Kenvue Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
July 20, 2023

There are 12 speakers on the call.

Operator

Greetings, and welcome to the Canvue Second Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Tina Romani, Head of Investor Relations for Canvue.

Operator

Thank you. Tina, you may begin.

Speaker 1

Good morning, everyone. Joining me on the call today is our Chief Executive Officer, Thibault Mongan and our Chief Financial Officer, Paul Ryu. Please note that today's call will include forward looking statements regarding among other things, our operating and financial performance, market opportunities and our 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 1

During this call, we will also reference certain non GAAP Financial information. The presentation of this non GAAP financial information is not intended to be considered in isolation or as a substitute for financial information presented in accordance with GAAP. A reconciliation of these items to the nearest U. S. GAAP measure can be found in this morning's press release and our presentation available on our IR website.

Speaker 1

With that, it's my pleasure to turn the call over to Thibault.

Speaker 2

Thank you, Tina. Good morning and thank you for joining our 2nd quarter earnings call and our very first as a public company. Our recent IPO marked an important and exciting milestone in Canvue's history. Over the last 135 years, We have established ourselves as the world's largest pure play consumer health company. And now as a standalone company, We are looking forward to building on our strong heritage and continuing to deliver on our purpose to realize the extraordinary power of everyday care.

Speaker 2

Before we begin, as you may have seen this morning, Johnson and Johnson announced their intended next step in the separation of KenView. At this point, we are very limited on what information we can provide other than what has been made public. And as a result, we will not be able to any further details at this time. What I can tell you is that we are ready to take on the next phase in our journey to becoming a fully independent company. For today's call, I'll begin with an overview of our Q2 results.

Speaker 2

Paul will then take you through a more detailed view of our But first, let me begin with our strong results this quarter. With over $4,000,000,000 in net sales, Q2 was one of the strongest quarters in our 135 year history and certainly the strongest since the beginning of our business transformation in 2019. Organic sales grew 7.7%, bringing our first half organic growth to a very strong 9.4%. Similar to Q1, Our growth was broad based across all segments of our portfolio and across all geographic regions. So this quarter was yet another proof point showcasing the power of our portfolio.

Speaker 2

Our 3 segments did well. We saw double digit growth in self care, continued recovery in skin health and beauty and growth ahead of our long term expectations in essential health. Further, we delivered balanced growth across all geographic regions with North America contributing about half of the growth with all other regions representing the remainder. There were several portfolio highlights in the quarter, but let me focus your attention on a few standouts. In Pain and in Cough and Cold Care, we saw higher incidence rates drive continued demand for our leading brands such as Tylenol, Motrin and our other brands in these need states.

Speaker 2

Across our self care portfolio, we see innovation, Premiumization and healthcare professional recommendations all fueling market share growth for many of our brands. In Skin Health and Beauty, our performance in sun care showed the power of our brands as we see continued recovery after a period of disruption. Innovation, improved supply and strong commercial execution contributed to sustained market share growth for Neutrogena Sun this season. In Essential Health, our listerine mouthwash superiority claim over dental floss is being deployed around the world And our listerine gum therapy product in the U. S.

Speaker 2

Is ranked number 1 new code in the mouthwash category this quarter. And we continue to see the power of Band Aid where consumer led innovation and strong customer partnerships delivered another strong quarter. Band Aid was also recognized in the quarter as America's Most Trusted Brands for 2023 by Morning Consult And this is the 2nd year in a row that Band Aid has earned the top spot. With the macro environment continuing to be challenging, Consumers are increasingly more choiceful with their purchase decisions. In the consumer health space though, they turn to brands and products they know and trust And we have many of those brands in our portfolio.

Speaker 2

We see this playing out in the value volume dynamics of Canvue this quarter. While the value represented 9.4 points of growth, volumes only declined 1.7 points. And excluding the impact of our own intentional decisions like portfolio rationalization or suspension of our Personal Care business in Russia, Volumes were about flat this quarter. Important to note that we delivered this exceptionally strong first half of the year in part thanks to the investments we have made supply chain, building capacity and resiliency. While service levels will continue to be a focus area for us, We have made significant progress that have allowed us to capitalize on and deliver against the unique demands of the first half of the year.

Speaker 2

Regarding our margins, they continue to be healthy fundamentally when excluding non operational impacts such as FX Of stand up company costs, inflationary pressures, though moderating, continue to be meaningful. But this quarter, again, We use a combination of strategic value realization, both price and mix and productivity initiatives in our operations to offset a significant portion of these costs, which Paul will get into in just a moment. So net, a strong quarter showing the power of our world class Which brings me to Canvue's greatest source of competitive advantage. With a sole focus on consumer health, Every day, our 22,000 CAN viewers are committed to delivering science based innovative solutions that increase relevancy with consumers and strengthen credibility with health care professionals. These relationships have been cultivated over decades through innovations supported by rigorous science based on our vast clinical research capabilities and meaningful cross category consumer insights.

Speaker 2

As a result, brands across our portfolio have a long history of recommendations by healthcare professionals and are often the number one most recommended brand in their respective categories, which ultimately fosters lifelong loyalty to our brands, loyalty that is passed down from generation to generation. Our first half results exemplify this loyalty and consumers' desire for our efficacious products. While consumers may be trading down in more discretionary and traditional staple categories, we have not seen this dynamic in our portfolio. Consistent with what we have seen historically during times of challenge and uncertainty, private label penetration for our categories We remain stable on a global basis this quarter. Our first half results also reflect the unique opportunity we I have to expand usage occasions across the spectrum of consumer health.

Speaker 2

There is no limit for consumers to take care of their own health. And for Canvue, there is no limit to finding new ways to help consumers take care of their health. The categories in which we operate tend to be under diagnosed, under treated and under penetrated. Using sun care, for example, since we are in the middle of the summer season, It's estimated that 1 in 5 Americans will develop skin cancer in their lifetime. Yet today, a majority of Americans Do not use sunscreen on a regular basis.

Speaker 2

At KenView, we want to understand why that is? What are the barriers to adoption? That's tremendous opportunity for us to leverage our extensive capabilities and consumer insights to develop innovative new products to better serve the needs of our consumers. So with this in mind, this year in the U. S, we launched Neutrogena Pure Screen Plus Mineral UV Tint in 4 shades that blends mostly to complement skin tones.

Speaker 2

Our new products are up to 30% less whitening than the leading mineral sunscreen, which is one of the biggest frustrations consumers have. Innovation like these have fueled share gains through better customer retention, Increased consumption and attraction of new consumers to the brand, all driving the strength we saw in the quarter for Neutrogena Sun Care. That's what makes this consumer health space very attractive, the infinite ability to expand usage occasions and give consumers around the world Now let me take a moment to speak to the strength and agility of our operating model that supported our results. Since 2019, we have made tremendous strides in removing complexity, Streamlining our organizational and operational footprint and simplifying our portfolio while investing in digital and omnichannel capabilities that position us well for the future. Today, we have a resilient portfolio with iconic brands well balanced across categories and geographic Our model is designed to drive synergies across our portfolio from shared consumer insights, go to market strategies, operation, marketing, innovation and so on.

Speaker 2

While we set our strategy and allocate resources at the segment level, All three segments are focused on 1 single and cohesive end market, consumer health. Take products for children as an example. You will see products living in self care with children's Tylenol, in skin health with Neutrogena or Avino Sun for kids Or in Essential Health with Johnson's Baby or Band Aid, but it's one consumer, one pediatrician, one understanding of the interaction between child and parents that allow us to present ourselves as a preferred partner for everything you need for Children's Health and the same applies to the rest of the portfolio. This dynamic is a critical component in understanding the strengths of Canvue. In addition, being a pure play consumer health business Both drives efficiency across areas like R and D and advertising and also afford us agility and flexibility.

Speaker 2

We saw this agility in action this quarter with the Canvue teams delivering strong performance on multiple fronts, including responding to unprecedented demand for

Speaker 3

our self care brands.

Speaker 2

So as you can see, our 2nd quarter results are emblematic of the power of our portfolio. In a dynamic macroeconomic environment, we delivered strong top line with operationally healthy margins and solid earnings per share, all of which supported the initiation of our 1st quarterly dividend at Canvue of $0.20 per share. Now looking to the back half of twenty twenty three, this year has for sure been an incredible journey for Kensio so far, We have a lot to look forward to with the full year organic growth expected to be between 5.5% and 6.5%. Paul will take you through the assumptions embedded within our full year outlook, but I wanted to take a moment to acknowledge the consumer It continues to be uncertain and we anticipate market volatility will continue including in the incidence level for the upcoming winter season. In this environment and building on the unique nature of the consumer health space, we at Canvue will continue to stay focused on what we do best, In self care, we will deliver a consistent cadence of innovation marketing programs to drive growth on our priority brands.

Speaker 2

You may have seen we just launched Tylenol Precise, where we leverage in self care our extensive skin health expertise To develop a maximum strength topical pain treatment with rapid absorption and an aesthetically pleasing next level experience. For me, this is another great example of what we mean by the power of the portfolio with synergies across segments delivering innovative health solution. Within Skin Health and Beauty, while we expect continued progress on distribution point recovery in the U. S. Through the Q3, We are planning to return to a normal cadence of innovation with a strengthened and more resilient supply chain and reactivation of marketing campaigns to continue to build momentum in our brands.

Speaker 2

And within Essential Health, we expect science backed claims and innovation launches to drive category essentiality and relevance via effective execution while strengthening brand equity in priority markets. So as you can tell, a lot to look forward to in the back half of the year. So in closing, as the largest pure play consumer health company in the world And with unparalleled depth and breadth of our portfolio, we offer one stop solution for retailers positioning Canvue as a preferred partner of Choice for retailers who want to become the destination for everyday care. This quarter was another strong illustration of the resilience of our categories and the strength of the Canvue operating model. None of this would be possible without the passion, commitment and owner's mindset Demonstrated by our amazing team of 22,000 Can viewers who work every day to help consumers realize the extraordinary power of everyday care.

Speaker 2

I want to acknowledge and recognize them here as we start our journey as a standalone company. To summarize, we feel confident about the future of this business With the strength of our brands, the power of our portfolio and our unique competitive advantages, which we believe will enable us to

Speaker 4

Thank you, Tivo, and good morning, everyone. I am pleased to be co hosting our first earnings call to report on a strong quarter, our first after a successful IPO. I'd like to echo Tivo's acknowledgment of the passionate and talented team we have here at Canavue. The team's execution on our proven strategies yielded strong broad based sales growth with healthy underlying margins Despite navigating continuous significant inflationary pressure and a challenging macro backdrop, I couldn't be prouder of what this team has delivered in the first key steps of our journey as a public company. Now getting into the quarter.

Speaker 4

We had a strong and balanced quarter with every segment and geographic region contributing to our 5.4% reported growth and 7.7 percent organic growth. In terms of drivers, value realization, which is comprised of price and mix, represented 9.4 points of growth. Approximately 60% of the value realization growth was driven by carryover of actions in the back half of last year, with the remainder driven by incremental actions in the first half of twenty twenty three. Notably, even with 9.4 points of value realization, volume remained strong with only a 1.7 point decline, which includes the impact of intentional strategic portfolio rationalization initiatives and the decision to suspend the sale Personal Care Products in Russia, which we are anniversarying this quarter. If not for these deliberate actions, volume would have been about flat, simplifying the resilience of our brands.

Speaker 4

By segment, self care had another strong quarter with the segment gaining share globally, driven by increased consumption across all need states and priority brands driving 14.2 percent organic growth. Value and volume were both strong at 10.63.6 points respectively. In addition to broad based strength across the cold, cough And flu categories globally, our new first to market vaping cessation indication in the UK is driving consumption in the correct And Digestive Health grew with strong emodium consumption globally. On allergy, we were very pleased with the performance of our largest brand, Syrtec, which continue to gain share in the U. S.

Speaker 4

This year, though we saw lower incidences this season. Moving to Skin Health and Beauty. Organic growth of 3.4% was comprised of 6.6 points of value realization with 3.2 points of volume decline. It's important to note that volume includes intentional strategic portfolio rationalization initiatives and the decision to suspend the sale of personal care products in Russia. Excluding this impact, volume was up low single digits, demonstrating the healthy underlying demand for our skin health brands.

Speaker 4

We're pleased with the recovery we're seeing in the business and expect gradual improvements to continue as we restore supply, regain points of distribution with retailer Strength in SonCare is a great example of our ability to grow and gain share when we have a full portfolio on shelf supported by innovation, premiumization and media support. Next, moving to Essential Health. Organic growth was 3.8%, comprised of 10.7 points of value realization and 6.9 points of volume declined primarily due to competitive micro dynamics, particularly in Asia. Similar to Skin Health, it's important to note that excluding intentional strategic portfolio rationalization initiatives Under the decision to suspend the sale of Personal Care Products in Russia, volume was only down mid single digits. With a healthier core portfolio, the business is focused on strengthening brand relevance through innovation driven brand differentiation and premiumization.

Speaker 4

Overall, our 2nd quarter results are indicative of the leadership positions we hold across the growing consumer health categories in which we operate. The resiliency we've seen this quarter and since our transformation efforts began in 2019 give us confidence That the investments we're making in our technology and digital capabilities to modernize our supply chain, product innovation pipeline, R and D and our strategic marketing are working and position Canvue well to drive sustainable growth over the long term. Now turning to gross margins. Excluding amortization, adjusted gross margin was 57.5%. We continue to face significant or moderating inflationary pressures during the quarter.

Speaker 4

Through value realization and supply chain productivity improvements, we were able to Successfully offset the majority of these headwinds. In parallel, gross margin was negatively impacted by transactional foreign currency fluctuations of approximately 100 basis points and other non operational costs related to building our standalone infrastructure. Our teams are focused on identifying and actioning productivity initiatives that will mitigate these headwinds. Moving to adjusted EBITDA margins. Adjusted EBITDA margin was 24.5 percent and reflects the impact of the ForEx headwinds I just mentioned and incremental costs of being a stand alone public company.

Speaker 4

In Q2, our stand alone public company costs were approximately $50,000,000 to $60,000,000 which reflects a front loading of these costs. Acknowledging the complexities of standing up a company of our size and scale and that there is more work ahead over the coming two quarters, we expect these costs to remain elevated as several investments are concentrated upfront in the process. However, we expect these costs to decrease and be offset by other productivity efforts over time, remaining in line with our initial expectations. Turning to taxes. As can be expected, there are several unique items impacting our 2nd quarter effective tax rate with our IPO in May.

Speaker 4

On a reported basis, our tax rate is approximately 32.7 percent and on an adjusted basis, our Q2 effective tax rate is 30%. The primary drivers for this higher tax rate versus last year are: 1st, higher GILTI and Subpart F taxes, Net of foreign tax credit and second, less favorable discrete benefits in 2023 as compared 2022 related to share based compensation, law changes and prior year items and third, The recording of our valuation allowance on our ability to utilize foreign tax credit assets in Q2 of 2023. And finally, our adjusted net income was $581,000,000 and adjusted diluted earnings per share of $0.32 All in, we are proud of what we delivered in our Q1 as a public company, strong and balanced top line with fundamentally healthy margins. As we look ahead, we remain committed to investing in our business for the long term with an eye towards delivering attractive total shareholder returns in a balanced way, which brings me to our capital allocation philosophy. We have a proven track record of generating robust, Durable cash flow north of $2,000,000,000 per year historically, which gives us the flexibility to pursue our balanced capital allocation strategy.

Speaker 4

This is comprised of 4 pillars. Number 1, responsibly invest resources in our iconic brands to drive profitable growth. 2, return cash to shareholders through dividends. 3, delever. Our reliable cash flow gives us Assess potential inorganic tuck in growth opportunities that strengthen our position as a leader in consumer health.

Speaker 4

And we've already begun executing on this strategy with this morning's announcement that our Board of Directors declared a 3rd quarter dividend of $0.20 per share. The decision by our Board reflects the confidence we have in our ability to deliver profitable growth over the long term, while returning cash to shareholders and their commitment to our balanced capital allocation strategy. Now let's get into our 2023 outlook. Starting with top line, reflecting our strong first half, we expect full year net sales growth to be between 4.5% and 5.5% and organic growth to be between 5.5% and 6.5%. At current spot rates, We expect an approximate one point negative impact of foreign currency fluctuations for the full year.

Speaker 4

A few other items to as we improve service level over that period. Further, our first half twenty twenty three results benefited from a couple of one time in nature dynamics that we would not expect to continue in the second half. First, our Q1 results were supported by higher than normal inventory replenishment, primarily in self care and skin health and beauty. This was a result of our retail customers exiting Q4 with lower than average inventory levels Generating outsized orders during the quarter as they looked to restock. 2nd, globally, there has been an exceptionally strong cold cough and flu season throughout the first half of the year.

Speaker 4

While we will be operationally ready for any level of seasonal demand, our outlook contemplates more normal incident rate levels this coming winter. With regards to interest, we expect reported net Interest expense to be approximately $270,000,000 and approximately $300,000,000 on an adjusted basis. Moving to taxes. With regards to the full year, we expect a reported effective tax rate of 34.5% To 35.5 percent. On an adjusted basis, we expect the range to be between 24.5% 25.5%.

Speaker 4

The higher rate versus prior year is primarily driven by jurisdictional mix of earnings and less favorable discrete benefits in 2023 as compared to 2022. On the bottom line, we expect full year adjusted diluted EPS to be in the range of 1.26 to $1.31 This range assumes a full year 2023 weighted average share count of 1,855,000,000 shares. As we look to the back half, we continue to operate in a challenging environment With ongoing pressures from labor costs, raw materials, packaging and foreign exchange volatility, while our guidance reflects a variety of scenarios, We remain focused on the things that we can control and will utilize the levers within our operating model to mitigate these headwinds. As we have done over the past several years, I'm confident in our proven ability to navigate uncertain operating environments, leveraging the power of the portfolio and the expertise of our teams. Now I'll turn it back to Thibault for some closing remarks.

Speaker 2

Thank you, Paul. Again, we are pleased with the strength of our 2nd quarter results and our Q1 as a publicly traded company. This quarter highlighted our unique model as the world's largest pure play consumer health company, building on our clear sources of competitive advantage to deliver robust financial performance. And now let's open up for Q and A.

Operator

At this time, we'll 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. One moment please while we poll for your questions. Our first question This comes from the line of Anna Lazzol with Bank of America. Please proceed with your questions.

Speaker 5

Hi, good morning and thank you for the question. And you mentioned innovation several times on the call and you previously shared that KenView has launched over 100 new product innovations each year since 2020 And they've comprised about 10% of net sales each year. Are you on track for product innovations to contribute to a similar amount to net sales this year? And also what gives you confidence in the coming quarters that consumers are still willing to spend on higher price innovation and consumer health when we have

Speaker 2

Yes. Good morning, Anna. Thank you for your questions. Yes, as you rightly pointed out, innovation is a big part of Our model at Canvue, that's what we have been doing historically and that has been our history of 135 years with There are many first to market innovation, and we definitely intend to continue on this I talked in my prepared remarks about a number of examples of innovation we launched this quarter And they have been well received and we are excited to about what is in the pipeline and what we are about to launch in the market in the back half of this year across all three segments. I would remind you that for us innovation means not only new products, but also It can be a new claim or a new clinical data that allows us to give consumers and health care professionals another reason to use our brands.

Speaker 2

So yes, We are pleased with the health of our innovation pipeline and the impact it has on our business. Regarding your second question, regarding the consumer confidence, While you may have seen in, I would say, more traditional staple categories some downgrading happening in some geographies, At Canvue, we don't see this dynamic happening in our portfolio. You saw that excluding Our own intentional discontinuations, our volumes were flat in the 2nd quarter Despite strong value realization, you remember that we saw the same thing happening in the full year 2022. So what we see is that even in this more dynamic environment, Consumers remain focused on their health and well-being. They want to take control of their own health And they are looking for trusted product solutions and brands that have been in their household for years, For decades, sometimes for generations.

Speaker 2

And as you know, many of these brands are in the Canvue portfolio. So that's what makes us confident in the fact that our brands will continue to be the go to brands for consumers around the world.

Speaker 5

Thank you. And just as a follow-up, in terms of distribution, Are you happy right now with your distribution with various retailers like Walmart, Target and the drug channel? Do you see any areas where you might be under penetrated or any

Speaker 2

Yes. I would tell you that domestically and internationally, distribution is always an opportunity for our vast portfolio of Brands, it's something that we continuously work on with our retail partners around the world across the portfolio. Following the period of disruption we had in the past that particularly hit our Skin Health and Beauty segment and some part of our Essential Health segment, we are focused on recovering distribution points. I'm pleased with the progress we have made so far, but I would expect continued Recovery in distribution points in the back half of the year. But beyond this specific event, Distribution is something that we always work on with our retail partners, yes.

Speaker 5

Great. Thank you. I'll pass it on.

Operator

Thank you. Our next question has come from the line of Filippo Falerni with Citi, please proceed with your questions.

Speaker 6

Hey, good morning guys and congrats on reporting the Q1 as a public company. I have two questions on top line. The first, at the total company level, just how you're thinking about the evolution of Price and volume in the second half of the year and whether you have additional pricing action that you're contemplating.

Speaker 2

Yes. Good morning, Filippo. Thank you for your question. So regarding the back half of the year, I would remind you a couple of things. First of all, we are going to comp a higher base than we had in the back half of 22 as we started recovering service levels.

Speaker 2

2nd, we had in the first half of twenty twenty three Two items that we would not expect to repeat in the back half of the year. The first one is the fact that in the first quarter, We saw retailers restocking our products significantly, Knowing that they had exited 2022 with extremely low inventory levels. The second thing is that we have seen There's very strong incidents in the past winter season. For this coming winter season, we are planning with a more normal season. So that's what we expect in for the back half of the year.

Speaker 2

The back We continue to see a mix of value realization and volume. Distribution gains will play a role. We talked about it With Anna a minute ago, value realization, price and mix will continue to play a role As well, we targeted price actions to cover continued elevated Input costs, but also premium innovation, innovative solutions and favorable mix. So All of that will lead to our guidance of an organic growth comprised between 5.5% 6 point

Speaker 6

Got it. Thank you. And then just a follow-up, a second question, particularly self care. As you mentioned, very strong cough and cold season. You're expecting a more normal one.

Speaker 6

Do you think there was also a little bit of Going forward in demand in the first half of the year, as you think about the second half, have you contemplated maybe like a bit of more de Stocking at the retailer, but also at the consumer level, embedding your guidance for the self care segment particularly.

Speaker 4

Good morning. This is Paul. Thank you for the question. We did not see a pull through. Our inventory, retail inventory and own inventory are in balance.

Speaker 4

And in the case of Self care seasonalities are normalizing, as that's what we have contemplated in our forecast. So we did not see a put forward in demand for the 2nd year. Expect a normalized season in the balance of the year.

Speaker 6

Great. Thank you, guys.

Operator

Thank you. Our next questions come from the line of Andrea Teixeira with JPMorgan, please proceed with your questions.

Speaker 7

Thank you. Good morning. I just want to follow-up a bit on the commentary regarding the consumer environment and just So, see if you can speak to, the consumer behavior towards the end of the quarter, if you're still seeing, in general, Consumers being not on trading or how you're seeing price elasticity coming along? And then also as you just mentioned Regarding the cold season, but any word on how we should be thinking of puts and takes of retail inventory, pantry inventory and customer demand? Thank you.

Speaker 2

Yes. Andreas, thank you for your questions. So As I mentioned, we live in the consumer health space, which might behave in a different manner compared to For the consumer stable categories, our world is really about bringing efficacious solutions And we have a very strong portfolio of brands that are very often synonymous with So when we combine when you combine these two factors, you see that consumers continue to be focused On the health and wellness, they want to trusted solution, trusted product that they know, that they trust, that are recommended by the health care Professionals that have seen their household for a very long time, these are the brands we are talking about with Canvue. I'll give you a couple of proof points. If you look at our key segments of Self Care and Skin Health and Beauty, again excluding the intentional discontinuations we made ourselves, Volumes are up in both segments.

Speaker 2

Another proof point is the fact that we don't see private label penetration we see private label penetration stable this quarter, which is in line with the history of private label. We have seen that In the past, even when times are tough, private label penetration doesn't tend to fluctuate very much. And the last proof point I would give you is what we are seeing as we speak in the summer season in Sun Care where our Neutrogena range is doing extremely well. We are market leader in the U. S.

Speaker 2

We have Premium positioning, we launched premium innovation. All of that is extremely well received by consumers and we are gaining share In the U. S. With Neutrogena san. So we are aware Of Consumer Dynamics, we make sure that our products are accessible at different price points together for different needs of different consumers.

Speaker 2

But we are also very confident in the robustness of our portfolio and our ability to consumers with the product and solutions they need. That's what we have been doing for 135 years and that's what we intend to continue to do.

Speaker 7

Thank you. Just a follow-up, if I may, In terms of like the other categories that are not so health oriented, for example, Listerine And some of the other categories within Adhesives and Wound Care, is that applied to that as well?

Speaker 2

So we in Essential Health, you as Paul mentioned, We are pleased with the performance of the segment at 3.8%, 10.7% of value realization. When you exclude discontinuations, it's mid single digit volume decline. So I would say volume held up With Band Aid, Listerine is we are pleased with the performance of our gum therapy product, which in the U. S, which is the number one new code in the U. S.

Speaker 2

This quarter. The Glycerin gum therapy gives you 4 times healthier gums in 3 weeks and consumers are responding very well To this offering, we saw softness in the category in Asia, But we continue to gain share there. So That how would summarize the performance of Essential Health.

Speaker 7

Thank you, Thibault. I'll pass it on.

Operator

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

Speaker 8

Thanks, operator, and good morning, everyone. So I was actually hoping to get some more color on the gross margin performance. So I know you mentioned headwinds from FX, stand up costs and inflation, but value realization was strong and you also mentioned productivity at the tail end. So can you maybe just help us bridge the decline in the quarter, which I think was a bit weaker than we were expecting? And then second part to this question, as we look through the balance Is there any color you could share on these moving pieces and how maybe specifically we should be thinking about gross margin progression?

Speaker 8

Thanks.

Speaker 4

Yes. Good morning, Peter, and thank you for the question. We are, in fact, navigating a volatile environment For a couple of years now, but I am actually very proud of the way we have been doing it consistently with our experience. In the case of the quarter, we still see some elevated inflation and ForEx Transaction and ForEx was also a headwind. However, we have an arsenal of tools to be able to offset Partially, the gross margin pressures, particularly we use supply chain efficiencies and we constantly do that as part of our discipline, Premiumization, innovation at RGM and value realization at TiVo is a big component, of course.

Speaker 4

As we look into the second half of the year, we believe that these levers will continue to be utilized. We have, as I said, It continues arsenal of ideas that we put in place in terms of total end to end network optimization. And of course, The carryover of the pricing that we have put in place will help us offset the still Inflationary yet diminishing commodity headwinds. We feel very good about our ability that we have demonstrated To maintain very healthy gross margins.

Speaker 8

No, that's super helpful. And then maybe shifting gears to China. I would just be curious kind of what you're seeing in that market? How did performance in the quarter compare versus your expectations. And I guess maybe specifically as you move through the quarter or around the exit rate, are you seeing any signs of an

Speaker 2

Yes, maybe I can take this one. We have been in China for a very long time as a business. I myself lived Positive about long term prospects of our business in China. When I look at our performance in China this Quarter, I think it's another great example of the power of the Canvue portfolio. I can tell you that We grew double digit in China this quarter, strong performance In our self care segment, we see softness in other categories, but it's Something that we anticipated.

Speaker 2

We have never been in the camp of those who thought that China will recover overnight. Unfortunately, we have been proven right. And we would expect a slow recovery In these categories that where we see softness today, but we are very confident In the ability of this market to continue to deliver performance and we see that again in this quarter with double digit growth and that's the power of the Canvue business model and Canvue portfolio.

Speaker 4

Thank you so much. I'll pass it on.

Operator

Thank you. Our next questions come from the line of Jason English with Goldman Sachs. Please proceed with your questions.

Speaker 3

Hey, good morning folks. Thanks for slotting me in and I'll echo some of the others' congrats on your Q1 as a public company. I got a couple of questions. First, let's pick up kind of where we just left off on geography. You mentioned China of double digit.

Speaker 3

I think APAC sales overall were only up 1.3. So what was the offset? And then as we look at EMEA, you started the year really strong with 9.3% growth and it Slow to around 3.5% this quarter despite what looks like it should have been a pretty moderating or much less onerous FX headwind. Can you unpack the performance there as well? Thanks.

Speaker 2

Hi. Hey, Jayson. Thank you for the question and thank you for your thanks for the strong quarter we delivered. So in Asia, we see competitive dynamics. We see Category dynamics happening that had a negative impact on part of our business in the 2nd quarter.

Speaker 2

I mentioned the mouthwash category where we see decline in both China, Japan and other parts of Asia. We are gaining share In China and Japan, the categories are suffering as we speak. India had a soft Quarter end, emerging markets in general, we saw softness there. So that's for Asia. For EMEA, we are very pleased with the performance of our business in Europe, Middle East and Africa Across our portfolio, We see our brands doing well, strong demand for products in both self care and skin health Sorry, go ahead.

Speaker 4

Sorry, Jason. You're right about the headwind is still persistent of yet moderating the ForEx. But the important thing is the underlying strength of the business is there. And also we had We continue to see elevated incidences of flu that we even saw that in the Q2. So it's more the Core that we feel very good about and moderating FX pressures.

Speaker 3

And let's pull on that thread of elevated flu incidences. Since you've IPOed lots of conversations with investors and one consistent question or area of concern to most investors is whether or not you're going We had sort of twin engines or twin tailwinds behind this business with COVID and then this nasty cold and flu season Lifting big parts of your business, is it reasonable to expect that there will be a self care slump? In other words, a period where your business is likely to contract as these tailwinds fade? Or is there reason to believe that you can have durable growth? And if so, what are those reasons?

Speaker 2

Yes. That's a very good question, Jason. That's It's a question that we are facing every day to plan for our operations. Our guidance of 5.5% to 6.5% growth organic growth for the full year takes into consideration our Current thinking, which is to have a normal season. So we do not expect To have as big of an incident as we had last winter season, we will be ready from an operational point of view to response to any seasonal demand.

Speaker 2

But from a planning perspective, we were not Planning with such a high season. Having said that, and I think the Q2 is a good example of that, our Self Care segment It comprises more need states than just cough and cold or analgesics. And you saw This quarter, our other need states like smoking cessation with Nicorette, like Digestive Health with Imodium Or like allergy, where despite a slightly slower level of lower level of incidence, we continue to gain share in the U. S. With both Ziatek and Benadryl, all of these other segments are doing well.

Speaker 2

So we are very pleased with the performance of

Operator

Thank you. Our next questions come from the line of Steve Powers with Deutsche Bank. Please proceed with your questions.

Speaker 9

Hey, good morning, everybody. Thank you. You've spoken to this A little bit, but I just want to kind of round it all out. Within Skin Health and Beauty and Essential Health, the growth And both segments came in slightly below external forecast. So I was hoping you could put a bit more definition around how they compared to Your internal forecast, I mean, you've spoken to the Asia issues in Essential Health, but just more broadly.

Speaker 9

And then I was also hoping you could just clarify for us exactly when you expect to fully cycle the portfolio rationalization headwinds that are impacting both those segments. And if possible, just within the context of that 5.5% to 6.5% organic growth call for the year. Talk a bit about how you expect the 3 segments to contribute On an annual basis to give us a little bit more perspective on how the second half is likely to shake out.

Speaker 2

Yes. Steve, three questions. So let Paul and I handle Let me first maybe talk about start with the last one on as you know, we don't give guidance by segment. It's a reminder that really we the portfolio is very important and we gave you several examples in this call again on The importance of seeing Canvue as one portfolio focused on consumer health, Your second question on anniversarying the discontinuation. As you heard from Paul, we are anniversarying our decision to suspend sales of Personal Care products in Russia this quarter.

Speaker 2

And regarding the other discontinuations of codes that we are talking about, Most of them were taken last year when we discontinued slower moving codes to free up capacity in our supply chain. Having said that, we will continue to remain focused On the velocity of our cost to make sure that our portfolio is as productive as possible, that's one of the tenants of our partnership with our retailers to make sure that we continuously work with them to optimize our assortment and make sure that our assortment is as productive as possible for them and for us. So on the Skin Health and Beauty and Essential Health segment, I would say that when you take out The impact of discontinuation and that's what may now have been fully reflected in external forecast. I feel very good about the underlying strengths of our brands and of our equities in across our portfolio. If you look at Skin Health and Beauty, with volume Up low single digit this quarter with strong value realization With some room to go in terms of distribution points in the U.

Speaker 2

S. Specifically, that makes us very Confident in the future of this business.

Speaker 9

Okay, very good. Thank you. And if I could, just On the topic of investment levels, just curious for a little bit more additional perspective now that you've been Operating independently, just your comfort with planned investment levels, and to some extent, where you expect to prioritize those investments over the balance of the year?

Speaker 4

Steve, thank you for the question. Nothing has changed in terms of our investment philosophy As we are now an independent company versus before, what we strive to do is maximize return on our investment and we continue to invest Solidly in our brands, whether it is through advertising, through healthcare professional representations, Promotional impact, so we balance all of that in the most effective way that maximizes the return on investment. So we are very encouraged by the performance and we will continue to fuel the growth of our brands through a balanced investment approach.

Operator

Thank you very much. Thank you. Our next questions come from the line of Navane Thi with BNP Paribas. Please proceed with

Speaker 10

your questions. Hi, good morning. Can you discuss and tell us more about the supply chain improvements that benefited the Q2 and you expect them to benefit the rest of the year? My second question is, and apologies if I missed it, can you detail the breakdown of pricing versus mix within The 9% value realization. And just the third one, if you could comment on Canvue recent dialogue with J and J regarding monetizing the stake in Canvue, has there been any change?

Speaker 10

Thank you.

Speaker 2

Okay. So on the pricemix question, we don't disclose The mix between the 2. On the supply chain improvement, Whether we expect some benefit in the balance of the year, the answer is absolutely yes. We have Invested in the more capacity and more resiliency of our supply chain. We continue to do that.

Speaker 2

As a result of that, We have significantly improved our service levels across the portfolio. Are we fully where we want to be? Not yet. So it will continue to be a focus area for us to improve service levels, but we are pleased with the progress so far. And we would expect the back half of the year and beyond to continue to benefit From these investments we have made in our supply chain, in terms of capacity, resiliency, automation, All working in the right direction.

Speaker 2

That will also include Even stronger partnerships with our retail partners to do some joint business planning and make sure that We get the right signal demands to make sure that we operate our supply chain efficiently, but making sure that we have always Products available on shelf for consumers when they need us.

Speaker 4

And Navane, on your question about The split from Johnson and Johnson, at this point, you also that Johnson and Johnson has announced Their intention for the next step of the separation of Canvue, unfortunately, we're very limited on the information that we can provide Other than what has already been made public, I can tell you that we're fully ready. We've been operating Independently and we're very excited about the future.

Speaker 10

Thank you.

Operator

Thank you. Our final questions will come from the line of Jeremy Fialco with HSBC. Please proceed with your questions.

Speaker 11

Hi, Jeremy Fialko, HSBC here. Thanks for fitting me in late in the call. So questions on on advertising and promotions. So the first one is, could you give a bit more color on what your advertising spend did in The quarter, the extent to which it was up and also whether it was up as a percentage of sales. And then if you could talk a little bit about your plans for advertising spend in the second half of the year.

Speaker 11

And then the second And related to that, have you seen any change in competitive behavior? Can you give examples of where you are Your competitors put more into advertising or more into trade promotion as the raw material prices in some areas start

Speaker 2

Yes. Jeremy, thank you for your questions. I will not comment on what other companies I'm doing we live in a competitive environment. What I would tell you is that we continue to invest behind our brands. Remember that our business model relies on demand generation delivered through different means.

Speaker 2

1 is direct to consumer demand generation activities. Another big part of our model relies on health care professional recommendation. And so on both fronts, we continue to invest. We are on track with our investments, and we intend to continue to invest to that level. We do not disclose Advertising at a quarter level, we'll disclose it on a full year basis.

Speaker 2

Matt, you should always remember that for Canvue, advertising expenses is only one part Of our demand generation model, another part, an important part is linked to Healthcare professional recommendation. But we are absolutely Committed to invest behind our brands. That's what we have been doing in the first half, and we intend to continue to do it in the back half of the year.

Speaker 11

Okay. Thanks very much.

Speaker 2

Thank you, Jeremy.

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 Manga for any concluding comments.

Speaker 2

So thank you for this Good conversation and thank you everyone for participating in today's call. Once again, as you heard from Paul and I, we are Very pleased with the strong results we achieved and our teams achieved around the world this quarter. They reinforced the power

Operator

of our iconic brands, the This concludes today's conference. Thank you for your participation. Have a wonderful day. You may now disconnect your lines.

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Earnings Conference Call
Kenvue Q2 2023
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