20-F 1 rghlye2019doc.htm 20-F RGHL 2019 Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 20-F
¨
REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934
Or
þ
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2019
Or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Or
¨
SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 333-177693
Reynolds Group Holdings Limited
(Exact name of Registrant as specified in its charter)
Not applicable
New Zealand
(Translation of Registrant's name into English)
(Jurisdiction of
incorporation or organization)
Level Nine
148 Quay Street
Auckland 1010 New Zealand
(Address of principal executive offices)
c/o Reynolds Group Holdings Limited
Level Nine
148 Quay Street
Auckland 1010 New Zealand
Attention: Joseph Doyle
Tel 847 482 2409
Fax 847 615 6417
Email: enquiries@reynoldsgroupholdings.com
(Name, Telephone, Email and/or Facsimile number and Address of Company Contact Person)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
¨ Yes þ No
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.                                            þ Yes ¨ No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
þ Yes ¨ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
þ Yes ¨ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See the definitions of “large accelerated filer," "accelerated filer,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ¨
 
Accelerated filer ¨
 
Non-accelerated filer þ
 
Emerging growth company ¨
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act.     ¨

† The term "new or revised financial accounting standard" refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
U.S. GAAP ¨
 
International Financial Reporting Standards as issued by the
 International Accounting Standards Board þ
 
Other ¨
If “Other” has been checked in response to the previous question indicate by check mark which financial statement item the registrant has elected to follow.
¨ Item 17 ¨ Item 18
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
¨ Yes þ No



SIGNATURES
 
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.
 
 
Reynolds Group Holdings Limited
 
(Registrant)
 
 
 
/s/ ALLEN HUGLI
 
Allen Hugli
 
Chief Financial Officer
 
March 10, 2020



















ANNUAL REPORT
For the fiscal year ended December 31, 2019


REYNOLDS GROUP HOLDINGS LIMITED
New Zealand
(Jurisdiction of incorporation or organization)

Reynolds Group Holdings Limited
Level Nine
148 Quay Street
Auckland 1010 New Zealand
Attention: Joseph Doyle
Tel: 847 482 2409
Fax: 847 615 6417
Email: enquiries@reynoldsgroupholdings.com











TABLE OF CONTENTS
PART I
 
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
 
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
 
ITEM 3. KEY INFORMATION
 
 
General Information
 
 
Presentation of Financial Information
 
 
Selected Historical Financial Data
 
 
Risk Factors
 
ITEM 4. INFORMATION ON RGHL
 
 
Corporate Information
 
 
History and Development
 
 
Business Overview
 
 
Organizational Structure
 
 
Property, Plants and Equipment
 
ITEM 4A. UNRESOLVED STAFF COMMENTS
 
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
 
 
Key Factors Influencing Our Financial Condition and Results of Operations
 
 
Results of Operations
 
 
Liquidity and Capital Resources
 
 
Quantitative and Qualitative Disclosures about Market Risk
 
 
Accounting Principles
 
 
Critical Accounting Policies
 
 
Recently Issued Accounting Pronouncements
 
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
 
 
Directors of RGHL and Senior Management of the RGHL Group
 
 
Directors' Compensation and Service Contracts
 
 
Directors' and Senior Management's Indemnification Agreements
 
 
Other
 
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
 
 
Major Shareholders and Beneficial Ownership
 
 
Related Party Transactions
 
ITEM 8. FINANCIAL INFORMATION
 
 
Consolidated Financial Statements and Other Financial Information
 
 
Significant Changes
 
ITEM 9. THE OFFER AND LISTING
 
ITEM 10. ADDITIONAL INFORMATION
 
 
Constitution of RGHL
 
 
Material Contracts
 
 
Exchange Controls
 
 
Documents on Display
 
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
 
 
 
 
PART II
 
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

1


 
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
 
ITEM 15. CONTROLS AND PROCEDURES
 
 
Evaluation of Disclosure Controls and Procedures
 
 
Management's Report on Internal Control Over Financial Reporting
 
 
Changes in Internal Control Over Financial Reporting
 
ITEM 16. [RESERVED]
 
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
 
ITEM 16B. CODE OF ETHICS
 
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
 
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
 
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
 
ITEM 16F. CHANGE IN CERTIFYING ACCOUNTANT
 
ITEM 16G. CORPORATE GOVERNANCE
 
ITEM 16H. MINE SAFETY DISCLOSURE
PART III
 
ITEM 17. FINANCIAL STATEMENTS
 
ITEM 18. FINANCIAL STATEMENTS
 
ITEM 19. EXHIBITS
 
 
    



2


Introductory Note    

In this annual report, references to “we,” “us,” “our” or the "RGHL Group" are to Reynolds Group Holdings Limited ("RGHL") and its consolidated subsidiaries, unless otherwise indicated.

We have prepared this annual report pursuant to (i) the requirements of the indentures governing certain of our outstanding notes, and (ii) the credit agreement with our lenders governing our senior secured credit facilities (the “Credit Agreement”). As of the date of this filing, our outstanding notes include:

the Floating Rate Senior Secured Notes due 2021;

the 5.125% Senior Secured Notes due 2023;

the 7.000% Senior Notes due 2024; and

the 7.950% Debentures due 2025 and the 8.375% Debentures due 2027 (collectively, the "Pactiv Notes").

The senior secured notes are referred to as the "Reynolds Senior Secured Notes." The senior notes are referred to as the "Reynolds Senior Notes." The Reynolds Senior Secured Notes and the Reynolds Senior Notes are collectively referred to as the "Reynolds Notes."

The indentures governing these notes, as well as our Credit Agreement, are described more fully in this annual report.

Non-GAAP Financial Measures

In this annual report, we utilize certain non-GAAP financial measures and ratios, including earnings before interest, tax, depreciation and amortization ("EBITDA") and Adjusted EBITDA. Adjusted EBITDA, a measure used by our management to measure operating performance, is defined as EBITDA, adjusted to exclude certain items of a significant or unusual nature, including but not limited to acquisition costs, non-cash pension income or expense, restructuring costs, related party management fees, unrealized gains or losses on derivatives, gains or losses on the sale of non-strategic assets, asset impairments and write-downs, strategic review costs and equity method profit not distributed in cash. These measures are presented because we believe that they and similar measures are widely used in the markets in which we operate as a means of evaluating a company’s operating performance and financing structure and, in certain cases, because those measures are used to determine compliance with covenants in our debt agreements and compensation of certain management. They may not be comparable to other similarly titled measures of other companies and are not measurements under International Financial Reporting Standards ("IFRS"), as issued by the International Accounting Standards Board (“IASB"), generally accepted accounting principles in the United States of America ("U.S. GAAP"), or other generally accepted accounting principles, are not measures of financial condition, liquidity or profitability and should not be considered as an alternative to profit from operations for the period or operating cash flows determined in accordance with IFRS, nor should they be considered as substitutes for the information contained in our financial statements prepared in accordance with IFRS included in this annual report. Additionally, EBITDA and Adjusted EBITDA are not intended to be measures of free cash flow, as they do not take into account certain items such as interest and principal payments on our indebtedness, working capital needs, tax payments and capital expenditures. We believe that the inclusion of EBITDA and Adjusted EBITDA in this annual report is appropriate to provide additional information to investors about our operating performance and to provide a measure of operating results unaffected by differences in capital structures, capital investment cycles and ages of related assets among otherwise comparable companies. We believe that issuers of high yield debt securities present EBITDA and Adjusted EBITDA because investors, analysts and rating agencies consider these measures useful. For additional information regarding the non-GAAP financial measures used by management, refer to note 5 of the RGHL Group's audited consolidated financial statements included elsewhere in this annual report.

Forward-Looking Statements

This annual report includes forward-looking statements. Forward-looking statements include statements regarding our goals, beliefs, plans or current expectations, taking into account the information currently available to our management. Forward-looking statements are not statements of historical fact. For example, when we use words such as “believe,” “anticipate,” “expect,” “estimate," "plan," “intend,” “should,” “would,” “could,” “may,” "might," “will” or other words that convey uncertainty of future events or outcomes, we are making forward-looking statements. We have based these forward-looking statements on our management's current view with respect to future events and financial performance and future business and economic conditions more generally. These views reflect the best judgment of our management, but involve a number of risks and uncertainties which could cause actual results to differ materially from those predicted in our forward-looking statements and from past results, performance or achievements. Although we believe that the estimates and the projections reflected in the forward-looking statements are reasonable, such estimates and projections may prove to be incorrect, and our actual results may differ from those described in our forward-looking statements as a result of the following risks, uncertainties and assumptions, among others:

risks related to future costs of raw materials, energy and freight, including the impact of tariffs, trade sanctions and similar matters affecting our importation of certain raw materials;

risks related to economic downturns in our target markets;

risks related to changes in consumer lifestyle, eating habits, nutritional preferences and health-related and environmental concerns that may harm our business and financial performance;

risks related to complying with environmental, health and safety laws or as a result of satisfying any liability or obligation imposed under such laws;

risks related to the impact of a loss of any of our key manufacturing facilities;

risks related to our dependence on key management and other highly skilled personnel;


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risks related to the consolidation of our customer bases, loss of a significant customer, competition and pricing pressure;

risks related to any potential supply of faulty or contaminated products;

risks related to exchange rate fluctuations;

risks related to dependence on the protection of our intellectual property and the development of new products;

risks related to pension plans sponsored by us and others in our control group;

risks related to strategic transactions, including completed and future acquisitions or dispositions;

risks related to our hedging activities which may result in significant losses and in period-to-period earnings volatility;

risks related to our suppliers of raw materials and any interruption in our supply of raw materials;

risks related to information security, including a cybersecurity breach or a failure of one or more of our information technology systems, networks, processes or service providers;

risks related to related party transactions entered into with Reynolds Consumer Products Inc. ("RCPI") and its subsidiaries ("Reynolds Consumer Products Group")

risks related to the tax-free distribution of our interest in RCPI to our shareholder, Packaging Finance Limited ("PFL");

risks related to our substantial indebtedness and our ability to service our current and future indebtedness;

risks related to restrictive covenants in certain of our outstanding notes and our other indebtedness which could adversely affect our business by limiting our operating and strategic flexibility; and

risks related to increases in interest rates which would increase the cost of servicing our variable rate debt instruments.

The risks described above and the risks disclosed in or referred to in this annual report are not exhaustive. Other sections of this annual report, including in "Item 3. Key Information — Risk Factors," describe additional factors that could adversely affect our business, financial condition or results of operations. Moreover, we operate in a very competitive and rapidly changing environment. New risk factors emerge from time to time and it is not possible for us to predict all such risk factors, nor can we assess the impact of all such risk factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks and uncertainties, you are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. Except as required by law, we undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise. All subsequent written and oral forward-looking statements attributable to us or to persons acting on our behalf are expressly qualified in their entirety by the cautionary statements referred to above and included elsewhere in this annual report.

PART I

ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS.

Not applicable.

ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE.

Not applicable.

ITEM 3. KEY INFORMATION.

General Information

We are a leading global manufacturer and supplier of consumer and foodservice products and beverage containers. We sell our products to customers globally, including to a diversified mix of leading multinational companies, large national and regional companies and small local businesses. We primarily serve the consumer food, beverage and foodservice market segments.

During the year ended December 31, 2019, we operated through four reportable segments:

Reynolds Consumer Products, which manufactures branded and store brand consumer products including aluminum foil, wraps, trash bags, food storage bags and disposable tableware and cookware;

Pactiv Foodservice, which manufactures foodservice products in a broad range of materials;

Graham Packaging, which designs and manufactures blow-molded plastic containers for consumer products; and

Evergreen, which manufactures cartons for fresh beverage products, primarily for the juice and milk markets.

In addition to our four segments, our Other/Unallocated category includes operations which do not meet the quantitative threshold for reportable segments. This category also includes holding companies and certain debt issuer companies which support the entire RGHL Group and which are not part of a specific segment, as well as eliminations of transactions between segments.

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We are part of a group of private companies based in New Zealand that are wholly-owned by Mr. Graeme Hart, our strategic owner.

Distribution of Reynolds Consumer Products

On February 4, 2020, we distributed our interest in the operations that represented the Reynolds Consumer Products segment to our shareholder, PFL. The distribution was effected in a manner that is intended to qualify as tax-free to us and to PFL. The distribution occurred prior to and in preparation for the previously-announced initial public offering ("IPO") of shares of common stock of RCPI, which completed on February 4, 2020. The distribution of Reynolds Consumer Products will trigger the presentation of this operation in our consolidated financial statements as a discontinued operation as of February 4, 2020. This change in presentation will be reflected in our interim unaudited condensed consolidated financial statements for the three month period ending March 31, 2020. For additional information, refer to "Item 5. Operating and Financial Review and Prospects — Liquidity and Capital Resources."

Discontinued Operations

Our former Closures segment manufactured plastic and aluminum beverage caps, closures and high speed rotary capping equipment. On December 20, 2019, we completed the sale of our North American and Japanese closures businesses. These operations represented substantially all of our former Closures segment. We received preliminary net proceeds of $611 million. These proceeds are subject to further adjustment associated with differences between estimated and final amounts as of completion, in respect of balances such as cash, indebtedness and working capital, each as defined in the sale agreement. The results of the North American and Japanese closures businesses have been presented as discontinued operations for all periods presented.

We have retained and continue to operate our remaining closures businesses in Europe, the Middle East, Egypt (collectively, “EMEA”) and South America. The results and financial position of our remaining closures businesses for all periods have been presented within the Other/Unallocated category, as they do not meet the quantitative threshold for a reportable segment. For additional information, refer to notes 2.6 and 7 of the RGHL Group's audited consolidated financial statements included elsewhere in this annual report.

Presentation of Financial Information

RGHL was incorporated on May 30, 2006 under the Companies Act 1993 of New Zealand. RGHL is a holding company that operates through four segments that it acquired in a series of transactions. See "Item 4. Information on RGHL — Business Overview" for information regarding the history of each of the four segments.


5


Selected Historical Financial Data

The selected historical consolidated financial data of the RGHL Group as of December 31, 2019 and 2018 and for the years ended December 31, 2019, 2018 and 2017 have been derived from the RGHL Group's audited consolidated financial statements included elsewhere in this annual report. The selected historical consolidated financial information of the RGHL Group as of December 31, 2017, 2016 and 2015 and for the years ended December 31, 2016 and 2015 have been derived from the RGHL Group's consolidated financial statements, as adjusted for certain items in accordance with IFRS, which are not included in this annual report.

The following information should be read in conjunction with the RGHL Group's audited consolidated financial statements and related notes, and other financial information included elsewhere in this annual report, including “Item 5. Operating and Financial Review and Prospects” and “ — Risk Factors.”
(In $ million)
 
2019(1)(2)
 
2018(1)
 
2017(1)
 
2016(1)
 
2015(1)(3)
Income Statement Data
 
 
 
 
 
 
 
 
 
 
Revenue
 
9,716

 
10,059

 
9,945

 
10,055

 
10,596

Gross profit
 
1,981

 
1,973

 
2,205

 
2,266

 
2,094

Profit from operating activities
 
823

 
797

 
1,176

 
1,105

 
1,209

Net financial expenses
 
(506
)
 
(824
)
 
(690
)
 
(880
)
 
(1,534
)
Profit (loss) from continuing operations before income tax
 
317

 
(27
)
 
486

 
225

 
(325
)
Income tax (expense) benefit
 
(134
)
 
(2
)
 
(65
)
 
(94
)
 
(14
)
Profit (loss) from continuing operations
 
183

 
(29
)
 
421

 
131

 
(339
)
Profit (loss) from discontinued operations, net of income tax
 
(77
)
 
24

 
18

 
30

 
2,657

Profit (loss) for the year
 
106

 
(5
)
 
439

 
161

 
2,318

Balance Sheet Data
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
1,291

 
783

 
617

 
932

 
1,977

Trade and other receivables, net
 
993

 
1,121

 
1,136

 
1,051

 
1,095

Inventories
 
1,312

 
1,411

 
1,370

 
1,245

 
1,262

Assets held for sale
 
11

 
5

 
144

 
26

 
1

Property, plant and equipment
 
3,277

 
3,021

 
2,923

 
3,010

 
3,184

Intangible assets
 
8,561

 
9,222

 
9,659

 
9,902

 
10,192

Total assets
 
16,257

 
16,178

 
16,682

 
16,954

 
18,491

Trade and other payables — current
 
975

 
1,163

 
1,116

 
1,182

 
1,205

Liabilities directly associated with assets held for sale
 

 

 
34

 
23

 

Borrowings — current
 
3,587

 
455

 
470

 
746

 
977

Borrowings — non-current
 
7,053

 
10,580

 
10,919

 
11,325

 
12,785

Total liabilities
 
14,280

 
14,552

 
15,030

 
15,997

 
17,694

Net assets (liabilities)
 
1,977

 
1,626

 
1,652

 
957

 
797

Other Data
 
 
 
 
 
 
 
 
 
 
Cash provided from (used in):
 
 
 
 
 
 
 
 
 
 
Operating activities
 
957

 
950

 
840

 
876

 
654

Investing activities
 
13

 
(440
)
 
(359
)
 
(157
)
 
3,820

Financing activities
 
(462
)
 
(357
)
 
(785
)
 
(1,749
)
 
(4,156
)
Capital expenditures
 
624

 
585

 
410

 
324

 
381

EBITDA(4) from continuing operations
 
1,521

 
1,412

 
1,804

 
1,769

 
1,878

Adjusted EBITDA(4) from continuing operations
 
1,825

 
1,771

 
1,981

 
2,014

 
1,933


(1)
The information presented has been revised to reflect the North American and Japanese closures businesses as discontinued operations for all periods. Refer to note 7 of the RGHL Group’s audited consolidated financial statements included elsewhere in this annual report for additional information.
(2)
Reflects the adoption of the accounting standard IFRS 16 “Leases.” Refer to note 3.7 of the RGHL Group’s audited consolidated financial statements included elsewhere in this annual report for additional information.
(3)
For the year ended December 31, 2015, profit (loss) from discontinued operations, net of income tax, includes the gain on sale of SIG, a segment we sold in 2015.
(4)
Refer to page 3 under the heading "Non-GAAP Financial Measures" for additional information related to this financial measure.


6


Risk Factors

Holders of our securities should carefully consider the following risk factors, in addition to the other information presented in this annual report, including the discussions set forth in "Item 4. Information on RGHL" and "Item 5. Operating and Financial Review and Prospects" and all the financial statements and related notes, in evaluating our business and an investment in the Reynolds Notes. Any of the following risks, as well as other risks and uncertainties, could harm our business and financial results and cause the value of such securities to decline, which in turn could cause you to lose all or part of your investment. The risks below are not the only ones facing our company. Additional risks not currently known to us or that we currently deem immaterial also may materially and adversely impact our business, financial condition or results of operations.

Risks Related to Our Business

Our business and financial performance may be harmed by fluctuations in raw material, energy and freight costs, including the impact of tariffs, trade and similar matters.

Raw material costs represent a significant portion of our cost of sales, so changes in raw material prices may impact our results of operations. The primary raw materials used to manufacture our products are plastic resins (particularly polypropylene (“PP”), polyethylene (“PE"), polystyrene ("PS") and polyethylene terephthalate ("PET")), aluminum, fiber (principally raw wood and wood chips) and paperboard (principally cartonboard and cupstock). The prices of our raw materials have fluctuated significantly in recent years. See "Item 5. Operating and Financial Review and Prospects — Key Factors Influencing our Financial Condition and Results of Operations — Raw Materials and Energy Prices."

Fluctuations in raw material costs can adversely affect our business. The fluctuations are generally due to movements in commodity market prices, which are reflected in published indices that are used in the negotiated rates with suppliers. We typically do not enter into long-term purchase contracts that provide for fixed prices for our principal raw materials. While we regularly enter into hedging agreements for some of our raw materials and energy sources, such as aluminum, resin (or components thereof), natural gas and diesel, to minimize the impact of such fluctuations, these hedging agreements do not cover all our needs, and hedging may reduce the positive impact we may otherwise receive when raw material prices decline. Although many of our customer pricing agreements include raw material cost pass-through mechanisms, which mitigate the impact of changes in raw material costs, the contractual price adjustments do not occur simultaneously with commodity price fluctuations. Additionally, some of our contracts generally do not contain such cost pass-through mechanisms in their customer pricing agreements. Furthermore, in the businesses that use such mechanisms, the contracts cover only a portion of the businesses' sales. Due to differences in timing between purchases of raw materials and sales to customers, there is often a lead-lag effect, during which margins are negatively impacted in periods of rising raw material costs and positively impacted in periods of falling raw material costs. We also use price increases, wherever possible, to mitigate the effect of raw material cost increases for customers that are not subject to raw material cost pass-through agreements. However, there is no assurance that increases in raw material costs may be covered by increases in pricing. As a result, we often are not able to pass on price increases to our customers on a timely basis, if at all, and consequently do not always recover the lost margin resulting from the price increases. Moreover, an increase in the selling prices for the products we produce resulting from a pass-through of increased raw material costs or freight costs could have an adverse impact on the volume of units we sell and decrease our revenue.

In addition to our dependence on primary raw materials, we are also dependent on different sources of energy for our operations, such as coal, fuel oil, electricity and natural gas. In particular, our Evergreen segment is susceptible to price fluctuations in natural gas, as it incurs significant natural gas costs to convert raw wood and wood chips to paper products and liquid packaging board. Historically, we have been able to mitigate the effect of higher energy-related costs with productivity improvements and other cost reductions. However, there is no assurance that we can sustain the level of productivity improvements and cost reduction measures in the future. In addition, if some of our large energy contracts were to be terminated for any reason or not renewed upon expiration, or if market conditions were to substantially change resulting in a significant increase in the price of coal, fuel oil, electricity and/or natural gas, we may not be able to find alternative, comparable suppliers or suppliers capable of providing coal, fuel oil, electricity and/or natural gas on terms or in amounts satisfactory to us. As a result of any of these events, our business, financial condition and operating results may suffer.

We are also dependent on third parties for the transportation of both our raw materials and the products we sell. In certain jurisdictions, we are exposed to import duties and freight costs, the latter of which is influenced by carrier availability and the fluctuating costs of oil and other transportation costs.

Raw material costs are also impacted by governmental actions, such as tariffs and trade sanctions. For example, the recent imposition by the U.S. government of tariffs on products imported from certain countries and trade sanctions against certain countries have introduced greater uncertainty with respect to policies affecting trade between the United States and other countries and have impacted the cost of certain raw materials, including aluminum and resin. Major developments in trade relations, including the imposition of new or increased tariffs by the United States and/or other countries, could have a material adverse effect on our business, financial condition and results of operations.

Our business and financial performance may be adversely affected by economic downturns in the markets that we serve.

Many of our products are used in conjunction with products manufactured by other companies, so demand for our products is directly affected by consumer consumption of these products. General economic conditions affect consumption in Graham Packaging's and Evergreen's primary end-use markets, including beverage products, such as milk, other dairy products, juices, teas and sports drinks/isotonics, as well as the liquid food market and other packaged consumer products. Demand for our Pactiv Foodservice products is impacted by market conditions in the foodservice industry, including restaurant demand and retail food sales.

Downturns or periods of economic weakness or increased prices in these consumer markets have resulted in the past, and could result in the future, in decreased demand for our products. In particular, our business has been in the past, and could be in the future, adversely affected by any economic downturn that results in difficulties for any of our major customers, including retailers. For example, uncertainty about future economic conditions globally, and in the United States and Europe in particular, could negatively impact our customers and adversely affect our results of operations. These conditions are beyond our control and may have an impact on our sales and results of operations. Macro-economic issues involving the broader financial markets, including the housing and credit systems and general liquidity issues in the securities markets, have negatively impacted the economy and may negatively affect our growth. In addition, weak economic conditions and declines in consumer spending and consumption have in the past harmed, and may in the future harm, our operating results.

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Increased competition could reduce our sales and profitability and adversely affect our financial condition and results of operations.

All of our segments operate in highly competitive markets. Some of our competitors have significantly higher market shares than we do globally, or in the geographic markets in which we compete. Some of our competitors offer a more specialized variety of materials and concepts and may serve more geographic regions through various distribution channels. Some of our competitors have lower costs or greater financial and other resources than we do and may be less adversely affected than we are by price declines or by increases in raw material costs or otherwise better withstand adverse economic or market conditions. The competitive issues faced by each of our segments are discussed in more detail in "Item 4. Information on RGHL — Business Overview — Competition."

Although in some of our businesses capital costs are significant and there are intellectual property and technological barriers to entry, in addition to existing competitors, we also face the threat of competition from new entrants to our markets. To the extent there are new entrants, increasing or even maintaining our market shares or margins may be more difficult. In addition to other suppliers of similar products, our businesses also face competition from products made from other substrates. The prices that we can charge for our products are therefore constrained by the availability and cost of substitutes.

The combination of these market influences has created an intensely competitive environment in which product pricing (including volume rebates, marketing allowances and other items impacting net pricing) is a key competitive factor. Our customers continuously evaluate their suppliers, often resulting in downward pricing pressure and increased pressure to continuously introduce and commercialize innovative new products, improve customer service and maintain strong relationships with our customers. We may lose customers in the future, which would adversely affect our business and results of operations. These competitive pressures could result in reduced sales and profitability and limit our ability to recover cost increases through price increases and, unless we are able to control our operating costs, our gross margin may be adversely affected.

We are affected by seasonality and cyclicality in certain of our businesses.

Demand for bottled beverages, and consequently the products we manufacture or supply, may be affected by weather conditions, especially during the summer months when weather impacts cold beverage consumption. Demand for certain of our products typically increases during the holiday season which leads to increased sales in the fourth quarter, and our school milk carton business is typically stronger during the North American school semesters and decreases during the holiday periods. The market for some of our products can be cyclical and sensitive to changes in general business conditions, industry capacity, consumer preferences and other factors. We have no control over these factors and they can significantly influence our financial performance.

Our business and financial performance may be harmed by changes in consumer lifestyle, eating habits, nutritional preferences and health-related and environmental concerns.

Many of our products are used by consumers in connection with food or beverage products. Any reduction in consumer demand for these product types as a result of lifestyle, environmental, nutritional or health considerations could have a significant impact on our customers and hence on our financial condition and results of operations. For example, there have been recent concerns about the environmental or health impact resulting from the manufacturing, shipping and/or disposal of resin-based products, such as plastic bottles and polystyrene containers. Product stewardship and resource sustainability concerns, including the recycling of products and product packaging and restrictions on the use of potentially harmful materials in products, have received increased attention in recent years and are likely to play an increasing role in brand management and consumer purchasing decisions. In addition, changes in consumer lifestyle may result in decreasing demand for certain of our products. Our financial position and results of operations might be adversely affected to the extent that such environmental concerns or changes in consumer lifestyle reduce demand for our products.

If we fail to maintain satisfactory relationships with our major customers, our results of operations could be adversely affected.

Many of our customers are large and possess significant market leverage, which results in significant downward pricing pressure, and often constrains our ability to pass through price increases. Pactiv Foodservice sells the majority of its products under agreements ranging from one to three years, with the balance sold pursuant to purchase orders or formal short-term supply agreements. In addition, we do not have written agreements with some of our customers and many of our agreements can be terminated on short notice. Graham Packaging's sales are made pursuant to long-term customer purchase orders and contracts which typically vary in length with terms up to ten years. Many of the contracts are requirements contracts which generally do not obligate the customer to purchase any given amount of product from Graham Packaging. Prices under Graham Packaging's arrangements are tied to market standards and therefore vary with market conditions. Evergreen's products are generally sold under multi-year supply agreements with many of their customers. If our major customers reduce purchasing volumes or stop purchasing our products, our business and results of operations would likely be adversely affected. It is possible that we will lose customers in the future, which may adversely affect our business and results of operations.

We could incur significant costs in complying with environmental, health and safety laws or permits or as a result of satisfying any liability or obligation imposed under such laws or permits.

Our operations are subject to various federal, state, local and foreign environmental, health and safety laws and regulations. Among other things, these laws regulate the emission or discharge of materials into the environment, govern the use, storage, treatment, disposal and management of hazardous substances and wastes, protect the health and safety of our employees and the end-users of our products, regulate the materials used in and the recycling of products and impose liability for the costs of investigating and remediating, and damages resulting from, present and past releases of hazardous substances, including releases by prior owners or operators of sites we currently own or operate. Violations of these laws and regulations or of any conditions contained in any environmental permit can result in substantial fines or penalties, injunctive relief, requirements to install pollution or other controls or equipment, civil and criminal sanctions, permit revocations and/or facility shutdowns. We could be held liable for the costs to address contamination of any real property we have ever owned, operated or used as a disposal site. We also could incur fines, penalties, sanctions or be subject to third-party claims for property damage, personal injury or nuisance or otherwise as a result of violations of or liabilities under environmental laws or in connection with releases of hazardous or other materials. In addition, changes in, or new interpretations of, existing laws, regulations or enforcement policies, the discovery of previously unknown contamination, or the imposition of other environmental liabilities or obligations in the future, including additional investigation or other obligations with respect to any potential health hazards of our products

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or business activities or the imposition of new permit requirements, may lead to additional compliance or other costs that could have a material adverse effect on our business, financial condition or results of operations.

Moreover, as environmental issues, such as climate change, have become more prevalent, federal, state and local governments, as well as foreign governments, have responded, and are expected to continue to respond, with increased legislation and regulation, which could negatively affect us. For example, the United States Congress has considered legislation to reduce emissions of greenhouse gases. In addition, the United States Environmental Protection Agency (“EPA”) is regulating certain greenhouse gas emissions under existing laws such as the Clean Air Act. These and other foreign, federal and state climate change initiatives may cause us to incur additional direct costs in complying with new environmental legislation or regulations, such as costs to upgrade or replace equipment, as well as increased indirect costs resulting from our suppliers, customers or both incurring additional compliance costs that could get passed through to us or impact product demand.

In addition, a number of governmental authorities, both in the United States and abroad, have considered, and are expected to consider, legislation aimed at reducing the amount of plastic wastes disposed. Programs have included, for example, banning certain types of products, mandating certain rates of recycling and/or the use of recycled materials, imposing deposits or taxes on plastic packaging material and requiring retailers or manufacturers to take back packaging used for their products. Such legislation, as well as voluntary initiatives similarly aimed at reducing the level of plastic wastes, could reduce the demand for certain plastic packaging, result in greater costs for manufacturers of plastic packaging products or otherwise impact our business. Some consumer products companies, including some of our customers, have responded to these governmental initiatives and to perceived environmental concerns of consumers by using containers made in whole or in part of recycled plastic or of non-plastic material. Future legislation and initiatives could adversely affect us in a manner that would be material to our results of operations.

We may not be able to achieve some or all of the benefits that we expect to achieve from our restructuring and cost savings programs.

We regularly review our businesses to identify opportunities to reduce our costs. When we identify such opportunities, we may develop a restructuring or cost savings program to attempt to capture those savings. We may not be able to realize some or all of the cost savings we expect to achieve in the future as a result of our restructuring and cost savings programs in the time frame we anticipate. A variety of factors could cause us not to realize some of the expected cost savings, including, among others, delays in the anticipated timing of activities related to our cost savings programs, lack of sustainability in cost savings over time, unexpected costs associated with operating our business, and lack of ability to eliminate duplicative back office overhead and redundant selling, general and administrative functions, obtain procurement related savings, rationalize our distribution and warehousing networks, rationalize manufacturing capacity and shift production to more economical facilities and avoid labor disruptions in connection with any integration, particularly in connection with any headcount reduction.

Our insurance may not protect us against business and operating risks.

We maintain insurance for some, but not all, of the potential risks and liabilities associated with our business. For some risks, we may not obtain insurance if we believe the cost of available insurance is excessive in relation to the risks presented. As a result of market conditions, premiums and deductibles for certain insurance policies can increase substantially, and in some instances, certain insurance policies are economically unavailable or available only for reduced amounts of coverage. For example, we will not be fully insured against all risks associated with pollution and other environmental incidents or impacts. Moreover, we may not be able to maintain adequate insurance in the future at rates we consider reasonable or to obtain or renew insurance against certain risks. Any significant uninsured liability may require us to pay substantial amounts which would adversely affect our cash position and results of operations.

We may be involved in a number of legal proceedings that could result in substantial liabilities for us.

We are involved in several legal proceedings. It is difficult to predict with certainty the cost of defense or the outcome of these proceedings and their impact on our business, including remedies or damage awards. The outcomes of these legal proceedings and other contingencies could require us to take or refrain from taking certain actions, which actions or inactions could adversely affect our operations or could require us to pay substantial amounts of money or restrict our operations. If liabilities or fines resulting from these proceedings are substantial or exceed our expectations, our business, financial condition or results of operations may be adversely affected.

Loss of any of our key manufacturing facilities could have an adverse effect on our financial condition or results of operations.

While we manufacture most of our products in a number of diversified facilities, a loss of the use of all or a portion of any of our key manufacturing facilities due to an accident, labor issues, weather conditions, natural disaster, the emergence of a pandemic or disease outbreak, such as the global coronavirus outbreak currently being experienced, or otherwise could have a material adverse effect on our financial condition or results of operations. In addition, certain of our products are produced at only one or at a small number of facilities, increasing the risks associated with a loss of use of such facilities. Facilities may from time to time be impacted by adverse weather and other natural events, and the prolonged loss of a key manufacturing facility due to such events could have a material adverse effect on our business.

Future government regulations and judicial decisions affecting products we produce or the products contained in or sealed with the packaging we produce could significantly reduce demand for our products.

Government regulations and judicial decisions that affect the products we produce or the products contained in or sealed with the containers or packaging we produce could significantly reduce demand for our products. For example, several cities have banned the sale of polystyrene foam products. Other jurisdictions have imposed taxes on products bottled or packaged in our products which has affected the sales of our products. Future legislation could also limit the use of our products or impose certain taxes on the use of our products. Such legislation could significantly reduce demand for many of our products and adversely affect our sales.

Changes to health and food safety regulations could increase costs and may also have a material adverse effect on our sales if, as a result, the public's attitude towards our consumer products or the end-products for which we provide containers or packaging is substantially affected.


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Loss of our key management and other personnel, or an inability to attract new management and other personnel, could impact our business.

We depend on our senior executive officers and other key personnel to operate our businesses and on our in-house technical experts to develop new products and technologies and to service our customers. The loss of any of these officers or other key personnel could adversely affect our operations. Competition is intense for qualified employees among companies that rely heavily on engineering and technology, and the loss of qualified employees or an inability to attract, retain and motivate additional highly skilled employees required for the operation and expansion of our business could hinder our ability to successfully conduct research and development activities or develop and support marketable products.

Significant consolidation among our customers or the loss of a significant customer could decrease demand for our products or our profitability.

Consolidation among our customers could adversely affect our profitability. Over the last several years, there has been a trend toward consolidation among our customers in the food and beverage industry and in the retail and foodservice industries, and we expect that this trend will continue. Consolidation among our customers could increase their ability to apply price pressure, and thereby force us to reduce our selling prices or lose sales, which would impact our results of operations. Following a consolidation, our customers in the food and beverage industry may also close production facilities or switch suppliers, which could impact sales of our filling machines and other products, while our customers in the retail industry may close stores, reduce inventory or switch suppliers of consumer products.

Additionally, Pactiv Foodservice and Graham Packaging rely on a relatively small number of customers for a significant portion of their revenue. In 2019, (i) Pactiv Foodservice's top ten customers accounted for 59% of its revenue, with two customers accounting for 12% and 11% of revenue, one of which was the Reynolds Consumer Products business included in the distribution completed on February 4, 2020, and (ii) Graham Packaging's top ten customers accounted for 51% of its revenue, with one customer accounting for 10% of revenue. The loss of any of our significant customers could have a material adverse effect on our business, financial condition and results of operations.

Supply of faulty or contaminated products could harm our reputation and business.

We have control measures and systems in place to ensure the maximum safety and quality of our products is maintained. The consequences of not being able to do so, due to accidental or malicious raw material contamination, or due to supply chain contamination caused by human error or faulty equipment, could be severe. Such consequences may include adverse effects on consumer health, reputation, loss of customers and market share, financial costs or loss of revenue. In addition, if any of our competitors or customers supply faulty or contaminated products to the market, or if manufacturers of the end-products that utilize our products produce faulty or contaminated products, our industry, or our end-products' industries, could be negatively impacted, which could have adverse effects on our business.

In addition, if any of our products are found to be defective, we could be required to recall such products, which could result in adverse publicity, significant expenses and a disruption in sales and could affect our reputation and that of our products. Although we maintain product liability insurance coverage, potential product liability claims may exceed the amount of insurance coverage or potential product liability claims may be excluded under the terms of the policy.

Currency exchange rate fluctuations could adversely affect our results of operations.

Our business is exposed to fluctuations in exchange rates. Although our reporting currency is U.S. dollars, we operate in multiple countries and transact in a range of currencies in addition to U.S. dollars. Where possible, we try to minimize the impact of exchange rate fluctuations by transacting in local currencies so as to create natural hedges. There can be no assurance that we will be successful in protecting against these risks. Under certain circumstances in which we are unable to naturally offset our exposure to these currency risks, we may enter into derivative transactions to reduce such exposures. Nevertheless, exchange rate fluctuations may either increase or decrease our revenue and expenses as reported in U.S. dollars. Given the volatility of exchange rates, we may not be able to manage our currency transaction risks effectively, and volatility in currency exchange rates may materially adversely affect our financial condition or results of operations.

We may not be successful in adequately protecting our intellectual property rights, including our unpatented proprietary knowledge and trade secrets, or in avoiding claims that we infringed on the intellectual property rights of others.

In addition to relying on the patent and trademark rights granted under the laws of the United States, countries in Europe and various other countries in which we operate, we rely on unpatented proprietary knowledge and trade secrets and employ various methods, including confidentiality agreements with employees and third parties, to protect our knowledge and trade secrets. However, these precautions and our patents and trademarks may not afford complete protection against infringement by third parties, and there can be no assurance that others will not independently develop the knowledge and trade secrets. Patent and trademark rights are territorial; thus, the patent and trademark protection we do have will only extend to those countries in which we have been issued patents and have registered trademarks. Even so, the laws of certain countries do not protect our intellectual property rights to the same extent as do the laws of the United States and various European countries. Further, we may not be able to prevent current and former employees, contractors and other parties from breaching confidentiality agreements and misappropriating proprietary information. It is possible that third parties may copy or otherwise obtain and use our information and proprietary technology without authorization or otherwise infringe on our intellectual property rights. Infringement of our intellectual property may adversely affect our results of operations and make it more difficult for us to establish a strong market position in countries which may not afford adequate protection of intellectual property. Additionally, we have licensed, and may license in the future, patents, trademarks, trade secrets and similar proprietary rights to third parties. While we attempt to ensure that our intellectual property and similar proprietary rights are protected when entering into business relationships, third parties may take actions that could materially and adversely affect our rights or the value of our intellectual property, similar proprietary rights or reputation. If necessary, we also rely on litigation to enforce our intellectual property rights and contractual rights, and, if not successful, we may not be able to protect the value of our intellectual property. Any litigation could be protracted and costly and could have a material adverse effect on our business and results of operations regardless of its outcome.

Our success depends in part on our ability to obtain, or license from third parties, patents, trademarks, trade secrets and similar proprietary rights without infringing on the proprietary rights of third parties. Although we believe that our intellectual property rights are sufficient to allow us to conduct our business without incurring liability to third parties, our products may infringe on the intellectual property rights of such persons and we may be

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subject to claims asserting infringement of intellectual property rights. No assurance can be given that we will not be subject to such additional claims seeking damages, the payment of royalties or licensing fees and/or injunctions against the sale of our products. Any such litigation could be protracted and costly and could have a material adverse effect on our business and results of operations regardless of its outcome.

If we are unable to stay abreast of changing technology in our industry, our profits may decline.

Our businesses are subject to frequent and sometimes significant changes in technology, and if we fail to anticipate or respond adequately to such changes, or do not have sufficient capital to invest in these developments, our profits may decline. Our future financial performance will depend in part upon our ability to develop and market new products and to implement and utilize technology successfully to improve our business operations. We cannot predict all the effects of future technological changes. The cost of implementing new technologies could be significant, and our ability to potentially finance these technological developments may be adversely affected by our debt servicing requirements or our inability to obtain the financing we require to develop or acquire competing technologies.

Employee slowdowns, strikes and similar actions could have a material adverse effect on our business and operations.

Approximately 25% of our employees are subject to collective bargaining agreements or are represented by work councils. The transportation and delivery of raw materials to our manufacturing facilities and of our products to our customers by workers that are members of labor unions is critical to our business. In many cases, before we take significant actions with respect to our production facilities, such as workforce reductions or closures, we must reach agreement with applicable labor unions and employee works councils. The failure to maintain satisfactory relationships with our employees and their representatives, or prolonged labor disputes, slowdowns, strikes or similar actions, could have a material adverse effect on our business and results of operations.

We face risks associated with certain pension obligations.

We have pension plans that cover many of our employees, former employees and employees of formerly affiliated businesses. Many of these pension plans are defined benefit pension plans, pursuant to which the participants receive defined payment amounts regardless of the value or investment performance of the assets held by such plans. Deterioration in the value of plan assets, including equity and debt securities, resulting from a general financial downturn or otherwise, or a change in the interest rate used to discount the projected benefit obligations, could cause an increase in the underfunded status of our defined benefit pension plans, thereby increasing our obligation to make contributions to the plans, which in turn would reduce the cash available for our business.

Our largest pension plan is the Reynolds Group Pension Plan (formerly the Pactiv Retirement Plan), of which Pactiv became the sponsor at the time of the Pactiv spin-off from Tenneco Inc. in 1999. This plan covers most of Pactiv's employees as well as employees (or their beneficiaries) of certain companies previously owned by Tenneco Inc. but not currently owned by us. As a result, while persons who are not current Pactiv employees do not accrue benefits under the plan, the total number of individuals/beneficiaries covered by this plan is much larger than if only Pactiv personnel were participants. For this reason, the impact of the pension plan on our net income and cash from operations is greater than the impact typically found at similarly sized companies. Changes in the following factors can have a disproportionate effect on our results of operations compared with similarly sized companies: (i) interest rate used to discount projected benefit obligations, (ii) governmental regulations related to funding of retirement plans, (iii) financial market performance and (iv) revisions to mortality tables as a result of changes in life expectancy. Additionally, we have merged certain other plans into the Reynolds Group Pension Plan.

As of December 31, 2019, the Reynolds Group Pension Plan was underfunded by approximately $654 million and subsequent adverse financial market performance and decreases in interest rates may significantly increase this deficit. Future contributions to our pension plans, including the Reynolds Group Pension Plan, could reduce the cash otherwise available to operate our business and could have an adverse effect on our results of operations.

We may pursue and execute acquisitions, which, if not successful, could adversely affect our business.

As part of our strategy, we may consider the acquisition of other companies, assets and product lines that either complement or expand our existing business. These acquisitions may be significant in size, scope or otherwise. However, we may not be able to continue to grow through acquisitions and cannot provide assurance that we will be able to consummate any acquisitions, or that any future acquisitions will be completed at acceptable prices and terms, or that the acquired businesses will be successfully integrated into our current operations. Acquisitions involve a number of specific risks.

There are or may be liabilities associated with the businesses we have acquired or may acquire. Acquisitions have the risk that the obligations and liabilities of an acquired company may not be adequately released, indemnified or reflected in the historical financial statements of such company and the risk that such historical financial statements may contain errors. We may also become responsible for liabilities that we failed to or were unable to discover in the course of performing due diligence procedures in connection with our historical acquisitions and any future acquisitions. When possible, we require the sellers to indemnify us against certain undisclosed liabilities; however, we cannot be certain that these indemnification rights that we have obtained, or will obtain in the future, will be enforceable, collectible or sufficient in amount, scope or duration to fully offset the possible liabilities associated with the business or property acquired. Any of these liabilities, individually or in the aggregate, could have a material adverse effect on our business, financial condition or results of operations.

Our ability to successfully implement our business plan and achieve targeted financial results depends on our ability to successfully integrate businesses we may acquire in the future. Acquisitions inherently involve risks, including those associated with assimilating and integrating different business operations, corporate cultures, personnel, infrastructure and technologies or products and increasing the scope, geographic diversity and complexity of operations. There may be additional costs or liabilities associated with the acquisitions that we have consummated in the past that we did not anticipate at the time such acquisitions were consummated. Future acquisitions may also be disruptive to our ongoing business and may not be favorably received by our customers. Any of these risks could adversely affect our business, financial condition and results of operations.


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We may dispose of some of our businesses from time to time.

From time to time we may dispose of some of our businesses. Sales and other disposals involve a number of risks, including diversion of management’s attention to the sale process, costs associated with the sale process, risks associated with retained liabilities or indemnification obligations under the applicable sales agreements, loss of synergies that we enjoyed prior to the sale from having the sold business combined with our other businesses for certain costs and cost-sharing and the potential loss of benefits from having a more diverse group of businesses. For example, in December 2019, we sold our North American and Japanese closures businesses. In February 2020, we distributed the Reynolds Consumer Products segment to PFL, our parent.

Sales also create risks relating to the use of sales proceeds. Under our Credit Agreement and notes indentures, we are generally required to either (a) reinvest the net sale proceeds in our businesses, or (b) use the net sale proceeds to reduce our indebtedness by prepaying loans under our Credit Agreement and/or repaying some of our outstanding Reynolds Notes. If there is a significant period of time between when the net proceeds are received and when they are used to reduce indebtedness or reinvested in our business, interest costs associated with holding the proceeds will exceed the earnings on such funds.

Changes in global conditions could adversely affect our business and results of operations.

Our financial results could be substantially affected by global market risks in the countries outside the United States in which we have manufacturing facilities or sell our products, primarily in Europe, Asia and South America. Our business and results of operations are materially affected by conditions in these economies. There can be no assurance that economic issues in these regions would not result in adverse effects that may be material to our cash flows, competitive position, financial condition, results of operations, or our ability to access capital. In addition, we have substantial manufacturing facilities in certain countries that are exposed to economic and political instability. Many of our raw materials, particularly plastic resins, are affected by changes in oil prices, and economic or political unrest in petroleum producing countries, such as those in the Middle East, will affect oil prices, which could affect our cost of raw materials and our results of operations. Downturns in economic activity, adverse foreign tax consequences or any changes in social, political or labor conditions in any of these countries or regions could negatively affect our results of operations.

Conditions in the global capital and credit markets and the economy in general may have a material adverse effect on our business, results of operations or financial position.

The global capital and credit markets have undergone periods of significant volatility and disruption. Our results of operations and financial position have been, and may continue to be, negatively affected by adverse changes in the global capital and credit markets and the economy in general, both in the United States and elsewhere around the world. Economic conditions may also adversely affect the ability of our lenders, customers and suppliers to continue to conduct their respective businesses and may affect our ability to operate our production facilities in an economical manner. Many of our customers rely on access to credit to fund their operations. The inability of our customers to access credit facilities may adversely affect our business by reducing our sales, increasing our exposure to accounts receivable bad debts and reducing our profitability.

Concerns about consumer confidence, the availability and cost of credit, reduced consumer spending and business investment, the volatility and strength of global capital and credit markets and inflation have affected, and may continue to affect, the business and economic environment and ultimately the profitability of our business. Economic downturns characterized by higher unemployment, lower family income, lower corporate earnings, lower business investment and lower consumer spending have resulted, and may continue to result, in decreased demand for our products. We are unable to predict the likely duration or severity of any disruption in global capital and credit markets and the economy in general, all of which are beyond our control and may have a significant impact on our business, results of operations, cash flows and financial position.

The global scope of our operations and our corporate and financing structure may expose us to potentially adverse tax consequences.

We are subject to taxation in and to the tax laws and regulations of multiple jurisdictions as a result of the global scope of our operations and our corporate and financing structure. We are also subject to intercompany pricing laws, including those relating to the flow of funds between our companies pursuant to, for example, purchase agreements, licensing agreements or other arrangements. Adverse developments in these laws or regulations, or any change in position regarding the application, administration or interpretation of these laws or regulations in any applicable jurisdiction, could have a material adverse effect on our business, financial condition and results of operations. In addition, the tax authorities in any applicable jurisdiction, including the United States, may disagree with the positions we have taken or intend to take regarding the tax treatment or characterization of any of our transactions, including the tax treatment or characterization of our indebtedness, including the Reynolds Notes, intercompany loans and guarantees. If any applicable tax authorities, including the U.S. tax authorities, were to successfully challenge the tax treatment or characterization of any of our transactions, it could result in the disallowance of deductions, the imposition of withholding taxes on internal deemed transfers or other consequences that could have a material adverse effect on our business, financial condition and results of operations.

Our access to trade receivable financings could adversely impact our liquidity.

The RGHL Group has a $600 million receivables loan and security facility (the "Securitization Facility"), which was reduced to $450 million in January 2020 as a result of the release of Reynolds Consumer Products from the Securitization Facility. As of December 31, 2019, the RGHL Group had drawn $420 million under this facility. The amount that can be borrowed is calculated by reference to a funding base determined by the amount of eligible trade receivables of certain members of the RGHL Group. The funding base may vary, on a monthly basis, throughout the term of the Securitization Facility. To the extent the amount of eligible trade receivables decreases, we may be required to pay down existing borrowings under the Securitization Facility, which could require us to use cash on hand or our revolver under the Credit Agreement (if available), which may be more expensive than borrowings under the Securitization Facility.

From time to time, we also may sell or factor some of our other accounts receivable. Our access to factoring programs depends on the availability of receivables insurance, and on our credit rating and the credit ratings of our customers and insurers. We may be unable to continue to utilize factoring programs or may only be able to do so on less desirable terms if either we are unable to obtain or renew receivables insurance or our credit rating or the credit ratings of our customers or insurers are negatively impacted. An inability to utilize factoring programs would slow our

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conversion of trade receivables to cash and increase our working capital requirements, which could require us to use revolver availability or cash on hand or to seek alternative sources of financing which may not be available or may be more expensive than our existing financing.

Our hedging activities may result in significant losses and in period-to-period earnings volatility.

We regularly enter into hedging transactions to limit our exposure to raw material and energy price risks. Our commodity hedges are primarily related to resin, aluminum, natural gas, ethylene, propylene, benzene, diesel and polyethylene. If our hedging strategies prove to be ineffective or if we fail to effectively monitor and manage our hedging activities, we could incur significant losses which could adversely affect our financial position and results of operations, and we could experience significant fluctuations in our earnings from period to period. Factors that could affect the impact and effectiveness of our hedging activities include the accuracy of our operational forecasts of raw material and energy needs and volatility of the commodities and raw materials pricing markets.

We depend on a small number of suppliers for our raw materials and any interruption in our supply of raw materials would harm our business and financial performance.

Some of our key raw materials are sourced from a relatively small number of suppliers. As a consequence, we are dependent on these suppliers for an uninterrupted supply of our key raw materials. Such supply could be disrupted for a wide variety of reasons, many of which are beyond our control. We have written contracts with some but not all of our key suppliers, and many of our written contracts can be terminated on short notice or include force majeure clauses that would excuse the supplier’s failure to supply in certain circumstances. An interruption in the supply of raw materials for an extended period of time could have an adverse impact on our business and results of operations.

Goodwill is a material component of our statement of financial position and impairments of such balance could have a significant impact on our results.

We have recorded a significant amount of goodwill in our consolidated financial statements resulting from our acquisitions. We test the carrying value of goodwill for impairment at least annually and whenever events or circumstances indicate the carrying value may not be recoverable. The estimates and assumptions about future results of operations and cash flows made in connection with the impairment testing could differ from future actual results of operations and cash flows. Any resulting impairment charge, although non-cash, could have a material adverse effect on our results of operations and financial position.

For the year ended December 31, 2019, in respect of our former Closures segment, we recorded a goodwill impairment charge of $33 million within discontinued operations related to the closures disposal group, and we recorded a goodwill impairment charge of $26 million within continuing operations related to the remaining closures businesses. For the year ended December 31, 2018, we recorded a goodwill impairment charge of $206 million in respect of Graham Packaging. It is reasonably possible that we could recognize additional goodwill impairment charges if we have declines in profitability due to changes in volume, pricing, cost or the business environment or an adverse change in the earnings multiple used in the calculation. These changes could cause us to record impairment charges in future periods, which could be material.

Breaches of our information systems security measures could disrupt our internal operations.

We depend on information technology for processing and distributing information in our business, including to and from our customers and suppliers. This information technology is subject to theft, damage or interruption from a variety of sources, including malicious computer viruses, security breaches, defects in design, employee malfeasance or human or technical errors. Additionally, we can be at risk if a customer’s or supplier’s information technology system is attacked or compromised. Cybersecurity incidents have increased in number and severity, and it is expected that these trends will continue. We have taken measures to protect our data and to protect our computer systems from attack but these measures may not prevent unauthorized access to our systems or theft of our data. If we or third parties with whom we do business were to fall victim to cyber-attacks or experience other cybersecurity incidents, such incidents could result in unauthorized access to, disclosure or loss of or damage to company, customer or other third party data; theft of confidential data including personal information and intellectual property; loss of access to critical data or systems; and other business delays or disruptions. If these events were to occur, we may incur substantial costs or suffer other consequences that negatively impact our operations and financial results.

We have entered, and may continue to enter, into certain related party transactions with Reynolds Consumer Products Group.

In connection with RCPI’s initial public offering, we entered into various transactions with related parties that are members of Reynolds Consumer Products Group, including the Tax Matters Agreement referred to below and other agreements relating to our operations including, among others, agreements relating to:

supply agreements where we sell certain products (primarily tableware) to, and purchase certain products (primarily aluminum foil containers and roll foil), from Reynolds Consumer Products Group;

a warehousing and freight services agreement whereby we provide certain logistics services to Reynolds Consumer Products Group;

a lease of part of our corporate headquarters in Lake Forest, Illinois and another lease of one of our facilities in Canandaigua, New York; and

a transition services agreement whereby we will continue to provide certain administrative services to Reynolds Consumer Products Group, including information technology service; accounting, treasury, financial reporting and transaction support; human resources; procurement; tax, legal and compliance related services; and other corporate services, and we will receive certain services from Reynolds Consumer Products Group, including human resources; compliance; and procurement, in each case for up to 24 months from February 2020.

For additional information, refer to “Item 7. Major Shareholders and Related Party Transactions."


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While we believe that all such transactions have been negotiated on an arm’s length basis and contain commercially reasonable terms, we may have been able to achieve more favorable terms had such transactions been entered into with unrelated parties. In addition, while goods and services are being provided to us by related parties, our operational flexibility to modify or implement changes with respect to such goods or services or the amounts we pay or receive for them may be limited.

Potential conflicts of interest or disputes may arise between us and Reynolds Consumer Products Group in connection with these related party agreements, or relating to our past or future relationships in several areas including tax, employee benefit, indemnification and other matters arising from our relationship with Reynolds Consumer Products Group; business combinations involving us; business opportunities that may be attractive to us and Reynolds Consumer Products Group; and the nature, quality and pricing of goods or services delivered between us. In the event of a dispute under any of these related party agreements, Reynolds Consumer Products Group’s interests may not align with ours and the resolution of any such disputes may be adverse to us, or less favorable to us than we might achieve if we were not dealing with a related party, and our ability to enforce our contractual rights may be limited.

There can be no assurance that such present or any future transactions, and any potential disputes that may arise in connection with them, individually or in the aggregate, will not have an adverse effect on our financial condition and results of operations, or that we could not have achieved more favorable terms if such transactions had not been entered into with related parties.

We could incur significant liability if the distributions of RCPI to PFL are determined to be a taxable transaction.

In February 2020, prior to the IPO of shares of common stock of RCPI, we effected certain distributions to transfer the interests of RCPI to PFL in a manner that was intended to qualify as tax-free to PFL, RGHL and Reynolds Group Holdings Inc. (“RGHI”) under Sections 368(a)(1)(D) and 355 of the Internal Revenue Code of 1986, as amended (the “Code”).

We have received a tax opinion as to the tax treatment of these distributions, which relied on certain facts, assumptions, representations and undertakings from Mr. Graeme Hart, RCPI and us regarding the past and future conduct of the RGHL Group’s and RCPI’s respective businesses and other matters. If any of these facts, assumptions, representations or undertakings are incorrect or not satisfied, we may not be able to rely on the opinion of tax counsel and could be subject to significant tax liabilities. Notwithstanding the opinion of tax counsel, the Internal Revenue Service could determine on audit that these distributions are taxable if it determines that any of these facts, assumptions, representations or undertakings are not correct or have been violated or if it disagrees with the conclusions in the opinion, or for other reasons, including as a result of certain significant changes in the stock ownership of RGHL, RGHI or RCPI after the distributions. If the distributions are determined to be taxable for U.S. federal income tax purposes, we could incur significant U.S. federal income tax liabilities.

Under the Tax Matters Agreement that we entered into with RCPI in connection with the IPO, RCPI will generally be required to indemnify us against taxes incurred that arise as a result of, among other things, a breach of any representation made by RCPI, including those provided in connection with the opinion of tax counsel or RCPI taking or failing to take, as the case may be, certain actions, in each case that result in the distributions failing to meet the requirements of a tax-free distribution under Sections 368(a)(1)(D) and 355 of the Code. In the event that RCPI fails to so indemnify us in accordance with the Tax Matters Agreement, we would bear such tax liability.

In order to preserve the tax-free treatment of the distributions, our ability to engage in certain corporate transactions for a two-year period after the distributions will be limited.

To preserve the tax-free treatment for U.S. federal income tax purposes of the distributions of RCPI, we will be limited in our ability to enter into acquisition, merger, liquidation, sale and stock redemption transactions with respect to our stock for the two-year period following these distributions. While we are under no contractual obligations, effecting certain such transactions could violate the representations and undertakings we made in connection with the opinion of tax counsel and could result in significant tax liabilities to us. These limitations may restrict our ability to pursue certain strategic transactions or other transactions that would otherwise be in our best interest or that might increase the value of our business. We will not be limited in our ability to acquire other businesses for cash consideration.

Risks Related to Our Structure, the Guarantees, the Collateral and the Reynolds Notes

Our substantial indebtedness could adversely affect our ability to fulfill our obligations under the Reynolds Notes and our other debt obligations.

We have a substantial amount of outstanding indebtedness, which totaled $10,685 million as of December 31, 2019, comprised of the outstanding principal amounts of our borrowings. As of the date of this filing, our total outstanding indebtedness was $7,505 million. For more information related to the RGHL Group’s external borrowings and debt repayments occurring subsequent to December 31, 2019, refer to notes 16 and 26, respectively, of the RGHL Group’s audited consolidated financial statements included elsewhere in this annual report.

Our substantial indebtedness could have significant consequences for you. For example, it could:

make it more difficult for us to generate sufficient cash to satisfy our obligations with respect to the Reynolds Notes and our other indebtedness;

increase our vulnerability to general adverse economic and market conditions;

limit our ability to obtain additional financing necessary for our business;

require us to dedicate a substantial portion of our cash flow from operations to payments in relation to indebtedness, reducing the amount of cash flow available for other purposes, including working capital, capital expenditures, acquisitions and other general corporate purposes;

require us to sell debt or equity securities or to sell some of our core assets, possibly on unfavorable terms, to meet debt payment obligations;


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restrict us from making strategic acquisitions or exploiting business opportunities;

limit our flexibility in planning for, or reacting to, changes in our business and industry;

place us at a possible competitive disadvantage compared to our competitors that have less debt;

expose us to risks that are inherent in interest rate and currency fluctuations because certain of our indebtedness bears variable rates of interest and is in various currencies; and

subject us to financial and other restrictive covenants, which, if we fail to comply with these covenants and that failure is not waived or cured, could result in an event of default under our indebtedness.

Despite our substantial indebtedness, we may be able to incur substantially more debt.

Despite our substantial indebtedness we may be able to incur or issue substantial additional debt in the future. Although restrictions on the incurrence of additional debt are contained in the indentures governing the Reynolds Notes and in the terms of our Credit Agreement, these restrictions are subject to a number of qualifications and exceptions. Also, these restrictions do not prevent us from incurring obligations that do not constitute indebtedness as defined in such restrictions, such as certain contingent obligations incurred in the ordinary course of business.

Our ability to incur indebtedness depends, in part, upon our satisfaction of certain financial covenants in the indentures governing the Reynolds Notes and in the terms of our Credit Agreement. The indentures governing the Reynolds Notes permit us to incur additional indebtedness either by satisfying certain incurrence tests or by incurring such additional indebtedness under certain specific categories of permitted debt. Indebtedness may be incurred under the incurrence tests if the fixed charge coverage ratio is at least 2.00 to 1.00 on a pro forma basis and, (i) under the indenture governing the Reynolds Senior Secured Notes, the liens securing first lien secured indebtedness do not exceed a 4.50 to 1.00 senior secured first lien leverage ratio and (ii) under the indenture governing the Reynolds Senior Notes, liens securing secured indebtedness do not exceed a 4.50 to 1.00 secured leverage ratio.

Under the Credit Agreement, we may incur additional indebtedness either by satisfying certain incurrence tests or by incurring such additional indebtedness under certain specific categories of permitted debt. Incremental senior secured indebtedness under the Credit Agreement and senior secured notes in lieu thereof are permitted to be incurred up to an aggregate principal amount of $750 million, subject to pro forma compliance with the Credit Agreement’s total secured leverage ratio covenant. In addition, we may incur incremental senior secured indebtedness under the Credit Agreement, other senior secured loans and senior secured notes in an unlimited amount so long as our total secured leverage ratio does not exceed 4.50 to 1.00 on a pro forma basis and (in the case of incremental senior secured indebtedness under the Credit Agreement only) we are in pro forma compliance with the Credit Agreement's total secured leverage ratio covenant. The incurrence of unsecured indebtedness, including the issuance of senior notes, and unsecured subordinated indebtedness is also permitted if the fixed charge coverage ratio is at least 2.00 to 1.00 on a pro forma basis.

The amount of indebtedness that we can incur at any point in time will vary materially as a result of historical and pro forma changes in our earnings, cash flows and performance against contractual ratios and other results and factors.

Restrictive covenants in the Reynolds Notes and our other indebtedness could adversely affect our business by limiting our operating and strategic flexibility.

The indentures governing the Reynolds Notes contain restrictive covenants that limit our ability to, among other things:

incur or guarantee additional indebtedness or issue preferred stock or disqualified stock, including to refinance existing indebtedness;

pay dividends or make distributions in respect of capital stock;

purchase or redeem capital stock;

make certain investments or certain other restricted payments;

create or incur liens;

sell assets;

agree to limitations on the ability of certain of our subsidiaries to make distributions;

enter into transactions with affiliates; and

effect a consolidation, amalgamation or merger.

These restrictive covenants could have an adverse effect on our business by limiting our ability to take advantage of financing, mergers and acquisitions, joint ventures or other corporate opportunities. In addition, the Credit Agreement contains, and our future indebtedness may contain, other and more restrictive covenants and also prohibits us from prepaying certain of our other indebtedness prior to discharge of the Credit Agreement or such future indebtedness. The Credit Agreement contains a total secured leverage ratio covenant not to exceed 5.00 to 1.00 on a pro forma basis. This covenant operates for the benefit of the revolver lenders and issuing banks only, and applies if the aggregate revolving credit exposure (excluding any exposure in respect of undrawn letters of credit) as of the last day of a fiscal quarter exceeds 35% of the total commitments under the revolving credit facility on such day. Our future indebtedness may contain similar or other financial ratios set at levels determined by us and our future lenders. The ability to meet the leverage ratio could be affected by a deterioration in our operating results, as well as by events beyond our control, including increases in raw material prices and unfavorable economic conditions, and we cannot assure you that the leverage ratio will be met. It may be necessary to obtain waivers or amendments with respect to covenants under the indentures governing the Reynolds Notes and in

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the terms of the Credit Agreement or our future indebtedness from time to time, but we cannot assure you that we will be able to obtain such waivers or amendments. A breach of any of these covenants, leverage ratio or restrictions could result in an event of default under the indentures governing the Reynolds Notes or in the terms of the Credit Agreement or our future indebtedness and any of our other indebtedness or result in cross-defaults under certain of our indebtedness. Upon the occurrence of an event of default under the indentures governing the Reynolds Notes, the terms of the Credit Agreement or such other indebtedness, the lenders could terminate their commitment to lend and elect to declare all amounts outstanding under such indebtedness, together with accrued interest, to be immediately due and payable. If the lenders accelerate the payment of that indebtedness or foreclose on the assets securing that indebtedness, including the collateral, we cannot assure you that our assets would be sufficient to repay in full that indebtedness and our other indebtedness then outstanding, including the Reynolds Notes.

Our ability to generate the significant amount of cash needed to pay interest and principal on the Reynolds Notes and service our other debt and the ability to refinance all or a portion of our indebtedness or obtain additional financing depends on many factors beyond our control.

Our ability to generate sufficient cash flow from operations to make scheduled payments on, or to refinance obligations under, our debt will depend on our financial and operating performance, which, in turn, will be subject to prevailing economic and competitive conditions and to financial and business-related factors, many of which may be beyond our control. See “— Risks Related to Our Business” above.

As of December 31, 2019, we had $10,685 million of outstanding indebtedness, comprised of the outstanding principal amounts of our borrowings. As of the date of this filing, our total outstanding indebtedness was $7,505 million. Refer to note 26 of the RGHL Group’s audited consolidated financial statements included elsewhere in this annual report for information related to debt repayments occurring subsequent to December 31, 2019. Our annual cash interest obligations for 2020 on our Credit Agreement, the Reynolds Notes, the Securitization Facility, the Pactiv Notes and our other indebtedness are expected to be approximately $440 million, which includes $55 million of interest payments on the 5.750% notes that were repaid in February 2020, assuming interest on our floating rate debt continues to accrue at the current interest rates and there is no change in the current euro-to-U.S. dollar exchange rate for euro-denominated interest obligations. If our cash flow and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce working capital levels, reduce or delay capital expenditures, sell assets, seek to obtain additional equity capital or restructure all or a portion of our debt. In the future, our cash flow and capital resources may not be sufficient to allow us to make payments of principal and interest on our debt. Any alternative measures we may take may not be successful or be on commercially reasonable terms and may not permit us to meet our scheduled debt service obligations, including the payment of interest or principal in respect of the Reynolds Notes. In addition, we may want or need to refinance some or all of our indebtedness prior to maturity. We cannot assure you that we will be able to refinance any of our indebtedness or obtain additional financing, particularly because of our anticipated high levels of debt, prevailing market conditions and the debt incurrence restrictions imposed by the agreements governing our debt. In the absence of sufficient cash flow and capital resources, we could face substantial liquidity problems and may be required to dispose of material assets or operations to meet our debt service and other obligations. The indentures governing the Reynolds Notes and the terms of the Credit Agreement restrict, and our future indebtedness is likely to restrict, both our ability to dispose of assets and the use of proceeds from any such disposition. We cannot assure you that we will be able to consummate any asset sales, or if we do, what the timing of the sales will be or whether the proceeds that we realize will be adequate to meet our debt service obligations when due or that we will be contractually permitted to apply such proceeds for that purpose. Our inability to generate sufficient cash flow to satisfy our debt obligations, or to implement any of these alternative measures, would have a material adverse effect on our business, financial condition and results of operations.

Mr. Graeme Hart, our strategic owner, controls us through a number of holding companies and may have conflicts of interest with the holders of our debt or us in the future.

Mr. Graeme Hart indirectly owns all of our common stock and the actions he is able to undertake as our sole ultimate shareholder may differ from or adversely affect the interests of our debt holders. Because Mr. Hart ultimately controls our voting shares and those of all of our subsidiaries, he has and will continue to have the power, among other things, to affect our legal and capital structure and our day-to-day operations, as well as to elect our directors and those of our subsidiaries, to change our management and to approve any other changes to our operations. Additionally, Mr. Hart is in the business of making investments in companies and may from time to time acquire and hold interests in businesses that compete, directly or indirectly, with us. Mr. Hart may also pursue acquisition opportunities that may be complementary to our business and, as a result, those acquisition opportunities may not be available to us. Finally, because none of our equity securities are listed on a securities exchange in the United States, we are not subject to certain of the corporate governance requirements of a U.S. securities exchange, including any requirement to have any independent directors.

An increase in interest rates would increase the cost of servicing our debt and could reduce our profitability.

A portion of our outstanding debt, including the indebtedness we have incurred under the Credit Agreement, the Floating Rate Senior Secured Notes due 2021 and the Securitization Facility and, potentially, our future indebtedness, bears interest at variable rates. As of December 31, 2019, we had $4,657 million of variable rate debt outstanding. As a result, an increase in interest rates, whether because of an increase in market interest rates or an increase in our cost of borrowing, would increase the cost of servicing this debt and could materially reduce our profitability and adversely affect our ability to meet our obligations under the Reynolds Notes and our other debt obligations. The impact on us of such an increase would be more significant than it would be on some other companies because of our substantial debt.

The Reynolds Notes are joint and several obligations of a New Zealand-based limited liability company, a U.S.-based corporation and a U.S.-based limited liability company, each having no independent operations or subsidiaries, and as a result, the Reynolds Notes Issuers' ability to service the Reynolds Notes is dependent on cash flow generated by members of the RGHL Group and their ability and willingness to make distributions to the Reynolds Notes Issuers.

Reynolds Group Issuer Inc. ("U.S. Issuer"), an indirect wholly-owned subsidiary of RGHL and co-issuer of the Reynolds Notes, is a finance company with no operations of its own and no material assets. Reynolds Group Issuer LLC ("U.S. Co-Issuer"), an indirect wholly-owned subsidiary of RGHL and co-issuer of the Reynolds Notes, is a finance company with no operations of its own, and its only material assets are certain intercompany proceeds loans to which it is a party. Reynolds Group Issuer (New Zealand) Limited ("NZ Issuer", and together with the U.S. Issuer and the U.S. Co-Issuer, the “Reynolds Notes Issuers”), an indirect wholly-owned subsidiary of RGHL and co-issuer of the Reynolds Notes, is a finance company with no operations of its own and no material assets. As a result of the foregoing, the Reynolds Notes Issuers' cash flows and their ability to service

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their indebtedness, including their ability to pay the interest and principal amount in respect of the Reynolds Notes when due, depend on the performance of the RGHL Group and the ability and willingness of members of the RGHL Group to provide funds to the Reynolds Notes Issuers.

Accordingly, repayment of the Reynolds Notes Issuers' indebtedness, including the Reynolds Notes, depends on the generation of cash flow by the RGHL Group, and (if they are not guarantors of the Reynolds Notes) the ability of RGHL Group members to make such cash available to the Reynolds Notes Issuers whether by dividend, debt repayment, investment, loan, advance or otherwise. Unless they are guarantors of the Reynolds Notes, members of the RGHL Group do not have any obligation to pay amounts due on such Reynolds Notes or to make funds available for that purpose. Our subsidiaries may not be able to make payments to each Reynolds Notes Issuer to enable it to make payments in respect of its indebtedness, including the Reynolds Notes. Each subsidiary is a distinct legal entity and, under certain circumstances, legal and contractual restrictions may limit the Reynolds Notes Issuers' ability to obtain cash from our subsidiaries. While the indentures governing the Reynolds Notes limit the ability of our subsidiaries to incur consensual restrictions on their ability to pay dividends or make other intercompany payments to the Reynolds Notes Issuers, these limitations are subject to certain qualifications and exceptions. In the event that the Reynolds Notes Issuers do not receive payments from our subsidiaries, they may be unable to make required principal and interest payments on their indebtedness, including the Reynolds Notes.

In addition, any payment of interest, dividends, distributions, debt repayments, investments, loans or advances by our subsidiaries to the Reynolds Notes Issuers could be subject to restrictions on such payments under applicable local law, monetary transfer restrictions, withholding taxes and foreign currency exchange regulations in the jurisdictions in which the subsidiaries operate or under arrangements with local partners.

A failure to comply with the debt covenants in the agreements governing our indebtedness could lead to an acceleration of our debt repayment and possibly bankruptcy.

The terms of the Credit Agreement, the indentures governing the Reynolds Notes and the terms of our other indebtedness require us, and the terms of our future indebtedness are also likely to require us, to meet certain covenants. A default under any of our debt instruments could result in the accelerated repayment of our debt and possibly bankruptcy. This will negatively impact our ability to fulfill our obligations under the Reynolds Notes, including our obligation to pay interest and principal thereon.

We are required to comply with covenants under our various debt agreements, which may be subject to multiple interpretations.

We are subject to covenants under our various debt agreements, such as the indentures governing the Reynolds Notes and the terms of the Credit Agreement. These covenants may be subject to multiple interpretations, and, from time to time, parties to our debt agreements may disagree with our interpretation of these covenants. Disagreements with respect to the interpretation of these covenants may result in allegations of non-compliance which could result in a default or event of default under our indebtedness, either of which could materially adversely affect our financial condition.

If we default on our obligations to pay our other indebtedness, we may not be able to make payments on the Reynolds Notes.

If our operating performance declines, and we breach our covenants under the agreements governing our indebtedness, we may need to seek waivers from the noteholders and the lenders under the Credit Agreement, or holders of our other indebtedness to avoid being in default. We may not be able to obtain a waiver from the required number of lenders or noteholders. If this occurs, we would be in default under such indebtedness. Any default under the agreements governing our indebtedness that is not cured or waived, as applicable, by the required lenders or noteholders thereunder, and the remedies sought by the holders of such indebtedness, could prevent us from making payments of principal, premium, if any, or interest on the Reynolds Notes and could substantially decrease the market value of the Reynolds Notes. In the event of any such default, the holders of such indebtedness could elect to declare all outstanding amounts thereunder to be due and payable, together with accrued and unpaid interest, and this may also cause a cross default in our other indebtedness and we could be forced into bankruptcy or liquidation. See "Item 10. Additional Information — Material Contracts."

We may be unable to raise the funds necessary to finance the change of control repurchase offers required by the indentures governing the Reynolds Notes and similar requirements in the agreements governing our other indebtedness.

If a specified change of control occurs in relation to us, the Reynolds Notes Issuers would be required to make an offer to purchase all of the outstanding Reynolds Notes at a price equal to 101% of the principal amount thereof plus accrued and unpaid interest, if any, to the date of purchase. The occurrence of a change of control under the indentures governing the Reynolds Notes would require that the Credit Agreement, and may require that any of our future indebtedness, be immediately repaid or that we make an offer to repurchase it, possibly at a premium or subject to penalties. The Reynolds Notes Issuers may be dependent on RGHL and its subsidiaries for the funds necessary to fund any mandatory prepayment or redemption caused by such change of control event. RGHL and its subsidiaries may not have sufficient financial resources to purchase all of the Reynolds Notes that are tendered upon a change of control offer or to redeem such notes. A failure by the Reynolds Notes Issuers to purchase the Reynolds Notes after a change of control in accordance with the terms of the applicable indentures requiring such purchases would result in a default under the Credit Agreement and the indentures governing the Reynolds Notes and may result in a default under any future indebtedness.

The occurrence of a change of control may not be under our control and may occur at any time. In the event of a change of control, we cannot assure you that we will have sufficient assets to satisfy all of our obligations under the Credit Agreement, the Reynolds Notes, any future indebtedness and any other debt requiring repayment upon such event.

The Credit Agreement limits, and our future indebtedness may limit, our right to purchase or redeem certain indebtedness. In the event any purchase or redemption is prohibited, we may seek to obtain waivers from the required lenders under the Credit Agreement or our future lenders to permit the required repurchase or redemption, but the required lenders do not have, and our future lenders are unlikely to have, any obligation to grant, and may refuse to grant, such a waiver.

Certain of our debt obligations mature in close proximity to each other.

As of the date of this filing, our obligations under the Reynolds Notes, the Pactiv Notes and the term loans under the Credit Agreement mature between July 15, 2021 and April 15, 2027, and some of the maturity dates are in close proximity to each other. Based on outstanding balances as of December 31, 2019, after giving effect to the repayments subsequent to December 31, 2019 of the 5.750% Senior Secured Notes due 2020 and

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other indebtedness, principal amounts of $36 million are due in 2020, $785 million are due in 2021, $36 million are due in 2022, $4,960 million are due in 2023, $800 million are due in 2024, $276 million are due in 2025 and $200 million are due in 2027. As a result, we may not have sufficient cash to repay all amounts under our debt obligations at maturity. Furthermore, there can be no assurance that we will have the ability to borrow or otherwise raise the amounts necessary to repay such amounts and it may be difficult to refinance our indebtedness.

Our Securitization Facility matures in 2022. As of December 31, 2019, $420 million was drawn under the Securitization Facility. We may not have sufficient cash to repay all amounts under our Securitization Facility at maturity. Furthermore, there can be no assurance that we will have the ability to borrow or otherwise raise the amounts necessary to repay the Securitization Facility and it may be difficult to refinance such facility.

Not all of our subsidiaries guarantee the Reynolds Notes, and the Reynolds Notes and the related guarantees will be structurally subordinated to all of the claims of creditors of those non-guarantor subsidiaries.

The Reynolds Notes are guaranteed by RGHL, Beverage Packaging Holdings I ("BP I") (a wholly owned subsidiary of the Company), and subsidiaries of BP I that guarantee the Credit Agreement. The guarantee of the Reynolds Notes by a subsidiary, however, will be automatically released upon the Trustee's receipt of a notice if such subsidiary’s guarantee of the Credit Agreement is released or discharged. See “— Because each guarantor's or security provider's liability under its guarantee or security may be reduced to zero, avoided or released under certain circumstances, you may not receive any payments from some or all of the guarantors or security providers.” In the future, other subsidiaries will be required to guarantee the Reynolds Notes only under certain limited circumstances. In addition, the indentures governing the Reynolds Notes do not limit the transfer of assets to, or the making of investments in, any of our restricted subsidiaries, including our non-guarantor subsidiaries.

In the event that any non-guarantor subsidiary becomes insolvent, is liquidated, reorganized or dissolved, or is otherwise wound up other than as part of a solvent transaction, the assets of such non-guarantor subsidiary will be used first to satisfy the claims of its creditors, including its trade creditors, banks and other lenders. Only the residual equity value will be available to the Reynolds Notes Issuers and any other guarantor of the Reynolds Notes, and only to the extent the Reynolds Notes Issuers or any guarantor of the Reynolds Notes are parent companies of such non-guarantor subsidiary. However, the Reynolds Notes Issuers currently do not have any subsidiaries. Consequently, the Reynolds Notes and each guarantee of the Reynolds Notes will be structurally subordinated to claims of creditors of non-guarantor subsidiaries. In addition, the indentures governing the Reynolds Notes permit our subsidiaries, including our non-guarantor subsidiaries, to incur additional debt (subject to certain conditions and limitations with respect to restricted subsidiaries) and do not limit their ability to incur trade payables and similar liabilities.

Fraudulent conveyance laws and other limitations on the enforceability of the Reynolds Notes, the related guarantees and any security securing such notes or related guarantees, may adversely affect the validity and enforceability of such instruments or the related security securing them.

The Reynolds Notes, the related guarantees and any security securing such notes or related guarantees (including any future guarantees and future security interests) may be subject to claims that they should be limited or voided in favor of our existing and future creditors under applicable fraudulent conveyance law, including laws in Canada, New Zealand and the United States, if an action (either in connection with a bankruptcy, liquidation or reorganization case or under a lawsuit in which a bankruptcy is not involved) were commenced at some future date by an issuer, by the guarantors or on behalf of our unpaid creditors or the unpaid creditors of a guarantor. In addition, the enforcement of the Reynolds Notes and the guarantees and the amount that can be recovered under a security interest in respect of any asset is limited to the extent of the amount which can be guaranteed by a particular guarantor, security provider or issuer without rendering the applicable guarantee or security voidable or otherwise ineffective under applicable law. Moreover, the enforcement of the Reynolds Notes, guarantees or security against any issuer, a relevant guarantor or security provider will be subject to certain defenses available to the issuers, guarantors or security providers generally under (i) the laws of New York, which will govern the Reynolds Notes and the guarantees, (ii) the laws governing the relevant security document, and (iii) laws applicable to companies and other corporate entities in the jurisdiction in which the relevant issuer or guarantor or, if applicable, security provider is organized. These laws and defenses include those that relate to fraudulent conveyance or transfer, fraudulent or voidable preference, financial assistance, corporate purpose or benefit, preservation of share capital, thin capitalization, unlawful dividend and defenses affecting the rights of creditors or other stakeholders generally.

Although laws differ significantly among jurisdictions, in general, under fraudulent conveyance and similar laws, a court could subordinate or void any note obligation, guarantee or security obligation if it found that, at the time any issuer, guarantor or security provider, as applicable, issued the Reynolds Notes or incurred obligations under a related guarantee or any security, (i) the transactions relating to the issuance of the Reynolds Notes, the related guarantees or providing the security securing such notes were undertaken with the intent of preferring, hindering, delaying or defrauding, as applicable, current or future creditors or (ii) such issuer or any of the guarantors, as applicable, received less than reasonably equivalent value or fair consideration in return for issuing the Reynolds Notes, incurring the guarantee or providing the security, as applicable, and, in the case of (ii) only, any one of the following is also true:

any issuer or any of the guarantors was insolvent or was rendered insolvent by reason of the incurrence of the applicable indebtedness or guarantee or providing the security, as applicable;

the issuance of the Reynolds Notes, the related guarantees or the grant of security interests left any issuer or any of the guarantors with an unreasonably small amount of capital to carry on the business in which such issuer or such guarantor was engaged or about to engage; or

any issuer or any of the guarantors intended to incur, or believed that it would incur, debts beyond its ability to pay as such debts matured.

If a court were to find that the issuance of the Reynolds Notes, the related guarantees or the grant of security interests was a fraudulent conveyance or fraudulent transfer, the court could void the payment obligations under the notes or such guarantee in total or in part or further subordinate the Reynolds Notes or such guarantee to presently existing and future indebtedness of the applicable issuer or such guarantor, or require the holders of the Reynolds Notes to repay any amounts received with respect to the Reynolds Notes or such guarantee or void the granting of security interests securing the Reynolds Notes or the related guarantees. In the event of a finding that a fraudulent conveyance or a fraudulent transfer occurred, you may not receive any repayment on the Reynolds Notes. Further, the voidance of the Reynolds Notes could result in an event of default with respect to our other debt and that of the guarantors that could result in the acceleration of such debt.


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The measure of insolvency for purposes of the foregoing considerations will vary depending upon the law of the jurisdiction that is being applied in the relevant legal proceeding, such that we cannot be certain as to: the standards a court would use to determine whether or not the applicable issuer or the guarantors were solvent at the relevant time, or, regardless of the standard that a court uses, that it would not determine that such issuer or a guarantor was indeed insolvent on that date; that any payments to the holders of the Reynolds Notes (including under the guarantees) did not constitute preferences, fraudulent conveyances or fraudulent transfers on other grounds; or that the issuance of the Reynolds Notes and the guarantees would not be subordinated to such issuer’s or any guarantor’s other debt. Generally, however, an issuer, a guarantor or a security provider could be considered insolvent if:

it has failed to pay an amount that is due and in relation to which the creditor has served a written demand;

it has failed to pay its liabilities generally as they become due;

the sum of its debts, including contingent liabilities, is greater than its assets, at a fair valuation; or

the present fair saleable value of its assets is less than the amount required to pay the probable liability on its total existing debts and liabilities, including contingent liabilities, as they become absolute and mature.

As a general matter, value is given for a transfer or an obligation if, in exchange for the transfer or obligation, property is transferred or a valid antecedent debt is satisfied. A court would likely find that the applicable issuer or a guarantor did not receive reasonably equivalent value or fair consideration for the Reynolds Notes or such guarantee and/or security interest if such issuer or such guarantor did not substantially benefit directly or indirectly from the issuance of the Reynolds Notes or the applicable guarantee and/or security interest. Thus, if the guarantees were legally challenged, any guarantee could be subject to the claim that, since the guarantee was incurred for the issuer’s benefit, and only indirectly for the benefit of the guarantor, the obligations of the applicable guarantor were incurred for less than reasonably equivalent value or fair consideration. Therefore, a court could void the obligations under the guarantees (and any related security interests), subordinate them to the applicable guarantor’s other debt or take other action detrimental to the holders of the Reynolds Notes.

To the extent a court voids any of the guarantees or related security interests as fraudulent conveyances or fraudulent transfers or holds any of the guarantees unenforceable for any other reason, the holders of the Reynolds Notes would cease to have any direct claim against the applicable guarantor or, in the case of the security interests or the related guarantees, the holders of the Reynolds Notes would cease to have a secured claim against the applicable issuer or guarantors. If a court were to hold a guarantee unenforceable, the applicable guarantor’s assets would be applied first to satisfy the applicable guarantor’s other liabilities, if any, and might not be applied to the payment of the guarantee of the Reynolds Notes. Sufficient funds to repay the Reynolds Notes may not be available from other sources, including the remaining guarantors, if any. In addition, the court might direct you to repay any amounts that you already received from the applicable issuer or the applicable guarantor.

Although each guarantee entered into in connection with the Reynolds Notes will contain a provision, referred to as the “savings clause,” intended to limit that guarantor’s liability to the maximum amount that it could incur without causing the incurrence of obligations under its guarantee to be a fraudulent conveyance or fraudulent transfer, this provision may not be effective as a legal matter to protect those guarantees from being avoided under fraudulent conveyance or fraudulent transfer law or otherwise, or may reduce that guarantor’s obligation to an amount that effectively makes its guarantee worthless.

In addition, as noted above, any payment by an issuer pursuant to the Reynolds Notes or by a guarantor under a guarantee made at a time such issuer or such guarantor was found to be insolvent could be voided and required to be returned to such issuer or such guarantor or to a fund for the benefit of such issuer’s or such guarantor’s creditors if such payment is made to an insider within a one-year period prior to a bankruptcy filing or within 90 days for any non-insider party and such payment would give such insider or non-insider party (as the case may be) more than such creditors would have received in a distribution under the U.S. Bankruptcy Code in a hypothetical Chapter 7 case.

Finally, as a court of equity, the bankruptcy court may otherwise subordinate the claims in respect of the Reynolds Notes or the guarantees to other claims against an issuer or the guarantors under the principle of equitable subordination, if the court determines that (i) the holder of the Reynolds Notes engaged in some type of inequitable conduct, (ii) such inequitable conduct resulted in injury to other creditors or conferred an unfair advantage upon the holder of the Reynolds Notes and (iii) equitable subordination is not inconsistent with the provisions of the U.S. Bankruptcy Code.

We cannot give you any assurance as to what standards a court would use to determine whether any issuer, guarantor or security provider was solvent at the relevant time, or whether, notwithstanding the standard used, the Reynolds Notes or the applicable guarantee or security would not be avoided on other grounds, including those described above.

Laws or judicial determinations similar to those described above may also apply to any future guarantee or security granted by one of our subsidiaries.

Insolvency laws could limit the ability of noteholders to enforce their rights under the Reynolds Notes, the guarantees and the security.

Any insolvency proceedings with regard to any issuer, guarantor or security provider would most likely be based on and governed by the insolvency laws of the jurisdiction under which the relevant entity is organized. As a result, in the event of insolvency with regard to any of these entities, the claims of holders of the Reynolds Notes against any applicable issuer, guarantor or security provider may be subject to the insolvency laws of its jurisdiction of organization. The provisions of such insolvency laws differ substantially from each other, including with respect to rights of creditors, priority of claims and procedure and may contain provisions that are unfavorable to holders of the Reynolds Notes. In addition, there can be no assurance as to how the insolvency laws of these jurisdictions will be applied in cross-border insolvency proceedings.

As a general matter, under insolvency law, any issuer's, any guarantor's or any security provider's liabilities in respect of the Reynolds Notes, the related guarantees and, if applicable, security, may, in the event of insolvency or similar proceedings, rank junior to certain of such issuer's, guarantor's or security provider's debts that are entitled to priority under the laws of such jurisdiction. Debts entitled to priority may include (i) amounts owed in respect of employee pension schemes, (ii) certain amounts owed to employees, (iii) amounts owed to governmental agencies, including tax authorities and (iv) expenses of an insolvency practitioner. In addition, in some jurisdictions, an examiner or administrator or similar party may be legally required to consider the interest of third parties (including, for example, employees) or the best interests of the relevant company in connection

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with the proceedings. In certain cases, the ability of a holder to collect interest accruing on the Reynolds Notes in respect of any period after the commencement of liquidation proceedings and a holder's rights in respect of the guarantees may be limited.

The enforcement of your rights as holders of the Reynolds Notes or under the related guarantees or security across multiple jurisdictions may be difficult.

The Reynolds Notes are joint and several obligations of the Reynolds Notes Issuers. The Reynolds Notes are guaranteed and for certain series of the Reynolds Notes security has been provided by certain of our subsidiaries which are organized under the laws of Canada, New Zealand and the United States. In the event of bankruptcy, insolvency or a similar event, proceedings could be initiated in any of these jurisdictions or in the jurisdiction of organization of a future guarantor. The rights of holders under the Reynolds Notes and the guarantees and the security granted will be subject to the laws of several jurisdictions and holders of the Reynolds Notes may not be able to enforce their rights effectively in multiple bankruptcy, insolvency and other similar proceedings. Moreover, such multi-jurisdictional proceedings are typically complex and costly for creditors and often result in substantial uncertainty and delay in the enforcement of creditors' rights.

In addition, the bankruptcy, insolvency, foreign exchange, administration and other laws of the various jurisdictions in which the issuers, guarantors and security providers are located may be materially different from or in conflict with one another and those of the United States, including in respect of creditors' rights, priority of creditors, the ability to obtain post-petition interest and the duration of the insolvency proceeding. The consequences of the multiple jurisdictions involved in the transaction could trigger disputes over which jurisdiction's law should apply and choice of law disputes which could adversely affect the ability of noteholders to enforce their rights and to collect payment in full under the Reynolds Notes, the related guarantees and any security.

You may be unable to enforce judgments obtained in the United States and foreign courts against us, certain of the guarantors or our or their respective directors and executive officers.

Certain of our directors and executive officers and certain of the guarantors as well as the NZ Issuer for the Reynolds Notes are, and will continue to be, non-residents of the United States, and most of the assets of these companies are located outside of the United States. As a consequence, you may not be able to effect service of process on the NZ Issuer and guarantors located outside the United States or the non-U.S. resident directors and officers in the United States or to enforce judgments of U.S. courts in any civil liabilities proceedings under the U.S. federal securities laws. Moreover, any judgment obtained in the United States against the non-resident directors, the executive officers, the NZ Issuer or the guarantors, including judgments with respect to the payment of principal, premium, if any, and interest on the Reynolds Notes, may not be collectible in the United States. There is also uncertainty about the enforceability in the courts of certain jurisdictions, including judgments obtained in the United States against certain of the guarantors, whether or not predicated upon the federal securities laws of the United States.

In particular, NZ Issuer is a limited liability company organized under the laws of New Zealand. Certain of its officers and directors are residents of various jurisdictions outside the United States. All or a substantial portion of their assets may be located outside the United States. As a result, it may be difficult for investors to effect service of process within the United States upon such persons or to enforce judgments obtained against such persons in U.S. courts and predicated upon the civil liability provisions of the U.S. federal securities laws.

We have not presented individual financial statements or summary financial data for each of the guarantors of the Reynolds Notes, the Reynolds Notes Issuers or other members of the RGHL Group, and we are not required to do so in the future under the indentures governing the Reynolds Notes.

We have not presented individual financial statements or summary financial data for each of the guarantors of the Reynolds Notes, the Reynolds Notes Issuers or other members of the RGHL Group in this annual report and are not required to do so in the future under the indentures governing the Reynolds Notes. The absence of such separate financial statements may make it difficult for holders of the Reynolds Notes to assess the financial condition or results of operations of the Reynolds Notes Issuers and the guarantors or their compliance with the covenants in the indentures governing the Reynolds Notes, as applicable.

Non-U.S. subsidiaries of our U.S. subsidiaries have not and will not guarantee the Reynolds Notes.

Non-U.S. subsidiaries of our U.S. subsidiaries have not and will not guarantee the Reynolds Notes, and the Reynolds Notes are and will be structurally subordinated to all claims of creditors, including trade creditors, of such non-U.S. subsidiaries.

In addition, any pledge of the securities of any first tier non-U.S. subsidiaries of our U.S. subsidiaries is limited to 100% of their non-voting capital stock and 65% of their voting capital stock. There is no pledge of the capital stock of any non-U.S. subsidiaries of our U.S. subsidiaries other than with respect to certain of our first-tier non-U.S. subsidiaries. The Reynolds Senior Secured Notes have not and will not be secured by a pledge of the assets of any non-U.S. subsidiary of our U.S. subsidiaries. Accordingly, the Reynolds Senior Secured Notes are and will be effectively subordinated to such non-U.S. subsidiaries' secured liabilities and obligations to the extent of the value of any assets that secure such liabilities and obligations.

We are not required to reorganize our corporate structure such that any non-U.S. subsidiaries of our U.S. subsidiaries will provide a guarantee or a pledge of their assets or such that a pledge of 100% of their voting capital stock can be granted.

Certain jurisdictions may impose withholding taxes on payments under the Reynolds Notes and any related guarantees or security documents or impose foreign exchange restrictions which may alter or reduce the amount recoverable by noteholders.

Payments made under the Reynolds Notes and any related guarantees or security granted in certain jurisdictions may be subject to withholding tax, the amount of which will vary depending on the residency of the recipient, the availability of double-tax treaty relief and the recipient's legal relationship with the relevant guarantor, issuer or security provider. In certain circumstances holders may be entitled to receive additional amounts in respect of such withholding tax, other than withholding tax imposed or levied by or on behalf of the United States or any political subdivision or governmental authority thereof or therein having power to tax. In addition, government or central bank approvals may be required in order for a guarantor, issuer or security provider organized under the laws of certain jurisdictions to remit payments outside that jurisdiction under its guarantee or security.

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In addition, foreign exchange controls applicable in certain jurisdictions may limit the amount of local currency that can be converted into other currencies, including U.S. dollars, upon enforcement of a guarantee or security interest.

You may face currency exchange risks by investing in the Reynolds Notes.

The Reynolds Notes are denominated and payable in U.S. dollars. If you measure your investment returns by reference to a currency other than U.S. dollars, investment in the Reynolds Notes entails foreign currency exchange-related risks due to, among other factors, possible significant changes in the value of the U.S. dollar relative to the currency you use to measure your investment returns, caused by economic, political and other factors which affect exchange rates and over which we have no control. Depreciation of the U.S. dollar against the currency in which you measure your investment returns would cause a decrease in the effective yield of the Reynolds Notes below their stated coupon rates and could result in a loss to you when the return on such notes is translated into the currency in which you measure your investment returns. There may be tax consequences for you as a result of any foreign currency exchange gains or losses resulting from your investment in the Reynolds Notes. You should consult your tax adviser concerning the tax consequences to you of acquiring, holding and disposing of the Reynolds Notes.

Our access to capital markets, our ability to enter into new financing arrangements and our business operations could be significantly impaired if our credit ratings are downgraded.

Downgrades in our credit ratings could adversely affect our ability to access the capital markets and/or lead to increased borrowing costs in the future. Some rating agencies that provide corporate ratings on us or provide ratings on our debt may downgrade their corporate or debt ratings with respect to us. In addition, perceptions of us by investors, producers, other businesses and consumers could also be significantly impaired.

Because each guarantor's or security provider's liability under its guarantee or security may be reduced to zero, avoided or released under certain circumstances, you may not receive any payments from some or all of the guarantors or security providers.

The Reynolds Notes have the benefit of the guarantees of and, with respect to the Reynolds Senior Secured Notes, security from RGHL and certain of its subsidiaries, including the Reynolds Notes Issuers. However, the guarantees and the security are limited to the maximum amount that the guarantors or the security providers are permitted to guarantee and secure under applicable law. As a result, a guarantor's or a security provider's liability under a guarantee or in respect of security could be materially reduced or reduced to zero depending on the amount of other obligations of such entity and upon applicable laws. Further, under certain circumstances, a court under applicable fraudulent conveyance and transfer statutes or other applicable laws could void the obligations under a guarantee or in respect of security, or subordinate the guarantee or security to other obligations of the guarantor or security provider. See “— Fraudulent conveyance laws and other limitations on the enforceability of the Reynolds Notes, the related guarantees and any security securing such notes or related guarantees, may adversely affect the validity and enforceability of such instruments or the related security securing them.”

Our Credit Agreement provides us with flexibility to exclude certain non-U.S. subsidiaries from the collateral and guarantee requirements under the Credit Agreement, subject to certain conditions. The Credit Agreement requires that our guarantor subsidiaries collectively continue to maintain combined gross assets, excluding intercompany balances, of at least 75% of our consolidated total assets and combined EBITDA of at least 75% of our consolidated EBITDA. If we are unable to meet these minimum guarantee requirements at the end of a fiscal quarter, we would be required to add additional subsidiary guarantors as necessary to satisfy such requirements. See “Item 10. Additional Information — Material Contracts.”

In addition, in certain jurisdictions, a guarantee or security interest granted by a company that is not in the company's corporate interests or where the burden of that guarantee or security exceeds the benefit to the company may not be valid and enforceable. It is possible that a creditor of an entity or the insolvency administrator in the case of an insolvency of an entity may contest the validity and enforceability of the guarantee or security and that the applicable court may determine that the guarantee or security should be limited or voided. In the event that any guarantees or security are deemed invalid or unenforceable, in whole or in part, or to the extent that agreed limitations on the guarantee or secured obligation apply, the Reynolds Notes would rank pari passu with, or be effectively subordinated to, all liabilities of the applicable guarantor, including trade payables of such guarantor.

Relevant local insolvency laws may not be as favorable to you as U.S. bankruptcy laws and may preclude holders of the Reynolds Notes from recovering payments due.

Certain members of the RGHL Group that are either an issuer or guarantors or security providers are organized under the laws of Canada or New Zealand. The procedural and substantive provisions of the insolvency laws of these countries may not be as favorable to creditors as the provisions of U.S. law.

In the event that any one or more of the Reynolds Notes Issuers, the guarantors, security providers, any future guarantors or security providers or any other of our subsidiaries experience financial difficulty, it is not possible to predict with certainty in which jurisdiction or jurisdictions insolvency or similar proceedings would be commenced, or the outcome of such proceedings.

Primary note obligations, guarantees and security provided by entities organized in jurisdictions not summarized in this annual report and, in the case of security governed by the laws of a jurisdiction not summarized in this annual report, are also subject to material limitations pursuant to their terms, by statute or otherwise. Any enforcement of the primary note obligations, the guarantees and security after bankruptcy or an insolvency event in such other jurisdictions will possibly be subject to the insolvency laws of the relevant entity's jurisdiction of organization or other jurisdictions. The insolvency and other laws of each of these jurisdictions may be materially different from, or in conflict with, each other, including in the areas of rights of creditors, the ability to void preferential transfer, priority of governmental and other creditors, ability to obtain post-petition interest and duration of the proceeding. The application of these laws, or any conflict among them, could call into question whether any particular jurisdiction's laws should apply, adversely affect your ability to enforce your rights under the guarantees and security in these jurisdictions and limit any amounts that you may receive.


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Most assets of the guarantors guaranteeing the Reynolds Senior Notes are subject to control by creditors with liens securing the Reynolds Senior Secured Notes and the Credit Agreement. If there is a default, the value of the assets may not be sufficient to repay the priority creditors and the holders of the Reynolds Senior Notes.

The Reynolds Senior Notes are unsecured but are guaranteed by RGHL and certain of its subsidiaries. Most of the assets of the guarantors of the Reynolds Senior Notes are pledged, on a priority basis, for the benefit of the lenders under the Credit Agreement and for the benefit of the holders of the Reynolds Senior Secured Notes. The indentures governing the Reynolds Notes, as well as the terms of the Credit Agreement, allow the incurrence of additional senior secured indebtedness in the future. In the event of an insolvency or liquidation, or if payment under the Reynolds Senior Secured Notes, the Credit Agreement or any other secured debt is accelerated, the lenders under the Credit Agreement, holders of the Reynolds Senior Secured Notes and holders of any other secured debt will be entitled to exercise the remedies available to a secured lender under applicable law (in addition to any remedies that may be available under documents pertaining to the Credit Agreement, the Reynolds Senior Secured Notes or any other secured debt) and will be paid out of the assets pledged as collateral before these assets are made available to holders of the Reynolds Senior Notes. In such event, the proceeds from the sale of such assets may not be sufficient to satisfy our obligations under the Reynolds Senior Notes.

Holders of the Reynolds Senior Secured Notes may not control certain decisions regarding collateral.

The trustee and collateral agents for the holders of the Reynolds Senior Secured Notes and the administrative agent under the Credit Agreement have entered into the First Lien Intercreditor Agreement, which provides, among other things, that the lenders under the Credit Agreement will control substantially all matters related to the collateral that secures the Credit Agreement, which collateral also secures the Reynolds Senior Secured Notes, and the lenders under the Credit Agreement may direct the collateral agents to foreclose on or take other actions with respect to such collateral with which holders of the Reynolds Senior Secured Notes may disagree or that may be contrary to the interests of holders of the Reynolds Senior Secured Notes. In addition, the First Lien Intercreditor Agreement provides that, to the extent any collateral securing our obligations under the Credit Agreement is released to satisfy such creditor's claims in connection with such a foreclosure, the liens on such collateral securing the Reynolds Senior Secured Notes will also automatically be released without any further action by the trustee, collateral agents or the holders of the Reynolds Senior Secured Notes and the holders of the Reynolds Senior Secured Notes will agree to waive certain of their rights relating to such collateral in connection with a bankruptcy or insolvency proceeding involving us or any guarantor of the Reynolds Senior Secured Notes. The First Lien Intercreditor Agreement provides that the holders of the Reynolds Senior Secured Notes may not take any actions to direct foreclosures or take other remedial actions following an event of default under the Credit Agreement or the Reynolds Senior Secured Notes for at least 90 days and longer if the administrative agent under the Credit Agreement takes action to direct foreclosures or other actions following such event of default.

After the discharge of the obligations with respect to the Credit Agreement whether on enforcement or repayment (other than repayment with indebtedness incurred under an agreement designated as a “Credit Agreement” for the purposes of the First Lien Intercreditor Agreement), at which time the parties to the Credit Agreement will no longer have the right to direct the actions of any collateral agent with respect to the collateral pursuant to the First Lien Intercreditor Agreement, that right passes to the authorized representative of holders of the next largest outstanding principal amount of indebtedness secured by a first lien on the collateral.

In addition, subject to certain conditions, the security documents generally allow us and our subsidiaries to remain in possession of, retain exclusive control over, freely operate, and collect, invest and dispose of any income from, the collateral. This may impact the type and quality of the security interest granted in respect of the collateral. In addition, to the extent we sell any assets that constitute collateral, the proceeds from such sale will be subject to a lien securing the Reynolds Senior Secured Notes only to the extent such proceeds would otherwise constitute “collateral” securing the Reynolds Senior Secured Notes under the security documents. To the extent the proceeds from any sale of collateral do not constitute “collateral” under the security documents, the pool of assets securing the Reynolds Senior Secured Notes would be reduced and the Reynolds Senior Secured Notes would not be secured by the proceeds of the sale.

There may not be sufficient collateral to satisfy our obligations under all or any of the Reynolds Senior Secured Notes.

Much of our assets are not and will not be collateral for the Reynolds Senior Secured Notes or our other secured indebtedness and no appraisals of the fair market value of any assets that are collateral were prepared in connection with the offerings of the Reynolds Senior Secured Notes. The assets that are excluded from the collateral include all assets of certain foreign subsidiaries and a number of real properties. The value of the collateral at any time will depend on market and other economic conditions, including the availability of suitable buyers for the collateral. The book value of our assets may not be indicative of the fair market value of such assets, which could be substantially lower. Accordingly, the value of the collateral securing our indebtedness, including the Reynolds Senior Secured Notes and the Credit Agreement and our other indebtedness that shares in the collateral, could be substantially less than the aggregate principal amount of our secured indebtedness. By their nature, some or all of the pledged assets may be illiquid and may have no readily ascertainable market value or market. While we do not presently believe the Reynolds Senior Secured Notes or our other secured indebtedness are under-collateralized, the value of the assets pledged as collateral for the Reynolds Senior Secured Notes or our other secured indebtedness could be impaired in the future as a result of changing economic conditions in the relevant jurisdictions, changing legal regimes, our failure to implement our business strategy, competition and other future trends. In the event of a foreclosure, liquidation, bankruptcy or similar proceeding, the proceeds from any sale or liquidation of the collateral may be insufficient to pay our obligations under the Reynolds Senior Secured Notes or our other secured indebtedness.

Most of the collateral is subject to the prior or equal claims of other creditors which could diminish any recovery from the collateral. Certain other creditors may have permitted liens which rank prior to the liens of the noteholders in the collateral. In addition, certain other creditors may have permitted liens which rank junior to the liens of the noteholders in the collateral. The indentures governing the Reynolds Notes also permit us to incur additional indebtedness that may share in the collateral on a senior or equal lien priority basis. Any additional obligations secured by a lien on the collateral securing the Reynolds Senior Secured Notes, whether effectively or actually senior to or equal with the lien in favor of the Reynolds Senior Secured Notes, will adversely affect the relative position of the holders of such Reynolds Senior Secured Notes with respect to the collateral securing such notes. In the event of a bankruptcy, liquidation, dissolution, reorganization or similar proceeding against us, the proceeds of the enforcement against the collateral will be used first to pay the secured parties under any indebtedness secured on a senior lien priority basis over the collateral in full before making any payments on the Reynolds Senior Secured Notes and any other indebtedness with an equal lien on the collateral. Any Reynolds Senior Secured Notes remaining outstanding will be general unsecured claims that are equal in right of payment with our other unsecured unsubordinated or subordinated indebtedness, as relevant. The presence of junior liens may also impair the value recoverable from the collateral.

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The value of the collateral securing the Reynolds Senior Secured Notes may not be sufficient to secure post-petition interest.

In the event of a bankruptcy, liquidation, dissolution, reorganization or similar proceeding against any issuer, guarantor or security provider located in the United States, holders of the Reynolds Senior Secured Notes will only be entitled to post-petition interest under the U.S. federal bankruptcy code to the extent that the value of their security interest in the collateral is greater than their pre-bankruptcy claim. Holders of the Reynolds Senior Secured Notes may be deemed to have an unsecured claim to the extent that our obligations in respect of the Reynolds Senior Secured Notes exceed the fair market value of the collateral securing the Reynolds Senior Secured Notes. As a result, holders of the Reynolds Senior Secured Notes that have a security interest in collateral with a value equal to or less than their pre-bankruptcy claim will not be entitled to post-petition interest under the bankruptcy code. In addition, it is possible that the bankruptcy trustee, the debtor-in-possession or competing creditors will assert that the fair market value of the collateral with respect to the Reynolds Senior Secured Notes on the date of the bankruptcy filing was less than the then-current principal amount of the Reynolds Senior Secured Notes. Upon a finding by a bankruptcy court that the Reynolds Senior Secured Notes are under-collateralized, the claims in the bankruptcy proceeding with respect to the Reynolds Senior Secured Notes would be bifurcated between a secured claim and an unsecured claim, and the unsecured claim would not be entitled to the benefits of security in the collateral. Other consequences of a finding of under-collateralization would be, among other things, a lack of entitlement for holders of the Reynolds Senior Secured Notes to receive post-petition interest and a lack of entitlement for holders of the unsecured portion of the Reynolds Senior Secured Notes to receive other “adequate protection” under U.S. federal bankruptcy laws. In addition, if any payments of post-petition interest had been made at the time of such a finding of under-collateralization, those payments could be re-characterized by the bankruptcy court as a reduction of the principal amount of the secured claim with respect to the Reynolds Senior Secured Notes. No appraisals of the fair market value of the collateral were prepared in connection with the offerings of the Reynolds Senior Secured Notes and we therefore cannot assure you that the value of the noteholders' interest in the collateral equals or exceeds the principal amount of the Reynolds Senior Secured Notes. See “— There may not be sufficient collateral to satisfy our obligations under all or any of the Reynolds Senior Secured Notes.” In addition, in certain other jurisdictions, holders of Reynolds Senior Secured Notes may not be entitled to post-petition interest.

The collateral securing the Reynolds Senior Secured Notes may be diluted under certain circumstances.

The collateral that secures the Reynolds Senior Secured Notes, subject to certain limited exceptions, also secures obligations under our Credit Agreement. In addition, this collateral may secure additional senior indebtedness that we or our restricted subsidiaries incur in the future, subject to restrictions on our or their ability to incur debt and liens under the indentures governing the Reynolds Senior Secured Notes and other agreements governing our indebtedness. Your rights would be diluted by any increase in the amount of indebtedness secured by this collateral.

The collateral is subject to casualty risk.

Even if we maintain insurance, there are certain losses that may be either uninsurable or not economically insurable, in whole or part. Insurance proceeds may not compensate us fully for our losses. If there is a complete or partial loss of any collateral, the insurance proceeds may not be sufficient to satisfy all of our obligations, including the Reynolds Senior Secured Notes and related guarantees.

Any security granted over collateral might be avoided by a trustee in bankruptcy.

Any security granted over collateral in favor of any collateral agents, including pursuant to security documents delivered after the date of the indentures governing the Reynolds Senior Secured Notes, might be avoided by the grantor, as debtor-in-possession, or by its trustee in bankruptcy if certain events or circumstances exist or occur, including, among others, if the grantor is insolvent at the time of granting the security or becomes insolvent as a result of entering into the security or associated documentation, including a guarantee, or a bankruptcy proceeding in respect of the security provider is commenced within a specified number of days following the granting of the security.

In the event that the First Lien Intercreditor Agreement is found to be invalid or unenforceable, the liens in favor of a series of Reynolds Senior Secured Notes in some foreign jurisdictions may not rank pari passu with the liens in favor of the Credit Agreement and the liens in favor of the rest of the Reynolds Senior Secured Notes.

The security documents that create the liens in favor of the Reynolds Senior Secured Notes and the Credit Agreement with respect to certain foreign collateral rely on the First Lien Intercreditor Agreement for establishing the relative priorities of the holders of the Reynolds Senior Secured Notes and the lenders and other secured parties under the Credit Agreement. Because the priority of any series of Reynolds Senior Secured Notes with respect to such foreign collateral as compared to the other series of Reynolds Senior Secured Notes and the Credit Agreement depends, in certain instances, on the enforceability of the First Lien Intercreditor Agreement, if the First Lien Intercreditor Agreement is found to be invalid or unenforceable, the liens in favor of a series of Reynolds Senior Secured Notes, in certain jurisdictions, may not rank pari passu with the liens in favor of the other series of Reynolds Senior Secured Notes and the Credit Agreement. In such a situation the claims of the holders of such series of the Reynolds Senior Secured Notes will be effectively subordinated to claims of the holders of the rest of the Reynolds Senior Secured Notes and the lenders and other secured parties under the Credit Agreement to the extent of the value of the assets secured by such liens.

Security interests in respect of the collateral may be adversely affected by the failure to perfect security interests in certain collateral presently owned or acquired in the future.

The security interest in the collateral securing the Reynolds Senior Secured Notes includes assets now owned or, to the extent permitted by applicable laws, acquired or arising in the future. Applicable law requires that certain property and rights acquired after the grant of a general security interest can only be perfected at the time such property and rights are acquired and identified. There can be no assurance that the trustee or any collateral agent will monitor, or that we will inform the relevant trustee or any collateral agent of, the future acquisition of property and rights that constitute collateral, and that the necessary action will be taken to properly create or perfect the security interest in such after-acquired collateral. Such failure may result in the loss of the security interest therein or the priority of the security interest in favor of the Reynolds Senior Secured Notes against third parties. In addition, we are not required to take certain perfection steps in respect of particular assets, whether owned now or acquired in the future, in certain jurisdictions for cost or commercial reasons or such perfection steps may only occur at the time of enforcement. For example, although certain of our trade receivables may be assigned by way of security, we are not required, and do not intend, to notify the obligor of such receivables of the existence of such security, which may impair the effectiveness of the security interest.


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Certain of the jurisdictions where you have the benefit of a security interest in collateral securing the Reynolds Senior Secured Notes may not have public, or other third-party, registers where liens, pledges or other forms of security interests may be centrally recorded and if they do have such registers, registration may not be compulsory to protect a secured party's interests or any registration may not be made or, when made, may not be effective to create priority over other security granted prior to the registration being made. As a result, in these jurisdictions the trustee or collateral agent must rely on any representations and warranties given by us that there are no liens, pledges or applicable other security interests already in place. There can be no assurance that we will accurately inform the relevant trustee or any collateral agent of the status of the collateral securing the Reynolds Senior Secured Notes and the value of the security interest may be adversely affected thereby.

In addition, in certain jurisdictions security interests created over particular assets can only be perfected by possession of the asset by the secured party. The terms of the security documents may not require possession to be granted to the secured party until enforcement, meaning that the security interest will remain unperfected until possession is granted.

Rights of holders of the Reynolds Senior Secured Notes may be adversely affected by bankruptcy proceedings in the United States.

The right of the collateral agents to repossess and dispose of the collateral securing the Reynolds Senior Secured Notes upon acceleration is likely to be significantly impaired by U.S. federal bankruptcy law if bankruptcy proceedings are commenced by or against us prior to or possibly even after any collateral agent has repossessed and disposed of the collateral. Under the U.S. Bankruptcy Code, a secured creditor, such as any collateral agent, is prohibited from repossessing its security from a debtor in a bankruptcy case, or from disposing of security repossessed from a debtor, without bankruptcy court approval. Moreover, U.S. bankruptcy law permits the debtor to continue to retain and to use collateral, and the proceeds, products, rents or profits of the collateral, even though the debtor is in default under the applicable debt instruments, provided that the secured creditor is given “adequate protection.” The meaning of the term “adequate protection” may vary according to circumstances, but it is intended in general to protect the value of the secured creditor's interest in the collateral and may include cash payments or the granting of additional security, if and at such time as the court in its discretion determines, for any diminution in the value of the collateral as a result of the stay of repossession or disposition or any use of the collateral by the debtor during the pendency of the bankruptcy case. In view of the broad discretionary powers of a bankruptcy court, it is impossible to predict how long payments under the Reynolds Senior Secured Notes could be delayed following commencement of a bankruptcy case, whether or when any collateral agent would repossess or dispose of the collateral, or whether or to what extent holders of the Reynolds Senior Secured Notes would be compensated for any delay in payment of loss of value of the collateral through the requirements of “adequate protection.” Furthermore, in the event the bankruptcy court determines that the value of the collateral is not sufficient to repay all amounts due on the Reynolds Senior Secured Notes, the holders of the Reynolds Senior Secured Notes would have “undersecured claims” as to the difference. U.S. federal bankruptcy laws do not permit the payment or accrual of interest, costs and attorneys' fees for “undersecured claims” during the debtor's bankruptcy case.

Security providers may own assets outside the respective jurisdictions in which they were formed.

The guarantors, security providers and issuers granting security in respect of the Reynolds Senior Secured Notes may own collateral located outside the respective jurisdictions in which such guarantors, security providers or issuers were formed. Where this is the case, the relevant security documents may not purport to create security interests over such collateral. In circumstances where the security documents purport to create security interests over such collateral, such security interests may not be effective, or the enforcement of such security interests in the jurisdiction in which the collateral is located may not be possible.

The use of collateral agents may diminish the rights that a secured creditor would otherwise have with respect to the collateral.

In most cases, the collateral will be taken in the name of a collateral agent for the benefit of the holders of the relevant Reynolds Senior Secured Notes and the relevant trustee. As a result, any collateral agent may effectively control actions with respect to collateral which may impair the rights that a noteholder would otherwise have as a secured creditor. Any collateral agent may take actions that a noteholder disagrees with or may fail to take actions that a noteholder wishes to pursue. For example, a collateral agent could decide to credit bid using the value of a noteholder's secured claim even if such noteholder would not individually have done so.

Furthermore, any collateral agent may fail to act in a timely manner which could impair the recovery of the noteholders.

In addition, in instances where any collateral agent cannot, or it is impractical for it to, hold a security interest, a gratuitous bailee may hold the security interest for the benefit of the noteholders. The holders will have no rights against any such gratuitous bailee.

The collateral agents may not be able to possess certain collateral on enforcement and may also be prevented from holding security interests in certain collateral.

Applicable laws may restrict the ability of a foreign entity that holds a security interest in particular collateral from taking possession of that collateral on enforcement. In addition, certain jurisdictions restrict the ability of foreign entities to hold the benefit of security interests over certain assets. This may mean that any collateral agent may be unable to benefit from security interests in certain collateral and may also restrict the ability of such collateral agent to transfer collateral into its name on enforcement.

Intercompany movements of collateral may diminish the assets that serve as collateral and the priority of noteholder liens with respect to collateral.

We are generally permitted to freely move assets within the RGHL Group subject to certain restrictions. However, not all members of the RGHL Group are or will be security providers or grant security over the same type of assets. If collateral is transferred to an entity that is not a security provider, the interests of the noteholders will cease to be secured by such assets.

If collateral is moved to another entity that is a security provider, the asset may cease to be collateral or your priority in the asset may be impaired. If a type of collateral is transferred to a security provider that does not grant security interests with respect to that particular type of asset, then the noteholders will lose the benefit of such collateral. Even if the asset continues as collateral in the hands of the recipient entity, there may be hardening periods or notification requirements before the security interest becomes effective or the security interest might not be as beneficial to noteholders as it was in the possession of the transferring entity.

24



Certain of our long-term indebtedness bears interest at variable interest rates, primarily based on LIBOR, which may be subject to regulatory guidance and/or reform that could cause interest rates under our current or future debt agreements to perform differently than in the past or cause other unanticipated consequences.

The U.K. Financial Conduct Authority, which regulates LIBOR, announced that it intends to stop encouraging or requiring banks to submit rates for the calculation of LIBOR after 2021. It is unclear whether LIBOR will cease to exist or if new methods of calculating LIBOR will be established such that it continues to exist after 2021. Similarly, it is not possible to predict whether LIBOR will continue to be viewed as an acceptable market benchmark, what rate or rates may become acceptable alternatives to LIBOR, or what effect these changes in views or alternatives may have on financial markets for LIBOR-linked financial instruments. If LIBOR ceases to exist or if the methods of calculating LIBOR change from their current form, interest rates on our current or future indebtedness including the Floating Rate Senior Secured Notes, borrowings under the Credit Agreement and the Securitization Facility may be adversely affected or we may need to renegotiate the terms of our debt agreements that utilize LIBOR as a factor in determining the applicable interest rate to replace LIBOR with the new standard that is established, if any, or to otherwise agree with the trustees or agents under such facilities or instruments on a new means of calculating interest.

ITEM 4. INFORMATION ON RGHL

Corporate Information

RGHL's executive offices are located at Level Nine, 148 Quay Street, Auckland 1010 New Zealand, and its telephone number is 64 (9) 358-5000. We have appointed National Registered Agents, Inc., 160 Greentree Drive, Suite 101, Dover, Delaware 19904 as our agent for service of process in the United States.

The United States Securities and Exchange Commission (the “SEC”) maintains a website (http://www.sec.gov) that contains reports, proxy and information statements and other information that we and other registrants have filed electronically with the SEC. Our filings are also available on our website at www.reynoldsgroupholdings.com. The contents of our website are not incorporated by reference into this annual report.

History and Development

RGHL was incorporated on May 30, 2006 under the Companies Act 1993 of New Zealand. RGHL acquired its businesses in a series of transactions between 2008 and 2011. Further information regarding the history of each of the four segments is included in " — Business Overview."

Business Overview

Overview

We are a leading global manufacturer and supplier of consumer and foodservice products and beverage containers. We are one of the largest consumer food, beverage and foodservice packaging companies in the United States, as measured by revenue, with leading market positions in many of our product lines based on management’s analysis of industry data. We sell our products to customers globally, including to a diversified mix of leading multinational companies, large national and regional companies, and small local businesses. We primarily serve the consumer food, beverage and foodservice market segments. The discussion below includes the Reynolds Consumer Products segment, a business we distributed to our shareholder, PFL, on February 4, 2020, which will be reflected as a discontinued operation in our interim unaudited condensed consolidated financial statements for the three month period ending March 31, 2020. Refer to note 26 of the RGHL Group’s audited consolidated financial statements included elsewhere in this annual report for additional information related to the distribution of Reynolds Consumer Products.

For a discussion of financial results by segment for each of the last three years, see “Item 5. Operating and Financial Review and Prospects — Results of Operations” and for a discussion of our capital expenditures for each of the last three years, see “Item 5. Operating and Financial Review and Prospects — Liquidity and Capital Resources — Capital Expenditures.”

Pactiv Foodservice

Pactiv Foodservice is a leading manufacturer of a wide range of foodservice products in a broad range of materials and serves food processors, restaurants and supermarkets. Pactiv Foodservice offers a comprehensive range of products including tableware items, cups, foam containers, paperboard containers, aluminum containers, microwaveable containers, clear rigid-display packaging, molded fiber and PET egg cartons, foamed and rigid trays, absorbent tray pads and plastic film. Pactiv Foodservice has a large customer base and operates primarily in North America. The following table shows total segment revenue by geographic region for Pactiv Foodservice for each of the years ended December 31, 2019, 2018 and 2017:
 
 
Revenue by geographic region
(In $ million)
 
2019
 
2018
 
2017
United States
 
3,359

 
3,396

 
3,299

Remaining North American Region
 
351

 
354

 
345

Europe
 

 
1

 
57

Other
 
7

 
27

 
28

Total
 
3,717

 
3,778

 
3,729



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History

Our Pactiv Foodservice business is primarily the result of combining the Reynolds and Pactiv foodservice businesses. Reynolds Metals Company was founded in 1919 as the U.S. Foil Company. In 2000, Reynolds Metals Company was acquired by Alcoa. In 2002, Alcoa acquired Ivex Packaging Corporation, which broadened the presence of the Reynolds foodservice business in the foodservice industry. In 2008, the Reynolds foodservice business was acquired indirectly by Mr. Graeme Hart, our strategic owner.

Pactiv’s foodservice business was originally part of Packaging Corporation of America (“PCA”), which was acquired by Tenneco Inc. in 1965. PCA manufactured paperboard and various paperboard products as well as certain plastic and aluminum food packaging products. In 1995, PCA was renamed Tenneco Packaging Inc. and acquired Mobil Plastics Company and in 1996 acquired Amoco Foam Products Company, which significantly expanded its foodservice offering. In April 1999, Tenneco Packaging Inc. sold its paperboard business and in November 1999 Tenneco Packaging Inc. (which was renamed Pactiv Corporation) was spun-off to Tenneco Inc.’s stockholders. Pactiv has made various acquisitions, including Prairie Packaging Inc. in 2007 and PWP Industries Inc. (which was renamed Pactiv Packaging Inc.) in 2010. In November 2010, we acquired Pactiv, and have since integrated our Reynolds foodservice and Pactiv foodservice businesses to form our Pactiv Foodservice segment. In May 2011, we acquired Dopaco Inc. and Dopaco Canada, Inc., and have subsequently acquired and sold various smaller businesses.

Products

Pactiv Foodservice is a leading manufacturer of various products for the foodservice and retail food markets. Pactiv Foodservice's products are designed to protect fresh food during distribution, aid retailers and food processors in merchandising food products and help customers prepare and serve meals in their homes. Pactiv Foodservice has a very broad portfolio of products with a continual emphasis on adding new product lines. Products designed for the foodservice market include tableware items, such as plates, bowls, cups, cutlery and straws, as well as clear plastic containers, microwaveable plastic containers, foam containers, paperboard containers and aluminum containers. Products designed for the foodservice market include foam and rigid trays, rigid trays for fresh and frozen applications, rigid and fiber berry baskets, clear display packaging, molded fiber cartons, PET egg cartons, aluminum containers and absorbent tray pads. Products designed for the retail market include clear rigid-display packaging for delicatessen and bakery applications, microwaveable containers for prepared, ready-to-eat meals, and foam trays and absorbent tray pads for meat and poultry. Products are manufactured using plastic resins, paperboard, aluminum and molded fiber. In addition, Pactiv Foodservice also sells plastic sheet to thermoformers made with various resins such as PET, PS and PP.

Customers

Pactiv Foodservice's customer base includes international companies, large national and regional customers and smaller local businesses, with its largest presence in North America. Pactiv Foodservice's customers include foodservice distributors, quick service restaurants, food processors, supermarket distributors and supermarkets. Pactiv Foodservice also manufactures most of Reynolds Consumer Products' tableware products. In 2019, Pactiv Foodservice's top ten customers accounted for 59% of the segment's total revenue, with two customers accounting for 12% and 11% of the segment's total revenue, one of which was the Reynolds Consumer Products business. Pactiv Foodservice has continued, and expects to continue, this relationship with Reynolds Consumer Products following its distribution.

Pactiv Foodservice generally sells its products on either a purchase order basis or under formal supply agreements with durations ranging from one to three years. A majority of Pactiv Foodservice's revenue is from supply agreements with raw material cost pass-through mechanisms, with the remainder from open market sales.

Competition

The U.S. foodservice and retail food markets are relatively mature but also relatively fragmented, with Pactiv Foodservice being one of a few participants with a product range that spans a significant portion of foodservice product categories. These competitors include Dart Container Corporation, Berry Global Group, Inc., Graphic Packaging Inc. and Genpak LP. Our competitors in the U.S. markets include large companies that offer several competing products and a range of smaller competitors with only single product offerings. These competitive pressures may adversely affect Pactiv Foodservice’s business and financial performance. Pactiv Foodservice primarily competes on the basis of breadth of product offerings, price, product features, performance, speed to market, distribution capabilities and product innovation.

Marketing and Sales

Pactiv Foodservice primarily uses a direct sales force to sell to foodservice and retail customers and also utilizes third-party brokers for selected products and accounts. Pactiv Foodservice's marketing and sales effort is premised on the “One Face to the Customer” value proposition which uses one sales representative per account to produce one order which is supported by one customer service representative that is responsible for one shipment with one invoice. In addition to the sales professionals, the sales organization includes customer service representatives, marketing teams and an internal logistics and transportation team.

Seasonality

Pactiv Foodservice's operations are moderately seasonal, peaking during the summer and fall months in the Northern Hemisphere when the favorable weather, harvest and holiday season lead to increased consumption of foodservice products. Pactiv Foodservice therefore typically experiences a greater level of sales in the second through fourth quarters.

Manufacturing

Pactiv Foodservice operates 40 manufacturing plants in North America. At 17 of its facilities, Pactiv Foodservice also manufactures products for Reynolds Consumer Products. In addition, eight facilities operated by Reynolds Consumer Products manufacture products for Pactiv Foodservice. Pactiv Foodservice also operates several distribution facilities in the United States. Pactiv Foodservice’s manufacturing plants are grouped based upon the two markets the business primarily serves: foodservice and food packaging. Each manufacturing plant is managed by a manufacturing director. The directors have responsibility for all plants that produce a specific process. The structure is integral to a disciplined and lean operating system that provides consistent operating practices and metrics across all locations.

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Pactiv Foodservice utilizes a variety of production processes, including thermoforming and extrusion, paperboard processing and injection molding. A focus on continuous improvement, lean manufacturing system initiatives and teamwork has resulted in better customer service measured by case fill, on-time delivery and quality performance metrics.

Pactiv Foodservice utilizes two distribution models. Direct distribution, primarily for processors and supermarkets, sends products straight from the factory to the customer. The second distribution model is based around eight regional mixing centers. These two distribution models yield significant cost savings for Pactiv Foodservice which are shared with customers.

Raw Materials and Suppliers

Pactiv Foodservice’s principal raw materials include plastic resins, paperboard and aluminum. In 2019, the total value of raw materials consumed by Pactiv Foodservice was $1,712 million and represented 59% of the segment's total cost of sales, excluding depreciation and amortization. Plastic resins accounted for 71% of raw material costs for the year, while paperboard, aluminum and other raw materials collectively accounted for 29%.

The prices of Pactiv Foodservice’s raw materials fluctuate with market movements in commodity prices. Resin prices can fluctuate significantly with fluctuations in crude oil and natural gas prices, as well as changes in refining capacity and the demand for other petroleum-based products. The price of cartonboard may fluctuate widely due to external conditions such as weather, product scarcity, currency and commodity market fluctuations and changes in governmental policies and regulations. Aluminum prices have been historically volatile as aluminum is a cyclical commodity with prices subject to global market factors. These factors include speculative activities by market participants, production capacity, strength or weakness in key end-markets such as housing and transportation, political and economic conditions and manufacturing costs in major production regions. Pactiv Foodservice's aluminum product offerings are manufactured by Reynolds Consumer Products. To minimize the impact of price fluctuations, Pactiv Foodservice enters into hedging agreements for certain raw materials. Pactiv Foodservice is also sensitive to other energy-related cost movements, in particular, those that affect transportation and utility costs.

We believe that Pactiv Foodservice’s relationships with its suppliers are satisfactory. Centralized purchasing enables Pactiv Foodservice to leverage its purchasing power for core raw materials and reduces its dependence on any one supplier. Pactiv Foodservice sources its raw materials from a variety of suppliers and maintains multiple suppliers for each input. Pactiv Foodservice typically has contracts with resin suppliers, which have historically provided Pactiv Foodservice with a steady supply of raw materials. Pactiv Foodservice has also undertaken programs to consolidate its supplier base and achieve savings by taking advantage of the economies of scale afforded by its increased purchasing volume. Pactiv Foodservice has not historically experienced any significant interruptions of key raw material supplies. Pactiv Foodservice has continuous improvement programs focused on cost reduction and productivity improvements. Existing programs in lean manufacturing allow for better inventory management. In addition, Pactiv Foodservice’s scale and knowledge of the resin market contribute to efficient raw materials management.

Quality Management

Pactiv Foodservice is committed to a quality management philosophy that aims to achieve continuous improvement in all stages of the production process through the involvement of management, customers and employees. Pactiv Foodservice uses a stringent technique of hazard analysis and critical control points to identify critical aspects of quality management as well as methods and tools to identify key areas for improvement that result in a reduction of waste and downtime at its facilities.

Intellectual Property

Pactiv Foodservice has a significant number of registered patents and registered trademarks which, along with trade secrets and manufacturing know-how, help support Pactiv Foodservice's ability to add value within the market and sustain its competitive advantages. Pactiv Foodservice has invested a considerable amount of resources in developing its proprietary products and manufacturing capabilities, and it employs various methods, including confidentiality and non-disclosure agreements with third parties, employees and consultants, to protect its intellectual property. Pactiv Foodservice uses internal and external resources to manage its intellectual property portfolio. In addition, where appropriate, the business defends its intellectual property rights throughout the world. We believe that the intellectual property and licensing rights held are adequate for the business. While in the aggregate Pactiv Foodservice's patents are of material importance to Pactiv Foodservice's business, Pactiv Foodservice believes that its business is not dependent upon any single patent or group of patents.

Other than licenses for commercially available software, Pactiv Foodservice does not believe that any of its licenses from third parties are material to its business taken as a whole. Pactiv Foodservice does not believe that any of its licenses to intellectual property rights granted to third parties are material to its business taken as a whole.

New Product Development

Pactiv Foodservice has two research and development facilities. Pactiv Foodservice and Reynolds Consumer Products operate a research and development center for new materials technology in Canandaigua, New York, and a customer innovation center in Bedford Park, Illinois. These facilities support and accommodate the full range of research, formulation, design and testing requirements related to customer-driven applications, including design studios, analytical and quality test laboratories, pilot operations for new materials and technology development, test kitchens, rapid prototyping modules and a commercial tooling fabrication operation.

Research and development costs were $22 million, $19 million and $16 million for the years ended December 31, 2019, 2018 and 2017, respectively.

Employees

As of December 31, 2019, Pactiv Foodservice employed approximately 10,700 people located primarily in its U.S. manufacturing facilities. Approximately 20% of Pactiv Foodservice's employees are covered by collective labor agreements. Pactiv Foodservice has not experienced any significant union-related work stoppages over the last 22 years. We believe Pactiv Foodservice's relationships with its employees and labor unions are satisfactory.


27


Regulatory

As Pactiv Foodservice's products are used in the foodservice and retail food markets, Pactiv Foodservice's business is subject to regulations governing products that may contact food in virtually every country where it has operations. Future regulatory and legislative change can affect the economics of Pactiv Foodservice's business activities, lead to changes in operating practices, affect its customers and influence the demand for and the cost of providing products and services to its customers. Pactiv Foodservice has implemented compliance programs and procedures designed to achieve compliance with applicable laws and regulations, and believes these programs and procedures are generally effective. However, because of the complexity of these laws and regulations and the multinational scope of Pactiv Foodservice's business, compliance cannot be guaranteed.

Pactiv Foodservice is subject to various national, state, local, foreign and international environmental, health and safety laws, regulations and permits. Among other things, these requirements regulate the emission or discharge of materials into the environment, govern the use, storage, treatment, disposal and management of hazardous substances and wastes, protect the health and safety of Pactiv Foodservice's employees, regulate the materials used in and the recycling of products and impose liability, which can be strict, joint and several, for the costs of investigating and remediating, and damages resulting from, present and past releases of hazardous substances related to Pactiv Foodservice's current and former sites, as well as at third party sites where Pactiv Foodservice or its predecessors have sent hazardous waste for disposal. These laws also regulate, and in certain instances ban, products that may be deemed harmful to the environment. Many of Pactiv Foodservice's manufacturing facilities require environmental permits, such as those limiting air emissions. Compliance with these permits can require capital investment and, in some cases, could limit production.

In addition, a number of governmental authorities, both in the United States and abroad, have considered, and are expected to consider, legislation aimed at reducing the amount of plastic waste. Programs have included banning certain types of products, mandating certain rates of recycling and/or the use of recycled materials, imposing deposits or taxes on plastic bags and packaging material and requiring retailers or manufacturers to take back packaging used for their products.

Moreover, as environmental issues, such as climate change, have become more prevalent, federal, state and local governments, as well as foreign governments, have responded, and are expected to continue to respond, with increased legislation and regulation, which could negatively affect Pactiv Foodservice. For example, the United States Congress has in the past considered legislation to reduce emissions of greenhouse gases. In addition, the EPA is regulating certain greenhouse gas emissions under existing laws such as the Clean Air Act. A number of state and local governments in the United States have also announced their intentions to implement their own programs to reduce greenhouses gases. These and other foreign, federal and state climate change initiatives may cause Pactiv Foodservice to incur additional direct costs in complying with new environmental legislation or regulations, such as costs to upgrade or replace equipment, as well as increased indirect costs that could get passed through to Pactiv Foodservice resulting from its suppliers and customers also incurring additional compliance costs.

Legal Proceedings

Pactiv Foodservice is a party to various litigation matters arising in the ordinary course of business. We cannot estimate with certainty the ultimate legal and financial liability with respect to these litigation matters but believe, based on examination of these matters, experience to date and discussions with counsel, that any ultimate liability will not be material to Pactiv Foodservice's financial position, results of operations or cash flows.

Graham Packaging

Graham Packaging is a leading designer and manufacturer of value-added, custom blow-molded plastic containers for branded consumer products. Graham Packaging focuses on product categories where customers and end-users value the technology and innovation that Graham Packaging's custom plastic containers offer as an alternative to traditional packaging materials such as glass, metal and paperboard. Graham Packaging has a large global customer base with its largest presence in North America. The following tables show total segment revenue by product group and revenue by geographic region for Graham Packaging for each of the years ended December 31, 2019, 2018 and 2017:
 
 
Revenue by product group
(In $ million)
 
2019
 
2018
 
2017
Food and beverage containers
 
1,356

 
1,443

 
1,487

All other containers
 
568

 
644

 
660

Total
 
1,924

 
2,087

 
2,147

 
 
Revenue by geographic region
(In $ million)
 
2019
 
2018
 
2017
United States
 
1,664

 
1,787

 
1,790

Remaining North American Region
 
95

 
105

 
116

Europe
 
116

 
136

 
155

South America
 
48

 
54

 
57

Other
 
1

 
5

 
29

Total
 
1,924

 
2,087

 
2,147



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History

Graham Packaging was formed in the mid-1970s as a regional domestic custom plastic container supplier. In October 2004, Graham Packaging acquired the blow-molded plastic container business of Owens-Illinois, Inc., which essentially doubled Graham Packaging's size. In September 2010, Graham Packaging acquired Liquid Container, L.P., a manufacturer of blow-molded plastic containers that primarily services the food and household product categories. In September 2011, we acquired Graham Packaging.

Products

Graham Packaging's strategy is to develop new, innovative packaging to meet the design and performance requirements of its customers. Graham Packaging supplies custom blow-molded plastic containers to a significant number of end-markets and geographic regions. Graham Packaging's product portfolio consists primarily of containers for food and beverage, such as for yogurt drinks, refrigerated and shelf-stable juices and juice drinks, teas, sports drinks/isotonics, condiments and dressings, dairy and non-dairy creamers, nutritional beverages, coffee, food sauces, liquor, beer, edible oils, snacks, peanut butter, syrups, jellies, jams and spices. Graham Packaging's product portfolio also includes containers for automotive lubricants, laundry detergents, liquid fabric care and stain removers, household cleaners, hair care, skin care and dish care.

Customers

Substantially all of Graham Packaging's sales are to major branded consumer products companies. Major customers are under multi-year contracts. These include customers for which Graham Packaging's products are manufactured at a dedicated production facility nearby or inside the customer's production facility, as well as products manufactured at Graham Packaging's stand-alone facilities which produce packaging for several customers. Graham Packaging's supply contracts with its customers for on-site production typically have terms of up to ten years, while its supply contracts for production off-site typically have terms that range from two to five years. Both of these categories of contracts often either renew automatically for subsequent one year terms or are renegotiated by Graham Packaging before expiration of the initial term. Graham Packaging's contracts typically contain provisions allowing for price adjustments based on changes in raw material prices and, in a majority of cases, the cost of energy and labor, among other factors. Graham Packaging is often the sole supplier of its customers' custom plastic container requirements nationally, regionally or for a specific brand. In 2019, Graham Packaging's top ten customers accounted for 51% of the segment's total revenue, with one customer accounting for 10% of the segment’s total revenue.

Competition

Graham Packaging has a significant market share in rigid blow-molded plastic containers in North America but faces increasing competition in that market. These competitors include Plastipak Packaging, Inc., Amcor Limited, ALPLA and Consolidated Container Company, LLC and Logoplaste. Graham Packaging faces competition from a number of well-established regional and international businesses across several of its product categories. Competition is based on several factors including price, product design, technology (such as barrier protection and lightweighting) and customer service. While several key competitors to Graham Packaging are positioned to provide a broader array of packaging solutions beyond rigid plastic containers, including flexible packaging and/or non-plastic solutions, Graham Packaging competes by striving to provide superior levels of service, speed to market and product design and development capabilities. Although Graham Packaging has been able over time to partially offset pricing pressures by reducing its cost structure and making the manufacturing process more efficient, it may not be able to continue to do so in the future. These competitive pressures may adversely affect Graham Packaging’s business and financial performance.

Marketing and Sales

Graham Packaging's sales are made primarily through its direct sales force, as well as selected brokers. Sales activities are conducted from Graham Packaging's regional headquarters in Lancaster, Pennsylvania and from field sales offices located in North America, Europe, South America and Asia. Graham Packaging's products are typically delivered by truck, on a daily basis, in order to meet customers' just-in-time delivery requirements, except in the case of on-site operations. In many cases, Graham Packaging's on-site operations are integrated with its customers' manufacturing operations so that deliveries are made, as needed, by direct conveyance to the customers' filling lines.

Seasonality

Graham Packaging's operations are slightly seasonal with higher levels of unit volume sales of bottled beverages during the summer months, most significantly in North America.

Manufacturing

A critical component of Graham Packaging's strategy is to locate manufacturing facilities on-site, when practical, reducing expensive shipping and handling charges, providing instantaneous quality acceptance feedback and increasing distribution efficiencies. Graham Packaging has 68 manufacturing facilities of which approximately one-third are located on-site at its customers' plants. Graham Packaging operates 56 plants in North America, seven in Europe, four in South America and one in Asia.

Graham Packaging utilizes a variety of production processes, including blow molding and injection molding. We believe that the blow molders and injection molders used by Graham Packaging are widely recognized as the leading technologies for high speed production of cold-fill, hot-fill, pasteurized and retorted rigid packaging using PET and other plastic resins, offering both mono- and multi-layer solutions. Graham Packaging also operates a variety of bottle labeling and decorating platforms, which is accomplished through in-mold techniques or post-molding methods.

Raw Materials and Suppliers

Resins constitute the primary raw materials used to make Graham Packaging's products. These materials are available from a number of domestic and international suppliers, and Graham Packaging is not dependent upon any single supplier. In 2019, the total value of raw materials consumed by Graham Packaging was $835 million and represented 57% of Graham Packaging's total cost of sales, excluding depreciation and amortization.


29


Typically, Graham Packaging does not enter into long-term supply agreements with its suppliers. Graham Packaging considers the supply and availability of raw materials to be adequate to meet its needs. Resin prices can fluctuate significantly with fluctuations in crude oil and natural gas prices, as well as changes in refining capacity and the demand for other petroleum-based products. We believe Graham Packaging's relationships with its suppliers are satisfactory.

Quality Management

Graham Packaging maintains quality assurance and control programs with respect to the performance of the products it manufactures, the performance of its suppliers and the compliance of its operations with its quality management system and sound manufacturing practices. Graham Packaging's production lines are equipped with specific quality control inspection equipment and its employees continuously monitor product attributes and performance through a comprehensive statistical process control system. Quality control laboratories are maintained at each manufacturing facility to test its products and validate their compliance with customer requirements. Graham Packaging continuously monitors and enhances its quality assurance and control programs to keep pace with the most current technologies and to meet and exceed customer expectations.

Intellectual Property

Graham Packaging holds a significant number of trademarks and a substantial number of issued or pending patents. While in the aggregate the patents are of material importance to its business, Graham Packaging believes that its business is not dependent upon any one single patent, group of patents or trademark. Graham Packaging also relies on unpatented proprietary know-how and continuing technological innovation and other trade secrets to develop and maintain its competitive position. Third parties could, however, obtain knowledge of this proprietary know-how through independent development, reverse engineering or other unauthorized access.

In addition to its own patents and proprietary know-how, Graham Packaging is a party to licensing arrangements and other agreements authorizing it to use other proprietary processes, know-how and related technology and/or to operate within the scope of certain patents owned by other entities. In some cases, the licenses granted to Graham Packaging are perpetual and in other cases, the term of the license is related to the life of the patent associated with the license. Graham Packaging also has licensed some of its intellectual property rights to third parties. Other than licenses for commercially available software, Graham Packaging does not believe that any of its licenses with third parties are material to its business taken as a whole.

New Product Development

Graham Packaging’s Global Innovation & Design Center in York, Pennsylvania supports all new product development and R&D innovations. The Innovation & Design Center is provided for customers to support their product development needs and to give them access to the knowledge and experience of the Center’s design and technical teams, including technical resources for industrial design, design engineering, virtual 3D modeling and simulations, prototype tooling, bottle sampling, lab evaluations, material analysis and customer training. Graham Packaging incurs costs to research, design and develop new packaging products and technologies. Such costs, net of any reimbursement from customers, were $5 million, $6 million and $7 million for the years ended December 31, 2019, 2018 and 2017, respectively.

Employees

As of December 31, 2019, Graham Packaging employed approximately 5,100 people. Approximately 22% of Graham Packaging's employees are covered by collective labor agreements. Graham Packaging has not experienced any significant union-related work stoppages over the last 30 years. We believe Graham Packaging's relationships with its employees and labor unions are satisfactory.

Regulatory

As Graham Packaging's products are used in food and beverage packaging, Graham Packaging's business is subject to regulations governing products that may contact food in virtually every country where it has operations. Future regulatory and legislative change can affect the economics of Graham Packaging's business activities, lead to changes in operating practices, affect its customers and influence the demand for and the cost of providing products and services to its customers. Graham Packaging has implemented compliance programs and procedures designed to achieve compliance with applicable laws and regulations, and believes these programs and procedures are generally effective. However, because of the complexity of these laws and regulations and the multinational scope of Graham Packaging's business, compliance cannot be guaranteed.

Graham Packaging is subject to various national, state, local, foreign and international environmental, health and safety laws, regulations and permits. Among other things, these requirements regulate the emission or discharge of materials into the environment, govern the use, storage, treatment, disposal and management of hazardous substances and wastes, protect the health and safety of Graham Packaging's employees, regulate the materials used in and the recycling of products and impose liability, which can be strict, joint and several, for the costs of investigating and remediating, and damages resulting from, present and past releases of hazardous substances related to Graham Packaging's current and former sites, as well as at third party sites where Graham Packaging or its predecessors have sent hazardous waste for disposal. These laws also regulate, and in certain instances ban, products that may be deemed harmful to the environment. Many of Graham Packaging's manufacturing facilities require environmental permits, such as those limiting air emissions. Compliance with these permits can require capital investment and, in some cases, could limit production.

In addition, a number of governmental authorities, both in the United States and abroad, have considered, and are expected to consider, legislation aimed at reducing the amount of plastic waste. Programs have included, for example, mandating certain rates of recycling and/or the use of recycled materials, imposing deposits or taxes on plastic packaging material and/or requiring retailers or manufacturers to take back packaging used for their products. That legislation, as well as voluntary initiatives similarly aimed at reducing the level of plastic wastes, could reduce the demand for certain plastic packaging, result in greater costs for plastic packaging manufacturers or otherwise impact Graham Packaging's business. Some consumer products companies, including some of Graham Packaging's customers, have responded to these governmental initiatives and to perceived environmental concerns of consumers by using containers made in whole or in part of recycled plastic. Graham Packaging operates a large HDPE recycling plant in York, Pennsylvania. To date, Graham Packaging has not been materially adversely affected by these initiatives and developments.


30


Moreover, as environmental issues, such as climate change, have become more prevalent, governments have responded, and are expected to continue to respond, with increased legislation and regulation, which could negatively affect Graham Packaging. For example, the United States Congress has in the past considered legislation to reduce emissions of greenhouse gases. In addition, the EPA is regulating certain greenhouse gas emissions under existing laws such as the Clean Air Act. A number of state and local governments in the United States have also announced their intentions to implement their own programs to reduce greenhouses gases. These initiatives may cause Graham Packaging to incur additional direct costs in complying with any new environmental legislation or regulations, such as costs to upgrade or replace equipment, as well as increased indirect costs that could get passed through to Graham Packaging resulting from its suppliers and customers also incurring additional compliance costs.

Legal Proceedings

Graham Packaging is a party to various litigation matters arising in the ordinary course of business. We cannot estimate with certainty the ultimate legal and financial liability with respect to these litigation matters but believe, based on examination of these matters, experience to date and discussions with counsel, that any ultimate liability will not be material to Graham Packaging's financial position, results of operations or cash flows.

Evergreen

Evergreen is a vertically integrated, leading manufacturer of cartons for fresh beverage products, primarily serving the juice and milk markets. Evergreen supplies integrated systems, which include cartons, spouts and filling machines. Evergreen produces liquid packaging board for its internal requirements and to sell to other fresh beverage carton manufacturers. Evergreen also produces paper products, including coated groundwood primarily for catalogs, inserts, magazine and commercial printing, and uncoated freesheet primarily for envelope, specialty and offset printing paper. Evergreen has a large customer base and operates primarily in North America. The following tables show total segment revenue by product group and revenue by geographic region for Evergreen for each of the years ended December 31, 2019, 2018 and 2017:
 
 
Revenue by product group
(In $ million)
 
2019
 
2018
 
2017
Cartons for fresh beverage products
 
812

 
799

 
774

Liquid packaging board
 
446

 
438

 
453

Paper products
 
348

 
366

 
335

Total
 
1,606

 
1,603

 
1,562

 
 
Revenue by geographic region
(In $ million)
 
2019
 
2018
 
2017
United States
 
1,408

 
1,401

 
1,372

Asia
 
164

 
167

 
155

Other
 
34

 
35

 
35

Total
 
1,606

 
1,603

 
1,562


History

Evergreen's predecessor was established in 1946 when International Paper Company ("IP") entered the beverage packaging business by acquiring Single Service, Inc. Over the years, the business was responsible for many breakthroughs in beverage carton packaging, including the introduction of PE coated cartons and barrier board technology. IP's beverage packaging business included fresh beverage converting facilities, a fresh filling machine manufacturing facility and the Pine Bluff, Arkansas mill. In January 2007, IP's beverage packaging business was acquired indirectly by Mr. Graeme Hart, our strategic owner, and renamed Evergreen. In July 2007, Evergreen acquired Blue Ridge Paper Products, Inc., an independent manufacturer of beverage packaging products. The Blue Ridge business included fresh beverage converting facilities and the Canton, North Carolina mill.

Products

Evergreen employs a business model that we refer to as “Total Packaging Solution,” which is based on providing Evergreen's customers with a single source for all of their fresh beverage carton requirements. Carton sleeves for fresh beverage products can be used with Evergreen's fresh filling machines, as well as other fresh filling machines. Carton sales represented 51% of Evergreen's revenue in 2019 and are sold under multi-year and shorter term contracts.

Cartons

Evergreen produces and sells carton sleeves for fresh beverage products and supplies spouts, caps and closures. During the filling process, the sleeve is opened, sealed at the base, filled with the beverage products and then sealed at the top of the carton. Carton sleeves can be used for a variety of fresh beverages including liquid dairy drinks, such as regular and flavored milk, and non-carbonated soft drinks, such as fresh juice, fruit-based drinks and iced tea. Cartons are also used for fresh food items, such as liquid eggs, and for non-food items, such as liquid detergents and softeners.

Evergreen has developed a variety of solutions to help beverage manufacturers differentiate their products and generate stronger brand recognition. The application of high-definition, multi-color, printed designs to the cartons gives customers the ability to differentiate their products. Furthermore,

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Evergreen's barrier board technology allows its customers to achieve longer shelf life for their products as well as protect against the loss of vitamins and other nutrients.

Evergreen’s fresh filling machines use fresh carton sleeves to produce and fill fresh cartons. Evergreen offers its customers a variety of filling machine models with different capabilities, which can be reconfigured for different package volumes, providing its customers with flexibility in their manufacturing processes. Evergreen’s fresh filling machines may be sold directly to customers or sold to a third-party finance company, which then leases the filling machines to customers.

Liquid Packaging Board

The production of liquid packaging board at Evergreen's mills in Pine Bluff, Arkansas and Canton, North Carolina allows Evergreen to be a vertically integrated producer of fresh cartons. Evergreen's Pine Bluff and Canton mills produce multiple grades of liquid packaging board, both PE coated and uncoated, for fresh cartons. Evergreen's liquid packaging board products can be broadly grouped into three categories: PE coated liquid packaging board; PE coated / co-extruded liquid packaging board (also known as barrier board); and uncoated liquid packaging board. In addition, Evergreen's mill in Canton produces cupstock for the manufacture of hot and cold cups as well as ovenable trays for the frozen food market as an alternative to plastic trays.

Paper Products

Evergreen also offers a range of paper products, including coated groundwood, which is used in catalogs, inserts, magazine and commercial printing, and uncoated freesheet primarily for envelope, specialty and offset printing paper.

Customers

Evergreen's customer base includes international companies, large national and regional customers and smaller local businesses, with its largest presence in North America. Many of Evergreen's customer sales contracts are index-based, allowing for the pass-through of input cost movements on a quarterly to annual basis. In 2019, Evergreen's top ten customers accounted for 34% of the segment's total revenue, and no single customer accounted for more than 10% of the segment's total revenue.

The Pine Bluff and Canton mills' aggregate liquid packaging board production is used by Evergreen's fresh cartons business and is also sold to external fresh carton converting customers, with whom Evergreen generally has long-standing relationships. In addition, Evergreen sells liquid packaging board to Pactiv Foodservice and other customers, who produce ovenable trays and cupstock.

Evergreen's coated groundwood customers consist primarily of catalog and magazine publishers. Evergreen's uncoated freesheet customers consist primarily of envelope converters, specialty paper producers and commercial printers. Evergreen sells both directly and through paper brokers in the coated groundwood and uncoated freesheet markets.

Competition

Evergreen operates primarily in markets with a limited number of key global competitors. These competitors include Tetra Pak International S.A., Domtar Corporation, Catalyst Paper Corporation, Stora Enso Oyj and Elopak. The fresh carton market is fairly consolidated. We believe Evergreen is the only major market participant that provides vertically integrated liquid packaging board as well as complete systems consisting of cartons, filling machines and spouts. We believe Evergreen is the largest participant in the fresh cartons market measured by volume based on our analysis of industry data.

We believe Evergreen is the largest producer of liquid packaging board for fresh cartons based on our analysis of industry data. Evergreen is a relatively small producer of coated groundwood within a concentrated North American coated papers market. Evergreen is also a small producer of uncoated freesheet within a concentrated market. Evergreen also competes in the cupstock and ovenable packaging board markets.

Changes within the paper industry have occurred and may continue to occur that may adversely affect Evergreen's business and financial performance. These changes include the consolidation of producers of products that compete with us, consolidation within the distribution channels for our products, and the reduced demand for end-products made from some of our products, including magazines, catalogs and envelopes.

Marketing and Sales

Evergreen's sales and marketing staff coordinates and performs all customer interaction activities, including sales, marketing and technical services. Evergreen reaches its large and diversified customer base primarily through a direct field sales force.

Evergreen's customer service representatives are responsible for processing sales orders, expediting production and liaising with customers on order status. Machine service technicians, paper technicians and field service engineers work closely with key account managers to satisfy customers' needs.

Evergreen has a marketing and new product development team focused on leveraging its Total Packaging Solution model and creating new, value-added products in current and adjacent markets.

Seasonality

Evergreen's operations are moderately seasonal. Evergreen's customers are principally engaged in providing products that are generally less sensitive to seasonal effects, although Evergreen does experience some seasonality as a result of increased consumption of milk by school children during the North American academic year. Evergreen therefore typically experiences a greater level of carton product sales in the first and fourth quarters when North American schools are in session.


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Manufacturing

Evergreen operates two integrated pulp and paper mills in North America and ten sleeve production plants globally, including six in the United States, three in East Asia and one in Central America. Evergreen also jointly controls three joint ventures in the Middle East/North Africa. Evergreen's manufacturing operations primarily consist of production of paper and packaging cartonboard, manufacturing and assembly of filling machines and parts and production of fresh carton sleeves that are used with Evergreen's machines to create fresh carton containers for its customers' beverage products. Fresh carton sleeves are also shipped to Evergreen's customers for filling.

Evergreen’s mills are vertically integrated pulp and paper manufacturing facilities that have their own power generation plant, bleached hardwood and softwood “kraft” pulp lines and extrusion capabilities. The Pine Bluff mill houses one liquid packaging board machine and one coated groundwood machine. In addition, the Pine Bluff mill has a groundwood pulp line to supply the coated groundwood machine. The Canton mill houses one liquid packaging board machine and three uncoated freesheet machines.

The manufacture and assembly of fresh filling machines takes place at Evergreen’s manufacturing facilities in Cedar Rapids, Iowa, and Shanghai, China. Evergreen’s filling machines are mainly utilized to fill cartons of non-carbonated soft drinks, such as juice and juice drinks, and liquid dairy products. Evergreen both manufactures and outsources components used in the production of its fresh filling machines. The majority of Evergreen’s component suppliers are located near the Cedar Rapids facility. In addition, Evergreen sources some components from China.

Raw Materials and Suppliers

In 2019, the total value of raw materials consumed by Evergreen was $560 million and represented 42% of Evergreen's total cost of sales, excluding depreciation and amortization.

Evergreen internally sources its liquid packaging board requirements from its paper mills in Pine Bluff and Canton. To produce cartonboard at its mills, Evergreen sources wood and resin from a variety of North American suppliers. We believe Evergreen's relationships with its suppliers are satisfactory.

The prices of Evergreen’s raw materials fluctuate in conjunction with market movements in commodities. Raw wood and wood chips are typically purchased from sources close to the mills, and as a result, prices are established based on local conditions. Potential price fluctuations can occur due to poor weather conditions or insect infestation, but are infrequent due to the techniques and practices of lumber extractors. Resin prices can fluctuate significantly with fluctuations in crude oil and natural gas prices, as well as changes in refining capacity and the demand for other petroleum-based products. In order to minimize the impact of price fluctuations, Evergreen uses price hedging arrangements for purchases of energy and single and multi-year agreements that provide for fixed prices or prices that escalate based on inflation or published index movements.

Evergreen manages its relationships with suppliers through a central supply-procurement system, which ensures that Evergreen receives a continuous supply of materials using vendor-managed inventory and consignment stocking. Evergreen reviews supplier developments in regular business review meetings.

Quality Management

Meeting customers' complex requirements and technical specifications requires a strong commitment to quality and attention to detail. Evergreen is committed to a quality management philosophy that aims to achieve continuous improvement in all stages of the production process through the involvement of management, customers and employees. Evergreen uses a stringent technique of hazard analysis and critical control points to identify critical aspects of quality management, as well as methods and tools to identify key areas for improvement that result in a reduction of waste and downtime, at all of Evergreen's facilities and those of its customers.

Intellectual Property

Evergreen has a significant number of registered patents and registered trademarks. Evergreen uses internal and external resources to manage its intellectual property portfolio and, where appropriate, defends its intellectual property rights throughout the world. Evergreen also relies on unpatented proprietary know-how and trade secrets and employs various methods including confidentiality agreements with employees and consultants to protect its intellectual property. Additionally, Evergreen has licensed, and may license in the future, patents, trademarks, trade secrets and similar intellectual property to third parties. Evergreen attempts to contractually ensure that its intellectual property and similar proprietary rights are protected when entering into business relationships. While in the aggregate Evergreen's patents are of material importance to Evergreen's business, Evergreen believes that its business is not dependent upon any single patent or group of related patents.

Other than licenses for commercially available software, Evergreen does not believe that any of its licenses from third parties are material to its business taken as a whole. Evergreen does not believe that any of its licenses to intellectual property rights granted to third parties are material to its business taken as a whole.

New Product Development

Evergreen's product innovation aims to deliver new products for both customers and end-use consumers and to generate a percentage of future revenue from new products. The innovation process follows a traditional stage gate development process. One of Evergreen's primary competitive advantages in fiber-based cartons is offering a total system solution — from board manufacture to efficient filling machines. Therefore, new carton product design teams include expertise from equipment, converting and the mills. A key focus for innovation is leveraging leading board and barrier technologies to adjacent markets, such as water and dry goods.

Employees

As of December 31, 2019, Evergreen employed approximately 3,800 people. Approximately 61% of Evergreen's employees are covered by collective labor agreements. Evergreen has not experienced any significant union-related work stoppages. We believe Evergreen's relationships with its employees and labor unions are satisfactory.

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Regulatory

As Evergreen's products are used in food and beverage packaging, Evergreen's business is subject to regulations governing products that may contact food in virtually every country where it has operations. Future regulatory and legislative change can affect the economics of Evergreen's business activities, lead to changes in operating practices, affect its customers and influence the demand for and the cost of providing products and services to its customers. Evergreen has adopted compliance programs and procedures designed to achieve compliance with applicable laws and regulations, and believes these programs and procedures are generally effective. However, because of the complexity of these laws and regulations, variance in production inputs and efficiencies, and the multinational scope of Evergreen's business, compliance cannot be guaranteed.

Evergreen is subject to various national, state, local, foreign and international environmental, health and safety laws, regulations and permits. Among other things, these requirements regulate the emission or discharge of materials into the environment, govern the use, storage, treatment, disposal and management of hazardous substances and wastes, protect the health and safety of Evergreen's employees, regulate the materials used in and the recycling of products and impose liability, which can be strict, joint and several, for the costs of investigating and remediating, and damages resulting from, present and past releases of hazardous substances related to Evergreen's current and former sites, as well as at third party sites where Evergreen or its predecessors have sent hazardous waste for disposal.

Moreover, as environmental issues, such as climate change, have become more prevalent, governments have responded, and are expected to continue to respond, with increased legislation and regulations, which could negatively affect Evergreen. These and other initiatives may cause Evergreen to incur additional direct costs in complying with any new environmental legislation or regulations, such as costs to upgrade or replace equipment, as well as increased indirect costs that could get passed through to Evergreen resulting from its suppliers and customers also incurring additional compliance costs.

Legal Proceedings

Evergreen is a party to various litigation matters, including environmental matters, arising in the ordinary course of business. We cannot estimate with certainty the ultimate legal and financial liability with respect to these litigation and environmental matters but believe, based on examination of these matters, experience to date and discussions with counsel, that any ultimate liability will not be material to Evergreen's financial position, results of operations or cash flows.

Reynolds Consumer Products

Reynolds Consumer Products is a leading manufacturer of branded and store brand consumer products such as aluminum foil, wraps, trash bags, food storage bags and disposable tableware and cookware. These products are typically used by consumers in their homes and are sold through a variety of retailers. Reynolds Consumer Products sells many of its products under well known brands such as Reynolds® and Hefty®, and also offers store brand products. Reynolds Consumer Products has a large customer base and operates primarily in North America. Virtually all revenue for Reynolds Consumer Products comes from the U.S. and Canada. The following table shows total segment revenue by product group for Reynolds Consumer Products for each of the years ended December 31, 2019, 2018 and 2017:
 
 
Revenue by product group
(In $ million)
 
2019
 
2018
 
2017
Waste and storage products
 
1,203

 
1,227

 
1,157

Cooking products
 
1,078

 
1,160

 
1,071

Tableware
 
751

 
757

 
731

Total
 
3,032

 
3,144

 
2,959


History

The Reynolds Consumer Products business is primarily the result of combining the Reynolds aluminum foil business and the Hefty trash bag, food storage bag and tableware business. Reynolds Metals Company was founded in 1919 as the U.S. Foil Company. In 1926, the company began producing aluminum foil for packaging. In 1947, the company introduced its most famous product, Reynolds Wrap Aluminum Foil. The store brand plastic wraps, bags and container business was founded in 1961 under the Presto name and was acquired by Reynolds Metals Company in 1988. In 2000, Alcoa merged with Reynolds Metals Company. In 2008, the Reynolds consumer products business was acquired indirectly by Mr. Graeme Hart, our strategic owner.

The Hefty business was developed by Mobil Plastics in the 1960s, starting with its best known product, the Hefty trash bag, and adding other plastic and aluminum products over time. In 1995, Tenneco Packaging Inc. acquired Mobil Plastics. In November 1999, Tenneco Packaging Inc. (which was renamed Pactiv Corporation) was spun-off to Tenneco Inc.’s stockholders. In November 2010, we acquired Pactiv and integrated the Hefty consumer products and Reynolds consumer products businesses to form the Reynolds Consumer Products segment.

On February 4, 2020, we distributed our interest in the operations that represented the Reynolds Consumer Products segment to our shareholder, PFL. The distribution of Reynolds Consumer Products will trigger the presentation of this operation in our consolidated financial statements as a discontinued operation as of February 4, 2020, and this change in presentation will be reflected in our interim unaudited condensed consolidated financial statements for the three month period ending March 31, 2020.

Products

Reynolds Consumer Products' portfolio of products consists of three product groups: waste and storage products, cooking products and tableware products. These products are typically used by consumers in their homes and are sold through a variety of retailers, including grocery stores, mass merchandisers, warehouse clubs, drug stores, discount chains and military channels.

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Waste and Storage

Waste and storage products includes branded and store brand plastic trash bags and food storage bags. The branded products are sold under such brand names as Hefty® Ultra Strong™, Hefty® Strong Trash Bags and Hefty® Slider Bags.

Cooking

Cooking products includes branded and store brand aluminum foil and disposable cookware, and the branded products are sold under the Reynolds® and Hefty® E-Z Foil® brands in the United States, under the Diamond® brand internationally and under the ALCAN® brand in Canada.

Tableware

Tableware products includes branded and store brand foam, plastic, molded fiber and pressed paperboard disposable tableware, including disposable plates, cups, bowls, cutlery and straws. Most of Reynolds Consumer Products' tableware is manufactured by Pactiv Foodservice. Branded products are sold under the Hefty® name.

Customers

Reynolds Consumer Products' customer base includes leading grocery stores, mass merchants, warehouse clubs, discount chains, dollar stores, drug stores, home improvement stores, military outlets and eCommerce retailers. Through its sales organization, Reynolds Consumer Products is able to manage its relationships with customers at the national, regional and local levels, depending on their needs. Reynolds Consumer Products also manufactures Pactiv Foodservice's aluminum product offerings. In 2019, Reynolds Consumer Products' top ten customers accounted for 69% of the segment's total revenue, with one customer accounting for 43% of the segment's total revenue.

Competition

Reynolds Consumer Products faces significant competition in all of its product lines from numerous national and regional companies of various sizes and cost structures. These competitors include The Clorox Company, S.C. Johnson & Sons, Inc., Poly-America, Handi-Foil Corporation, Republic Plastics, Ltd., Trinidad Benham Corporation, Inteplast Group, Ltd. and Dart Container Corporation. The U.S. consumer food packaging market is relatively mature and highly competitive, with Reynolds Consumer Products being one of the few key participants in North America. Competitors include consumer product companies, including large and well-established multinational companies and smaller regional and local companies, as most of the products compete with other widely advertised brands within each product category and with store brand products.

Reynolds Consumer Products benefits from the strength of its brands, a differentiated suite of store brand products, as well as significant capital investment in its manufacturing facilities.

Reynolds Consumer Products competes in a marketplace dominated by large retailers, including grocery stores, mass-merchants, warehouse clubs, discount stores and drug stores, and changes in the strategy or structure of our major retailer customers, such as store and inventory reductions and retailer consolidations, have increased competitive pressures. The rapid growth of these large retailers, together with changes in consumer purchasing patterns, have contributed to the formation of dominant multi-category retailers that have strong negotiating power with suppliers. Current trends among such retailers include fostering high levels of competition among suppliers, demanding innovative new products from suppliers and requiring suppliers to maintain or reduce product prices and deliver products within shorter lead times. Other trends include consumers shifting purchasing channels by moving away from grocery stores and towards warehouse clubs and mass-merchants and retailers importing products directly from foreign sources and sourcing and selling products under their own store brands, which compete with the Reynolds and Hefty branded products.

Marketing and Sales

Reynolds Consumer Products employs sales professionals organized by product type and customer channel. In addition to the sales professionals, the sales organization includes customer service representatives, marketing teams and an internal logistics and transportation team. Reynolds Consumer Products also utilizes third-party brokers for selected products and accounts. Reynolds Consumer Products provides its customers with category management expertise including assortment, pricing and promotion strategies, supported by innovation and consumer-focused insights.

Seasonality

Reynolds Consumer Products' operations are moderately seasonal with higher levels of sales of cooking and tableware products around major U.S. holidays. Sales of cooking products are typically higher in the fourth quarter of the year, primarily due to the holiday use of Reynolds Wrap foil, Reynolds Oven Bags and Reynolds Parchment Paper. Sales of tableware products are higher in the second quarter of the year due to outdoor summer holiday use of disposable tableware plates, cups and bowls. Sales of waste and storage products are slightly higher in the second half of the year in North America, coinciding with the outdoor fall cleanup season.

Manufacturing

Reynolds Consumer Products operates 15 manufacturing facilities strategically located across the United States and one manufacturing facility located in Canada to optimize distribution and minimize lead times and freight costs. At eight of its facilities, Reynolds Consumer Products also manufactures products for Pactiv Foodservice. In addition, Pactiv Foodservice manufactures products for Reynolds Consumer Products at 17 of its facilities.

Raw Materials and Suppliers

Reynolds Consumer Products' principal raw materials include plastic resins, mainly PE and PS, and aluminum. In 2019, the total value of raw materials consumed by Reynolds Consumer Products was $1,308 million and represented 62% of the segment's total cost of sales, excluding

35


depreciation and amortization. Plastic resins accounted for 42% of raw material costs for the year, while aluminum and other metal-related components collectively accounted for 22%. Reynolds Consumer Products' other raw materials include products purchased and resold as well as paper, corrugated carton and cases. Reynolds Consumer Products is sensitive to price movements of raw materials, mainly resin and aluminum, and to energy-related cost movements, particularly those that affect transportation and utility costs. Aluminum prices have been historically volatile as aluminum is a cyclical commodity with prices subject to global market factors. Resin prices have also historically fluctuated with fluctuations in crude oil and natural gas prices, as well as changes in refining capacity and the demand for other petroleum-based products. To minimize the impact of price fluctuations, Reynolds Consumer Products enters into hedging agreements for some resin and aluminum purchases. Reynolds Consumer Products also enters into hedging agreements at the request of certain customers who want to mitigate the risk of changes in raw material costs in their purchase pricing.

Centralized purchasing enables Reynolds Consumer Products to leverage the global purchasing power of its operations and reduces its dependence on any one supplier. Reynolds Consumer Products sources its raw materials from a variety of suppliers and maintains multiple suppliers for each input. Reynolds Consumer Products typically has one-year contracts with resin suppliers and multi-year contracts with aluminum suppliers, which has historically provided Reynolds Consumer Products with a steady supply of raw materials. Reynolds Consumer Products has not historically experienced any significant interruptions of key raw material supplies. We believe Reynolds Consumer Products' relationships with its suppliers are satisfactory.

Quality Management

Reynolds Consumer Products' research and development resources primarily facilitate branded innovation and support store brand growth. Reynolds Consumer Products also has continuous improvement programs focused on cost reduction and productivity improvements and existing programs in lean manufacturing systems that allow for better inventory management. Reynolds Consumer Products' store brand products are subject to a high degree of quality control and many have “national brand equivalent” certification from third parties. Reynolds Consumer Products' integrated aluminum foil production is also designed to achieve the highest degree of product safety through its disciplined control of aluminum ingot grade and retail traceability of products. Supplier controls that are in place throughout Reynolds Consumer Products' facilities require product and process controls, a safe and healthy work environment, environmental compliance and product safety. Reynolds Consumer Products reviews its facilities at least annually for full compliance, and appropriate remediation procedures are taken if necessary.

Intellectual Property

Reynolds Consumer Products has a significant number of registered patents and registered trademarks, including Reynolds® and Hefty®, as well as several copyrights, which, along with trade secrets and manufacturing know-how, help support its ability to add value within the market and sustain its competitive advantages. Reynolds Consumer Products has invested a considerable amount of resources in developing proprietary products and manufacturing capabilities, and it employs various methods, including confidentiality and non-disclosure agreements with third parties, employees and consultants, to protect its intellectual property. While in the aggregate Reynolds Consumer Products' patents are of material importance to Reynolds Consumer Products' business, Reynolds Consumer Products believes that its business is not dependent upon any single patent or group of patents.

Other than licenses for commercially available software, Reynolds Consumer Products does not believe that any of its licenses from third parties are material to its business taken as a whole. Reynolds Consumer Products does not believe that any of its licenses to intellectual property rights granted to third parties are material to its business taken as a whole.

New Product Development

New product innovation is an important component of Reynolds Consumer Products' business strategy. Reynolds Consumer Products and Pactiv Foodservice operate a research and development center for new materials technology in Canandaigua, New York, and a customer innovation center in Bedford Park, Illinois.

Over the years, Reynolds Consumer Products has focused on developing innovative products that address consumers' unmet needs, as well as developing products that replace or upgrade existing items. Reynolds Consumer Products has a strong history of adding innovative features to its products, such as the slider closure on food storage bags, the “gripper” feature on trash bags, an unscented odor block feature to trash bags and the non-stick coating added to the foil in its Reynolds Wrap non-stick product line.

Research and development costs were $33 million, $29 million and $27 million for the years ended December 31, 2019, 2018 and 2017, respectively.

Employees

As of December 31, 2019, Reynolds Consumer Products employed approximately 5,200 people located primarily in its U.S. and Canada manufacturing facilities. Approximately 18% of Reynolds Consumer Products' employees are covered by collective labor agreements. Reynolds Consumer Products has not experienced any significant union-related work stoppages over the last 13 years. We believe Reynolds Consumer Products' relationships with its employees and labor unions are satisfactory.

Regulatory

As many of Reynolds Consumer Products' products are used in food packaging, Reynolds Consumer Products' business is subject to regulations governing products that may contact food in virtually every country where it has operations. Future regulatory and legislative change can affect the economics of Reynolds Consumer Products' business activities, lead to changes in operating practices, affect its customers and influence the demand for and the cost of providing products and services to its customers. Reynolds Consumer Products has implemented compliance programs and procedures designed to achieve compliance with applicable laws and regulations, and believes these programs and procedures are generally effective. However, because of the complexity of these laws and regulations and the multinational scope of Reynolds Consumer Products' business, compliance cannot be guaranteed.

Reynolds Consumer Products is subject to various national, state, local, foreign and international environmental, health and safety laws, regulations and permits. Among other things, these requirements regulate the emission or discharge of materials into the environment, govern the use, storage,

36


treatment, disposal and management of hazardous substances and wastes, protect the health and safety of Reynolds Consumer Products' employees, regulate the materials used in and the recycling of products and impose liability, which can be strict, joint and several, for the costs of investigating and remediating, and damages resulting from, present and past releases of hazardous substances related to Reynolds Consumer Products' current and former sites, as well as at third party sites where Reynolds Consumer Products or its predecessors have sent hazardous waste for disposal. Many of Reynolds Consumer Products' manufacturing facilities require environmental permits, such as those limiting air emissions. Compliance with these permits can require capital investment and, in some cases, could limit production.

In addition, a number of governmental authorities, both in the United States and abroad, have considered, and are expected to consider, legislation aimed at reducing the amount of plastic waste. Programs have included banning certain types of products, mandating certain rates of recycling and/or the use of recycled materials, imposing deposits or taxes on plastic bags and packaging material and requiring retailers or manufacturers to take back packaging used for their products.

Moreover, as environmental issues, such as climate change, have become more prevalent, governments have responded, and are expected to continue to respond, with increased legislation and regulation, which could negatively affect Reynolds Consumer Products. For example, the United States Congress has in the past considered legislation to reduce emissions of greenhouse gases. In addition, the EPA is regulating certain greenhouse gas emissions under existing laws such as the Clean Air Act. A number of state and local governments in the United States have also announced their intentions to implement their own programs to reduce greenhouses gases. These initiatives may cause Reynolds Consumer Products to incur additional direct costs in complying with any new environmental legislation or regulations, such as costs to upgrade or replace equipment, as well as increased indirect costs that could get passed through to Reynolds Consumer Products resulting from its suppliers and customers also incurring additional compliance costs.

Legal Proceedings

Reynolds Consumer Products is a party to various litigation matters arising in the ordinary course of business. We cannot estimate with certainty the ultimate legal and financial liability with respect to these litigation matters but believe, based on examination of these matters, experience to date and discussions with counsel, that any ultimate liability will not be material to Reynolds Consumer Products' financial position, results of operations or cash flows.


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Organizational Structure

We are a holding company that conducts its business operations through its controlled entities. Our significant controlled entities, their country of incorporation and the proportion of ownership and voting interest held, directly or indirectly, in them by us, are set out in note 22 to our audited consolidated financial statements included elsewhere in this annual report.

The following diagram sets forth a summary of our corporate structure and certain financing arrangements as of the date of this filing.

reystructurechartq42019a02.jpg

Property, Plants and Equipment

Our business segments operate through a number of offices, manufacturing facilities and warehouses throughout the world. We generally own or lease our facilities under long-term leases. Some of our principal facilities are subject to mortgages and other security interests granted to secure indebtedness with certain financial institutions. We believe that our manufacturing facilities are well maintained, suitable for their respective operations and provide sufficient capacity to meet reasonably foreseeable production requirements.


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ITEM 4A. UNRESOLVED STAFF COMMENTS.

None.

ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS.

The following discussion should be read in conjunction with “Item 4. Information on RGHL — Business Overview” and our historical financial statements and the notes thereto, in each case included elsewhere in this annual report. The following discussion and analysis also includes forward-looking statements. These forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results to differ materially from those expressed or implied by the forward-looking statements with respect to our actual results. Factors that could cause or contribute to these differences include, but are not limited to, those discussed below and elsewhere in this annual report. See “Forward-Looking Statements” and “Item 3. Key Information — Risk Factors.”

Key Factors Influencing Our Financial Condition and Results of Operations

Substantial Leverage

The four reportable segments in which we operate have all been acquired through a series of transactions. Our results of operations, financial position and cash flows are significantly impacted by the effects of these acquisitions, which were financed primarily through borrowings. In addition, from time to time, we refinance our borrowings which also can have a significant impact on our results of operations.

As of December 31, 2019, our total indebtedness of $10,685 million ($11,076 million as of December 31, 2018) was comprised of the outstanding principal amounts of our borrowings. As reflected in our consolidated statement of financial position, we had total borrowings of $10,640 million, consisting of total indebtedness net of unamortized transaction costs, original issue discounts and embedded derivatives. As of the date of this filing, our total outstanding indebtedness was $7,505 million. For more information regarding our external borrowings and debt repayments subsequent to December 31, 2019, refer to notes 16 and 26, respectively, of the RGHL Group's audited consolidated financial statements included elsewhere in this annual report. Our future results of operations, including our net financial expenses, will be significantly affected by our substantial indebtedness. The servicing of this indebtedness has had and will continue to have an impact on our cash flows and cash balance. For more information, refer to “— Liquidity and Capital Resources.”

Raw Materials and Energy Prices

Our results of operations, and the gross profits corresponding to each of our segments, are impacted by changes in the costs of our raw materials and energy prices. The primary raw materials used to manufacture our products are plastic resins, aluminum, fiber (principally raw wood and wood chips) and paperboard (principally cartonboard and cupstock). We also use commodity chemicals, steel and energy, including fuel oil, electricity, natural gas and coal, to manufacture our products.

Principal raw materials used by each of our segments are as follows (in order of cost significance):

Reynolds Consumer Products — resin, aluminum

Pactiv Foodservice — resin, paperboard, aluminum

Graham Packaging — resin

Evergreen — fiber, resin

The cost of our raw materials can also be affected by tariffs, trade sanctions and similar matters that affect international commerce. For instance, the U.S. government has announced tariffs on various materials, including certain types of resins. In response to these actions, other governments have proposed or imposed tariffs on U.S. goods. The impact of these actions, and possible future actions, on our business remains uncertain. At this time, we do not believe that these matters as they currently exist will have a material adverse effect on our business, financial condition or results of operations, but this has been a rapidly changing area and the full effect of these actions may not be known for some time.

Historical index prices of resin, aluminum and paperboard from December 31, 2017 through December 31, 2019 are shown in the charts below. These charts present index prices and do not represent the prices at which we purchased these raw materials.

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rghlye2019resincharta04.jpg

Source: IHS Inc.

Resin prices can fluctuate significantly with fluctuations in crude oil and natural gas prices, as well as changes in refining capacity and the demand for other petroleum-based products.

rghlye2019aluminumcharta04.jpg

Source: Platts Metal Weekly

Aluminum prices can fluctuate significantly as aluminum is a cyclical commodity with prices subject to global market factors. These factors include speculative activities by market participants, production capacity, strength or weakness in key end-markets such as housing and transportation, political and economic conditions and production costs in major production regions.

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rghlye2019papercharta04.jpg

Source: RISI Inc.

The prices of cupstock and cartonboard may fluctuate due to external conditions such as weather, product scarcity, currency and commodity market fluctuations and changes in governmental policies and regulations.

Purchases of most of our raw materials are based on negotiated rates with suppliers, which are tied to published indices. Typically, we do not enter into long-term purchase contracts that provide for fixed quantities or prices for our principal raw materials. For Evergreen, most raw materials and other input costs are purchased on the spot market.

Changes in raw material prices impact our results of operations. Revenue is directly impacted by changes in raw material costs as a result of raw material cost pass-through mechanisms in many of the customer pricing agreements entered into by most of our segments. Generally, the contractual price adjustments do not occur simultaneously with commodity price fluctuations, but rather on a mutually agreed upon schedule. Due to differences in timing between purchases of raw materials and sales to customers, there is often a lead-lag effect, during which margins are negatively impacted in periods of rising raw material costs and positively impacted in periods of falling raw material costs. Historically, the average lag time in implementing raw material cost pass-through mechanisms (where contractually permitted) has been approximately three months.

We use price increases, where possible, to mitigate the effects of raw material cost increases for customers that are not subject to raw material cost pass-through agreements.

The prices for some of our raw materials, particularly resins and aluminum, have fluctuated significantly in recent years. Prices for raw wood and wood chips have fluctuated less than the prices of resins and aluminum. Raw wood and wood chips are typically purchased from sources close to our mills and, as a result, prices are established locally based on factors such as local competitive conditions and weather conditions.

Management expects continued volatility in raw material prices and such volatility may impact our results of operations. Although we continue to take steps to minimize the impact of the volatility of raw material prices through commodity hedging, fixed supplier pricing, reducing the lag time in contractual raw material cost pass-through mechanisms and entering into additional indexed customer contracts that include raw material cost pass-through provisions, these efforts may prove to be inadequate.

Our segments are also sensitive to energy-related cost movements, particularly those that affect transportation and utility costs. In particular, our Evergreen segment is susceptible to price fluctuations in natural gas, as Evergreen incurs significant natural gas costs to convert raw wood and wood chips to paper products and liquid packaging board. Historically, we have been able to mitigate the effect of higher energy-related costs with productivity improvements and other cost reductions. Further, energy costs (excluding transportation costs) are generally included in Evergreen's indexed customer contracts.

Commodity Hedging Activities

We are exposed to commodity and other price risk principally from the purchase of resin, natural gas, electricity, raw cartonboard, aluminum, diesel and steel. From time to time we enter into hedging agreements for some of our raw materials and energy sources to minimize the impact of price fluctuations. We use various strategies to manage cost exposures on certain raw material purchases with the objective of obtaining more predictable costs for these commodities. We generally enter into commodity financial instruments or derivatives to hedge commodity prices primarily related to resin, aluminum, diesel and natural gas. For additional details related to our commodity hedging activities, refer to “— Quantitative and Qualitative Disclosures about Market Risk — Commodity Risk.”


41


The realized gains or losses arising from derivative instruments are recognized in cost of sales while the unrealized gains or losses associated with derivative instruments are recognized in net other income (expenses).

While we currently employ the hedging strategy discussed above, we may decide to increase or decrease our level of hedging depending on management's assessment of current market conditions.

Effect of Currency Fluctuations

We operate in multiple countries and transact business in a range of currencies. Reynolds Consumer Products, Pactiv Foodservice and Evergreen, which predominantly operate in the United States, are less affected by currency fluctuations than Graham Packaging. In addition to the U.S. dollar, the currencies in which our transactions are primarily denominated are the euro, Mexican peso, New Zealand dollar and Canadian dollar, and to a lesser extent the Brazilian real, Chinese yuan renminbi, Korean won, Polish zloty and Taiwanese dollar. Exchange rate fluctuations can therefore either increase or decrease revenue and expense items when reported in U.S. dollars. For most financial periods, the impact on revenue due to fluctuations in exchange rates has been partially offset by the impact on expenses, as most of our business units incur revenue and expenses in their respective local currencies, creating a natural hedge to currency fluctuations. From time to time we enter into hedging agreements for some of our foreign currency transactions to minimize the impact of foreign currency pricing changes.

Seasonality

Our business is impacted by seasonal fluctuations. For additional information, refer to each segment's seasonality discussion at “Item 4. Information on RGHL — Business Overview.”


42


Results of Operations

The following discussion should be read in conjunction with the RGHL Group's audited consolidated financial statements included elsewhere in this annual report. Detailed comparisons of revenue and results are presented in the discussions of the operating segments, which follow the RGHL Group results discussion.

On December 20, 2019, the RGHL Group completed the sale of its North American and Japanese closures businesses. These operations represent substantially all of our former Closures segment. The RGHL Group received preliminary net proceeds of $611 million. These proceeds are subject to further adjustment associated with differences between estimated and final amounts as of completion, in respect of balances such as cash, indebtedness and working capital, each as defined in the sale agreement. The results of the North American and Japanese closures businesses have been presented as discontinued operations for all periods presented.

The following discussion includes the results of Reynolds Consumer Products, which was distributed to its shareholder on February 4, 2020. The operations of Reynolds Consumer Products will be presented as discontinued operations in the RGHL Group's interim unaudited condensed consolidated financial statements for the three month period ending March 31, 2020.

Year Ended December 31, 2019 Compared with the Year Ended December 31, 2018

RGHL Group
 
 
For the year ended December 31,
 
 
 
 
(In $ million, except for %)
 
2019
 
% of revenue
 
2018(2)
 
% of revenue
 
Change
 
% change
Revenue
 
9,716

 
100
 %
 
10,059

 
100
 %
 
(343
)
 
(3
)%
Cost of sales
 
(7,735
)
 
(80
)%
 
(8,086
)
 
(80
)%
 
351

 
4
 %
Gross profit
 
1,981

 
20
 %
 
1,973

 
20
 %
 
8

 
 %
Selling, marketing and distribution expenses/General and administration expenses
 
(1,028
)
 
(11
)%
 
(899
)
 
(9
)%
 
(129
)
 
(14
)%
Net other income (expenses)
 
(130
)
 
(1
)%
 
(277
)
 
(3
)%
 
147

 
53
 %
Profit from operating activities
 
823

 
8
 %
 
797

 
8
 %
 
26

 
3
 %
Financial income
 
145

 
1
 %
 
41

 
 %
 
104

 
NM

Financial expenses
 
(651
)
 
(7
)%
 
(865
)
 
(9
)%
 
214

 
25
 %
Net financial income (expenses)
 
(506
)
 
(5
)%
 
(824
)
 
(8
)%
 
318

 
39
 %
Profit (loss) from continuing operations before income tax
 
317

 
3
 %
 
(27
)
 
 %
 
344

 
NM

Income tax (expense) benefit
 
(134
)
 
(1
)%
 
(2
)
 
 %
 
(132
)
 
NM

Profit (loss) from continuing operations
 
183

 
2
 %
 
(29
)
 
 %
 
212

 
NM

Profit (loss) from discontinued operations, net of income tax
 
(77
)
 
NM

 
24

 
NM

 
(101
)
 
NM

Profit (loss) for the year
 
106

 
NM

 
(5
)
 
NM

 
111

 
NM

Depreciation and amortization from continuing operations
 
698

 
7
 %
 
615

 
6
 %
 
83

 
13
 %
RGHL Group Adjusted EBITDA(1) from continuing operations
 
1,825

 
19
 %
 
1,771

 
18
 %
 
54

 
3
 %
RGHL Group Adjusted EBITDA from discontinued operations
 
105

 
NM

 
101

 
NM

 
4

 
4
 %
Total Adjusted EBITDA
 
1,930

 
NM

 
1,872

 
NM

 
58

 
3
 %

(1)
Refer to page 3 under the heading "Non-GAAP Financial Measures" for additional information related to this financial measure.
(2)
The information presented has been revised to reflect the North American and Japanese closures businesses as discontinued operations. Refer to notes 2.6 and 7 of the RGHL Group’s audited consolidated financial statements included elsewhere in this annual report for additional information.

Revenue. Revenue decreased by $343 million, or 3%. The decrease was primarily due to lower sales volume, the impact of business divestitures, an unfavorable foreign currency impact and lower pricing primarily due to lower costs passed through to customers.

Cost of Sales. Cost of sales decreased by $351 million, or 4%. The decrease was primarily due to lower raw material costs, lower sales volume, the impact of business divestitures and a favorable foreign currency impact, partially offset by higher manufacturing costs. The adoption of the new lease accounting standard, IFRS 16 “Leases,” resulted in a portion of operating lease expense now being classified as depreciation expense (refer to note 3.7 of the RGHL Group’s audited consolidated financial statements included elsewhere in this annual report).

Selling, Marketing and Distribution Expenses/General and Administration Expenses. Selling, marketing and distribution expenses and general and administration expenses increased by $129 million, or 14%. The increase was primarily due to higher employee-related costs of $64 million and higher strategic review costs of $40 million. The strategic review costs have been included in the RGHL Group’s Adjusted EBITDA calculation.

Net Other. Net other expenses decreased by $147 million to $130 million. The decrease was primarily due to lower asset impairment charges of $139 million, mainly due to a goodwill impairment charge of $206 million at Graham Packaging in the prior year compared to impairment charges of $67 million in the current year at the remaining closures operations. In addition, the decrease was due to a favorable change of $35 million in unrealized gains and losses on derivatives. These decreases were partially offset by an unfavorable change of $38 million in gains and losses on

43


sale of businesses and non-current assets. These items have been included in the RGHL Group’s Adjusted EBITDA calculation. For more information regarding impairment charges, refer to note 14 of the RGHL Group's audited consolidated financial statements included elsewhere in this annual report.

Net Financial Income (Expenses). Net financial expenses decreased by $318 million to $506 million. The decrease was primarily due to a favorable change of $361 million in the fair value of derivatives, partially offset by a $31 million increase in interest expense, substantially due to the new lease accounting standard, and a $24 million unfavorable foreign currency impact.

Income Tax. We recognized income tax expense of $134 million on profit before income tax of $317 million (an effective tax rate of 42%) compared to income tax expense of $2 million on a loss before income tax of $27 million (an effective tax rate of (7)%) for the prior year. Factors that have contributed to the effective tax rate include the mix of book income and losses taxed at varying rates among the jurisdictions and the inability to realize tax benefits for certain temporary differences and tax losses and other non-deductible expenses, partially offset by the tax benefit in 2019 for refunds associated with foreign tax credits. For further information, including a reconciliation of income tax expense, refer to note 10 of the RGHL Group's audited consolidated financial statements included elsewhere in this annual report.

Profit (Loss) from Discontinued Operations, Net of Income Tax. Profit (loss) from discontinued operations, net of income tax, which represents the results of the North American and Japanese closures businesses, changed by $101 million, resulting in loss from discontinued operations of $77 million. The change was primarily due to an $85 million loss on sale, a $33 million goodwill impairment charge and lower pricing primarily due to lower costs passed through to customers, partially offset by lower raw material costs. For more information regarding discontinued operations, refer to notes 2.6 and 7 of the RGHL Group’s audited consolidated financial statements included elsewhere in this annual report.

Depreciation and Amortization. Depreciation and amortization increased by $83 million. The increase was primarily due to the impact of the new lease accounting standard.

Impact of IFRS 16. The adoption of the new lease accounting standard, IFRS 16, has resulted in a portion of operating lease expense being classified as depreciation and interest expense. Under the transition method chosen by the RGHL Group, the comparative information has not been restated. For further information, refer to note 3.7 of the RGHL Group’s audited consolidated financial statements included elsewhere in this annual report. The following table sets out the benefit to Adjusted EBITDA by segment for the year ended December 31, 2019:
(In $ million)
 
For the year ended December 31, 2019
Reynolds Consumer Products
 
13

Pactiv Foodservice
 
39

Graham Packaging
 
32

Evergreen
 
9

Other/Unallocated
 
4

Total impact of IFRS 16 on RGHL Group Adjusted EBITDA from continuing operations
 
97

Total impact of IFRS 16 on RGHL Group Adjusted EBITDA from discontinued operations
 
6

Total impact of IFRS 16 on RGHL Group Adjusted EBITDA
 
103



44


EBITDA/Adjusted EBITDA Reconciliation

The reconciliation of profit from operating activities to EBITDA and Adjusted EBITDA for the RGHL Group is as follows:
 
 
For the year ended December 31,
(In $ million)
 
2019
 
2018(2)
Profit from operating activities
 
823

 
797

Depreciation and amortization from continuing operations
 
698

 
615

RGHL Group EBITDA(1) from continuing operations
 
1,521

 
1,412

Included in the RGHL Group EBITDA:
 
 
 
 
Asset impairment charges, net of reversals
 
101

 
240

(Gain) loss on sale or disposal of businesses and non-current assets
 
30

 
(8
)
Non-cash pension expense
 
58

 
56

Operational process engineering-related consultancy costs
 
29

 
14

Related party management fee
 
27

 
27

Restructuring costs, net of reversals
 
21

 
14

Strategic review costs
 
40

 

Unrealized (gain) loss on derivatives
 
(13
)
 
22

Other
 
11

 
(6
)
RGHL Group Adjusted EBITDA(1) from continuing operations
 
1,825

 
1,771

 
 
 
 
 
Segment detail of Adjusted EBITDA:
 
 
 
 
Reynolds Consumer Products
 
677

 
652

Pactiv Foodservice
 
619

 
569

Graham Packaging
 
370

 
349

Evergreen
 
201

 
230

Other/Unallocated
 
(42
)
 
(29
)
RGHL Group Adjusted EBITDA from continuing operations
 
1,825

 
1,771

RGHL Group Adjusted EBITDA from discontinued operations
 
105

 
101

Total Adjusted EBITDA
 
1,930

 
1,872


(1)
Refer to page 3 under the heading "Non-GAAP Financial Measures" for additional information related to these financial measures.
(2)
The information presented has been revised to reflect the North American and Japanese closures businesses as discontinued operations and to include the remaining closures businesses in Other/Unallocated. Refer to notes 2.6 and 7 of the RGHL Group’s audited consolidated financial statements included elsewhere in this annual report for additional information.

45


Reynolds Consumer Products Segment
 
 
For the year ended December 31,
 
 
 
 
(In $ million, except for %)
 
2019
 
% of segment revenue
 
2018
 
% of segment revenue
 
Change
 
% change
External revenue
 
2,881

 
95
 %
 
2,980

 
95
 %
 
(99
)
 
(3
)%
Inter-segment revenue
 
151

 
5
 %
 
164

 
5
 %
 
(13
)
 
(8
)%
Total segment revenue
 
3,032

 
100
 %
 
3,144

 
100
 %
 
(112
)
 
(4
)%
Cost of sales
 
(2,165
)
 
(71
)%
 
(2,295
)
 
(73
)%
 
130

 
6
 %
Gross profit
 
867

 
29
 %
 
849

 
27
 %
 
18

 
2
 %
Selling, marketing and distribution expenses/ General and administration expenses
 
(326
)
 
(11
)%
 
(277
)
 
(9
)%
 
(49
)
 
(18
)%
Net other income (expenses)
 
11

 
 %
 
(12
)
 
 %
 
23

 
NM

Profit from operating activities
 
552

 
18
 %
 
560

 
18
 %
 
(8
)
 
(1
)%
Reynolds Consumer Products segment Adjusted EBITDA
 
677

 
22
 %
 
652

 
21
 %
 
25

 
4
 %

Revenue. Total segment revenue decreased by $112 million, or 4%. The decrease was primarily due to lower sales volume.

Cost of Sales. Cost of sales decreased by $130 million, or 6%. The decrease was primarily due to lower sales volume and lower raw material costs.

Selling, Marketing and Distribution Expenses/General and Administration Expenses. Selling, marketing and distribution expenses and general and administration expenses increased by $49 million, or 18%. The increase was primarily due to higher strategic review costs and higher employee-related costs. The strategic review costs have been included in the segment's Adjusted EBITDA calculation.

Net Other. Net other changed by $23 million, resulting in net other income of $11 million. The change was primarily due to a favorable change in unrealized gains and losses on derivatives. This item has been included in the segment’s Adjusted EBITDA calculation.

EBITDA/Adjusted EBITDA Reconciliation

The reconciliation of profit from operating activities to EBITDA and Adjusted EBITDA for the Reynolds Consumer Products segment is as follows:
 
 
For the year ended December 31,
(In $ million)
 
2019
 
2018
Profit from operating activities
 
552

 
560

Depreciation and amortization
 
99

 
83

EBITDA
 
651

 
643

Included in Reynolds Consumer Products segment EBITDA:
 
 
 
 
Strategic review costs
 
33

 

Unrealized (gain) loss on derivatives
 
(9
)
 
14

Other
 
2

 
(5
)
Reynolds Consumer Products segment Adjusted EBITDA
 
677

 
652



46


Pactiv Foodservice Segment
 
 
For the year ended December 31,
 
 
 
 
(In $ million, except for %)
 
2019
 
% of segment revenue
 
2018
 
% of segment revenue
 
Change
 
% change
External revenue
 
3,275

 
88
 %
 
3,267

 
86
 %
 
8

 
 %
Inter-segment revenue
 
442

 
12
 %
 
511

 
14
 %
 
(69
)
 
(14
)%
Total segment revenue
 
3,717

 
100
 %
 
3,778

 
100
 %
 
(61
)
 
(2
)%
Cost of sales
 
(3,078
)
 
(83
)%
 
(3,172
)
 
(84
)%
 
94

 
3
 %
Gross profit
 
639

 
17
 %
 
606

 
16
 %
 
33

 
5
 %
Selling, marketing and distribution expenses/ General and administration expenses
 
(297
)
 
(8
)%
 
(257
)
 
(7
)%
 
(40
)
 
(16
)%
Net other income (expenses)
 
(19
)
 
(1
)%
 
(36
)
 
(1
)%
 
17

 
47
 %
Profit from operating activities
 
323

 
9
 %
 
313

 
8
 %
 
10

 
3
 %
Pactiv Foodservice segment Adjusted EBITDA
 
619

 
17
 %
 
569

 
15
 %
 
50

 
9
 %

Revenue. Total segment revenue decreased by $61 million, or 2%. The decrease was primarily due to lower inter-segment revenue, the impact of business divestitures and lower pricing primarily due to lower costs passed through to customers, partially offset by higher external sales volume.

Cost of Sales. Cost of sales decreased by $94 million, or 3%. The decrease was primarily due to lower raw material costs, lower inter-segment sales volume and the impact of business divestitures. These decreases were partially offset by higher sales volume to external customers, as well as higher manufacturing and logistics costs. For the years ended December 31, 2019 and 2018, raw material costs accounted for 56% and 58% of Pactiv Foodservice's cost of sales, respectively.

Selling, Marketing and Distribution Expenses/General and Administration Expenses. Selling, marketing and distribution expenses and general and administration expenses increased by $40 million, or 16%. The increase was primarily due to an increase of $19 million in employee-related costs, as well as higher operational process engineering-related consultancy costs, which has been included in the segment’s Adjusted EBITDA calculation.

Net Other. Net other expenses decreased by $17 million to $19 million. The decrease was primarily due to a favorable change in unrealized gains and losses on derivatives, decreased asset impairment charges and decreased losses on disposal of businesses and non-current assets. These items have been included in the segment’s Adjusted EBITDA calculation.

EBITDA/Adjusted EBITDA Reconciliation

The reconciliation of profit from operating activities to EBITDA and Adjusted EBITDA for our Pactiv Foodservice segment is as follows:
 
 
For the year ended December 31,
(In $ million)
 
2019
 
2018
Profit from operating activities
 
323

 
313

Depreciation and amortization
 
247

 
204

EBITDA
 
570

 
517

Included in Pactiv Foodservice segment EBITDA:
 
 
 
 
Asset impairment charges, net of reversals
 
2

 
7

(Gain) loss on sale or disposal of businesses and non-current assets
 
20

 
23

Operational process engineering-related consultancy costs
 
26

 
14

Unrealized (gain) loss on derivatives
 
(4
)
 
6

Other
 
5

 
2

Pactiv Foodservice segment Adjusted EBITDA
 
619

 
569



47


Graham Packaging Segment
 
 
For the year ended December 31,
 
 
 
 
(In $ million, except for %)
 
2019
 
% of segment revenue
 
2018
 
% of segment revenue
 
Change
 
% change
External revenue
 
1,924

 
100
 %
 
2,087

 
100
 %
 
(163
)
 
(8
)%
Inter-segment revenue
 

 
 %
 

 
 %
 

 
 %
Total segment revenue
 
1,924

 
100
 %
 
2,087

 
100
 %
 
(163
)
 
(8
)%
Cost of sales
 
(1,665
)
 
(87
)%
 
(1,822
)
 
(87
)%
 
157

 
9
 %
Gross profit
 
259

 
13
 %
 
265

 
13
 %
 
(6
)
 
(2
)%
Selling, marketing and distribution expenses/General and administration expenses
 
(183
)
 
(10
)%
 
(176
)
 
(8
)%
 
(7
)
 
(4
)%
Net other income (expenses)
 
(31
)
 
(2
)%
 
(228
)
 
(11
)%
 
197

 
86
 %
Profit (loss) from operating activities
 
45

 
2
 %
 
(139