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..

Good morning, everyone and welcome to Kenvue's first quarter 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 or expectations about future events and are subject to various risks, uncertainties and assumptions that 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've also referenced certain non-GAAP financial information.

The presentation of this non-GAAP financial information is not intended to be considered in isolation 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 comparable GAAP financial measures. A reconciliation of these items to the nearest U.S.

GAAP measure can be found in this morning's press release and our presentation available on our IR website, investors.kenvue.com. With that, I'll turn it over to Thibaut..

To foster a culture of impact and performance, where we are moving in the right direction, transforming our company operationally and culturally. Starting with strategic alignment, we rallied all Kenvuers behind our 3 company priorities via our robust goal-setting process, part of our new approach to performance and pay.

In addition, we clarified the responsibilities and decision rights throughout the company. We streamlined processes, encouraging faster decision-making, improved execution, heightened accountability and enhanced collaboration.

As we continue our journey to grow Kenvue into the undisputed leader in consumer health, we are intentionally bringing in high-performing external talent.

A couple of weeks ago, I was pleased to announce that Russ Dyer will be joining my leadership team as Chief Corporate Affairs Officer; an important leadership role as we continue our journey to grow.

In addition to instilling an owner mindset across the organization to elevate operational performance, we are also committed to operating the business responsibly.

With the understanding that human health is inseparably linked to environmental health, during the quarter, we affirmed our commitment to our Healthy Lives Mission, our ESG strategy aiming to advance the well-being of both people and the planet.

And last week, we announced that Kenvue's near-term greenhouse gas emissions reduction targets were validated by the Science- based Targets Initiative and this in less than 1 year since becoming a public company, demonstrating our team's passion and commitment on this front.

We look forward to publishing our inaugural Healthy Lives Mission Report in June, where you will see how Kenvue is maximizing its impact for good. So as you can tell, you are starting to see a different Kenvue in action in 2024. We are off to a good start for the year.

Our teams are laser-focused on our 3 strategic priorities, we are making progress on our journey to transform our company, all of which makes us confident in our ability to deliver our plans for the year and execute on our long-term algorithm in 2025 and beyond. Before I turn it over to Paul, I would like to thank our Kenvuers around the world.

Every day, they help consumers realize the extraordinary power of everyday care. They embrace change and are actively contributing to our transformation. They are the ones delivering the results I just shared with you and it is an honor to work alongside such a great team. And now over to you, Paul..

We had a strong start to 2024; we're executing against our strategic priorities for the year; and we have the right plans, talented people and strategic investments in place to deliver our long-term algorithm. Thank you. And with that, we will take your questions..

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

Thibaut and Paul, you both mentioned that the destocking in the Self Care business will likely continue in Q2 and you gave some color on what to expect in organic sales growth.

But in terms of how we should be thinking across the divisions in terms of the Skin Health and Beauty, is that something we should -- I understand that there is still a job to be done and it takes time and you mentioned, Paul, a couple of quarters or several quarters, I think, was the language.

But should we expect things to improve sequentially? How we should be thinking of Skin Health and Beauty as we progress?.

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.

Ladies and gentlemen, we are experiencing some technical difficulties. Please stand by. [Technical Difficulty] [Operator Instructions].

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..

All right. So Andrea, I was responding to your question. I'm not sure how much you got out from my answer. I would start -- go back to the beginning, your question about retail inventory reduction and potential impact in Q2. We see -- we saw an impact in Q1 of the retail inventory reduction with some retailers in the U.S.

in Self Care but I would say across categories. And you would expect this impact to continue into Q2 but not beyond the first half. Regarding your question on the Skin Health segment and how -- what we should expect moving forward in Skin Health. Our diagnostic has not changed.

I've always said that our recovery would not happen overnight, will not be linear. We have developed a thoughtful plan. It's a priority for us. Jan and his team in the U.S. are laser-focused on executing this plan, the objective to stabilize brand in 2024 with improving volumes as the year goes on and deliver growth from 2025 onwards. It's early.

It's early but I'm encouraged, as you heard in my remarks, with what I call the anecdotal evidence that we are moving in the right direction. We saw this quarter once again that when we activate our brands properly, whether it's with dermatologists or consumers, we see a response, a pretty quick response.

Now we know that we will need more of these activities to have an impact at scale on the business. And we also know that these activities take time to translate into sales and share gains.

But we should -- we are definitely hyper-focused on executing the plan in the balance of 2024 to stabilize this business through our focus on in-store presence and prominence, our focus on elevating consumer and dermatologist engagement and on amplifying innovation..

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

So I wanted to ask because we're hearing from some of your peers that they're seeing a step-up in promotional intensity and they're expecting this going forward. So could you talk about what you're seeing in your markets and some of your key categories and if that's consistent? And basically what your approach will be for the rest of the year.

And then how do we think about this in the context of robust gross margin delivery in the quarter? And finally, how does that feed into your expectations for continued contribution from net price realization going forward?.

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..

Let me take the other part of your question. When we think about the impact of promotional spend to gross margin, we always look at all activation and investment with an eye to return on investment. So when we think about how we deploy our promotional spend, as well as for media, we look at how we can maximize the spend in investable propositions.

So we do balance growth and profitability. In fact, we're very pleased with how our gross margin is evolving so far. I had mentioned the 290 basis points of gross margin expansion, that comes from both value realization and the excellent work that our supply chain team is doing across the board.

And we expect this to continue in the balance of the year..

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

Thibaut, I wanted to ask about Our Vue Forward program. It seems like it was really just approved by the Board yesterday.

So maybe you could give some perspective on just initial reactions internally across the organization and what steps you've taken to maybe help ensure that this is a program that's viewed as a program of acceleration that people can rally around versus maybe a potential source of disruption.

And in that vein, if you could talk a little bit about where you see reinvestments to be prioritized as the savings are realized over the next couple of years, that would be great as well..

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..

Yes. Let me provide some more details about how we're spending the $275 million both in '24 and '25.

First, a large is going towards streamlining operations, mostly in our functions, where we are clarifying roles and responsibilities, we're simplifying processes, eliminating redundancies and the associated costs are primarily related to severance and footprint.

A second large bucket is related to the upgrade of IT infrastructure that will allow us to be more competitive with our peers, allowing for faster and more informed decision-making. That is the second part of our investment.

Ultimately, all of these investments position Kenvue to be much more agile at a lower cost of infrastructure and allowing us to be more competitive. I want to reiterate all of this has been contemplated in our guidance and it bolsters into delivering on our long-term algorithm on growing income faster than sales..

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

Just a quick clarification in terms of how you overdeliver, just wanted to make sure I understood exactly what the source of the upside was.

And then, Thibaut just -- when you think about new leadership for Skin Health and Beauty, are there any specific characteristics you're looking for in terms of the new leadership? Just any perspective around that would be helpful..

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..

On Skin Health, we have made the decision this quarter to relocate our segment leader position from Asia to the U.S. to work more closely with, again, in the spirit of being co-located with the majority of our teams and foster collaboration and creativity.

As we look for a new leader for this segment, you will see a new leader coming in with an experience in the dynamic skin care category but also with experience in growing global megabrands because that's what you are talking about when you are talking about brands like Neutrogena, Aveeno and others that are megabrands present all over the world.

So that's what you will see moving forward..

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..

And for the full year, in line with our expectations as well..

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

I just wanted to follow up on Bonnie's question. I wanted to ask how you plan to split some of the incremental investment in your brands, maybe between marketing and promotion.

And how should we think about a potential increase of promotion or trade spend on price/mix as we move through the year? And then in Skin Health and Beauty, how much of the volume weakness was driven by Dr.Ci:Labo in China? Are you beginning to see a recovery there? And how should we think about the volume performance in Skin Health and Beauty by region this quarter?.

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..

Sure. So your question on volume in China and Dr.Ci:Labo is a great question because it gives me the opportunity to talk about our China business. I feel that it's not always well understood. So China grew nicely last year and we saw China continuing to do very well in Q1, growing double digit. A couple of facts about our business in China.

You may recall that China represents approximately 7% of our business. So it's not an overly developed market for us, ample opportunity for Kenvue to grow in that market. The other thing is that the majority of our business in China is in Self Care segment.

We continue to see the categories growing as macro trends in China support growth, especially with a very ambitious Healthy China 2030 agenda by the China government. We see Chinese consumers continuing to be attracted to science-based efficacious solutions like ours. We are operating in China for many years with a very strong team.

We are investing in our Self Care pipeline. Just a fun fact for you. Last year, we launched more innovation in China than we launched in the past 11 years combined in Self Care. And we have a very strong leadership position in that market across analgesics, pediatrics, allergy, antifungals.

So when you hear me talking about our business in China, you see why we are pleased with the performance of our China -- the teams in China. Then there is a small part of our business that is not Self Care. That's where Dr.Ci:Labo and other brands are hosted. And here, as everybody else, we saw a deceleration of that part of business.

We see the consumer being more cautious. As I indicated at the beginning of the year, we are not investing ahead of the curve in that part of the business. We have not assumed any recovery in the back half of our plan -- back half of the year in our plan and our outlook for the year.

And -- but as I've always said, we are committed to the long-term prospect in China and that view has not changed. China is a positive contributor to our growth and we expect it to be the case again in 2024..

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

Just a quick clarification. In the Q1 results, in the 1.9% organic, was there any impact from hyperinflation or repricing? Most of your peers have called it out. So I just wanted to check on that. And then a bigger question. You mentioned Q2, you expect low single-digit declines in Self Care.

Maybe you can give some color for the other segment on expectations as well. And as you think about the second half, what gives you that confidence that volume will accelerate? Some of it is easy comps? Is it benefit from your investment action and investment in marketing advertising? Any more color there would be helpful..

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?.

I will take the second one about the unique dynamics of the Self Care segment in Q2. Filippo, there are a few dynamics for you to consider in Q2 as you think about Q2 for the Self Care segment specifically. One, we are going to have compares -- the difficult compares to absorb. We grew double digit in the second quarter last year.

So that will be a strong compare. The second one is that we do not expect the same seasonal strength that we saw in China in the second quarter when China reopened. We expect continued impact of trade inventory reduction in -- by some customers in the U.S.

And I told you that, so far, we saw a slow start to the allergy season which will weigh on volumes in Q2. Having said that, we -- you should also see it as non-operational elements masking the underlying in-market performance of our Self Care business. So that's what is driving our current thinking for Self Care in Q2.

Regarding the back half of the year, we see no change in our expectations for the back half and that's why we reaffirm our guidance for 2024 this morning. It's going to be a combination of the easier compares, to your point but also seeing our plans taking hold as we execute our -- against our 2024 priorities..

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

I'd like to touch a little bit more on the gross margin. It came in a little bit higher this quarter. I know you talked a little bit about some of the drivers there.

Is there any way you can help us quantify the specific drivers and help us better understand which ones are going to be more sticky throughout the course of the year? And then any color on how to think about the cadence of the gross margin throughout the remainder of the year?.

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..

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 closing remarks..

Reaching more consumers, freeing up resources to invest in our brands and fostering a culture of performance and impact at Kenvue. So our teams are all focused on executing with excellence and we look forward to updating you on our progress throughout the year. Have a great day, everyone..

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