Kenvue Inc (KVUE)

• Kenvue is successfully implementing cost-saving initiatives like the Vue Forward program, aiming for $350 million in annual savings by 2026, which is ahead of schedule and fueling increased investment in their brands while maintaining EPS guidance. - - -
• Early signs of recovery in the Skin Health and Beauty segment, with Neutrogena regaining the #1 position in U.S. face care in brick-and-mortar channels, indicate the new Kenvue playbook is starting to generate results. -
• Management expects Q4 to be the strongest growth quarter due to the cumulative impact of their new strategies and easier year-over-year comparisons, and they are confident in delivering adjusted diluted EPS towards the middle of their $1.10 to $1.20 guidance range for the full year. -

• Significant headwinds in the Skin Health and Beauty segment: KVUE is experiencing deceleration in the skincare category in the U.S., continued softness in Asia, and a muted sun season, which are expected to persist into Q4, potentially impacting future revenues. -
• Recovery in Skin Health and Beauty will be prolonged: The company acknowledges that the turnaround in this key segment will not be immediate or linear, indicating continued challenges in achieving growth despite increased investments and transformation initiatives. - -
• Uncertainty in the Self Care segment due to low incidence levels: KVUE faces softer category dynamics in the second half of the year, with unusually low levels of incidents in key categories like allergy and pediatric fever, and uncertainty about whether this represents a new normal, which could negatively affect future sales. -

1. Updated Guidance
   Q: Why is organic sales growth guidance now lower?
   A: Management explained that external factors are not helping, including slower allergy and pediatric fever categories, deceleration in the Skin Health category globally, and cautious consumers in China. - Despite these challenges, they expect Q4 to be the strongest growth quarter due to the cumulative impact of their new playbook and easier year-over-year comparisons, as last year's destocking and portfolio rationalization won't repeat. -

2. 2025 Growth Outlook
   Q: Will weaker category trends impact ability to return to growth in 2025?
   A: Management is confident that the ongoing transformation will allow acceleration of top-line growth in 2025. - They plan to deliver on their algorithm, with income growing faster than sales and continued investment in the business, despite monitoring category performance carefully. -

3. Skin Health Recovery
   Q: Can you return Skin Health to growth next year?
   A: They are focused on returning the Skin Health and Beauty segment to growth in 2025. - Despite continued consumer softness in Asia, they plan to fuel expansion in EMEA and counter U.S. deceleration with better execution of their playbook, stronger innovation, and improved marketing campaigns. -

4. Gross Margin Outlook
   Q: What is the outlook for gross margins?
   A: They are pleased with gross margin performance and confident in expanding margins further. - Improvement sources include value realization, manufacturing efficiencies, and supply chain optimizations. - Commodity tailwinds are starting to wind down, and Q4 is typically the lowest margin period due to high plant maintenance investments. - Long term, they target sustainable gross margin expansion of 20 to 30 basis points annually. -

5. Cost Savings Initiatives
   Q: How are cost savings programs affecting margins?
   A: Exiting Transition Services Agreements (TSAs) is on track with no operational disruptions. - While TSAs may not optimize costs immediately, their "Vue Forward" program aims to realize $350 million in savings by 2026. - These savings are starting to benefit margins and will have more impact in 2025. -

6. Inventory Levels
   Q: What are retailer inventory levels?
   A: In the U.S., inventory levels are on the low side. - Destocking in the first half did not continue in Q3, and they do not expect it in Q4 due to low inventory levels. - They anticipate exiting 2024 with healthy inventory levels globally. -

7. Continued Investments
   Q: Will you adjust investments if category trends persist?
   A: They are confident in sourcing funds to invest in their brands from gross profit and the "Vue Forward" program. - Their algorithm calls for continued investment, and they are not yet at competitive levels. - Investments will be based on return on investment and are crucial for growth. -

8. Portfolio Focus
   Q: Are you streamlining the skincare portfolio?
   A: They prioritize the biggest areas within each brand. - For Neutrogena, they focus on sun and face products, which account for 80% of U.S. revenue. - Initiatives include promoting mega platforms like Hydro Boost and unifying the brand for easier consumer navigation. -

9. Consumer Behavior
   Q: Is consumer softness affecting sales?
   A: Lower sales are attributed to unusually low levels of illness incidents, not consumer weakness. - Consumers continue to prioritize health and seek convenience and value. - No significant trade-down to private labels has been observed; in fact, private label penetration has decreased in some categories. -

10. Promotional Activity
    Q: Has there been an increase in promotions?
    A: They do not see increased promotional intensity in the Self Care segment. - There is a slight low single-digit increase in promotions in Self Care, Essential Health, and Skin Health categories, but nothing out of the ordinary. -

Annual guidance for FY 2024:

• Organic Growth: Towards the low end of 2% to 4% - (no change from 2% to 4% - )
• Adjusted Operating Margin: 21% to 22% - (no change from 21% to 22% - )
• Interest Expense: Approximately $380 million - (lowered from $380 million to $400 million - )
• Adjusted Tax Rate: 26.5% to 27% - (no prior guidance)
• Adjusted Diluted EPS: $1.10 to $1.20 - (no change from $1.10 to $1.20 - )
• Foreign Exchange Impact: Headwind of about 1% - (no change from 1% headwind - )