Q3 2023 Kenvue Inc Earnings Call
Greetings and welcome to Kennedy was third quarter 2023 earnings Conference call.
My name is darrel and I'll be your operator today.
At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the call. Please press star zero on your telephone keypad.
As a reminder, this conference call is being recorded it is now my pleasure to introduce you to can be used as vice president of Investor Relations Tina Romani.
Good morning, everyone I am pleased to be joined today by cheap among gon, Chief Executive Officer, and director and Colorado, 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 and market opportunities and growth.
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 will also reference certain non-GAAP financial information.
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 GAAP.
A reconciliation of these items to the nearest U S. GAAP measure can be found in this morning's press release and a presentation available on the Investor Relations section of our company's website can be dot com.
And with that I'm pleased to turn the call over to Tivo.
Thank you Tina and good morning, and thank you for joining us today I'm pleased to be here with you or Steve Filton recall as a fully independent company.
Law School can do have formerly separated from Johnson <unk> 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.
We believe it has only been two months since J&J completed a successful exchange offer given all we have accomplished this year.
In addition to delivering another healthy quarter with three 6% organic growth this quarter on top of four 7% growth last year. We also continued to make tremendous progress extending up to 10 gigs for success as a standalone company.
From the creation of legal entities and the transfer of licenses to the development of a fit for purpose company policies and build out our systems. Our teams continue to execute all separation plan successfully and on time.
We remain on track in building a consumer focused operating infrastructure.
Simultaneously bring them to life, all cocos to realize or extraordinary power of everyday care and delivering profitable growth.
Operating in the attractive consumer health space with an unparalleled portfolio of science back healthcare professional recommended trusted brands, either 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 situations on consumer behavior.
It is our long track record through economic cycles.
This year, so that gives us confidence into the superiority of our model based on brands that are part of the daily rituals and design 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.
Through 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 standalone company. Our teams remained focused on advancing consumer health through innovation, bringing new options to market that consumers love and expanding the reach of our brown 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 segments of the healthcare once again this quarter self care as demonstrated its ability to serve consumers with trusted solutions when they need them most.
Even at unprecedented levels of cold cough and flu incidents starting to normalize as expected. This quarter. We continued to see sense can outperform the market growing six 7% on top of a strong six 9% growth last year, driven by both the value realization and positive volumes.
All our product category is growing mid to high single digit.
Consumer loyalty to our brands alongside investments and relevant brand activation introduction of consumer experience and haven't seen innovation in premium amortization continuing to foster a volume growth and share gains let me share. Some examples with you.
In digestive health in modem and Pepsi brands outpacing the market, our supply recovery and strong consumer demand ended up being growth as consumer preferences shift away from preventative solutions to immediate relief products.
Teams strategically launched the successful broad activation campaigns to capitalize on these dynamics ultimately actually everything all share gains during the quarter.
In pain care, even with cold and flu incidents 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 premium innovation and product premium amortization.
Tylenol the number one thing Brian globally continues to gain share with successful putting organization initiatives and the reintroduction of product activation and display and supporting growth.
He is a testament to the brand's leadership, so enviable consumer and health care professional trust and the strength of our teams.
Another standout innovation in this category that deserves highlighting.
Our recently launched motoring dual action product in the U S. It combines two core ingredients from two iconic brands motoring 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 gains for <unk>.
Beyond the U S. We apply a similar winning formula around the world in China. For example, more train recently expanded into more holistic solutions with a successful launch of new motoring fever of patches.
Within allergy was a season remains soft with lower incidence levels. This year, we have continued to drive accelerated share gains globally, and you know our largest market. The U S. I don't you'll take as it maintained its number one branded share leadership for 77 consecutive weeks now and Childrenswear take achieving number one Brandon.
Sure position could impact from go to market strategy and heightened outreach to health care professionals supporting the successful launch of Childrenswear texture Weibo's last year.
We also drove share gains for Benadryl in the U S with the launch of extra strength formula and for LNG portfolio in China.
Smoking cessation had another strong quarter as well in the U K on nicorette team secured a new indication for sapiens decision.
Early indications of consumer response have been strong with me correct, gaining share and increasing household penetration.
This new indication demonstrates can choose 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 that can view model at work, we continuously strengthen our leadership positions across product categories.
Addressing impactful innovations, bringing health care professionals, and new clinical data and identifying solutions to help address unmet consumer 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 mitigation, which we appreciate based on our engagements with many of you in recent weeks remains top of mind.
As you will understand that I'm limited on what I can say on the 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 is important to note that the only meaningful developments in the litigation from our perspective has been that the FDA continues to maintain the same pregnancy advice, Connecticut aminophenol labels that hasn't been in place for decades at least conclusion is based on multiple reviews since 2014 with them.
The most recent being March 2023 that recent studies do not change <unk> view on timing of offensive safety.
For us it can shoot nothing is more important than the health and safety of the people. We use all products. We are also concerned about the potential for a real public health consequences and Furloughing claims made in courtrooms to influence medical decisions.
Certainly <unk> is one of the most studied medications in history and is often recommended by doctors are the first line treatment option for women, who have a fever or experiencing pain during pregnancy.
In addition to that when left untreated a scientifically known to potentially serious health consequences for both mother and baby and will 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 of about slots. This quarter. Our current results do not reflect our long term ambition for the segments and all of the underlying strength of our brands.
There were two primary pockets of weakness this quarter in this segment, which accounted for about two thirds of the six 8% volume decline first the continued impact of the rationalization and you should see as we conducted last year and secondly by general market softness in China.
Starting with the first as a reminder, we made the decision in 2022 to discontinue certain codes to focus on the production of core lines, while we were experiencing supply chain disruption.
These discontinuation resulted in lost points of distribution into 2022 U S retail plan O Gram resets and with plenty of arm resets all carrying annually our first opportunity to regain a portion of the distributions points either way in the fall 2023, resets, which are happening as we speak.
While we expect to still see an impact of the discontinuation in the fourth quarter. As these changes take time to materialize in our results is good to see L team, securing a number of wins with our customers resets.
Moving to China, we see continued softness in that geography, with Chinese consumers being more cautious on spending as I shared last quarter, we had expected a slower recovery in China and Unfortunately, that's what we see happening.
We remain positive on the long term prospect in China, Although we have operated there for many years and have confidence in the markets potential longer term, but we need to be patient as we expect continued softness in the market in Q4.
Teams on the ground and we continue to be agile and allocate resources. According to the opportunities that you see in the market.
Importantly, despite these two distinct dynamics, we were pleased to see sequential quarter over quarter improvements when looking at the organic sales on a two year basis, which factors in some other unique supply recovery dynamics, we're lapping in the back half of 2022.
If we look at the performance of skin. It has it by geography now in the U S. Our largest market when excluding the impact of the discontinuation. We were pleased to see sequential progress in our recovery plan with some of our core platform gaining share. This.
Quarter, we expanded our beloved neutrogena hydro boost line by elevating our science design and packaging and this includes upgrading of the water gel formats with dye free fragrance free options alongside more sustainable packaging and also introducing all new hydro boost water cream, which delivers nine time more light.
The hydration.
These two innovations are in the top three new launches in facial moisturizers and hydro boost to prolonged at 2023 people Beauty award in this category, reflecting its status as a category prototypes in hydration.
We also had a strong finish to the senses growing at more than 80% faster than the market and regaining our leadership position through expanse enhancing innovation in companion brand activation with neutrogena holding nearly half of the top 10 luxury the other category.
Building on the successes, we continue to deploy our recovery plan and look forward to sequential improvements in the coming quarters.
Outside the U S I've already spoken about China, but in other markets like excited to see positive initial reaction to the reintroduction of innovation and benefits from pro resets completed earlier in the year.
This quarter, we have seen skin hasn't beauty grew mid teens in both Latin America, and Europe, and Latin America strong performance was driven by strength in some coupled with positive customer response to the neutrogena hydro boost innovation I just talked about.
In Europe, the momentum continued in neutrogena and Aveeno with mid teens growth across priority markets on strong consumer response to the new product and innovation our teams launched early in the year.
Neutrogena, it's currently growing twice as fast as the category in Germany outpacing the competition.
<unk> by the continued success of our hydro boost and retinal boost lines in.
The U K avino continues to accelerated share growth with the team holding the number one position in body care and also doubling its share in face care and that's just a year ago.
With Europe being the first in the portfolio to launch innovation in completing their floor resets early in the year. We believe this market is a leading indicator for the remainder of the globe.
While we expect a gradual recovery to continue we acknowledge there is more work ahead, all briony Quinn is strong and these examples of success give us confidence that with appropriate support for this segment will deliver over time a level of performance per line to our long term ambition.
Essential health with three 8% organic growth this quarter as central has continues to deliver ahead of our long term growth goals for those segments of the value of regulation and premium amortization strategies continues to perform well with 10 points of value realization offset by about six points of volume and about two points.
The volume decline can be attributed to the softness in China, I, just talked about with the remainder, reflecting our prioritization of margin recovery, who value realization as well as certain market and competitive dynamics.
Innovation, all care premium amortization in women's health and strength in the U S Baby care are fueling our growth.
Starting with Mouthwash, we continued to see strength with LISTERINE gun therapy in the U S. Recognizing three out of four adults suffer from some form of gum disease in the U S. You may remember that we launched earlier this year at least tearing them therapy to address this unmet consumer need and at least the number one or all.
Brian on the market and with acceptance by the American Dental Association, we have seen immediate success post launch with LISTERINE gun therapy quickly winning and holding.
Number one new product innovation in the mouthwash category.
In addition, we also continue to see positive response from health care professionals with all five times for dosing claim getting traction around the world and we see the impact in our performance, while being roughly five times larger than the next competitor <unk> continues to gain share globally through the strength of our innovation has kept proficiently common.
Nations and a strong distribution network.
In baby care, our global leadership in baby totally trees remained strong jumps on the baby and Aveeno baby are the number one and number two brands in the baby toys treats category globally and up eight times and two times bigger than the next closest competitor respectively. While we continue to see pressure in Asia in the U S. Our largest market.
Right.
We see strong growth, we've jumped from the baby and Aveeno baby, gaining share with supply recovery value realization and the successful launch of Avino kids, which is driving substantial growth, becoming the fastest growing brand in the U S keeps torrid traits market.
Finally in women's health and wound care, we had another quarter of solid growth.
So as you can tell our Q3 performance exemplifies the power of our portfolio. While we continue to operate in a dynamic environment, requiring agility and customer intimacy I am pleased with the way our teams have been able to deliver on our top line objectives this quarter and throughout the year.
Same applies to the balance of the P&L and Paul will walk you through the details of our financials. We are pleased with our ability to navigate the market dynamics and deliver earnings per share in line with expectations.
Executing our plan to stand up all Standalone company for success.
In closing we delivered another quarter of healthy growth as a result of the balance we have across all intentionally curated portfolio of iconic brands to the power and agility of our operating model and the execution of our 22000 can do whereas but around the world I want to take this opportunity to thank our teams for their outs.
Tightening focus the owner's mindset and our bearings spirit as a fully independent company. They demonstrate every day their commitment to deliver innovative healthcare solutions to our more than $1 2 billion consumers around the globe and with that I'll pass the call over to Paul to review our financial results in more detail.
Equaling tivo sentiment I'd like to commend the ongoing passion of our people and their dedication to standing up can view to be well positioned over the long term.
The energy I felt across the organization over the past several months has been inspiring.
Not only have our team has made tremendous progress in executing the separation. They also delivered in the face of continued inflationary or not.
Macroeconomic pressures and they die.
<unk> operating environment.
Getting into performance.
We had another healthy quarter with three 3% reported growth and $3 six organic growth.
In terms of drivers value reputation, which is comprised of price and mix represented seven one points of growth.
The majority of the value realization reflects the benefit of price actions, we have taken in the first half of this year.
With a contribution of approximately 20% from carryover actions, we executed in the second half of 2022.
Volume was down three five points with approximately two thirds of the decline attributed to two distinct factors.
First last year's portfolio rationalization and second the continued market softness in China, that's people spoke about.
Excluding these unique dynamics our results demonstrate consumers' affinity to our brands.
Acknowledging that performance in certain pockets of the portfolio is not where we would like it to be.
We were able to deliver results in line with our commitment how these early stage in our journey.
Simply fry, the strength and resiliency of our portfolio and operating model.
Drive the ability of our results alongside durable cash flow generation.
Transitioning to our results by segment.
Strength in South Korea continues with six 7% organic growth, we continue to see strong positive value realization of five five points.
Alongside a 1.2 points and volume increase.
As Steve mentioned.
With all product categories contributing to growth.
We recognize that there's a lot of attention on cold cough and flu products as weak on the entire industry lots of unprecedented demand over the past few years.
To date, we have observed a delayed start of the season, we have incorporated the slow start in our outlook for the balance of 2023.
We of course are ready for whatever decision may bring.
We will work with our customers to ensure our products are available to meet consumers' needs.
Lastly, in healthcare with regards to phenylephrine or P. E. While this ingredient has been in the headlines recently due to the ongoing FDA to review the agency has been clear that the review is not about the safety of four O P and they have not made a determination about or a P in them.
Monograph, nor have they advised consumers to discontinue use.
The MTA routinely reducing radians handoff, Illinois.
We'll work with the agency and our customers to ensure that we continue to offer a variety of options, both OTC and behind the counter solutions to serve the needs of our consumers.
To date, we have not seen any impact on our business.
With products containing <unk> across our portfolio, representing just 2% of our global revenue in the U S comprising about half of that.
Organic growth was negative <unk>, 4% this quarter.
Realization of six four points was more than offset by six eight points of volume decrease.
Approximately two thirds of these volume declines can be attributed to our portfolio decisions last year.
Salting and lost distribution points this year.
Alongside continued market softness in China.
With regards to the recapture of points of distribution in the U S. While.
While we are pleased with our progress and as Steve discussed, we don't expect to regain all of the lost ground overnight.
Our expectations for gradual recovery remain the same how.
How do we have spoken about we prioritized some given the seasonality of the business than focus on the face with body and hair care next in our recovery plan.
As Steve articulated we have confidence in our strong brand equities as demonstrated by our performance in EMEA.
At a time.
When supported by the right level of inventory product distribution and innovation, we see the flywheel in the business that fuels our growth.
We look forward to restoring these elements across the segment.
In essential health.
We grew organically by three 8% this quarter, how do we execute on our value realization and premium location strategy with 10 points of value realization.
Fit by six points of volume declined.
Approximately one third of the decline can be attributed to market softness in China.
Heading into Q4, we see continued momentum in oral care behind the holistic value realization plans people spoke about premium innovation such as Latino kids amongst others continued to perform quite well, putting etcetera to ourselves on track to deliver another strong quarter.
Now turning to gross margins, excluding amortization adjusted gross margin was 59, 4% an expansion of 80 basis points versus last year.
Similar to Q2, we continued to see significant though moderating inflationary headwinds.
Ctrip in logistics and restaurants has been more than offset by ongoing pressures in energy and continued wage inflation.
This pressure was heightened by worsening FX with further devaluation of local currencies, such as the Russian ruble and the Argentinian peso, adding incremental pressure to gross margin.
Effects negatively impacted gross margin by approximately 1.3 points hynix.
An acceleration from prior quarters, approximately one point impact.
Assuming current spot rates, we expect these pressures to continue into the balance of the year that we would not expect to fully offset.
During the quarter, we were able to more than offset to these pressures through proactive productivity initiatives as per plan, including procurement category cost reduction improving supply chain manufacturing efficiencies and leveraging digital and automation technologies.
I'm incredibly proud of our talented operations teams, who work in an end to end fashion with the R&D and commercial teams.
<unk> efficiencies and executing successful innovation.
During the quarter, we also realize some benefits as a result of nonrecurring items related to the separation as we continue to evolve to a more fit for purpose organization.
Moving to adjusted operating income.
Adjusted operating income margin was 23, 3% and reflects the impact of the FX headwinds I, just mentioned as well as incremental costs of being a standalone public company.
In line with expectations in prior quarter.
Our Standalone public company costs were approximately $50 million to $60 million. How we continue to expect the same level in Q4 are several of our investments and how concentrated it upfront in the process.
SG&A also included expenses incurred related to the implementation of a new fit for purpose IP infrastructure and spend around digital capability enhancements.
Moving to taxes.
On a reported basis Q3 tax rate is approximately 25, 1%.
Lower reported tax rate versus prior quarter is primarily due to a change in accounting policy with regards to the treatment of global intangible low taxed income or guilty to be in line with peer companies in the consumer goods industry.
On an adjusted basis.
Q3 effective tax rate is 25, 3%.
The primary drivers for this higher tax rate versus last year or so.
First higher U S tax on O U S income net of foreign tax credits.
And second higher tax expense related to prior year return provision adjustments and tax law changes offset by windfall benefit on share based compensation and tax benefits related to the full separation from Johnson <unk> Johnson.
And finally, our adjusted net income was $519 million and adjusted diluted earnings per share were <unk> 31.
In sum, we continue to operate in a dynamic environment that requires agility and where brand loyalty is rewarded.
Q3 top and bottom line performance is a testament to the power of our portfolio of iconic brands and the strength of our operating model.
Now moving to cash and capital allocation.
We ended the quarter with a cash balance of $1 $1 billion unexpected operating cash flow to be approximately $2 billion year to date.
Simplifying how strong cash conversion.
Our disciplined capital allocation philosophy remains the same.
First and foremost, we responsibly invest resources in our iconic brands to drive profitable growth through marketing R&D and capital investments.
Secondly, dividends serve as an important part to Elkhart P. S. Our algorithm.
Third.
Reliable cash flow generation allows us to prudently delever and reduce interest expense over time.
Fourth we assess potential inorganic tuck in growth opportunities that builds on our capabilities and strengthen our position as a leader in consumer health.
And lastly, we use share repurchase to offset dilution from the vesting or exercise of stock based compensation.
Today, we announced that our board of directors has authorized a program to repurchase up to 27 million shares of outstanding common stock for this purpose.
Getting into our outlook for the remainder of the year.
With the strengthening of the dollar we now expect the impact of translational foreign currency fluctuations to negatively impact reported net sales growth by approximately one to two points.
Separately, given the soft start of the cold and flu season, we are tightening our previously provided outlook, which included expectations for a more normal season.
As I mentioned, so far in the U S and in Europe, We Havent really seen the start of the season.
We would typically see at this point in the year.
As a result, we expect net sales growth for the full year to be between four and four 5% and organic growth to be between five five and 6%.
On the bottom line, we expect full year adjusted diluted EPS to be in the range of $1 26 to $1 28.
Which also includes the higher negative impact of FX on gross margin versus our prior expectations.
With regards to remaining fiscal 2023 guidance items.
We continue to expect reported net interest expense to be approximately $270 million and approximately $300 million on an adjusted basis.
We now expect our reported effective tax rate to be between 25, 5% and 26, 5%, reflecting the change in accounting policy of <unk> taxes I previously discussed.
On an adjusted basis, we expect the range to be between 24, 5% and 25, 5%.
Higher rates versus prior year is primarily driven by jurisdictional mix of earnings and higher U S tax on foreign income net off foreign tax credits in 2023 as compared to 2022.
And lastly, our earnings per share range assumes a full year 2023 weighted average share count of 1.8 to five 2 million shares.
A couple of notes regarding other assumptions in our guidance.
As you review your models for the remainder of the year it will be important to consider that comps in prior year.
Typically in healthcare, where we are lapping a mid teens growth how do we experienced unprecedented levels of demand as a result of the triples damage in the U S.
And a strong cold and flu season globally last year.
Further in skin health and beauty in addition to continuing to see the impacts of discontinuation. So until the end of the year. We will also be lapping stronger comps in the fourth quarter of the prior year as we restored supply.
With regards to gross margin in addition to the FX impact I mentioned previously.
Fourth quarter gross margins are generally lower from a seasonality perspective, as we typically perform our annual maintenance at our manufacturing sites at the end of the calendar year.
Operating as one team, we have been able to deliver on topline and earnings expectations year to date.
This performance allows us to feel confident in our ability to deliver on our commitments for the full year and standup can view on our foundation for long term success.
Now we will open up the line for questions.
Thank you at this time, we will be conducting a question and answer session. In the interest of time, we ask that you limit yourself to one question and one follow up to allow for as many questions as possible.
I'd like to ask a question. Please press star one on your telephone keypad.
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Participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys, one moment. Please while we poll for your questions.
Our first questions come from the line of Andrea to share it with J P. Morgan. Please proceed with your questions.
Thank you operator, and good morning, everyone. So Paul when you you gave a lot of examples of the headwinds that you're facing that you faced in the third quarter and you're facing into the fourth and potentially the freshwater I understand given the.
The very strong cold season last year, so can you.
Give us like some sense of underlying consumption that you're seeing.
<unk>, what we investors should expect in 2020 four I think at this point, we are all I'm, hoping to get some clarity on some of your peers have given.
It's a little bit off small calling comes on underlying I understand of course, if you can put aside.
South care and then focus on on the beauty and skin a house because some of that was self inflicted.
If you can comment on how we should be seeing in looking into.
Into 'twenty 'twenty four in terms of balancing volumes and pricing.
And just my clarification as a second part.
The underlying.
The volume decline in the quarter, if I did the math correctly, whereas this to about one and a half with Fannie if you extrapolate those two items that you discreetly pointed out can you talk on a how much do you think consumption would still be negative and the <unk>.
Visions I would say in particular in South Korea.
And how innovation can play a hole into 'twenty 'twenty four.
Given that thank you.
Alright, good morning Andreas.
Thank you for your question so a lot a lot in your question. So let me.
Getting through it.
Yeah.
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 with all brands.
We need to unpack so different puts and takes we have seen in our results that you see in all the Q3 results the strength of the portfolio and the strong affinity consumers have for all brands.
If you look at.
This healthcare segment.
You see that all our categories are growing.
Behind as consumer demand has kept proficiently recommendation innovation.
We continue to innovate very strongly I gave you in my remarks, a number of examples.
And and we intend to continue to to execute these this model, where we strengthen our leadership positions with a continuous flow of innovation.
New clinical data for health care professionals and to cultivate the vibrancy of our portfolio, which is I remind you are broader than a cold and flu.
Is a vibrant business in energy in smoking cessation in in digestive health. So we continue to be excited.
Excited about the prospect of a largest segment sides of care are understanding that we are comping, a very strong unusually strong as we said all along.
Triple they make and very high cold and flu season, we had last winter and we would certainly not expect.
The has the same level of incidents to be repeatedly shows 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 Thats, 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.
To skin health.
And they all do.
A lot of elements and puts and takes here so that makes it a bit more difficult to understand of performance. So let me unpack it for you folks.
For Q3.
We are first lapping.
The strong Q3 of 2022 with full points of interest like the phone any growth last year as we began to rebuild service level.
On top of that we have the impact of the discontinuation as we did last year are those where the weather were known and and expected.
As you heard in our prepared remark, we expect to continue to see some of that in the in Q4.
As a clinical arm resets are becoming effective in the U S and around the world and.
And we see a Chinese consumer being continuing to be very choice fall and cautious about where they spend their money.
And that affects demand in a in this market. So these three elements are really masking all the bright spots that we have in our in house segments.
You heard that Latin America, and Europe are doing very well we concluded in Q3, a very strong sense season in.
In the U S.
And.
As we have said all along.
<unk> skin health business has been disrupted.
We are in executing our recovery plan, we're not expecting an overnight improvement of the recovery will be gradual not linear.
We started with Sun for obvious reasons to catch the season, we are now moving to face and body.
He is doing well we are launching.
A number of innovation, especially under the.
Hydro boost a range in our in the U S and we continue to move with body and hair.
Being next in line so.
We do we believe that all current performance reflect our long term ambition for this segment absolutely not but are we confident that the.
The.
The cadence of our recovery plan.
Yes.
<unk> is on track absolutely.
[noise].
And youre going to see that continuing in the in 2020 in 2024.
Okay.
Thank you. Our next question comes from the line of Steve Powers with Deutsche Bank. Please proceed with your questions.
Hey, great and good morning, Thank you very much.
So people maybe to pick up on.
Your last thread there just maybe a little bit more detail if you could around.
The expected pacing of distribution point recovery in skin health and beauty I appreciate that.
The same thing in face and body and hair, but you know how much.
Progress if there's 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 is 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, you've called out.
Yes.
Well as currency headwinds I guess have you.
Altered at all your investment plans or investment levels, and marketing or other commercial demand building initiatives because of those headwinds or are you still planning to invest.
As you were before.
Perhaps offsetting that with with other forms of productivity or or sort of like thank you very much.
Yes, good morning, Steve So let me take the first question on info you can take the second.
So in terms of a recovery.
Recovery as I said, we expect the recovery to continue to be gradual not to be linear.
And you'll see you'll see the the dynamics in the China market. So that is an important market for skin health, we don't expect the market to improve soon and certainly not in Q4.
In terms of distribution points.
In our in the U S. The plenty of them resets are happening as we speak that happened in the fall.
We are pleased with.
The wins that our teams have been able to get.
Bob I was just kind of where I'm resets.
It takes a leave enough time to for these resets to materialize in <unk> results. So you are going to see.
Some initial impact in <unk>.
In Q4.
And then.
Going up from there into into 2020 for meta I cannot reinforcing all power as I've said, all along that its not going to be an overnight improvement. It's a plan that we have planned for 2023 and 'twenty to 'twenty four.
And what matters for us is to make sure that we continue to be on track with our with the execution of this plan.
Paul do you want to take the cycle happy to yeah, 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 drift in clean on gross margins, because we don't want to miss on the opportunities to invest where we see the growth on a model that vertical operating model allows us to do that what we do is when we see opportunities to invest.
With high rates of return we moved the resources put in place I mean, this is only starting slowly we moved our resources to where we see the season or the other opportunities for growth are 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 have where they make most sense in Costa Rica.
And I would add you see that reflected in our innovation program.
In Q3, and and we have a lot of exciting innovation lined up for Q4, you will see.
More displays and brand activation with a with a tylenol.
I talked about the ball innovation multi interaction that is doing very well and allowing more trying to gain share.
You will see a run activation around neutrogena Hydra boost range in particular.
Continuing activation in a in Europe as well.
Great. Thank you very much both of you.
Thank you. Our next question will come from the line of Jason English with Goldman Sachs. Please proceed with your questions.
Hey, good morning folks. Thanks for Slotting me in two questions I'll start with a change topic over too cold and flu.
We heard P&G.
Last week double digit growth on VIX really good sell in there and we heard from rocket who also talked about really good sell in around cold and flu your messages, obviously contrasting pretty sharply with that and I guess, it's a little unclear why in two potential explanations one you're selling this week are suggesting like maybe retailers are planning for it.
Although less support behind using Eric Petters.
Or secondly, like maybe selling fine youre, just looking around the corner Hussein selling is good but the season looks soft so we're in a plan for less pull through as we look forward. So can you help provide a little more clarity on how we reconcile those and which of those type of potential scenarios as most close to the truth.
Jason.
Good morning, first you are absolutely right in your analysis, we we have the second scenario.
In mind and that's what we are seeing we see.
Ourselves and our retailers are ready for the season.
Everybody is prepared for the season, and that's reflecting in the setting and that's reflecting in the strong performance.
Of our health care business in Q3.
Having said that when we look around the corner and look at them.
Signs of a start of the season, we have not seen that so far given the.
Very warm weather, we have seen in the U S and Europe.
And so that's what we are reflecting in our outlook not not so much the selling that is as always a good to make sure that everybody is ready for the season.
More what we see on the ground in terms of a stop of the season.
And a couple of other sites to add maybe Jason on the first one is a readiness compared to what it was before is much higher we have actually increased our capacity in several lines and also in our IP infrastructure to be able to connect much better with our retailers. So when the signal is there will be a.
Ready to react.
It means that we on a total end to end value chain, where it's able to optimize inventories for the benefit of us and our retailers as well. So we will be ready and the situation is much better after the learnings that we had from the previous pandemic yours.
Helpful stuff. Thank you.
And congrats on the success, you've seen us get health and beauty in Europe I like you said I told you that it is indeed, an early indication of what the U S could look like when all these initiatives.
You mentioned that the cadence of the improvement is on track it doesn't for me outside looking in it doesn't seem like that's the case at all we spoke last quarter about.
The cadence of the destock or I'm, sorry, not to destock the rationalization.
It happened this quarter last year, you're supposed to come out of this quarter, having fully cycled out and in fact, you're supposed to file this quarter with now more products slotted in shelf reset. So this was supposed to pivot from a headwind to full almost net neutralized this quarter its a tailwind in the fourth quarter and now you're saying now not the case, it's actually gonna be a headwind again in the fourth quarter. So something has gone wrong.
All the shelf resets must not be going as well as expected or theres other discontinuation as elsewhere.
Help me understand kind of what's been what's derailing this path of improvement.
Yeah.
So let me take let me take this one on the on skin health and beauty and the recovery of distribution in our in the U S. A as am I.
No.
Kind of a grand resets happen in the fall so.
So we are just going through the resets.
We speak right now in the U S, depending on which customer you're talking about as I said, we are pleased with some of the wins we have had.
With with these resets and you are going to see improved.
Improvement, but not immediate.
That's a lot of time.
It's always been all plan.
And we're going to so we are seeing continuing impacts. This quarter you are going to see continued impact in Q4, less and less as of Q4, the four unfolds.
Hum.
We are this new plan O Gram reset materialize team members.
So you have a lasting impact of these losses of distribution points that you're right. We are recovering.
Ideally as we said all along.
Through November he sets through launch of innovation.
Innovation and.
That's what we saw with Sun.
We are going to see in a in that.
At face and and and and body and hair will be next.
Okay. Thank you.
Yeah.
Thank you our next questions come from the line of Ana <unk> with Bank of America. Please proceed with your question.
Hi, good morning, and thank you for the question.
On self care volumes were a bit better than expected despite the more normalized or a slower start to the cold and cough season. We've noticed that you gained market share nicely in the solitaire categories over the past few years.
Even if we do see a softer winter season overall should we expect volumes continued to be bolstered by those market share gains.
Hey, Good morning. Good question I think what you rightly said that we have consistently outperformed the market for a long time now in sense can you continue to see that happening you also see the power of the portfolio, our broad based portfolio and self care covering multiple.
Categories.
So in terms of volume, we certainly continue to.
We expect.
All non seasonal categories to to outperform.
With our innovation with strong brand activation and execution around the world with customers and health care professionals.
With regard to the cough cold and flu season.
You know given the.
Totally abnormal high season.
Season, with a triple Jamie we had last year.
As we said all along we would not expect.
The same type of volume to materialize.
Materialize this year so no.
No change in our in this area we continue to.
Grow them.
I on all cylinders.
Non seasonal part of the portfolio.
The seasonal part of the portfolio.
We will.
Has it been expanded and we are absolutely.
We're ready to have.
To be very competitive season.
Okay. Thank you for that and you also wanted to follow up on in health and beauty and you did mention in your prepared remarks, you are introducing some innovation within the neutrogena brand.
Is that helping you out to regain distribution and then just in terms of the innovation you know given that's typically more premium in nature year over year. The placing you know slowed this quarter versus last year and just wondering why that was given the innovation that you introduced.
On the innovation, but building all these innovations so absolutely innovation is spot awful algorithm for success and and it helps us activate brands.
You can imagine when you go away our in store and online.
Thank you.
Thank you our next questions come from the line of Filippo for Laurent <unk> with Citi. Please proceed with your questions.
Hey, Good morning, everyone question on China, Obviously, you talked about being a headwind in the quarter.
Can you give us some some sizing of that your China business and some color on where your main exposure is about it on a segment basis.
And longer term clearly the macro picture is still challenging there, but like what are your expectation of the improvement in in China consumer trends in your business performance there. Thank you.
Yes, China represents about 7% of all global a global revenue Filippo so.
So that gives you a sense helpful exposure to China that is not disproportionate I would say.
We see them as I said couple of consumers to be cautious.
And choice in their spending and we see that reflecting in our portfolio.
All 16 have N and M is central in house.
The segments I've been impacted by this behavior in our in China.
And we don't expect short term recovery in India in that area on the other hand on the self care side we.
We continue to see vibrant demand for.
For all brands.
In in allergy analgesics.
As a as an example, so a lots of again the power of our author Ken view portfolio.
That allows us to continue to.
For them to be confident in the long term outlook in this in this market we continue to innovate.
Innovate in this market, we I talked about more.
Train fever patches.
And as a as an example of the type of innovation, we are launching into the market. So.
For China, the power of the portfolio will continue to be agile and move resources to see we.
Two areas, where we get a good return.
Clearly today, it's more into sense gift side, I mean, all the thoughts of the oxo business that all teams on the ground agile and <unk> and we will continue to be ready we have been in China for vacate we are in China for the long term and we remain confident in our in the long term.
Prospect of this market to keep the size of the.
The middle class.
The healthy China 2030 agenda.
And.
And in all the underlying factors in that market.
Alright, thank you.
Thank you our final questions will be from the lineup is Susan Anderson with Canaccord Genuity. Please proceed with your questions.
Hi, Good morning, Thanks for taking my question and 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 cost flowing through you just kind of wrapping around or has things elevated further and then maybe if you could just talk about between commodity cost labor et cetera.
And what the drivers are there and when do you expect it to continue to ensure they fall off.
I think if it was and and as I said, yeah, we still see some elevated inflation. Although it is slowing down if you think about the buckets of our coastal spine.
We still see some elevators and inflation in particular into areas number one eating energy and labor on the areas, where we see the declines its already investing inside of our chemicals logistics, a significant decline given the normalization of the particularly the.
The freight lines.
Both in Oh, I'm, just he and.
On land.
Overall, we see a diminishing inflation. We are also adjusting our pricing accordingly remember as a principle, we are aiming to maintain our gross margins through value realization.
On premium innovation to ensure that we maintain our gross margins and not anymore. So we have a healthy margins to be able to invest back in our brands.
So that's our principal we're living into it and we are there yet.
Seeing the inflation diminishing which is a good thing.
Great and then if I could just add one more also on the beauty and skin segment 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.
Yeah.
In the case of skin health and beauty, if you look at our margins.
We are focusing our efforts on improving our gross margins to be able to create more fuel for growth and the other thing that is particular in our in our business. He is we moved the resources around and when we see the opportunity to invest there like in this case when we see the new innovation, we're actually moving.
In the end, it's a temporary more facing a.
Matter when it comes to the quarterly.
Margins, but if you look at it on a normalized basis on a full year basis, it will not cede those ups and downs.
It's just how the facing of our advertising spend but we are focusing our efforts on the on the healthy gross margins to be able to invest back in our brands and not only is keen California in general.
Great. Thanks, so much good luck the rest of the year.
Thank you.
Thank you we have reached the end of our question and answer session I would now like to hand, the call back over to Tivo for any closing remarks.
So thank you everyone for participating to today's call. Once again as you heard from Paul and I. We are pleased with our third quarter results.
I believe they reflect the strength of our model the power of our portfolio of iconic brands with our operating.
Operating results and strong cash flow generation underscoring the strength of our position in the consumer health space. So we look forward to connecting with you all of you again.
To keep you updated on our continuous progress on future earnings calls so have a great day and thank you everyone.
Thank you. This does conclude today's conference. Thank you for your participation have a wonderful day you may disconnect your lines at this time.