Reynolds Consumer Products Inc.

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 4/5

Reynolds Consumer Products Inc. is a consumer goods company manufacturing and selling a variety of branded and store-brand products across three main categories: cooking and baking, waste and storage, and disposable tableware.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview Reynolds Consumer Products Inc. (REYN) operates across three main segments: Reynolds Cooking & Baking, Hefty Waste & Storage, and Presto Products.

  • Reynolds Cooking & Baking: This segment primarily produces branded aluminum foil, parchment paper, freezer paper, and similar products. They compete primarily with other branded products.
  • Hefty Waste & Storage: This segment’s main brands are Hefty and Hefty Tailored. They manufacture branded and store-brand trash bags, food storage bags, and plasticware.
  • Presto Products: They sell storage bags, food wraps, and other kitchen and home storage items.

Revenue Distribution and Trends:

  • The company’s revenues are primarily driven by consumer demand for their products. They have multiple leading positions across the U.S. market.
  • A significant portion of their revenue growth comes from increased pricing.
  • The company faces a combination of volume declines in retail and increase volume in non-retail business.
  • While total revenue has increased in the first 9 months of 2024, it has been driven completely by the non-retail channels. * This shows decline in demand and competitive pressure from retail channels.

Competitive Landscape:

  • The household products market is highly competitive, with REYN facing rivals across all segments.
  • In cooking and baking, they primarily face other branded players, like “Glad” or “Hefty” branded bags, rather than low-cost alternatives.
  • In waste & storage and food storage, they face both branded players and private labels, that are often cheaper than their products and compete with price, not necessarily quality.
  • They need to balance increasing prices with potential volume declines.
  • The company competes with other large firms like Berry Global, Sonoco Products, and Pactiv Evergreen as well as other manufacturers from all over the world.
  • The company needs to defend its moat, that is based mostly on its brand strength.

What Makes REYN Different:

  • Brand Recognition: Reynolds and Hefty are very recognizable brands in their market categories. They are seen as having good quality products, and some customer might pay extra for the brand.
  • Market leadership: REYN consistently maintains a top 2 market share. This gives them advantages related to scale.
  • Distribution capabilities: the company has invested heavily to become a one-stop shop for its customers
  • Diversified product line: They have products in a number of categories in the consumer goods space

Margins:

  • Gross profit margins are good at 32.8% (reported on their Q3 2024 results).
  • Operating margin is about 12%, which is a good but not exceptional margin.
  • Margins have been under pressure from supply chain issues and inflation, but recently have shown an increase due to lower manufacturing and material costs.

Recent Concerns and Issues:

  • Sales Volume Decline: The company has recently had volume decline in its main revenue stream. While the higher pricing helps mitigate that, it may mean that the company is losing market share. The increase in volume for non-retail products is an outlier as the company sells fewer and fewer products in general.
  • Debt: the company’s level of debt has increased compared to previous year levels. This is a concern and could cause problems in a high interest environment.
  • Impact from Inflation: Although prices have been raised to match inflation, this could affect demand for products, and competitors with lower prices may take market share.
  • Uncertain Macroenvironment: REYN management faces uncertainty on future inflation, interest rates, and global economic growth.
    • If they overestimate inflation and increase prices too fast, they might have trouble selling as competitors won’t increase prices as much.

Financial Health Rating: 4 / 5 Reynolds Consumer Products shows overall good financial health:

  • Liquidity: The company has a solid liquidity base with cash of $181 million and credit availability, allowing them to fund operations easily.
  • Low leverage: Total debt is $1,735 million against total assets worth $4,663 million. While not bad, it could be a concern in high interest rate environments.
  • Profitability: The company’s profit margins are respectable, which helps them keep their financial position strong.
  • Strong financial history: the company has a decent history of stable cashflows and revenues.
  • Capital Expenditures: the company is cutting down on capex and is increasing cash flows. However, the level of long-term growth is tied to the capex for future business.
  • While the company’s balance sheet looks good overall, the debt is something to keep in mind.

Moat Rating: 2 / 5

  • REYN’s moats are somewhat limited. While REYN does have brands like Reynolds and Hefty, these brands are not immune to competition.
    • Intangible assets: The main competitive advantage is brand strength, which can give pricing power. Other types of intangible assets are not significant for this company. Brand strength, however, doesn’t always translate into strong margins and profitability.
  • Switching costs: Customer switching costs are low, since brands like Hefty, and Glad are all very comparable and it’s easy for customers to switch. * Network effects: They are not present in their businesses. * Cost advantages: The company doesn’t have any cost advantages, but location might play a part in some categories.
  • For now, REYN has no moat in my opinion, but a narrow moat can be said to exist due to it’s brands and distribution network.
  • However, if prices stay high and customer switch to low-cost brands, it’s likely that their sales will drop.
  • Their ability to keep up with their competition will determine the future stability of their moat.

Risks to the Moat:

  • Increased competition: the presence of a great number of competitors, especially with private labels, might lower revenue and margins.
  • Technological changes: changes in manufacturing and processes could undermine their advantages, especially within the low-margin commodity areas.
  • Loss of brand value: brands like Hefty and Reynolds could fall out of favor, which would reduce pricing power.
  • Weakening of the overall economy: if the economy worsens, customers could drop higher priced items and start purchasing cheaper alternatives.
  • Supply Chain Disruptions: any more disruptions in the supply chain, or in prices, might impact profitability.
  • Commodity Risk: changes in costs of raw materials such as resin and aluminum will have a big impact on the company margins and profitability
  • Inflation: While prices have been increased to keep up with inflation, this could affect demand for products, and competitors with lower prices may take market share.

Understandability Rating: 3/5 REYN is easy to understand for the most part. They make household goods, and there is nothing too complex about that. However, the company has many different product categories, and revenue analysis between those categories and different markets is difficult. The company has a simple business, but the sheer scale makes the financials quite difficult to follow. The company’s finances require in-depth analysis of balance sheet, income statement, and cash flow statement.