Reynolds Consumer Products Inc

NASDAQ:REYN

Earnings Call Transcript 2021-Q4

[Operator]

00:01 Ladies and gentlemen thank you for standing by and welcome to the Reynolds Consumer Products Fourth Quarter 2021 Earnings Call. At this time, all participants are in 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.

00:32 And I like to hand the conference over to your speaker today, Mark Swartzberg. Thank you. Please go ahead.

[Mark Swartzberg, Vice President of Investor Relations]

00:42 Good morning and thank you for joining us on Reynolds Consumer Products' fourth quarter and fiscal year 2021 earnings conference call. On the call today are Lance Mitchell, President and Chief Executive Officer; and Michael Graham, Chief Financial Officer.

00:55 For our agenda today, Lance will focus on market conditions, our fundamentals, and our 2022 priorities. And Michael will review our quarter and outlook. Together, our remarks will be approximately 20 minutes, then we will open it up for your questions.

01:11 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.

01:28 Please refer to Reynolds Consumer Products' annual report on Form 10-K and other reports filed from time to time with the Securities and Exchange Commission and its 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.

01:48 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.

02:05 The company has also prepared a few presentation slides and additional supplemental financial information, which are posted on Reynolds website under the Investor Relations heading. This call is being webcast and an archive of it will also be available on the website.

02:20 While we would like to answer all of 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.

02:32 And now, I'd like to turn the call over to Lance Mitchell.

[Lance Mitchell, President and Chief Executive Officer]

02:36 Thanks, Mark. We delivered another year of record net revenues finishing the year with continued strong demand and in line with our expectations in-spite of continued supply chain challenges. Thanks to the resilience and hard work of our team, we grew revenue 9% on top of last year’s record net revenues. We grew volume another 1% on top of 2020’s 9% increase.

03:04 We grew market shares for most of our products. We grew both of our billion dollar brands. The Hefty brand grew and exceeded 1.3 billion in retail sales in 2021 and Reynolds brand continued to grow strongly up to $1 billion in retail sales achieved in 2020.

03:26 We anticipated and fulfilled strong holiday related demand and we mitigated ongoing supply chain challenges, including production disruptions at third-party suppliers, import delays, and significant staffing and logistics related headwinds.

03:44 We also accelerated revolution cost savings in 2021 and began increasing our emphasis on revolution growth and cost savings initiatives, strengthening our earnings potential for 2022 and the long-term.

04:01 Michael will walk through the details of our 2022 outlook, but let me set the stage. Our four rounds of price increases since late 2020 have been implemented as planned. Inflation remains a watch-out, but maybe moderating and we anticipate profit growth this year. We are forecasting that to commence with our second quarter results.

04:28 Now, let's turn to the top line. We expect consumer demand, price increases, innovation, and expanded manufacturing and supply chain capabilities to remain our main drivers of growth. First, consumer demand.

04:46 Household use of our products remained elevated versus pre-pandemic levels. According to our latest Harris Poll, which we conducted again in December it is our ninth since we started – the start of the pandemic. Everyday use of foil is up fivefold versus pre-pandemic levels and weekly use of waste bags and food bags is up more than 20% versus pre-pandemic levels.

05:13 And according to our fifth Numerator poll, the overwhelming majority of respondents continue to expect to maintain or increase their foil waste bag and food bag use beyond 2021 levels. And our brands and product portfolio are performing very well.

05:31 In the fourth quarter, on an omni-channel basis, branded dollar share in foil, waste bags and disposable cups and dishes is up versus year ago levels. Those figures include e-commerce and in track channels, it's the same trend, branded dollar share in foil, waste bags, and disposable costs and dishes higher than year ago levels. We also continue to build on e-commerce momentum. E-commerce related sales grew strong double-digits in the quarter.

06:04 Growth remains broad based across RCP, and major e-commerce retailers. We tested [holiday themed] [ph] product bundles and we continue to expand participating in third party marketplaces, while also continuing work on multiple direct-to-consumer initiatives.

06:25 The next driver of our revenue growth is price. Our fourth round of pricing has been implemented as planned. We have been vigilant and quick to adjust pricing to inflation and market conditions, and we will implement further price increases when required.

06:41 However, inflation rates began moderating late last year and we anticipate generally stable resin and aluminum rates versus current levels. We therefore expect margin recovery to begin in the second quarter.

06:58 In terms of elasticity, as you know, historically, our categories have demonstrated low elasticity by comparison to many consumer staples categories. We continue to monitor that very closely.

07:12 The third driver of our strong growth is innovation. Innovation has been a major driver of Reynolds and Hefty brand strong performance, and our continued category leadership and our expansion into adjacencies.

07:27 Reynolds Wrap everyday non-stick foil, Hefty Fabuloso waste bags, and Hefty ECOSAVE disposable tableware have been true standouts. Including new users and demonstrating the velocities to drive additional distribution gains this year.

07:43 Reynolds Kitchens Unbleached Parchment paper, Reynolds Kitchens Butcher Paper, Hefty slider half gallon storage bags, and Hefty 20-ounce food storage containers, also scaled substantially in 2021. And we innovated extensively in private label, introducing functionally embossed waste bag, recyclable fresh lock sliders, holiday printed food bags, and more.

08:09 We enter 2022, not only with momentum from these products, but also with a strong pipeline of innovation, including a number of sustainable product solutions.

08:20 Finally, in 2022 we also plan to extend the Hefty energy bag program to new municipalities, building upon last year's doubling of eligible households with our expansion to the greater Atlanta market.

08:38 Our fourth growth drivers expanded manufacturing and supply chain capabilities. Our market share trends have been healthy across RCP, reflecting the capacity additions we undertook at the start of the pandemic and are effectiveness managing the supply chain. That's not to say that staffing and logistics pressures are not a significant challenge.

09:00 We're working hard to minimize the impact of those and other supply related impediments to our ability to produce and ship our products.

09:10 Before I pass the call over to Michael, I'd like to leave you with the following. The business environment remains dynamic, but we've shown time and time again, our ability to [stare down] [ph] challenges. Our ability to adapt and change is a tremendous asset, and meeting adversity has only made us better of what we do.

09:32 We expect to start seeing profits growing in the second quarter and we are doing the work to make our business and earnings potential stronger. Have enormous confidence in our people, and see a bright future for our company, our partners, and our shareholders.

09:49 With that, I'll turn it over to you, Michael.

[Michael Graham, Chief Financial Officer]

09:52 Thanks, Lance, and good morning, everyone. I will briefly review our fiscal year 2021 and fourth quarter results then turn to our outlook. For the fiscal year 2021, net revenues were 3.6 billion, up 9% over a record 3.3 billion net revenues we had in 2020.

10:11 Growth was driven by pricing to offset higher material costs, continued strong demand, and continued benefits from innovation. Adjusted EBITDA was $601 million, down 16% versus last year as price increases lagged higher material labor and logistics cost, partially offset by higher volume and lower SG&A. Adjusted earnings per share for the year was $1.59.

10:36 Now turning to the quarter, revenues in the fourth quarter were $1 billion, an increase of 15% over the prior year record net revenues of $888 million. Growth was driven by pricing to offset increased material costs, continued strong demand and continued benefits from innovation, adjusted EBITDA for the fourth quarter was $181 million, compared to $198 million in the prior year.

11:01 The decrease was primarily due to price increases lagging in higher material, labor, and logistics cost, and is partially offset by higher volume and lower SG&A. Adjusted earnings per share for the quarter was $0.51.

11:15 Turning to our segment results for the quarter, there were three main drivers of our year-on-year earnings decline. Price increases which lag commodity cost increases, higher labor and logistics costs and continued staffing and logistics related challenges. Partially offsetting these factors was continued strong demand for our categories and product portfolio.

11:37 In Reynolds cooking and baking, net revenues increased 23%, driven by higher pricing and a 9% volume increase. Adjusted EBITDA rose [4%] [ph] as higher volume and lower SG&A more than offset material cost increases in excess of price increases.

11:53 Volume grew 9% driven by strength across Reynolds cooking and baking categories. For Hefty waste and storage net revenues grew by 9%, driven by price increases partially offset by a volume decline of 4%. Adjusted EBITDA decreased 13%, reflecting material cost increases in excess of price increases and the volume decline.

12:16 The 4% volume decline substantially weaker than consumer takeaway, reflecting the adverse impact of staffing and logistics related disruptions. For Hefty Tableware, net revenues were up 12% driven by higher prices and a 2% increase in volume. Adjusted EBITDA declined 34% as price increases lagged higher material and labor and logistics costs and was partially offset by the volume increase.

12:43 The 2% volume gain was driven by continued strength from higher everyday usage, social gatherings, and innovation, partially offset by the adverse impact of labor shortages at third party suppliers.

12:56 Finally, Presto Products net revenues in the quarter increased 9% driven by pricing, partially offset by a 5% volume decline. Adjusted EBITDA declined 6% driven by a volume decline as price reasons offset material cost increases.

13:13 The 5% volume decline was substantially weaker than consumer takeaway, reflecting the adverse impact of staffing and logistics related disruptions and import device.

13:24 Now, to our guidance. I will review our expectation for the year and the first quarter followed by a couple of additional comments on expected phasing by quarter. We expect 9% to 12% net revenue growth for fiscal 2022, driven primarily by pricing, as well as continued strong consumption across our categories, innovation, and retail replenishment.

13:47 We're assuming elasticity remains lower than pre-pandemic rates that we effectively mitigate staffing third party manufacturing and logistics related disruptions. We are increasing trade investments to help drive growth, spending against zero base budgets that drive traffic and loyalty suited to today's market.

14:07 We estimate 2022 cost pressures of nearly $400 million. Rates for resin and aluminum are assumed to be stable by comparison to current levels. On that basis, we expect to fully recover material cost increases and all, but Hefty waste bags by the end of the first quarter.

14:25 We expect gross profit dollars to grow well in excess of volume growth resulted in approximately 100 basis points in gross profit margin expansion by comparison to 2021 levels. This implies margins below pre-pandemic percentages and is largely due to the effect of significant price increases on the structure of our P&L. This also reflects our expectation to restore pre-pandemic profitability, but not entirely this year.

14:53 We anticipate significant additional revolution of cost savings in 2022 and continue to capital investment in high return programs that improve our cost structure beyond 2022. We estimate capital spending at approximately 4% of net revenues. This includes this fully automation project we mentioned in November.

15:13 Our focus across all segments is on identifying other attractive [RRI] [ph] automation and intelligent factory projects, particularly in light of the labor supply chain conditions to which are improving [RRI’s] [ph] for many projects.

15:28 We estimate depreciation and amortization to be approximately 10 million higher than 2021 levels and an estimated $120 million in 2022. We estimate our effective tax rate at 25% for the year. The details of our guide for fiscal year 2022 are as follows:

15:47 Net revenues to grow 9% to 12% from $3.556 billion in 2021. Adjusted net income to be in the range of $327 million to $357 million. Adjusted EPS to be in the range of $1.56 to $1.70. Adjusted EBITDA to be in the range of $615 million to $655 million. Net debt to be approximately 1.8 billion to 1.9 billion at December 31, 2022.

16:20 For the first quarter, we expect 10% to 14% net revenue growth driven primarily by price increases. We expect gross profit dollars to be down slightly year-on-year, driven by higher labor costs and the fact that price increases will go into effect over the close of the quarter. Omicron and the recent one of the storms have impacted staffing and production, and these factors continue to be significant challenges that we are working to mitigate.

16:45 The details of our first quarter guide are as follows: Net revenues to grow 10% to 14% on $757 million in the prior year. Adjusted net income to be in the range of $51 million to $59 million. Adjusted EPS to be in the range of $0.24 to $0.28, and adjusted EBITDA to be in the range of $110 million to $120 million.

17:09 As you revisit your models, also keep in mind, we expect sequentially easy rates of revenue growth each quarter this year as we lap last year’s price increases, which ramped throughout the year. We also expect revenue growth to remain positive in the fourth quarter. We expect EBITDA to grow each quarter after the first quarter.

17:29 Now, before I turn the call back over to Mark and your questions, I'd like to leave you with the following. As you can see, we expect another year of record net revenues in return to profit growth, driven by recovery of material cost and pricing, generally stable commodity rates, further improvements to our cost structure and continued investment for growth.

17:50 The moves we’re making strengthen our business not only for 2022, but also for the long-term and our capital allocation priorities are unchanged. Invest to strengthen and extend our competitive advantage earnings potential. Deleverage with the target ratio of 2x to 2.5x EBITDA. Return excess cash to our shareholders via dividends, and pursue strategic bolt-on acquisitions.

17:50 With that, I'll hand the call back over to Mark. Thank you.

[Mark Swartzberg, Vice President of Investor Relations]

18:20 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?

[Operator]

18:32 Thank you very much. [Operator Instructions] Our first question comes from the line of Rob Ottenstein from Evercore ISI. Please go ahead.

[Rob Ottenstein, Evercore ISI]

19:20 [Indiscernible] much and well done guys. So, just couple of points of clarification from your comments. You mentioned that demand patterns remain very strong and elevated and based on your surveys, you expect them to continue. Can you help us kind of think through what is driving that given that you obviously were a big benefit from people quarantining from work from home and now as mobility increases, people start going back out to restaurants more, start going back to the office, even if it's part time how should we think about the impact to that on demand, and how you see that playing out?

[Lance Mitchell, President and Chief Executive Officer]

20:12 Robert, thank you. We have seen consumer demand shift fundamentally. We talked about that during the course of the pandemic that our consumer research said that consumers fundamental habits of spending more time at home, spending more time cooking and baking and utilizing our products more frequently was a fundamental shift and we've seen that continue.

20:36 What we've seen is, after the pandemic, people are staying at home more frequently, part time at the office, going to restaurants perhaps more frequently, but still changing their habits and behaviors from pre-pandemic levels. So, demand for our products continue to be very strong.

20:59 They continued strong through the fourth quarter. We're seeing the same through the beginning of this year.

[Rob Ottenstein, Evercore ISI]

21:07 Terrific. And then, just a clarification on the commodity outlook, my standing, that Polyethylene inventories in the U.S. are very high. So, I'm assuming that's kind of unguards your view on resins, can you maybe talk about – a little bit about what's going on in aluminum and remind us, you know – what percentage of your business is a straight push through, cost push through, how much hedging you do and any other kind of factors around that in terms of understanding what the commodity outlook looks like for you for the next 6 months to 12 months?

[Lance Mitchell, President and Chief Executive Officer]

21:52 Yes, as you know, predicting commodity prices is very challenging and something we've faced during the course of last year, but what we have seen now, as you mentioned as resin has stabilized. The two main resins that we use are polyethylene and polystyrene, and they have plateaued at a higher level during the pandemic, but we do see that they are moderating.

22:21 Aluminum was moderating in Q4 and took a spike up in Q1 and it stayed elevated [sunset] [ph]. So, we have factored that into our guide and are obviously looking for other mitigation against that, but is part of our plan for 2022. We do expect aluminum to moderate and come down in the back half of the year.

22:46 The commodity contractual pass through is approximately 25% of our business overall. So, 75% of our business we price to the market. And – what was the last question? I forgot the… oh, hedging.

23:05 So, we don't hedge any of our raw materials. We do have a physical hedge with aluminum that we've talked about previously. We have approximately between work in process, finished goods and raw materials, we have about six months of supply in the pipeline. So, therefore, we have a physical hedge of aluminum, but none of our raw materials are financially hedged.

[Rob Ottenstein, Evercore ISI]

23:33 Great. Thank you.

[Operator]

23:39 Thank you. We have next question from the line of Jason English from Goldman Sachs. Please go ahead.

[Jason English, Goldman Sachs]

23:47 Hey, good morning folks.

[Lance Mitchell, President and Chief Executive Officer]

23:50 Good morning.

[Jason English, Goldman Sachs]

23:51 Good morning. Couple of quick questions. First, you pulled back on a lot of SG&A last year in the face of all the commodity pressure. In your outlook, how much reinvestment are you assuming?

[Michael Graham, Chief Financial Officer]

24:07 Yes. So, in our outlook, we are clearly investing further in our advertising. We’ve reduced our investment last year as you stated, primarily due to service levels. But in 2022, we are going to plan to turn to more of our historical levels of advertising spend. So that will be up sizable.

[Jason English, Goldman Sachs]

24:29 Okay. And you're clearly putting a lot of pricing in the market, and we’ve seen your P&L, we're seeing a lot more price come to your P&L then we are HPC peers, although I know the category makes it different from one to the other. What do you see in terms of price gaps out there? Is there any reason to be concerned that price gaps may be coming on sustainably high? That would be relative to branded competitors or private label?

[Lance Mitchell, President and Chief Executive Officer]

24:54 The price gaps have narrowed from what they were previously and some of the categories, but it varies across different categories. Private label foil, for example has also increased along with our branded foil. So, you've got to look at it category by category. But in total, these total categories have increased in price during the course of 2021 and going into 2022.

[Jason English, Goldman Sachs]

25:23 Okay. Thanks. I'll pass it on.

[Operator]

25:29 Thank you. We have a next question from the line of Lauren Lieberman from Barclays. Please go ahead.

[Lauren Lieberman, Barclays]

25:37 Great, Thanks. Good morning, everyone. I wanted to ask about the logistics and staffing issues that you talked a little bit about. So, curious, I guess, as you kind of, as you stand even today, where the things stand on that front? I know you mentioned that things are getting better, but any kind of further color you could offer would be great, be it pandemic omicron related or otherwise? And then anything you could offer on fill rates in stock levels during this period and how that may or may not be improving at this point?

[Lance Mitchell, President and Chief Executive Officer]

26:15 Thank you, Lauren. Yes. Staffing is a geographical challenge, right. Some plans and areas are more challenged than others. Particularly in Q4 and Q1, it was omicron related, as well as just the general labor availability. We called-out specifically in two segments with Presto and our Hefty Waste & Storage segments, those plans and those particular geographies were the most effected in Q4.

26:47 We are seeing improvement in January with omicron, there was continued challenges, but with the cases reducing and with our changes to our wage rate structures, we've seen improvement in overall staffing levels across our manufacturing locations. So, we're optimistic that we're improving this. We from a [indiscernible] standpoint, we did take a backward step in Q4 in some of our product lines. And those are starting to improve in Q1, but it continues to be a challenge from an in-stock standpoint.

27:28 We do measure in-stocks in our categories across all of our retail partners and most of our products were doing better or as good as our competitors of the categories. So, it's a challenge across all of the categories. We do see it improving throughout the year, but staffing and logistics continues to be a challenge.

[Lauren Lieberman, Barclays]

27:52 Okay. And so, that's really helpful. And so with it being comparable to others in your category, you're not seeing any impact on market share or shelf sets or those sorts of things that we should think about if there be sort of more lasting effect?

[Lance Mitchell, President and Chief Executive Officer]

28:08 No, distribution has been fairly stable across our categories throughout 2021. So, it has not been an impact to share either, which I'm sure you watched the share across all of our products and track channels that you can see has been improving or stable to cutting on the category.

[Lauren Lieberman, Barclays]

28:29 Terrific. Thanks. I'll pass it on.

[Operator]

28:34 Thank you. We have next question from the line of Andrea Teixeira from JP Morgan. Please go ahead.

[Andrea Teixeira, JP Morgan]

28:44 Thank you. Good morning. So, I wanted to follow-up on the cost impacts, but beyond commodities, but also transportation labor, are you, Michael assuming that you stay as current or you're assuming some improvement as we go? And just a follow-up on what you said, Lance on the private label? Are you seeing your retail partners asking for more, probably label vis-a-vis your branded, just to improve affordability or we are not there yet? And hopefully we will not be. Thank you.

[Michael Graham, Chief Financial Officer]

29:22 Yeah. The transportation front, we are anticipating that we'll see that those costs continue to increase. We’ve baked that into our guide appropriately. We're taking the appropriate actions, whether it be through pricing or cost reductions initiatives to offset that. So, we think we’ve baked all that into overall guide to - and we have coverage around that relative to the numbers we presented.

[Lance Mitchell, President and Chief Executive Officer]

29:47 And from a branded private label standpoint, things remain stable there. We have not seen any fundamental changes in our categories between brand and private label. If anything the brands have performed us more strongly than private label in these categories through the pandemic and that's not shifted and seen any change from our retail partners.

[Andrea Teixeira, JP Morgan]

30:11 Very helpful. Thank you.

[Operator]

30:17 Thank you. We have next question from the line of Peter Grom from UBS. Please go ahead.

[Peter Grom, UBS]

30:24 Hey, good morning, everyone. So, I just wanted to ask about the future of gross margins. When you think about gross margin and compression. Like, have you given any thoughts to whether some of these costs could prove to be more structural rather than cyclical? And I guess like how does that inform your view of restoring gross margin kind of back to the mid-to-high 20s over time? I recognize you probably want to provide an outlook beyond this year, but how should we think about a potential timeline in terms of getting back to those margin levels?

[Lance Mitchell, President and Chief Executive Officer]

30:55 Yes. So as we think about our gross profit dollars, we see us getting back to those previous levels in 2023. And we think we’ve got the plans in place to initiate that and it's kind of – it's going to take the time, but we're pretty structured very well to get recover back to those over pre-pandemic levels.

[Peter Grom, UBS]

31:23 Okay. Thanks for that. And then I guess, just Michael following up on the phasing of top line growth for the year, I just – when you look at 10% to 14% growth for 1Q, I realize more pricing is going to build, but I think you said, using rates of growth from here, but can you just help us understand how much using we should really be modeling post 1Q, because it seems that it would be harder to hit the high-end of the full-year range assuming sales moderate from 1Q, which I think at the mid-point is 12%?

[Michael Graham, Chief Financial Officer]

31:52 So, I think in my remarks, I kind of stated that we expect it after Q1 that our growth rates will rise. And then over the period of the year it would kind of decline a bit slowly as we reach or approach Q4.

[Peter Grom, UBS]

32:10 Okay, got it. So, the top line will accelerate from the 10% to 14%, and then accelerate in the back half? Okay, sorry.

[Michael Graham, Chief Financial Officer]

32:18 You have to think about [indiscernible] standpoint, our cost increased over the course of the year and our pricing took place over the course of the year. So, as we lap those additional pricing, you will see that decline a bit.

[Peter Grom, UBS]

32:34 Okay. Thanks for that.

[Operator]

32:39 Thank you. We have next question from the line of Kaumil Gajrawala from Credit Suisse. Please go ahead.

[Kaumil Gajrawala, Credit Suisse]

32:49 Thank you. By the way, fantastic pronunciation. Operator, I don't get that frequently. If you guys don't mind talking a bit about regulation cost savings, where you were last year and perhaps what you're incorporating in your guide for 2022?

[Michael Graham, Chief Financial Officer]

33:07 Yes, Appreciate that question. We delivered a little more than two points of margin improvement through revolutions cost savings in 2021. And we set out to do that, and then we actually beat that. We're planning deliver somewhere in the range this year. So, we feel pretty good about our position on continue to drive revolution savings.

[Kaumil Gajrawala, Credit Suisse]

33:31 Okay, great. And as it relates to inflations impact on the consumer, it sounds much as from yourselves, but from many others that the price elasticity just isn't where – it is lower than what might have been expected. What are you looking at to gauge if that's going to continue to be true or if at some point we reach an area where the consumer doesn't need start to respond?

[Lance Mitchell, President and Chief Executive Officer]

33:58 Well, we're using two tools to analyze that. The first is some consumer research, which we directly reach out to consumers that are buying in our categories to determine their purchase behavior. And the second is, to just moderate the overall consumer takeaway and just monitor that very closely.

34:20 The consumption patterns continue to be very strong and consumer behavior is what their telling us is that they're continuing to use our products more frequently despite the higher prices.

[Kaumil Gajrawala, Credit Suisse]

34:34 Great. Thank you.

[Operator]

34:38 Thank you. We have next question from the line of Erik Rasmussen from Stifel. Please go ahead.

[Mark Astrachan, Stifel]

34:50 I don't know if that's me or not. Can you guys hear me, it’s Mark Astrachan here?

[Lance Mitchell, President and Chief Executive Officer]

34:54 Hey, Mark, it shows up as Erik on the queue for some reason. We recognize your voice. Good morning.

[Mark Astrachan, Stifel]

35:02 I don't know what to say. I think I'll talk to my boss after this call and make sure he's not trying to send me a message. Well. So, I guess two questions, one, on just aluminum broadly, so aluminum is up another 3% today, not that you guys didn't already know that, but kind of current level is that’s what based into what you referred to as stable. So, from here and then, I guess kind of elaborating on previous comments, Michael, it sounds like then, resin maybe pricing comes down so on products that have that as a component, is that how we should think about it? If aluminum stays where it is, should we be thinking about the Reynolds oil business continue to have pricing go up and is that a good way to think about it? And then obviously how to think about the volume impacts since those actually remain fairly stable?

[Michael Graham, Chief Financial Officer]

35:58 So, let's start out with the aluminum question, as it relates to current levels. So, our assumptions in our overall guide and our plan is that aluminum will be stable at current levels through the rest of the year. And so, our overall planning and recovery actions are all around that assumption.

[Mark Astrachan, Stifel]

36:17 Okay. And from here then, are you anticipating more price or is it a fair way to think about it, maybe that business gets more price versus some of the other where you have lower anticipated resin costs is that reasonable?

[Lance Mitchell, President and Chief Executive Officer]

36:32 We are planning some targeted resin or aluminum increases because of where the prices are at now. Not necessarily across the board, but on some specific products to offset that, as well as some other cost reduction initiatives.

36:52 From a resin standpoint, yes, it's moderated and we've recovered the resin prices if all of our segments accept Hefty branded waste bags.

[Mark Astrachan, Stifel]

37:06 Right. Got it. Okay. And then Michael, on free cash flow conversion, I guess [your] [ph] broader strokes, a, how should we be thinking about that in 2022? How should we be thinking about debt reduction priorities, you know the net debt levels are actually a little bit above where you would forecast 12 months ago at this time? And I say that in-part with the commentary and the release that continues to be that you'll pursue strategic bolt-on acquisition. So, let's take capacity and how should we be thinking about that and kind of what should we be thinking about from that standpoint in terms of what you're targeting?

[Michael Graham, Chief Financial Officer]

37:42 So, our capital allocation strategy is pretty much unchanged. We still want to get to 2.5x. And we're pursuing that. Obviously, last year had its challenges. And as a result of that, we decided to invest more heavily in capital to support our growth and automation projects. And we think that's going to pay off in the long run.

38:07 So, overall, I mean, our strategy is the same, we're going to continue to drive that down and that will be a focus area for us going forward. So, the only thing I would say is that, as you think about our capital structure, we'll look opportunistically to refinance long-term debt, you know that makes sense for us. And that would be the only potential change as interest rates fluctuate.

[Mark Astrachan, Stifel]

38:34 Got it. Okay, Erik, signing off here. Thanks guys.

[Operator]

38:41 Thank you. We have next question from the line of Wendy Nicholson of Citi. Please go ahead.

[Wendy Nicholson, Citi]

38:48 Hi. I wanted to go back to the line of questioning, kind of around the consumer and the lack of price sensitivity and just the increase in demand for your products. I mean, I think you said at the very beginning there's been a five-fold increase. I mean, that's just huge in terms of incremental usage, if you will. And so my question is, as you think about the business, kind of a little bit longer term, assuming these rates of usage and the lack of price sensitivity continues, does it give you kind of more license to think creatively about innovation, can you say, oh, we can add more value to these categories or products because people certainly aren't showing the price dealing that they used do at a price resistance? And also are you seeing any reaction from the retailers?

39:43 I mean, if the retailers are seeing sustained, higher velocity, in your aisle, if you will, are they giving the category more shelf space, more end-caps, all that kind of stuff? I'm just wondering if we really are seeing sustained higher demand, how does the category change maybe sort of from a bigger picture perspective? Thanks so much.

[Michael Graham, Chief Financial Officer]

40:06 Thanks, Wendy. From an innovation standpoint, certainly, and I’ve said in our prepared remarks, this has provided us the environment to really step-up innovation across these product lines. So, we've got a lot of innovations going in 2021. Our pipeline is very strong because of the change in consumer behavior. And we're looking to introduce a lot more products as we go through 2022 and beyond.

40:35 So, innovation has been a significant beneficiary from the pandemic and the change in consumer behavior. From an overall category standpoint and merchandising, we've restrained that a bit because of supply capabilities. As Mike mentioned in his prepared remarks, we are returning to promotional activity.

40:58 So, we did not have a lot of end caps and promotions in the last two years because we significantly reduced our promotional activity because of lack of supply in case fill. As that's improving, we are seeing significant opportunities for secondary placements and improve distribution. And that is factored in also to our plans for 2022 and beyond.

[Wendy Nicholson, Citi]

41:25 Got it. That's helpful. Thank you so much.

[Operator]

41:29 Thank you. We have next question from the line of Jason English with Goldman Sachs. Please go ahead.

[Jason English, Goldman Sachs]

41:36 Hey, folks. Thanks for slot me in for a follow-up. I appreciate it. So, thanks earlier for your comments on private label. And while I appreciate its status quo at the moment, many investors, well and frankly as well as myself, believe that there's a reasonable chance that private label share could begin to bounce back when spending power through lower income consumer, begins to squeeze a bit lower throughout the course of the year. Assuming this played out in your categories and knowing that you play both sides, how do you think this would impact your P&L from a revenue margin bottom line perspective?

[Lance Mitchell, President and Chief Executive Officer]

42:10 Well, I'll talk about the trends and I'll let Michael speculate about the P&L. The trends for the long-term in these categories because they are already highly penetrated between brand and private label, have been stable. We saw some bounce towards brands in 2020 and 2021, but not a significant shift like we've seen in some other household categories.

42:38 So, our expectation and forecast is it’s going to continue to remain relatively stable. But as you mentioned, we do play both sides of that. So, we're beneficiaries regardless of how that plays out in the long-term.

[Michael Graham, Chief Financial Officer]

42:53 I would just add one thing, one of the things that we've benefited from is our reliability in this environment, although everyone was challenged, it was significantly greater than competition. So, I mean, so we are benefiting from some potential staying power as a result of that shortages that were coming from other players.

43:14 As it relates to our overall P&L implications, we've shared in the past that while there's a margin difference, we wouldn't consider that significant, and so we still feel that there is not going to be a material impact to overall profit [indiscernible] picture in, as it mixes to change slightly.

[Jason English, Goldman Sachs]

43:34 Understood very helpful. Thank you, guys.

[Operator]

43:40 Thank you. Ladies and gentlemen, we have reached the end of the question-and-answer session and I'd like to turn the call back to Lance Mitchell, CEO for closing remarks. Over to you.

[Lance Mitchell, President and Chief Executive Officer]

43:53 Well, thank you everybody for joining us today. We appreciate your time and I just want to reinforce our business is strong and growing and we're forecasting profit growth beginning in the second quarter.

44:05 I particularly want to thank our employees as they’ve continuing to put safety first as we grow this business in this exceptional time. Stay safe and stay well. Thank you.

[Operator]

44:18 Thank you. This concludes today's conference. You may now disconnect your lines. Thank you for your participation.