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

Next up this afternoon, we are pleased to welcome Reynolds Consumer Products. Joining us, we have Lance Mitchell, President and CEO; and Scott Huckins, the company's CFO. So Lance, welcome back. And Scott, we're pleased to have you up here. I think it's the first time, right?

Yes.

So we have a lot to go through. So before we get into Q&A, I think, Lance, you had some prepared remarks. I'm going to give it .

Yes. Just a brief introduction of the Reynolds Consumer Products for some of your participants that may not know us. But first, I'd like to thank you for inviting us back at the conference. I think ever since we went public in 2020, we've had the opportunity to be part of this conference and we truly appreciate the invitation. We're a leading supplier of cooking, serving, cleanup and storage products, specifically aluminum foil, food bags, waste bags and disposable tableware, the four main categories that we participate in. 95% of U.S. households have one or more of our products in their pantry and it's -- our whole mission is to create products that people love. We have a talent and dedicated team of over 6,000 people that support our goals and our results. We have two iconic brands that have been part of American history since 1947, 1961. That's Reynolds and Hefty as well as we do store brand business as well. So we're unique in that we have a unique value proposition for our retail partners of doing both brands and store brands. And one of the unique parts of that is we're able to apply our expertise as a branded supplier to the company's store brands. So we treat their brands as our brand. And innovation is a key part of our success. Since day one, as I said a moment ago, we create products that people love. And we're focusing now on increasing the number of innovations and the speed to market, but we've already been successful in that, in that greater than 20% of our revenue comes from products that are less than three years old. And I'll close by saying we just had the best second quarter in our history with the exception pandemic fuel Q2 of 2020. We exceeded our revenue guide and increased our retail revenue by outperforming our categories.

Great. So Lance, that's a great intro. Let's maybe talk a little bit about the consumer environment. So on the second quarter call, I mean, right along with that great set of numbers, you also talked about some of the pressures that consumers are experiencing. So maybe you can speak about kind of why that is, how it's playing out and any evolution since, I guess, the end of July.

Well, I think we've been consistent when we even started it in February with our full year guide, that the environment that we saw was a consumer that was under stress and pressure. There's been a decline in personal savings. In fact, all of the savings that occurred during COVID are now depleted. We have record levels of household debt and credit card debt and SNAP level has decreased significantly. But our categories are household essentials. They're affordable, they're convenient. And we are also seeing some benefit from people eating away from -- eating at home than they were previously. So they're eating away from home less frequently. But we expected our categories to be down 2% this year, which is the first time since I've been in this role for 13 years, we saw a -- or expected a category decline. Now we have been gaining share, and we did see the categories perform a little better than that, and we're continuing to execute as we go.

Okay. Great. You just mentioned that consumers were eating out less frequently, which would tend to benefit your business. So yes, what's going on, on that front and any changes?

Well, I'd say it's one of the factors that's driving our success, but it's not a significant factor. I wouldn't want to overplay it. We may be at a point where this is just starting a trend, it is a beginning of a trend of eating at home more frequently benefiting our categories because our products are more affordable and make our -- make eating at home more convenient. But it's one of the contributors to our success. There may be additional inflection point coming as we go forward, but I wouldn't overstate the benefit at this point. I will say that, obviously, the economics are in favor, you're seeing quick service, restaurants declined sequentially in their volume and food inflation is much lower than the consumer price index.

Okay. I get very angry if anyone in my house, put something in the toaster oven without parchment or foil underneath that.

Excellent. Reynolds parchment foil .

But it is clear also from the second quarter results, innovation played a big role in the conversation, right? And it's driving share gains, and you've made some encouraging comments but the pipeline still to come. So maybe an update, talk through some of the innovation activity that you've had and what's on the docket.

I think we've been successful in driving innovations even before we were a public company, and we're now accelerating that. And we're continuing to provide consumers with new product benefits and expanded range of sustainable product solutions. So some of the new products that we've introduced recently are Hefty waste bag with the Fabuloso scent, Hefty waste bags with post-consumer recycled resin content. We introduced a stay flat parchment paper and we've introduced Hefty Compostable Press-To-Close Food Bag. So it's an entry into a new part of the category with a Press- To-Close food bag for us. We introduced Hefty waste bags with recovered coastal plastics. We have a half gallon now of slider bag that complements our court and gallon slider bags, and we introduced partial pop-up sheets, which are precut sheets that have no curl. And finally, we introduced a store brand bio-based Sandwich Bags, which has 20% plant and ocean materials, the substitute for the resin. Our Presto business, which is 100% store brands launched a record number of new products this year, and we're on track to have sustainable product solutions for all of our product categories by next year. That was an ESG goal that we set several years ago. And as I mentioned a moment ago, more than 20% of our revenue comes now from products that are less than three years old.

Okay. The innovation definitely, like I said, it played a big role. It was pretty clear in the second quarter results. But in the conversation, we're also struck by some of the marketing that you've been doing based off of consumer insights and to really make sure the awareness is there for that new product pipeline. So can you share maybe a bit about how views on demographic trends, the consumer is informing your approach on marketing?

Well, I will say, first of all, we got a team that's completely dedicated to consumer insights. And of course, we use third parties to supplement that with market research as well. So it's a very big part of what we do on a day-to-day basis, and it informs us on everything that we do from innovation, advertising, marketing, for both our brands and store brands. I'll try to run through a couple of examples of that. We introduced a new Chef's Kiss cooking campaign, which is really a full range of our Reynolds products aimed at younger consumers who enjoy cooking or recently coming into cooking and they need someone they trust to guide them in the kitchen. We have products that we've introduced to eliminate pain points that we've learned from consumer insights. Examples of that include Air Fryer Liners and lay flat partial papers that doesn't curl. The Hefty new Press-To-Close, which I mentioned a moment ago, it meets consumers' needs for quality and value with a product that's set an attractive price point. So it's a value brand in the Press-To-Close food bag. We've got a new campaign with John Cena. John Cena has been our spokesperson for Hefty waste bags for over 8 years. And we use the consumer insights to really look at what the consumers would appeal to, particularly younger consumers with an ad campaign with John Cena. And we came with the idea of importance of inner strength. So you'll see in the new ad campaign using humor and a great spokesman to really demonstrate the value of inner strength with some things like taking the trash out in the rain and catching a garbage truck, et cetera, a lot of fun, and it's tested very well since we've introduced it. And then, of course, a multitude of sustainable products as younger consumers are looking for more sustainable solutions. Store brands. I mentioned that we have record number of Presto store brand innovations that we've introduced this year and includes stand-and-fill food bags. So that following research, indicating a high consumer preference for a bag that doesn't tip over when being filled like with a marinade, for example. We reengineered our stretch and hold bags so that they would cover into the -- it won't fall into the waste bag and sense at a competitive price point. And we launched a renewable Sandwich bag that I talked about a moment ago with leveraging our land and sea technology.

Great. So let's maybe do a brief discussion of each of the four businesses, and we could start with Reynold's cooking and baking. So how is that business performing and kind of what's on the horizon? .

Yes. As you know, we had a disruption in that business unit two years ago. And since then, we are now gaining share in household foil and growing our parchment business as well. Our price gaps are right. We have the right promotional programs now in place and we're advertising focused on millennials and Gen Zs. I mentioned the Chef's Kiss campaign, which is really targeted for younger consumers as well. And I think we're really strongly positioned for the holiday season. This business really skews towards the fourth quarter holidays and we are well positioned. Our operations are stable and improving. As a result, we're expanding our margins. So we're investing in the future of this business. We've got a very strong innovation pipeline in the Reynolds cooking and baking product lines. We are focused on recruiting younger consumers, and we're driving additional revolution cost savings and continuing to invest in our manufacturing operations.

Great. Within Cooking & Baking, I was hoping we could also get a bit deeper on the nonretail portion of the business. It's pressured total company volumes in recent quarters. So -- maybe you could just talk a little bit about what that business is, the role that it plays in the portfolio and how you expect it to fare going forward?

Well, our nonretail sales really consists of two parts. One is sales to food service customers, which are classified as related party net revenues in our financial filings. And then also a second product line, which is industrial customers, where we sell excess capacity from our hot springs melting and casting facility. So these are low-margin businesses, and it really doesn't have much of an impact on our earnings. It's really there to provide operating leverage. And what I mean by that is it helps absorb some of our overhead, but it's not a significant contributor to our earnings. The performance in this segment, as you asked, is doing a little better than we had expected for the full year, but it's pretty much in line with what we had put in our guidance.

Okay. So if the business though, were to underperform, which is not what it's doing right now. But how does it start to become more of an issue because it's the negative operating leverage, right? Is there to absorb? And then if it subpar. So .

Even if it went to 0, it would not have a significant impact on our manufacturing operations. .

Perfect. Okay. So let's switch to tableware. So tableware sales were a bit better than we expected in the second quarter. Both pricing and volume. Profit was down year-on-year, but this has been a business that's in turnaround mode. So maybe update there from your perspective, how that performance racked up versus your own expectations because maybe I just modeled it wrong, which happens sometimes. .

First of all, I would say that this is an entire category story. The entire tableware category has a -- has been challenged. And one of the things that we know from our research is 60% of use occasions for disposable tableware is everyday use occasions, particularly not wanting to do the dishes. And if you don't have a dishwasher, that's a big motivator. So we are seeing the entire category under pressure. It was down about 5% in Q2, we were down 1%. So we're seeing good top line performance in Q2. Our price and our volume and our price pack architecture is working. And regarding your question on profitability, it was a modest decrease. It's exactly what we were expecting. It was factored into our guide. Looking out forward, we believe we've got the right promos and programs in place to ensure the continued performance we saw in Q2, we started a new advertising campaign back to that everyday use occasion, we'll do the dishes. And we've got a lot of innovation in place that we're bringing forward and introducing to our retail partners and consumers really focused on sustainable solutions. With paper being a major component of that.

Okay, okay. And in terms of the profit performance in line with your expectations, so maybe you could just articulate what it is that pulled the profit down? And is that what we're expecting in the next couple of quarters?

Well, it's primarily volume. I mean, it's what we had expected, but it's down versus prior year. So when you compare the quarter to the prior year quarter, the volume was down because the category is under pressure. And then we invested a little bit more in promotions in the second quarter to drive some volume. So that's also part of the factor, but it's mostly a volume story.

Okay. Okay. Waste and Storage is doing very well competitively and is also growing profits. Is it reasonable to expect the trend to continue in terms of growth? I'm curious kind of how you're managing promotional activity think there's been -- Clorox has talked about an intention to pick up their own promotional activity. They've come back in stock and moved past cyber. So the promotional environment, competitiveness and sort of likely ability to continue the trend line.

Well, first of all, we're very proud of the record that we've had at this product line for the last 8 years. We have gained share in the waste bag category for 8 years now. So we believe that we've got the right programs and the right price gaps in place to be able to continue to do that. Our price points are in a good place. We're very happy with the price caps that now are in retail. We've got our promo calendar locked for the balance of the year. So we know exactly what the promotions are going to be and we're really excited about this advertising campaign with John Cena that I talked about a moment ago. And I think it's one of the primary drivers that we've been so successful over the last 8 years is with him as our spokesperson, it really speaks to strength and humor and really attracts new and younger consumers into the category. And it's really important to note that our primary goal because we do both brands and store brands in this category is to work with our retail partners to get the promotions right and the price points right to drive the growth of the entire category.

Okay. Are you seeing any change in promotional activity, though right now in the market?

I would say that the promotion activity we're seeing currently is back to like 2019 levels. And I call that normal. A lot of us cut promotions during the period of time of supply disruption in COVID and then there are other reasons that were cut for promotion activity. We're back now to a more normalized type of promotion, the percentage sold on promotion, but it's not an extraordinary level.

Okay. Great. And what about for Waste and Storage distribution. I'm just curious if you've gained much in the way of incremental distribution over the last year that's worth calling out.

We have gained distribution in the waste bag category. I think it's -- we feel we've been successful in distribution gains. That's been part of the story for the last several years. It's not a new part of the equation. And it's one that we, again, built on in 2024 as we went through the line reviews.

Okay. Great. Final business division would be Presto. So in presto, really strong EBITDA margin, second strongest segment as of the second quarter, nearly 25%. Historically, that's been the case, but Presto was kind of the least profitable business, right? So it kind of changes the pecking order a bit. What are the underpinnings of the strength of the margin there? And what do you expect of the profitability for Presto going forward?

Yes. Just for a little color commentary to the question for the participants who may not know what Presto is. Presto is 100% store brand waste bags and food bags. And the EBITDA margin posted year-to-date is over 20%. So that is a profitable store brand business. I would say it's a couple of factors. One, our branded and our store brand business, the Hefty Waste & Storage and the Presto Waste & Storage, they really work together effectively from a technology and support standpoint to ensure that we're getting growth in cost savings. So that's one aspect of the equation. Is that whole branded and store-branded model. I'd say more significant though is -- we've got significant improvements we've made in productivity and operating costs in recent years. We've made investments in automation, for example, productivity programs driven through our revolution initiatives, and we've made, as I mentioned a moment ago, a real emphasis on new products and truly being innovative, a record number of new products introduced at the Presto business in 2025. So we're not done driving Presto margins. We believe those are very sustainable, and we're commercially even more robust innovation pipelines and we've got opportunity unlock additional cost savings.

Okay. Great. Scott your turn. But it's your first time at the conference since joining Reynolds, so welcome. And just, I guess, before we get into more specific questions, any observations you'd kind of like to share.

Yes, thanks. Great to be here. So good to see you. A couple I would share would be -- number one, Lance hit this implicitly, but my observation is that the business model of a branded and store brand business model is, in fact, a core competitive advantage among other reasons. Imagine the credibility facing retailers growing the category with skin of the game in both dimensions. Second one would be about the team. I've been just impressed with the cohesiveness and the collaboration of the team, driving against the priorities that have produced the results we've seen year-to-date. A very pleasant welcome into the company included the company already had a very strong culture of generating free cash flow and focusing on free cash flow and ROI sort of thinking. So in my trade, that's a welcome addition. And then probably lastly, would be on revolution. For those who don't know that, that's our program where we're looking across businesses and functions, trying to drive efficiencies or cost savings. So that's what it is. It is absolutely part of the fabric and culture of the organization. So as we're looking to drive some of those programs, we're driving into open arms. But those -- I think those would be the core messages that I would share.

Okay. Great. So -- let's just pick up on Revolution. It sounds like there's a lot of opportunity there. And [ the one thing ] that excited you the most as you kind of got to the company. So maybe you can just elaborate on that, it would be great.

So again, what it is, it's really a cost focused opportunity across businesses and functions. What we've seen as we've gone through this year is really sort of three categories of opportunities, Lauren, both procurement, supply chain and manufacturing. And we think those will be significant opportunities to unlock not just this year, but is a significant contributor over the next couple of years. And then I think maybe just to scale this, we shared back at our March Investor Day that we would estimate about 1/3 of our long-term earnings growth would come from the Revolution program. So it remains vibrant, and we're very optimistic about it.

Yes. Okay. And your financial flexibility is really increasing as you delever just a few questions there. I mean, first, maybe you can share with the audience your capital allocation priorities.

You bet. So I think start with the context we established a target of running the business with target leverage between 2 and 2.5x debt to EBITDA. In the second quarter, we delevered down to 2.4x. So that's the context. So we established three buckets for evaluation to allocate capital. First would be organic or internal investments back into the company. Second would be targeted -- keyword targeted mergers and acquisitions to supplement what we already do. And then, of course, the third piece would be returns of capital back to shareholders. And I think the important thing to understand is rather than an arbitrary allocation, these compete purposely with each other for capital allocation. And then what I'll try to do is maybe give you a little bit of perspective on each of the three buckets as we go. I think the first one would be, we do see, as I mentioned, in the Revolution cost savings context, I think it will be a significant amount of an investment opportunity at attractive returns within the organic or internal bucket with an emphasis on two things. First would be on product innovation. And the second would be on productivity. When we then think about some of the characteristics or context around targeted M&A, it would be categories that are adjacent and have very similar operating characteristics to those that we have today to kind of scale this. The categories we serve today, there's about a $20 billion TAM I'm rounding. We have about a $4 billion business. If we look at those categories that are immediately adjacent, it's an incremental $20 billion, just to kind of give a a feel for the playing field. And then lastly, of course, we look at a variety of ways with which we could return capital to shareholders, recognizing we have an existing dividend framework in place.

Yes. Okay. In terms of M&A, I mean, the only M&A that we've seen Reynolds do as a public company is the Atacama acquisition last year. How has that acquisition begun to impact innovation or has it yet because I should say, and should we expect future M&A to look similar to that. So small manufacturing-oriented capability oriented? Or could we see M&A as a sort of different ilk.

Good question. So I'd say that we're very pleased with what we've seen in the integration, specifically around the Atacama acquisition, having an effect on our innovation pipeline, specifically around sustainability profit offerings land shared. The ambition is every category has a sustainable offering by the end of 2025. We think this is an incremental driver of that. So we're pleased with it. In terms of it being a precedent, if you like, for acquisition, I'd say hard to say. As I shared earlier, we think about the acquisition journey being in immediate adjacencies where the shopping behavior and patterns are similar. The category dynamics are similar, perhaps the distribution is similar to what we do today, so that we feel very confident we can add value in close to home game, so to speak.

Okay. And then sort of what's your appetite for share repurchase or special dividends or other forms of cash return to shareholders?

So I think effectively, we're on bucket three really of the capital allocation framework, and we will consider and would look at all of these. I guess what I'd say is on the buybacks in particular, I think the math is probably a little more complicated by the fact that it's certainly possible that our current level of flow as a limiter or a governor on our multiple relative to other, say, HPC stocks. And so we want to be thoughtful about including that consideration set because of the obvious impact on float. But -- but to close, I'd just say, again, our responsibility is to look at all the forms and levers. .

Okay. Okay. One thing I'm curious about also is international. I think at various points in time and certainly the time of the IPO lands international came up and it's come up in the context of is that scope for M&A. So maybe if you could kind of update us on your thinking there, what that might look like because we're a company that's so clearly, domestic oriented, that's just -- it's a big world out there. So curious how we should be thinking about what's in the realm of the possible.

Well, I got to ask you a similar question at Investor Day. And what I said was our core competency is North America. We've got a lot of opportunities for growth and distribution of our products in Canada and Mexico and some limited exports. So we're focusing our international growth primarily in North America. That's really consistent with our core competencies. I see a day down the road that there could be an acquisition in international beyond that scope. But we've got so much opportunity within that geography that, that's where we're going to focus for the next several years.

Okay. And do you have staff teams that are dedicated to Canada and Mexico. And even to be honest, like the extent of the footprint to the degree there is one.

We have a dedicated international team. Most of them are actually headquartered in our Toronto area. There are dedicated resources throughout the world, including at our headquarters in Lake Forest as well. So it is a dedicated team. They have their own P&L. They have their own growth targets, and it is an opportunity for continued growth for us.

Okay. And in Canada, for example, given you said -- you mentioned Toronto, is the market -- do you have strong market shares already? Or is it building almost from scratch with hoping the Reynolds brand is .

Well I wouldn't say it's building from scratch. One product line that we have in Canada is called ALCAN, and that's the Reynolds Wrap equivalent of Canadian aluminum foil. It actually has a higher market share than we have with Reynolds Wrap in the U.S. So we have a 65% market share of Reynolds Wrap in the United States. So that's saying a lot about that product line. However, you go across the rest of the product categories that I talked about, and we don't have good distribution yet. We've got opportunities for growth in waste bags and food bags, parts of paper. The list goes on across the broad list of our product lines. So we're -- we're excited about that opportunity. We've got a dedicated team working on it, and the same is true with Mexico. There's been some opportunities for growth in Mexico as well.

Okay. And would you approach it also with the same branded private label approach? .

Interestingly, Reynolds tested better for food bags and waste bags in Mexico than Hefty did. So we've introduced a line of Reynolds products in Mexico that's on that platform. And then Reynolds Wrap is doing very well in Mexico, and we're going to expand the distribution of that.

Okay. Great. In terms of sustainable products, so it's pretty remarkable, just the amount of change even since the IPO when we first met and talking about having sustainable options in every category and that being such a close-in goal. And if I recall back several years ago when we talked about it. I remember you saying we have the answers. We have recycled foil. It's just the consumer won't pay up for it. So where do price points stand? It's a broad question because I know it may be different in every category, but on some of these sustainable solutions versus the, let's call it, mainline. And have you seen a change in the consumer appetite to pay up if it is, in fact, a premium-priced product. .

Let me answer the first question on Reynolds 100% recycled first. We have narrowed the price gap on that. It is now line priced with Reynolds Wrap. So a 50-foot or 75-foot roll of everyday Reynolds Wrap are 100% recycled price. So we have figured out how to crack the equation on that. In other product lines, there's still a premium for sustainable products because the input materials are more costly. We are working through things like the Atacama acquisition, which is we talked about it as more of an R&D play to be able to narrow that price cut because the raw material code that they cracked is significant cost reduction from some of the current materials being used in those applications, and it's all plant and organic based. So we are working diligently to close that price gap to answer your final question, consumers rarely will pay a a premium for sustainable product solutions. So that's why we have so much emphasis on narrowing the price gap so that we don't have that premium price.

Yes. And retailers are giving facing these products. I'm guessing retailers see it as important and they do rather do something that doesn't great velocity, but it needs to be on the shelf.

They see it because consumers, particularly younger consumers are pulling it. So it's not as much of a retail push, although that's a part of it. It's primarily a younger consumer pull for a solution. Some of them will pay a premium. So that's why we get the shelf spaces.

Okay. All right, great. We're going to wrap it there. So thank you so much for being here this year. Please join me in thanking the Reynolds team for being at the conference.