Greetings, and welcome to the Reynolds Consumer Products Third Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mark Swartzberg, Vice President of Investor Relations. Thank you, sir. You may begin.

Thank you, operator. Good morning, everyone, and thank you for joining us on Reynolds Consumer Products' third quarter 2023 earnings conference call. Please note that this call is being recorded and webcast on the Investor Relations section of our corporate website at reynoldsconsumerproducts.com. Our earnings press release and accompanying presentation slides are also available. With me on the call today are Lance Mitchell, our President and Chief Executive Officer; Michael Graham, our Chief Financial Officer; and Scott Huckins, who recently joined RCP and becomes Chief Financial Officer on November 13. For our call, Lance will discuss our results, the macroeconomic environment and our category performance. Mike will provide additional detail on the third quarter, our guide and capital allocation. Following prepared remarks, we will open the call for questions. Before we begin, I would like to provide a couple of 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 in our annual report on Form 10-K and our quarterly report on Form 10-Q. Please note that 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-Q. Copies of which can be found on the Investor Relations section of our site. Now I'd like to turn the call over to Lance.

Thank you, Mark, and good morning, everyone. Please join me and welcome being Scott Huckins. Scott comes to RCP at a great moment in our history of our company when our brands, our market position and financial profile are strong and getting stronger. He is with us on the call today as part of the transition plan. I'll begin by discussing our results, then I will turn to the macroeconomic environment, our performance in our largest categories and what we're doing to improve the volume trends in disposable tableware. After that, I'll turn the call over to Michael to provide more detail on the quarter and our guide. RCP team continues to perform very effectively in a dynamic challenging economic environment, and I'm extremely proud of all that we've accomplished. We've delivered net revenues and earnings at the upper end of our expectations for the quarter. We expanded EBITDA margin more than 500 basis points in each of our businesses, reflecting effective execution of our plans to increase share across RCP, continued disciplined investments in our business and additional successful implementation of the Reynolds Cooking & Baking Recovery Plan. We converted higher earnings into significant cash flow resulting in our deleveraging more quickly than previously anticipated. We introduced the Hefty brand in press to close food bag category and increased loyalty with Gen Z and millennials. And following quarter-end, we acquired a company that is a research-driven business, which will allow us to accelerate production and commercialization of affordable high-quality sustainable products and material blends. As you know, U.S. households are facing significant economic challenges, including inflation and rising interest rates and other headwinds and which have impacted sales volume across consumer staples. We continue to respond to these challenges by adapting and innovating to meet consumers' needs leveraging our…

Thank you, Lance. I really appreciate the kind words, and good morning, everyone. I'll start by reviewing third quarter results and then turn to our guide. Net revenues were at the upper end of our guide, reflecting a 1% increase in pricing and volume consistent with our expectations. Execution and consistency were strong as each business generated over 500 basis points of EBITDA margin improvement. We demonstrated strong balance sheet discipline, including reductions in working capital, primarily driven by strong inventory management. As a result, we grew operating cash flow by nearly $200 million by comparison to the third quarter of 2022 and improved leverage. Net debt to tolling 12-month adjusted EBITDA decreased from 3.8 times at the end of 2022 to 3.1 times at the end of September, and we made an additional voluntary debt payment of $100 million subsequent to the quarter end. As a reminder, our term loan is a floating rate facility we have hedged approximately 55% of the floating rate risk affording us flexibility to delever without penalty while providing protection and predictability in this volatile interest rate environment. Turning to our guide. We've raised the full year earnings expectations to the upper end of our previous range, reflecting better-than-expected third quarter results and unchanged earnings expectations for the fourth quarter. Our net revenue estimate for the year is now 2% lower than prior year net revenues, consisting of 2% higher pricing, which is unchanged at 4% lower volume. Consolidated retail volume for the year is estimated to be 2% below consolidated retail volume in the prior year. In the fourth quarter, we expect stable to growing retail volume in aluminum foil, waste bags and food bags and lower disposable tableware volume, resulting in a consolidated retail volume decline of 2% to 4%. Our fourth…

[Operator Instructions] Our first question comes from Peter Grom with UBS. Please proceed with your question.

Michael, I wish you the best of luck moving forward and thank you for all the help over the years. And Scott, congratulations and looking forward to working with you. So I wanted to ask about the 4Q revenue guidance, which was a bit weaker than expected, especially on the retail volume front. I think last quarter, there's always an expectation for non-retail sales to have an impact in the fourth quarter. But I may be mistaken, but I think the expectation was for retail volume to return to growth. Can you maybe just talk about what's changed versus August? And while I wouldn't expect any official commentary on '24 just now, but I do think it would be helpful to understand how you see volume performance evolving kind of given the weaker exit rate?

I'll start, and I'll let Michael add to my comments. The change in the revenue guide is primarily the tableware business and non-retail. In the retail -- in the tableware business, we are seeing volumes decline. However, it's worth reminding everyone that we're seeing an 800 basis point increase in the EBITDA margins in that business. Tableware is a more discretionary item than our other categories, and we've taken the most pricing up in that category than we have other categories, up over 30% on a 4-year basis versus high teens in our other businesses. And we started and completed those increases later than we did in our other categories. So we've now crossed some key elasticity thresholds knowing that we may have to address the volume impact. And we're going to use the same playbook we've used with Reynolds Wrap at the right price points, get the promoted activity right and drive the overall category growth. Nonetheless, it's going to take some time to see the full benefit of those actions as it did with Reynolds Wrap, and we've gone through that previously. So that's the primary change in the revenue guidance on tableware.

And Peter, this is Mark. I'll just add to what Lance said to remind you that our non-retail business is a very low-margin business. So while it's impacting the top line, it's not having any really very significant effect on our earnings expectations versus where we were a few months ago.

No, that's really helpful. And then maybe just a follow-up. I wanted to ask about Hefty Waste & Storage. You touched on the innovation and share performance, and it was nice to see -- so the volume mix return to growth this quarter, but there's obviously been a lot of disruption in the category with your largest branded competitor. Did this impact your results at all in the quarter? And I just really be curious how do you kind of see this dynamic evolving as you look out to the fourth quarter?

Well, first, I want to start by saying I would never wish a cybersecurity incident on any company and particularly on a competitor. It's very disappointing to hear that happening to any business across our country. Hefty, as you mentioned, was already driving volume and share in waste bags prior to Clorox's cybersecurity incident. There was some benefit in the latter part of Q3, which is continuing in that, along with a refresh of our category expectations across all of our businesses was factored into our Q4 guide.

Our next question comes from Mark Astrachan with Stifel. Please proceed with your question.

A couple of questions for me. One, just starting on M&A, not trying to make too much out of it, but it's kind of notable considering your history. What are you trying to get out of the acquisition? Is it commercialization technology, R&D know-how, et cetera, any signaling on more willingness for M&A? Or was it just opportunistic and partly because of Michael's comments on the deleveraging faster than anticipated? That's question one.

No, our capital allocation strategy has not changed. We saw a very unique opportunity with this acquisition. This company creates unique and novel raw materials that enhanced performance in postability. They manufacture reusable plant-based products and develop technologies and partnerships in a circular economy, which aligns with our Hefty renewed recycling program and our sustainable product development. So we saw this as a unique opportunity to enhance our research and development opportunities and sustainable products. And as I said, but that doesn't change. Our primary focus is on delevering.

Got it. And maybe just a related question to that and then the second question. So is there any change in your thinking about how to think about that specific Avenue, the sustainability of what you're selling? Or is it just part of the core sort of thing? And then the second real question is just how to think about the balance between gross margin expansion, obviously, very good in the quarter. It probably continues to be good reinvestment, which was increased and just the flow-through to adjusted EBITDA.

I'll answer the first part of the question, I'll ask you to repeat the second one. So Michael can answer it. But our focus has always been on -- and if you look at our ESG scorecard on having sustainable product solutions across our product portfolios. We have a goal to ensure that consumers have a choice of a sustainable product across all of our categories by 2025, and we're well on our way to achieving that goal. So this is part of developing those sustainable product options for consumers. And could you repeat the second part of your question for Michael?

Yes. It was basically just about thinking about the balance between gross margin expansion, reinvestment and adjusted EBITDA growth.

Yes. So when you think about our gross margin expansion, we are expecting continued improvement into the future. We do expect additional gross margin expansion driven by the full year of cooking and baking improvements additional mix and revolution cost savings. So that is our expectation going forward. So you should look to see continuation of our expansion to understand. And you -- and then the second part of that question was related specifically to what again, can you...

Yes. Just what do you do with that incremental gross profit? How do you think about reinvestment? How do you think about flow-through EBITDA?

Well, our priority continues to be delevering and pay down debt. Anything beyond that would be dealt with on an opportunistic basis, but -- and we'll continue to invest in this business, but our priority is to pay down debt and delever as we indicated previously.

Our next question comes from Lauren Lieberman with Barclays. Please proceed with your question.

One question I had on tableware. You walked through the plans for kind of resuscitating the business and using that the existing playbook that's worked. But I was wondering if there's an opportunity to reset profitability or business -- product mix within tableware as you're doing this? So there are segments of that business that are more profitable than others. Sort of is there like a broader kind of reset opportunity within that business as well as you're putting in this resuscitation plan?

Yes. Without getting into specific details beyond what I said in the prepared remarks, the answer to that question is yes. We have restored profitability across all of the products, which gives us the flexibility to invest in all those actions I talked about, which is features and displays, adjusting counts and increasing advertising and promotional activity.

Okay. And then if I shift to the Hefty food bag launch, and I apologize, I don't know if you covered this to a great extent in the prepared remarks. I'm sorry if you did because I was on another call. But I was just curious about just early reads from retailers on shelf space there, if it's incremental, if this is a replace slider bags with press to close, but just how that kind of fits into the product lineup and the decision to add this to the portfolio?

It is to add another brand to the Presto close category. At this point in time, there's only 1 brand in the category and much length we've successfully been in the food bag category with both brands and store brands. There's 3 brands in the slider category. So we saw an opportunity through our category management teams, insights and development to add a brand to the Presto close category. We just launched it recently, and it's too early to get a read on the revenue success that we project. We'll have that when we put our 2024 plan together.

And then final thing, sorry, I was just at our conference, you had spoken to 2024 volumes kind of flattish as a good starting point for expectations. Now that we know about the pressure from -- in tableware and I guess, continued on the non-retail side of things. Just curious how much of that's driving that thought process on flattish volumes? Like should we think about Hefty and Reynolds Cooking & Baking is having like a sort of some growth and then they're began offset from tableware and non-retail?

Well, we are in the middle of our planning process for next year, and we'll have more share in our volume expectations when that's complete. We are -- certainly, we're operating in a very dynamic macroeconomic environment. And I'm pleased with our performance in our largest categories. As you heard in my prepared remarks, our retail volume is stable and growing in household foil, waste bags, and food bags. And that's better than many CPGs in their largest categories, driven by many factors, including our innovation, our leverage of our brand and store brand business model and successful category management with our retail partners. As commodities have and costs have stabilized, our tableware business has achieved levels of profitability, as I mentioned a moment ago on key items that gives us the flexibility to adjust retail prices and price packs together with our retail partners. And those actions will require time to drive improvement, and I'm confident they will, and that will be factored into our 2024 planning.

[Operator Instructions] Our next question comes from Jason English with Goldman Sachs. Please proceed with your question.

And I have to apologies in advance like Lauren, I'm stretching multiple directions. So I may ask questions that you've already addressed, if that's the case. Well, my apologies. It's great to see the robust margin recovery on Reynolds Cooking & Baking, You, however, still well below kind of the 20% level EBITDA level that you were hovering at plus/minus for quite a few years there. Is that a reasonable number to get back to or just because of the numerator denominator effect of how much price you put in the system, should we be looking to level off at a lower margin than that? And if so, what is that right margin? And when do you think you'd be able to get there?

Yes, Jason, it's a great question. We're still in the midst of working through our plan. I mean, so I think we're going to pause and give you an answer on that in a lot more detail in January.

Jason, Mark here. And what I would add to what Michael said is that as you've seen, and really it's been a story all year in 2023, you've seen margin expansion in each of our businesses. And as Lance just mentioned, we're pleased with what we've achieved. As you know, our earnings expectations for the year have come up as we move through the year. So we think we're going into the planning cycle in a very good place to be starting that exercise.

I would absolutely agree with from the perspective an outsider looking in. Turning to the waste and storage business. I think it was Mr. Astrachan earlier who asked the question around Clorox' disruption and the benefit that's accruing to. You mentioned you saw some benefit late in the third quarter. How long should we expect these benefits to continue? And said differently, I imagine some of that disruption is giving you an opportunity to secure some maybe a higher share of promotional merchandising programming than you otherwise would have had. Is that the case? And how far out have you been able to secure the higher share?

I think it would be premature for us to comment on that as we're developing our 2024 plan, how sticky these gains have been on a sustained basis. We'll wait and see, and we'll plan accordingly.

Our next question comes from Andrea Teixeira with JPMorgan. Please proceed with your question.

And Michael, I would like to congratulate you in the next steps of your life and thank you for all the patience along the way. And Scott, welcome, and looking forward to working with you. My question is on the balance between your branded and private label offerings. And I understand that you have -- and correct me if I'm wrong, you had alluded to that, I think, in the second quarter that you had a contractual price reduction in trash bags in the Q4 because of just the rising price flowing through. So I wonder, number one, if that's correct? And number two, if you're looking to do any adjustments to the price of Hefty trash bags given that the price gap will likely widen and what your experience with tableware has been in terms of price elasticity or conversely, because you probably got more velocity given your competitors issues. Is there anything we should be thinking of? And again, thinking of how you've been able to recover your -- it was impressive 800 basis points improvement in gross margin. If you want reinvest a little bit more in promo or that is the level that you feel is appropriate in terms of price points and price gaps?

To your first point about the private label pricing and waste bags, it's been stable and has not changed. We didn't make any changes in private label pricing on waste bags. And resin has stabilized, but we haven't seen nor do we expect significant decreases there. So our pricing strategy remains as it has been. We've restored the margins to a level that we're satisfied with. We believe that we can continue to grow from this point forward.

Go ahead.

I was going to say, I think one of your questions was there about our path to continued gross margin expansion. I did speak on this earlier, but we do expect to see continued gross margin expansion as we get the benefit of the full year benefits from the Reynolds Cooking & Baking improvements. And in additional, we do see mix being favorable. And obviously, we have Reyvolution cost savings that we're still working through. But we've demonstrated in the past that we managed Reyvolution projects pretty well, and you should expect to see that going forward.

There are no further questions at this time. I would now like to turn the floor back over to Lance Mitchell for closing comments.

Thank you, operator, and thank you, everyone, for your questions and your interest in our business. I'd also like to just say thank you again to Michael Graham for his contributions to our company. We're going to miss his business partnership. I also want to really extend a sincere thank you to everyone on the RCP team. They are the reason that we're doing and performing so well. And finally, I'd like you to all mark your calendars for Wednesday, March 20, 2024, when we will be in New York City on that day for an Investor Day to see you all then. Thank you.

This concludes today's teleconference. You may disconnect your lines at this time, thank you for your participation.