Ladies and gentlemen, thank you for standing by, and welcome to the Reynolds Consumer Products' Second Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. I would now like to hand the conference over to your speaker today, Mark Swartzberg. Thank you. Please go ahead.

Thank you. Good afternoon and thank you for joining us for Reynolds Consumer Products' second quarter 2021 earnings conference call. On the call today are Lance Mitchell, President and Chief Executive Officer; and Michael Graham, Chief Financial Officer.

Thank you, Mark. We delivered a good quarter in a challenging environment, thanks to the resilience and dedication of our team. We grew revenue 6% on top of last year's record second quarter revenues and in spite of estimating two percentage point impact from shipment delays from import and other third-party suppliers. We grew both price and volume. We strengthened market shares across our business and we achieved our earnings forecast in the face of continuing pressure from rising commodity costs. Nonetheless, we are lowering our earnings guide to reflect significant increases in commodity costs since we spoke with you last. Michael will walk through the drivers of this pressure and the pricing actions we are taking to offset material cost increases on an annualized basis. I'm committed to implementing price increases that fully offset material costs increases at a pace, in and out appropriate to market conditions. We will also talk about Revolution cost savings, which are tracking ahead of plan and remain another significant source of margin recovery.

Thanks, Lance, and good afternoon, everyone. I'll briefly review our second quarter results, then turn to our outlook. Revenues increased 6% on top of record second quarter revenues in 2020, and this was in spite of shipment delays from important other third-party suppliers, having an impact of approximately two percentage point. Price and volume each contributed to the increase, reflecting pricing to offset commodity cost increases and the pickup in growth for Hefty Waste & Storage and Hefty Tableware, as everyday usage occasions will remain strong and social gatherings increased. Adjusted EBITDA was $148 million, down 23% versus last year's adjusted EBITDA as price increases lagged material cost increases. Adjusted earnings per share for the quarter was $0.39. Turning to our segment results for the second quarter. There were two main drivers of our year-on-year performance; strong demand and material costs increases outpacing pricing implementation. In Cooking & Baking, net revenues grew 3% driven by price increases, partially offset by a volume decline. Adjusted EBITDA decreased 11% driven by lower volume as pricing actions fully offset increases in material and other costs. The volume decline was primarily due to lapping of last year's elevated consumption, also as Lance told you, our brand -- branded foil dollar share is up versus year ago levels, and I'm happy to add that this is an all-time high.

Thanks Michael. As I turn it over to the operator for the question, I'd like to remind you that we ask that you ask one question and a follow-up and then rejoin the queue if you have additional questions. Operator?

Thank you. We'll now be conducting a question-and-answer session. Our first question today is coming from Rob Ottenstein from Evercore. Your line is now live.

Great. Thank you very much. So, I was wondering if you could give us a sense of the magnitude of the price increases that you're putting through in Q3, with particular color on waste bags and private label.

Thanks Robert. Well, we've announced and raised prices at double-digit rates across our entire portfolio with these price increases. And we have announced increases across most of our portfolio. Most of the third quarter, price increases have already been announced. And as Michael indicated, we expect the pricing to result in improvement and profitability as we enter the fourth quarter, and we expect the majority of the margin pressure arising from the lag between pricing commodity increases to be behind us as we exit the quarter. Those price increases were across the product portfolio as I mentioned, including our store brands and these were high -- these were double-digit to mid double-digits, depending on the products and the product portfolio. Now in waste bags, in late June, we announced the second round of increases in waste bags. That increase goes into effect on August 30th. We are evaluating an opportunity for a third increase this year. As Michael said, the recovery in Waste & Storage will be dependent upon the easing of commodity rates, additional pricing or both. And there are numerous factors that are form our pricing decisions. Those include, consumer demand, strength of the category, retail price points, price gaps, consultation with our retail partners and the competitive environment.

Just to clarify what you said in terms of double-digit rates across the entire portfolio with the three increases. So the double-digit is accumulative amount of the three increases.

Yes. That includes all three of the increases. And as Michael indicated in three of our four segments that covers the current outlook for the commodity costs.

Okay. And what have you seen in terms of retailers, their own pricing that they've been putting in and consumer's reaction to price increases.

The retailers have been increasing prices. Some of these increases are not yet reflective at retail. That's a retailer by retailer decision. And as we've indicated in our opening remarks, consumer demand and share remain strong.

Terrific. Thank you very much.

Thank you. Next question today is coming from Bill Chappell from Truist Security. Your line is now live.

Hey, this is Steven Wineburg on for Bill Chappell. I guess, as we head into 2022, are you guys comfortable with where your 3Q pricing actions played out given cost higher? Also, like what should our expectations be for margins in 2022? Is there a potential return to 2019 levels or possible expansion given your history of proper recovery? Thank you.

Yeah. So, let me start with the latter part of that question. So, I don't want to get ahead of myself start talking about 2022. So, we're still evaluating this. This environment has been incredibly, incredibly dynamic, hard to predict what's going to happen. And so, we need a little bit more information, a little bit more time, and we'll be prepared to talk about that as we talk about our Q4 results -- I mean, our Q3 results, as well as start talking about our 2021 guide. Was there -- did I miss this part of your question? I'm sorry.

Yeah. Just talking about like the comfortability to where your 3Q pricing actions are playing out, given like the heightened cost increases.

I think, we answered that both in the prepared earlier opening remarks, as well as in my last answer. We have -- based on the current indexes, we use IHS and CDI for resin, and we use the LME and the Midwest Premium for aluminum and, based on those forward curves and the pricing actions we've taken, we have in three of our four business segments achieved pricing that offset those commodity costs with these three price increases.

Okay. Thank you.

Thank you. Next question today is coming from Lauren Lieberman from Barclays. Your line is now live.

Great. Thanks. Hi, everyone. I know I'm also in the -- press release today that you had mentioned challenges from supply chain, import delays, third-party producers. So, I was hoping you could just elaborate a bit more on that. Has things opened up a bit, kind of your thought process on how that may or may not impede your ability to have product on shelves as you go into the second half of the year? Thanks.

Yeah. So, -- yeah, some of the challenges have -- as I stated, have been the import delays. Those import delays were kind of really isolated to a few core products. Some of the ones that have been impacted have been low count sliders, plastic wraps. Reynolds or Wrap pre-cut sheets, and foam dishes. So, those are the primary ones that have been impacted and impacted at 2% challenged that -- focus that impacted our overall results.

And Michael, is that easing now? Or is that still a dynamic?

Yeah. It is abating now. It will slowly go away. So, we feel comfortable that things have caught up, got to understand what it's related to. This is -- many people were experiencing the ability to get orders out off the docks. And as that improves, we improve with it. And that was already been baked into our world.

Okay. Great. And then, it was also the sentence of -- at least also mentioned third-party manufacturing. So, I didn't know if that was domestic. And if so, if there's any thought process on kind of -- I know we're in a certainly unprecedented time, but qualifying other producers, or there's anything in terms of just that that's something that should be part of the thought process in terms of planning and risk mitigation ahead?

Yeah. Lauren, I think, it's important to note that the vast majority of our products, we have the control over producing ourselves. The imports and third parties are not necessarily core to our total business, but they do represent part of the -- how we go to market. Some are imports, some are domestics. And in all cases, we are evaluating other parties to ensure we have a surety of supply both in the near-term and the long-term.

Okay. All right. Great. Thanks. I appreciate it.

Thank you. Our next question today is coming from Andrea Teixeira from JP Morgan. Your line is now live.

Andre, your line is live.

Maybe on mute.

Please re-queue. Our next question today is from Nik Modi from RBC. Your line is now live.

Yeah. Good morning, everyone. Sorry. Good afternoon. So, I guess, the question is kind of twofold. Lance, maybe you could just talk a little bit about the return of social gatherings and the impact on demand. And then, I guess, the secondary question is, given the dynamic nature of this COVID situation, things really start to ramp and we start seeing more at-home behavior. Do you think the supply chain is prepared for another surge in demand?

On the first question on the social mobility and gatherings, that actually does have a positive impact in a lot of aspects of our business. Now, if you think about our Tableware business, particularly that's a -- and we saw the growth of that in the second quarter from the social mobility, but also in everyday occasions, like grilling with family and friends with Reynolds Wrap, Cooking & Baking as groups. And as we head in the holiday season and having more normalized holiday occasions, we see the benefit of social gatherings, but we're also seeing every day used occasionally also be a positive influence on consumer demand. So, it's a win-win. From a supply chain standpoint, we talked throughout last year that we were adding capacity without adding roofs and that's largely completed. So, we have the capacity in place to be able to be continued strong consumer demand. Some of that was because we took some non-commissioned lines and re-commissioned them. And although, there are certain pockets and locations where we've faced some staffing challenges on balance and across most of our plants and our locations, we have been able to effectively staff our plants be able to hit high utilization rates and have continued to improve our retailers and stocks in most of our product lines.

Excellent. Thank you.

Thank you. Next question today is coming from Mark Astrachan from Stifel. Your line is now live.

Hey. Guys. This is Chris Armes on for Mark. I just wanted to start off with, if you could talk about if you're kind of seeing any volume impact from the multiple rounds of pricing, any change to that Alaska City function relative to history. I know, you guys kind of talked to that on the last call as well.

We've been raising prices in a broadly inflationary consumer environment. And as we indicated, we continue to see strong consumer demand in these categories, as well as our market shares are doing extremely well. In fact, Reynolds Wrap is at an all time high. So, there are some of these price increases are still to be reflected at retail. We'll continue to watch the momentum going forward and adjust accordingly if necessary. But to this point, we're very pleased with what we're seeing from a continued consumer demand in an inflationary environment.

Got it. That's helpful. If I could follow-up and maybe if you'd just give us a reminder, how to think about kind of these price increases kind of the year after you take them, is it -- how do you guys think about it? Are you mainly giving them back? Are you going to reinvest, or it kind of flow through if the inputs come back down.

Probably the best way to characterize this is have you reflect upon what we experienced back in 2017 where we experienced some pretty significant commodity increases and how we manage through that. During that period of time, we would cover all the commodity costs through pricing, and that offset other -- and also offset other inflationary pressures by leveraging our Revolution initiatives. I think that's a good indicator of what we would expect going forward here. And we're pretty confident that we're really good at this, right? And we've demonstrated our courage in taking pricing and we've demonstrated in the past the ability to benefit from that pricing in subsequent years.

Thanks guys.

Thank you. Next question today is coming from Peter Grom from UBS. Your line is now live.

Hey, yeah, good afternoon. So, I just wanted to understand the top line guidance for Q3 to a degree. Could you maybe help us understand what it embeds from a pricing versus volume perspective? I mean, do you expect volume growth? I know, the comp gets much tougher there. And then, maybe more of a housekeeping and following up on Lauren's question, do you anticipate the 200 basis points negative impact from shipping delays and suppliers to reverse in Q3? And then, sorry, just lastly, on the top line, like how much more room is there from a retail replenishment perspective. Thanks.

Well, let me just start with the last part of your question and we do expect that the impact of the shipping delays to some degree will abate, right, but that's been baked into our overall guide. As it relates to the …

Okay.

All right. So, as it relates to the pricing increases and how we will fair moving forward on that. I mean, I think that we've kind of communicated that clearly. We feel pretty confident about those and that our ability to recover that has been proven in the past. So, I feel pretty good about our ability to continue to manage through this.

And regarding your last question on retailer replenishment, and it's made significant progress in Q2. There's some that go in Q3 and that's baked into our guide as well. But the revenue in Q3 is primarily price. We're not making a lot of volume growth assumptions in Q3 based on growth of volume. We had a good strong year, last year. Consumer demand remains strong, but the revenue guide for Q3 is primarily price.

Okay. Super helpful. And then, Lance, I just wanted to go back to comments you made in Q4, and then again in Q1 around changes in category growth rates. And I know you mentioned in your prepared remarks, the Harris Poll and Numerator Polling around stronger category growth versus pre-COVID levels. But I would love to get your perspective on if anything has changed in your view sequentially, right, as consumer behaviors change. And then, is there any way you can help us quantify what you expect that new and category growth rate to look like post-COVID? I think it was around 2% pre-COVID, so it was a long-term expectation now 2.5%, 3%, just anything that will be really helpful.

Yeah. We haven't seen fundamental shifts in consumer behavior. I talked a lot about that in our prepared remarks that consumers in both of our Harris Polls and our Numerator Polling indicate continued elevated use of our products across our category. So, no fundamental shift from all those previous seven polls that we've done throughout COVID. As far as the category growth, of course, that's a bit difficult to predict. But what we said pre-COVID was these categories were growing at 2% to 3% and we expect after COVID for the usage to be higher, as people are cooking, baking, and spending more time at home.

Very helpful. Thank you so much.

Thank you. Our next question today is coming from Andrea Teixeira from JP Morgan. Your line is now live.

Thank you. So, my question is regarding -- basically the phasing of your guide. So, when you -- when we look at how you -- like the new guidance for the third quarter, and like, well, not the new, but how the third quarter and the fourth quarter will shape. And then, the way you were saying about the timing of the price increases, how should we be thinking? Because I'm assuming like to get into a guide, you're still looking at a high single on the top line. And then the fourth quarter is a much easier comparison. And to your point, that's where we're going to get all the benefits of the pricing increases. So, I'm just surprised that the decline in guidance is actually also impacting the fourth quarter so much. And on that, like I was curious, because you did say the resin, your expectation that the resins will have peaked in July, is that what you're baking into guidance, or you were basically saying, that's what we expect, which we for -- just to be prudent, we are assuming spot prices for everything else remaining of the year.

Well, let me take the last part of that question first, which is what are we baking in the guide relative to resin prices? And what we're baking in is what the curves are that I referred to from IHS and CDI, which have peaking in the July timeframe and easing through the balance of the year for resin and aluminum stabilizing at the current rate. So, from a standpoint, what's changed from the last commodity increases, that's a $100 million of higher commodities, a process three -- those three resin -- the two resins and aluminum versus what we had when we talked to in May. So, two things happened. One, it continued to go up very rapidly. And then two, the forecast for the curves came down much slower, much more gradual. And that's the -- that is the difference between both Q3 and Q4 is the May guide versus our current guide.

No, I understand that. But then probably what's happening -- and you're assuming the phasing of it, because by the time it hits your P&L, you might not -- like the decline may not be effective fast enough. So you're not -- we are not going to see this -- the alleviation of those costs. Is that the way we should be thinking?

Yeah. It -- because it got pushed out further on the curve, it pushes it out on the P&L. It's fundamentally time. It's all time. So, as the curves -- if they continue to go up and then they come down more gradually, the recovery time is gets pushed out on an annualized basis as I mentioned a moment ago. And three of our four business segments, we've got enough pricing now and it covers those curves on an annualized basis. But the timing lag is the challenge with Q3 primarily and then some of Q4 versus the prior guide.

Okay. Thank you. And on the top line, just as we go into -- I understand like most of your high single digits, pretty much your price. So, right there we get the two price increases or about that call at 6% and no volume. But then when we get into the fourth quarter, then we probably going to get a double-digit growth, because then you're going to get the volume and the price increase at a higher magnitude, is that the way to think as we back out your guide?

Yeah. I think that is exactly the way to think about it. In addition to that, I would say that some of the things that we are benefiting from as well is they are innovation pipeline. So, we still are seeing 20% of our overall revenue coming from new products and within those new products, like a non-stack and a 100% recycled foil, we're also seeing richer margins as a result of that. So, I think it's a combination of what you said as well as the benefit we're getting from innovative products coming on stream.

And Michael, that's super helpful. Then, the 200 basis points improvements in the Revolution. So, that -- is that baked -- basically, is that going to impact mostly the fourth quarter? Is that the way to think, or that was gradual.

That's gradual. It's spread out throughout -- over the course of the year. And I mean, in Revolution, we've been quite pleased with it. It's tracking well ahead of what we've expected. And -- but that's a continuous process. It's not as choppy as one might think about.

Okay. Thank you. I'll pass it on.

Thank you. We reached at our question-and-answer session. I'd like to turn the floor back over to management for any further closing comments.

Well, thank you everybody for your questions. And we sincerely appreciate your time this afternoon. Our revenue is growing, and we expect accelerating revenue growth over the balance of the year, driven by consumer demand, pricing, innovation and our strengthened manufacturing and supply chain capabilities. I also want to particularly thank all of our employees for continuing to follow prevention measures and putting safety first, as we grow our business in a very exceptional time. Stay safe, stay well. Thank you.

Thank you. That does conclude today's teleconference. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today.