Kenvue (NYSE: KVUE) - Q4 2023 Earnings Call

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 Kenvue viewers 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 a long-term value creation algorithm centered around profitable growth, durable cash flow generation, and disciplined capital allocation. 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 gains. 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. 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. I'll give you more details about that in just a moment. We continued our successful multi-year 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. 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. I'll start with Skin Health and Beauty, as our disappointing fourth quarter performance on the top line clearly fell short of expectations, both yours and ours. Looking by region, it is evident where we have strengths 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 continue to grow double digits, Neutrogena face 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 and our skincare brands. However, it is our performance in the US that did not meet our expectations. As we have talked with you about, we had an 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. Over the past several months, I spent significant time with our team in the US and engaged with our customers, and 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 executional 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 investment. In early December, we shared that Yan Murer, previously our Chief Growth Officer, would assume the position of Head of North America. With Yan's deep knowledge of our portfolio and our growth strategy, he has already outlined with his team a focused roadmap 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 articulates dermatological benefits, and more prominent in-store brand activation. Second, we are enhancing consumer engagement through distinct and consistent brand experiences delivered with the appropriate level of reach and frequency and supported by a revamped marketing effort. Third, we are amplifying innovations and bolstering demand generation activities with consumers and healthcare professionals. 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 is 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 continue 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 28 consecutive weeks of share growth even as category volumes declined as expected, with roughly 15% lower incidence levels of this cold and flu season compared to 2022. Again this quarter, we strengthened our leadership positions with relevant innovation, premiumization, and leading healthcare professional endorsement. Looking to 2024, we intend to continue to deploy this winning formula around the world. 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 one point of share in under 12 months just for this SKU. 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. First, we are going to reach more consumers with a strong focus on our 15 priority brands. We are strengthening our plans to build attractive, consistent brand experiences for 15 priority brands, which represent two-thirds of our growth. With strong retailer partnership, we will bring to market relevant innovation across our segments, driving mental availability but also ensuring physical availability where and when our consumers need us. We are also raising our bar in terms of activation excellence in our focus markets, starting with the US. So you are going to see our top brands with a higher level of activation in 2024. As we fuel growth in self-care, we have strong plans to bring forward science-based, category-leading innovations to meet the needs of consumers, maintain category-leading healthcare professional recommendation, and ultimately drive continued share gains. In Skin Health, we will stabilize the business in the US with the plan I outlined today. Outside the US, in China, we will monitor consumer sentiment and thoughtfully calibrate our investment accordingly, while in the rest of the world we will continue to fuel our growth in Europe and Latin America. This requires investment, and we have plans to invest more in brand activation in 2024, both with consumers and with healthcare professionals. Continued margin expansion and efficiencies across the business will fuel this investment, which brings me to our second priority: to free up resources and invest in our brands. We expect gross margins to expand at an accelerated pace compared to 2023, which will fund increased investment in our brands. You've heard me say that over the past several years we have been going to the gym on gross margin, and through this work we will continue to strengthen this muscle, driving efficiency across our supply chain, managing our mix, and implementing thoughtful revenue management initiatives. In addition, as we exit our transition services agreements with Johnson & Johnson, we are not simply replicating legacy processes but rather intentionally reinventing our ways of working. This includes implementing modern systems designed specifically to meet the needs of our new company and enable speed, agility, accuracy, and a lower cost base. For example, we are implementing a new integrated business planning process that will improve our demand forecasting capabilities and service levels through better integrating and automating retailer data and demand sensing. This plan will be implemented throughout the next six quarters, with a majority occurring this year. All of this will be enabled by our teams around the world, which leads me to our final priority: fostering a culture that rewards performance and impact. In 2024, we are deploying our new Kenvue Performance Management plan with clear goals and a heightened sense of accountability for every Kenvue viewer. The plan introduces new incentive programs for all leaders, encouraging and rewarding impact on the four drivers of shareholder return: top-line growth, margin expansion, earnings growth, and free cash flow. Further, we are streamlining decision-making across the organization, including in my own leadership team. Most importantly, we are creating a culture based on our Kenvue values, where everyone has a strong sense of purpose and belonging, an opportunity to grow, and is rewarded for impact. In closing, we made significant progress in 2023, and while we still have a lot of work ahead of us, our priorities are clear in 2024 and give me confidence in our ability to deliver our plan for the year. I'm deeply grateful to our talented teams for their energy and passion to work together as one team to build our new company. It is inspiring to see 22,000 Kenvue viewers rally behind one purpose: helping people realize the extraordinary power of everyday care. I know they will make us successful this year and into the future. With that, I'll turn it over to Paul.

Sure, good morning Steve. 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 comps of 2023 that we talked about, but also the fact that we expect our increased investment and the plans I outlined earlier to 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 Health, as well as a possibility for unknowns in our seasonal businesses. But I reiterate that we are confident in our plans for the year.

Yes, good morning Anna. Let me answer your question on Skin Health and what we see in China and the US. In China, we saw weak demand for our brands, especially Dr. Ci:Labo, due to temporary PR issues you are familiar with. We believe that these PR issues are dissipating as we speak, but we are going to be thoughtful about continuing to monitor how the categories are doing, how the consumer sentiment is going in China. While we are going to see gradual recovery in 2024, we are not contemplating in our guidance a strong recovery, especially in the first half of the year, in our skincare brands in China. I remind you that China is about 7% of our revenue as a total company, but we have a total portfolio represented in China, and Skin Health is not the largest part of our portfolio in China. Regarding the US, we had an ambitious recovery plan in Q4, and as I said in my prepared remarks, the outcome of this plan was not what we expected. What's good is that we understand exactly what is going on. Our brands are healthy. Neutrogena, for example, has a very high penetration in the US. Our online sales are doing well; we grew double digit on Amazon with a brand like Neutrogena. So what we really need to improve is execution, and Yan and his team are laser focused on improving this execution. It's going to be broad-based, it goes beyond just distribution, but it starts with our in-store presence and prominence. Here I'm talking about better on-shelf execution, increasing displays, increasing fixtures, updating the packaging where needed to make our range easier to shop, making sure that we have the price pack architecture everywhere, and ultimately making it easier for consumers to shop in store for their needs. It's also about engaging with consumers in a bigger way than what we did in 2023. We have industry-leading ROI on our advertising, so really 2024 is about increasing the reach and frequency of our engagement activities and active brand activation activities with both consumers and healthcare professionals. We're going to put more products in their hands, think about samples, because we know that once they try your product, they love them. Lastly, we will deploy innovation at a bigger scale, amplifying our 2023 programs, and we are excited about what we have in the plan for 2024 in terms of innovation. Retailers are excited about it as well. So in a nutshell, it's a heightened focus, more precision around execution, more presence with consumers, amplified innovation. As I said, it's not going to happen overnight, recovery will not be linear, but we are confident that this stronger plan will help stabilize the business, and with a higher level of precision in execution, we expect growth in 2024 to definitely be ahead of 2023.

Yes, it's a great question because we talk a lot about the season and Paul described very well the dynamics there and how pleased we are with our performance during the season. But the strength of our leadership position doesn't happen by accident; it's the outcome of a lot of work that permeates throughout the entire self-care portfolio. That's true for analgesics, but it's also true for allergy, for digestive health, for smoking cessation. In these other areas of the business, we are very pleased with our performance, with continued performance in smoking cessation, good performance in digestive health. Allergy, while we had lower incidences, we had strong share gains. Innovation like Zyrtec chewables continues to do very well. So our strong performance in self-care is broad-based across the portfolio.

No, it's an important one. So let me unpack your question in terms of phasing and 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 you described 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 discontinuations, 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, for example in Q1 the large replenishments we saw in retailer inventory once we got out of the majority of our supply chain issues in the back half of 2022. That's going to be a headwind for us. But if you exclude these comps dynamics, what we are laser focused on 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. So that way, 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 spending advertising and 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 a 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.

Yes, and Filippo, this additional overall investment is broad-based to activate our brand with consumers and with healthcare professionals. 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. That's once again what makes us confident in our ability to deliver the plan we outlined this year.

Yes, 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 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 skincare brands in China, we will invest appropriately. In the US, 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 Yan, 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. This heightened focus, increased level of precision, and higher level of investment, 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 that market.

Yes, 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. 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 all 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. 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 comps 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 algorithm to life, we are confident in our plans.

Yeah, to answer quickly your Q1 question, Peter, we have included in our slide deck a slide that I think you will find helpful as you model 2024 with all the puts and takes in the different quarters of 2023. You will see that Q1 has a number of items that are going to make the comps very challenging for us. So it's really about unique events that happened last year. I talked for example about the inventory replenishment, but also the fact that we expect the season to continue to be below last year as we exit the winter, similar to what we have seen in Q4 of 2023. So it's a mix of unique items to what happened at Kenvue last year and a continued lower level of incidence in Q1 similar to what we saw in Q4. To your broader question about whether or not we are changing our philosophy, I would say our commitment to our long-term algorithm is stronger than ever. Our commitment to deliver strong TSR through the 3% to 4% top-line growth year over year, growing earnings faster than sales, and having a disciplined capital allocation strategy is what we started deploying in 2023. You are going to see as we move through 2024 and into 2025, and we become fully independent and exit transition service agreements with Johnson & Johnson, you are going to see this long-term algorithm brought to life in a meaningful way. That was always the plan: to make sure that we exit our TSAs and reinvent our ways of working so we make it fit for purpose for our company, with ways of working that fit what we need to be successful as Kenvue, but also do it at a lower cost base. The combination of this lower cost base and the continued improvement in gross margin that we have demonstrated our ability to do for years, again in 2023 and we are going to do it again in 2024, this is what brings the fuel to bring more investment to our brands. There is no limit to our investment in our brands. We are very disciplined in our approach. We go for a return-on-investment approach. We believe that we have strong investable propositions in terms of building blocks and activities for 2024 as an example, and that's why we feel confident that the higher investment that we mention will give us good results in 2024 and beyond.

All right, so thank you all for participating on today's call. 2023 was, as we talked about, transformational for Kenvue. I think we have been very clear about our priorities for 2024: reaching more consumers, investing in our brands, and fostering a culture that rewards performance and impact. So we look forward to updating you throughout the year as we continue to advance these efforts. For now, have a nice day and thank you again.