the mid-teen other categories. We're also innovating in store brands including new compostable sandwich bags and reformulated stretchable waste bag. We recently extended our contract with John Cena who features in a new omnichannel campaign for Hefty Ultra Strong trash bags and highlights strength that is anything, but ordinary with a number of new spots rolling out over the course of the year. Turning now to our disposable tableware segment. Our first quarter results demonstrated a moderation in volume declines from the second half of 2023. It's important to recognize that this entire category is impacted by price elasticity after a period of significant inflation and resulting price actions.

On the commercial front, we adjusted trade promotions in the quarter and we've made progress on several initiatives including lower pack counts at competitive price points, increases in cross-portfolio promotion and expansion of multiple new products and distribution including Hefty ECOSAVE, Hefty Compostable Printed Plates and Hefty pet cups made with post-consumer recycled content and we continue to migrate the category to more sustainable solutions. And despite the decline in revenue, profits were unchanged in the quarter. Before turning the call over to Scott, I'd like to reiterate that our business model is a competitive advantage and we have the right team and plan in place to build on the momentum in the first quarter the entire RCP organization remains committed to leading our categories and driving earnings growth.

Scott, over to you.

Scott Huckins: Thank you, Lance. Good morning, everyone. 2024 is off to a strong start as our first quarter performance closely aligned with the objectives we outlined when introducing our full year 2024 guide in February. As a reminder, those objectives are: driving retail volume at or above category performance, delivering double-digit earnings growth, investing in our categories and product innovation, driving productivity disciplined cost management and additional Reyvolution cost savings and generating strong free cash flow and reducing leverage. In totality, we delivered the first quarter we expected and are on track to deliver our guide for 2024. During the first quarter we generated revenues adjusted EBITDA and earnings that surpassed the high end of our guide and continue to increase financial flexibility.

First quarter retail revenues were $794 million at the top end of our expectations and $23 million below retail revenues in the year ago period. After giving effect to 150 basis points of product portfolio optimization our retail revenues outperformed our categories by approximately 50 basis points. Low-margin non-retail revenues declined to $39 million in the quarter, but outperformed our expectations. Adjusted EBITDA increased $40 million to $122 million reflecting high-teens or more earnings growth in three of our four businesses driven by manufacturing output and lower operational costs. Earnings per share were $0.23 up significantly from $0.08 per share in the first quarter of 2023 reflecting EBITDA growth and lower interest expense from a significant reduction in debt in 2023.

Operating cash flow of $99 million was a record for the first quarter driving a reduction of net debt to 2.5 times trailing 12-month adjusted EBITDA and enabled an additional $50 million voluntary principal payment on our term loan facility subsequent to quarter end. Turning to our 2024 guide. Our financial objectives remain simple and clear: protect and expand market share, drive earnings growth, and continue to delever and increase financial flexibility. We continue to forecast 2024 net revenues in the range of $3.530 billion to $3.640 billion compared to net revenues of $3.756 billion in 2023. The elements of our guide are also unchanged as follows. We expect pricing to reduce revenue by approximately 1%, which included certain contractual pass-throughs.

We expect retail volume to perform at or better than our categories at a rate of minus 2% to plus 1%. And we expect most of our anticipated decrease in net revenues to be driven by our low-margin non-retail business and optimization of our retail product portfolio. We continue to forecast full year adjusted EBITDA within a range of $660 million to $680 million on the basis of our revenue forecasts and margin expansion driven by improvements in product mix, the Reynolds Cooking & Baking recovery of historical earnings and the delivery of additional Reyvolution cost savings in all four businesses. And we are increasing our forecast of earnings per share by $0.05 per share or approximately $10 million in net income to a range of $1.62 to $1.70 per share for updated tax expectations for the second quarter and full year 2024.

Other considerations for the full year forecast consist of: commodity rates more stable than in recent years; SG&A unchanged compared to SG&A in 2023; depreciation and amortization of approximately $120 million for the year; and interest expense is estimated to be $100 million for the year, in terms of each quarter's contribution to full year earnings. In 2023 with the Reynolds Cooking & Baking business executing a recovery plan, the quarterly contributions of earnings were not representative of historical phasing. In particular, we pointed out on our fourth quarter earnings call that Q4 2023 EBITDA was a record which was in part driven by the anomaly in earnings contribution coming from the recovery in Cooking & Baking last year. In 2024 and as we mentioned on our fourth quarter 2023 earnings call, we see the quarterly contribution of earnings looking a lot more like it did prior to 2023.

For the second quarter, we expect revenues in a range of $875 million to $900 million versus second quarter 2023 revenues of $940 million consisting of: unchanged pricing; a 3.5 point to a 1.5 point reduction from retail volume at or better than category forecasts; and a 3.5 point reduction from lower-margin non-retail volume and the optimization of the retail product portfolio. We forecast second quarter adjusted EBITDA in a range of $160 million to $170 million, representing a $10 million to $20 million increase over second quarter 2023 adjusted EBITDA. And earnings per share and adjusted earnings per share in a range of $0.42 to $0.46 per share versus $0.32 per share in the year ago period. The adjusted EPS forecast includes the tax benefit that I mentioned earlier.

Now, before turning to cash flow and capital allocation. For those of you using Circana data, it is worth noting that in evaluating Circana's expansion of reported channels we have compared our historical share trends on a MULO+ basis to those on a MULO basis. And concluded that our share trends in MULO+ are similar to what they are on a MULO basis. On capital allocation, our top priority remains the enhancement of financial flexibility through ongoing debt reduction. We continue to estimate free cash flow of over $300 million this year. As a result we are tracking very well against our plan for leverage to be within our target range of 2 to 2.5 times adjusted EBITDA at year-end. Our other capital allocation priorities to invest in organic growth automation and other Reyvolution cost savings.

And to pursue targeted acquisitions consistent with our marketplace position and core competencies are unchanged. Finally, on capital structure, I want to make note that we will file an amended shelf registration later today. As you know these statements facilitate debt and equity offerings without stating and intent. While we do not have any specific plans for an offering, we will certainly update the market if that were to change. In closing, our first quarter results provided us with a strong start to 2024 and I am very pleased with our operational execution and balance sheet discipline. Consumer pressures continue as Lance noted, but we have the business model, the team, the plans, and the actions in motion to continue delivering on our financial objectives for the year and over the long-term.

With that let's turn to your questions. Operator?

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