Ladies and gentlemen, thank you for standing by, and welcome to the Reynolds Consumer Products First Quarter 2021 Earnings Conference Call. Please be advised, 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. This is Mark Swartzberg, and thank you for joining us on Reynolds Consumer Products' First Quarter 2021 Earnings Conference Call. On the call today are Lance Mitchell, President and Chief Executive Officer; and Michael Graham, Chief Financial Officer. For our agenda today, Lance will focus on market conditions, our fundamentals and our 2021 priorities, and Michael will review our quarter and outlook.

Thank you, Mark. Due to the continued dedication of the RCP team, we delivered another outstanding quarter in a challenging environment. I'm extremely proud that we grew revenues 4% in spite of February storms and unrelenting supply chain challenges. We expect 4 factors to drive even stronger growth over the balance of the year. Those are consumer consumption, price increases, innovation and our increased supply chain capabilities. We entered 2021, expecting higher consumption to stick, and we're seeing those higher levels sustain across our business. According to our latest Harris Poll, which we have been doing in successive ways since the start of the pandemic, everyday use of foil is up fivefold versus pre-pandemic levels. Usage of waste bags per week is up more than 30%. And weekly slider food bag usage is up nearly 40% versus pre-pandemic loves. As a result, dollar sales of foil, waste bags, parchment and other categories are growing at average annual rates well in excess of rates preceding the pandemic.

Thanks, Lance, and good morning, everyone. Before I turn to our results and our outlook, I'd like to point out a couple things. This is obviously a challenging cost environment, but one that we see as temporary. We have a track record and the tools to ultimately offset cost increases over time. And we remain committed to strong cash generation and a disciplined capital allocation, including deleverage to net debt between 2 and 2.5x adjusted EBITDA and continued growth of dividends over time. Turning to the quarter. Net revenues in the first quarter of 2021 were $757 million, an increase of 4% over prior year net revenues of $730 million. Growth was driven by pricing to offset rising input costs and lower levels of trade promotion. We saw an estimated 2 percentage point impact to the first quarter net revenues due to February storms, which primarily impacted the Waste & Storage and Presto business segments. Adjusted EBITDA for the first quarter was $140 million, an increase of 4% over the prior year adjusted EBITDA of $135 million. Growth was driven by the increase in net revenues, partially offset by higher material, manufacturing and logistics costs.

Thanks, Michael. Operator?

Our first question comes from the line of Nik Modi with RBC Capital Markets.

Just a point of clarification. What exactly was the issue with the Texas storms in terms of the impact? I'm just trying to get some more clarity on that. And then the broader question is, Lance, last quarter, you made a pretty bold statement about category growth rates doubling post pandemic relative to what you saw during the IPO road show. Certainly, it seems, at this point, that was a pretty prescient comment, but I just was hoping you could provide an update on -- based on what you've seen. Do you still think it's 2x or do you think it will be more like 1. 5x or something along those lines?

Okay. I'll start with the issue with the storms and ask MG to add on to that with more specifics. But the issues with the storms were, first of all, we had 2 plants in Texas, which were closed for over an entire week where we had no production that we were able to achieve or shipments as a result of customers. We also had multiple call-ins across many other manufacturing locations with high absence rates due to the storms in other states during that period of time, which resulted in lower productivity and lower volume shipments. In addition to that, freight and being able to ship to customers on a timely basis and be able to get shipments out during the quarter was impacted due to availability of trucks. So those were the three primary factors. Michael, do you want to add to that?

Yes. I can add a few things to that. So when you think about the storms, the biggest driver of that overall impact was the disruption that it created as it relates to availability of trucks being able to get to our destinations. As a result of that, we saw significant increased costs in that particular area as well as it challenged our ability to get cases out the door. Beyond that, obviously, there was incremental freight costs in this particular period as the availability was a little tighter. And there was an opportunity for people to price up accordingly, and we had to accommodate the overall pricing. So those also influenced the overall challenges that we saw as it related to that.

I will also add that a number of our retail partners had retail stores shut down during that period of time, which also impacted some sales in the quarter. Turning now to the growth rate, and just to be clear, from what I said in the last earnings call, is if you look at a 2-year CAGR for our categories that we expect continued growth, and the growth of the category is continuing stronger than they were pre pandemic. And if you look at the category growth on a 2-year CAGR, that's bearing out. Foil is growing over 6%, waste bags over 5%, food bags near 5%; party cups, 8%; and disposable dishes 9%. So on a 2-year CAGR, which is what my reference was meant to communicate we are seeing those kind of growth rates. And I think all of us would agree that based on all the data that the category growth rates pre pandemic and now post pandemic, we're seeing higher growth rates. So I appreciate the opportunity, Nik, to clarify that comment from last quarter's communication.

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

A couple of questions. So first, on price increases, you said you're looking through 3 rounds. How does the conversations go with retailers in round 1? How are they going in round 2? And what gives you confidence that round 3 will go smoothly as well?

Thanks, Jason. Well, retailer receptivity to pricing, the pricing actions we planned for Q1 have been fully executed exactly as planned. Our retailer customers are partners and pricing conversations are never easy. However, the current cost environment supports additional cost increases, and we show them the detailed costs that we're seeing so that we can provide them with that information. So they see the costs as part of the reason that we're requiring the price increases. The level and timing of additional price increases and decisions are made on a customer-by-customer basis. The Q2 price increase, most of that is in the May time frame and is near implementation or being implemented as we speak. And the Q3 planning is underway.

Lance, I can take the confidence. Want to do that?

Sure.

So there are a number of factors kind of baked into the confidence levels that we have around the pricing actions. First is the strength of our brands. And Lance talked about that earlier. Second is their history. We've definitely had an exceptional period of increases, and we acknowledge that. But truly, this is what we do. This is we manage. We manage through these commodity cycles and had a track record of being able to fully offset cost increases in effect. Third is our pricing. We already operate at higher levels of pricing than those entering in the year. Additional pricing increases are well underway and sticking, as Lance mentioned. And then fourth is our cost comparison. Remember, in Q4 of 2020, we saw increasing pressures from sequential increases in commodity and logistics costs. So as we ramp up into the fourth quarter, our comparables will be a little bit easier from that perspective.

Okay. That's helpful. And 1 more question. Based on how you talked about your guidance and your high single-digit revenue forecast, with most of that coming from price, it suggests that you're not expecting volume declines. And I guess the question there is, why shouldn't we be looking for volume to be down 4%, 5%, 6% when we contemplate that there's going to be some degree of likely cross price elasticity with competitors, perhaps not moving as quickly? And second Lance, we're not out of a pandemic yet. You're calling from 3 different locations today, and workplace mobility is still down 30% from pre-pandemic levels. That's probably going to change in the back half of the year. So -- and it seems like the prudent base case is to assume that we see contraction in the third and fourth quarter of just underlying consumption in your category. So am I right that you're baking for flat volume? And are there offsets to those factors that should give us confidence in your ability to get there?

Well, 2 things. I would say, first of all, we are updating our elasticity models, and it's early in updating those. But the elasticity models point to the fact that with inflation being across multiple categories, not just ours, that a new normal of elasticity is being evaluated by consumers. Secondly, we did do an evaluation of open states that had higher levels of mobility versus states that were still closed, that had lower states of mobility in the last 4- and 8-week period, I did not see discernible differences in increased consumption between those 2 areas. So we see strong consumption continuing post pandemic.

And Lance, this is Mark. If I could just add 1 thing to your response there for you, Jason, think about the fourth quarter. Remember, fourth quarter last year, we were, of course, somewhat capacity constrained in a very important period for us. Think about particularly the Cooking & Baking unit. So we didn't promote quite the way we normally would. So that comparison dynamic, coupled with our desire to promote here in the fourth quarter of 2021, I think it's also something you should keep in mind as you think about volume performance as we move through the year.

Our next question comes from the line of Andrea Teixeira with JPMorgan.

So I want to follow-up on how you -- we can track on the Nielsen data and pretty much on the track data, how are you seeing consumption now for the Cooking & Baking segment since you're able to actually grow partially, as you said, is pricing. And we're only going to see those details later today. But if you're seeing any green shoots conversely on the other businesses, especially the ones that you sell to like B2B, like to the mom-and-pop services that I believe that since go on. As mobility improves, new labs, the weddings, graduations and other social gatherings that happened in the spring last year, do we see something more positive now? Or we should -- this is something that's going to be washed out through the tough comparisons you get in the second quarter? And in terms -- and this is like a volume question. And in terms of follow-up for the cost pressures, I mean, if I do my math correctly, you have a double-digit cost pressure. You said you -- by the end of the year, you're going to -- on an annualized basis, you're going to lack those $300 million that you called out. But can you also pull some other levers, as you said, Reyvolution before kind of like innovation that is cost effective. Can you walk us through the bridge for the COGS and see how we can actually see the puts and takes for margins?

Thanks, Andrea. I'll talk about the Nielsen consumption data and the B2B question, then I'll ask Michael to talk about the COGS bridge question that you asked. The Nielsen consumption data continues to show good strong consumption, albeit we are now lapping a period where there's some pantry loading in the March and April time frame of the prior year. But we're very encouraged by the continued consumption across all of our categories and our brand share in those categories during this period of time. From a B2B standpoint, we are seeing the tableware and disposable products in B2B accelerating. We've seen very strong sales in the back half of Q1, and we expect that to continue as we go forward into Q2. Any further follow-up on those before I turn it over to MG for the COGS bridge?

Yes. No, that's great. And I think that's going to ramp. Remind us again when that business was -- Hefty Tableware was like more impacted. I know it was puts and takes -- during the COVID pandemic, you had initially a negative impact and then later on customers were using disposables at home. So second quarter definitely, as you said, is an easy comp. And then I believe the third, but then the fourth is more normalized. Is that a good metric? And then related to that before you pass it on to Michael, on the Cookie & Baking segment, do you think inventory on the trade kind of caught up in terms of volumes? Or conversely, you see that it kind of like given the Nielsen data, it may actually had been higher than what it should? How are the inventories on that segment?

Yes. Inventory as a trade in the Cooking & Baking, we're still at a 90% in-stock level. If you recall, we had some Q4 shipping challenges that we talked about which we recovered in Q1, but the in-stock levels are still way below acceptable levels, hovering at 90%. So there's more replenishment to come in Cooking & Baking as well as all the other segments. Turning now to tableware, there were 2 quarters where we had challenges last year. Q2 was the biggest that we did repeat Memorial Day and 4th of July, there were fewer social gatherings. But the same occurred in Q4 last year, where the holiday gatherings, primarily in the December time frame, were much smaller. So we did see some lower sales versus prior year in tableware in Q4, and we expect those to recover, adding on to the comments from Mark about the Q4 holiday celebrations for Reynolds and cooking products as well.

That's encouraging.

MG?

Yes. So Andrea, when you look at the overall COGS, materials are just under 2/3 of our COGS with about 45 of those points coming from commodities. Polyethylene and aluminum are clearly our largest followed by polystyrene. So beyond that, obviously, the COGS, the bigger parts of it are conversion and logistics. We've already kind of talked about our plans to offset that material component, and we're well on our way to sort of offsetting that through the second round of pricing, which is already in flight. And then as appropriately, the third round, that is currently being planned.

And Michael, just on that, we've heard some of your peers talk about like an outlook that actually can ease off potentially by the fall or even before that. Is this -- those -- especially the resins, polyethylene and polypropylene could potentially kind of ease off there. What are you embedding in your guide that they could.

Yes.

Stabilize by then? Yes.

No. So similar -- it's probably similar. Our guide is informed by current commodity indices. But I'm not going to say that our indices are a crystal ball. There's always some variability around that, and we're prepared to respond accordingly. But based upon the indices right now, it is a downward slope as we continue throughout the rest of the year.

Great. And on the innovation or the cost restructuring, the Reyvolution, any outlook for this year?

Well, we typically don't get into the specifics around Reyvolution. I would say that our Reyvolution initiatives are tracking incredibly well. We had a record year in that space last year, and we anticipate that we'll be beyond that this year. So we continue to drive and elevate our Reyvolution initiatives, and we anticipate that's going to be significantly higher than last year. Not significantly, but sizably higher than last year.

And if I can squeeze the last one on the cost pressures that you.

Last one.

Yes, sorry. The cost pressure from COVID, is there any opportunity to just reduce those pressures since it's more best controlled now? Or if you're kind of elevated?

Well, clearly, the COVID cost pressures were more intense last year. We've seen that come down and is primarily focused on the PP&E now. And we've kind of baked that into our overall guide as we move throughout the year and vaccines take hold.

Our next question comes from the line of Bill Chappell with Truist Securities.

Just want to follow-up a question as the others on pricing, but I think you said in the prepared remarks, you look to price for margin to cover margin, which I think is in your kind of historical policy, but not necessarily what other companies do allow this price for the dollar cost and you're actually pricing to recover margin. So do you expect your competitors to do the same? Is this any issue when you're dealing with the retailers? And did I get that correct? Are you pricing to recover margin? Or are you just pricing to cover dollar cost?

We're pricing, Bill, to cover margin dollars. So I hope that's ear.

So there would be a long-term negative impact on margins, just the way math works on that.

On the way the math works, right, because of the higher numerator.

And you don't see any competitors doing lesser pricing or slower pricing than you are. Do you expect everybody kind of move in the same fashion?

It is a very dynamic situation that changes by category. It changes by channel, and it's something that we manage at that dynamic level. So there's no one answer to that question.

Got it. And -- go ahead.

Go ahead. Go ahead. I'll wait for the question.

No, no. Please expand. I was going was a different question .

So we -- as we said, we are implementing a second round of price increases in Q2, and those are in place. We're planning a second increase for Hefty waste bags which was not included in the Q2 round of increases. And if resin stays at this level versus the indices, significant increases are going to be required.

My second question is just maybe tell me how you're planning kind of for the food service or the away-from-the-home boom over the next few months? I mean it's clearly stuff like New York and New Jersey, opening completely up in 2 weeks or other -- I mean, it's going to -- I would imagine, put a strain on the food service and supply, similar to kind of how lockdowns were a year ago for the at-home. So are you prepared? Are you preparing for that? Or do you expect kind of a normal ramp?

Well, we are seeing elevated demand for some specific products in the tableware business, which we are meeting that demand. We're watching that elevation closely. And currently, we're able to achieve it. But as things continue to open up, that could be a challenge from a pure capacity standpoint for a period of time until things normalize.

Our next question comes from the line of Rob Ottenstein with Evercore ISI.

So a couple of questions. First, you guys are category captains, I think a 70% of your volume. Can you talk a little bit about how your discussions with retailers on the category have evolved apart from pricing, which you discussed already today? But how are they thinking about shelf space, private label? Do they agree with you that demand is likely to be at an elevated level going forward? So just kind of interested in all that. And then second, if you could talk a little bit more about innovation and demand in the Cooking & Baking sector.

Sure. From the feedback we're getting from retailers relative to the category, it's a very dynamic environment right now. But they do believe, as we do, that the categories are going to continue to be elevated over the long period of time, and they're planning accordingly. We did see some migration to higher levels of brand in the categories during the pandemic, and we do expect some of that to moderate as we go forward. But as I've talked about many times, these categories have been very stable between the brand and store brands balance. It didn't change significantly during the pandemic, and we don't -- and they don't expect it to change post pandemic from that balance standpoint. And the overall conversations with the retailers are from a shelf assortment standpoint is skewing towards innovation, looking for opportunities to add shelf space for new products and continued elevation of those new products, which leads to your second question, which was innovation on the Cooking & Banking products. We have staged a significant number of changes in that, and those product lines, as I indicated in my opening remarks, 100% recycled aluminum foil Reynolds Wrap, which is at a price point that is consistent and line priced with the other products in the category. So fewer feet, but no significant premium any longer because we've got a different supply source. We've changed the price point on nonstick foil to get more users into the category. And we've changed our packaging on Reynolds Wrap to make it easier to use and easier to shop the category with the graphics on the package. We've also introduced more products for cooking, which includes butcher paper, which is used for smoking and grilling, and we continue to innovate across the Cooking & Baking product line.

Our next question comes from the line of Mark Astrachan with Stifel.

I guess just first, maybe a follow-up to the last question, is your expectation that the private label moves pricing similarly to you given that a year ago brands tended to do a little bit better than private label?

Mark, could you repeat the question? I just didn't quite catch all of it. I think it broke up a bit.

Yes. Sorry about that. Basically just asking whether you expect private label to move pricing similarly to your brands, given what you said about the importance of brands outperforming private label last year.

Yes. So we've seen evidence of private label in these categories moving consistently. There -- as you know, we're a big supplier of private label across these categories, and the cost pressures that all of the suppliers are seeing in these categories are the same, and they're significant. If you follow the polyethylene aluminum curves, you know that those 2 cost inputs, which are -- have almost doubled from their low point of last year.

And secondly, could you just remind how much of the price increases historically are given back, if any, as we kind of try to think about longer term sustainability of the benefit of the pricing that you're talking about this year?

This is going to be a significant increase compared to historicals, but generally, I will say that it's not all given back. There is a lot that we get back, and it's partially related to overall market conditions. But it is generally, as you look through the history of these commodity cycles, you will see that margins increased after commodity cycles are stabilized.

Our next question comes from the link of Lauren Lieberman with Barclays.

I was curious to just continue the conversation on pricing. But I guess 2 things on this. One, is that in the Reynolds Cooking & Baking business, in the past, you've talked about key thresholds on pricing where elasticity kind of kicks in. I'm going to test my memory, but it was like above $4.99 maybe. So I'm just curious about as you -- the degree to which 1 pricing plans in that division and for foil, in particular, might take you above those threshold levels that the elasticity, notwithstanding your comments on changing elasticity models would be more relevant. And then on the Waste & Storage and particularly the branded side of the business, just curious about how you are monitoring or what you're anticipating in terms of price gaps to branded? Because at least I think all of us are historic knowledge of the branded side of that business with your public competitor. Is it -- 3 price increases wouldn't be typical, right? It kind of all goes in at once. So trying to understand maybe how much those 3 rounds of pricing refers more to the private label side of the house versus branded? And how to think about price gaps and how the degree of what you're monitoring that on the branded side of the business?

Good memory on Cooking & Baking. Just missed price threshold by $1, it's $3.99 versus $4.99. But you're right that, that was the key threshold pre pandemic. Our initial indications of the elasticity models is they have changed post pandemic and in an inflationary environment across all grocery, not just our categories. So it is somewhat unknown. There is no question that we're crossing the $3.99 price threshold, but evidence suggests that, that whole threshold no longer holds. We don't have complete data on that yet. So some of this will be tested realtime. However, there's no choice. As I mentioned a moment ago, aluminum prices have almost doubled from where they were at the low point in 2020. And so in order to ensure continued health of our business, we need to take those prices up by commodity costs. And we won't be alone. The commodity costs will be in place for the rest of the category, too. And as consumption has gone up and new users are coming to the categories, we're confident that consumption levels will stay high. But time will tell, and we'll obviously be closely watching that. On Waste & Storage and particular Hefty waste bag price gaps, we did take a price increase in Q1. And as those of you that monitor the scanning data closely saw that the price gap is closed. We are implementing a second price increase, as I said a moment ago, across the majority of our products in Q2. We are now planning a second increase for Hefty waste bags, which was not included in that Q2 round. And so we will continue to move Hefty pricing up as the commodity costs have gone up significantly.

Okay. Lance, just to clarify then, you said it was most of your product line in 2Q, but Hefty was not a part of that. So some of that's 3Q planning, so Hefty would effectively probably get 2 rounds of pricing, not 3.

Hefty has gone up 1. We expect to get another one in Q2 again. But it probably -- no, I mean, it will be announced in Q2 for Q3 implementation.

For Q3. Okay. Perfect. Just make sure I got that.

Ladies and gentlemen, that concludes our question-and-answer session. I'll turn the floor back to Mr. Mitchell for any final comments.

Thank you, operator, and thank you, everyone, for your questions. We really value your interest and your participation. Most of all, we appreciate your time. Our revenue is growing, and we expect RCP to be even stronger in revenue growth this year, driven by pricing, consumer consumption, innovation and our increased supply chain capabilities. I also want to thank our employees for continuing to follow the prevention measures, putting safety first as we grow our business during this exceptional time. Stay well, stay safe, and hope to see you soon. Thank you.

Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.