Release Date: August 07, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Reynolds Consumer Products Inc (REYN, Financial) reported its best second-quarter earnings in its history as a public company, excluding the pandemic-fueled second quarter of 2020.
- Second-quarter retail revenues increased by 1% to $892 million, exceeding expectations.
- The company continues to drive product innovation, particularly in household essentials and sustainable solutions.
- Reynolds Wrap gained additional market share in the household foil category, and Reynolds Kitchen Parchment continues to grow.
- The company identified and unlocked additional cost savings through its Reyvolution initiative, contributing to earnings growth.
Negative Points
- Consolidated revenues declined by 1%, reflecting a decrease in low-margin non-retail revenue.
- Higher incentive compensation costs and a modest increase in advertising partially offset the gains from manufacturing volume output and lower operational costs.
- The disposable tableware segment continues to be under pressure, despite sequential improvements.
- The company expects a modest increase in commodity costs through the balance of the year.
- There is a $10 million cost headwind anticipated in the fourth quarter due to higher aluminum prices and premiums paid for cooking bags.
Q & A Highlights
Q: Scott, you mentioned that you're looking for a moderate improvement in retail volume in the second half on a like-for-like basis. Can you just kind of take us through the various building blocks behind that?
A: Scott Huckins (CFO): We start with the as-reported retail volumes and make two adjustments: removing the effect of any product portfolio optimization and the effect of retail order timing differences. The core retail volume improved sequentially from Q1 to Q2 by 150 basis points. We expect a sequential improvement from Q2 to Q3 by 50 basis points and another 50 basis points from Q3 to Q4.
Q: Do you think the categories moderately outperformed your expectations due to a weaker consumer who's not going out as much?
A: Lance Mitchell (CEO): Yes, part of the equation is the pressure on out-of-home dining costs, leading people to eat more at home. Additionally, our categories are household essentials that are convenient and low-cost, which people need every day.
Q: Given the broader economy and commentary from other consumer-facing companies, how are things going in Q3 or July so far?
A: Lance Mitchell (CEO): Our July performance was right in line with our expectations, and consumer takeaway in our categories was also in line with our expectations throughout July. We have factored in sequential modest improvement in core retail sales volume into our guide.
Q: Can you provide an update on the new scanner data channels and their impact on your business?
A: Scott Huckins (CFO): MULO+ captures more of the total retail market for our products than Nielsen. We saw outperformance of about 130 basis points versus Nielsen track channels. There is no significant difference in margin profile between these two track channel observations.
Q: What is your perspective on the economic situation and the pricing promotion environment?
A: Lance Mitchell (CEO): Consumers are under pressure due to declines in personal savings, record levels of household debt, and reduced SNAP funding. Our categories are household essentials that are affordable and convenient. Promotional levels have returned to pre-pandemic levels, and about 20% of our product sales are on promotion, consistent with our plan and guide.
Q: How are you holding on to shelf space in the waste bags category, especially with Clorox trying to get back to space?
A: Lance Mitchell (CEO): Both Hefty and private label gained share in the second quarter. Our total points of distribution are up double digits year-to-date. Our price points are in a good place, and our promotional calendar is strong and locked. We are excited about a new ad campaign with John Cena.
Q: Can you provide some perspective on the gross margin progression for the rest of the year?
A: Scott Huckins (CFO): We continue to see a 200-basis-point improvement in gross margin for the full year. We expect a little bit of expansion in Q3 and a little bit of contraction in Q4 due to $10 million of cost absorption in Q4. Aluminum has been volatile, and resin prices have drifted up consistently throughout the year.
Q: Can you provide a status report on Hefty Tableware and the impact on margins?
A: Lance Mitchell (CEO): We are pleased with the sales recovery in our tableware segment. Promotions were more effective than anticipated in driving volume but did affect margins to a limited extent. Different promotional programs and timing by comparison to the prior year also contributed to the timing benefit in the quarter.
Q: How are you seeing consumer trade-downs between brands and non-brands, and how are you managing this within your portfolio?
A: Lance Mitchell (CEO): Private label sales volume is back to 2019 levels. There has been a modest increase in private label in some categories, and we are benefiting from these increases while also driving brand share. We are managing margins effectively, as reflected in our stronger-than-expected profitability in Q1 and Q2.
Q: Do you think your business is benefiting from the consumer shift away from foodservice?
A: Lance Mitchell (CEO): There is a modest improvement due to this shift. Quick service restaurant volumes are down 2% in the second quarter, and the higher rate of inflation in food away from home is a contributing factor. However, it is one of many factors contributing to our outperformance.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
