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Greetings, and welcome to Reynolds Group 2017 Fourth Quarter Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Thomas Degnan, CEO of Reynolds Group. Thank you. You may begin.
Thank you, Sherry. Good morning. Today we have Allen Hugli, CFO of Reynolds Group Holding Limited; Michael Graham, CFO of Reynolds Consumer Products, and Michael is standing in for Lance Mitchell; John McGrath, CEO of Pactiv; and John Rooney, CEO of GEC, which is Graham, Evergreen and Closures. I'll have a few comments on our results for 2017, and then Michael, John and John will add some detail to their respective businesses. Allen will give a financial overview, and then we'll take your questions. In August, on our 6-month earnings call, EBITDA was down 8% from 2016. This was caused mostly by the effects of Hurricanes Harvey and Irma. On our last call in November, we were down 4% versus prior year-to-date. I said I thought we would catch up with the previous year over the course of the fourth quarter. For the full year, revenue at $10.5 billion was down 1% from 2016, and EBITDA at $2.078 billion was also down 1%. While Q4's EBITDA was up 8%, it was not enough to make up the shortfall, and we missed 2016's EBITDA by $25 million. However, I believe the trend was very good. We had 2 real good quarters but we ran out of time. The results for the businesses for the full year's EBITDA: at $650 million, Reynolds Consumer Products was up $10 million; at $677 million, Pactiv was up $15 million; at $397 million, Graham Packaging was down $24 million; and at $258 million, Evergreen was down $12 million; and finally, at $131 million, CSI was down $5 million and that's what nets out to the down $25 million. As I said, Michael, John and John will give you more color on these results. I think the year was a good one. After a tough start, we performed well. Reynolds and Pactiv showed growth, and the improvement in Graham is evident. Our plans are much improved, which build better customer service. We're beginning to see more bids, and the number of wins is increasing. We continue to pay down debt and still target our total debt leverage at 4.5x. We are going to continue to improve our operations by investing capital in our plants to address customers' changing needs and to take on new business. We're also planning on investment in automation to improve our quality, cost and throughput. We're going to evaluate tack-on acquisitions, but we're probably not going to do anything transformative. And as I said, we're going to continue to reduce leverage. With that, I'll turn the call over to Michael Graham, CFO of Reynolds Consumer.
Thanks, Tom. Turning to Page 7. For full year, RCP revenue was up $23 million or 1%. All of our businesses -- all of our business product lines grew volume with the exception of one. Reynolds Wrap achieved strong share growth. The disposable tableware business pricing actions offset raw material cost increases with only a minor impact to volume. The Presto private label business participated in the growth of the category and achieved pricing to offset resin cost increases. In addition, the Presto Specialty's zipper business continued growth fueled by the Child-Guard product and growth with existing customers. The only product to have lower revenue for the year was the waste bag business. This was exclusively due to the Internet -- intentional switch from supplying private label programs to utilize the capacity for the share and category growth of our more profitable Hefty branded waste bag products. For Q4, RCP revenue was up $23 million or 3%. Every product across our portfolio grew volume in the quarter with the exception of Reynolds parchment paper and bakeware. The introduction of private label parchment to the category was -- affected our share and slowed the growth of the category. We are introducing a new product for the -- into the category to reverse this trend. Additionally, we exited some of our low-margin bakeware business. This product line had a record year for earnings in 2017. Turning to EBITDA on Page 8. For the full year, RCP EBITDA grew $10 million or 2%. Price actions across the business portfolio were implemented due to resin and aluminum pricing increases. These pricing actions offset raw material cost increases for the year. Volume growth and lower advertising costs were partially offset by higher conversion and logistics costs. We have established some key projects for 2018 and beyond that will have a positive impact on our manufacturing and transportation cost going forward. The lower advertising versus prior year was planned due to the launch of the Hefty Ultra Strong, waste bag new product launch in 2016. For Q4, RCP EBITDA grew $32 million or 19%. This improvement was due to strong volume growth across all product lines. Lower advertising cost due to the Q4 launch last year of the Ultra -- Hefty Ultra Strong product, which was partially offset by higher conversion cost and logistics cost, consistent with the full year trend discussed previously. With that, I'll turn it over to John McGrath.
Thanks, Michael. Pactiv had another good year in 2017. 2017 revenue was up $19 million to $3.7 billion, due primarily to the divestiture of 2 businesses, 1 in Europe and 1 in Asia, and lower sales volume in certain business segments. These declines were partially offset by higher pricing, from raw material pass-through as well as market price increases. Revenue in Q4 2017 increased $17 million or 2% to $945 million. This increase was driven by higher pricing and partially offset by the business divestitures and volume decline previously mentioned. 2017 adjusted EBITDA increased $15 million or 2%. This increase was driven by increased pricing, both contractual and market-based, as well as lower SG&A spending. Higher year-over-year raw material cost, manufacturing conversion cost and unfavorable sales volume in some segments partially offset these increases. Adjusted EBITDA increased $24 million or 15% in Q4, driven by increased pricing, partially offset by higher raw material cost. I'll now -- I will now turn it over to John Rooney.
Okay. Thanks, John. I'm going to go through Graham first. And when I do that, I'm just going to hit the headlines from the deck. I'm going to save the meat and potatoes for Graham for the Q&A section. However, when I go through the other 2 businesses, I'll give some color commentary upfront about the 2 of those, what's going on in the business. And then go through the headlines for each of those 2 businesses. So starting with Graham, and again, hitting just the headlines from the deck, our revenue decreased by 3% to $2.147 billion in 2017. The decrease was primarily driven by lower sales volume, decline in pricing due to contractual price movements, strategic business exits to a small extent, partially offset by an increase in pricing from higher resin cost passed through to customers. Our revenue increased to $508 million in Q4 2017. Increase primarily driven by increase in pricing from higher resin cost that was a pass-through, favorable foreign currency impact, partially offset by decline in pricing due to contractual price movements and, again, strategic business exits. In terms of EBITDA, for Graham Packaging, adjusted EBITDA decreased by 6% to $397 million in 2017. The decrease was primarily driven by, again, decline in pricing due to contractual price movement, lower sales volume, partially offset by favorable input cost and cost-saving initiatives. Our adjusted EBITDA for Graham decreased by 7% to $87 million in the fourth quarter. Decrease is primarily driven by decline in pricing due to contractual price movements, again, partially offset by favorable input cost. Turn it over to Evergreen. So I'll just give some color commentary upfront for that business. There is primarily 3 revenue streams, the Packaging business, our paper board business, and we call paper, which boils down to items 3A and 3B, and we break the 2 different types of paper out. The Packaging business is the big engine out of the 3, and the Packaging business Evergreen is running extremely well both operationally and commercially, both in North America and international. In a comparative period year-over-year, we lost some volume due to pricing only, but earning a fair amount of that volume back. And then in the year, particularly towards the end of the year, we locked up an awful lot of volume under very long term in the Packaging business. Second piece is board. Our board volume is up. The price was down, which we had predicted. Thirdly, paper, which, for us, is uncoated groundwood and coated -- coated groundwood and uncoated free sheet, and we're down in price on that. As we go through the numbers, some of the numbers -- the numbers are masked a bit by -- and the real story in it is, the paper mills in 2017 ran very poorly as compared to prior years. So as I go through the numbers, you won't see all of that. Some of that is masked by the fact that we did not have an outage in the period-to-period comparison, but that will be something that has offset our numbers otherwise running fairly strong. So turning to the numbers in the deck, our revenue for Evergreen decreased by 1% to $1.562 billion in 2017. Decrease is primarily driven by price declines on paper products and liquid packaging board, partially offset by increased pricing from carton packaging. Lower sales volumes, as I mentioned, in carton packaging and paper products, offset by higher sales volume from liquid packaging board. Our revenue increased by 3% to $395 million in Q4, primarily driven by higher sales volume from liquid packaging board and paper products, partially offset by lower sales volume from carton packaging and price declines from paper products. Our adjusted EBITDA at Evergreen decreased by 4% in 2017 to $258 million. The decrease was primarily driven by price decline for paper products and liquid packaging board, higher input cost, primarily resins and freight cost, lower sales volume from carton packaging, partially offset by decreased SG&A expenses and higher sales volume for liquid packaging board. And, again, embedded in those numbers is the mill system not running well in 2017. Our adjusted EBITDA decreased by 6% to $64 million in Q4 2017. The decrease primarily driven by higher input cost, primarily resins, lower sales volume from carton packaging, again, a fair amount of which we've earned back, price declines from paper products, partially offset by decreased SG&A expenses and higher sales volume for liquid packaging board and paper products. Turning to CSI. That business is running well. In the year, we gave on price and in return, locked in term, and price was offset via operational and other cost improvements in the business. 2018 is looking fairly good for CSI, nothing earth shattering. We'll continue to have growth in water in North America, and we're well positioned for that both commercially and operationally. CSD is continuing to be fairly good for us. In 2018, we anticipate the same sort of activity there, continuous improvement operationally and chipping away and getting increased volume in specific segments. Returning to the numbers in the deck. Our revenue for CSI decreased by 3% to $901 million in 2017. The decrease was primarily driven by lower pricing due to competitive pressure, lower sales volume, unfavorable foreign currency impact. Our revenue increased to $210 million in Q4, and the increase was primarily driven by higher sales volume, partially offset by lower pricing due to competitive pressure. In terms of EBITDA, for our Closures business, it decreased by 5% to $131 million. The decrease was driven primarily by lower pricing due to competitive pressure, partially offset by favorable manufacturing cost and favorable foreign currency impact. For the quarter, our EBITDA decreased by 11% to $24 million, and the decrease was primarily driven by lower pricing due to competitive pressure, partially offset, again, by favorable manufacturing cost and favorable foreign currency. With that, I'd like to turn it over to Allen Hugli.
Thanks, John. So in summary, revenue for the group for the quarter was approximately $2.7 billion, up 2% on the same period last year. For the year, revenue was $10.5 billion, down approximately 1% from 2016. Adjusted EBITDA for the quarter was $548 million, well up on Q4 last year. For the full year, adjusted EBITDA was $2.078 billion, down 1% from 2016. We are reporting pro forma adjusted EBITDA for the year at $2.094 billion, and a full reconciliation is attached as an appendix to this presentation. Capital expenditure for the year at $410 million was up 27% on 2016. The increased spend comprised of a large number of small and medium-size projects, primarily focused on improving operational efficiencies and meeting customer requirements. During Q4, the group repaid $100 million of its 5.75% notes. In January 2018, after year-end, the group repaid $16 million of 6.4% Pactiv notes that matured. In January, the group also issued a notice of redemption for $300 million of the 6.875% notes. Redemption will occur tomorrow, February 15. With that, I'll hand it back to Tom.
Okay, Sherry, we'd like to take some questions now.
[Operator Instructions] Our first question is from Sam McGovern with Crédit Suisse.
Just want to ask a quick question regarding resin. Obviously, we saw resin up in the fourth quarter, and I think the estimates I've seen for 2018 indicate that they'll be up again in the first quarter and then perhaps recede in the back half of the year. Is that something you guys see as sort of fairly reasonable? And then in terms of different business units, should we expect that, that would squeeze your margin in the first half of the year and then we could get that back in the back half?
Well, Sam, I think we -- this is nothing new. This is what we live with every year. What you stated is I think the best view that we all have for the time being, but it's 12 months in the year and who knows what's going to happen. Probably one of our biggest jobs here is figuring out for those that we don't have a pass-through ability, how we cover those resin cost, but that's not going to change. I don't see how next year 2018's resin is going to have any sort of an impact much different than any other year. I think it's pretty much business as usual for us.
Okay. Great. That's good to hear. And then just regarding the debt reduction, I know you guys reiterated the target of 4.5x in the plan to continue to pay down debt. In the slide deck, you guys highlighted the amount that you paid in January on the Pactiv notes and then the notice to redeem $300 million of the 6 7/8%. Is that just being paid off at the call price? Or what's the price that's going to be paid on that?
Yes, that was at the call price, yes.
Okay. Got it. And then just my last question. On the adjusted EBITDA, I think, Slide 22, where you guys show the $16 million was the annualized impact of cost savings and acquisitions/divestitures, that's down from $37 million in the third quarter. Is that just due to the assets that you guys sold, the $99 million purchase price? Or are there other things netting against that, so that it's not like a $20 million delta for those assets?
There's other things going on. I think you'll see that and that will get a bit of a shove kind of Q1, Q2.
Our next question is from Roger Spitz with Bank of America Merrill Lynch.
First on CapEx, can you discuss CapEx rising to $525 million this year versus sort of $410 million last year and $325 million in 2016?
Sure. The rise in CapEx is due to the point that I made in my opening comments. We have a number of customers, you would have read about them, who are converting products from one sort of material to another. This means that as long as we want to keep servicing them and grow with them, we need to invest in equipment to make the products that they want to change to. That's a big part of it. Another big part of it is quality control and automation in the factories. So we're looking at significant investments or we're going to do significant investments to control our input right through the process, so that the product at the end will be -- more of it will be good product. It will be lower costs, throughput will increase, our operating in our plants will be more standardized and so forth, and all that stuff is going to pay out in the end. It's going to take a while for it to hit the EBITDA line but it's things that we believe we must do in order to stay in the position we're in and actually improve our position. And that's really the biggest thing, and there's normal maintenance capital, which is not going up because I don't think -- I think we spend enough on maintenance capital that we're not starving it. I think it's pretty much those 2 types of things that are going to drive the increased capital.
Okay. Perfect. And how should we think about 2019 CapEx? Will we stay at this elevated level? Will it move back to $400 million or even further down from there?
Yes, I think what -- some of these are very big investments. I don't think we're going to see some of these large customers change after 6 months or 1 year to another new product and we're going have to go invest in new lines and so forth. So I would expect it will be a downtick in CapEx in '19.
Okay. And in terms of 2018 cash taxes, given the new laws, et cetera, what kind of guidance can you provide on that?
I think there will be a modest benefit, if we do spend the whole $525 million on CapEx, of course, that will give us a bigger kick in most of it at least will be 100% deductible in the year. But if you want to look over a couple of years to smooth that out a bit, I think there'll be a modest benefit to us but it's not going to be huge.
Okay. And working capital, the rise in 2017, and if I just look at receivables, inventories and payable, that working capital across the year was $275 million, is that principally a rise in resin price levels? Or you're having -- or is working capital going up for a different reason? And how should we think about 2018 working capital inflow/outflow?
A good chunk of it relates to increased commodity costs for sure. We are also doing some things to improve the operational performance in our plants level [indiscernible]. So we increased the inventory levels there. Having said all that, there are certainly some areas of opportunity for us to reduce working capital in the businesses and we're focused on that, and I would expect to see a cash benefit from working capital in 2018.
Okay. And lastly for me, can you expand a little bit on the Evergreen paper mills not running as well? Is that something fundamental or some idiosyncratic things that were going on?
John?
Yes. I got it. Thanks, Tom. Yes, we had a number of individual issues across both mills in 2017. So no real pattern to it. Morbid operational failures in each of the mills. The bottom line, we'll take that in the leadership side that we didn't lead well enough through it. Some of it were weather related as we came into early part of 2018, but nothing overly systemic, nothing crazy. It was an outlier relative to the past 8, 9 years, and we plan to just doing a better job in 2018.
Our next question is from Karl Blunden with Goldman Sachs.
Just a few more granular ones in the segments. In Reynolds Consumer, great growth there. I'm interested to know how much of that growth was due to that advertising spend from last year and the ramp of that product? So you get some benefit obviously here at a full run rate of sales this year and then lower spend. Just trying to figure out what the controlling for that? How large the growth was?
Yes. I would say a fair amount of the growth was attributed to that, but underlying that, and I talked about all of our business did -- we did see growth across our entire portfolio with the exception of one area that I talked to. But clearly, the advertising spend was uncharacteristically high for that particular quarter. And we did not have a repeat in new product launch in this year, so -- and it was kind of a mixed bag.
Got you. And I guess it's hard to predict what spend will be like this year and you may not want to talk about it. But are there any kind of big payments for advertising or those kind of one-offs we should expect in the quarter for the -- in the segment for this year?
No. I mean, we're going to advertise, but we don't have a new product like we did last year that will be pumping a lot of money behind.
That's helpful. Just on the strategy, it's been some time that you've spoken about divestitures and assets that you could be owners of or not depending on valuation. You spoke today about tuck-in M&A being something of interest. How should we think about your approach to divestitures and if you do get good pricing on some of the segments that you've in the past considered noncore to the business?
Yes. I mean, every year, we're looking at the business operations we have that are not core. And in the past year, we sold 3 small businesses I think it was. And we have any number that -- we're doing -- John Rooney talked about the paper business, that's not core to us. We're very small and so we just are subject to the moves of the big players. But you have to have a buyer out there that's really interested in time to do it. You have to be able to figure out how to separate and all that. So a lot of things have to go right if there are any of these, what we might call orphans in our group that are going to get moved off, and we'll continue to look at that and continue to try and do it. But it isn't something that's going to move the needle in a large way for our results.
That's helpful. And just finally, just on the GEC businesses, you briefly went over Graham, but as a group, are those performing according to your expectation? It seems like a couple of headwinds outside of the Evergreen mills. Should we think of these trends as the ones that will be sustained into the year? Or is there some upside particularly in Graham?
So John, how do you feel about the group?
Yes. Just -- and some of it is a repeat, so I'll make it short. But for Evergreen, the big engine on the packaging side really is running extremely well. The board business is also running well. It just really boils down to the mills running well in 2018 is the key. We've got good volume. We've got long-term contracts. We're in a really good spot. And so I'm not going to predict that the mills will run well because it's got to happen, but if the mills run well, it would be a very solid year for Evergreen packaging and it will improve '18 over '17, if that in fact happens. Everything else is lined up. The CSI business, there has been trends in that and where the market was going, but relative to that, CSI in the last 16 months has done a very good job by getting into market, being where we need to be on price and then improving our margins operationally. On top of that, they're doing a good job growing in selective segments. And so we do think that for 2018, that it will be slightly better than 2017. And again, it'll be nothing earth shattering, just be good, solid fundamental work, a bunch of base hits and that's what they've been doing for 15 months, and we think that will go forward. Graham Packaging in a number of areas is a larger business and more moving parts to it. The primary trends that we had in 2017 was continue to improve in operations, and we did, and we improved in 2017 relative to 2016. It wasn't huge but it was an improvement. Relative to that, I know in the past, I've qualified it, which can sound a bit weak, but for each and every quarter of 2017, our wins did exceed our losses, if I qualify out the loss self manufacturing, which was primarily 1 single account on 1 single product line. So that overall has been good. There's still an awful lot of work to do in Graham Packaging, and we see this year as improving relative to '17. We did had some slight flutter at the end of 2017 operationally, so that tracks my story a bit, but those are all back on track. We've got 1 primary one we've got to move forward. But 2018 for Graham looks pretty good, but it's the same thing that we've got to really improve operationally in that. But likewise, also with the Graham Packaging business, we have locked in a lot of volume under term going forward. So of the 3, the big one is Graham Packaging, the moving pieces and Evergreen is singular in nature, the mills have got to run well, and we're counting everything else continue to run well as it really has. So if I haven't answered your question, make me go back, but I think I did.
No. You did.
Our next question is from Andrew Keches with Barclays.
You continued to reiterate that 4.5x long-term leverage target for the balance sheet. I guess as you start to approach that level in 2018, do you foresee yourself and the owner revisiting capital allocation priorities? I guess, said differently, as your cash balances grow above your historical operating needs, how do you plan to deploy those? Or is the goal just to continue to build liquidity?
Right now, I mean, the only goal I can share with you is our leverage target. What the owner decides he wants to do when we're into 2018, he will share that with me and the rest of our team at that time, but I don't know any more than what I've told you in terms of what we're going to be doing.
Okay. Understood. And then just quickly, can you remind us -- or do you know what your restricted payments capacity was at the end of the year?
Just a tick over $2 billion.
Our next question is from Richard Kus with Jefferies.
So just a couple of quick follow-ups for me. First, in terms of the Graham business, you've talked about the fact that you have extended up some volume here. Do you have a significant amount of negative contractual price adjustments that are going to come into effect as you head into 2018?
John?
Yes, we do.
Okay. And how much do you expect that to impact you from either a top line or EBITDA standpoint just so we can get a sense for the year?
Do you have that?
It'll -- on a forward view, it'll drive us flat to negative across the business, but that impact is mitigated by the other things John had talked about around volume and operations.
Okay. And then on the Evergreen side of things, do you have any sense of how much the operational underperformance cost you over the course of 2017 in terms of EBITDA?
$14 million.
Our next question is from [ Robert Krayn ] with MidOcean Credit Partners.
Just 2 quick follow-up questions here. Is there -- can you remind me, is there a rule of thumb for the businesses that don't have a pass-through if resin costs rise or decrease? What it affects kind of earnings or EBITDA by?
No.
No. Okay. And then, can you just remind me again, what's the percentage of the business that's under contract? And about how long are the average contracts?
Pactiv is the largest one, and I would say they are about 70%. I think in Reynolds Consumer, the only place with this pass-through are the private label contracts in Presto. So the rest is brand strength and being able to raise your prices or lower them depending on the commodity cost. John, do you want to give us a guesstimate on your pass-through across your group? Or how much isn't pass-through?
Which John? John Rooney?
Rooney, yes.
Sorry. Yes. That question is a mouthful across all the businesses. For Graham, it's about 90% pass-through. Evergreen, given how different the revenue streams are, it's quite a bit different depending on which revenue stream we're talking about. But to get at the other question for Evergreen, for example, North American Packaging business, about 90% of it is under contract, long term, and term typically means 2 to 5 years, in some cases, 7 years. For CSI, vast majority is a pass-through and the vast majority of that business is under contract as well. Board business and Evergreen, I mean, it's -- you got to go by segment-by-segment if you go through the Evergreen business.
Okay. Great. And then just last question. On the bonds, the 6 7/8%, when you're talking about getting down to your leverage target and you think about kind of growth versus paying off debt, I've noticed you've been paying it off with kind of cash as you go. How do you think about those 6 7/8%? Or how do you think about paying down debt in the future or -- versus refinancing it in the market?
I guess we certainly entertain refinancing offers. What we've landed so far, we think it's better to use cash.
[Operator Instructions] Our next question is from Mack Fuller with GSO Capital Partners.
Most of my questions were answered. I guess, just the one I had with Closures, just to clarify, when you say that it'll be slightly better next year, is that better meaning EBITDA would be up or EBITDA would be down less?
Yes. That's a good question the way you worded that. Yes, EBITDA will be up a slight amount year-over-year on an absolute sense, and we're talking small $1 million, $2 million -- $1 million to $2 million kind of thing.
Ladies and gentlemen, we have reached the end of our question-and-answer session. I would like to turn the call back over to management for closing remarks.
Okay. Well, thank you, everybody for listening in, and I want to remind you, today is Valentine's Day, in case you forgot. Goodbye.
Thank you. This concludes Valentine's Day conference. You may disconnect your lines at this time, and thank you for your participation.