REYN Financial Analysis

Analysis Date: 2/6/2025

Business Model

Reynolds Consumer Products operates a brand and store brand business model, generating revenue from the sale of household consumer products across three main categories: Cooking, Waste & Storage, and Disposable Tableware. Revenue is derived from retail sales to consumers and non-retail sales, primarily aluminum to food service and industrial customers.

Revenue Sources

• Retail Net Revenues: Sales of branded and store brand products to consumers through retail channels (approx. 95% of total revenue).
• Non-Retail Net Revenues: Sales of aluminum to food service and industrial customers (approx. 5% of total revenue).

Income Statement Analysis

• Total Net Revenues increased by 1.39% in Q4 2024 compared to Q4 2023, driven by retail and non-retail growth.
• Cost of Sales increased by 6.16% year-over-year, outpacing revenue growth and impacting gross profit.
• Gross Profit decreased by 9.39% year-over-year, reflecting pressure from increased cost of sales.
• Selling, General and Administrative Expenses decreased slightly by 2.91% year-over-year, indicating cost control efforts.
• Income from Operations decreased by 12.62% year-over-year due to lower gross profit, despite SG&A control.
• Interest Expense, Net decreased by 21.43% year-over-year, benefiting from debt reduction.
• Net Income decreased by 11.68% year-over-year, reflecting lower operating income partially offset by lower interest expense.

Balance Sheet Analysis

• Cash and Cash Equivalents increased by 19.13%, strengthening the company's liquidity position.
• Accounts Receivable decreased slightly by 2.88%, indicating efficient collection or potentially slower sales growth depending on context.
• Inventories increased by 8.21%, which could indicate anticipation of future sales growth or potential inventory build-up.
• Long-Term Debt decreased by 8.08%, reflecting deleveraging and improved financial health. Net Debt Leverage reduced from 2.7x to 2.3x (Source: Exhibit 99.1).
• Total Stockholders' Equity increased by 7.99%, driven by retained earnings and potentially other equity components, strengthening the financial base.
• Accounts Payable increased significantly by 45.66%, which could be due to timing of payments or increased purchasing activities. Needs further investigation to ensure not a sign of liquidity pressure if not matched by inventory turnover or sales.

Capital Allocation

Reynolds Consumer Products prioritizes capital allocation towards debt reduction, dividend payments, and reinvestment in the business. In 2024, $150 million of debt was paid down, with an additional $50 million paid in January 2025. The company declared a quarterly dividend of $0.23 per share. Reinvestment is focused on automation, material processing improvements, and strategic initiatives to drive growth and cost savings. Management is also open to M&A opportunities and entry into adjacent categories under a returns-based capital allocation framework (Source: Q4 2024 Earnings Call Transcript, Exhibit 99.1).

Management Commentary

Retail volume accelerated in the fourth quarter, and we have the team, business model and resources to drive strong growth, further margin expansion and consistently attractive shareholder returns.

2024 represented the strongest profitability in our history outside of the COVID fueled 2020 results.

We enter 2025 in a strong competitive position along with very strong cash flows, a deleveraged and very strong balance sheet and the opportunity to invest in a range of well developed programs to improve growth, drive out costs and produce more stable earnings growth.

We expect 2025 net revenues to be down low single digits driven by retail revenue at or above category performance. Down 2% category expectation is driven exclusively by our expectation of a double digit decline for Foam Dishes.

We see the year as having some level of headwinds, especially in the area of raw materials.

Overall Sentiment: Cautiously optimistic. Management expresses confidence in long-term growth and margin expansion driven by strategic investments and strong brands, but acknowledges near-term headwinds from category decline in foam dishes and rising raw material costs. Focus is on executing strategic programs and leveraging financial flexibility.

Recommendation

Rating: Hold

Reason for Rating: Hold recommendation based on a balanced view of strengths and weaknesses. Strong brands, deleveraged balance sheet, and strategic initiatives for growth are positives. However, near-term revenue headwinds from category decline in foam dishes and increased costs present challenges. Wait for clearer signs of revenue growth acceleration and margin expansion from investments before considering a Buy rating.

Disclaimer: This report is for informational purposes only and not investment advice. The analysis is based on limited information and subject to change. Investing in securities involves risks, including potential loss of principal. Past performance doesn't guarantee future results. Always conduct your own research, understand the risks, and consult a financial professional before making investment decisions.

Generated on: 2/6/2025, 10:14:41 AM