Kenvue Inc. (KVUE) Earnings Call Transcript & Summary

I'm Steve Powers. I'm the Deutsche Bank's U.S. Consumer Staples franchise. And I'm thrilled to welcome back for the second year in a row, Kenvue, to our conference. With us today are Thibaut Mongon, the Chief Executive Officer of Kenvue; Paul Ruh, Chief Financial Officer; as well as Carlton Lawson, who is the Group President of Europe, the Middle East and Africa as well as Latin America. So thank you all 3 for joining us today.

Great to be back.

All right. So it's been a little more than a year now since Kenvue's IPO, Thibaut. I guess as you reflect on that year, which has been, I think we'd all agree, fairly eventful. What would you say are the key lessons that you've learned? The key lessons you think the organization has taken away? And how has that translated into the 2024 strategic priorities that you've set?

Yes. First of all, it's good to be back here. Last year, we were here for our debut as Kenvue. We have just celebrated our first year anniversary. And what a year. So we are definitely on a journey to transform our organization from a segment of J&J, mostly focused on profit and cash to an independent company focused on accelerated profitable growth. So that's what the entire organization is focused on. If you think about '23 versus '24, '23 was really about separating from J&J. We did that with massive undertaking, 135 years of history. And we have done that very well. I'm very pleased with the quality of the execution by the team around the world. No material impact on the business. But '24, you see a very different Kenvue in action. It's our first full year as an independent company. And you see an organization that is mostly focused on 3 things. We are, first and foremost, transforming the way we work to reach more consumers to accelerate our top line. That's one area where we know that we can do more and to fully unleash the potential of our brands and our position in consumer health. So we are changing the way we are working very actively, very intentionally to reach more consumers and activate our brands at a bigger scale and with more precision in the execution of the plans. We are also funding this growth differently by continuing to expand our gross margins. That's an area where we have a strong track record, and we continue to exercise this muscle by expanding our gross margins, but also by rebalancing our investment from infrastructure to brand activation. So we are investing more behind brand activation, but it doesn't come at the expense of margin, margin dilution. We are really rebalancing from a high base of infrastructure costs that we are inheriting from a parent company. And as we move to being a fit-for-purpose competitive company in the consumer health space, we're able to reinvent the way of working and do it at a lower cost. And finally and very importantly, we are focused on fostering a culture of impact and performance in the organization where the entire organization is really able to see the impact of what they are doing, something that was not necessarily easy to do in a larger organization. We have changed our incentive system and we are really focused on driving this growth mindset.

Okay. And then lastly on culture. How do you feel like you're in the early stages? Or do you feel like the organization has embraced the new called action?

Culture doesn't happen overnight. So it's definitely a multiyear journey. But I'm very, very excited with the way the organization has embraced the opportunity. There is really a desire to leverage this unique moment in time in our business to reinvent our ways of working, embrace the new opportunity and unleash the full potential of this business.

Great. So if maybe we just take a kind of a 30,000-foot level view and run-through of your 3 major businesses, self-care, essential health, skin health and beauty. How would you describe current trends and momentum? And how would you frame the long-term opportunity for each?

Sure. The first, yes, we operate in 3 segments. I would say the first thing to understand well about Kenvue is that it's a power of one portfolio. We are the undisputed leader in consumer health, the largest consumer health company in the world by revenue, and that's really the power of the portfolio. So yes, we have skin health, essential health and self-care, but they're all part of the portfolio that covers the full spectrum of consumer health needs. It allows us to partner with retailers in a unique way. I was in Canada last week, where we have a very strong market positions across the portfolio. And it was great to see how we go to market in a differentiated manner with a large retailer there. We have a Summer Readiness Program where you have product in self-care; with ZYRTEC in allergy, in skin health; with -- or sunscreen products; or in Essential Health with BAND-AID and Listerine. It's all part of the Summer Readiness Program, and you see the power of the portfolio. So that's a high level. Now if you go one step lower and you look at the detail by segment, in self-care, we continue to outperform the market. It's our largest segment. And so it's very important for us to continue to strengthen our positions. We have outperformed the market for a number of years now. And I'm excited by what's ahead of us. We have strong capabilities, strong market positions, strong pipeline. And so we intend to continue to gain share and drive the market in the right direction. Even if in some of our businesses, the seasonal businesses, we will continue to see variations. If you think about the season we are in right now, [indiscernible], it's a slow season. And so we are going to see a temporary impact on the business but it doesn't prevent us from gaining share as we speak between ZYRTEC and Benadryl in the U.S. I'm very pleased with our share performance. So continued strength in self-care. Our second largest segment, essential health. Here, we are very strong in this segment. Our brands are often synonymous with the categories where they're playing whether it's BAND-AID, Listerine or Johnson. We are very big in these categories. In mouthwash, we are not only the largest mouthwash brand in the world with Listerine, in both alcohol and non-alcohol, but we are 5x bigger than the next competitor. In Baby, we are #1, #2, 8, 9x bigger than the next competitors. So our job in Essential Health is to expand the category, to drive category growth. And that's what we are doing in mouthwash by driving penetration into more households or in baby care where we expand into kids, very successfully with Aveeno Kids in the U.S., for example. So we want to continue to see -- to do that moving forward. And then skin health is a segment where we have strong equities. We are doing well in pockets of our business like in EMEA where we count on leads our business. The U.S. is an area where we have more work to do, and we are focused on recovering oppositions in the U.S. in that part -- specific part of the portfolio.

Okay. Yes. If we could maybe dive a little bit deeper into skin health and beauty. And there's change going on, right? You had Jan take over the North American role at the end of last year. There's a search ongoing for a global leader of that segment, moving the headquarters of that segment to the U.S. Maybe just get a little bit more detail on the progress since some of those changes, as those changes are unfolding. And how do you define? How do you think about the organization's kind of medium-term goals for that business?

Yes, it's one area, skincare, skin health in the U.S. where we are not pleased with our performance today so we are actively working on it. We are strengthening our teams. You talk about Jan taking over our North America business. We are in the process of strengthening our skin health brand teams across the organization. So a lot of work happening there. The U.S. team under Jan's leadership is really focused on executing with precision, the plan that they have put together at the beginning of the year. And I'm pleased with the early signs of progress in this area. We are far from being done. I said all along that it will not happen overnight, but objective for this year is to stabilize the business. And I see them making progress on all 3 areas of their plan. I see an in-store, our brands being more prominently featured. We'll see an increase in displays of our skincare brand, Neutrogena, Aveeno in the back half of the year. I see progress in how we engage with dermatologists. In the first quarter, we increased our sampling budget, and we saw an immediate lift in dermatologist recommendation. In the second quarter, from April 1, we have doubled the size of our detailing sales force to dermatologists. So I would expect to see continued progress there. And in terms of consumer outreach, the good news is that we already knew that Neutrogena was the brand with the highest penetration in the U.S. in terms of skincare brand. We saw this penetration increasing in Q1. Now there are certain demographics where we are not -- where we want to be yet. And so we are actively working on those. But I see the team pivoting our marketing efforts to a more influencer-based program. And a few tentpole events we had in March and April. We saw that one, where we were able to be #1 in terms of share of voice. And two, we were able to come up with content that was relevant for consumers and especially young consumers. So more to come on that. Some green shoots way too early to declare victory is going to be a sequential improvement, but we are focused on executing the plan.

Okay. So from an annualized perspective, it seems like '24 is more about kind of resetting the foundation with the objective to kind of resume hopefully more structural growth as we get into '25 and beyond.

Correct. So in Europe, it's really about accelerating the momentum we are seeing and driving further growth in the U.S. It's about stabilizing the business to grow from there from 2025 onwards.

Okay. Maybe we can talk -- and we'll get Carlton involved in this, too, but maybe to kind of do the same kind of walk through by geography. From my perspective, it seems like North America and Asia Pacific are facing relative headwinds. Maybe not more so than was expected coming into the year, but it remains a little bit more difficult, while EMEA and Latin America, obviously, a testament to Carlton's great leadership have been a little bit -- overdelivered in the first quarter. Maybe just walk through the dynamics you're seeing across those regions to the extent you agree just agree with my summarization there. And then how each region you see trending versus plan in '24?

Yes. We have a well-balanced business, right? About half of our business is in North America, half of business outside of North America. North America, the majority of the business is doing well. We talked about self-care, the majority of our Essential Health business. I'm pleased with the performance. We have this focus on skin care that we are actively addressing, as I just talked about. Then Asia Pacific and China, in particular, here, we have upside opportunity, and we are excited about the future of this region. If you take China, we are relatively underdeveloped. In China, it's only about 7% of our total revenue base. So ample opportunity for us to grow. The majority of our business in China is self-care today. And it's an area where we see consistent demand for highly efficacious products like ours. We have been in China for a very long time at very strong positions, continue to innovate. Last year, we brought more innovation to the market than in the previous 11 years combined, to give you a sense of the intensity of the innovation plan in China. And so we had a good year last year. We had a good start of the year in self-care, and we expect this to continue moving forward. The small part of our portfolio, which is nonself-care, we don't have all our brands in China. But here we see, as everybody else, a Chinese consumer that is more cautious about where they spend their money. We -- as I said at the beginning of the year, we are not going to invest ahead of the curve on that part of the business. But we have strong equities that will be ready to be well positioned if -- when the consumer is ready. And we are not counting on it for our growth algorithm this year. So from that perspective, no change compared to what we talked about. And then we have Europe and that continues to do well. We had a couple of very good years in Europe, Middle East and Africa, back to a good start this year as well, and Carlton will be able to talk about it more. Latin America is a relatively smaller region for us. It's about 10% of our global revenue and opportunities there as well, but we are pleased with the strength of our brands in that region. Carlton, do you want to speak about.

Just building on the skin part of the portfolio. So we have seen -- taken the same portfolio of brands, Neutrogena and Aveeno, leveraging the playbooks. And we've been on this probably 2 years or more. We've been able to build momentum in those brands in a region where you've got a heartland of European competitors, right? So it's just as competitive in France, Germany, in the homeland and the U.K., by the way. So in the U.K., with Aveeno, we're growing twice as fast as the market. and we've expanded into face and so on. So super competitive position there. In Germany, building on the Neutrogena platform, again, face, very competitive. And right now, our model in Southern Europe is leveraging our strength in OTC and Self Care and pharmacy to be able to gain distribution of Neutrogena across Southern Europe. And that's a unique position because we're very strong in pharmacy through OTC and therefore, pharmacists trust us and see the opportunity in NEUTROGENA. So we're rolling that out right now. In fact, the pharmacy in this block here in the pharmacy [indiscernible] -- there's a Neutrogena premier block there, and that's having a real impact. So 3,500 of those units are being deployed right now.

Don't forget to buy your Neutrogena products.

That's right. Right outside. Carl, maybe a billion, how have you defined sort of the broader priorities for your region? What objectives have you set for the organization? And if there are any other -- what you've just said, any other areas of sort of notable over-delivery or notable areas of areas for improvement that you would like to call out?

Sure, Steve. So across EMEA and LatAm, it's about 3 billion consumers. It's very sizable. It's dynamic. And maybe some might say it's complex. It's 120 markets in EMEA, for instance, that we distribute products to very different regulatory environments and so on. But we know have to win in this market. We have a team to deeply understand the route to market, work with regulators, work with customers, and we can build businesses. And we have a portfolio of brands that leverage the global power brands. So we have the billionaire brands through to regional brands and local jewels that meet the needs of consumers in this region. And it's through that brand portfolio that actually we're able then to expand from that foundation, our footprint. So good examples I touched on that with Aveeno and Neutrogena just before. But in Africa and the Middle East, very strong Johnson's Baby foundation that we're able off the back of that in the last few years to drive a Self Care business, which is growing very, very well. We're seeing how we can have impact here. Nicorette is our biggest brand in the region, and smoking remains a significant high level of incidence. But vaping has increased significantly, particularly in markets like the U.K. We saw that opportunity. There's a lot of dissonant vapors. And so we added an indication to Nicorette from smoking to include vaping, the only product available to help people quit vaping. And that was launched the beginning of last year, and we've seen double-digit growth in the U.K. on Nicorette. On Listerine, A good example here is for many years, in every market has its own dental guidelines issued by dentists and KOLs and forever brushing twice a day with the fluoride toothpaste and flossing was the gold standard. You don't need to do any more. Until we presented data that showed periodontitis, gingivitis, oral health care, were continuing to be on the increase. So it can't be the panacea. And now in the U.K., the guidelines have changed so that now, a chemical mouthwash is added to that brush-floss regime. And so we can leverage that with dentists and with consumers, and we have a new global indication on Listerine, which is 5x more effective than brushing and flossing alone. And that's driven complete reappraisal of the brand with dentists and with consumers, and that drives penetration on daily use oral health benefits. So there are a couple of examples that we're deploying here. And I said the final thing I'd say is there's quite a lot of local jewels. Le Petit Marseillais is a big brand, an iconic brand in France, if you're familiar with the region or if I take CALPOL in the U.K., which is infant acetaminophen, paracetamol suspension. We're able to take Tylenol formulas, insights and so on and leverage them in CALPOL in the U.K. or skin health, chassis and leverage them in Le Petit Marseillais. So we're able to take global platforms and deploy them either the brand or through regional and local jewels.

Great. Paul, very patient. I want to get you involved here. So and maybe doing so by moving to '24 momentum. As we talked about, the first quarter results came in ahead of external expectations, I think, internal -- ahead of internal expectations as well. Relative to that, you called for some slowing in 2Q and then reacceleration in the second half. Maybe talk through some of the dynamics there. And when the dust settles on the first half, given those kind of puts and takes between 1Q and 2Q, do you see the business is likely to be net on track in the aggregate, a bit ahead, a bit behind how you're thinking about the year as it's taking shape?

Good. Thank you for the question. And let me reiterate that at this point, we're not updating our full year guidance that we issued on May 7. And we remain on track to deliver on our full year commitments. And we are also remaining on track to deliver on our first half commitments. But it's important to talk about a few nuances that are specific to Q2. If I think about the first half, we overdelivered in Q1 and we expect that over delivery, both in top line and in bottom line to be fully offset in the second quarter. To be able to deliver on the first half, in line with our commitments,and also, the second half remains with our commitment so that the overall full year is in line. Now in the case of Self Care specifically. We see some of these headwinds that we mentioned in the quarterly earnings call that included the labs, the destocking and also the seasonality, particularly in allergy and also in some, in the case of skin health and beauty as well coming through. In fact, what we talked about has been an early start of the allergy season, is turning out to be a slow season in allergy, and we see that in the quarter. So with those dynamics that we are seeing, that's why we believe that the over performance we had in Q1 is going to be fully offset in Q2, both in top line and bottom line. But we remain on the first half intact and in the second half as well. In the second half, we are seeing easier comps and we also see the momentum that we are putting behind our brands, delivering the results. So overall, we feel good about the year with these dynamics that I talked about in the quarter. And we also believe that if you look at our segment performance, we will continue to drive the gaining share performance in Self Care, the momentum in Essential Health, the recovery in North America and skin health and the continued overall performance of Self Care outside the U.S.

Okay. Is the trade inventory rebalancing that you mentioned in 2Q, is that simply a carryover of the first quarter? Or is that incremental, some trade inventory rebalancing tied to a slower allergy slower sun season?

We talk about the destocking of certain channels in the U.S. during our Q1 call. And we also said that we expected those to continue. We see that happening. And we do not foresee necessarily that to transpire further in the balance of the year. We are at healthy levels of inventory. The level of inventory of our retailers is their decision, but we work collaboratively with them to ensure that they have the right levels so that in case of a spike on demand. We're able to have products on the shelf. It's not about the COVID time. It's where we have inventory just in case. Now it's about having the just-in-time inventory. We have strengthened the supply chain collectively, and we're able to be operating with more efficiency.

Okay. Great. So I think another -- well, another aspect to me, at least, of your first quarter performance and the 2024 outlook that maybe has been underappreciated is just the strength in gross margins that was exhibited in the first quarter, over 60%. And that allowed for strong investments, stronger-than-expected investments back into the business. You also announced the Our View Forward program in the first quarter, which frees up more opportunity for reinvestment. Maybe can you talk a little bit more about how we should think about core strength in gross margin from here? That, our forward savings program, and essentially how you will rebalance or balance your investments back into the business to drive growth, without diluting margins.

Very good. Yes, we are pleased with our gross margin performance. And in fact, during our earnings release, we talked about the fact that we now expect to be ahead of our original expectations that were to have adjusted gross margins back to the 2021 levels of 59%. So we will most likely be ahead of that, given where the inflation is trending, where the ForEx is trending, notwithstanding that there may be some volatility, of course, in FX. So that is a continued source of fuel for our growth, and we see building blocks to continue to drive that going forward. Another important building block is our view forward. Our view forward, we talked about this efficiency and effectiveness program that will allow us to turn what is unproductive SG&A into productive SG&A. So put more investment behind our brands. We talked about a restructuring charge of 2 times $275 million, so $550 million approximately over '24 and '25 that will allow us to deliver savings in the range of EUR 350 million on a full year basis in 2026 and beyond. And we are already putting that to work. We started putting that to work in more advertising and that is what is fueling our growth. The advertising that we are putting in place, we are always reflecting that in the P&L. So we should expect our overall operating margins to be slightly lower than 2023 numbers, which is what we said at the beginning of the year. And the SG&A number that we saw in Q1, to be about the same for the balance of the year. So that's how the algorithm and the P&L shapes out. All of this allows us to deliver within the guidance of bottom line as well. We are taking a charge associated with the [indiscernible] program. We have the strength of the balance sheet. And it will also continue in 2025. We're not done in '24 because we see further opportunity in our view forward in continued gross margin enhancement, and that will allow us to deliver on our long-term algorithm, which is growing income faster than sales.

And of the funds freed up from that as you say, the initial wave is sort of kind of leaning into advertising and that will continue. Are there other capabilities, technology, automation that are prioritized? And what kind of where do they sit on the time line in terms of reinvestment?

Yes. The funds that are freed up are going to be used against investment behind our brands in a broad sense. Advertising is a part, but remember, we also use other levers that include our health care professional network activation. We're increasing our promotional spend as well. And we are fortifying an amplifying innovation with all these levers. We're also building additional capabilities, margin capabilities. We're leveraging some of our new strengths, and we continue to develop [ some ] more agile systems and automation, information that allows us to have faster or a closer post to the business so that we can have a faster and more agile decision-making.

Perfect. A question for Thibaut or for Paul, both of you. With all the investments that Paul just ran us through, both in '24 and looking out to the next couple of years, it would seem that, at least, for the time being, the M&A, which was a key -- is a key part of the Kenvue strategy. But maybe that in the near term has been push back a little bit to the back burner, just as you focus on organic reinvestment, et cetera. Can you clarify or validate that thought process? And then as you think about the longer-term strategic vision, just the role of M&A in the overall capital allocation strategy.

Why don't I take that? I'm on the roll here. So I [indiscernible]. So our capital allocation priorities are very clear. We have started putting those in place in 2023, and they will continue to be put in place in '24 and beyond. And they start with investing in the business and our view forward is the proof of that. We are leveraging our balance sheet to invest in our business to unleash the fuel for growth. Our second priority is dividends, and we are committed to delivering solid dividends to our shareholders. And that is the and also the leverage. We have a stated goal of delevering to 2x gross by next year. And those are the short-term priorities associated to capital allocation. As we reach those goals of the transformation and also the deleverage point that I talked about, we will consider other value accretive uses of our cash. So far, we have used share buybacks to offset stock-based compensation. But as we think about the future, we may use that lever more. We question ourselves all the time and what we believe at the moment to do that is once we have reached those important goals. And M&A, to your question is another one that we will consider once we get there. The reason why is because we see a higher return on investment or on our money these days on transformation. That's why we prioritized our view forward. And the bar for M&A at this point that we are focused on executing the transformation, executing in the recovery on North America skin and driving the momentum, is actually higher. So M&A, the bar is higher. We will always consider. We look at talking -- strategic acquisitions. That will be part of our long-term strategy and value accretion as well. At this point, not the priority as much.

From a strategic point of view, we want to continue to be the one-stop shop for anything consumer health. We are the largest pure play in consumer health. And so that's how we think about it. We map the consumer health space where we are not present as strongly as we want to be in one part of our category. We ask ourselves, right? Can we expand into it with one of our existing brands? That what we just did with Tylenol Precise, expanding into topical analgesics where we are not present. That's our preferred option. But if we don't believe that our brands can expand into this white space, if you will, that's where we would consider deploying capital into it. But as Paul just mentioned, for now, we are focused on our transformation journey.

Very good. We have -- I'm going to give Thibaut the last word, but Carlton, I'm curious as you've listened to the -- as you listen to Paul described the reinvestments, but also as you heard Thibaut at the beginning kind of articulate what was new for Kenvue in '24 versus sort of what hasn't changed. How has that impacted your business? What do you see kind of day-to-day in your business in terms of the organization's response to the '24 strategy? And then also, how are you thinking about making use of some of these reinvestments in your business?

Yes. Steve. So I think if I was joined with my other peers, Jan or Eli, we'd all be saying the same thing, right? We're very clear on where to play in terms of our 15 brand priority and where that makes sense from a regional perspective because some of the brands like Tylenol, you wouldn't roll out necessarily into EMEA. But we're very clear on our brand priorities and also our channel priorities. So in EMEA, it's pharmacy and it's e-commerce as primary growth channels, very profitable. Then how to win is about excellence in execution. And really driving that precision in execution, physical availability and mental availability. And releasing oxygen into the P&L through operational efficiency, really unlocking that infrastructural investment that was made historically into brand investment. And that's what's driving growth. And I'd say the final and most important thing is cultural. And I would say in EMEA, we've been on this journey for several years. I rejoined J&J in 2019 after more than a decade in GSK and other companies prior to that. And the performance culture and the growth mindset is what's unlocking this. And it's tied to our incentive program now as well and reinforced by that. But from a history of being chapters of -- in legacy J&J, of cash generation to growth mindset, is what's unlocking that cultural piece, is what's fueling the strategy.

That's great. So I'd give you the last word, I promise I will. So that's a great segue. I mean what would you leave with investors who are assessing Kenvue as an investment opportunity? Where do you think the key things they should leave with top of mind as they assess Kenvue?

Yes. We are on this transformation journey. We have this amazing portfolio of brands, these leadership positions around the world. Where we decide to play, we are in position to win. We have tremendous momentum in large parts of the portfolio. We have specific parts of the portfolio where we are very clear on what we need to do to improve our performance. As I said at the beginning, it's a different Kenvue in action today. And we are on track with this transformation journey. We are confident in our ability to deliver on the short term, talked about this year. But as importantly, in our ability to deliver on our long-term value creation algorithm that we talked about at our IPO a year ago, growing at the top end of categories, growing income faster than sales, delivering a strong dividend and overall, delivering in a consistent manner, strong TSR. So that's what we are going after. The whole organization is mobilized behind it. Very strong consistency to Carlton's point across the globe. Different businesses, different brand market combinations are at different stages of maturity and transformation. But everybody is pushing in the same direction and we are confident in our ability to deliver on this algorithm so.

Perfect.

More to come.

Thank you.

Looking forward to coming back next year.

And we'll hear all about it. All about the success.

[indiscernible] year.

That's right. Thanks Thibaut, Paul, Carlton, thank you so much.

Thank you, Steve. Thank you all for joining us.

Thank you.

Thank you.