Ladies and gentlemen, thank you for standing by and welcome to the Reynolds Consumer Products Fourth Quarter 2022 Earnings Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will 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.

Thank you, operator. Good morning everyone, and thank you for joining us on Reynolds Consumer Products fourth quarter and fiscal year 2022 earnings conference call. Please note that this call is being simultaneously webcast on the Investor Relations section of the company’s corporate website at reynoldsconsumerproducts.com. Our earnings press release and accompanying presentation slides are also available on the website. With me on the call today are, Lance Mitchell, our President and Chief Executive Officer; and Michael Graham, our Chief Financial Officer. For our agenda this morning, Lance will focus his remarks on market performance and the Reynolds cooking and baking recovery plans, as well as discussion of our performance drivers, while Michael will review our fourth quarter and full-year financials, as well as our 2023 outlook. Following prepared remarks, we will open the call for questions. Before we begin, I would like to provide a few reminders. First, this morning's discussion may contain forward-looking statements based on current expectations and beliefs. These statements are subject to risks, uncertainties, and changes in circumstances that could cause actual results and outcomes to differ materially from those described today. Please refer to our Risk Factors section in our SEC filings, including our annual report on Form 10-K, and our quarterly report on Form 10-Q. Please note the company does not intend to update or alter these forward-looking statements to reflect events or circumstances arising after the call. Second, during today's call, we will refer to certain non-GAAP or adjusted financial measures. Reconciliations of these GAAP to non-GAAP financial measures are available in our earnings press release, investor presentation deck, and Form 10-K. Copies of which can be found on the Investor Relations section of our website. Now, I'd like to turn the call over to Lance Mitchell.

Thank you, Mark. Thanks to our people, our integrated brand and store brand business model and our unwavering commitment to category leadership, we made strong progress on our key initiatives in 2022. We enter 2023 with increased market share in our largest categories, service returned to pre-pandemic levels, and profitability restored in three of our four business segments. However, as you can see from our fourth quarter results, the Reynolds' Cooking & Baking business segment performance fell short of our expectations. On our earnings call in November, we reported that the Reynolds Cooking & Baking business segment entered the fourth quarter having experienced periods of unplanned equipment downtime, resulting in additional manufacturing costs, and impacting our ability to adequately supply customers. Equipment reliability remain challenging in the fourth quarter, driving inefficiencies and manufacturing costs higher than expected, while also driving continued higher aluminum costs. These factors drove the EBITDA shortfall versus the expectations we shared with you in November. In addition, while we were successful driving Reynolds' Wrap share to the highest quarterly level for the year. Household foil consumption was weaker than expected. Also, contributing to lower than anticipated net revenues for the quarter. Now, let's turn to our plan to return Reynolds Cooking & Baking to historical levels of profitability. And as I do so, I want you to know that we enter 2023 with a thorough understanding of what has been impeding Reynolds Cooking & Baking's margin recovery, as well as the team and resources in place working to correct the issues impacting that business segment. Key actions underpinning the Reynolds recovery plan include the following: management changes including several key operational leadership roles. Redesign of equipment reliability processes and practices incorporating benchmarks and input from experts and operational excellence, return to pre-pandemic preventive maintenance disciplines, and…

Thank you, Lance, and good morning, everyone. I'll start with a review of our full-year 2022 and fourth quarter financial results before turning to our 2023 outlook and the actions we're taking to return to pre-pandemic profitability this year. For the fiscal year 2022, net revenues were a record $3.8 billion, up 7% from $3.6 billion in the prior year. This growth was driven by pricing, up 13% taken in response to increased material, manufacturing, and logistics costs, and partially offset by lower volume. Volume was lower driven by price elasticity and increased activity outside the home, which was partially offset by share gains in household foil, waste bags to submersible tableware and other categories. Adjusted EBITDA was $546 million, down 9% from $601 million in the prior year, due to lower volume and higher advertising costs, partially offset by the timing of pricing actions to recover increased material, manufacturing, and logistics costs. Operational inefficiencies in the Reynolds Cooking & Baking segment and continued supplemental purchases of milled aluminum at a premium to our cost drove the EBITDA disappointment versus our previously provided outlook. Lower household fuel consumption together with higher cost aluminum also contributed to the earnings decrease. Adjusted earnings per share for the year was $1.28 versus $1.59 in the prior year. Turning to our fourth quarter results. We delivered a record net revenue of $1.1 billion during the fourth quarter, up 7% from the prior year's Q4 of $1 billion, and in terms of profitability, each of Hefty Waste & Storage, Hefty Tableware, and Presto segments, fully recovered to pre-pandemic profitability, while also reporting record earnings. With improvement driving a 10% increase in adjusted EBITDA to $200 million by comparison to $181 million in the prior year. Operational inefficiencies in the Reynolds Cooking and Banking segment and…

Thank you, Michael. As I turn the call over to the operator for your questions, in the interest of time, we ask that you please ask one question and a follow-up and then rejoin the queue if you have additional questions. Operator?

Thank you. [Operator Instructions] Our first question is from Lauren Lieberman with Barclays. Please proceed.

Thanks so much. Good morning. I guess to start at a, kind of high level and appreciating you went through in, kind of key bullets on this plan to recover in the Cooking & Baking business. I guess upon first getting to know the company, you know my assumption was, this is going to be a great manufacturing operation, right? Reynolds comes out of packaging background that this is a manufacturing company and then my positive surprise with how – what great marketers the company is. But now what we're finding is where there seem to be cracks is in what I thought was core, right, the manufacturing. So, I just – knowing you've offered words already on the plan to repair, I just need to go back and understand a little bit better. What's going on in terms of equipment reliability? Is it a matter of underinvestment in capital? I'm struggling with, kind of what's broken down operationally because last quarter when you had these downtime, you discussed it as temporary in nature, and so, there's something here that wasn't temporary was a misunderstanding of the issues that began in the third quarter. So, just a little bit more color on all that would really be great. Thanks.

Lauren, that's a very fair question and very accurate. We are a great manufacturing company. And the cause really goes back to the pandemic. Our focus during that period of time, really strong demand from consumers, particularly for Reynolds Wrap, included some swings and production rates that we've never seen historically and it compromised our maintenance programs and therefore our equipment reliability. In addition, we paid heavy attention to restore any element of production to [unpreventive] [ph] maintenance. So, the resolution of that is to return to historically effective preventive maintenance disciplines, while also implementing multiple new initiatives, including the ones I mentioned in my prepared remarks. I think it's also worth reminding that we have a very strong team. And along with the input of some outside expertise that we brought on board, it gives us a high degree of confidence in the effectiveness of our plan. The key here is the improvement in operational efficiencies as that reduces the manufacturing cost while also decreasing our reliance on supplemental purchases of milled aluminum. And we expect to [proceed] [ph] along the lines of Michael reviewed in his prepared remarks. Our plan is very detailed and it has multiple elements to it. I think that ultimately the key assumptions are that, one, we have a very firm grasp on the causes of the downtime; two, a prescription match to the causes; and three a team to apply that prescription. I mentioned the confidence in our team and I'm equally confident in our understanding of the loss of efficiencies and our plan for fully reversing them.

Okay. That's great. Thank you for that. And then just in follow-up, in the release it was specifically that you're not going to offer non-GAAP or adjusted net income and EPS and sticking with EBITDA. So, [the time] [ph], you know EBITDA’s cash, it's closer to cash, but any sort of perspective you can offer on some of those non-GAAP adjustments or just maybe even why, right, is it because you don't yet know the cost of restructuring and sort of remedying the plan that you're detailing and you don't want to put a number out there for the cost of the plan? Is that the key reason we're moving away from adjusted EPS?

The reason we're moving away from adjusted EPS, and I'll let Michael elaborate on this is there is no transaction costs anymore. And so, we don't expect there to be any adjustments to any of the GAAP measurements, three years after the IPO. And as a matter of fact, our compensation is based on EBIT, not EBITDA based on the incentive plan. So that comment in the release was primarily just to say, there's not going to be an adjustments period.

Okay, that's great. Okay, great. That was a misunderstanding. I was reading it and thinking is this about there being restructuring costs that can't be quantified, but it's rather that there's – that the adjustments post IPO or that's in the past? That's great.

Right.

Okay. Thanks. I'll pass it on and get back in the queue if there's time. Thank you.

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

Hey, folks. Thank you for letting me in. A couple of questions. First, you hinted that the issues you're seeing in first quarter are going to bleed into 2Q with comments like lapping elevated consumption through the first half; comments like, you're still going to be working through the inefficiencies through the second quarter etcetera. Can we just put a finer point on that? And can you unpack what really are your expectations through the first half of the year with the implicit second quarter?

Yes. So, as I said in my prepared remarks, after Q1, we have significant less reliance on supplemental milled aluminum, resulting in lower average cost. Operational efficiencies approved over the course of first quarter improved further in Q2 followed by a return to pre-pandemic profitability in the second half. A bit more color on this, you'll see carryover of Q4's additional purchases for supplemental – supplemented by milled aluminum into Q1. Also, since Q1 is seasonally a smaller quarter, the profit impact will be more pronounced in the second quarter, which is a [larger one] [ph].

Okay. Okay. So, let's switch gears then back to, sort of Lauren’s angle of questioning and if we go back to your pre-IPO days and I remember all the hype about your shake and bake technique of taking and starting to, kind of form your own stuff. So, you don't have to go out there in the open market and buy this. And I recall it being, kind of new. It's not like you've been doing this for a decade. It's something that you began to implement really just a few years ago and it sounds like given that you're now going back out to the market to buy this, it sounds like that's the issue, like this new approach that's still relatively young isn't working for you. So, do you have to, kind of revisit that whole model, this whole shake and bake approach and why should we have confidence that it's just a couple of tweaks on the preventative measures and you'll be back to [prime] [ph]?

Shake and bake is about melting aluminum. It's about melting scrap aluminum. It's that production process is in Hot Springs, Arkansas. It's part of our aluminum melting facility and it's 100% operational. What we're talking about here is the milling operations in Louisville. That is the area where we have the challenges and that we're addressing. So, we're able to melt more aluminum that we can mill. And so, we have to buy milled aluminum from a third party. That's the significant issue here that we're addressing. There are two different manufacturing processes that you're addressing.

That's helpful. Thank you. I'll pass it on and like Lauren get back in if there's time.

Our next question is from Kaumil Gajrawala with Credit Suisse. Please proceed.

Hey, everybody. Good morning. So, clearly something didn't go, I guess, according to plan in Cooking & Baking. It sounds like you have a grasp on what occurred. Is there – are you able to put some – perhaps some numbers around precisely what it cost? Obviously, your guidance for 1Q, EBITDA for the segment gives us a sense, but did it cost $20 million of EBITDA or $40 million or can you just give a little bit of a read on what it might have – what the expense might have been that is a little more one-time?

We missed the guide by let's call it $20 million. $10 million of that was volume, approximately $5 million of it was the metal purchases, and the other $5 million was the operations disruptions.

Thank you. Thanks for being so clear. And typically we don't ask for guide by segment or anything, but I think in this instance, it might be helpful to just get a sense for the full-year as Cooking & Baking has made between [200 and 250] [ph] of EBITDAs, you know as we're thinking about the full-year for 20233 or if you can at least give us a sense of where you expect it to end up once we get past 1Q?

Yes, you're right. We don't give guidance on individual segments. We did try to be very clear about the cadence of the earnings recovery in the Cooking & Baking segment. And Michael in his prepared remarks talked about Q1 being breakeven type EBITDA and then recovering the full profitability by the second half with good progress in Q2. For the full-year, that business segment will be better than it was in 2022. It is back half loaded, but specific numbers, we're not going to guide specific numbers on segments.

Got it. Thank you. I had to try.

Our next question is from Tristen Chau with Stifel. Please proceed.

Thanks and good morning everyone. This is Tristen on for Mark. I just have two questions. First, just on cash flow, they saw that working capital was dragged down by increased inventories. So, what gives you confidence that working capital or inventories can improve to get net debt to 1.8 billion to 1.9 billion as forecasted in your guidance? And what's the reasonable expectation for cash flows from operations? And I have a second question after that.

Yes. A big drivers, you know obviously a big part of [it] [ph] return to profitability within our Cooking & Baking. We also see commodities as being stable. We have a number of revolution initiatives that we've talked before and we've had a great track record in terms of driving that and that materializing and bottom line results. Beyond that, we also have a number of working capital initiatives that we continue to push. Inclusive in that, obviously, is making sure that we manage our CapEx spending, but that's going to be supplemented by a very high focus on accounts payables, as well as managing inventory levels.

Great, thanks. And my second is just, you mentioned an increase in [A&P spend] [ph] in 2023, and so how does that compare to pre-pandemic levels? Is there a certain threshold where volumes respond? Thanks.

Yes. This brings us back to historical levels of advertising spending. It will be approximately $20 million higher than it was in 2022.

Thanks.

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

Hi. This is [Shobana] [ph] on for Andrea. You did mention that you are expecting to see improvement of profitability by Q3, end of Q2 progressing and laid out all the foundational, but can you please go over the specific reasons, like is it the timing of the commodities? The addressing the inefficiencies and/or promotions? And if you could please give us a sense of the, kind of numbers you're allocating to each of these reasons? Thank you.

Yes. I did say that in my prepared remarks that we do expect that we're going to see increased operational efficiencies throughout the quarter. And obviously, a big part of that is going to be the timing of the actions we've put in place. We do also see commodities. As I mentioned earlier, our commodity is not being as much of a drag on overall business. And we see the lower Cooking & Baking have a better performance, as we've mentioned earlier. Those are the key drivers.

Thank you. And promotions would not play a factor at all or...?

Well, it's minor in terms of the overall impact to overall [indiscernible]. I don't think that is a big factor.

Thank you for clarifying. I’ll pass that on.

Our next question is from Peter Grom with UBS. Please proceed.

Thanks, operator, and good morning, everyone. I hope you're doing well. So, I wanted to ask about the profit outlook, but more just, kind of what's embedded in terms of the commodity cost. I think the release date that you're expecting spot rates from the end of January to hold, is that simply just being conservative or is there something that you're seeing that would, kind of actually drive these spot rates to hold at current levels? And then maybe just a follow-up on that. I mean a lot of news around potential tariffs on Russian aluminum, any thoughts on how this may or may not impact your profit targets?

Let me answer the last question first. We don't buy metal from Russia. So, it will not have any impact on us either way. The first question – remind me the first question, again, it was...

Yes, just more around why are you assuming spot rates, kind of hold? I mean, I think most people are more of the view that you could see some moderation in commodity costs from here. So, just any thoughts on…

Yes. Aluminum prices closed out, the LME plus the Midwest premium closed out December to $1.29. It's now trading at the high $1.40 to $1.50. So, we've seen some already some increases in aluminum costs from where they closed out the year. And polyethylene recently went up $0.03 a pound as it closed out January. So, we do see stability, compared to what we saw in 2021 and 2022 in these commodity costs, but I think further declines plus other inflationary costs are factored into our guide.

That's super helpful. And then I guess I just want to go back to the commentary around gross profit return to pre-pandemic profitability in terms of gross profit dollars. And Michael, I think back in July, it was kind of this $950 million number in November, the change in elasticity, kind of shifted that number lower. So, just – I know it's kind of the gross profit recovery is more of a back half dynamic now, but just how should we be thinking about gross profit recovery for the full-year, just in the context of what you've outlined previously?

Yes. So, I think the context you provide is accurate, you know drivers, we see gross profit being around $920 million now. We did previously guided that – we did previously give an indication around $950 million, which we later lowered to around $930 million. It's lower for Reynolds Cooking & Baking and higher for the other business segments, but net down Reynolds for we've reviewed operational efficiencies and the purchases of supplemental milled aluminum at a premium. Those are big drivers of that. And then on other business segments – other businesses, as we enter 2023, they have healthy shares across the businesses. They've demonstrated strong performance, and it's going to be a bit of an offset there. So, the confidence is high as we move forward, but clearly, it's been a drag, primarily driven by the Cooking & Baking business.

Got it. Thanks so much. I’ll pass it on.

[Operator Instructions] Our next question is from Rob Ottenstein with Evercore ISI. Please proceed.

Great. Thank you very much. Maybe if you could talk a little bit about – you had some initial comments that you expect trade promos to be up in 2023, how should we think about that in the context of still an inflationary environment, still a lot of room to recover on the margins. You guys are the category captains. So, how should we think about that statement? And maybe if you can reference percent of volume or sales that were sold on trade promos, kind of pre-pandemic at the bottom and kind of where we are now. Thank you.

Yes, Robert, we're talking about a 1% increase in trade year-over-year, and most of that being in the segments that are performing at historical plus levels from a margin standpoint. The trade promotions that we took in Reynolds were completed in Q4 and probably maintain those levels, but we may have to revisit that based on the fact that aluminum has gone up and we may have to reduce some trade and move some price points around. I think we've had a great track record of demonstrating across our business over the years evidenced recently by how we've managed share with Reynolds Wrap that we can manage trade to ensure that we hit the right price points and ensure that we get growth and share as a result. But we're not talking about a significant – it's 1 point of revenue that we're talking about.

Great. That’s very helpful and clear. Thank you.

Our next question is a follow-up from Lauren Lieberman with Barclays. Please proceed.

Great. Thanks. First thing was just on that detail you offered earlier on the drivers of the EBITDA miss, the 10 million from volume. I was curious, how much of that would you – have to ask for more detail on [that’s already] [ph] great detail, but conceptually, was the result of the lower consumption in terms of consumer takeaway or was some of that related to the production challenges in the foil business? The year it was about [5] [ph].

Yes, it was almost exclusively consumer consumption related and a lot of it occurred in December time period from a retailer replenishment from Thanksgiving and then the December holidays. It just did not play out from a consumption standpoint the way that we had forecasted. Our share actually went up in Q4. So, we had – it was not a share issue. It was a category consumption issue that occurred from a consumer standpoint, and we have factored that into our guide as part of 2023.

Okay. Okay. And assuming that consumption remains lower than historic trend or what you previously might have expected, is that slightly softer [indiscernible]?

Driven by elasticities, primarily.

Okay. Great. And then – so Hefty, so profitability, kind of off the charts – sorry, Waste & Storage, I should be more specific. Profitability, sort of unbelievably strong this quarter, right, both in dollar terms, in terms of EBITDA and then also on margin. So, maybe any update on kind of, A, the competitive environment; and B, separate from the comments you've made on a little bit more trade promotion? I think we've spoken previously about just whether or not pricing would prove so sticky with easing in the raw material cost basket? So, yes, just any kind of thoughts there as we think maybe towards – as we move into next year, I'm going to assume this kind of 70 million EBITDA isn't a run rate for the business. So, just kind of any thoughts there would be helpful to make sure we don't get ahead of ourselves on that business.

Well, that category has grown significantly since the pandemic, right? So, it's not as high as it was in the peak of the pandemic, but pre-pandemic, this category is up. And the pricing has been stable. And I think all of us in the category have been focused on ensuring that we maintain profitability and not with a lot of – not a lot of promotions, but ensuring that we get the right price points to ensure consumers continue to have high takeaway. So, I think things are relatively stable in that category, and there's no reason to believe that these profit levels can continue.

Okay. Because it was a huge – I mean [indiscernible] sequentially, right, it's a very material step up. So, would you say what we're seeing there is a combination of better resin costs flowing through, plus the higher pricing that's been enacted over the last – the prior 18 months or so?

I think it's primarily been pricing. It has been implemented across the category over the last three quarters.

Okay. Okay. Because there was a final increase I think that went in September, October, but again, just that sequential jump in profit would suggest it was much more sizable than prior rounds or again, getting back to better coverage on stable resin cost.

Resin costs came down some, and then the pricing went up. So, we've crossed that threshold where we're back to higher profitability.

Okay. Alright. Thank you.

Our next question is a follow-up from Kaumil Gajrawala with Credit Suisse. Please proceed.

Thank you. Thanks for taking a second. I think you guys are in a better position than most on having a sense of the consumer and any shifting between private label and branded. Can you just give a sense of what you're seeing from a consumer perspective? Is there any trading down? There's reduced consumption, but are decisions being made to save dollars at the shelf? Any insight there would be useful.

In our categories, label share was actually down in a number of our categories last year and in the fourth quarter. Private label shares down in foil. It's down in food bags. It's down in slow cooker liner and oven bags for both the year and the quarter, Q4. And private label share in waste bags was down for the full-year, was up slightly in Q4, but the Hefty brand was also up slightly in Q4. We are seeing a higher private label in party cups, plastic wrap and parchment paper. And all of those, at parchment paper, we have a very strong private label position. So, those three segments, we are seeing some trade down. We've also seen some trade down in some channels to lower pack sizes, but not a shift from brand to private label.

[Operator Instructions] Our next question is a follow-up from Jason English with Goldman Sachs. Please proceed.

Hey guys. Thanks for letting me double dip. Michael, you said your guidance is now predicated 920 million of gross profit. You had previously said, you expected SG&A of 400 million. That gets you to a $640 million EBITDA figure, about 20 million ahead of what you're actually guiding to. So, implicitly, you're now expecting higher SG&A. What's driving the higher SG&A outlook?

Yes. The significant driver of the SG&A increase is the higher variable comp and increased advertising, as you noted, as well as market research, but it is just a reminder from a variable comp standpoint. Our variable comp is linked to our year-over-year earnings growth. And as such, as we expect to increase in earnings over the year with that will become – come higher SG&A expense. That is a big driver.

So, you're cutting your earnings outlook and raising your incentive comp outlook versus where you were in 3Q?

No, I'm telling our telling you that our incentive comp is linked to earnings progression, right, and our forecast has that going up.

Okay. And that's the reason SG&A is going from [400 million to 420 million] [ph]?

That's the largest driver.

Okay. And then on the volume outlook for, sort of flattish on the year and you're coming in down mid-singles, what gives you confidence in the inflection to growth later in the year? And is there any like reroll or anything that we're not going to be able to see in the consumer link data that would drive that?

As a company, our volumes are up roughly 4% versus 2019. Of course, pricing has been taken over this period has been significant. And implying some elasticities for a sustained period of time. At different points in 2022, our categories did return to pre-pandemic elasticities. And we're using those elasticities I've mentioned in a previous question, as part of our guide. Our confidence in our assumptions on elasticity is based on a number of factors. Price increases are largely complete when assuming a more stable and easing commodity environment. Consumer activity outside of the home is increasing versus the pandemic rates continuing at a relatively stable level in recent months. Our categories and our portfolio's response to trade and other forms of promotion has proven to be very effective. And our planned levels of trade and advertising we've talked about are – we expect to have that impact.

Okay. Thank you.

We have reached the end of our question-and-answer session. I would like to turn the conference back over to Lance for closing comments.

Thank you all for your questions, and we do appreciate your time this morning. We have strengthened our competitive position over the last three years. We've recovered pre-pandemic profitability in three of our four business segments, and we enter 2023 with a strong team and a robust plan for recovering Reynolds Cooking & Baking profitability. We'll translate to even stronger performance for us overall. I want to also thank our employers and our retail partners for their dedication and contributions during these challenging and dynamic times. Thank you.

Thank you. This does conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.