KVUE - NYSE

Hello, and welcome to the Kenvue Fourth Quarter and Full-Year 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, Sofya Tsinis, Head of Investor Relations for Kenvue.

Good morning, everyone, and welcome to Kenvue’s Fourth Quarter and Full-Year 2024 Earnings Conference Call. I'm pleased to be joined today by Thibaut Mongon, Chief Executive Officer; and Paul Ruh, Chief Financial Officer. Before we get started, I'd like to remind you that today's call includes forward-looking statements regarding, among other things, our operating and financial performance, market opportunities and growth. These statements represent our current beliefs, expectations or assumptions about future events and are subject to various risks, uncertainties and changes that are difficult to predict and could cause our actual results to differ materially. For information regarding these risks and uncertainties, please refer to our earnings materials related to this call posted on our website and our filings with the SEC. During this call, we will also reference certain non-GAAP financial information. The presentation of this non-GAAP financial information is not intended to be considered in isolation or as a substitute for financial information presented in accordance with U.S. GAAP. These non-GAAP financial measures should be viewed in conjunction with the most directly comparable U.S. GAAP financial measures and are not presented as substitutes for or superior to those most directly comparable U.S. GAAP financial measures. Those mostly directly comparable U.S. GAAP financial measures and a reconciliation of our non-GAAP items to those U.S. GAAP measures can be found in this morning's press release and our presentation available on the IR page of Kenvue's website, www.investors.kenvue.com. With that, I'll turn it over to Thibaut.

Thank you, Sofya. Good morning, everyone, and thank you for joining us today. I'll begin by sharing our performance and progress in 2024, then provide a review of our results for the fourth quarter. I'll close by discussing our outlook for 2025, with Paul building on some of these topics later in the call. Our organic sales growth for the year was 1.5%. This was below our expectations, and we are not satisfied with it. As we'll discuss later, this was due in part to lower-than-expected incidences of cough, cold and flu, which negatively impacted our pediatric pain franchise and a reduction in distributor orders in Asia Pacific, particularly China. While topline missed our expectations, we met or exceeded our expectations on other fronts. We meaningfully expanded our adjusted gross margin and took significant costs out of our infrastructure, which enabled us to increase investments in our brands. And we delivered adjusted diluted EPS for the year of $1.14, squarely within our guidance range. At the start of 2024, we outlined three priorities for Kenvue, reaching more consumers, freeing up resources to invest behind our brands, and fostering a new culture that rewards performance and impact. While we still have work ahead of us to accelerate growth, we made progress on each one of these priorities, so let me take each one in turn. First, to reach more consumers across our three segments, we strengthened our presence and prominence in-store and online, launched impact with innovation and expanded and deepened our engagement with consumers and healthcare professionals. In self-care, we strengthened our leadership positions with nearly 80% of the segment gaining share, including our largest brands, Tylenol,

Thank you, Thibault, and good morning, everyone. I’ll start with an overview of results for the fourth quarter and the year, and then close with the details around our outlook for 2025. Fourth quarter organic sales grew 1.7% versus last year, which was disappointing due to the reasons that Thibault highlighted. Organic sales growth in the quarter was relatively balanced between value realization and volume. We drove favorable value realization across all segments and volume growth in both self-care and skin health and beauty. Overall, volume increased 0.7% year-over-year. Value realization contributed 1% to organic sales growth, primarily driven by incremental pricing outside the US. For the year, organic sales increased 1.5%, with value realization of 2.7% and consolidated volume declines of 1.2%. Going forward, we expect a more normal balance between value realization and volume, with a skew to volume increases to drive our organic sales growth. Taking a look at our segments. In the fourth quarter, self-care organic sales grew 2.9% year-over-year as volumes and value realization contributed 1.7% and 1.2% of growth, respectively. As Thibault mentioned, the segment delivered very strong organic sales growth, except for pediatric pain, which was a significant drug on the segment and the company growth. Importantly, in self-care we continue to gain share across categories globally for the quarter and full year. In skin health and beauty, organic sales grew 2.6% year-over-year in the quarter as volume increased 2.1% on easier comparisons, and value realization contributed 0.5%. Pricing actions abroad more than offset the impact of our strategic investment behind select price reductions and in-store activation in the US. We remain focused on building further traction with our commercial efforts to strengthen these segments’ performance. And for essential health, organic sales decline 0.7% in the quarter, with value realization increasing 1.2% year-over-year, which was more than offset by volume declines of 1.9%. While organic sales for essential health grew 4.1% for full year, which was the fastest growth in recent years, the fourth quarter was an outlier, primarily due to a reduction in customer orders in Asia Pacific, particularly in China. Without Asia Pacific, organic sales for essential health grew mid-single digits in the fourth quarter, with Latin America and North America leading the charge. Moving now to adjusted gross margin, our operations team drove meaningful productivity improvements in 2024, expanding adjusted gross margin by 200 basis points versus last year to 60.4%. As anticipated, in the fourth quarter, adjusted gross margin came in at 58.7% versus 59.5% last year, which as you may recall, included a non-recurring benefit of approximately 50 basis points. In Q4, we continued to generate supply chain efficiencies and value realization, which helped offset inflationary headwinds. Adjusted operating margin was 19.2% in the quarter and landed at 21.5% for the full year, right at the midpoint of our 21% to 22% guidance range. Recall, we raised our total brand investment in 2024 by about 20%, with cost savings and gross margin improvement funding this spend. As of 2024 year-end, we're more than halfway through realizing our view forward savings, and are well on track to get the full annualized run rate of $350 million by 2026. Closing out the P&L, net interest expense was $95 million for the quarter and $378 million for the full year of 2024, in line with our expectations. For taxes, fourth quarter adjusted effective tax rate was 17.7%, and full year adjusted effective tax rate was 25.5%, slightly below our expectations due to the realization of discrete tax benefits. And finally, adjusted net income was $499 million for the quarter or $0.26 of adjusted diluted EPS. Full-year adjusted net income was $2.2 billion or $1.14 adjusted diluted EPS, within our 2024 guidance range. Before discussing the outlook for this year, I'd like to take you through two internal initiatives that we are deploying to upgrade data and analytics across multiple facets of Kenvue as part of the evolution of our company. First, as we continue our revenue growth management effort, we are deploying a global center of excellence that will support our markets with strategic pricing and promotion capabilities. We're also implementing new trade spend management technology in select markets, which will facilitate more robust management of trade investment and better inform promotional spending decisions, all to further improve effectiveness. Second, we will complete the global rollout of integrated business planning, with enhanced digital capabilities in 2025. The new IBP process and AI-driven tools will improve the level of information that supports our financial forecasting, enhancing planning accuracy. Also, while these upgraded systems and processes do not protect against some demand changes, they collectively enable greater agility and more timely decision-making, significantly enhancing our ability to respond to shifting market trends. Now, to summarize our expectations for the full year 2025, we expect organic sales growth to be in the 2% to 4% range, representing an acceleration from 2024 levels, with growth expected to be volume-led. Our assumptions are grounded on approximately 2% to 3% growth across the categories and markets where we compete. Based on current spot rates, we're assuming currency will be an approximately 3% headwind to our top-line, resulting in expected net sales in the range of down 1% to up 1%. As you heard from Thibault, we have strong commercial plans for the year for each one of our segments as we bring and amplify more innovation to market, leverage our growing marketing muscle, continue to build distribution and realize benefit from revenue growth management. At the same time, we're coming into 2025 with more competitive brand support levels, with the goal to accelerate consumption. We also expect our teams to execute at a higher level in 2025 behind the full adoption of our new operating model. Looking at our segments, for the full year we expect self-care organic sales growth will accelerate from 2024 levels, building on our strong leadership positions and continuing to introduce differentiated innovation. In skin health and beauty, we expect to return the segment on a global basis back to organic sales growth in 2025 as we continue to strengthen our US business while driving ongoing solid performance in EMEA and Latin America. And finally, in essential health, as pricing rolls off, we expect to deliver more moderate organic sales growth in 2025, with broad-based growth across the categories. From a quarterly progression, as Thibault mentioned, destocking and strategic price investments will impact the cadence of Kenvue’s top-line and margin performance in the first half of the year. Combined, we estimate these factors will account for a three to four point headwind in the first quarter. As a result, we expect organic sales to decline low single digits in Q1. We expect these headwinds on top-line to moderate in the second quarter. These dynamics will mask the underlying health of the business in the first half of the year. As we cycle through them, organic sales growth is expected to be much stronger in the back half of the year relative to the front half. In parallel, we expect 2025 to be another year of strong productivity and efficiencies for our company. We are continuing to accelerate automation, streamline end-to-end processes, optimize spend, leverage digital and AI to enhance logistics and demand management, and are on track to realize the balance of our view forward savings. These combined savings will more than offset the investments we're making behind the business to increase our brand's competitiveness, as well as inflationary and foreign exchange-related headwinds that we are facing this year. As a result, we're planning for adjusted operating margin to expand year-over-year. Given the fluidity of the recent tariff announcements, we have not factored in any impact in this outlook. We are assuming a fairly similar net interest expense to 2024 and adjusted effective tax rate of 25.5% to 26.5%, with about 1.93 billion diluted weighted average shares outstanding. We're planning to grow adjusted diluted EPS on a constant currency basis, slightly ahead of organic sales growth, even as we continue to reinvest at higher rates behind our brands. Adjusted diluted earnings per share are expected to be flat to up 2%, including a mid-single digit headwind from currency. In closing, 2025 will be an important year for Kenvue. As we put our separation from J&J behind us, we enter the next chapter of our journey as an independent company and aim to unleash acceleration in our profitable growth. Our teams around the world are ready and I want to thank them for the passion and focus on helping more consumers realize the extraordinary power of everyday care. Before we open the call for questions, you may have seen the filing that was recently made by Starboard Value. We engage regularly with our shareholders and are open to constructive dialogue and suggestions from all Kenvue shareholders. With that said, the purpose of today's call is to discuss our 2024 results and 2025 outlook. We appreciate your keeping your questions focused on these topics, and we will not be making any further comments on our shareholder conversations or denominations at this time. With that, we will open the call for questions.

[Operator Instructions]. Our first question comes from the line of Filippo Falorni with Citi. Please proceed with your question.

Hey, good morning, everyone. So, I wanted to ask two clarification on the organic sales growth guidance for 2025. First, in terms of like the negative impacts that you saw in Q4 both on cold and flu and essential health, can you give us a sense of like what is the contribution of the drag in Q1? Particularly in cold and fluid, it seems like the case count has really picked up in the end of December, beginning of January. So, are you assuming you're not going to get a restocking on new cold and flu, especially the pediatric cold and flu medicine that you called out? And then on the kind of Asia Pacific inventory issues, can you walk us through like what impact are you expecting going forward and how long it would take you to fix the disruptions that you called out? Thank you.

Yes, good morning, Filippo. And so, question about our guidance for 2025, let me start by talking about how we feel confident about our guidance overall. If you think about our starting point, we grew 1.5% in 2024. You heard me say in the prepared remarks that without pediatric pain, we would've grown one point higher as a company. So, I would say our run rate exiting 2024 is about 2.5%. If you add to that the stronger plans we have for 2025, and the fact that we are going to benefit from the compounding impact of the structural changes we did in 2024, that's what gets us to the midpoint of our guidance. Now, what will bring us up or down versus this mid-point will be driven by the quality of the execution and how consumers respond, but also the seasonal businesses and how the seasons are going to behave in 2025. So, if the seasons are positive, it will tilt towards the higher end of the guidance. If it's not the case, it will tilt towards the lower end of the guidance. Now, as you said, we expect - while we have strong operational plans through the full year, we expect in the first quarter to have two factors that will depress our results and mask the underlying health of the business. The first one is a linear impact of the low pediatric pain incidents that we saw in Q4. And you are right, we are not expecting uptick in Q1 for two reasons. In markets like the US, while we saw an uptick at the beginning of January, then a decline in the middle of January, and we see a slight uptick again recently, it has been pretty erratic, and I think it's too soon to call for an upside in the US. In China, the go-to market is different. Distributors and stores tend to stock up ahead of the season. They had a low season in Q4, as we talked about. And so, even if the incident goes up in Q1, we would expect them to destock and to bleed their inventory in Q1 with no impact on our shipments. And the second reason that will impact the first quarter on that front is the lingering impact of the distribution disruption we saw in China will take a little bit of time to fix. Paul, do you want to add something?

Thank you, Thibault. Yes, and I said in my prepared remarks, Filippo, the factors that Thibault referred to are a drag of about three to four points. So, the combination of the low start to the season, particularly in pediatrics, and also the lingering impacts of the distribution issues we have in China and Asia Pacific in general. There's one more factor that I would like to mention that gets us to the top-line of low single digits in Q1, which is trade investments that we’re stepping up in the first half of 2025. As we think holistically about our brand investment, we not only have brand marketing investments through advertising, but we are also making sure that our promotional spend in store is competitive, and we're doing that primarily in the US through trade investment and promotional programs. So, that's how I get to the number that I explained before. This is temporary. It does not say much about the underlying health of the business because as those impacts cycle through, we will see the acceleration in the second half of the year as we see the full impact of our plans, including the benefits of our GM, the full impact of our brand plans and some of the absence of the headwinds we saw in 2024. So, strong operational plans underlying these impacts that I described.

Thank you. Our next question comes from the line of Peter Grom with UBS. Please proceed with your question.

Thanks, operator. Good morning, everyone. Maybe just to follow up on that I would love to get some perspective on just the category growth assumptions. I think you mentioned 2% to 3% globally. Can you maybe share how you see that playing out in the US versus what you might expect internationally? And then just on the guidance, I think you just mentioned an acceleration in the back half of the year. So, should we interpret that as 2Q organic sales growth is going to be muted as well. And then maybe just taking the flip of Filippo’s question, I mean, what are you assuming in the fourth quarter? Are you assuming that you get these headwinds that you dealt with from weaker cough and cold from the inventory disruptions? Are you assuming they come back and that's part of the improvement that you're embedding in the back half of the year? Thanks.

Yes, Peter, good morning. So, let me take you question on the category assumptions for 2025, and Paul will follow up on the phasing in 2025. So, we indeed expect our categories to slow down from 3% to 4% to 2% to 3% in 2025. I would say the main reason, Peter, is the fact that you will have a much lower impact of price in 2025 compared to 2024. From a consumer point of view, what we see is on one hand, consumers are clearly focused on convenience and value, but they are also extremely focused on the health and the health of their loved ones, and they are not ready to compromise on this. And we see it with the example of private label penetration that continues to be, I would say, about flat on a global basis. And actually, if I look at the most recent periods, private label penetration in our categories going down in aggregate. So, I would expect consumer to continue to be focused on high quality, differentiated, superior health solutions. But we will have a lower roll of pricing in 2025, definitely. Paul, do you want to speak about the phasing?

Sure. Thank you, Thibault. And Peter, good morning. I described the dynamics in Q1. Particularly for the second quarter, we will see, we do see an acceleration. We expect an acceleration and it's into positive territory. It's not all the way to the full strength of our plans because the dynamics in China will take more than one quarter to be fixed. So, again, it does not demonstrate the full impact of our plans. When it comes to the fourth quarter assumptions. You are right, what we are talking about in Q4 is the absence of the headwinds that we saw in Q4 of 2024. We expect a normal season overall in cold, cough, and flu. And we also see selective price actions outside the US and the full impact of our plans, with the most strengths being seen in Q4 of 2025.

Thank you. Our next question comes from the line of Anna Lizzul with Bank of America. Please proceed with your question.

Hi, good morning. Thank you so much for the question. I wanted to ask on skin health and beauty in particular, the volumes starting to recover here in the fourth quarter, and I was wondering just if you can give more insight on the innovation pipeline and any potential for shelf space gains in 2025. I was wondering if you're expecting maybe a better sun care season and then potentially shelf space gains in the fall. Thank you.

All right, good morning, Anna. Let me take this one. So, as far as skin health and beauty is concerned, our recovery as we saw in 2024 is taking longer than initially anticipated. Having said that, we see that our plans are working when you see our progress in the areas where we focus our efforts. We continue to see very strong traction in Europe and Latin America, and we would expect continued traction in 2025 in this region. We have strong plans in terms of distribution, innovation and communication. And in North America, we are very encouraged by the positive signs we keep seeing in the region. And you saw that we got our leadership back across all channels in the fourth quarter of online and offline. And so, in 2025, we will amplify these efforts to more parts of the portfolio. We have, I would say largely - to a large extent, revamped our skin health and beauty team with strong talent in 2024. And you start seeing the impact of what this team is doing. We are going to roll out a much stronger innovation pipeline in 2025 in the US and around the world. And this will be supported by strong, and I would even say stronger campaigns as we pivot to social media influencer-led campaigns and really execute them at a stronger level. You look at the campaign we just released this week with Tate McRae, we got 1 billion earned media impressions in the first 24 hours. That's five times the engagement rate on organic social media. This is what we would expect from industry benchmark. So, up to a very good start. Our investment in healthcare professionals is working as well, and we will continue to invest in this area. So, more innovation in skin health and beauty. I will not get into the details of what it will look like for obvious reasons, but we are starting with revitalize Hydro Boost session campaign in the first quarter. We're building on the innovation we launched in the fourth quarter on new skin care lines and our Collagen Bank line, which is off to a good start. We'll also increase distribution. To your question about sun care, we feel good about the upcoming season in terms of retailer partnerships. We'll see how the season plays out, but we feel we are well prepared getting into the season and we'll continue to invest behind our healthcare professional recommendation. So, all in, that's what makes us confident that we will return the segment to growth in 2025 on a global basis.

Thank you. Our next question comes from the line of Andrea Teixeira with J.P. Morgan. Please proceed with your question.

Thank you, operator, and good morning, everyone. Can you just elaborate more on the temporary trade investments you're embedding in guidance? And should we expect, I understand like the 3% mid-point of organic sales growth to be mostly driven by volumes and in the second half and in the price realization to be negative in the US, but positive abroad with FX-led pricing. So, hopefully, like if you can kind of break it down if it's fair to assume, number one, that you obviously will have potentially less price realization, but some, as you mentioned before, Thibault, I think you, to another question, had said you expect to have pricing towards the back end of the year. And then on the operating margin guidance that Paul had mentioned to be above 2024, I understand the puts and takes here is like the synergies are coming in, in line with what you expected. And then, but that's going to be a gross margin accretion. And then your SG&A will have that A&P investment. And I think that's one of the things that we haven't discussed on the call yet is the 11% it still holds in 2025, or you are actually investing even more because when you say investment in spending, it's obviously above the line, but you also had said that you are putting more programs in place at the retailer. So, I was wondering if that number is appropriate and if you feel this is going to be where you're going to land in 2025. I'll stop here.

Okay, Andrea, thank you for your question. I will start with your question on what we really mean by our strategic pricing investments, and then Paul will take your question on SG&A and gross margin. So, what are we talking about when we talk about pricing investment? As we reposition Kenvue for accelerated growth, you see that we are taking deliberate actions across the business to make us more competitive. One aspect of this competitiveness is making sure that our brands are at the right price points for consumers versus our competition. In 2025, we are making adjustments to our business, especially in the US to ensure that this happens. We are not doing it across the board. We are doing it in select brands, in select codes that where we see an opportunity to be more competitive and be rewarded with higher volume if we become more competitive. I will not give you more details for obvious competitive reasons, but I can give you examples of what it looks like. An example is one thing we are correcting is that in the past, we have made some price increases, and for certain codes we crossed certain price thresholds that impacted our volumes. So, after doing a few successful pilots in 2024, where we have checked that going back down below these price thresholds, we're driving volume. We are doing - we are implementing those, again, on select codes in 2025. Another example of an investment we're making is simplifying the number of price points within specific brands. In certain brands over time, the number of price points had grown, prohibiting us from co-promoting different products within the same brand at the same price point. We are simplifying this in 2025, reducing the number of price points, which will allow us to co-promote our products more effectively and make our displays more effective. So, all of that ends up being an investment in the short term, but we are confident that it'll turn into volume growth in the mid to long term.

Great. Thank you, Thibault. And let me put some numbers behind your questions. First of all, you asked whether this will have an impact on volumes, or are we going to have negative value realization in the US. The answer is yes. We do expect negative value realization in the US primarily in Q1 and in Q2 behind these promotional spend investments. We see brand investment holistically push and pull. That's how every other consumer company does it. And our marketing mix will allow us to be much more competitive at the point of sale and also supported by our brand investments. So, what do we expect in the balance of the year? In the second half, those will be rolling out. We will be in the right - with the right price points, and we will also taking price in the balance of the award, and that will allow us to have positive value realization overall towards the second half of the year. How are we funding all of these? That's your second part of your question. We do have very concrete and strong plans both on the gross margin line and on the operating margin line. So, when it comes to gross margin, you know that we have delivered a trajectory of gross margin enhancements. We do have line of sight to more building blocks, particularly driven by efficiencies end to end in our value chain. Not at the same pace as in the past, of course, but we do see gross margin accretion, modest gross margin accretion in 2025. And when it comes to SG&A, we do believe we have still some room to go in terms of our A&P investment, again, but a much more moderate level. We're thinking about these push and pull marketing mix models. And we will be very thoughtful about the ROI of both our top and brand marketing investments. But we still want to invest more while we are able to deliver on our algorithm that we talked about, our guidance that we talked about, which is growing our operating margins year-over-year. So, those are the puts and takes. And we believe we have strong efficiency plans because we want to continue to fuel our brands both from a push and pull perspective.

Thank you. Our next question comes from the line of Bonnie Herzog with Goldman Sachs. Please proceed with your question.

All right, thank you. Good morning, everyone. I actually had a question on your self-care segment margins, which contracted a lot in Q4 and for the full year. So, as you guys called out, the flu season has been tracking much weaker, I guess, than expected. But just hoping for a little more color on how we should think about segment margin trajectory from here, especially in the context of maybe subdued price mix growth moving forward, and then certainly some of your reinvestment plans. Thank you.

Bonnie, thank you for the question. I would not place too much emphasis on the quarterly margin by segment. Remember, there's fluidity between the different segments, and also it is impacted by mix. We talked about the fact that our pediatrics business saw declines, and that certainly impacted our mix. temporarily I would say it had the lowest gross margin in self-care of the year, but that is temporary. If you think about our overall operating margin performance, we were squarely within the guidance that we talked about. So, overall consolidated operating margin was 21.5%. So, we contemplated all of these investments and there are puts and takes when it comes to mix, how we drive our brand investments. And we do see, as we think about 2025, a little bit of an acceleration in self-care gross margin. We will continue to invest in skin health, as we talked about both in the push and the pull, and essential health will continue to be driving operating margin enhancement for that incremental operating margin that I described. So, those are the puts and takes between the different segments and also how mix plays. And all of this is supported by strong efficiency programs overall.

Thank you. Our next question comes from the line of Korinne Wolfmeyer with Piper Sandler. Please proceed with your question.

Hey, thanks so much for the question. I'd like to touch a little bit more on kind of like the cadence of the margin trajectory. I know you're talking about a little bit of modest expansion for the full year, but any more deeper color you can provide us on what to expect for Q1 for the gross margin operating margin line and how that should progress over the year. And then maybe you could touch a little bit on some of your risk mitigation plans as it relates to potential tariffs. I know it's a still pretty dynamic situation right now and a lot of uncertainty, but how much flexibility do you think you have to offset with pricing and some supply chain enhancements to drive better productivity if tariffs were to take hold. Thank you.

Thank you for the question, Korinne. When it comes to our margin evolution throughout the year, both on the gross margin and on the operating margin level, it will be follow a little bit of the top-line trajectory given the leverage that we're seeing, the investment levels that we're seeing, the pricing that I talked about. So, it will be more muted towards the first half of the year, particularly in Q1. And we will see an acceleration towards the second quarter and particularly the third quarter. Remember, we talked about the normal cadence that our gross margin follows. Usually, the second quarter is the highest one. We will see some investment. So, we'll probably see a little bit of a shift more towards the third quarter. And normally the fourth quarter has the associated costs related to plant maintenance, et cetera. So, it'll follow that trajectory. Net-net we see a more muted Q1, accelerating towards the second quarter, third quarter as well, and then going to the normal levels in Q4. So, that's the cadence of our gross margin and operating margin. And when it comes to tariffs, of course, that we're following closely. We established a team that's dedicated end-to-end to tracking the impact of these tariffs. And we have very, very - plans that we're ready to trigger. And our exposure is mostly between - at this point, between the US and Canada. That's where the majority of the cross-border trade happens. We do see - we do have imports from Canada to the US, very little from Mexico and a small part from China. And we have a variety of levers that we are pulling. And those include, of course, alternate sourcing. We are considering potential pricing actions, but we are not triggering at this point given the fluidity. We are ready, we have the playbook ready, and we will be ready to take actions in the short term and also in the long term. The guidance that we have does not include any impact of any tariffs, and that's something that we will be of course working closely with our customers to ensure that we continue to provide consumers with the right value equation. But we are ready whenever it comes. Our playbook is ready to be activated.

Thank you. Our next question comes from the line of Nik Modi with RBC Capital Markets. Please proceed with your question.

Yes, thank you. Good morning, everyone. Thibault, Paul, I was wondering if you could remind us on how the incentive compensation works, particularly for the regional managers. And I'm asking this in the context of, are they compensated or the targets post FX just given the movement of the dollar versus the rest of the world? And sometimes there's a tendency for folks to pull back on spending to hit post FX numbers. And so, I just wanted to get some clarity around that, and if you had any thoughts around mitigating that risk, if that is in fact how you compensate.

So, Nik, the metrics that we have for everyone in the company and by the way, we have an approach to one Kenvue, includes it's all in. So, we have the levers to be able to offset as much as possible forex impacts. And we do not give any dispensation to any teams regarding Forex. Our plans are on a - as they are reflected externally in line with our guidance. We talked about organic sales, and we also talked about our EPS on a constant currency basis. But we have - we track both. An important thing that I wanted to mention is that we do have hedging programs, and we have those for the purpose of predictability, and we employ them very rigorously. And last thing I wanted to mention is that in 2025, we have already factored in the headwinds that I referred to, so mid-single digits headwinds in EPS. And that's how we compensate our teams. So, it's a holistic approach. It's one team approach. And we are not going to take the foot off the pedal when it comes to investment in our brands. Remember, we talked about in 2024 that we would be investing $400 million more in advertising, and that's exactly what we did. And we will make other trade-offs, but the majority of the efforts will be towards more taking complexity and unrewarded complexity and other non-value added costs out of our P&L to be able to protect the investments despite potential swings in currency. Remember, it's organic, it's one team, and that's how we evaluate our teams.

Thank you. Our next question comes from the line of Lauren Lieberman with Barclays. Please proceed with your question.

Great. Thanks so much. So, sneaking in a clarification, and then a real question. Clarification was just, in the prepared remarks, I thought you said that skin health and beauty was up mid singles in the US, which if that's the case in EMEA and Latin America were up double digits in volume. I just wanted to understand the total result of 2.5%. the more interesting question, the go-to-market in Asia, you called out in particular essential health, but I was curious what the route to market is for the other categories there. And also just there's a range of what it means to use distributors in China, right? There's the, we put stuff on a ship and it's like very hands off, which I don't think is what you do, because I know you have significant local operations. And the other side is it's just getting the product from point A to point B. So, I was just curious to understand where you fall currently on that continuum, and with the changes you're looking to make, what it will look like after the fact and if there is sort of investment you need to make in local capabilities, staffing, and so on to complete that journey. Thanks.

Yes, thank you, Lauren. So, very quickly on your first question, you are absolutely right. The US grew mid single-digit in skin health and beauty in the fourth quarter, and EMEA and LatAm grew very strongly double-digit. We are very pleased with the performance of the segment in EMEA and LatAm, and we are encouraged to see these improvements in the US. Regarding your question about our route to market in China, so remember, the majority of our business in China is in self-care. And for this part of the business, we have one dedicated route to market with distributors who are specialized in serving hospitals and pharmacies across the country. For the non-regulated, if you will, part of the portfolio by essential health and skin health, we use different types of distributors. We serve directly what we call our tier one distributors who are more at the provincial level. And these distributors sell themselves to lower tier distributors, wholesalers who serve supermarkets, grocery stores in the different tiers of cities and villages in China. So, that's how it works. What we are doing about it as we speak, is two things, one, replacing the distributors who are clearly facing difficulties in the current environment in China, which as we all know, continues to see a consumer that is cautious about consuming products and are facing liquidity issues. The second thing we are fixing is where we relied too much on these lower tier distributors to activate our brands, we are deploying our teams to reclaim responsibility for the negotiation with these key local retailers of our brand activation teams. That will give us two benefits, one, the better handle of the activation of our brands in these lower tiers in the country, and two, more visibility on the quality of the execution in in this lower tier customers.

Thank you. Our last question will come from the line of Steve Powers with Deutsche Bank. Please proceed with your question.

Thank you very much, and good morning. Thibault, maybe just to close the loop on Lauren's prior clarification question. If the US and EMEA and Latin America were all sort of comfortably above the segment average, it implies a pretty weak Asia Pacific result. So, if you can just amplify or clarify a little bit a little bit on that. My real question was on - it's actually on cash flow and just your expectations of cash relative to the $1.14, $1.17 and EPS that you called. If my math is right, fiscal 2024 conversion of cash kind of came in around 60%. You've obviously previously framed the evergreen target at 100% plus. So, just with the TSA exits winding down, how much progress do you think you'll be able to make against that 100% plus target in 2025? And then more broadly, when do we think we can get back to achieving that long-term run rate on a more consistent basis? Thank you.

Yes. So, very quickly on your first question, you're absolutely right, Steve. The quarter was not positive for Asia Pacific for the reason I mentioned in China. Paul, do you want to take the one on free cash flow?

Yes, happy to. So, just to set the stage free cash flow in 2023 was $2.7 billion. Free cash flow in 2024 was $1.3 billion. If we think about what happened between 2023 and 2024, it's about half and half. The first half is separation-related items. For example in 2023, we had a partial year of interest, a partial year of company costs. And the other one were operational elements. In 2024, we had a particular year end where we didn't have the normal number of working dates at the end of the year. So, from an AR perspective, we had a headwind. And remember, we're also investing in our view forward. We're reinvesting to exit the TSAs. So, we're very thoughtful and prudent about how we invest in our business for long-term success. So, that explains the 2023 to 2024. So, half and half. If you think about going forward, we are expecting to get closer to the cash conversion that I talked about, but we will not get there in 2025. We will continue to invest in our view forward. We still are investing in TSAs, particularly TSA exit, particularly in IT, which requires investment in SAP and other platforms. And it will give us an opportunity to become much more agile. So, those are the right investments that we're doing. And we also talked about the fact that we're moving to our Summit headquarters. It will drive the right energy, the right collaboration within our team. So, with those investments behind us, we see very clear line of sight to getting to that 90% to 100% cash conversion. But as you know, the separation and the investments that we're going through to set ourselves up for clear success require investment temporarily. And then we will have a very strong cash conversion, as we traditionally do. And we have very also clear building blocks to be able to get there from a cash conversion cycle perspective as we become a fully, fully independent company and operate in a consumer environment with the right payables, with the right inventories, with the right receivables and because we have two building blocks to get there. So, overall, line of sight to that cash conversion after a period of investment, which is the right thing to do.

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.

So, thank you all for joining us today. We hope that this call gave you some color on our outlook for 2025. And as I said earlier, we enter 2025 very confident in our ability to deliver on our outlook, with the compounding impact of the transformation we led in 2024 and the strength of the plans we have for 2025. So, with that, we thank you for joining us today, and we will talk soon.