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Edited Transcript of Reynolds Group Holdings Ltd earnings conference call or presentation 31-Jul-19 1:00pm GMT

Q2 2019 Reynolds Group Holdings Ltd Earnings Call

AUCKLAND Aug 6, 2019 (Thomson StreetEvents) -- Edited Transcript of Reynolds Group Holdings Ltd earnings conference call or presentation Wednesday, July 31, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Allen Philip Hugli

Reynolds Group Holdings Limited - CFO

* Floyd E. Needham

Reynolds Group Holdings Limited - CEO of Closures

* John Rooney

Reynolds Group Holdings Limited - CEO of Graham Packaging Business and Graham Packaging, Evergreen & Closures

* John T. McGrath

Reynolds Group Holdings Limited - CEO of Pactiv Foodservice

* Lance Mitchell

Reynolds Group Holdings Limited - CEO of Reynolds Consumer Products

* Michael King

Graham Packaging Company Inc. - President & CEO

* Thomas James Degnan

Reynolds Group Holdings Limited - CEO & Director

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Conference Call Participants

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* James Yoon

Citigroup Inc, Research Division - High Yield and Leveraged Loans Research Associate

* Mack Fuller

The Blackstone Group Inc. - Principal of GSO

* Nathan Edward Schubert

JP Morgan Chase & Co, Research Division - Senior Analyst

* Richard E. Kus

Jefferies LLC, Fixed Income Research - Analyst

* Roger Neil Spitz

BofA Merrill Lynch, Research Division - Director and High Yield Research Analyst

* Samuel Thomas McGovern

Crédit Suisse AG, Research Division - Research Analyst

* Travis Edwards

Goldman Sachs Group Inc., Research Division - Research Analyst

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Presentation

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Operator [1]

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Greetings and welcome to the Reynolds Group Q2 2019 Results Conference Call. (Operator Instructions) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Tom Degnan, CEO of RGHL. Thank you. Mr. Degnan, you may begin.

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Thomas James Degnan, Reynolds Group Holdings Limited - CEO & Director [2]

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Thank you, Jerry. Good morning, and welcome. With me today to discuss the quarter's results are Allen Hugli, RGHL's CFO; Lance Mitchell, Reynolds Consumer Products CEO; John McGrath, Pactiv CEO; Mike King, Graham Packaging CEO; John Rooney, the Evergreen CEO; and Floyd Needham, the Closures CEO.

Revenue for the quarter was $2.65 billion, that's down 3% from Q2 in 2018. EBITDA for the quarter was $521 million, up 7% from the previous year. The new accounting standard for leases, which we talked about on the last call, added $25 million to this year's Q2, and if excluded, EBITDA was up 2%. As I said, the CEOs will go into some detail around their results. But a quick summary is Reynolds Consumer Products was up mainly due to pricing. Pactiv showed improvement, mainly due to material costs. Graham Packaging was down, mainly due to lower volumes. Evergreen was down, due to fiber costs and operational performance in 1 mill, and CSI quarter was flat.

During our last call, I talked about investments in new projects, our investments in automation, intelligent factory and warehouse and logistics management are in process, and where we have completed a project, we're seeing the expected benefits. This is a multiyear program and should continue to benefit our bottom line as we complete implementation.

As mentioned in the last call, our mill operations need to improve. And I [think] 1 mill has probably turned the corner, and we're very focused on the other mill. While the numbers do not yet reflect the improvement, I believe Graham Packaging's second half will start to show improvement. There's nothing new to report on the Closures strategic review, so now I'll ask Lance Mitchell to take over the call. And after the CEOs, Allen Hugli will cover the financial highlights, and then we'll take Q&A. Lance?

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Lance Mitchell, Reynolds Group Holdings Limited - CEO of Reynolds Consumer Products [3]

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Good morning. Reynolds Consumer Products revenue for Q2 was flat prior -- to prior year Q2. Price increases that we implemented in Q3 last year were offset by lower volume in the quarter. The lower sales volume versus Q2 last year were low-margin products that we exited and noncore business, including sales of aluminum foils from excess melting capacity and lower intercompany sales. Additionally, our premium waste bag product demand outpaced our supply, so we're adding equivalents to increase capacity.

Reynolds Wrap sales volume that I've highlighted for the last 2 quarters is now back to a positive comparable versus prior year Q2. The price point for our flagship 75 foot product is now below $4 in 3/4 of all retail channels. For the last 12 months, Reynolds Consumer Products revenue increased 3% to $3.14 billion.

Turning now to EBITDA. RCP Q2 EBITDA increased by $26 million or 17% to $182 million. Excluding the impact of the change of lease accounting, EBITDA increased by $23 million or 15%. Price increases that we gained in prior periods combined with the reduction of resin and aluminum costs increased margins for the quarter. This was partially offset by lower volume that I discussed previously and higher conversion costs primarily driven by higher labor rates. Other drivers on the EBITDA bridge were not significant impacts versus prior year Q2.

For the last 12 months, Reynolds Consumer Products EBITDA has increased by 7% or $676 million, excluding the impact of the change in lease accounting.

I'll now turn it over to John McGrath.

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John T. McGrath, Reynolds Group Holdings Limited - CEO of Pactiv Foodservice [4]

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Thanks, Lance. Pactiv's Q2 2019 revenue decreased 3% or $0.7 million to $952 million during the period. This decrease was primarily driven by lower intersegment revenues combined with the impact of business divestitures totaling $31 million for the period. These decreases were partially offset by favorable volume with our external customers.

Last 12 months revenue increased to $3.8 billion, reflecting a 1% increase from backing out the impact of divestitures. Pactiv's Q2 2019 adjusted EBITDA increased by 13% or $20 million to $169 million. Excluding the change in lease accounting, adjusted EBITDA increased 7% or $12 million to $160 million. These increases were primarily driven by net favorable raw material costs and the associated sell price material spreads. This increase was partially offset by higher employee-related costs and higher warehousing expenses.

Last 12 months adjusted EBITDA decreased by 5% to $601 million. Excluding the impact of the lease accounting change, last 12 months adjusted EBITDA decreased by 8%. As we discussed last quarter, our total labor management program, which was designed to develop plant and warehouse-specific strategies around recruiting, training and retention, is delivering the desired benefits. We now have implemented the program in 75% of our facilities and are optimistic about the productivity benefits that we will realize once fully optimized.

We also continue to advance our top 4 2019/2020 initiatives, those being automation, integrated supply chain, factory asset intelligence and profitable innovation/growth. Our automation program, which impacts many of our facilities, is delivering on our headcount reduction assumptions as we automate many of our labor-intensive manufacturing plant tasks.

We continue to implement our integrated supply chain solution, which will simplify our sales and operations planning process and deliver tangible warehouse and transportation planning savings. We are in the process of completing our second factory asset intelligence transformation and are seeing many of the productivity improvements we anticipated.

We are also in the process of developing and launching 5 new sustainable product lines under our EarthChoice brand, designed to provide additional choices for our customers looking for packaging alternatives. We manufacture our products out of 13 different basic materials and have built out our product portfolio to address customer needs around performance, functionality and cost.

As existing products are deselected based on legislation or customer preference, we have the ability to maintain the sales volume in other material types. This distinction differentiates ourselves from many of our competitors.

I'll now turn it over to Mike King to discuss Graham Packaging results.

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Michael King, Graham Packaging Company Inc. - President & CEO [5]

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Thank you, John. In Q2, our revenue decreased by 8% to $499 million, which is down $42 million from $5.41 in the prior Q. These decreases are primarily driven by lower sales volumes, some of which is linked to the self-manufacturer with one large customer, and the balance is really linked to ongoing market dynamics and some pricing and lower resin costs.

LTM revenue decreased by 5% to $2,021,000,000 or down $102 million Q-versus-Q -- or LTM-versus-LTM, and that's primarily driven by the same causal as given on the Q, primarily volume, lower resin cost and some customer pricing.

Jumping over to EBITDA. Adjusted EBITDA was flat at $95 million Q2 2019 versus Q2 of 2018. And accounting for IFRS 16 changes, that drops our Q-over-Q EBITDA to $87 million or down 8%. These decreases are primarily driven by lower sales volumes, as mentioned earlier, higher operational costs linked to inflation, and this was partially offset by lower raw material costs.

Our last 12 months adjusted EBITDA decreased by 9% to $347 million. If you exclude the impact change of the lease accounting, our EBITDA would have decreased by 14% or $16 million less to $331 million.

With that, I'm going to turn it over to John Rooney, CEO of Evergreen Packaging.

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John Rooney, Reynolds Group Holdings Limited - CEO of Graham Packaging Business and Graham Packaging, Evergreen & Closures [6]

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Thanks, Mike. Evergreen's revenue decreased by 2% to $389 million in the quarter. The decrease was primarily driven by lower sales volume in paper and external board sales partially offset by higher sales volume in every other revenue stream. Our LTM revenue increased by 1% to $1.6 billion.

For EBITDA, excluding the impact of the lease accounting change, our EBITDA decreased 19% or $12 million in the quarter. Of the $12 million unfavorable, $13 million was unfavorable Pine Bluff Mill operational performance and $12 million was unfavorable wood cost. This was partially offset by favorable operational performance in other areas, including our Canton mill, our second of 2 mills, logistics and also partially offset by favorable pricing.

Three things have been severely hurting Evergreen's earnings. Of those 3 things, the first 2 has shown repeated numeric improvement and the third has not. Of the 3 things, the first is operational performance of our Canton mill, 1 of our 2 paper mills. The Canton mill has had 8 consecutive months of improvement and year-to-date 2019 is better than year-to-date 2018.

The second of 3 things is wood cost. While still above norm in pricing, wood cost have begun to come down and have come down each of the last 6 months and should continue to come down to normalized market pricing moderated by any unusual future wet weather and (inaudible)

So 2 of the main things that have been hurting us have shown consecutive improvement 8 months and 6 months. The third and final thing is the operational performance at our Pine Bluff mill and has not improved. All of our discretionary efforts are now focused on improving our operational performance at our Pine Bluff mill.

With that, I turn it over to Floyd.

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Floyd E. Needham, Reynolds Group Holdings Limited - CEO of Closures [7]

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Thank you, John. Our second quarter 2019 revenue decreased $34 million or 14%, of which, $3 million or 1% was due to the strategic business exit in Germany. Excluding the divested business, revenue decreased $31 million or 13%, $18 million due to lower volume with $4 million of that being the South American plant closures and $11 million due to pricing and $2 million due to foreign currency impact.

Last 12 months revenue decreased by 11% or $103 million, of which $55 million or 6% was due to the strategic business exits in Asia and Germany. Excluding the divested business, revenue decreased $48 million or 5%. $43 million due to lower volumes with $9 million of that being the South American plant, $7 million due to foreign currency impact and $6 million due to pricing.

Now on to EBITDA. Second quarter 2019 EBITDA was up $2 million or 6% due to change in lease accounting. Net of the lease accounting changes, our EBITDA for the second quarter was flat year-over-year. Spend controls and material operations SG&A added $5 million offset by volume and lower pricing of $6 million and $2 million.

Last 12 months EBITDA decreased by $12 million or 9%. Net of the strategic business exit and lease impact, EBITDA decreased by $8 million or 7%. Sales volume was unfavorable by $9 million, lower pricing contributed a negative $8 million and unfavorable foreign currency contributed an impact of $1 million. Once again, these were mitigated by lower SG&A of $4 million, lower net materials of $4 million and favorability from the 2018 legal settlement of $2 million.

And with that, I'll hand it to Allen Hugli.

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Allen Philip Hugli, Reynolds Group Holdings Limited - CFO [8]

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Thanks, Floyd. So in summary, revenue for the group for the quarter was approximately $2.65 billion, down 3% from the same period last year. This was primarily due to lower volume, changes in FX rate and the divestiture of some operations.

Year-to-date revenue is $5.1 billion or down 2%. On an LTM basis, revenue was approximately $10.5 billion. Adjusted EBITDA for the quarter was $521 million, up 7% on Q2 last year.

As discussed here in our Q1 call, the group adopted IFRS 16, the new lease accounting standard on January 1. Under IFRS, a significant portion of what was previously recognized in the P&L as lease expense is now [reauthorized] as depreciation and interest. Therefore, as a result of adopting the new standard, the group's EBITDA has increased. This difference from U.S. GAAP or [EBITDAC] does not change. The impact is $25 million for the quarter and $49 million year-to-date. We expect it to be approximately $100 million for the full year.

Therefore, on a like-for-like basis, EBITDA for the quarter was up 2%. We reported pro forma adjusted EBITDA for the LTM period of $1.966 billion. A full reconciliation is attached as an appendix to this presentation.

Capital expenditure for the quarter, at $162 million, was up $18 million same period last year. This increase is primarily due to work on new projects. We are focused on reducing our cost base and meeting customer requirements. I expect that the full year expenditure will be approximately $675 million.

I will now hand it back to Tom.

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Thomas James Degnan, Reynolds Group Holdings Limited - CEO & Director [9]

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Okay, Jerry. We can take some questions now.

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Questions and Answers

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Operator [1]

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Operator Instructions) The first question is from Mr. Sam McGovern, Credit Suisse.

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Samuel Thomas McGovern, Crédit Suisse AG, Research Division - Research Analyst [2]

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I know we've discussed it ad nauseam in past calls. But with regard to plastic packaging and consumer preference and regulatory encouragement on that, obviously, the results today were quite good in the face of that. Can you talk about what you've seen so far? We're still sort of early days, but we're at least at sort of the year advance versus the -- when we first started discussing it.

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Thomas James Degnan, Reynolds Group Holdings Limited - CEO & Director [3]

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Sure, Sean (sic) [Sam]. I think what we've seen is not much. I think there's talk, and there are organizations dealing with setting up sustainability people. John, in our Pactiv business, is going to be hiring very shortly a Vice President of Sustainability, so we're ramping up our efforts across the board. And our goal really is to be prepared with alternative products when the market demands it. But if you guys can jump in, if you've got anything specific where you've had to deal with this, just go right ahead.

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John T. McGrath, Reynolds Group Holdings Limited - CEO of Pactiv Foodservice [4]

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Yes. I'll start. This is John McGrath. So, I guess, there's really 2 areas that I look at. One is where different products are being banned by legislation. So where a city or a municipality or even a state for that matter has elected to be ban a particular material type, we've been able to replace our sales with alternate material types. As I mentioned, we do make our products out of 13 different basic materials and have the ability to make those materials into a variety of shapes and sizes. So where products are banned, we definitely have alternatives. Where consumers just want to buy materials and products that are more "environmentally friendly," we will offer those to them. In most cases, the environmentally friendly alternative does come at a price premium. However, we are seeing consumers that are -- and a variety of our accounts that are willing to pay a little bit more for that product. So, I guess, from the package standpoint, we feel pretty good not only with our existing portfolio but with the 5 new product launches that we're talking about that will really round out our EarthChoice product offering.

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Samuel Thomas McGovern, Crédit Suisse AG, Research Division - Research Analyst [5]

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Great. And then also, with regard to the capital structure. Your 2020 notes become current in Q4. Have you guys given any additional thoughts to potentially reentering the market with the refinancing?

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Allen Philip Hugli, Reynolds Group Holdings Limited - CFO [6]

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So the question, we've given an awful lot thought to it, but we're not in a position -- we've not made a decision yet, and we're really not in a position to say much more at this point in time.

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Operator [7]

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The next question is from Karl Blunden, Goldman Sachs.

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Travis Edwards, Goldman Sachs Group Inc., Research Division - Research Analyst [8]

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This is Travis on for Karl. A few segment level questions. You talked about some new business awards and new sustainable product lines in your Pactiv segment that will materialize throughout the year. I was just wondering if there's any sort of cadence to when those might benefit results? Are they material enough to provide like an irregular boost to earnings that we should be aware of?

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John T. McGrath, Reynolds Group Holdings Limited - CEO of Pactiv Foodservice [9]

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Yes, this is John again. We'll begin to see the sales materialize in Q3 in 2 out of the 5 product offerings, but the rest will not materialize until Q1 2020. But we feel pretty good that these are going to be significant contributors to our overall volume picture, especially in relation to our other EarthChoice sustainable product offerings.

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Travis Edwards, Goldman Sachs Group Inc., Research Division - Research Analyst [10]

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Got it. And then maybe moving over to Reynolds Consumer Products. Last quarter, you made some commentary about volume recovery maybe with the help of some lower prices on a few of your key products. Looking forward, when do you see that inflection point taking place? Or rather, how should we be thinking about volume recovery in that segment?

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Thomas James Degnan, Reynolds Group Holdings Limited - CEO & Director [11]

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Yes, I think I commented about this in my opening statement. We have seen -- we had a 13% improvement in Reynolds Wrap in the quarter versus prior year. It was masked by the fact that we had some lower volume and some low-margin product that we intentionally exited and some sales that we do to third parties from excess melting capacity. But our recovery is very solid across our core business.

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Operator [12]

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The next question is from Robert (sic) [Roger] Spitz, Bank of America.

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Roger Neil Spitz, BofA Merrill Lynch, Research Division - Director and High Yield Research Analyst [13]

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Can you give us an update on the so-called cumulative credit under the restricted payments basket as of June 2019, please?

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Allen Philip Hugli, Reynolds Group Holdings Limited - CFO [14]

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Sure. It's just over $2.5 billion, $2.54 billion.

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Roger Neil Spitz, BofA Merrill Lynch, Research Division - Director and High Yield Research Analyst [15]

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And for each of the segments that this is relevant, I'm trying to think of how much is plastic sales versus nonplastic sales. If I look through your annual report, you basically have splits on cost of sales. Is that a good proxy? For instance, consumer products, it looks like it's 65% plastics; Pactiv, 73%; I guess, Graham is 100%. And I'm not sure on Closures, the annual reports says a majority. I don't know if that means greater than 90%. How might we think about that for those segments?

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Thomas James Degnan, Reynolds Group Holdings Limited - CEO & Director [16]

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Do you guys want to each comment?

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John T. McGrath, Reynolds Group Holdings Limited - CEO of Pactiv Foodservice [17]

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I'd say for -- at this point in time, for Pactiv, we're probably at -- it's below 73%. We're probably somewhere between 65% and 70%, and we continue to see a gradual shift from plastic to paper in a lot of our product lines. But again, I think, as we look at the sustainable products we're going to be offering, those are going to be, in some cases, plastic materials but different type of plastics that have a better environmental profile from a recycling and a composting standpoint. So I would say, over the long haul, you could say Pactiv should be, call it, 65% to 70% plastic.

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Roger Neil Spitz, BofA Merrill Lynch, Research Division - Director and High Yield Research Analyst [18]

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Great.

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Thomas James Degnan, Reynolds Group Holdings Limited - CEO & Director [19]

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Lance?

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Lance Mitchell, Reynolds Group Holdings Limited - CEO of Reynolds Consumer Products [20]

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For Reynolds Consumer Products I don't have the number right in front of me. I would say, it's approximately 50% plastic. And similar to what John talked about, you have to break this out into different kinds of plastics. You can't talk about it in one generic sense. And so as we have done the same thing in our product line where we're offering alternatives, including recycled content products.

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Roger Neil Spitz, BofA Merrill Lynch, Research Division - Director and High Yield Research Analyst [21]

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Got it. And Closures, would it -- Floyd, is that a -- what is that like?

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Floyd E. Needham, Reynolds Group Holdings Limited - CEO of Closures [22]

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Yes. We are at approximately 95-plus percent plastic. And as the other gentlemen said, the efforts around sustainability are in post-consumer recycled plastic materials within our division.

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Operator [23]

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We have a question from Richard Kus of Jefferies.

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Richard E. Kus, Jefferies LLC, Fixed Income Research - Analyst [24]

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So first question for me, can you talk a little bit more about what's going on at that Pine Bluff mill in the Evergreen business? What's actually happening there and what's the time frame for improvement?

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John Rooney, Reynolds Group Holdings Limited - CEO of Graham Packaging Business and Graham Packaging, Evergreen & Closures [25]

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Yes. I got it. So at the Pine Bluff mill, our operational performance is worse than prior year, worse than planned. More specifically, the symptom is lower throughput per scheduled hour and higher scrap per scheduled hour. So I'm not getting cute about it, but at the end of the day, it's lower scheduled throughput per hour and higher scrap per hour. We're not adversely affecting customer orders, just our costs are up. In it, the fundamental root causes go back to, over a 3- or 4-year period, losing an inordinate amount of technical skills, both in the hourly ranks and the leadership ranks. And on top of that, a need for improved reliability in the mill. So we had similar problems at both mills, and they are a difference of degree not a difference of kind. And in the Canton mill, which just had 8 consecutive months of improvement. The plan actually finally put in place there, it's very similar to Pine Bluff, but the Pine Bluff plan necessarily runs deeper because, again, it's a difference of degree, and a greater degree of difficulty in Pine Bluff. Likewise, you also started both plans, Canton and Pine Bluff, simultaneously, but we had more effort skewed initially towards Canton. And hence, we are moving more -- have seen results sooner. And now all discretionary effort is focused on Pine Bluff. But it gets down to people, process systems and equipment reliability. And that's where all of our effort is in the Pine Bluff mill. There's leading indicators of improvement, but they're just purely leading indicators. Numerically, they have not begun to turn the corner yet, and I'm not going to place a forecast on when we do, but all the fundamentals that we're putting in place are the right things. And again, initial leading indicators are starting to show positives, but the hardcore results have not been delivered yet.

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Richard E. Kus, Jefferies LLC, Fixed Income Research - Analyst [26]

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Got it. Okay. And then in the Closures business, we know you're going through a strategic review there. Can you talk a little bit about how some of these regulations, both here and in Europe, and maybe the pressure that you're seeing on plastic bottle usage broadly is impacting that review?

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Floyd E. Needham, Reynolds Group Holdings Limited - CEO of Closures [27]

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Tom, would you like me to comment on that?

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Thomas James Degnan, Reynolds Group Holdings Limited - CEO & Director [28]

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Yes. Floyd. Yes, sorry. Yes.

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Floyd E. Needham, Reynolds Group Holdings Limited - CEO of Closures [29]

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Yes. And so, obviously, during the review, it is a topic that is discussed with everyone interested. Everyone's very keen and aware of the dynamics in the market. So we end up going into a lot of detail about alternative projects with customers around post-consumer recycling, the tethered closure legislation in Europe and what are we doing to partner with our key customers to be their strategic ally as they move in the market. Predominantly, everyone is educated, and they understand that the market is going to evolve. And we're making sure that we're the leading partner with that.

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Operator [30]

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We have a question from Nathan Schubert, JPMorgan.

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Nathan Edward Schubert, JP Morgan Chase & Co, Research Division - Senior Analyst [31]

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So my first question is just following up on Richard's question there. Can you give us an update in terms of where you're at with divestitures and the strategic review? How much are you looking to bring in? And what's the timeline there?

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Thomas James Degnan, Reynolds Group Holdings Limited - CEO & Director [32]

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So I guess, what I'd say is that we commented on the one that we're -- got in process, which is the Closures. We're really not looking at any sort of other M&A activity in terms of acquisitions at this point. And so I really don't have anything else to say about it.

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Nathan Edward Schubert, JP Morgan Chase & Co, Research Division - Senior Analyst [33]

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Okay. All right. And then on the refinancing, we've seen several levered paper and packaging issuers come to market this year, and they've gotten pretty favorable, I think, interest on their offerings. What's the holdup? Why haven't you guys approached the market?

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Allen Philip Hugli, Reynolds Group Holdings Limited - CFO [34]

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We're still working through the options, what's going to happen with CSI, for instance. How much cash are we generating, both the CapEx profile, so it's not completely straightforward. We take your point, and we're spending a lot of time on it right now.

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Operator [35]

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You we have a question from Mack Fuller, GSO Capital Partners.

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Mack Fuller, The Blackstone Group Inc. - Principal of GSO [36]

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This is Mack Fuller. For Pactiv, you've talked about this in a couple of other questions. But just curious, specifically with what products or materials are you guys seeing de-selected? And it sounds like it's a small part of your mix, but if you could quantify that, that would be helpful.

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John T. McGrath, Reynolds Group Holdings Limited - CEO of Pactiv Foodservice [37]

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Yes. I guess, if I would just overly generalize, polystyrene is probably the one material that, more often than not, it gets mentioned when there's either a ban or concern over plastics in the environment. So obviously, polystyrene is a very cost-effective material. It's been around for many, many, many years. It's still a very good material from a strength-to-weight standpoint and obviously from a functionality and cost standpoint. But as that material gets to de-selected, as I had indicated before, there are several other materials that we can make the same exact types of products out of that would have what would be perceived as a better environmental profile. But I'd say, again, polystyrene would probably be the one material that's more often than not called out as far as being a nuisance to the environment.

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Mack Fuller, The Blackstone Group Inc. - Principal of GSO [38]

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And how much of your mix is polystyrene? And when it is de-selected, do you find yourself generally getting -- winning the alternative? Or is it going to a competitor?

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John T. McGrath, Reynolds Group Holdings Limited - CEO of Pactiv Foodservice [39]

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Yes. So polystyrene probably represents, give or take, if I look at solid sheet polystyrene, oriented polystyrene and foam polystyrene, so there's a lot of polystyrenes in there, and if I look at the ones particularly that are being banned or selected -- or deselected, I should say, it's probably around 25% to 30%. And, yes, in those cases, we are coming right behind. If a polystyrene foam ban is enacted, we have 3 or 4 different alternatives at different price points for the exact same product. And typically, we maintain the business in those situations.

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Mack Fuller, The Blackstone Group Inc. - Principal of GSO [40]

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Got you. And then for Graham, I think you've mentioned this in the past, but can you just refresh us when the self -- the customer that went to self-manufacture, when that impact lapsed? And are there any more customers with -- that you can see going in that direction in the near term?

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Thomas James Degnan, Reynolds Group Holdings Limited - CEO & Director [41]

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So Mike, I don't think we've named that customer, and I don't think we should.

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Michael King, Graham Packaging Company Inc. - President & CEO [42]

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No. Yes, I'd just leave it as, it was a very insignificant beverage customer of ours.

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Thomas James Degnan, Reynolds Group Holdings Limited - CEO & Director [43]

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Yes. And so we'll lapse that in Q4, the end of this year is when we expect the year-over-year variance to fall off. And we don't have anything forecasted that says that we have other large-scale customers or even small-scale customers that intend to do the same.

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Mack Fuller, The Blackstone Group Inc. - Principal of GSO [44]

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Got that. Got you. And then my final question, in terms of raw material costs and your price outlook, granted things can move around over the next couple of quarters, but from what you're seeing today, do you expect sort of an overall benefit as you experienced in 2Q from a pricing cost -- from an input cost standpoint?

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Thomas James Degnan, Reynolds Group Holdings Limited - CEO & Director [45]

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Yes. If I interpret your question -- if I -- you're talking about Graham Packaging or are you talking...

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Mack Fuller, The Blackstone Group Inc. - Principal of GSO [46]

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Well, I guess, for each (inaudible) segment. But it seems like, generally, it was positive. Evergreen has paper, even that's moving in the right direction. Just curious if, on the resin side specifically, I guess, if you see that.

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John Rooney, Reynolds Group Holdings Limited - CEO of Graham Packaging Business and Graham Packaging, Evergreen & Closures [47]

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This is John. For Evergreen, in terms of input costs, we don't see anything unusual on the horizon. The wildcard has been wood. It's the big one for us. But again, it's come down each of the last 6 months, albeit still quite a bit higher than we would consider normal market cost, but it does continue to come down. In every other area, we don't see anything unusual on the horizon.

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John T. McGrath, Reynolds Group Holdings Limited - CEO of Pactiv Foodservice [48]

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From Pactiv's standpoint, we look at polystyrene, polypropylene and PET as 3 of our larger materials from a usage standpoint. We would envision all 3 of those being somewhat flat between now and the end of the year. However, we're right in the midst of hurricane season. And if there would be any disruption or any activity in the Gulf Coast where a lot of the refineries are, then perhaps, you would see some movement in raw materials. But right now, we have in our forecast that raw materials look flattish.

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Lance Mitchell, Reynolds Group Holdings Limited - CEO of Reynolds Consumer Products [49]

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For Reynolds Consumer Products, our 2 main inputs are aluminum and polyethylene, and both of those are stable at this point. As John indicated, there are potential disruptions with hurricanes and other world events. But what we're looking for, for the foreseeable future is a stable environment.

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Mack Fuller, The Blackstone Group Inc. - Principal of GSO [50]

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And then for -- Yes, go ahead, Mike.

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Michael King, Graham Packaging Company Inc. - President & CEO [51]

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Yes. At Grant Packaging, we're in the same boat. So stable material environment. I would expect much the same in terms of our ability to achieve our cost targets.

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Floyd E. Needham, Reynolds Group Holdings Limited - CEO of Closures [52]

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And then for Closures, we've had very minor impact in the second quarter. We expect flat the rest of the year outside of acts of God, which the other gentlemen have mentioned.

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Operator [53]

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We have a question from James Yoon, Citi.

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James Yoon, Citigroup Inc, Research Division - High Yield and Leveraged Loans Research Associate [54]

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So just kind of following on from the last question, it looks like Pactiv had a pretty favorable raw material benefit. I just want to confirm if you guys expect that -- if we should expect that to continue going forward or if it's a 1 quarter thing just given your outlook.

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John T. McGrath, Reynolds Group Holdings Limited - CEO of Pactiv Foodservice [55]

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I'd say most of the benefit that we got in Q4 actually was either resin that we had bought in prior periods or finished goods that have flowed through our inventory system and got into the market and favorably impacted our P&L. We should see a little bit more favorability, not much in Q3, and then we'd expect it to be flat in Q4.

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James Yoon, Citigroup Inc, Research Division - High Yield and Leveraged Loans Research Associate [56]

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Got it. And then on the operational efficiencies in Evergreen. Just curious what the bridge was for the current quarter. And I know you guys showing -- or said you guys are seeing some improvement. Just kind of wondering how we should think about that improvement in the coming quarters.

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Thomas James Degnan, Reynolds Group Holdings Limited - CEO & Director [57]

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John?

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John Rooney, Reynolds Group Holdings Limited - CEO of Graham Packaging Business and Graham Packaging, Evergreen & Closures [58]

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Yes. I'm thinking how to answer the question. Improvement in coming quarters.

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Thomas James Degnan, Reynolds Group Holdings Limited - CEO & Director [59]

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Let me take a shot. So what John said in his discussion about Evergreen was that the vast majority of the [expense] people-wise, et cetera, went to the Canton mill, and we've now seen those looking like they've turned the mill around and it's performing pretty well. While that was going on, not much was happening at Pine Bluff, and now Pine Bluff, very recently, has all of the efforts, including all key people in Pine Bluff, Arkansas every week. So all we can really say is the expectation is that things are going to improve. John has replaced almost all of the vacancies that occurred in the last 1.5 years on both the hourly and management levels through retirement and things like that. And so his staffing is full and he's got his key people there. Expectation is going to get better. But I don't think either John or I could venture a guess as to when we'll see that happen. It will happen as fast as he can get it done because that's his biggest job.

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James Yoon, Citigroup Inc, Research Division - High Yield and Leveraged Loans Research Associate [60]

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Got it. That's helpful. Do you guys have an estimate on the year-over-year impact caused by the operational inefficiencies?

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Thomas James Degnan, Reynolds Group Holdings Limited - CEO & Director [61]

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John?

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John Rooney, Reynolds Group Holdings Limited - CEO of Graham Packaging Business and Graham Packaging, Evergreen & Closures [62]

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Yes. I can tell you, just Q-to-Q, I'll just repeat, operational performance of Pine Bluff mill Q-to-Q was $13 million worse than prior period. And then year-to-date, Canton is $6 million better than on a year-to-year, year-to-date basis. So continued opportunity for continued improvement in Canton, that's the beginning of it, but we expect it to continue such that the improvement amount grows as we go forward. In the Pine Bluff, as Tom already said, we'll fixing on flipping that the other way.

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James Yoon, Citigroup Inc, Research Division - High Yield and Leveraged Loans Research Associate [63]

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Got it. That's helpful. And then you guys highlighted some footprint rationalizations at Graham Packaging, announcing 3 facility closures. Just kind of wondering that kind of the timing of when we should see that benefit? How much cost savings we should expect and just the cost to maybe achieve the rationalizations?

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Thomas James Degnan, Reynolds Group Holdings Limited - CEO & Director [64]

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So why don't I answer this, Mike. That's what I was referring to in my opening comments that I thought the second half would be improved. It's going to be -- the size of that improvement is going to be driven completely by how well and how quickly we can finish our plant rationalization plan. So there's a few more plants that need to get done. We're working on achieving those as quickly as we can. My expectation is that the second half that Graham Packaging's improvement will be all around how quickly we achieve those. But again, I don't have a crystal ball. So I can't tell you we're going to make $10 million more in the third quarter and $10 million more in the fourth. I don't know those numbers.

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James Yoon, Citigroup Inc, Research Division - High Yield and Leveraged Loans Research Associate [65]

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Got it. Understood. Do you have like a -- once you hit that run rate, is there kind of an annual expectation that you guys expect to achieve?

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Thomas James Degnan, Reynolds Group Holdings Limited - CEO & Director [66]

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Mike, I don't remember you and I talking about an annual number.

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Michael King, Graham Packaging Company Inc. - President & CEO [67]

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Yes. I have it, if you want me to share, roughly, and it's really a range. So it's between $15 million and $20 million.

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Thomas James Degnan, Reynolds Group Holdings Limited - CEO & Director [68]

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Yes. And the other part of that is other things will pop up that will offset some of that. So it's not like, okay, we're done, look for graham Packaging to be $20 million better in the next 12 months.

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James Yoon, Citigroup Inc, Research Division - High Yield and Leveraged Loans Research Associate [69]

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Yes. Yes. Understood. And that's just based off of what you guys have announced today, right?

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Thomas James Degnan, Reynolds Group Holdings Limited - CEO & Director [70]

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Yes.

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James Yoon, Citigroup Inc, Research Division - High Yield and Leveraged Loans Research Associate [71]

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All right. That's helpful. I'll turn it over now.

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Thomas James Degnan, Reynolds Group Holdings Limited - CEO & Director [72]

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No. That's based on what also is going to happen in the second half but which [now] is announced, I don't believe. Is that right, Mike?

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Michael King, Graham Packaging Company Inc. - President & CEO [73]

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Correct. So it's a range. It's a range. Yes.

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James Yoon, Citigroup Inc, Research Division - High Yield and Leveraged Loans Research Associate [74]

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Got it. So it's the 3 facility closures that you guys announced, plus maybe some other stuff that you guys are working on in the background.

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Michael King, Graham Packaging Company Inc. - President & CEO [75]

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Right.

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Thomas James Degnan, Reynolds Group Holdings Limited - CEO & Director [76]

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Correct.

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Operator [77]

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Operator Instructions) We have a follow on question from Roger Spitz, Bank of America.

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Roger Neil Spitz, BofA Merrill Lynch, Research Division - Director and High Yield Research Analyst [78]

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Impact of the polystyrene types being banned, John, you mentioned 25% to 30%. I wasn't sure was that referring to the percent of polystyrene being banned to the total polystyrene products you have or to the total resin, all resin products you have?

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John T. McGrath, Reynolds Group Holdings Limited - CEO of Pactiv Foodservice [79]

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That would be for the total resin products that we have. So again, we're not seeing, in all cases, sheet polystyrene or oriented polystyrene coming under attack. It's mainly our foam polystyrene. So really these would be carry-out containers that are used in restaurants and disposable plates that are used in feeding operations. Other containers and things like lids and other types of cups are not routinely coming under these bans. It's mainly the polystyrene foam. And again, it's the foodservice disposables not the packed polystyrene foam that's used to package protein, for instance, in a supermarket. That is not coming under attack.

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Roger Neil Spitz, BofA Merrill Lynch, Research Division - Director and High Yield Research Analyst [80]

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Got it. And you're saying that those -- I call them, crystal, the crystal polystyrene that -- or solid polystyrene that -- for the takeout food, the clamshell, that's not -- or things like that, that's not under pressure as far as you are seeing or demand not going down on that?

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Thomas James Degnan, Reynolds Group Holdings Limited - CEO & Director [81]

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So oriented polystyrene would be like clear containers that you would see, typically salads and prepared foods packaged in, we're not seeing that come under attack. However, there are many customers that are opting to go with a recycled PET container, which is also a clear container, that has a high percent of recycled content in it. And again, those are customers that are making that selection, typically at a higher price.

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Roger Neil Spitz, BofA Merrill Lynch, Research Division - Director and High Yield Research Analyst [82]

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Got it. And then, I'm not sure I -- I'll listen to the replay, if you already gave it, but I wasn't sure I heard the actual year-over-year for Q2 volume percentage changes by segments. Like in Consumer Products, Lance, I think volumes were lower, but I wasn't sure I heard how much lower and same with Pactiv, et cetera. Would it be possible if you haven't given that to go through that?

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John T. McGrath, Reynolds Group Holdings Limited - CEO of Pactiv Foodservice [83]

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Sure. Pactiv was up 1% for the quarter, and it's up 1% overall year-to-date, and that's including everything, all-in.

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Lance Mitchell, Reynolds Group Holdings Limited - CEO of Reynolds Consumer Products [84]

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Yes. For Reynolds Consumer Products, our total volume measured on pounds basis is 3%. But as I indicated, that's in noncore businesses products.

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Michael King, Graham Packaging Company Inc. - President & CEO [85]

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At Graham Packaging, on a pounds sold basis, we're down 4.4%.

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John Rooney, Reynolds Group Holdings Limited - CEO of Graham Packaging Business and Graham Packaging, Evergreen & Closures [86]

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At Evergreen Packaging, on a revenue dollar basis, were up 1% LTM. And given the varied nature of our revenue streams and product lines, I can't do it and won't do it by pound and things like that.

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Floyd E. Needham, Reynolds Group Holdings Limited - CEO of Closures [87]

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And for CSI, our unit volume is 8% decline.

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Operator [88]

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There are no further questions at this time. I'd like to turn the floor back over to Tom Degnan for closing comments. Please go ahead, sir.

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Thomas James Degnan, Reynolds Group Holdings Limited - CEO & Director [89]

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Okay. Well, thank you, Jerry, and thank you, everybody, for calling in. And I look forward to having a conversation with you again in about 3 months. Bye.

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Operator [90]

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This concludes today's teleconference. You may disconnect your phones at this time. Thank you for your participation, and have a good day.