Ladies and gentlemen, thank you for standing by and welcome to the Reynolds Consumer Products Third Quarter 2022 Earnings Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there'll be a question-and-answer session. [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.

Good morning, and thank you for joining us for Reynolds Consumer Products third quarter 2022 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 and our fundamentals, and Michael will review our quarter and outlook. Then we will open it up for your questions. 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 our Annual Report on Form 10-K and other reports filed from time-to-time with the Securities and Exchange Commission and our 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 measures to non-GAAP financial measures is available in the earnings release posted under the Investor Relations heading on our website at, reynoldsconsumerproducts.com. We have also prepared a few presentation slides and additional supplemental financial information, which are posted on our website under the Investor Relations heading. This call is being webcast and an archive of it will also be available on the website. While we would like to answer all 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'd like to turn the call over to Lance Mitchell.

Thank you, Mark. We delivered another quarter in-line with our earnings expectations in what continues to be a very dynamic environment. Third quarter highlights include the following: household foil and waste bag volume responded favorably to increased advertising, promotions and in-store features and displays. Reynolds and Hefty gained share in waste bags, households foil and disposable plates. Private label gained share is Presto close food bags and disposable party cups where we have a significant private-label presence. We implemented previously announced pricing to offset additional cost increases. We accelerated revolution cost-savings while also implementing new programs for savings, and as a result we closed the gap between pricing and cost increases. Our category leadership and agility grow these achievements while setting the stage for substantial margin expansion and profit growth in the fourth quarter and 2023. Before talking about performance drivers, I'd like to share a few thoughts about the economic environment and our market position. We assume increased elasticities going-forward, which contributes to our fourth quarter revenue expectations now being at the low-end of our previous range. That's obviously a headwind, but one of our strengths is our ability to adapt. And as I said, we are pleased with how consumption is responding to our pickup in promotions, advertising and in-store features and displays. I think it's also worth remembering that our integrated brand and store brand model is a competitive advantage. Reynolds and Hefty represent a large share of our categories. And our private-label portfolio complements our brands in mobile categories. Finally as we enter the holiday season and develop our plans for next year it's important to note that increased cooking and working at-home have driven many of our categories to levels that are beyond those implied by the last three years of household formation. That's clear…

Thanks, Lance, and good morning everyone. I'll start with a review of our third quarter results then turn to our outlook and why we are well positioned for margin expansion and earnings growth in the fourth quarter and in 2023. Net revenues in the third quarter were $967 million, an increase of 7% over third quarter net revenues of $905 million in 2021, driven by price increases, partially offset by a decline in volume. Adjusted EBITDA for the quarter was $116 million, down 12% versus last year's third quarter of $132 million, driven by lower-volume and higher SG&A as price increases fully offset increases in material, manufacturing and logistics costs. Adjusted earnings per share for the quarter was $0.24. Turning to our segment performance, details are in our press release and in our 10-Q. However, I do want to cover few key highlights. Pricing was up 14% driven by increases across our entire portfolio, offsetting all material, manufacturing and logistic cost increases. This increase was partially offset by a 7% decline in volume, reflecting a 7% increase in Hefty Tableware volume more than offset by a 14% volume decline in Reynolds Cooking and Baking at high single digit decline for each of Hefty waste and storage and Presto. When we reported our second quarter results, we shared our expectation of low to mid-single digit volume decline in the third quarter. This largely played out as anticipated with the exception being non-retail sales that were impacted by unplanned downtime in the Reynolds Cooking and Baking segment and to a lesser extent increases in waste bag elasticities. So let's unpack the volume performance for the third quarter compared to prior year period. Reynolds Cooking and Baking volume decline of 14% was primarily driven by lower non-retail sale, which included [indiscernible], related-party sale…

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

At this time, we'll be conducting a question-and-answer session. [Operator Instructions] Our first question comes from Bill Chappell with Truist Securities. Please proceed with your question.

Thanks. Good morning.

Good morning, Bill.

Hey. I just wanted to follow-up on the cooking and baking profitability issue. I appreciate the comments, but I guess the leadership change maybe implies a little bit bigger or longer lasting issues, so maybe any color around that of when you think things can get back to where you want them to be and how long it would take?

Yeah. So as Lance stated in his remarks, the recent manufacturing, operational performance in Reynolds and Cooking and Baking has fallen short of our standard and our historical results. So we've had demonstrated capabilities that is proven in the past. In terms of what's driving that. As I said in my remarks, it's unplanned equipment downtime. And this is driving higher manufacturing costs and lower production volume. That's impacting our ability to fulfill non-retail demand, it's also slowing down the flow-through of our lower cost metal which has a significant impact to our Q4. While most of these issues are temporary in nature, we are implementing operational changes to address them all and Lance kind of spoke to that. So we do see this as being a temporary challenge that we're working through. We -- as it relates to the change with leadership, obviously, we brought in a person with significantly greater operational experience to help us manage through this.

Got it. And then just as a follow-up, and you might have touched this before, but when you comment about returning to kind of pre pandemic profitability levels in ’23, is that -- I know you're not giving guidance, but is that for 2023 or within -- during 2023 you reach that on kind of a run-rate? Thanks.

So it is within 2023, that why we're talking about returning back to pre-pandemic profitability.

Got you. It will be a run-rate as we move through the year.

Yes.

Thank you. Thanks so much.

[Technical Difficulty] comes from Mark Astrachan with Stifel. Please proceed with your question.

Yes. Thanks and good morning, everyone. I guess two questions for me. One, if you can just give maybe a bit of background on what happened from a sales perspective relative to early September and your updated thoughts at that point relative to where results came in, kind of what progress through September and is that sort of directionally what we're hearing from an elasticity standpoint implied in the fourth-quarter commentary? And then, the main question is what drove the increase in promotion price gaps in waste bags and are you happy with where you are as volume declines worsened in the quarter and maybe give some expectations on where we go from here? Thank you.

Thank you, Mark. September volume across our products and segments came in-line with our forecast and our expectations. So there's really no difference from what we talked about at the Barclays Conference relative to the September results. We have from a category standpoint in waste bags we implemented a Hefty waste bag price increase in September. And the promotions we have added are off of a small base and they are focused on quality, features and displays like end-caps, not just price points. The category itself is 7% larger than it was in 2019 year-to-date, but elasticity and reopening are driving some category declines versus year-ago levels. So our strategy remains as to what it's been for many years, support the category and our retail partners with a strong portfolio of branded and private-label products and drive Hefty as a brand operating with the best combination of value. That's benefited the category and our portfolio is -- requires continued adjustments to be successful. Hefty is outperforming the category. The last four weeks ending October 30 with the stand EQ the category is down 8.5%, while Hefty is down 3.8%. And for the last 12 it’s similar, the category is down 7.5% and Hefty is down 3%. And we're looking at EQ performance because looking at dollars in the category is really blurred by the price increases.

Thank you.

Our next question is from Rob Ottenstein with Evercore ISI. Please proceed with your question.

Great. Two questions please, one in the shorter-term on results, just maybe a little bit more detailed thoughts on the trend improvement on the foils. And then a little bit kind of forward-looking, can you give us just some way to think about the potential benefit to your business, with a more constrained consumer who may be thinking about trying to save money by eating more at-home and less at restaurants and how that's likely to play into your business? Thanks.

Yeah. I think both of those questions could really be answered in terms of what's happening with the foil category, what we're seeing from the promotional activity that we've taken. The pandemic has benefited cooking and baking behavior and consumers, people are in the kitchen more and we did a proprietary survey that they are cooking more often, the younger consumers have come into the category and stayed in the category, and recently because of the higher-cost of eating out they're coming back and eating in the home more frequently than they were earlier in the year. Our category and our brands are responding to advertising and promotion as we talked about in the prepared remarks. Now on the challenge side we do see that the consumers are not leaving the category, but versus during the pandemic the daily usages has dropped moderately. And there are some other options in the kitchen which is an opportunity as well as a challenge, they've got other options for creating a meal, appliances other than a stove or grill, which include air fryers and instant pots and slow cookers, for example. So, overall, we're very pleased with how the promotions have responded and as we head into the holiday season we've really got a lot of promotions in-place and got the price points in-place for the category.

Thank you.

Our next question is from Andrea Teixeira with JP Morgan. Please proceed with your question.

Thank you. Good morning everyone. So my question is regarding your comment about the 7% increasing from 2019 for the pandemic, especially for trash bags and then I think for cooking and baking, you said some categories, I'm assuming it's cooking and baking, was above 10%. Is that a volume consideration? And if so, from a total outspending from the consumer standpoint, like are you assuming again it has been bigger price elasticity and on-top of that you had this service issues, is that any indication that this is going to be abating into the first quarter of next year? And if not, what is the scenario that would lead you to form that margin inflection you're assuming some volume recovery into 2023. In other words, what we need to see in order for you to get the margin accretion? Is the pricing continue sticking or the $525 million in inflation abating, what needs to happen in order to get there? Thank you.

Let's talk about what's happening in each of the categories versus 2019 and as we've gone through the pandemic and as we're now in 2022. First of all, I'll just add some of the comments I made about the foil category in answering Bill's question. There are several things that are driving the growth in the foil category, people are cooking more now than they were in 2019. Foil and parchment usage continues to be higher than pre pandemic levels and 70% of consumers are eating at home more in response to inflation as I mentioned a moment ago. Importantly, we've achieved key price points for Reynolds Wrap, we stepped-up promotions, have gotten below the $5 price points and have gotten that across the other product lines as well. And private-label gaps in the category are returning to historical levels when Reynolds Wrap is on promotion. So we've achieved those price points, we've introduced additional promotions in grocery club and dollar channels in October and our retail partners plan additional promotions leading into Thanksgiving and Christmas. So Reynolds Wrap is responding better than the category as a result in EQ, as I mentioned, across all of our categories, we're evaluating EQ performance versus dollar performance and Reynolds Wrap EQ was up 4.5% versus the same period of 2019, so that's the last 12 weeks ended October 30t. Turning to waste bags, the stay at-home more frequently trend and working more frequently from home has left waste bags healthier than it was prior to the pandemic. The category is strong versus 2019, it's up 7% year-to-date. As I mentioned, reflecting consumer spending more time at-home. Food bag consumption on the other hand is moderately down versus 2019 and that's primarily driven by elasticity. So as the playbook that we've been using for foil and waste bags, we're going to be doing the same in food bag to get the price points correct. In disposable tableware, plastic party cups are up 9% versus 2019 levels, driven by increased everyday use at-home. Now disposable foam dishes are down versus 2019, but that's completely driven by supply constraints. We are selling as much foam dishes as we have supply. And our brand year-to-date is actually up 5%. We see the use of disposable tableware has been steady this year across the category and heading into the holiday season this may continue to be a key theme of driving consumer behavior, desire for convenience as well as keeping tourists to a minimum, as well as holiday gatherings is factored into our forecast for the quarter, but we are seeing elasticity pick-up as we took a significant price increase in October in the tableware business, and we'll be watching that closely.

That's helpful. And on the margin front what needs to happen in terms of like price elasticity and inflation -- cost inflation into 2023, going back to Bill's questions.

Yeah. As we said in our prepared remarks, we've closed the gap and we've closed the gap primarily through our pricing actions and the tableware was the significant one as well as waste bags that we took that led into Q4. So with that, with the easing of commodities we will have a margin that as we go into 2023 and Q4 as well will be improved and back to more normalized levels.

Okay. That's super helpful. Thank you Lance and Michael. I'll pass it on.

[Operator Instruction] Our next question comes from Lauren Lieberman with Barclays. Please proceed with your question.

Great. Thanks. Good morning everyone. Lance, your prepared remarks and comments you've just gone through on category demand and the competitive dynamics are all very, very constructive. And so I wanted to just sort of drill it down and see that to ask if the operational challenges you've got in the Cooking and Baking segment, if that's really what you would attribute fourth quarter looking a little bit softer than prior expectations. What that's really attributable to and I know you've said its short-term and you're making changes, but how should we, think about that? Does that bleed into ‘23 at all or is it kind of a second half of ‘22 and then you think things should be back to normal from that non-retail and manufacturing side of things?

Lauren, I'll answer that one [indiscernible] add to it, Michael if you like. The driver our Q4 EBITDA guide being lower is volume at $7 million, $8 million at the midpoint, the lower-volume is primarily non-retail. And as we mentioned the specific products at our prepared remarks of what non-retail is. And some increased elasticities versus what we saw in Q3. So it's driven primarily by and elasticity look at our volume in Q4 versus where we were at Q3 when we guided. The increased manufacturing costs are short-term and offset by revolution and SG&A reductions.

Okay. All right. That's great. So as I look into ’23, you guys had previously spoken to mid- $900 million for gross profit dollars. And that really being kind of the math on pre pandemic profitability with an assumption on volume. I'm guessing now with elasticity being a bit more significant than what you had previously expected, we should anchor to something a bit lower when we think about that gross profit level for ‘23.

Yeah. I think that's correct, but mid- $900 million are still in the ballpark. And clearly elasticities are greater than we anticipated and reported in Q2. We did kind of give indication that that was a watch out, so that is overall concern. So I think the -- while in the ballpark, I would say that it is a bit lower than we originally thinking.

Okay. All right. That’s great. [Multiple Speakers]

I'd add that we are working to identify additional revolution savings to mitigate and we'll obviously be more specific when we report in February.

Okay. That's great. Thank you so much. On elasticity, I guess what is historically -- and I know for a lot of categories the historic models don't -- aren't even relevant because pricing has gone so far beyond what's been the case historically. So would you characterize that, it's kind of what's been the case for your elasticity models. Is it something about the kind of cross elasticity of overall inflation that's making it a bit worse and we kind of run like a one-for-one type dynamic now is what you're forecasting or something still a bit less than that?

Our categories have been moderately elastic historically with a defined range of 1 to 1.5 negative. Part of it may be the exception, but when price thresholds, that's more significant in our categories then the actual price gaps. And so that's why we're watching those price thresholds and adjusting accordingly and having success in doing so across most of our categories today. Our categories are defined as staples, need given categories and reactive price change accordingly within this moderately elastic range.

Okay. That's great. Thanks so much. I'll pass it on.

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

Hey, good morning folks. Thanks for slotting me in. So lots of comments today about how volume in your categories is still elevated. I think you mentioned that daily use for certain categories is drifting off the highs, but still well-above where we were pre COVID. Lance and Michael, as you guys think forward how much -- what's the cadence, pace and magnitude that you expect that to online as we go through next year?

We have not completed our plan for 2023. We're going through that process now, it will be premature for us to be able to comment on what our outlook is for 2023 from a volume and elasticity standpoint. We certainly want to see how things develop in Q4 as we've gotten price points in-place and we're entering our holiday season which is significant for several of our categories. Once we get through that, we'll have a much better read on 2023 and the outlook for volume for that year.

Is it fair to say that that mid- $900 million guidance out there for gross profit assumes that not all of this volume sticks?

As Michael said, I think it's still in that neighborhood, but elasticity is greater than when we reported in Q2. And so we've got a -- we've got to work through that before we we're able to update the mid- $900 million.

Okay. All right. I'll stay tuned. Thank you. I'll pass it on.

We have reached the end of our question-and-answer session. I would now like to turn the floor back over to Lance Mitchell for concluding comments.

Thank you for your questions and we appreciate your time this morning. I think our business is well-positioned for any economic environment and we anticipate earnings growth in the fourth-quarter and in 2023. I also want to thank all of our employees and our retail partners. They've been dedicated and contributing during these really challenging and dynamic times. Thank you everyone.

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