Ladies and gentlemen, thank you for standing by and welcome to the Reynolds Consumer Products Second Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] Please be advised that today’s call is being recorded. I would now like to hand the conference over to your speaker today, Mark Swartzberg. Thank you. Please go ahead.

Thank you. Good morning and thank you for joining us on Reynolds Consumer Products second quarter 2020 earnings conference call. On the call today are Lance Mitchell, President and Chief Executive Officer; and Michael Graham, Chief Financial Officer. Nathan Lowe, Senior Finance Director; and Chris Mayrhofer, Vice President, Corporate Controller and Principal Accounting Officer, will also be available for Q&A. During the course of this call, management may make forward-looking statements within the meaning of the federal securities laws. These statements are based on management’s current expectations and involve risks and uncertainties that could cause actual results and outcomes to differ materially from those described in these forward-looking statements. Please refer to the Reynolds Consumer Products annual report on Form 10-K and other reports filed from time to time with the Securities and Exchange Commission and its press release issued this morning for a detailed discussion of the risks that could cause actual results to differ materially from those expressed or implied in any forward-looking statements made today. Please note, management’s remarks today will focus on non-GAAP or adjusted financial measures. A reconciliation of GAAP results to non-GAAP financial measures is available in the earnings release posted under the Investor Relations heading on our website at reynoldsconsumerproducts.com. The company has also prepared a few presentation slides and additional supplemental financial information, which are posted on Reynolds website under the Investor Relations heading. This call is being webcast, and an archive of it will also be available on the website. I would also like to note that we are conducting our call today from our respective remote locations. As such, there maybe brief delays, crosstalk or other minor technical issues during this call. We thank you in advance for your patience and understanding. I would like to answer all of your questions during the question-and-answer session. In the interest of time, we ask that you ask one question and a follow-up and rejoin the queue if you have additional questions. And now, I would like to turn the call over to Lance Mitchell.

Thanks Mark. Good morning, everyone. Today, I would like to start by recognizing and thanking essential frontline workers, especially the work of healthcare professionals caring firsthand for those who are sick. Employees at our retail partners have also stepped up to continue to supply people with essential products on an ongoing basis. We are pleased to be able to support them, and I’m incredibly proud of how the entire team at Reynolds has come together, as we emerge from this quarter a stronger and more agile company. The pandemic continues to present immense challenges for people everywhere and there are five areas where I believe we have learned grew and demonstrated new and better capabilities in the quarter. I will review each of them, including the challenges we faced and high-level comments on our second quarter financial results, then speak to our second half priorities and how we are pivoting from managing the crisis to leading and working our plans to become a stronger company and partner. Safety, our safety-first culture has served us well as the pandemic developed in March and was fully underway throughout the second quarter. We implemented unprecedented safety protocols ahead of CDC guidance with urgency. These included safe distancing, barriers, shift separation, mandatory mask usage, temperature testing, hand washing and increased cleaning. It’s one thing to develop policies and procedures. It’s yet another to ensure that they are implemented on a day in and day out basis. Our safety culture has ensured we successfully continue to follow all the guidelines we established at the outset of the COVID-19 pandemic. Supply chain. We moved rapidly to expand capacity for products that continue to be in higher-than-planned demand, and we were creative in unlocking capacity. We worked with our retail partners to pause low-volume SKUs in favor…

Thanks, Lance, and good morning, everyone. I’d like to echo Lance’s comments in thanking our employees whose dedication has been crucial to navigating our company through the implications of this pandemic, and I’m extremely proud to be part of the Reynolds team. With that said, I now will spend a few minutes reviewing the financial results for the quarter. Total net revenues in the second quarter of 2020 were $822 million compared to $791 million in the prior year. The increase was primarily driven by stronger volume stemming from the consumer response to the pandemic. We saw increased demand across our Reynolds Cooking & Baking, Hefty Waste & Storage and Presto Products segments, whereas our Hefty Tableware segment was negatively impacted by the pandemic. We’ll go into the details of these segments shortly. Net income for the second quarter was $112 million compared to $55 million in the second quarter of last year, and adjusted net income was $115 million for the second quarter of 2020. The increase was primarily driven by the aforementioned stronger volume as well as lower interest expense, reflecting the capital structure that went into effect with the IPO. Adjusted EPS for the quarter was $0.55. Adjusted EBITDA for the second quarter was $193 million compared to $169 million in the prior year. The increase was primarily due to the previously noted volume increases. Now I will discuss the results of each of our segments. Reynolds Cooking & Baking net revenues in the second quarter were $295 million compared to $275 million in the same period of last year. The increase was primarily driven by increased demand due to consumer response to the COVID-19 pandemic. The increase was partially offset by lower related party sales and lower pricing from actions largely taken in the prior year…

Thanks, Michael. As I turn it over to the operator for the questions. [Operator Instructions] Operator?

Thank you. [Operator Instructions] Our first question comes from the line of Bill Chappell with Truist. Please proceed with your question.

Hey, thanks. Good morning.

Good morning, Bill.

I guess just on – certainly, your portfolio is well positioned with your store-brand private-labeled portfolio. Just trying to understand if you are starting to see consumer trade down or if you are kind of expectations for the remainder of the year kind of consumer trade-down and kind of related impact to margins?

If – Bill, this is Lance Mitchell. If you mean by trade-down is shifting from brand to store brands, we have seen just the opposite continuing. You can see that in the scanner data, even through July, that shares across our categories have remained strong for the branded businesses. And in fact, they have continued to grow in some cases.

Got it. And do you expect that to continue as we kind of move forward for the rest of the year and in a recession?

Well, as we have talked previously, this company has not gone through a recession as Reynolds Consumer Products, but the legacy companies have. And the historical look back indicates that there was no meaningful difference in shares changing during the last recession for the majority of the products.

Got it. And then one follow-up just on the capacity additions is there a need for these additions? Are you expecting demand to continue well past COVID and into 2021 or is this just things are being pulled forward that you were planning to do it down the road anyways?

It is a combination of both. We did pull forward some planned capacity additions, but we have also increased our capacity because our outlook for consumer demand, based on the research I talked about in my opening remarks, indicates that this is a more permanent type of demand pattern from consumers for our categories. So we are adding additional capacity for the long-term.

Got it. Thank you so much.

Thank you.

Our next question comes from the line of Rob Ottenstein with Evercore. Please proceed with you question.

Great. Thank you very much. So I am wondering how the dialogue with retailers has progressed given your important role as a category captain through – let’s say March through June. And given what you are saying that you think there’s a more permanent demand pattern here, is that something that retailers agree with? And are they going to therefore give more shelf space? And then related to that, how is the whole discussion going with retailers in terms of e-commerce? And how do you see the development of e-commerce as the crisis continues?

Okay. I guess, there is two questions there. And the first one regarding our relationship with retail partners, I think our relationship has emerged from the pandemic in the last quarter stronger than it was before. We have been very transparent with them about our capabilities, our capacity additions. And we have talked about our SKUs that we are going to pause and come to a collaborative agreement on that. So there are agreements that the categories are going to grow and a demand permanently stronger than we had originally anticipated before the pandemic because consumer behaviors are changing. Regarding shelf space, that’s premature. We haven’t had those discussions. We are discussing new product introductions. But regarding the shelf space, that’s not something that’s been on the agenda as of yet. The second question, remind me again, please.

Just you had mentioned that, I think, 26% – based on your research, 26% of the population was looking towards e-commerce as a channel for your products. So I am trying to understand what that means in terms of how you are going to adapt to that and what that means in terms of your discussions with your brick-and-mortar retailers?

Well, I would say, first of all, our brick-and-mortar retailers, we include in e-commerce. So, curbside pickup and the programs that the brick-and-mortar retailers are participating in is included in the way that we look at e-commerce. It’s not just home delivery, but it’s all aspects of e-commerce. And we are very pleased with our results in e-commerce through the second quarter and as we look forward because in those categories, we are growing, in fact, growing from a share standpoint, most of our products faster than we have grown traditional brick-and-mortar channels.

Are you able to give us a sense of what percentage of your sales were e-commerce and a sense of what your share in e-commerce looks like?

Yes. I can’t share that number at this point partially because the data is still murky. Some retailers are sharing very detailed numbers and some are not. So we get directional data there, but we are not getting clean data. That is going to improve over time as more and more retailers provide specific information.

Okay, thank you very much.

Our next question comes from the line of Jason English with Goldman Sachs. Please proceed with your question.

Hey, good morning folks.

Hope you are doing well.

I was a little surprised by the revenue you posted this quarter. In light of the data we are all looking at in Nielsen or IRI, I think many of us expected to see a more robust figure. Can you walk us through what the disconnect is? As we look at these numbers, why the gap? What are some of the offsets?

We are on our quiet period, I really want to reach out and talk about this, and so did Mark. We attribute this mainly to the decline in related party revenue and a straight focus on scanner data at the macro category level that also must take the net of our branded and private label performance. So let me try and break it down for the quarter. Our related party net revenues were down $14 million for the quarter, and the related party is just primarily into foodservice and restaurants, foodservice foil and bakeware, aluminum pans. Our reported net revenues, excluding related net – related party net revenues were up 6% for the quarter. That’s still well below the rates I know many of you cited from the scanner data. And I said it’s important to go deep into the category and accurately net our branded and private label performance to see how we perform the scanned channels. For example, in tableware, our Hefty Cups performance was more than offset by our private label cup performance, whereas our private label performance in the foam plate segment outgrew the branded. In tableware, it’s also important to note that paper is a significant part of disposable dishes segment, and we are introducing new products in that area, but we don’t yet participate in that segment in a meaningful way from a paper standpoint. In addition, some of our revenue from the Tableware business is sold in certain channels for foodservice applications. So a combination of all of those events, you can’t look at our business just on the scanner data across – and apply that across our entire company.

That’s really helpful. I appreciate the point. Sorry go ahead.

And Jason – I will add to that, Jason. This is Mark speaking, nothing substantive because Lance covered the substantive points. But we get that you are tracking the data and trying to get it at the most granular level you can. So definitely look for Nathan and I to help you just follow it because as Lance said, the number was – the underlying number was plus 6%. And you obviously want to be able to see that and – try to get closer to that as you go through given sort of month intra quarter.

Absolutely. You are still a new company, and we are all trying to learn here. So we will lean on you going forward a little more heavily. The second question. Michael, in the tail end of your prepared remarks, you ran through a lot of headwinds in the fourth quarter. From logistics costs, from commodities moving to incremental COVID cost, to heavy-up on SG&A ad spend in the fourth quarter. Can you give us any sort of quantum of investment? Any way to contextualize the level of expenses and headwinds that you are talking about there?

Sure. I would attribute a big – a large part of that headwinds, and I did comment on that, is related to our A&P spending. So a couple of things contributed to that A&P spending. Some of it was related to the COVID, but also a large part of that is that as we start to build momentum for the – for our franchise we want to make sure it’s supportive with appropriate levels of A&P spending. So a big chunk of that additional cost that you to see directly relates to A&P spending. The other part of it is that, I would say, from an overall standpoint is that we do have a larger increases in commodity costs that rising in the second quarter. And we see that both on the aluminum side as well as the resin side.

I would also say from a volume standpoint, Jason, we are expecting the holidays to be different this year. That is traditionally our largest quarter from a seasonality standpoint, is Thanksgiving and the December holidays. And we don’t expect those to drive the same kind of volume as they have in the past, partially because consumers already have on hand many of our products and partially because the gatherings are going to be different.

Yes. It will be interesting to see how that plays out. Thank you all for your time and I will pass it on.

Our next question comes from the line of Lauren Lieberman with Barclays. Please proceed with your questions.

Great. Thanks. Good morning.

Good morning.

I just wanted to – your line to follow-up again I know you just ran through some details on, I guess, helping us through how we should be looking at Nielsen going forward, and we’ll pick that up further offline. But I wanted to also just clarify the comments on in-stock versus out-of-stock. So right now, would you say that, I guess, let’s say, as of July, that your shipments are now back in line with takeaway and that retail inventory levels are kind of where they need to be?

Let me answer that in a couple of different ways. First of all, our in-stock levels have improved from where they were in April. So we saw the out of stocks increase until inflection point at the end of April with a combination of demand, easing and capacity increases that we put in place. Capacity is coming closer to matching demand due to our rapid planning, our creative solutions that I have talked about in my opening remarks as well as adding staff. So yes, we are seeing improvements, but we still have many of our products on allocation with our retail partners. And we are continuing to add capacity and staffing, although not at the rate, as I indicated, that we would like because our case fill levels are not at the 98.5% that we target for ourselves. But the in-stock levels have returned, and it varies by product to the low 90s. It’s not like you go into a retail partner and see the shelves wiped out in our categories, like you may in others. And our retail partners tell us we are doing better than a lot of other companies in keeping the in-stocks. But it’s not to the level that we hold ourselves to, and we are continuing to work to improve that, as I said in my opening remarks. We are – a lot of our – and essentially, in a lot of our products that are in high demand, we are shipping everything we are making. And so what you’re seeing in the scanner data is shipments. So retailers are not sitting on inventory. In fact, they’ve depleted a lot of their inventories.

Okay because the reason I wanted to also touch on this is, if I think back to some of the conversations that we’ve had about pre-COVID, if you can remember that time, some of your market share gains for Hefty came – they were very strong performance on innovation, right? The part of the story was that you were already capacity-constrained and that was beginning to be alleviated. But now when we look at the Nielsen data, we continue to see shares under pressure. And so just thinking ahead to retailers needing to prioritize with manufacturers that can deliver in-stock levels, is there a worry that some of this continued market share pressure, because of the stock issues, kind of persist and requires greater investment outside of CapEx, but to kind of build back that market share on the superior products that you’ve got?

Yes. Across those categories that are in high demand, which includes waste bags, we have significant capacity increases underway. And we expect to be able to be at the restored case flow levels that I talked about by the end of the year. So we can talk through the waste bag business directly. I think our shares have held up very strongly during this period of time. I attribute any change that primarily to some minor out-of-stocks at a few retail partners, but those are rebounding this month and will continue to rebound.

Lauren, I would like to just add to what Lance is saying. I am confident that after a little more time, the market is going to be just simply more accurate at reading what we actually did in scanned channels and in terms of absolute performance because you can see in the scanned channels that our share trends are good. So your concern about in-stock, where I understand from the perspective you’re looking at and the way you’re looking at the data, I hear where you’re coming from. But as Lance said, the share performance, pick your channel – or not pick your channel, pick your category, there are a few exceptions, but the dominant trend is one of very healthy share performance. So I think it really just boils down to really making sure you’re getting at the proper granular level of what’s happening in our business, and that’s not a unique to Barclays comment.

Okay, awesome. Thank you. I will follow-up. Thank you so much guys.

[Operator Instructions] Our next question comes from the line of Mark Astrachan with Stifel. Please proceed with your question.

Yes, thanks and good morning everybody. Wanted to ask two kind of related questions. One, just on the cost outlook, so I appreciate the commentary there about levels increasing. But if we look at just oil for resin and look at aluminum, they’re still below where they would have been at the beginning of the year, presumably relating to your initial outlook. So I guess, what has changed maybe relative to that? What are you anticipating within your guidance for those metrics over the balance of the year in terms of commodities? And then related to that, you didn’t have the same commentary in the press release, maybe I’m over-analyzing this, around being more challenged to show year-on-year improvement in adjusted EBITDA in 2021 so maybe if you could just touch on that, too, that would be helpful?

And Nathan, can you take the commodity question, and Michael, you can take the 2021 question?

Yes. No. Thanks, Lance. So I will just pick on one about our commodities. So for – as an example, polyethylene prices, which is part of our spend were up in June and slightly above where we started the year and certainly worse than our expectations as we entered the year. More recently, if I – just as a reminder, materials are 60% of our COGS, and about 45 of those points are commodities. Within that polyethylene is the largest followed by aluminum and then polystyrene resin. All three of those commodities that I’ve just mentioned increased in June and now again in July which are contributing to worsening of our commodity outlook and suppliers are, frankly, are signaling additional increases in the back half.

And as far as 2021 is concerned, look, there is a lot of uncertainties we have still yet and we are still figuring out. And we are not quite ready to talk about 2021 yet as it relates to our expectations around that. But as the year goes on and we get a little bit more visibility, we will be clear to give you a little bit more insight into that.

Okay. Thank you.

Our next question comes from the line of Andrea Teixeira with RJ Commodities. Please proceed with your question.

Hi, it’s JPMorgan. So, thanks and good morning everyone. I am happy to hear you are all well. My question is on the consumer consumption dynamics, and I appreciate all the color you gave in the earlier question. So can you give us an idea of the pantry destocking? And do you think consumers are still working on their inventories? And also can you please comment on your exit rate for shipments growth, in particular, for cooking and tableware? I think you talked about the level of shipments against weaker inventory, so I was hoping to see if you can give us an idea of the exit rate in particular for those 2. I mean, basically, I try to – I’m trying to figure out if cooking has accelerated, while tableware became less negative as you progress the quarter with reopening. And also a follow-up on the additional distribution for innovation, have you already benefited from that or the bulk of it has yet to come for the balance of the year? Thank you.

Thanks, Andrea. For the – the RCP categories are experiencing elevated in-home usage, and they are continuing to grow. I think the scanner data that you’re seeing is representative of takeaway. As I’ve mentioned a moment ago, there’s really no retailers replenishing inventory at this point because they’re on allocation on most of our high-demand products. We are seeing tableware start to recover, and those – particularly in those states that have reopened more than others. But we’re tracking that state-by-state back, actually geography-by-geography within those states. And overall, we are seeing stronger demand in those tableware items. So from an overall demand standpoint and shipments, I think the scanner data reflects the shipment data as well, and I really can’t comment on Q3 any further than that. So could you remind me of the other two questions that you asked?

Yes. Sorry, Lance. Yes, and I appreciate that color. But I think more on the consumption habits. I know you try to run a lot of kind of Nielsen or surveys. Do you think that consumption of your products, meaning the foil, aluminum foil and all the baking products and obviously trash bags, are you tracking to meet demand basically because people have bought and clean out these shelves? Like are they probably through their inventory and then now, what we see Nielsen is few consumption or there still you think there’s still pantry stocking at this point?

Our data shows that the pantry stocking is no longer occurring and that the de-stocking has occurred – is already over, and that occurred in the April, May time frame, that these are now use occasions. The products tracked via the – our survey, well over half of our consumers are cleaning, cooking, baking, doing yard work and organizing more often than they did three months ago. And 80% of customers say they are cooking more meals. The majority, over 64%, say they’re generating more trash and using more disposable dishes to ease the burden of cleaning. And in foil, for example, our research indicates that usage is steady over the past few months, and about 1/3 of our consumers are using foil at least once per day, up from a pre-COVID benchmark of 6%. So this is sticky behavior that we expect to really continue for the long term.

That’s super helpful. Thank you so much. I will pass it on.

[Operator Instructions] Our next question comes from the line of Wendy Nicholson with Citigroup. Please proceed with your question.

Hi, good morning. Two just housekeeping things. Number one, the expense of $5 million to $10 million related to the COVID expenses, is that a permanent number that you expect will be with you going forward? Or is there – that’s particularly large as you got those new protocols put in place? That’s question one. Question two, Michael, can you remind us, the $16 million headwind that you had on revenues from the exit of the low-margin business last year, how many more quarters do we have that as a headwind? When does that last? And then I hope it’s okay. My real question is just with regard to capacity constraints. Just Lance, like, how do you manage capacity constraints when you have a demand from your private label contracts and you have obviously demand for your branded goods? Is there a choice that you have to make sometimes, how you prioritize where you’re going to meet the demand for the private label versus the brand or what’s the decisioning process like if you’ve got demand on both sides that you can’t meet? I hope that makes sense. Thank you so much.

It makes great sense. Michael, why don’t you answer the first two questions, and I will take the last question.

Sure. So our COVID cost, the range I gave you, $5 million to $10 million, these are discrete type of costs that are around PP&E, extra labor and cleaning costs and things that we experienced – we’ve been experiencing, thus far. It’s hard to peg on what that will be because, obviously, depending upon what happens in the overall – within the country as it relates to the COVID, and we’re seeing some ramp-up in elevated cases, that has impact on all our locations. So that could vary. I think we give you – that $5 million to $10 million is a reasonable range to assume going forward, somewhere in there, but it’s really hard to peg to a specific number. So as it relates to the lapping of the exit of low-margin business, we expect that to be behind us in September. So as of September, we’ll – we could be on a normal pace as it relates to those losses of business.

And I will just add to that. It’s a gradual through the Q3, too, right? So a vast majority of it was through Q2 and then the final part of it will be in Q3, right?

Correct.

Got it.

So on that question of how do you balance the capacity constraints for demand on high-volume items between store brands and RCP brands, the answer is customer-by-customer, product-by-product collaboration. And as we’re adding capacity that we are managing that balance to provide in-stocks for both and pausing items in both that are on the lower-velocity SKUs. So it really is in partnership, communications and decision-making with our retail partners because they want both products on the shelves. Now in the case of one case where we had some severe capacity constraints on foam plates, we made the decision to really stop production of Hefty brand and went 100% store brand on foam for a period of time. And you probably saw that in the scanner data in Q3 until we were able to get the in-stocks back in demand. But for the most part, it’s been a very balanced, and we have not had to make significant decisions one way or the other. It’s been a balancing after both.

Fair enough. Well done. Thank you so much.

We have no further questions at this time. Mr. Mitchell, I would now like to turn the floor back over to you for closing comments.

Well, thank you, everyone, for your participation and interest in Reynolds Consumer Products. We’re becoming a stronger and more agile company, and I’m privileged to lead this great team with discipline and vigilance on safety and a focus on strong performance in an even more attractive environment for our products. Please take care of yourselves, your families and your friends. Stay safe and healthy. Goodbye.

Ladies and gentlemen, this does conclude today’s teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.