Reynolds Consumer Products Inc. (NASDAQ:REYN) Q4 2023 Earnings Call Transcript
Reynolds Consumer Products Inc. (NASDAQ:REYN) Q4 2023 Earnings Call Transcript February 7, 2024
Reynolds Consumer Products Inc. beats earnings expectations. Reported EPS is $0.652, expectations were $0.62. Reynolds Consumer Products Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Greetings and welcome to the Reynolds Consumer Products, Inc. Fourth Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It's now my pleasure to introduce your host, Mark Swartzberg, Vice President of Investor Relations. Thank you, sir. You may begin.
Mark Swartzberg: Thank you, operator. Good morning, everyone, and thank you for joining us on Reynolds Consumer Products fourth quarter and fiscal year 2023 earnings conference call. Please note that this call is being recorded and webcast on the Investor Relations section of our corporate website at reynoldsconsumerproducts.com. Our earnings press release and accompanying presentation slides are also available. With me on the call today are, Lance Mitchell, our President and Chief Executive Officer; and Scott Huckins, our Chief Financial Officer. Lance will review our accomplishments in 2023, our priorities for 2024, and our commercial performance by business, followed by Scott, who will review our results, our guide, and our capital allocation priorities.
Following prepared remarks, we will open the call for your questions. Before we begin, I would like to provide a couple of reminders. First, this morning's discussion may contain forward-looking statements based on current expectations and beliefs. These statements are subject to risks, uncertainties, and changes in circumstances that could cause actual results and outcomes to differ materially from those described today. Please refer to our Risk Factors section in our SEC filings, including in our Annual Report on Form 10-K, and our quarterly reports on Form 10-Q. Please note that the Company does not intend to update or alter these forward-looking statements to reflect events or circumstances arising after the call. Second, during today's call, we will refer to certain non-GAAP or adjusted financial measures.
Reconciliations of these GAAP to non-GAAP financial measures are available in our earnings press release, investor presentation deck, and Form 10-K, copies of which can be found on the Investor Relations section of our website. Now, I'd like to turn the call over to Lance.
Lance Mitchell: Thank you, Mark, and good morning, everyone. I'm extremely proud of all that our team accomplished in 2023. We finished very strong in our most important quarter, record profit, significant margin expansion, and record cash flow in Q4. Throughout 2023, we grew share in our largest categories, including household foil and waste bags. We exceeded our target of 20% of sales from products launched in the past three years. We've restored operational stability and returned the Reynolds Cooking business to historical earnings. Our execution across the Company was strong, each of our businesses delivering double-digit profit growth. We outperformed our earnings guidance, growing adjusted EBITDA and EPS double-digits.
And we increased financial flexibility, reducing leverage to less than three times adjusted EBITDA at year-end. As strong as our Company is, volume is under pressure across consumer staples. Unemployment rates are relatively low, and inflation is moderating. However, household savings are down, credit card debt is at record highs, and wages have not kept pace with food and energy inflation. Consumers continue to contend with challenging economic pressures. As a result, our categories' volumes were down 4% in 2023. Household formation and other drivers of long-term growth that drive category consumption are being more than offset by reduced consumer spending. But what does that mean for RCP? First, this means our integrated national brand and store brand business model remains a competitive advantage.
Secondly, that our entire organization is focused on driving volume at or above the category growth, expanding margins, and maintaining discipline on costs. In 2024, we will invest in impactful advertising and actively manage price, pack sizes, and promotions to meet our retailer-partner and consumers' needs for the right combination of volume and performance. We will continue to innovate with new sustainable solutions and other new products to further differentiate our offerings and our categories to protect and grow our share. We will continue to optimize our retail product portfolio to drive improved profitability. And we will drive productivity and other Reyvolution cost savings across our business, providing additional margin growth. I will now review our performance and outlook by business.
The Reynolds Cooking & Baking team has executed consistently on the recovery plan we introduced to you a year ago. I'm pleased to report that operational stability has been restored. We've achieved historical levels of earnings. Reynolds Wrap gained three points of share in 2023 and new product innovations are expanding distribution and driving growth. I'm very proud of the Reynolds Cooking & Baking team and how the broader organization rallied behind the recovery plan. And I'm equally pleased with our plan to continue investing in our categories to drive volume and margin in 2024. Reynolds recently surpassed the $1 billion mark at retail. We plan to build on that momentum by adapting and executing proven features, displays, and promotions to meet consumers' needs for value, making additional modifications to price and pack combination across channels, and continuing to monitor and make refinements to pricing, evaluating price gaps, and thresholds by channel.
We plan to drive additional volume from expanded distribution of new products in addition to increasing distribution of more established high-velocity products. We'll continue to recruit millennials and Gen Z consumers to our products and categories. We recently launched the Reynolds Chef's Kiss Advertising Campaign nationally across digital and traditional media outlets. Chef's Kiss targets young adults who want to cook more but lack the experience in the kitchen, demonstrating how Reynolds' products make meal prep, cooking, and cleanup easier and better. And we plan to drive additional margin through ongoing work to optimize our retail product portfolio, and the implementation of new Reyvolution cost savings programs. Our Hefty and Presto waste bag and storage businesses both achieved strong recovery of earnings in 2023.
Hefty gained share of waste bags at an increasing rate as the year progressed, delivering nearly a point of share growth in the third and fourth quarter. We expanded and launched high-impact product innovations, including Hefty Fabuloso, which continues to grow and it closed a $160 million in annual retail sales for the year. And numerous other projects including Hefty Ultra Strong made with 50% post-consumer recovered materials, and Hefty press to close food bags. We continue to lead the store brand food segment with strong product innovation, including bio-based sandwich bags, made with 20% plant and ocean materials. And in store brand waste bags, we partnered with our retail partners to launch new sizes and new scents. We increased profitability through ongoing work to optimize our retail product portfolio in both businesses.
And we invested in advertising and trade support for our retail product portfolio. Our plans for driving volume and expanding waste and storage margins in 2024 include, continued investment in advertising and trade to protect and drive brand share, further distribution gains for Hefty Fabuloso as existing scents require additional shelf space and new scents are added, launch and expansion of other new products including Hefty press to close food bags, Hefty compostable press to close food bags and Hefty recovered bags made with coastal collected plastics, new and expanded distribution of store brand stretches more waste bags, slider, and half gallon food bags, and compostable sandwich bags. Continued optimization of our Hefty and store brand product portfolios and additional Reyvolution cost savings in both businesses.
Turning now to our disposable tableware segment. We've been very effective restoring tableware profitability. During our Q3 earnings release, I provided an update on the volume softness we were experiencing in certain tableware categories. And while we had a plan, I said it would take multiple quarters to see sustained improvement. I'm encouraged by the moderation of declines in the fourth quarter, and I'm confident that the plans we're implementing will drive further improvements in 2024 and over the long-term. As we noted in our earnings release, improved holiday-related features, displays, and promotions were effective in offsetting continued elasticity pressure in the fourth quarter. And we increased the advertising of Hefty party cups and disposable dishes, reminding consumers we'll do the dishes.
And we're modifying trade plans to manage price points to key thresholds on certain packs and select channels. We're introducing new multi-packs of cups and plates at lower opening price points. We are expanding distribution of select high-velocity products, and we are introducing and expanding distribution of sustainable solutions and other new products, including Hefty Zoopals, Hefty ECOSAVE, molded fiber plates and cutlery, Hefty compostable printed paper plates, and new cups and plates with designs and colors to help celebrate and entertain during important holiday periods. I will close by reiterating that we've been very effective supporting our categories and driving share growth, while increasing earnings and financial flexibility in a challenging macroeconomic environment.
Our team is implementing proven and comprehensive programs to deliver an even stronger 2024 and sustained growth into the future. Before I turn the call over to Scott, I'd like to close by highlighting that we've been very successful completing our well-planned CFO transition. Scott has come up to speed quickly, and our finance team has clear priorities to support our plans for 2024 and beyond. Scott, over to you.
Scott Huckins: Thank you, Lance. Good morning, everyone. Before we dive in, I'd like to offer a few observations about Reynolds from my first 100 days. First, the Reynolds business is a very durable, sustainable earnings platform from which to build upon. Second, our integrated national and store brand offerings provide a strong source of competitive advantage. Third, we have runway to deliver earnings growth from the existing business portfolio over time. Fourth, I've been fortunate to have had a very thorough and thoughtful onboarding process, allowing me to get up to speed quickly. And fifth, I found the leadership team to be very talented, collaborative, and supportive. As a result, I'm very pleased to be at Reynolds and I look forward to working with all of you in the quarters and years to come.
Now, turning to our results. As Lance said, we accomplished a lot in 2023 in a challenging macro environment; increasing share in our largest categories, including household foil and waste bags; outperforming our earnings guidance, delivering double-digit earnings growth in the quarter and the year; strong execution across the entire Company with each of our businesses delivering double-digit earnings growth; generating record free cash flows through profit improvement and very strong working capital management, including a nearly $200 million reduction of inventory; and significantly increasing financial flexibility by reducing leverage by more than one turn of adjusted EBITDA from 3.8 times in 2022 to 2.7 times in 2023. You should expect us to continue down this path in 2024, driving retail volume at or above the categories' performance; delivering earnings growth by investing in our categories and product innovation; optimizing our retail product mix; driving productivity; disciplined cost management; and unlocking additional Reyvolution cost savings; and continuing to increase financial flexibility by reducing leverage towards the top of our target range of 2 to 2.5 times adjusted EBITDA by year-end.
Now, I would like to review our 2023 and fourth quarter results in more detail, before turning to our guide. For the year, retail net revenues were $3,559 million, surpassing 2022 retail net revenues by $10 million. This increase was more than offset by a $71 million decrease in low-margin non-retail net revenues, resulting in a $61 million decline in consolidated net revenues for the year. Our share gains were significant, demonstrated by a 2% decline in retail volume compared to a weighted-average category decline of 4% for the year. Adjusted EBITDA increased $90 million or 16% to $636 million, reflecting over 250 basis points of margin expansion. This was driven by executing the Reynolds Cooking & Baking Recovery Plan, ongoing work to optimize the retail product portfolio, lower operational costs and previously implemented pricing actions, partially offset by higher SG&A, which included an increased investment in advertising.
Free cash flow of $540 million, which increased $449 million versus the prior year, driven by earnings growth and a nearly $200 million reduction of inventory. As a result of our successful focus on cash flow, we paid down $262 million of debt, driving a significant increase in financial flexibility that I mentioned, and adjusted earnings per share were $1.42 per share, up 11% from $1.28 per share in 2022. Now turning to the results for the fourth quarter, we delivered in-line revenues, gained share, grew earnings at the high end of our guide, and continued to increase financial flexibility. Retail net revenues were $972 million, $42 million below retail net revenues in the fourth quarter of 2022, driven primarily by lower tableware volume as well as the optimization of our retail product portfolio.
As Lance mentioned, tableware volume improved sequentially responding well to improved holiday-related promotions. We continued to outperform our categories in the fourth quarter. Retail volume decreased 3% compared to a weighted-average category decline of 4%, evidencing the strength of our brands and advantages of our integrated business model. Low-margin non-retail net revenues declined $40 million as expected, driven by lower demand from industrial customers. Adjusted EBITDA increased $38 million or 19% to $238 million, reflecting over 500 basis points of margin expansion. This was driven by executing the Reynolds Cooking & Baking Recovery Plan, increased optimization of the retail product portfolio, and lower operational costs, partially offset by higher SG&A which included increased investment in advertising.
Free cash flow of $194 million, driven by earnings growth and an over $50 million reduction of inventory. A $150 million of voluntary principal payments were made during the quarter. And adjusted earnings per share were $0.65 a share, up 23% from $0.53 per share in the fourth quarter of 2022. Turning to our 2024 guide, as I mentioned, our financial objectives are simple and clear. One, protect and grow share; two, drive earnings growth; and three, continue to increase financial flexibility. We guide net revenues in the range of $3,530 million to $3,640 million for the year compared to net revenues of $3,756 million in 2023. Most of the decrease or approximately three percentage points is expected from declines in our non-retail business and further optimization of our retail product portfolio.
As a reminder, our non-retail business is reported in our Reynolds Cooking & Baking business, and is low-margin and subject to different demand dynamics in our retail business. According to Circana, our categories are projected to be down 2% on average for the year in 2024. We plan to perform at or better than these categories at a rate of minus 2% to plus 1%. Pricing is forecasted to be a headwind of 1% which include certain contractual pass-throughs. We plan to support our categories and product portfolio by investing in advertising, trade, and product innovation. We plan to grow earnings by protecting and growing share, continuing to optimize our retail product portfolio, driving productivity, maintaining cost discipline, and unlocking additional Reyvolution cost savings, resulting in adjusted EBITDA in a range of $660 million to $680 million for the year.
And we forecast earnings per share of $1.57 to $1.65 for the year, driven by adjusted EBITDA growth and last year's significant improvement in leverage, resulting in lower interest expense. Other considerations for the year consist of the following. Commodities are expected to be more stable than in recent years. SG&A is forecasted to be unchanged to slightly down compared to SG&A in 2023. Depreciation and amortization is estimated at $120 million for the year. Interest expense is estimated at $100 million for the year. And our estimated effective tax rate is 24.5%. Turning to phasing. In the first quarter, we expect net revenues in a range of $795 million to $820 million versus first quarter 2023 net revenues of $874 million, consisting of a 4.5 point headwind from lower non-retail volume in further optimization of the retail product portfolio, a 4.5 to a 1.5 point headwind from retail volume at or better than category volumes, which we expect to improve as the year progresses, and unchanged pricing.
We expect adjusted EBITDA in a range of $115 million to $120 million, representing a significant increase over first quarter 2023 adjusted EBITDA, and earnings per share of $0.21 to $0.23 per share. In addition, it is worth noting that in 2023, with one of our businesses executing a recovery plan, the quarterly contribution of earnings was not representative of our historical phasing of earnings. We see quarterly phasing of earnings looking at a lot more like historical levels in 2024. Turning to cash flow and capital allocation, our top priority is to continue increasing financial flexibility by cutting down debt. We estimate free cash flow of over $300 million this year. Remember, we are comping last year's nearly $200 million reduction of inventory and that we will be below the upper end of target leverage of 2 to 2.5 times adjusted EBITDA by year end.
Our 2023 results put us on track to cut the annual interest expense by approximately $20 million in 2024. And as you know, every dollar of debt pay-down generates a roughly 7% return. Remember too, as we noted in November, our term loan is a floating rate facility. We have hedged approximately 60% of the floating rate risk, affording us the flexibility to de-lever without penalty, while providing protection and predictability in this volatile interest rate environment. And our capital allocation priorities remain unchanged. One, invest in organic growth, automation, and other Reyvolution cost savings; two, return cash to shareholders by maintaining our current dividend and achieving leverage of 2 to 2.5 times adjusted EBITDA; and three, pursue bolt-on acquisitions consistent with our marketplace position and core competencies.
Before I turn the call over to your questions. We had a very strong year in 2023 and I am pleased with our high degree of visibility into 2024 earnings, noting that we plan for a stronger contribution in the first half as we return to our historical phasing of earnings. Our financial flexibility is increasing, and we have the opportunities, commercial strength, and programs to drive earnings growth over the long-term. Finally and importantly, I'd like to remind everyone that we are hosting an Investor Day in New York on March 19th. Our business unit Presidents, Lance, and I look forward to speaking in more detail about our strategy as to create value by driving organic and inorganic growth. With that, let's turn to your questions. Operator?
Operator: Thank you. At this time, we'll be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Rob Ottenstein with Evercore ISI. Please proceed with your question.
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