Q2 2024 Kenvue Inc Earnings Call

Operator: Hello, and welcome to the Kenvue second quarter 2024 earnings conference call. All lines have been placed on mute to prevent any background noise.

Hello, and welcome to the kind of view second quarter 2024 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to ask a question. During this time simply press star one on your telephone keypad as a REIT.

Speaker Change: Minder. This conference is being recorded it is now my pleasure to introduce your host Jim G. On of course interim head of Investor Relations for Kennedy.

Operator: After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star one on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Jim Giannakouros, Interim Head of Investor Relations for Kenvue.

Jim Giannakouros: Good morning, everyone, and welcome to Kenvue's second quarter 2024 earnings conference call. I'm pleased to be joined today by Thibaut Mongon, Kenvue's Chief Executive Officer, and Paul Ruh, our Chief Financial Officer.

Good morning, everyone and welcome to Ken views second quarter 2024 earnings Conference call.

Speaker Change: I'm pleased to be joined today by Tebow Mongol can use chief Executive Officer, and Paul <unk>, Our Chief Financial Officer.

Jim Giannakouros: 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.

Speaker Change: 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.

Speaker Change: 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.

Jim Giannakouros: During this call, we will reference certain non-GAAP financial information. The presentation of this non-GAAP financial information is not intended to be considered in isolation or as a substitute for financial information presented in accordance with U.S. GAAP. These non-GAAP financial measures should be viewed in conjunction with the most comparable GAAP financial measures. A reconciliation of these items to their respective nearest U.S. gap measure can be found in this morning's earnings press release and our presentation available on our IR website, investors.kenvue.com. With that, I'll turn it over to Thibaut.

Thibaut Mongon: Thank you, Jim, and thank you to everyone for joining us today. This quarter, we made good progress against our strategy. We drove year-over-year organic growth of 1.5 percent, on top of 7.7 percent organic growth last year, and increased adjusted gross profit margin by 410 basis points to 61.6 percent. This huge investment in our brands, while not impacting our ability to deliver APS as per guidance. With our first and second quarter performance, we are on track to deliver our year as we continue to execute our new strategy as an independent company.

Thibaut Mongon: Earlier this year, I committed to you that you would see a new Kenvue, a bolder company that is moving quickly to advance our three priorities to reach more consumers effectively, invest further behind our brands, and build a culture of performance and impact. Our first half results show the value of our pure play model with a carefully curated portfolio covering a full spectrum of consumer health needs with iconic brands. While still early days, our results demonstrate that our transformation efforts are beginning to drive our intended impact.

Thibaut Mongon: These efforts include our work to improve productivity and reduce costs. We expect to deliver approximately 150 basis points of adjusted gross profit margin expansion in 2024, higher than we anticipated coming into the year, as we drive greater value realization from favorable mix and stronger efficiencies in operations. In self-care, organic growth was essentially flat year over year, on top of 14.2% growth last year, which beat our internal expectations. Listerine is another good example of how increased investment in the right areas drives return.

Speaker Change: T mobile existing consumers and expand our reach to new consumers and we are beginning to see the impact on all brands across our portfolio.

Speaker Change: Core to our transformation is the culture, we are building, while driving a heightened sense of accountability across the organization that is truly speed and execution to drive profitable growth.

Speaker Change: In summary, halfway through our first full year as an independent company. We are on track to deliver our financial goals for 2024. In addition, while we would expect to continue to operate in a volatile environment, our progress to date and our plans for the back half bolster our confidence to deliver on our long term value creation algorithm.

Speaker Change: Targeting attractive total shareholder return in 2025 and beyond.

Speaker Change: Now looking at the key highlights of our performance this quarter.

Speaker Change: We are starting to see the early impact of our work on our three priorities.

Speaker Change: After a slow start in allergy and Sun earlier in the quarter, we saw a positive shift in U S consumption in the months of June this immediately translate into shipments due to the strength of our brands being top of mind for consumers.

Speaker Change: Our ability to replenish low levels of retail inventory with agility.

Speaker Change: In self care organic growth was essentially flat year over year on top of 14, 2% growth last year, which beat our internal expectations. Once again, we outperformed the market globally. This quarter, having no maintained all grown share every quarter for the last two years.

Speaker Change: Symptoms by your top retailers.

Speaker Change: To build demand before products arrived in store collateral Bank first launched antique stock shop US first of all neutrogena.

Speaker Change: This approach generated tremendous buzz online and motivated to one of our major customers to put forward their retail launch.

Speaker Change: So why are we are in the early days of our journey. We are focused on executing our plan with precision strengthened capabilities and increased investments across our portfolio.

Paul: A few final remarks on other areas, where we are making progress as an independent company before I hand, it over to Paul.

Paul: First I hope you all had a chance to read our inaugural healthy lives Mission report, which we published in June.

Paul: Outlines all ESG strategy goals and progress and there is a lot we are proud of in year one.

Paul: You May also have seen last week that we announced the implementation of a bolt succession process. Following the sale of changes stake earlier this year.

Paul: The appointments of Kathy Polish and Cook, Barry as two new independent directors coincide with Joe Wolk, and Peter Fasulo stepping down by the end of this year.

Unknown Executive: Smoking cessation also had a strong quarter overall.

Paul: Our year to date net interest expense, we now expect it to be in the range of $380 million to $400 million for the full year 2024.

Paul: For taxes, the second quarter adjusted effective tax rate was 25, 7%.

Paul: Regarding other income and expenses.

Paul: In the quarter, we incurred a noncash after tax charge of $337 million to adjust the carrying value of long lived assets related to the Doctor C level business.

Paul: The impairment was a result of updates in our strategy to reach more consumers and appropriately address evolving market dynamics, including shifts in consumer sentiment in China as well as changing shopping patterns in the region.

Paul: We continue to believe in the strength of the brand and are actively investing in its long term opportunities.

Paul: And finally, adjusted net income was $611 million for the quarter and adjusted diluted earnings per share was 32.

Speaker Change: Moving to capital allocation the quarter reflects our balanced approach. Our first priority is investing in the business both in your brands and your operations with our view forward as.

Speaker Change: As a reminder, our view forward includes a multiyear program of rebalancing our resources to improve our agility and speed better positioning us for the future with a more efficient cost base.

Speaker Change: Keith do you want comment where are we going and what's.

Keith: How far Steve.

Keith: Can tell we all.

Keith: Getting closer to <unk>.

Keith: Industry stand up faster than we anticipated.

Keith: Having said that as you heard from Paul will continue to invest.

Paul: The one one of the realities of the consumer health space is that we are talking about categories that are underpenetrated, and where we have many opportunities to expand usage occasions. So as long as we see opportunities to do that we will raise or investment level, we have more.

Keith: Many consumers to talk to and to recruit into our portfolio with innovation for many years to come having said that we'll continue to do that with discipline.

Keith: With an eye on strong return on investment, but as long as we see strong returns on our investments and we will.

Keith: We continue to free up resources to invest behind our brands and reach more consumers.

Speaker Change: Thank you. Our next question comes from the line of Andrea to shower with J P. Morgan. Please proceed with your question.

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

Andrea Towner: Which is which is great.

Speaker Change: We are focused on improving the relevance of our brands and innovation plays a big role there.

Speaker Change: Thank you. Our next question comes from the line of Filippo for <unk> with Citi. Please proceed with your question.

Thibaut Mongon: Hi, good morning, everyone. Thanks for taking the time to answer the question. So I wanted to ask about the essential health business. It's been an area of strength in your portfolio. Maybe you could elaborate on that and some of the expectations into the second half for essential health. And then a second question. I have a quick follow-up on the skin health and beauty business. Maybe you can comment on the China portion of the business. What are your expectations? What did you see in the quarter? What are your expectations for the second half? Thank you.

Filippo: Hi, good morning, everyone. Thanks for taking the question.

Filippo: So I wanted to ask about the essential health business its been an area of strength in your portfolio.

Filippo: Maybe what drove the strength in the quarter, a bigger improvement in volume growth compared to Q1, maybe you can elaborate on that and some of the expectations into the second half.

Speaker Change: For essential health and then a second question I have a quick follow up on the skin health and beauty business. Maybe you can comment about the China portion of the business. What are you expect what you saw in the quarter, while your expectations in the second half. Thank you.

Philip: Okay, Philip I Wouldnt morning.

Speaker Change: Let me start with your question on the essential health. We are pleased with the performance of the essential health segments.

Speaker Change: A strong quarter to strong first half.

Speaker Change: Broad based growth across.

Speaker Change: Every region and every category.

Speaker Change: On top of growth last year.

Speaker Change: Also a balanced growth between value and volume we talked about it's a very strong performance of LISTERINE.

Speaker Change: Growing double digit when you.

Speaker Change: See that these Brian is a global brand.

Speaker Change: More than five times bigger than our next competitor.

Speaker Change: Very strong showing but we have a similar momentum going on across the segments with strong innovation, we launched a validated pro hill in the U S, which is up to a good start.

Speaker Change: We talked last quarter about having kids in the U S, which is our expansion from babies into into kids to grow the category.

Speaker Change: <unk> continues to do extremely well.

Speaker Change: We are also doing very well with our premium stay free napkins in India. So really the theme for us across Eastern Australia health is to expand the category to bring new users to the category given the very strong leadership positions. We have in each of the category in which we compete and that's what you see happening.

Speaker Change: Happening across the portfolio this quarter and the first half longer term.

Speaker Change: That's what we intend to continue to do that.

Speaker Change: Driving category growth, we have a lot of room to go.

Speaker Change: Growing these directions.

Speaker Change: Bringing new users in the category with solutions that help them take better care of their health.

Speaker Change: And that's what we intend to do moving moving forward.

Speaker Change: On the second question regarding China.

Speaker Change: China is a positive contributor to our growth in Q2, and we expect it to continue to be the case in 2024.

Speaker Change: Remember that the majority of our business in China is in self care.

Speaker Change: With very strong position in the allergy analgesics Antifungals pediatrics.

Thibaut Mongon: And we continue to see Chinese consumers looking for science-based efficacious solutions in the self-care space, and we are extremely well positioned to respond to this increasing demand. So we remain committed to the Chinese market from this perspective and would expect China to continue to be a positive contributor to our growth. Then we have a small part of our business that is in the other segments, and here, as everybody else, we see in the skin health part that you mentioned a soft category, the consumer is more cautious; there are different needs of different consumers.

Speaker Change: And we continue to see Chinese consumers.

Speaker Change: Looking for science based efficacious solutions.

Speaker Change: In the healthcare space and we are extremely well positioned.

Speaker Change: To respond to this increasing demand. So we we remain committed to to the <unk>.

Speaker Change: China market from this perspective, and would expect China to continue to be a positive contributor to our growth then we have a small part of our business.

Speaker Change: That is in.

Speaker Change: In the other segments and here.

Speaker Change: Yes, we see in the skin health.

Speaker Change: I thought that you mentioned that the soft soft categories of consumer is a more cautious.

Speaker Change: You have evolving.

Speaker Change: Consumer preferences.

Speaker Change: And that's an area, where we are more cautious in our investment having said that it's an area, where we see the beauty of our model and the strength of our portfolio why do we see.

Speaker Change: The Doctor Slabaugh Brown of Japanese are aging being negatively impacted this year with your very strong demand and very strong growth.

Speaker Change: For our local Chinese brown called the ball.

Speaker Change: And so that's why you see the beauty of the portfolio.

Speaker Change: Our multiple brands allow us to get it to that.

Speaker Change: If it needs of different consumers.

Speaker Change: Sorry.

Speaker Change: But yeah, we're continuing to work on productivity and continued to advance our our productivity enhancements.

Operator: As we look at it,

Speaker Change: As we look at.

Speaker Change: The gross margin going forward, we'll look at it holistically value realization efficiencies et cetera, and we're preparing building blocks for 2024.

Speaker Change: Four and 25 and beyond so that's how I look at it and promotions are in.

Speaker Change: It's something we consider but it's.

Speaker Change: A holistic analysis on how we drive our gross profit margins going forward.

Speaker Change: Thank you. Our next question comes from the line of Jeremy Fiacco with HSBC. Please proceed with your question.

Unknown Attendee: Hi there, thanks for taking the questions. I have a couple from me. The first one is just a follow-up on the previous question.

Jeremy Fiacco: Hi, there thanks for taking the questions. A couple from me first one is just a follow up on the previous question. We've heard a number of peers talk about a slowdown in our U S skin care, particularly on the dermatological side.

Unknown Executive: We've heard a number of peers talk about a slowdown in US skin care, particularly on the dermatological side. So I wanted to hear whether that is something that you are seeing and where the slowdown that they've referred to is happening. And then secondly, just a bit of a follow-up on the seasonal businesses. Talk about sun care, the trends that you're seeing through Q3, and then the set-up for the cold and flu season.

Jeremy Fiacco: So wants to hear whether that is something that you are seeing are where the slowdowns that they refer to is happening and then secondly.

Speaker Change: Just a bit of a follow up on the seasonal businesses took about some cat trends that you'll see through Q3, and then the fourth than the setup for the cold and flu season. My assumption is that you've now got a pretty normal quarter I E. Normally beatriz a global base of comparison and therefore, we should expect to see some.

Unknown Executive: My assumption is that you've now got a pretty normal quarter, i.e. normal inventories, a normal base of comparison, and therefore we should expect to see some sort of year-on-year growth in line with the historic averages. But again, your perspective on that would be very helpful. Thanks.

Speaker Change: Year on year growth in line with the historic averages, but again your perspective on that would be very helpful. Thanks.

Speaker Change: Yes, Jeremy So your first question on the what we see in a in the scheme has category.

Speaker Change: We see units are about flat in Q2, I would say you have different seats between body Sun hair.

Speaker Change: And and face are within phase, we see some softness recently moisturizers, but offset by by growth in acne as an example, so I would say that from a can view point of view.

Speaker Change: We all are focused on executing the plan I highlighted.

Speaker Change: And we don't see category dynamics.

Speaker Change: <unk>.

Speaker Change: Yeah.

Speaker Change: The prestige and the execution of our plan of moving moving forward.

Jeremy Fiacco: If you.

Jeremy Fiacco: You think about the back half of the year I'm not going to stop reporting on Q3.

Jeremy Fiacco: But I would say that Sun we.

Jeremy Fiacco: We saw a positive shift.

Jeremy Fiacco: Shift in consumption in in June.

Jeremy Fiacco: And basically the season is.

Jeremy Fiacco: Almost is basically done by by the owner or the second quarter in terms of shipments for us and I would not expect a replenishment happening in EQ suites.

Jeremy Fiacco: The upcoming cough cold and flu season.

Jeremy Fiacco: That's in a in front of us.

Jeremy Fiacco: We as we said at the beginning of the year, we are planning for a normal season. This.

Jeremy Fiacco: This year.

Speaker Change: What are what we are seeing is more in terms of phasing of shipments between Q3 and Q4, what we see is ease retailers' reverting to the historical bolder impact them.

Jeremy Fiacco: Of ordering.

Speaker Change: What do they need.

Jeremy Fiacco: More in Q4 than in Q3, so last year, when we were still recovering from the triple damaging 22, and there were questions on supply chain resiliency around the world. We saw some retailers anticipating their purchases in Q3. This year, we don't see that happen.

Jeremy Fiacco: We see retail knows.

Jeremy Fiacco: We built into the historical ordering pattern.

Jeremy Fiacco: Capitalizing on the fact that supply chain, a more resilient and that certainly is a case with <unk>, we can view.

Jeremy Fiacco: As always we will be ready to.

Jeremy Fiacco: Respond to the demand regardless of the system.

Speaker Change: Thank you as a reminder, if you would like to ask a question. Please press star one on your telephone keypad.

Operator: Our next question comes from the line of Peter Grom with UBS. Please proceed with your question. Thanks, operator.

Speaker Change: Our next question comes from the line of Peter Grom with UBS. Please proceed with your question.

Peter Grom: Thanks, operator, and good morning, everyone, who hope youre doing well, maybe just to start a bit more of a housekeeping.

Speaker Change: I think you mentioned in response to Andrea's question that you expect sequential improvement in <unk>.

Speaker Change: Performance in the back half of the year for skin health and beauty.

Speaker Change: Do you anticipate returning to growth at some point in the back half of the year just trying to make sure. We think about the trajectory correctly, just given all the moving pieces.

Unknown Executive: Peter, yes, good morning, and thanks for the question. So we see sequential improvement in volume. In the second half, it will turn positive. We expect it to happen more towards the fourth quarter, both in terms of volume and also growth. Also keep in mind the comps versus last year. So in Q4, we certainly see a positive showing in skin health and beauty.

Speaker Change: Yes, good morning, and thanks for the question. So we see sequential improvement in volume.

Jeremy Fiacco: In the second half it.

Jeremy Fiacco: It will turn to positive.

Jeremy Fiacco: We expect it to happen more towards the fourth quarter. Both in terms of volume and also growth also keep in mind that comps versus last year. So Q4, we certainly see a positive showing his skin health and beauty.

Speaker Change: Thank you we have reached the end of our question and answer session I would now like to turn the floor back over to keep up on guard for concluding comments.

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

Speaker Change: Alright. Thank you all for your questions. This morning.

Speaker Change: I would just end by repeating rights that are earlier this year I committed to you that you would see when you can do in action. This year, one that a company that is moving quickly to advance our three priorities to reach more consumers effectively invest whether that'd be hanging up brands and build a culture of talking about the impact and.

Jeremy Fiacco: While we are still in the early stages of implementing our strategies.

Jeremy Fiacco: We are confident that we are on the right path to deliver on our near term targets, but as importantly, setting up can view to deliver on our long term value creation algorithm. So we thought I wish you all a great day. Thank you for joining us on the call.

Speaker Change: And thank you.

Speaker Change: Thank you. This does conclude today's teleconference. We appreciate your participation have a wonderful day you may disconnect your lines at this time.