Reynolds Consumer Products Inc. (REYN) Earnings Call Transcript & Summary

We're pleased to welcome Reynolds Consumer Products back to our conference this year. And joining us today, we have CEO, Lance Mitchell; and CFO, Michael Graham. [indiscernible]

I thought I [indiscernible]. I realize as we've had some of these smaller breakout sessions that there's still a lot of folks that don't quite know us [indiscernible] fairly new public company. We went public January of 2020 [indiscernible] in early March, and it seemed like right after the board meeting, we were working from home office just to try to figure out a [indiscernible] things change rapidly in a very -- that period of time for a company. Most of you don't know Reynolds Consumer Products [indiscernible] in revenue, and we have [indiscernible] who are dedicated to producing our products. We manufacture and sell products across 3 main categories, cooking product, aluminum foil, [ tissue ] paper, [indiscernible] grab, making cups and many more. Waste and storage for food storage as well as storage for organizing and disposable tableware. These are under iconic brands like brands so the iconic brands of Reynolds and Hefty as well as dedicated store brands, and the dedicated store brands is a unique capability to provide strategic competitive advantage in our categories. 95% of households in the United States have 1 or more of our products in their pantry, and we have the #1 or #2 market share in our products across the categories. So our 6,000 teammates are dedicated to producing products that simplify daily life. So consumer can enjoy what matters. That's our mission statement. Our mission statement is really meant to convey that our products provide consumers with convenience, different time, but they can use that time to spend more time with their families and hobbies. That's Reynolds Consumer Products.

Excellent. Let's get in maybe some details on something little [indiscernible] and hopefully, people who are familiar with the story will know what I'm talking about. But let's start with Reynolds cooking and baking. It's been great to see what you've achieved with that business. And in particular, we've been really successful in improving operations [indiscernible] challenging period. So I guess let's start there, talk a little bit of how confident you are in the outlook ahead and rebuilding the profitability of [indiscernible].

Yes, the challenge you speak of, we're getting right into the meat of some of the [indiscernible] that we need to talk about is that we -- going through the pandemic and then the supply chain issues today, then overall commodity costs, we navigate it through all that only to have a self-inflicted wound of having some of our manufacturing equipment experiencing unplanned downtime. And so we have spent a lot of time getting that corrected over the last several months. We established a very specific plan, a detailed plan with milestones that was above [indiscernible] of plan as well as top-down and being executed through the leadership team at all levels. We've got store cards in place that we monitor to ensure that we're achieving those outcomes. And we brought in some third parties to help us really understand will provide us with some different perspectives of what we could do better in [indiscernible]. And quite frankly, the easiest answer to this is we were running that equipment so hard to keep up with demand that we just did not keep up with and maintenance. And so we've reinstituted our planned maintenance programs, [indiscernible] in place, we established some processes, well some new processes with outside help. And we put in predictive maintenance [indiscernible] not only -- we don't have to wait for failure, we can see failure coming and predicted so that we can address it before it occurs.

Okay. And then just in terms of the confidence in the possibility for the business and sort of rebuilding beyond where we are today?

Yes. I mentioned we have these scorecards. These scorecards are very detailed. They provided with very specific information about what's working, what we're achieving. And we're on goal for across the board [indiscernible]. Scorecard, a simplified one, we use the [indiscernible] directors on a monthly basis. But in our monthly business to use and other business updates, we're looking at a much more detail. And in reporting our financial results, both our Q1 and Q2 results. We achieved exactly what we said we would in that business unit, if the fact exceeded it.

Great. And with that third-party perspective, I'm curious if there was any in addition to better processes being put in place, but [indiscernible] new cost savings opportunities that were identified that might be something we talk about further down the line?

There were new processes that they helped us identify and they also helped us identify some equipment modifications that we could make that would improve the reliability. So we actually took one of the longest planned downtimes in the history of that business over 3 weeks invested that time in upgrades, changing our processes and some automation equipment that we previously were putting in place for our [indiscernible] operations.

Okay. Great. So let's step back. I mean from a total category perspective, kind of whether it's foil or one of the other categories, how's the demand has been playing out by comparison to your expectations at the start of this year?

I guess I'd like to start off with that by saying we're very confident in the volume and revenue guide that we have for the year, which really hasn't changed since the beginning of the year when we announced in February. And we're also very confident in our guide for both revenue and profit for Q3. However, we have seen some changes in consumer demand, primarily elasticity is impacting a little bit more moderately than we'd expected. In our foil category, it's actually doing better than we'd originally planned from a consumer takeaway standpoint, responding well to the price points that we've established, some planned promotions that we've put in place through the holidays of Memorial Day and Fourth of July and just the price gaps. It's offset a little bit by some trade down to private label in waste bags. So we're being flexible. We're adjusting our promotional advertising plans accordingly.

Okay. And anything you'd call out kind of about your own performance in these categories [indiscernible] is the category -- I guess, let me back up like overall category demand in both the foil category is better, waste bags, it's a bit worse? Or is it a matter of...

It depends on the comparison period. Both are better than 2019, pre pandemic, waste bags even more so than foil versus prior year foils up and waste bags as a category is down modestly.

Okay, okay. Anything else in other big categories, food bag disposable table [indiscernible], that's worth calling out?

Yes. I think obviously, when I talked about the brief introduction, those are the other 2 main categories we play in is food bags and disposable table. Let me start with disposable table where disposable table where we've seen more elasticity than we had expected. We've taken significant pricing in that category because of raw material commodity costs and labor costs, upwards of 50% price increases. And as a result, we have seen the impact of that and some of the consumer takeaway, particularly in everyday use occasions. So we're going to use the same playbook that we use with funnels rep in that category, where we found the right price points got the price points right rate, got the promotional activity right, not to drive share because we have high share positions in these categories. It's to drive category growth. We have both brand and store brand in disable tableware. In fact, most people don't recognize this, but Hefty has the #1 party cup -- branded party cup in the category. It's not so low, even though Toby Keith is saying as long about it, it's Hefty party cups, and we have a very strong private label presence too. So we've proven with our playbook and tableware that we know how to find the right price points, the right promotional programs by category growth, and that's the play where we're going to use in the tableware.

Okay. And then food bag?

Food bags, it's a little bit different story there. The category is migrating. First of all, there's 2 parts of the food bag categories. There's sliders, which are the more premium closure, and we participate very strongly in that with the Hefty slider as well as some private label sliders. We're pleased with how that's performing overall. It's stable from a performance standpoint. We believe there's opportunities for continued category and share growth. But the category main amount of product that's used is depressed to close, and that is migrating more to private label. I mentioned that we do both brands and private label and our product lines. In press to close food bags, we only do private label. So that migration to private label food bag is actually benefiting Reynolds Consumer Products.

Okay. Going a bit higher level again, just think about advertising. So your advertising as a percentage of sales is generally less than consumer products peers. So how do you determine the optimal level of advertising is about return on advertising investments, do you measure that?

No, I get asked this question quite frequently in a lot of investor sections and from analysts because it is lower than a lot of peers in the CPG business. I'd say a couple of things. First of all, you've got to look at just our branded sales. So our branded sales, we're advertising at about 5% of our revenue. And then we look at how effective is that 5% we're spending. And that 5% is effective if you're growing market share and the categories are growing. And we have proven, if you look across our categories, and you look at our share position across our categories, we've proven share growth through our brands in those categories. Reynolds Wrap has grown 3 share points in the last year, Hefty recently is just stable at -- in the category, but has been growing share for the last 5 years. And the tableware business, we're very pleased with the share growth there, too, of Hefty. So effective advertising is about is the category growing. And is your share growing, and we're seeing effective outcomes from our investments. If you think about the foil category, we're the only brand in that category. So our primary voice to the consumer is about use occasions and focusing on younger consumers coming into the category, millennials and Gen Xs as opposed to trying to compete against another company in the category.

Yes. Let's talk about that for a minute. So I think that your very high share position in foil are really interesting because like the [indiscernible] is on you to grow the category right? And same with the parts revenue, but it's a Reynolds brand family almost. So maybe you could talk a little bit about, I guess, innovation under the Reynolds brand? Let's start there as we think about kind of driving overall category growth for at-home cooking.

Yes. I would say, first of all, our innovation is across all of our categories, and it's one of our passions as a company. It's one of our cultural foundations. And 20% of our revenue comes from products that are less than 3 years old. We established that goal aspirationally about 6 years ago, long before we were public, and we've been achieving that goal for the last several years. It is part of the DNA of Reynolds Consumer Products to develop new products. And a color change or account change, that does not count as a new product. It's truly got to be a new product. In -- specifically in the cooking business, there are several things that we have done. One of the things we've done is we've repositioned our nonstick So previously, it was all heavy duty. We've moved it to the gauge that is consistent with every day so that we're able to bring the price points down and be able to provide the value to consumers to be able to bring them into the nonstick category, and that has been growing significantly. We've line-priced heavy duty so that we've been able to get more heavy-duty users in the category. And we do that through recipe integration and teaching young cooks who are coming into the category as part of the last several years, particularly with COVID, more people staying at home and cooking at home. We've introduced new products like air fryer liners. So the recent innovations of air fryer liners coming into a lot of homes. We developed a product that is now growing very significantly in use for that. And [indiscernible], which you mentioned is that category is up 40% since 2019, just demonstrating how many new cooks there are looking every day. And of course, we have the brand position on that -- in that part of the category.

Okay. Great. With nonstick and heavy duty, so that's actually something I -- little arms length from in terms of -- when did you -- I guess, between it -- I know heavy duties always exist in nonstick [indiscernible] for a long time. But -- when would you say you really sort of to emphasize the differentiation between the 2? And how is the [indiscernible] right now?

[indiscernible] reposition 2 years ago. We did a packaging change at the same time so that we could really make this self easier to shop for the consumer. If you thought we haven't noticed that, but Reynolds Wrap every day, heavy-duty, nonstick is really called out more on the graphic designs of our packaging so that the consumer can really understand the difference. And then through our advertising and promotional campaigns, we've been teaching them about the different use occasions for each one of those products.

Okay. And what are the relative price points like between non-stick and the heavy-duty?

We've line priced it. You get 75-foot of Reynolds Wrap every day for the same price, you get 50-foot of nonstick 50 feet of heavy duty. So it is line price, but it's just a different footage.

Okay. Great. And then let's talk maybe a bit about waste bags. So I guess the category saw some significant growth in units consumption people were at home right more trash is being generated the home. Then I'd say maybe 6 months ago, we started to hear conversations on a trash being stuffed in the bag. So certainly, I think [indiscernible] words on the front lines of what's happening in terms of consumer trends, right? Sort of consumers at the low end feeling more pressure, maybe arguing higher-end consumer spending less time at home. So I guess, what's your current read on the consumer environment and a big topic that [indiscernible] surprisingly has been waiting for good over session sort of thing. So I'd just be curious to know your perspective on [indiscernible]?

On household penetration or consumer behavior as it relates to not just waste bags, but across the board, we have seen a change in consumer behavior from a lot of product into the pantry, and I'm not talking about the stock up that occurred during the pandemic. But usually, you'd have another role on hand or another box on hand of waste bags. And the frequency of use is still up. I mean, people are spending more time at home than they were pre-pandemic. There are not -- everybody back to the office 5 days a week. So there are more use occasions than there were before. But in this year, there has been more return to the office, and there have been what we've seen a change in the way that they're managing their pantry. So it's not just stuffing the bags more, but it's more run out to 0. Run out to 0 means I'm going to wait until I run all the way down and have nothing left. And then I'm going to go buy my next roll of Reynolds Wrap or my next bag of Hefty. And that's a different behavior than what's been previously where they would have one in the pantry. So it's -- eventually, you're going to replenish that. It's a change because the cost and the inflationary environment that we're at.

Okay. And then trade spend is -- I mean in this context at the trade spend is up versus year ago levels. So kind of what are you seeing as a return from that? And maybe anything you can share on the approach, right? Is it frequency, depth getting a little bit more in the weeds and how you're leveraging trade spend?

Yes. And as I mentioned in one of my comments earlier, first of all, we don't necessarily focus on promotions trying to gain share. Our focus on promotions is about how do we fundamentally grow the category because we're on both sides of this with brands and store brands. So we're working to find the right periods of time to be able to get trial repeat and ensure we've got the right price points on shelf. So it's not necessarily about high low. It's more about perhaps TPR, temporary price reductions as sure we had the shelf price, right, for a longer extended period of time. This is a deep store promotion. And one of the things that COVID and the supply chain disruptions provided us is there were 2 years where we had very limited promotions. So we were able to, with our retail partners step back and say, let's not just repeat what has been done historically in the past. We can wipe the slate clean and really look at starting over. What worked in the past, what didn't work and let's look at the highest ROI events, and let's repeat those, but let's not necessarily to that [indiscernible] that we did every year just because we did it before. So what we're seeing is we're not at the same levels that we were pre-COVID from a percentage on promotion standpoint. What we're doing is more about getting the price points right. And so it's a longer period of time, less [indiscernible] and getting the -- when we are promoting it for the holiday or use occasions to really drive category.

Okay. And what's the response been from retailers on that front? And are retailers anticipating for more and more and more or...

As long as we're collaborative and we're working and which we are, it's a very collaborative process about how are we going to invest to grow the category. So our strategy as a company because we do both brands and store brands is consistent with their strategies. Their focus is growing the category, not necessarily a brand or a store brand, but the entire category both. So we focus on the same and those promotional programs are designed to really focus on the same thing they're trying to achieve. So it's a collaborative process.

Okay. We definitely seem like a Walmart, like holiday period is much bigger promotional baskets and Fourth of July, Memorial Day, Thanksgiving, a big one for you guys. Let's talk about the pending holiday season, not to rush the beautiful autumn weather, but as you think ahead to holiday, actually, what can you tell us maybe a bit about marketing plans, commercial plans and activity with the backdrop of a questionable consumer environment?

Yes. Our disposable tableware and our, of course, our cooking business is most focused on the holiday. The other 2 business segments are less seasonal than those 2 businesses. So we've got very specific programs put in place, which include promotional pricing during that period of time in [indiscernible] as well as getting secondary placement. We find that particularly with cooking products, getting secondary placement throughout the retailers is the best way to really provide an opportunity for ensuring that the consumer remembers to buy foil or [indiscernible] paper or Turkey oven bag.

Okay. At least through the period of having to worry about how many turkeys are being cooked year-over-year and whether it's group, Thanksgiving, there are many small Thanksgiving.

It's not something that our marketing folks are talking about this year.

That's good. Okay. It's good news for all. Okay. Wanted to just talk for a moment about guidance for commodities and input costs. So I guess, kind of putting that aside, if we assume decreases relative to your assumptions, like what would you be approach to -- let's say, is differently -- the commodity input cost outlook is better than what is embedded in your assumptions? What would happen with that kind of profit flexibility that you might find in the P&L?

I have been fortunate and privileged to be in this role as a CEO of this company for 13 years. We've been through commodity cycles, and we have managed through those very effectively. This is not the first one. This has been a very big one, meaning the commodities went up very quickly and very high, but it's not the first time this company has been through managing pricing with commodities moving. We're now in an environment where we're able to manage to ensure that we get the pricing right for the consumer, margins for the retailer and ensure that we're restoring our margins for our shareholders. Because prices are stabilizing or on a downward trend for most of the commodities in our categories. If they continue to go down even further, which we're not projecting, we're projecting some stabilization here as to the level they're at. And there are things we can do from a promotional standpoint to ensure that we get, again, not high low, but to ensure that we get that equation for all the participants in the category, the consumer, the retailers and, of course, our shareholders, we get that right.

Okay. The competitive dynamics in your categories differ pretty significantly foil, where you're the only branded player, but then, of course, we have the trash -- waste bag category where it's a much more competitive landscape. So what's your experience been with that category, in particular, as we move through a commodity cycle? Does it tend to follow the same series? Does that sort of more of a watch out point for how things could unfold?

I'd say the -- overall, that has been fairly good competitive environment. It's been pretty stable. I think the thing that we watch carefully is the store brands because the store brands have about 50% or a little less than that of the share of the waste bag category. So that's an important part of what we need to manage the price gap to and as we look at how to price in the category.

Okay. would you also think about some of the theoretical savings again, if commodities were to come in a bit better. Is there scope for stepping up advertising or refreshing on Hefty in particular because the Ultra Strong and [indiscernible] so really had tremendous results, but it would seem a branded competitors kind of getting back on the right footing, which is healthy for the category, obviously. But just thoughts about maybe refresh in the marketing or activity or new product activities to kind of continue the momentum you've had on the branded side?

I think we're doing a very effective job, as I mentioned earlier, of advertising in that category as well of all of our categories. There's always eventually an opportunity for some improvement, but I wouldn't say that there's necessarily a step change required in the category from an investment standpoint. I do think that we'll continue to invest in innovation. And regardless of whether or not the commodities are stable or going down slightly. That's another area of investment for us to ensure that we're -- we've got a product pipeline that ensures that, that 20% of revenue from products that are less than 3-year old, it continues. So it's -- we're always going to be investing in advertising as well as investing in innovation.

Great. Michael, so cash flow has improved a lot this year, and you called that working capital initiatives again with second quarter results. So can you just help -- what's been driving these improvements?

Yes. Thanks, Lauren. Cash has been very strong in the first half of the year. We've been quite pleased with the results. The primary driver of that has been our efforts in all around managing every [indiscernible] and across all of our segments, we've made significant strides to reduce our overall inventory levels. We embarked upon this early in the year and had specific goals on how we're going to go after that inventory reductions in each of our businesses have been successful in just managing to that overall goal and you'll see that continue to come down through the rest of the year. So we're really pleased around. The second part of it is our ongoing efforts around improving overall payment terms extensions. So we're well in our way on that journey, and we'll continue to opportunistically go after those opportunities to extend terms with our suppliers.

Okay. Do you see any changes in the incentive structure? Is there often when you see kind of cash flow tick in the right direction is because you're paying for performance is something that helps?

Yes. More recently, we did add a cash component to our overall incentive structure as a measure to make sure that our organization is overall improvement in overall area. So that's worked well for us.

Yes. Okay. Any other -- actually change now that I'm on the topic. Any other changes in the incentive comp structure that has been -- that's worth noting that you've made of late or in the past year?

Cash flow is a big change. The EPS is the other that as we went public, it was a bang for our management team.

Okay. Michael, [indiscernible] me to try to see you're paying back to paying down debt. Can you just remind us of the capital allocation priorities for the business?

Yes. Largely, our capital priorities are unchanged, invest in our business, continue to have a very disciplined approach to our capital spending, evaluate both on M&As. We've continuously done that. It hasn't been a rich environment for us at this point in time, but we'll continue to look at those opportunities and then deleverage targeting 2 to 2.5x EBITDA. And not to mention, last month, as you indicated, we did announce a voluntary cash payment of about $100 million. And so we're pleased with that, and you should have expected to look for more of that type of activity as we move forward.

Great. I would love to talk a bit about bolt-on M&A because it's actually been even going back to the IPO period. It's something like I never really got my head around in terms of what bolt-on M&A might look like for you guys. So I do think it was kind of the criteria to the degree you can find a way to articulate this, but what are the types of things that are interesting?

I think what's most interesting is, first of all, we're -- what Michael talked about is there are a lot of opportunities to continue to invest in our business, both from a growth standpoint as well as for cost reductions. So that's a very important part of our capital allocation. Our dividends are very strong, and we're going to continue to pay dividends to give cash back to our shareholders. And then paying down our debt. Those are the 3 biggest priorities. And then as we look at M&A, it's got to be very close in. And when we say bolt-on, it's like not transformational, it's smaller, which limits those opportunities fairly significant. As Michael indicated, a target-rich environment, when you narrow it that much, there's not that many opportunities. So -- we are looking primarily at what can we do to improve the R&D development, sustainability of our products, so perhaps research and development, small companies that have develop some new products and sustainable that we can then take to our product lines and scale in a much faster, bigger way is those kind of things we're looking.

Okay. Okay. So more like technology than necessarily brands?

Yes, exactly.

Okay. And then what about international? I mean that was something that kind of came up here and there early on. And I was just curious what that is -- it's been a tumultuous few years. But as we look out 5 years, will we be having a bigger [indiscernible]?

In a previous life, I've run a company that had multinational and it was in 38 countries. And I can tell you that's not in our DNA. That is not something that we're looking to expand beyond North America. We've got a lot of good growth opportunities in North America, the United of course of new products, but also in Canada and Mexico, where we're underdeveloped in those 2 countries with our products. We recently discussed the waste bags into Canada. So we've got expansion opportunities in North America. We're going to play in our own backyard for the next few years, and then we can look further out but we don't need to do that as part of our near-term strategy.

Okay. Great. Finally, before wrapping up, I just wanted to take a moment to touch on ESG, and you mentioned it as we were talking about bolt-on M&A. So -- you do provide targets on ESG scorecard, often sustainable options in [indiscernible], recyclable, reasonable packaging, recycling instruction. I have a lot of list here. But could you just give an update on where you stand versus those targets and how you kind of see your targets evolving as you actually hit them?

We established 3 different pillars in our ESG strategy. And we had all the components of that as a privately held company, but going public, and we really needed to formalize that. Those 3 pillars of products, people and communities. For example, on the products, we've achieved ensuring that all of our products have labeling on how to recycle those products. So that particular specific goal, our ESG platform has been achieved. On people, we set a goal to ensure that we had pay equity across our organization. As an example, we've achieved that goal. Recycling education to consumers was part of our communities commitment as well as giving back to communities. On the educational, we've achieved a lot of that goal. So we're looking now at saying, all right, we've achieved these goals. We are looking at our stakeholders to add more and different goals to our list to ensure that it's an evolving and continuous improvement. In greenhouse gas emissions, we committed that we would by 2025, reduce our emissions by 25%. And I can tell you, our board challenged us, you're not going to sign up for that unless we see a clear path to achieve it. And we do have a very clear path to achieve that through primarily energy reduction in our manufacturing operations, but there are other very specific actions that we are taking over the next several years to achieve that outcome.

Okay. Great. And then just for the ESG [indiscernible] growing amongst consumers and particularly in younger cohorts, which has also been an area [indiscernible] very successfully in the cohorts [indiscernible] them into cooking at home and so on. I just wonder how your strategy towards the ESG might differ from other companies at this conference, just frankly, given the product offering, right, to that [indiscernible].

One of the goals that we have in our ESP platform is to have a sustainable product solution for our entire product portfolio by 2025, so that a consumer can make that decision about a sustainable product choice in any one of our products. We are well on our way to achieving that. We've got the pipeline to achieve that across all of our product lines. The next challenge is going to be to narrow that price gap so that the materials that we're using in order to achieve that do not have a significant premium cost versus our standard offering. So that's really how we're thinking about bringing that capability into our company and the younger consumers as well as expanding our -- it used to be called Hefty energy bag, it's now the Hefty Renew program, which is a hard-to-recycle plastics curbside recycling. We're expanding that across other municipalities, more to come on that as we're able to announce that, but we've got more municipalities that have signed up to join us in that endeavor.

Okay. That's great. Please join me in thanking Lance and Michael for being here. That's great. And good to see you guys.

Thank you.