Operator:

Hello and welcome to the Kenvue Second Quarter 2024 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and answer session. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Jim Giannakouros, Interim Head of Investor Relations for Kenvue.

Thibaut Mongon:

Thank you, Jim. And thank you to everyone for joining us today. This quarter, we made good progress against our strategy. We drove year-over-year organic growth of 1.5% on top of 7.7% organic growth last year and increased adjusted gross profit margin by 410 basis points to 61.6%. This huge investment in our brands, while not impacting our ability to deliver EPS as per guidance. With our first and second quarter performance, we are on track to deliver our year as we continue to execute our new strategy as an independent company. Earlier this year, I committed to you that you would see a new Kenvue, the bolder company that is moving quickly to advance our three priorities to reach more consumers effectively, invest further behind our brands, and build a culture of performance and impact. Our first half results show the value of our pure-play model with a carefully curated portfolio covering a full spectrum of consumer health needs with iconic brands. While still early days, our results demonstrate that our transformation efforts are beginning to drive our internal impact. These efforts include our work to improve productivity and reduce cost. We expect to deliver approximately 150 basis points of adjusted gross profit margin expansion in 2024, higher than we anticipated coming into the year, as we drive greater value realization from favorable mix and stronger efficiencies in operations. In addition, we are actively reducing our cost structure through rigorous expense management and the on-track execution of our Vue Forward, our program to become a leaner, more agile, and fast-moving organization with a lower cost base. Our significant progress on productivity gives us more strategic flexibility. We have now chosen to invest approximately 20% more behind our brands this year than we did last year, advancing our priority to free up resources to invest more behind our brands to drive future growth. We are targeting our investment toward high-yield strategies such as healthcare professional engagement, install prominence, and direct consumer engagement with an increasing focus on innovation and influences. This both strengthens loyalty among our existing consumers and expands our reach to new consumers. And we are beginning to see the impact on our brands across our portfolio. Core to our transformation is the culture we are building. We are driving a heightened sense of accountability across the organization that is shooting speed in execution to drive profitable growth. In summary, halfway through our first full year as an independent company, we are on track to deliver our financial goals for 2024. In addition, while we would expect to continue to operate in a volatile environment, our progress to date and our plans for the back half bolster our confidence to deliver on our long-term value creation algorithm targeting attractive total shareholder return in 2025 and beyond. Now looking at the key highlights of our performance this quarter. We have started to see the early impact of our work on our three priorities. After a slow start in allergy and sun earlier in the quarter, we saw a positive shift in US consumption in the months of June. This immediately translated to shipments due to the strength of our brands being top of mind for consumers and our ability to replenish low levels of retail inventory with agility. In Self Care, organic growth was essentially flat year-over-year on top of 14.2% growth last year, which beat our internal expectations. Once again, we outperform the market globally this quarter, having no maintain or grown share every quarter for the last two years. Tylenol, the number one brand in pain relief globally, delivered its eighth consecutive quarter of shared growth in the U.S., further widening the gap versus our closest competitor in both value and volume. Our consumer-centric innovations, including Tylenol Easy to Swallow, designed for those who hesitate to take a pill, benefited from our increased investments to reach more healthcare professionals and consumers, and expanded in-store presence and prominence. In Allergy, sales accelerated in June after a slow start to the spring season in the U.S. Kenvue is now the number one and fastest-growing manufacturer in the Allergy category in the U.S., with our brands Zyrtec and Benadryl gaining share in value and volume. This growth has been driven in part by our expanded in-store presence and increased media to amplify innovation like Zyrtec overall Dissolved Tablets. Essential Health continued to perform well, with broad-based organic growth of 7.6% in the quarter, on top of 3.8% in the same period last year, and balanced growth between value realization and volume. Notably, Listerine grew approximately 10% globally. Listerine is another good example of how increased investment in the right areas drives returns. While the brand has historically been powered by our number one recommendation with dentist and strong clinical superiority, we are strengthening marketing span to create higher visibility with consumers through digital media, influencers, and in-store prominence, driving new consumers to the category. We are also amplifying high-performing innovation, including Listerine Clinical Solutions, our new premium line in which each product is tailored to specific all health needs. As a result, Clinical Solutions is the number one mouthwash line innovation in the US today. Our Skin Health and Beauty segment performed in line with our expectations in this first phase of our recovery plan. Organic growth declined 2.4% year-over-year, following plus 3.4% organic growth in the second quarter last year. This is an improvement sequentially, and while this is a journey, we are on track to stabilize the business. Europe continues to perform well with the successful expansion of Aveeno and Neutrogena in the UK, Germany, and Southern Europe. The teams are executing with excellence in-store with a significant increase in shell presence through compelling brand blocks. In China, the category continues to be soft and evolving consumer preferences are proving to be challenging for Dr.Ci:Labo Brand, contributing to the impairment of assets we described in our press release. In the US, which is our priority, we continue to activate our plans to stabilize the business this year with expectations to resume consumption growth next year. As we shared with you previously, we are working diligently to improve our in -store presence and prominence, increasing the number of our displays to augment growth. We activated our strategies this sun season, and as a result, Neutrogena confirmed its number one position and gained share in the seasonal segment with our ultra share and biz defense lines. We are also elevating healthcare professional and consumer engagement. We have doubled the size of our detailing sales force and significantly increased our sampling efforts with dermatologists, already resulting in an increased share of dermatologist recommendations. And on social media, Neutrogena is making a strong pivot to reach Gen Z consumers through influencers, partnering with Alex Pearl, our gold medalist, Sydney McLaughlin-Levrone to launch engaging content on social media. I hope you will join us in sharing for Sydney during the 400-meter hurdle this week. And we are amplifying innovation as well. For example, we are launching Neutrogena Collagen Bank in the US, a brand new pre-aging platform with a patented peptide technology developed with dermatologists to penetrate more than 10 layers deep within your skin. This innovation receives 100% acceptance by your top retailers. To build demand before products arrive in-store, Collagen Bank first launched on TikTok Shop, the first for Neutrogena. This approach generated tremendous buzz online and motivated one of our major customers to pull forward their retail launch. So while we are in the early days of our journey, we are focused on executing our plan with precision, strengthened capabilities, and increased investment across our portfolio. A few final remarks on other areas where we are making progress as an independent company before I hand it over to Paul. First, I hope you all had a chance to read our inaugural Healthy Lives Mission report, which we published in June. The report outlines our ESG strategy, goals, and progress, and there is a lot we are proud of in year one. You may also have seen last week that we announced the implementation of a board succession process following the sale of J&J's stake earlier this year. The appointments of Kathleen Pawlus and Kirk Perry as two new Independent Directors coincide with Joe Wolk and Peter Fasolo stepping down by the end of this year. I would like to express my deep gratitude for Joe and Peter's contributions to Kenvue as we executed a successful transition to become an Independent Company and welcome Kathy and Kirk whose deep experience, expertise, and capabilities will be valuable additions to the board. Additionally, as an Independent Company with a deep commitment to shareholder value creation, we were pleased to announce earlier in July the board's declaration of first dividend increase. This is a testament to our strong balance sheet and cash-generating capabilities which will only improve as we continue our journey at Kenvue. All our efforts will not be possible without the performance of our people. I would like to thank Kenvuers around the world for leading our new culture and for their commitment to driving results this quarter again, demonstrating the power of Kenvue in action. With that, I will turn it over to Paul.

Operator:

[Operator Instructions] Our first question comes from the line of Anna Lizzul with Bank of America.

Thibaut Mongon:

Yes, good morning. Anna and thank you for your question. Regarding your first question on value realization, it's really the combination of carryover pricing, new pricing as you stated and a mix. Regarding new price actions, remember that our philosophy at Kenvue is to offset inflation and FX conditions with pricing. So typically we take these price actions in markets and categories where we still see inflation and FX impact. We expect value realization to continue to be part of our value creation algorithm, but as the year continues you will see less and less impact of carryover pricing and you will see more impact of mix and new pricing actions. In terms of your question on the sequential improvement in volume for our Skin Health segment, we are pleased with the early signs of impact of the recovery plan we have put in place since the beginning of the year. I'm encouraged with these early signs. As you said, we see a sequential improvement from Q1 in terms of year-over-year trends. We are reaching more consumers and HCPs successfully. We saw an increase in household penetration for Neutrogena in the US, particularly with millennials and Hispanics, which is encouraging and we have strong building blocks for the back half. So we are executing a thoughtful plan. This will be a journey, but I'm encouraged with what we have seen so far.

Steve Powers:

Hey, guys, good morning. Thank you. I wanted to ask on the 20% aggregate increase in spending behind your brands that you called out this year. I'm curious as to how much of that has already been deployed versus is something that you're targeting to come in the second half. And then I guess as you contemplate that 20% increase, where does that bring you relative to what you view as kind of the optimized level of aggregate brand support? It sounds like from Vue Forward contemplation, we should expect more investment in the years to come. But I guess I'm curious as to where you think you are today relative to what is ultimately optimal. Thank you.

Thibaut Mongon:

Yes, Steve, as you can tell, we are getting closer to industry standard faster than we anticipated. Having said that, as you heard from Paul, we will continue to invest. One of the realities of the consumer health space is that we are talking about categories that are underpenetrated and where we have many opportunities to expand usage occasions. So as long as we see opportunities to do that, we will raise our investment level. We have many consumers talk to and to recruit into our portfolio with our innovation for many years to come. Having said that, we continue to do that with discipline, always with an eye on strong return on investment, but as long as we see strong returns on our investment, we will continue to free up resources to invest behind our brands and reach more consumers.

Andrea Teixeira:

Hi, good morning to all and thank you for the question. Thibaut, you mentioned that the Skin Health and Beauty division delivered according to expectations and is on track for the plan in the year. Would that imply a positive inflection in organic sales growth? I mean, more specifically, I know to a previous question, you were very positive about that support and the innovation that is coming online, but I think investors wanted to see some sort of reassuring into the second half. Understandably, you have much easier comps and good setups on, as you mentioned before, a lot of salesforce improvement there as well. Then related to the comments about the retail destocking and thinking about Self Care as well, is there any update on that? In particular, I understand it's mostly into the US, but if you can, given that your business is a lot of international, we are focusing a lot in the US right now, but you have half of your business outside the US, so wondering if you can comment on how you're seeing Europe, how you're seeing Asia, and across the board in Self Care. Thank you.

Operator:

Our next question comes from the line of Nik Modi with RBC Capital Markets.

Thibaut Mongon:

Yes, Nick, great question. So on the leadership, we are making progress to fill the segment leadership position, so we will inform you when we are ready to do so. In the meantime, things are happening fast and furious. In Kenvue, our Chief Growth Officer, Charmaine England, is leading the segment in interim and making great progress there. I talked about how the US team is focused on execution, the same thing outside the US. So the entire team around the world is mobilized to execute risk precision against our three priorities, and that includes Skin Health and Beauty, and you start seeing the impact of their work. Now, talking about your second question on our brands, our focus is on making sure that our brands are more relevant every day and reach more consumers in multiple ways, and that's why we are so focused on executing risk precision, making sure that we reach more consumers with social media influencers. We reach more dermatologists, so they can recommend the brand more. Through these activities, we are not only reaching more consumers, but we are more relevant. This is also the case with innovation. Innovation is, every time we launch a new product, and Collagen Bank is a good example, it's an opportunity for a brand like Neutrogena to advance its relevance with our target audience and demonstrate our superiority. So our brands are strong, highly penetrated. I talked about the improvement we have seen in the first half in household penetration for Neutrogena in the US, which is great. We are focused on improving the relevance of our brands and innovation plays a big role there.

Filippo Falorni:

Hi, good morning, everyone. Thanks for taking a question. So I wanted to ask about the Essential Health business. It's been an area of strength in your portfolio. Maybe what drove the strength in the quarter, a bigger improvement in volume growth compared to Q1? Maybe you can elaborate on that and some of the expectations into the second half for Essential Health. And then a second question, I have a quick follow-up on the Skin Health and Beauty business. Maybe you can comment about the China portion of the business, what you saw in the quarter, what your expectations in the second half. Thank you.

Operator:

Our next question comes from the line of Susan Anderson with Canaccord Genuity.

Thibaut Mongon:

Okay, I'll start with telling you a little bit about what we see with consumer and then I will let Paul answer your question on the gross margin in the back half of the year. So when we look at the consumers in the U.S. and frankly around the world, we see that consumers continue to be thoughtful and choiceful on where they make trade-offs. One area where they are not making trade-offs is their health and the health of their loved ones. They are, we see consumers, I would say, increasingly prioritizing their health and the health of their family. We have in our portfolio different price points and different brands to meet them where they are and carry out to the different needs of different consumers but we see that in consumer health, consumers are willing to pay a premium for brands that are science-backed, recommended by their doctors and brought to them by a brand they trust and that's what Kenvue is all about. So in my prepared remark, I talked about Tylenol Easy to Swallow, or Listerine Clinical Solutions. I just talked about BAND-AID Pro Heal. These are all premium solutions that are 10%, 15%, 20% more expensive than the base offering and they are extremely well received by consumers. Why? Because they bring an efficacious solution to real need for consumers. We are not in the impulse buying categories at Kenvue. We are providing efficacious solutions to respond to the needs of our consumers. Another data point that I would give you is that we don't see a change in the penetration of private level in our categories in the US and around the world. If I take the US Self Care category, which is probably one of the most penetrated categories we have in terms of private level, the private level penetration is down so far this year. So we don't see in our categories and at Kenvue what you see in other categories. Having said that, we don't take it for granted and our teams work very hard every day to make sure that we understand our consumers, are close to our consumers and bring them the data, the solutions, the products, the brands they trust and the need to take care of their health.

Operator:

Our next question comes from the line of Jeremy Fialko with HSBC.

Thibaut Mongon:

Yes, Jeremy, so your first question on what we see in the Skin Health category, we see units about flat in Q2, I would say. You have differences between body, sun, hair and face. Within face, we see some softness recently in moisturizers, but offset by growth in acne as an example. So I would say that from a Kenvue point of view, we are focused on executing the plan I highlighted, and we don't see category dynamics impacting the precision in the execution of our plan moving forward. If you think about the back half of the year, I'm not going to start reporting on Q3, but I would say that, sun, we saw a positive shift in consumption in June, and basically the season is almost is basically done by the end of the second quarter in terms of shipments for us and I would not expect replenishment happening in Q3. For the upcoming cough, cold and flu season that's in front of us, as we said at the beginning of the year, we are planning for normal season this year. What we are seeing is more in terms of phasing of shipments between Q3 and Q4. What we see is retailers reverting to their historical ordering pattern of ordering what they need more in Q4 than in Q3. So last year when we were still recovering from the pre-pandemic in ‘22 and there were questions on supply chain resiliency around the world, we saw some retailers anticipating their purchase in Q3. This year we don't see that happening. We see retailers reverting to their historical ordering pattern capitalizing on the fact that supply chain is more resilient and that certainly is the case with Kenvue. But as always, we will be ready to respond to the demand regardless of the season.

Peter Grom:

Thanks operator and good morning, everyone. I hope you are doing well. Maybe just to start a bit more of a housekeeping. I think you mentioned in response to Andrea's question that you expect sequential improvement in volume performance in the back half of the year for Skin Health and Beauty. Do you anticipate returning to growth at some point in the backup year? Just trying to make sure we think about the trajectory correctly, just giving all the moving pieces.

Operator:

Thank you. We have reached the end of our question and answer session. I would now like to turn the floor back over to Thibaut Mongon for concluding comments.

Operator:

Thank you. This does conclude today's teleconference. We appreciate your participation. Have a wonderful day. You may disconnect your lines at this time.

Operator:

Hello and welcome to Kenvue First Quarter 2024 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Tina Romani, Head of Investor Relations for Kenvue.

Thibaut Mongon:

Thank you, Tina and thank you to everyone for joining us today. I'm pleased to be here with you this morning to discuss our solid start to the year with Q1 results coming in ahead of expectations. Earlier this year, I shared with you how we are committed to transform our organization with 3 clear strategic priorities in 2024

Operator:

[Operator Instructions] And your first question comes from the line of Andrea Teixeira from JPMorgan.

Thibaut Mongon:

All right. Andrea. And so many questions in your question, let me take the first one very quickly on inventory. We mentioned that we saw an impact of the inventory reduction in some U.S. retailers in Q1 in Self Care but across categories, I would say. And we expect this to continue in Q2 but not last beyond Q2 in terms of this

Tina Romani:

Hi, everyone. Apologies for that. We had some technical difficulties in our room. We will just go back to Thibaut answering your first question from Andrea.

Operator:

Your next question comes from the line of Bonnie Herzog from Goldman Sachs.

Thibaut Mongon:

Yes. So what do we see in our categories? We see that our categories continue to be resilient and strong, that's probably unique to -- linked to the unique nature of the consumer health categories compared other stable categories you may be familiar with. In our categories, consumers are looking for efficacious solutions at a compelling value proposition but it is exactly what we offer at Kenvue. If I look at one indicator which is the penetration of private label in our categories, we don't see that moving around the world. Actually, the penetration was down in the U.S. in the most recent read. It's also linked to the fact that our Kenvue brands are strong. We are typically number 1 and number 2 in our respective categories. We offer very strong value proposition at different price points for different types of consumers. And so we cater to different needs of different consumers through our portfolio. Now it's not something we take for granted. Every day, our teams are focused on making sure that we increase the relevancy of our brands with consumers, our credibility with health care professionals, to maintain our leadership position.

Operator:

Your next question comes from the line of Steve Powers from Deutsche Bank.

Thibaut Mongon:

Yes. So let me take the first part of your question, Steve and I'll have Paul answer the second one on the reinvestment. Our Vue Forward has always been a key element of our plan. We see the opportunity of exiting TSAs to not only clone the way of working we had as a division of J&J but as an opportunity to reinvent our ways of working to make Kenvue more competitive and a company focused on profitable growth. And that's what Our Vue Forward is all about. We are -- we have been thoughtful about putting together a comprehensive program that covers our global operations. As you said, our Board formally approved this work this week. And so today, we are sharing the details with you. We are -- everybody at Kenvue is mobilized to transform our company. That's something that we started doing from day 1 but we are clearly ramping up our efforts in this area as we enter our first full year as an independent company. And as I said, everybody understands that -- and is excited that the TSA exits is really an opportunity for us to reinvent our ways of working and become more nimble, more agile, closer to the consumer with better defined roles and responsibilities, having our teams co-located for better collaboration, innovation, creativity. And that's what we are all going after through this program.

Operator:

Your next question comes from the line of Nik Modi from RBC Capital Markets.

Paul Ruh:

Thank you, Nik. And let me take the first one, what drove the outperformance in Q1. Remember, we guided to about flat and the outperformance was driven by price, a little bit by a little bit by volume as well. And from a regional perspective, Europe is doing very well, slightly ahead of our expectations and Essential Health from a segment perspective is also performing very well both in EMEA and LatAm. The rest is performing in our expectations. So pockets of strength across the portfolio as we execute against our priorities. I'll let you answer the second part of your question.

Tina Romani:

And then, Nik, maybe just to add on because it's an important point just in terms of Q1's outperformance. Paul talked through some of the unique dynamics. There's also unique dynamics in the second quarter that will absorb some of that. So overall for the first half, kind of in line with expectations in terms of performance.

Operator:

Your next question comes from the line of Anna Lizzul from Bank of America.

Paul Ruh:

Thank you for the question, Anna. Let me take the first part and Thibaut will the second one. In terms of how we plan to spend our investments in our brands, remember, we always take a digital-first ROI-driven approach. We are on track to investing the $300 million more that we mentioned at our Q4 earnings. And we began Q1 with a focus on our 15 priority brands, considering what we call investable propositions and those are the ones where we maximize the return on investment. We are increasing investment across a spectrum of activities, from in-store activation to media, digital influencers and also HCP endorsement with a focus to amplify our innovation. Now the timing of the payback, you may ask, may vary. For example, in-store promotion has a more immediate but short-lived payback. And when we think about on the other extreme, HCP engagement is generally more of a long-term, more durable impact. But we're balancing all of those activities, focusing on the 15 priority brands and we're encouraged by what we are seeing in Q1. And we'll continue to deploy in the balance of the year to maximize reach and return on investment. Thibaut, let me pass on the second question to you.

Operator:

Your next question comes from the line of Filippo Falorni from Citi.

Paul Ruh:

Yes. Thank you for the question, Filippo. Hyperinflation, particularly in both Argentina and in Turkey, represented about 90 basis points in Q1 with no impact to earnings. We are taking the appropriate pricing. That's why there's no impact to earnings. Hyperinflation is expected to have about 50% benefits for the top line for the full year as this 90 basis points in Q1 was particularly high given the compares versus last year. Do you want to take second one?

Operator:

Your last question comes from the line of Korinne Wolfmeyer from Piper Sandler.

Paul Ruh:

Yes. Korinne, thank you for the question. We're actually very, very proud of the work that team is doing. Gross margin is a strong muscle for Kenvue. And pricing, that is value realization, continues to be a component our gross margin enhancement along with continuous efficiencies in our operations. The impact of inflation is also moderating with agrochemicals becoming now a tailwind and is still offset by some headwinds in labor and energy. And we're mindful of the unique dynamics and the volatility that we still see in the commodity markets. But we're very confident that we will be reaching, as I said in my prepared remarks, our stated goal of 59% by -- that we had back in 2021 this year. So we're more optimistic about the gross margin enhancement that will help fuel the brand activation and getting closer to our consumers and customers. As to what it means in terms of the cadence of the year, there's always a natural seasonality in our business. But I would -- it's fair to assume that our gross margins will be slightly better than we originally anticipated, that will continue to allow to fuel our investments in our brands.

Thibaut Mongon:

So thank you all for participating on today's call and apologies again for the technical glitch at the beginning. As you can see, we are pleased with our solid start to the year. As we have discussed, we are committed to continue to transform our organization with our 3 clear strategic priorities

Operator:

Hello. And welcome to the Kenvue Fourth Quarter and Full-Year 2023 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. [Operator instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Tina Romani, Head of Investor Relations for Kenvue.

Thibaut Mongon:

Thank you, Tina. And thank you to everyone for joining us today. 2023 was a year of transformational change for our company and for 22,000 Kenvuers around the world. Our teams accomplished a tremendous amount, successfully standing up Kenvue as an independent public company, while continuing to drive profitable growth. While we accomplished a lot in 2023, we know we have areas where we need to increase our focus and improve. So as we enter 2024, we have identified three key priorities that will enable our continued transition as an independent company, while continuing to grow the business. This year, we will reach more consumers, with a stronger focus on our 15 priority brands, free up resources to invest behind our brands and foster a culture that rewards performance and impact. In 2023, we delivered on our long-term value creation algorithm centered around profitable growth, durable cash flow generation and disciplined capital allocation. Our 5% organic growth was broad-based across all three segments, all four regions, and all eight product categories. Self Care delivered another banner year of 8.4% organic growth, sustaining the momentum we have built over the past several years, resulting, once again, in strong revenue growth and share gain. Essential Health grew ahead of our long-term expectations, with 3.6% organic growth, while continuing to execute our strategy to drive gross margin enhancement through successful value realization and premiumization initiatives. And in Skin Health and Beauty, organic growth was 1.8%, less than we expected, mostly due to specific missteps around in-store execution in the US, which we are actively addressing, and I'll give you more details about that in just a moment. We continued our successful multiyear program to expand gross margins in 2023 with 30 basis points of expansion through thoughtful revenue management initiatives and relentless supply chain optimization. This further demonstrates that we have the capabilities and the strategies in place to drive profitable growth even in a dynamic and uncertain macro backdrop. And finally, we utilized our strong free cash flow to initiate our dividend program, delivering on our commitment of returning cash to shareholders. Pivoting to Q4 specifically, let's now have a look at the performance of each one of our segments, and I'll start with Skin Health and Beauty as our disappointing fourth quarter's performance on top line clearly fell short of expectations, both yours and ours. Looking by region, it is evident where we have strength to leverage and where we need to improve. EMEA and Latin America ended the year strong. In EMEA, organic growth improved sequentially quarter-over-quarter on positive consumer response to innovation launched earlier in the year. In Germany, for example, Neutrogena Hydro Boost has fueled growth ahead of the category. In Latin America, where we continued to grow double digits, Neutrogena faced doubled sales in the quarter, supported by the successful launch of Hydro Boost refills. In China, weaker consumer demand continued to pressure the overall category in our skin care brands. However, it is our performance in the US that did not meet our expectations. As we have talked with you about, we had ambitious fourth-quarter recovery plan for the US, but, frankly, the execution of this plan was disappointing. Restoring Neutrogena to the level of growth we know the brand is capable of is a priority for me and for the team. So over the past several months, I spent significant time with our team in the US and engaged with our customers as the diagnosis is clear. We know our brand equities are healthy and our products resonate with consumers in the category. However, we must improve our in-store execution capabilities to drive stronger demand for our brands, better communicate our value proposition to consumers, launch innovation successfully, and finally, support our brands with a robust level of marketing investments. In early December, we shared that Jan Meurer, previously our Chief Growth Officer, will assume the position of Head of North America. With Jan's deep knowledge of our portfolio and our growth strategy, he has already outlined with his team the focused road map that they are executing to strengthen their capabilities and stabilize the business. Specifically, the recently redesigned North America Skin Health and Beauty leadership team is taking action in three areas. First, we are strengthening in-store presence and prominence through better planning with customers, enhanced packaging that clearly articulate dermatological benefits and more prominent in-store brand activation. Second, we are enhancing consumer engagements through distinct and consistent brand experiences delivered with the appropriate level of reach and frequency and supported by a revamped marketing effort. And third, we are amplifying innovation through bolstered demand-generation activities with consumers and healthcare professionals. So, this will not be an overnight shift. It will take time for these actions to generate impact on our results, which we expect to occur in the second half of the year, but we are confident we have correctly diagnosed our weaknesses and are making the necessary changes. Additionally, we believe our strong partnerships with retailers, coupled with increased investment and a higher level of precision in our execution, will enable us to stabilize the business in the US and deliver stronger growth in 2024. So now turning to the rest of the portfolio. In Self Care, our largest segment, it's a very different picture. We ended the year in line with our expectations, delivering organic growth of 8.4% in 2023 on top of 10.9% growth in 2022. We continued to demonstrate our leadership in the fourth quarter, reading the season accurately and activating our brands with precision. Adult Tylenol continued to gain share in the US, with 78 consecutive weeks of share growth even as category volumes declined as expected with roughly 15% lower incidence levels this cold and flu season compared to 2022. And again, this quarter, we strengthened our leadership positions with relevant innovation, premiumization and leading healthcare professional endorsement. So looking to 2024, we intend to continue to deploy this winning formula around the world. And finally, in Essential Health, performance was led by oral care and women's health, while baby care shipments were less robust this quarter. Oral care grew 8%, with organic growth in all regions, including the US, where Listerine, despite being around five times bigger than our next competitor, remains the most productive brand in the category and has now delivered 21 weeks of double-digit consumption growth. The launch of Listerine gum therapy has done extremely well as the largest innovation in the US mouthwash category in 2023, reaching 1 point of share in 12 months just for this code. And we have more great innovation planned in 2024. Which brings me to our priorities for this year. 2024 will be our first full year as an independent company. And you will see us starting to operate differently than what we have in the past, which will enable us to unleash the full potential of our portfolio. As I shared earlier, we have three priorities

Operator:

[Operator Instructions]. Our first question comes from the line of Stephen Powers of Deutsche Bank.

Thibaut Mongon:

Regarding your question on the top line and our ambitions for 2024, we continue to see our categories growing 3% to 4% in 2024 and beyond. Our guidance for 2024 reflects a range of scenarios. It does embed a sequential improvement as we move through the year and as we lap the unusual compares of 2023 that we talked about, but also the fact that we expect our increased investment and the plans that I outlined earlier generate impact, especially in the second half of the year. So that's what makes us confident in our plan for the year. But we also think it's prudent to acknowledge some of the dynamics at play in 2024, and that's why our guidance also contemplates certain headwinds that could materialize, such as further softness in China, the time it will take to improve in-store execution in Skin as well as the possibility for unknowns in our seasonal businesses. But I reiterate that we are confident in our plans for the year.

Paul Ruh:

In regards to your first part of the question, yes, we are very pleased with our gross margin trajectory. As you know, and Thibaut mentioned, we have developed a muscle in terms of continued sustained gross profit margin enhancement. And the FX that I talked about is embedded in gross margin and also in SG&A, but primarily in gross margin. To your second question, year-over-year rates of advertising, we will disclose advertising in our K. Advertising year over year versus 2022 was slightly down. But I can tell you that we have very strong plans to increase our advertising. I mentioned 15%. We're approximately $300 million more that will fuel the progressive growth enhancement that Thibault talked about.

Anna Lizzul:

I wanted to ask on Q4 Skin Health and Beauty. I know you said the volume weakness was mostly driven by the US. But can you be more specific on how much of the weakness was driven by China on Dr.Ci:Labo? And are you expecting this to recover in Q1 in terms of your guidance? And then also in the US on Skin Health and Beauty, in Q3, you had highlighted some innovation in sun care for Neutrogena, which helped last quarter, but volumes saw a significant deceleration here in Q4. So in terms of the recovery in distribution, where are you at in your conversations with retailers?

Anna Lizzul:

And if I can ask a follow-up on Self Care in Q4. Just outside of cold, cough and flu, could you comment on the rest of the portfolio? I think you had mentioned last quarter you were seeing some gains in your other categories. So I was wondering if there are some bright spots there? Or if they were also somewhat of a drag in the quarter?

Operator:

Our next question comes from the line of Andrea Teixeira of J.P. Morgan.

Thibaut Mongon:

That's a big question, Andrea. It's an important one. So let me unpack your question in terms of phasing in what we plan to see unfolding in Skin Health and Beauty for the year. First of all, I think the way you are describing the year is directionally correct. We are not guiding by segment, by quarter. But I think the way to describe the phasing throughout the year is directionally correct and in line with the way we see it, given the noise you have in the comps. You talked about the impact of discontinuation, the suspension of our sales in Russia in the first half of the year, these are going to be tailwinds in terms of growth rate. But we have headwinds like, for example, in Q1, the large replenishments we saw in retailer inventory once we got out of the majority of our supply chain issue in the back half of 2022. That's going to be a headwind for us. If you exclude these comp dynamics, what we are laser-focused as an organization is deploying the plan that I just highlighted, and making sure that we execute with precision. That does include the stronger presence in-store, but that also includes amplifying our reach to consumers and healthcare professionals. And so, that's where you will have different phasing of the impact of these different aspects of the plan throughout the year. I can tell you that we are executing our higher investment plan in terms of media as of January. So you will see a lag, as we all know, between the spend in advertising and the consumption that has already started. In terms of in-store activation, that will happen throughout the year, depending on the rhythm each retailer has. So, we are laser-focused on executing these building blocks. You also mentioned that we are doing very well online, where the brand experience is very strong, and we grew the brand, like Neutrogena, double digit. That's something that is not easy for you to track, but that continues to be a source of strength for us. And so, we are laser-focused on the tracked channel, if you will, which is what you see and which is where we have the biggest area for improvement.

Paul Ruh:

Yes. Directionally correct, Andrea. As you know, gross margin is the result of several elements, including value realization. We have about 60% of the value realization as a carryover from last year, and we will take surgical pricing in addition to another 40%. So that's one in addition to premiumization and mix. And also, the efficiency that we talked about. In addition, of course, you have the inflation and forex impact. Inflation is still positive, but it's coming down. So you will see a progression to contribution to gross margin enhancement in terms of that inflation. We're exiting TSAs as we speak. Day by day, we're talking about hundreds of TSAs, and that impact both our gross profit line and also our operating income line, and those are spread throughout the year, where you will be seeing is the investment starting right out of the gate. Some of that will bear fruits later. If it's more equity advertising or promotional spend will deliver the benefits in the shorter term. So that's how I see the cadence. So it's definitely more of a – it's a balance with an enhancement toward the second half, and we intend to continue that into 2025. We're not running into 2025, but that philosophy of heightened investment should continue beyond 2024.

Filippo Falorni:

I wanted to go back to the question on marketing investment. I think the initial plan was to spend more in 2023. But I think, Paul, you said advertising was slightly down in 2023. So maybe what drove, I guess, the decline? As you think about the investment into 2024, can you give us a little more concrete examples of where you're spending the advertising by product, by category, and your expected ROI on those investments?

Thibaut Mongon:

Filippo, this overall investment is broad-based to activate our brands with consumers and with healthcare professionals. So I remind you that our advertising line only captures part of our investment to activate our brands as everything that's related to healthcare professional engagement is not reflected in that line. In 2024, we are going to increase our investment in both areas. And we are going to apply this additional investment across the portfolio, but very focused behind our 15 priority brands that I highlighted in my prepared remarks. So, it's a very focused plan, but with more fuel behind a philosophy that Paul highlighted of extremely high ROI. We have, I believe, industry-leading ROIs on our marketing investment. This is a capability that we have developed over the years with state-of-the-art analytics, systems and capabilities. So we intend to continue to use this disciplined approach to deploy a higher level of dollars. And so, that's, once again, what makes us confident in our ability to deliver the plan we outlined this year.

Thibaut Mongon:

Filippo, what's very clear about Skin Health and Beauty is that the opportunities to improve are really isolated to two areas – two important areas, but two areas. One is the China market. And the other one is, I would say, in-store performance in the US. So our plan is laser focused to improve our performance in these two areas, while we continue to fuel growth in the other areas where it's working well, namely Europe and Latin America. So, in China, it's not entirely in our hands, and that's why I talked about our position to thoughtfully track how the categories are developing in that market, make sure that we do not invest ahead of the curve to get a strong return. So we are monitoring consumer sentiment. And as we see the right conditions for our skin care brand in China, we will invest appropriately. In the US in-store, what's different in 2024 compared to 2023 is a higher level of precision in the execution, the heightened focus. I can tell you that many people in the organization are focused on this plan. The plan that Jan, our new leader for North America, and his team, with the support of the entire organization, have put together and started executing, as we speak, is very precise. And this heightened focus, increased level of precision, and higher level of investment, again, we would expect this to deliver stronger results, especially in the back half of the year. It's not going to happen overnight. But over time, we are confident that we are going to see the full potential of our brands being unleashed in the market.

Alec Legg:

Alec Legg on for Susan. Lot of color, so thank you for that. But on the gross margin, you said you expect it to get to fiscal 2021 levels. I guess, what are the key drivers of those gains in fiscal 2024 versus 2021? And how should we think about how that progresses through the year?

Alec Legg:

Potentially a quick follow-up. Are you able to comment on the acetaminophen lawsuit? It seems like the judge had a positive ruling for the defendants.

Operator:

Our next question comes from the line of Navann Ty of BNP Paribas.

Thibaut Mongon:

Let me take this one. I think, overall, the execution of our recovery plan in the fourth quarter fell short of expectations on a number of elements that I talked about. In a nutshell, it's making sure that our brands are more prominent in-store, easier to shop and supported by the appropriate level of engagement activities, both at the consumer and healthcare professional level. While all these elements were included in the plan, the level of investment or the precision of the execution was not what we expected, and the outcome was not what we expected. Now lessons learned. All these lessons are included in the buildup of the plan for 2024. And that's why you see us in the US executing a plan that is different from what we had in 2023 in these different dimensions. And so, you will see this broad-based activation plan put in place. But I would say, if you think about the three priorities I outlined for the company more broadly in 2024, you will see a different Kenvue in 2024 compared to what you saw in 2023. It's going to be our first full year as an independent company. And so, you will see, especially our 15 priority brands, being activated at a much higher level in 2024, with strong building blocks across these 15 brands and across our three segments. You are going to see us being much more agile and moving with speed and urgency to capitalize on all the opportunities we see in the market and unleash the full potential of our portfolio. That requires investment. That investment is going to be fueled by the continued and, I would say, accelerated gross profit margin enhancement that Paul referred to. As we exit our TSAs with Johnson & Johnson, it's also an opportunity for us to reinvent the way we work, work faster, better, make it easier for our teams to operate, but also do it at a lower cost base. And this combination of expanded margin and efficiencies in the organization is what's going to fuel this investment and allow us to fuel growth in 2024. Now, the year will be a bit noisy due to the unusual compares we have in 2023. But if you look at the underlying strength of the business and the building blocks we have to drive growth in 2024 and profitable growth in 2024 and bring our long-term algo to life, we are confident in our plans.

Tina Romani:

Navann, like I said, there's really not much I can share. We're going through the process, now that the court has granted our motion to exclude expert testimony. So we're going through the process to allow the court to determine whether the cases are dismissed.

Peter Grom:

I guess I had a more conceptual question on the guidance. But over time, we've kind of seen some of your staples tiers that have underperformed from a top line perspective or a share perspective. We kind of rejigger investments to try and fuel growth. In many cases, that coincides with rebasing earnings to set the company up for a stronger growth, not in the current year, but more in future years. Is that what's going on here? Like, has your thought process on the need for investment and innovation evolved versus where we were six, nine months ago? Or has this kind of earnings performance been contemplated for some time? I guess as a follow-up to Steve's question earlier on the organic growth. Is the flat performance in 1Q a function of weaker category growth and the improvement just is something that the category accelerates? Or is the underlying improvement assuming that your performance relative to the category improved substantially? Because it would just seem that if you're kind of exiting the year at more mid-single-digit growth that that would imply some pretty decent share gains. So just any color on kind of the share assumptions would be helpful.

Operator:

Thank you. We have reached the end of our question-and-answer session. I would like to turn the floor back over to Thibaut Mongon for concluding remarks.

Operator:

Thank you. This concludes today's conference call. We thank you for your participation. Have a wonderful day. You may disconnect your lines at this time.

Operator:

Greetings, and welcome to Kenvue's Third Quarter 2023 Earnings Conference Call. My name is Darryl, and I'll be your operator today. [Operator instructions] As a reminder, this conference call is being recorded. It is now my pleasure to introduce you to Kenvue's Vice President of Investor Relations, Tina Romani.

Thibaut Mongon:

Thank you, Tina. Good morning, and thank you for joining us today. I'm pleased to be here with you, hosting our first earnings call as a fully independent company. Since our last call, Kenvue has formally separated from Johnson & Johnson, and we are now included in the S&P 500 Index, solidifying our place as the world's largest pure-play consumer health company by revenue. It's hard to believe it has only been two months since J&J completed their successful exchange offer given all we have accomplished this year. So in addition to delivering another healthy quarter with 3.6% organic growth this quarter on top of 4.7% growth last year, we also continued to make tremendous progress standing up Kenvue for success as a stand-alone company. From the creation of legal entities and to transfer of licenses to the development of fit-for-purpose company policies and build-out of systems, our teams continued to execute our separation plan successfully and on time. We remain on track in building a consumer-focused operating infrastructure while simultaneously bringing to life our purpose to realize the extraordinary power of everyday care and delivering profitable growth. Operating in the attractive consumer health space with an unparalleled portfolio of science-backed, healthcare professional-recommended trusted brands is what drives the resiliency and sustainability of our performance. We do all this in what continues to be a volatile environment, and we are conscious of the impact of the current geopolitical and macroeconomic situation and consumer behavior. It is our long track record through economic cycles and our performance this year that gives us confidence in the superiority of our model based on brands that are part of daily rituals and designed for moments that matter. Every day, we continue to make sure our brands are attractive for all consumers, and we cultivate their desire for our efficacious, trusted products. Similar to Q2 and consistent with what we have seen historically, while consumers may be trending down in certain discretionary categories, we continue to see strong affinity for our brands and stable private-label penetration. As a stand-alone company, our teams remain focused on advancing consumer health through innovation, bringing new options to market that consumers love, and expanding the reach of our brands in the categories we operate in. And we see this reflected in the healthy performance of our portfolio again this quarter. Starting with our largest segment, self-care. Once again, this quarter, self-care has demonstrated its ability to serve consumers with trusted solutions when they need them most. Even as unprecedented levels of cold, cough, and flu incidents started to normalize as expected this quarter, we continue to see self-care outperform the market, growing 6.7% on top of a strong 6.9% growth last year, driven by both value realization and positive volumes with all our product categories growing mid- to high single digit. Consumer loyalty to our brands, alongside investments in relevant brand activation, introduction of consumer experience, enhancing innovation, and premiumization continue to foster volume growth and share gains. Let me share some examples with you. In digestive health, our Imodium and Pepcid brands are outpacing the market as supply recovery and strong consumer demand end up in growth. As consumer preferences shift away from preventive solutions to immediate relief products, our teams strategically launched successful brand activation campaigns that capitalize on this dynamic, ultimately accelerating our share gains during the quarter. In pain care, even with cold and flu incidence levels down and a slow start to the season so far as the weather in the Northern Hemisphere remained unseasonably warm, we are gaining share this year globally through preeminent innovation and product premiumization. Tylenol, the No. 1 pain brand globally, continues to gain share with successful premiumization initiatives and the reintroduction of product activation and display supporting growth through the testament to the brand's leadership, the enviable consumer and healthcare professional trust and the strength of our teams. Another standout innovation in this category that deserves highlighting is our recently launched Motrin Dual Action product in the U.S. It combines two core ingredients from two iconic brands, Motrin and Tylenol. And the combination of these two brands is resonating with our consumers with eight hours of relief in pain and inflammation, driving share gain for Motrin. Beyond the U.S., we apply a similar winning formula around the world. In China, for example, Motrin recently expanded into more holistic fever solutions with the successful launch of new Motrin fever patches. Within allergy, while the season remained soft with lower incidence levels this year, we have continued to drive accelerated share gains globally and in our largest market, the U.S. Adult Zyrtec has maintained its No. One branded share leadership for 77 consecutive weeks now and Children's Zyrtec achieved No. 1 branded share position through an impactful go-to-market strategy and hyped-up outreach to healthcare professionals supporting the successful launch of Children's Zyrtec Chewables last year. We also drove share gains for Benadryl in the U.S. with the launch of our extra-strength formula and for our allergy portfolio in China. Smoking cessation had another strong quarter as well. In the U.K., our Nicorette team secured a new indication for vaping cessation. Early indications of consumer response have been strong with Nicorette gaining share and increasing household penetration. This new indication demonstrates Kenvue's credibility in establishing new standards in the category while also highlighting the opportunity for growth in other markets around the world. Through these examples, you see the Kenvue model at work. We continuously strengthen our leadership positions across product categories, introducing impactful innovations, bringing healthcare professionals new clinical data, and identifying solutions to help address unmet consumer health needs. And we do this successfully, extending the reach of our iconic brands to deliver sustainable growth. Before I wrap on self-care, I want to take a moment to address the U.S. acetaminophen litigation, which we appreciate late on our engagement with many of you in recent weeks, remains top of mind. As you will understand, I'm limited on what I can say on active litigation. However, even some of the noise and frankly misinformation we have seen lately, I believe we should provide some clarity. Over the past several months, it's important to note that the only meaningful development in the litigation from our perspective has been that FDA continues to maintain the same pregnancy advice on acetaminophen labels that has been in place for decades. This conclusion is based on multiple reviews since 2014 with the most recent being March 2023 that recent studies do not change FDA's view on acetaminophen's safety. For us at Kenvue, nothing is more important than the health and safety of the people who use our products. We are also concerned about the potential for real public health consequences in allowing claims made in courtrooms to influence medical decisions. Acetaminophen is one of the most studied medications in history and is often recommended by doctors as a first-line treatment option for women who have a fever or experiencing pain during pregnancy. Conditions that, when left untreated, are scientifically known to potentially have serious health consequences for both mother and baby, and we continue to stand behind the safety of our product. Getting back to the third quarter and moving to skin health and beauty, while we are executing on our plans to gradually increase performance, with organic growth about flat this quarter, our current results do not reflect our long-term ambition for the segments nor the underlying strength of our brands. There were two primary pockets of weakness this quarter in the segment which accounted for about two-third of the 6.8% volume decline

Operator:

Our first question comes from the line of Andrea Teixeira with J.P. Morgan. Please proceed with your questions.

Thibaut Mongon:

All right. Good morning, Andrea. Thank you for your question. So a lot in your questions, so let me get into it point by point. So talking about the consumption, the underlying consumption we see in our business, we see that our consumers continue to be focused on taking care of their own health. We see strong -- continued strong affinity with our brands. We need to unpack the different puts and takes we have in our results, but you see in our Q3 results the strength of the portfolio and the strong affinity consumers have for our brands. If you look at the self-care segment, you see that all our categories are growing behind the consumer demand, healthcare professional recommendation, innovation. We continue to innovate very strongly. I gave you in my remarks a number of examples, and we intend to continue to execute this model where we strengthened our leadership positions with a continuous flow of innovation, new clinical data for healthcare professionals, and to cultivate the vibrancy of our portfolio, which is, I remind you, broader than cold and flu with vibrant business in allergy, in smoking cessation, in digestive health. So we continue to be excited about the prospect of our largest segment, self-care, understanding that we are comping a very strong -- unusually strong, as we said all along, tripledemic and very high cold and flu season we had last winter, and we will certainly not expect the same level of incidents to be replicated this year. That's why we talked all along that we were planning for a more normal season. We -- as you heard from us this morning, so far, we haven't seen really the season starting, and that's what we reflect in our guidance for this year. But we continue to be excited about the strength of the portfolio and the breadth of the portfolio. If I move to skin health, there are a lot of elements and puts and takes here. So that makes it a bit more difficult to understand our performance, so let me unpack it for you. For Q3, we are first lapping a relatively strong Q3 of 2022 with 4.7% organic growth last year as we began to rebuild service levels. On top of that, we have the impact of the discontinuations we did last year. Those were known and expected. As you heard in our prepared remarks, we expect to continue to see some of that in Q4 as Planogram resets are becoming effective in the U.S. and around the world. And we see the Chinese consumer being -- continuing to be very choiceful and cautious about where they spend their money, and that affects demand in this market. So these three elements are really masking all the bright spots that we have in of -- in health segments. You heard that Latin America and Europe are doing very well. We concluded in Q3 a very strong sun season in the U.S. And as we have said all along, our skin health business has been disrupted. We are in -- executing our recovery plan. We're not expecting an overnight improvement. The recovery will be gradual, not linear. We started with sun for the obvious reason, to catch the season. We are now moving to face and body. Lubriderm is doing well. We are launching a number of innovations, especially under the Hydro Boost range in the U.S., and we'll continue to move with body and hair being next in line. So are we -- do we believe that our current performance reflects our long-term ambition for the segment? Absolutely not. But are we confident that the cadence of our recovery plan is on track? Absolutely, and you are going to see that continuing in 2024.

Steve Powers:

Hey, great, and good morning. Thank you very much. A few questions. So Thibaut, maybe to pick up on your last thread there, just maybe a little bit more detail, if you could, around the expected phasing of distribution point recovery in skin health and beauty. I appreciate the phasing of face and then body and hair. But how much progress is this as a way to quantify a recovery of those lost distribution points should we expect in this first phase? And how long do you think it will take to fully recover overall? That's question number one. Question number two. I guess as we step back and maybe, Paul, this is for you, just given the slower cold and flu dynamic that you've called out, the China backdrop that you've called out, as well as currency headwinds, I guess have you altered at all your investment plans or investment levels in marketing or other commercial demand-building initiatives because of those headwinds? Or are you still planning to invest as you were before and perhaps offsetting that with other forms of productivity or the like. Thank you very much.

Paul Ruh:

Happy to. Yes. Thanks, Steve, and great to talk to you. So our priority number one is to make sure that we keep the flywheel turning. Therefore, as you saw in the results of Q3, we put a lot of emphasis on productivity, and you see that reflected in our gross margins because we don't want to miss on the opportunities to invest where we see the growth. And our model, our operating model allows us to do that. What we do is when we see opportunities to invest with high rate of return, we move the resources to that place. And if the season is starting slowly, we move the resources to where we see the season or the other opportunities for growth already there. So we have not changed our investment plans overall. Our focus is to deliver on the productivity to maintain those investments where they make most sense in terms of return.

Operator:

Our next questions come from the line of Jason English with Goldman Sachs. Please proceed with your questions.

Thibaut Mongon:

Jason, good morning first. You are absolutely right in your analysis. We have the second scenario in mind. That's what we are seeing. We see ourselves and our retailers ready for the season. Everybody is prepared for the season, and that's reflecting in the sell-in, and that's reflecting in the strong performance of our self-care business in Q3. Having said that, when we look around the corner and look at signs of start of the season, we have not seen that so far given the very warm weather we have seen in the U.S., in Europe. And so that's what we are reflecting in our outlook, not so much the sell-in. That is, as always, good to make sure that everybody is ready for the season but more what we see on the ground in terms of start of the season.

Paul Ruh:

And a couple of points to add maybe, Jason. The first one is our readiness compared to what it was before is much higher. We have actually increased our capacity in several lines and also in our IT infrastructure to be able to connect much better with our retailers. So when the signal is there, we will be ready to react. That means that we, on a total end-to-end value chain, we're able to optimize inventories for the benefit of us and the retailers as well. So we will be ready, and the situation is much better after the learnings that we had from the previous pandemic years.

Thibaut Mongon:

Yes. So let me take this one. On skin health and beauty and the recovery of distribution in the U.S., as you know, the Planogram resets happen in the fall. So we are just going through the resets, as we speak, right, in the U.S., depending on which customer you are talking about. As I said, we are pleased with some of the wins we have had with these resets, and you are going to see improvement but not immediate. That has always been our plan, and we are in -- we are seeing continued impact this quarter. You are going to see continued impact in Q4, less and less as the Quarter 4 and forwards as we -- as these new Planogram resets materialize in our numbers. So you have a lasting impact of this loss of distribution points. But you're right, we are recovering gradually, as we said all along, through Planogram resets, through launch of innovation. And that's what we saw with sun, that's what we're going to see again in face and body, and hair will be next.

Anna Lizzul:

Hi. Good morning, and thank you for the question. On self-care, volumes were a bit better than expected despite the more normalized or slower start to the cold and cough season. We've noticed that you've gained market share nicely in the self-care categories over the past two years. So even if we do see a softer winter season overall, should we expect volumes to continue to be bolstered by those market share gains?

Anna Lizzul:

Thank you for that. And I also wanted to follow up on skin health and beauty. You did mention in your prepared remarks you are introducing some innovation within the Neutrogena brand. Is that helping you add or regain distribution? And then just in terms of the innovation, given that's typically more premium in nature, year over year, the pricing slowed this quarter versus last year. I'm just wondering why that was given the innovation that you introduced.

Operator:

Our next questions come from the line of Filippo Falorni with Citi.

Thibaut Mongon:

Yes. China represents about 7% of our global revenue, Filippo, so that gives you a sense of our exposure to China that is not disproportionate, I would say. We see, as I said, a couple of consumers to be cautious and choiceful in their spending, and we see that reflecting in our portfolio of skin health. And essential health segment has been impacted by this behavior in China, and we don't expect short-term recovery in that area. On the other hand, on the self-care side, we continue to see vibrant demand for our brands, in allergy, analgesics, as an example. So a lot – again, the power of the Kenvue portfolio that allows us to continue to be confident in the long-term outlook in this market. We continue to innovate in this market. We -- I talked about Motrin fever patches and as an example of the type of innovation we are launching in the market. So for China, the power of the portfolio will continue to be agile and move resources to see -- to the areas where we get a good return. Clearly, today, it's more in the self-care side than in other parts of the business. But our teams on the ground are agile, and we'll continue to be ready. We have been in China for decades. We are in China for the long term, and we remain confident in the long-term prospect of this market given the size of the middle class, the Healthy China 2030 agenda, and other underlying factors in that market.

Susan Anderson:

Hi. Good morning. Thanks for taking my question. I was wondering if maybe you could talk about just the input cost inflation. You called out still pressuring gross margin. Is that still higher costs flowing through, just kind of wrapping around? Or have things elevated further? And then maybe if you could just talk about between commodity costs, labor, etc., what the drivers are there when you expect it to potentially fall off. Thanks.

Susan Anderson:

Great. And then if I could just add one more also on the beauty and skin segment. Just the operating income, it looks like there was increasing deleverage there. Is that mainly from just lower sales? Or is there something else going on there, too?

Operator:

We have reached the end of our question-and-answer session. I would now like to hand the call back over to Thibaut for any closing remarks.

Operator:

Greetings and welcome to the Kenvue Second Quarter 2023 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Tina Romani, Head of Investor Relations for Kenvue. Thank you. Tina, you may begin.

Thibaut Mongon:

Thank you, Tina. Good morning and thank you for joining our second quarter earnings call and our very first as a public company. Our recent IPO marked an important and exciting milestone in Kenvue’s history. Over the last 135 years, we have established ourselves as the world’s largest pure-play consumer health company. And now as a standalone company, we are looking forward to building on our strong heritage and continuing to deliver on our purpose to realize the extraordinary power of everyday care. Before we begin, as you may have seen this morning, Johnson & Johnson announced their intended next step in the separation of Kenvue. At this point, we are very limited on what information we can provide other than what has been made public, and as a result, we will not be able to discuss any further details at this time. What I can tell you is that we are ready to take on the next phase in our journey to becoming a fully independent company. For today’s call, I will begin with an overview of our second quarter results, Paul will then take you through a more detailed view of our Q2 financials and 2023 outlook, and then Paul and I will be happy to answer any questions you may have. But first, let me begin with our strong results this quarter. With over $4 billion in net sales, Q2 was one of the strongest quarters in our 135-year history and certainly is the strongest since the beginning of our business transformation in 2019. Organic sales grew 7.7%, bringing our first half organic growth to a very strong 9.4%. Similar to Q1, our growth was broad-based across all segments of our portfolio and across all geographic regions. So this quarter was yet another proof point showcasing the power of our portfolio. Our three segments did well. We saw double-digit growth in Self Care, continued recovery in Skin Health and Beauty and growth ahead of our long-term expectations in Essential Health. Further, we delivered balanced growth across all geographic regions, with North America contributing about half of the growth with all other regions representing the remainder. There were several portfolio highlights in the quarter, but let me focus your attention on a few standouts. In Pain and in Cough and Cold Care, we saw higher incidence rates drive continued demand for our leading brands such as Tylenol, Motrin and our other brands in these need states. Across our Self Care portfolio, we see innovation, premiumization and health care professional recommendations, all fueling market share growth for many of our brands. In Skin Health and Beauty, our performance in Sun Care showed the power of our brands as we see continued recovery after a period of disruption. Innovation, improved supply and strong commercial execution contributed to sustained market share growth for Neutrogena Sun this season. In Essential Health, our Listerine mouthwash superiority claim of dental floss is being deployed around the world, and our Listerine gum therapy product in the U.S. is ranked number one new code in the mouthwash category this quarter, and we continue to see the power of Band-Aid, where consumer-led innovation and strong customer partnerships delivered another strong quarter. Band-Aid was also recognized in the quarter as America’s most trusted brands for 2023 by Morning Consult, and this is the second year in a row that Band-Aid has earned the top spot. With the macro environment continuing to be challenging, consumers are increasingly more choiceful with their purchase decisions. In the consumer health space, though, they turn to brands and products they know and trust and we have many of those brands in our portfolio. We see this playing out in the value-volume dynamics of Kenvue this quarter. While value represented 9.4 points of growth, volumes only declined 1.7 points and excluding the impact of our own intentional decisions like portfolio rationalization or suspension of our Personal Care business in Russia, volumes were about flat this quarter. Important to note that we delivered this exceptionally strong first half of the year, in part thanks to the investment we have made in our supply chain, building capacity and resiliency. While service levels will continue to be a focus area for us, we have made significant progress that have allowed us to capitalize on and deliver against the unique demands of the first half of the year. Regarding our margins, they continue to be healthy fundamentally when excluding non-operational impacts such as FX or standard company costs. Inflationary pressures, though moderating, continue to be meaningful. But this quarter, again, we use a combination of strategic value realization, both price and mix, and productivity initiatives in our operations to offset a significant portion of these costs, which Paul will get into in just a moment. So net, a strong quarter showing the power of our world-class portfolio of category-leading brands that includes many of the most recognizable household names across consumer health, which brings me to Kenvue’s greatest source of competitive advantage. With a sole focus on consumer health, every day, our 22,000 Kenvue’ers are committed to delivering science-based innovative solutions that increased relevancy with consumers and strengthen credibility with health care professionals. These relationships have been cultivated over decades through innovation supported by rigorous science based on our vast clinical research capabilities and meaningful cross-category consumer insights. As a result, brands across our portfolio have a long history of recommendations by health care professionals and are often the number one most recommended brand in their respective categories, which ultimately fosters lifelong loyalty to our brands, loyalty that is passed down from generation to generation. Our first half results exemplifies its loyalty and consumers’ desire for our efficacious products. While consumers may be trading down in more discretionary and traditional staple categories, we have not seen this dynamic in our portfolio. Consistent with what we have seen historically during times of challenge and uncertainty, private label penetration for our categories remain stable on a global basis this quarter. Our first half results also reflect the unique opportunity we have to expand usage occasions across the spectrum of consumer health. There is no limit for consumers to take care of their own health. And for Kenvue, there is no limit to finding new ways to help consumers take care of their health. The categories in which we operate tend to be underdiagnosed, undertreated and underpenetrated. Using Sun Care, for example, since we are in the middle of the summer season, it’s estimated that 1 in 5 Americans will develop skin cancer in their lifetime. Yet today, a majority of Americans do not use sunscreen on a regular basis. At Kenvue, we want to understand why that is? What are the barriers to adoption? That’s a tremendous opportunity for us to leverage our extensive capabilities and consumer insights to develop innovative new products to better serve the needs of our consumers. So with this in mind, this year in the U.S., we launched Neutrogena PureScreen Plus Mineral UV in 4 sheds that blends mostly to complement skin tones. Our new products are up to 30% less whitening at the leading mineral sunscreen, which is one of the biggest frustrations consumers have. Innovations like these have fueled share gains through better customer retention, increased consumption and attraction of new consumers to the brand, all driving the strength we saw in the quarter for Neutrogena Sun Care. That’s what makes this consumer health space very attractive the infinite ability to expand usage occasions and give consumers around the world new opportunities to take care of their health. Now let me take a moment to speak to the strength and agility of our operating model that supported our results. Since 2019, we have made tremendous strides in removing complexity, streamlining our organizational and operational footprint and simplifying our portfolio while investing in digital and omnichannel capabilities that position us well for the future. Today, we have a resilient portfolio with iconic brands well balanced across categories and geographic markets. Our model is designed to drive synergies across our portfolio from shared consumer insights, go-to-market strategies, operation, marketing, innovation and so on. While we set our strategy and allocate resources at the segment level, all 3 segments are focused on one single and cohesive end market, consumer health. Take products for children as an example. You will see products living in Self Care with children’s Tylenol; in skin health with Neutrogena or Avino Sun for kids; or in Essential Health with Johnson’s Baby or Band-Aid. But it’s 1 consumer, 1 pediatrician, 1 understanding of the interaction between child and parents that allow us to present ourselves as a preferred partner for everything you need for children’s health. And the same applies to the rest of the portfolio. This dynamic is a critical component in understanding the strength of Kenvue. In addition, being a pure-play consumer health business both drives efficiency across areas like R&D and advertising and also afford us agility and flexibility. We saw this agility in action this quarter with the Kenvue teams delivering strong performance on multiple fronts, including responding to unprecedented demand for Self Care brands. So as you can see, our second quarter results are emblematic of the power of our portfolio. In a dynamic macroeconomic environment, we delivered strong top line with operationally healthy margins and solid earnings per share, all of which supported the initiation of our first quarterly dividend as Kenvue of $0.20 per share. Now looking to the back half of 2023. This year has, for sure, been an incredible journey for Kenvue so far, but we have a lot to look forward to with the full year organic growth expected to be between 5.5% and 6.5%. Paul will take you through the assumptions embedded within our full year outlook, but I wanted to take a moment to acknowledge the consumer landscape. It continues to be uncertain, and we anticipate market volatility will continue, including in the incidence level for the upcoming winter season. In this environment and building on the unique nature of the consumer health space, we, at Kenvue, will continue to stay focused on what we do best, delivering superior science-backed, efficacious health solutions to serve the needs of our 1.2 billion consumers around the world who know and trust our brands. In Self Care, we will deliver a consistent cadence of innovation and marketing programs to drive growth on our priority brands. You may have seen we just launched Tylenol Precise where we leverage in Self Care our extensive skin health expertise to develop a maximum strength topical pain treatment with rapid absorption in an esthetically pleasing next-level experience. For me, this is another great example of what we mean by the power of the portfolio with synergies across segments delivering innovative health solutions. Within Skin Health and Beauty, while we expect continued progress on distribution point recovery in the U.S. through the third quarter, we are planning to return to a normal cadence of innovation with a strengthened and more resilient supply chain and reactivation of marketing campaigns to continue to build momentum in our brands. And within Essential Health, we expect science-backed claims and innovation launches to drive category essentiality and relevance the effective execution while strengthening brand equity in priority markets. So as you can tell a lot to look forward to in the back half of the year. So in closing, as the largest pure-play consumer health company in the world and with unparalleled depth and breadth of our portfolio we offer a one-stop solution for retailers, positioning Kenvue as a preferred partner of choice for retailers who want to become the destination for everyday care. This quarter was another strong illustration of the resilience of our categories and the strength of the Kenvue operating model. None of this would be possible without the passion, commitment and owner’s mindset demonstrated by our amazing team of 22,000 Kenvue’ers who work every day to help consumers realize the extraordinary power of everyday care I want to acknowledge and recognize them here as we start our journey as a stand-alone company. To summarize, we feel confident about the future of this business with the strength of our brands, the power of our portfolio and our unique competitive advantages, which we believe will enable us to consistently deliver strong performance over time and drive long-term value for all our stakeholders. With that, I’ll turn it over to Paul.

Thibaut Mongon:

Thank you, Paul. Again, we are pleased with the strength of our second quarter results and our first quarter as a publicly traded company. This quarter highlighted our unique model as the world’s largest pure-play consumer health company, building on our clear sources of competitive advantage to deliver robust financial performance. And now let’s open up for Q&A.

Anna Lizzul:

Hi, good morning. And thank you for the questions. You mentioned innovation several times on the call, and you previously shared that Kenvue has launched over a 100 new product innovations each year since 2020 and they have comprised about 10% of net sales each year. Are you on track for product innovations to contribute to a similar amount to net sales this year? And also, what gives you confidence in the coming quarters that consumers are still willing to spend on higher price innovation and consumer health when we have seen some greater trade down within some categories in HPC? Thank you.

Anna Lizzul:

Thank you. And just as a follow-up, in terms of distribution, are you happy right now with your distribution with various retailers like Walmart, Target and the drug channel? Do you see any areas where you might be under penetrated or any potential categories where you can expand distribution with certain retailers, either domestically or internationally?

Anna Lizzul:

Great, thank you. I will pass it on.

Filippo Falorni:

Hey, good morning, guys. Congrats on reporting the first quarter as a public company. I have two questions on top line. The first at the total company level, just how you’re thinking about the evolution of price and volume in the second half of the year and whether you have additional pricing actions that you’re contemplating?

Filippo Falorni:

Got it, thank you. And then just a follow-up, a second question, particularly Self Care. As you mentioned, very strong cough and cold season, you’re expecting a more normal one. Are you – do you think there was also a little bit of pull forward in demand in the first half of the year as you think about the segment half? Have you contemplated maybe like a bit more destocking at the retailer but also at the consumer level embedded in your guidance for the Self Care segment, particularly?

Filippo Falorni:

Great. Thank you, guys. I will pass…

Andrea Teixeira:

Thank you. Good morning. I just want to follow-up a bit on the commentary regarding the consumer environment and just see if you can speak to the consumer behavior towards the end of the quarter. If you’re still seeing, in general, consumers being not on trading or how you’re seeing price elasticity coming along? And then also, as you just mentioned, regarding the cold season, but any word on how we should be thinking of puts and takes of retail inventory, pantry inventory and consumer demand? Thank you.

Andrea Teixeira:

Thank you. Just a follow-up, if I may, in terms of like the other categories that are not so health-oriented, for example, Listerine and some of the other categories within Adhesives and Wound Care, is that applied to that as well?

Andrea Teixeira:

Thank you to both. I will pass it on.

Peter Grom:

Thanks operator and good morning everyone. So, I was actually hoping to get some more color on the gross margin performance. So, I know you mentioned headwinds from FX, standup costs and inflation, but value realization was strong, and you also mentioned productivity as a tailwind. So, can you maybe just help us bridge the decline in the quarter, which I think was a bit weaker than we were expecting? And then second part to this question, as we look through the balance of the year, is there any color you could share on these moving pieces? And how maybe specifically we should be thinking about gross margin progression? Thanks.

Peter Grom:

No, that’s super helpful. And then maybe shifting gears to China. I would just be curious kind of what you are seeing in that market? How did performance in the quarter prepare or compare versus your expectations? And I guess maybe specifically, as you move through the quarter or around the exit rate, are you seeing any signs of improved demand that gives you confidence that there can be better performance on the horizon or would you expect trends to remain choppy there for a period of time?

Peter Grom:

Thank you so much. I will pass it on.

Jason English:

Hey. Good morning folks. Thanks for taking me in and I will echo some of the other’s, congrats on your first quarter as a public company. I got a couple of questions. First, let’s pick up kind of where we just left off on geography. You mentioned China up double digit. I think APAC sales overall were only up 1.3%. So, what was the offset? And then as we look at EMEA, you started the year really strong with 9.3% growth and it slowed to around 3.5% this quarter despite what looks like it should have been a pretty moderate or much less owners FX headwind, can you unpack that performance there as well? Thanks.

Jason English:

Okay. Good to hear – sorry, go ahead.

Jason English:

And let’s pull on that thread of elevated flu incidences. Since you have IPO-ed, lots of conversations with investors, and one consistent question or area of concern amongst investors is whether or not you are going to enter a Self Care slump. We had sort of twin engines or twin tailwinds behind this business with COVID and then this nasty cold and flu season lifting big parts of your business. Is it reasonable to expect that there will be a Self Care slump? In other words, a period where your business is likely to contract as we – as these tailwinds fade, or is there reason to believe that you could have durable growth, and if so, what are those reasons?

Jason English:

Understood. Thank you all.

Steve Powers:

Hey. Good morning everybody. Thank you. You have spoken to this a little bit, but I just want to kind of round it all out. Within Skin Health & Beauty and Essential Health, the growth in both segments came in slightly below external forecast. So, I was hoping you could put a bit more definition around how they compare to your internal forecast? I mean you have spoken to the issues in Essential Health, but just more broadly. And then I was also hoping you could just clarify for us exactly when you expect to fully cycle the portfolio rationalization headwinds that are impacting both the segments? And if possible, just within the context of that 5.5% to 6.5% organic growth call for the year, talk a bit about how you expect the three segments to contribute to that on an annual basis to give us a little bit more perspective on how the second half is likely to shake out?

Steve Powers:

Okay. Very good. Thank you. And if I could, just on the topic of investment levels, just curious for a little bit more additional perspective, now that you have been operating independently, just your comfort with planned investment levels and to some extent, where you expect to prioritize those investments over the balance of the year?

Steve Powers:

Thank you very much.

Navann Ty:

Hi. Good morning. Can you discuss and tell us more about the supply chain improvements that benefited the second quarter and do you expect them to benefit the rest of the year? My second question is, and apologies if I missed it, can you detail the breakdown of pricing versus mix within the 9% value realization? And just a third one, if you could comment on Kenvue recent dialogue with J&J regarding monetizing the stake in Kenvue with – has there been any change? Thank you.

Thibaut Mongon:

And Navann, on your question about the split from Johnson & Johnson, at this point, you – also that Johnson & Johnson has announced their intention for the next step of the separation of Kenvue. Unfortunately, we are very limited on the information that we can provide other than what has already been made public. I can tell you that we are fully ready. We have been operating independently, and we are very excited about the future.

Operator:

Thank you. Our final questions will come from the line of Jeremy Fialko with HSBC. Please proceed with your questions.

Thibaut Mongon:

Yes. Jeremy, thank you for your question. I will not comment on what other companies are doing. We live in a competitive environment. What I would tell you is that we continue to invest behind our brands. Remember that our business model relies on demand generation delivered through different means. One is direct-to-consumer demand generation activities. Another big part of our model relies on healthcare professional recommendation. And so on both fronts, we continued to invest. We are on track with our investments, and we intend to continue to invest to that level. We do not disclose advertising at a quarter level. We will disclose it on a full year basis. But you should always remember that for Kenvue, advertising expenses is only one part of our demand generation model. Another part, and important part, is linked to healthcare professional recommendation. But we are absolutely committed to invest behind our brands, that’s what we have been doing in the first half, and we intend to continue to do it in the back half of the year.

Thibaut Mongon:

Thank you, Jeremy.

Thibaut Mongon:

So, thank you for this good conversation, and thank you everyone for participating in today’s call. Once again, as you heard from Paul and I, we are very pleased with the strong results we achieved and our teams achieved around the world this quarter. They reinforced the power of our iconic brands, the strength of the Kenvue operating model. So, very strong debut for Kenvue as a newly publicly traded company and we look forward to connecting with all of you again and keeping you updated on our continuous progress on future earnings calls. So, have a great day and thank you everyone.

Operator:

This concludes today’s conference. Thank you for your participation. Have a wonderful day. You may now disconnect your lines.