Greetings, and welcome to Kenvue's Third Quarter 2023 Earnings Conference Call. My name is Darryl, and I'll be your operator today. [Operator instructions] As a reminder, this conference call is being recorded. It is now my pleasure to introduce you to Kenvue's Vice President of Investor Relations, Tina Romani.

Good morning, everyone. I am pleased to be joined today by Thibaut Mongon, Chief Executive Officer and Director; and Paul Ruh, 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, 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. 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 GAAP measure can be found in this morning's press release and our presentation available on the Investor Relations section of our company's website, kenvue.com. And with that, I'm pleased to turn the call over to Thibaut.

Thank you, Tina. Good morning, and thank you for joining us today. I'm pleased to be here with you, hosting our first earnings call as a fully independent company. Since our last call, Kenvue has formally separated from Johnson & 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. It's hard to believe it has only been two months since J&J completed their successful exchange offer given all we have accomplished this year. So in addition to delivering another healthy quarter with 3.6% organic growth this quarter on top of 4.7% growth last year, we also continued to make tremendous progress standing up Kenvue for success as a stand-alone company. From the creation of legal entities and to transfer of licenses to the development of fit-for-purpose company policies and build-out of systems, our teams continued to execute our separation plan successfully and on time. We remain on track in building a consumer-focused operating infrastructure while simultaneously bringing to life our purpose to realize the extraordinary power of everyday care and delivering profitable growth. Operating in the attractive consumer health space with an unparalleled portfolio of science-backed, healthcare professional-recommended trusted brands is 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 situation and consumer behavior. It is our long track record through economic cycles and our performance this year that gives us confidence in the superiority of our model based on brands that are part of daily rituals and designed for moments that matter. Every day, we continue to make sure our brands are attractive for all consumers, and we cultivate…

Thank you, Thibaut, and good morning, everyone. Echoing Thibaut's sentiments, I'd like to comment the ongoing passion of our people and their dedication to standing up Kenvue 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 teams made tremendous progress in executing the separation, they also delivered in the face of continued inflationary and macroeconomic pressures and a dynamic operating environment. Getting into performance, we had another healthy quarter with 3.3% reported growth and 3.6% organic growth. In terms of drivers, value realization, which is comprised of price and mix, represented 7.1 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 3.5 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 Thibaut 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, the fact that we were able to deliver results in line with our commitments at this early stage in our journey, exemplifies the strength and resiliency of our portfolio and operating model. This drives the reliability of our results, alongside durable cash flow generation. Transitioning to our results by segment. Strength in self-care continued with 6.7% organic growth. We continued to see strong positive value realization of 5.5 points, alongside a 1.2-point volume increase. As Thibaut mentioned, our teams continued to strengthen our self-care portfolio with…

Our first question comes from the line of Andrea Teixeira with J.P. Morgan. Please proceed with your questions.

Thank you, operator, and good morning, everyone. So Thibaut and Paul, you gave a lot of examples of the headwinds that you are facing, that you faced in the third quarter and you're facing into the fourth and potentially the first quarter, I understand, given the very strong cold season last year. So can you give us like some sense of underlying consumption that you're seeing vis-a-vis what your investors should expect in 2024? I think at this point, we are all hoping to get some clarity and some of the -- your peers have given us a little bit of more color in terms of underlying. I understand, of course, if you can put aside self-care and then focus on the beauty and skin and health because some of that was self-inflicted. If you can comment on how we should be seeing and looking into 2024 in terms of balancing volumes and pricing. And just my clarification as the second part, your underlying volume decline in the quarter, if I do the math correctly, was still about 1.5%, if you extrapolate those two items that you discretely pointed out. Can you talk on how much do you think consumption would still be negative in the divisions, I would say, in particular self-care, and how innovation can play a role into 2024 given that? Thank you.

All right. Good morning, Andrea. Thank you for your question. So a lot in your questions, so let me get into it 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 our brands. We need to unpack the different puts and takes we have in our results, but you see in our Q3 results the strength of the portfolio and the strong affinity consumers have for our brands. If you look at the self-care segment, you see that all our categories are growing behind the consumer demand, healthcare professional recommendation, innovation. We continue to innovate very strongly. I gave you in my remarks a number of examples, and we intend to continue to execute this model where we strengthened our leadership positions with a continuous flow of innovation, new clinical data for healthcare professionals, and to cultivate the vibrancy of our portfolio, which is, I remind you, broader than cold and flu with vibrant business in allergy, in smoking cessation, in digestive health. So we continue to be excited about the prospect of our largest segment, self-care, understanding that we are comping a very strong -- unusually strong, as we said all along, tripledemic and very high cold and flu season we had last winter, and we will certainly not expect the same level of incidents to be replicated this year. 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 that's what we reflect in our guidance for this year. But we continue to…

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. A few questions. So Thibaut, maybe to pick up on your last thread there, just maybe a little bit more detail, if you could, around the expected phasing of distribution point recovery in skin health and beauty. I appreciate the phasing of face and then body and hair. But how much progress is this as 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 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 that you've called out, as well as currency headwinds, I guess have you altered at all your investment plans or investment levels in marketing or other commercial demand-building initiatives because of those headwinds? Or are you still planning to invest as you were before and perhaps offsetting that with other forms of productivity or the like. Thank you very much.

Good morning, Steve. So let me take the first question, and Paul you take the second one. So in terms of recovery, as I said, we expect the recovery to continue to be gradual, not to be linear. You see the dynamics in the China market. It 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 the U.S., the Planogram resets are happening as we speak. They happen in the fall. We are pleased with the wins that our teams have been able to get as part of the Planogram resets. It takes a little bit of time for these resets to materialize in our results, so you are going to see some initial impact in Q4 and then going up from there into 2024. But I cannot reinforce enough, as I've said all along, that it's not going to be an overnight improvement. It's a plan that we have planned for 2023 and 2024, and what matters for us is to make sure that we continue to be on track with the execution of this plan. Paul, do you want to take the second one?

Happy to. Yes. 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 reflected in our gross margins because we don't want to miss on the opportunities to invest where we see the growth. And our model, our operating model allows us to do that. What we do is when we see opportunities to invest with high rate of return, we move the resources to that place. And if the season is starting slowly, we move the resources to where we see the season or the other opportunities for growth 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 make most sense in terms of return.

And I would add, you see that reflected in our innovation program in Q3, and we have a lot of exciting innovation lined up for Q4. You will see more displays and brand activation with Tylenol. I talked about our innovation Motrin Dual Action that is doing very well and allowing Motrin to gain share. You will see brand activation around Neutrogena Hydro Boost range, in particular, and continued activation in Europe as well.

Our next questions 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 of topic over to cold and flu. We heard P&G last week, double-digit growth on Vicks, really good sell-in there. And we heard from Reckitt, who also talked about really good sell-in around cold and flu. Your message is obviously contrasting pretty sharply with that, and I guess it's a little unclear why. Two potential explanations: one, your sell-in is weaker, suggesting like maybe retailers are planning for a little less support behind you than your competitors; or secondly, like maybe sell-in is fine. You're just looking around the corner, saying sell-in is good, but the season looks soft, so we're going to 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 potential scenarios is most close to the truth?

Jason, good morning first. You are absolutely right in your analysis. We have the second scenario in mind. That's what we are seeing. We see ourselves and our retailers ready for the season. Everybody is prepared for the season, and that's reflecting in the sell-in, and that's reflecting in the strong performance of our self-care business in Q3. Having said that, when we look around the corner and look at signs of start of the season, we have not seen that so far given the very warm weather we have seen in the U.S., in Europe. And so that's what we are reflecting in our outlook, not so much the sell-in. That is, as always, good to make sure that everybody is ready for the season but more what we see on the ground in terms of start of the season.

Understood.

And a couple of points to add maybe, Jason. The first one is our readiness compared to what it was before is much higher. We have actually increased our capacity in several lines and also in our IT infrastructure to be able to connect much better with our retailers. So when the signal is there, we will be ready to react. That means that we, on a total end-to-end value chain, we're able to optimize inventories for the benefit of us and the retailers as well. So we will be ready, and the situation is much better after the learnings that we had from the previous pandemic years.

Helpful stuff. Thank you, and congrats on the success you're seeing in skin health and beauty in Europe. I like what you said. I hope that is indeed an early indication of what the U.S. could look like when all these initiatives take hold. You mentioned that the cadence of the improvement is on track. It doesn't -- from the 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 sorry, not the destock, the rationalization that happened this quarter last year. You're supposed to come out of this quarter having fully cycled that. And in fact, you're supposed to come out this quarter with now more products slotted in on shelf resets. So this was supposed to pivot from a headwind to almost net neutralize this quarter as a tailwind in the fourth quarter. Now you're saying no, not the case. It's actually going to be a headwind again in the fourth quarter. So something's gone wrong. The shelf resets must not be going as well as expected or there's other discontinuations elsewhere. Help me understand kind of what's been -- what's derailing this path of improvement.

Yes. So let me take this one. On skin health and beauty and the recovery of distribution in the U.S., as you know, the Planogram resets happen in the fall. So we are just going through the resets, as we speak, right, in the U.S., depending on which customer you are talking about. As I said, we are pleased with some of the wins we have had with these resets, and you are going to see improvement but not immediate. That has always been our plan, and we are in -- we are seeing continued impact this quarter. You are going to see continued impact in Q4, less and less as the Quarter 4 and forwards as we -- as these new Planogram resets materialize in our numbers. So you have a lasting impact of this loss of distribution points. But you're right, we are recovering gradually, as we said all along, through Planogram resets, through launch of innovation. And that's what we saw with sun, that's what we're going to see again in face and body, and hair will be next.

Our next questions come from the line of Anna Lizzul with Bank of America.

Hi. Good morning, and thank you for the question. On self-care, volumes were a bit better than expected despite the more normalized or slower start to the cold and cough season. We've noticed that you've gained market share nicely in the self-care categories over the past two years. So even if we do see a softer winter season overall, should we expect volumes to continue to be bolstered by those market share gains?

Anna, good morning. Good question. I think what -- you rightly said that we have consistently outperformed the market for a long time now in healthcare, and you continue to see that happening. You also see the power of the portfolio, our broad-based portfolio in self-care covering multiple categories. So in terms of volume, we certainly continue to expect our nonseasonal categories to outperform with innovation, with strong brand activation and execution around the world with customers and healthcare professionals. With regards to the cough, cold, and flu season, given the totally abnormal high season with the tripledemic we had last year, as we said all along, we would not expect the same type of volume to materialize this year. So no change in this area. We continue to grow and fire on all cylinders on the nonseasonal part of the portfolio. For the seasonal part of the portfolio, we will see where the season goes. What I can tell you is that within this season, we are absolutely ready to be extremely competitive. Paul mentioned about our supply capacity that has been expanded, and we are absolutely ready to have -- to be very competitive this season.

Thank you for that. And I also wanted to follow up on skin health and beauty. You did mention in your prepared remarks you are introducing some innovation within the Neutrogena brand. Is that helping you add or regain distribution? And then just in terms of the innovation, given that's typically more premium in nature, year over year, the pricing slowed this quarter versus last year. I'm just wondering why that was given the innovation that you introduced.

So absolutely, you're right. We are introducing innovation around the world. I talked about the positive impact that this innovation had in Europe. If you talk about Neutrogena, Germany is a great example where our new Hydro Boost lines and Retinol Boost lines are doing extremely well over there. For us, this fall and winter, our hydration line, Hydro Boost, which is really the hero line in hydration for Neutrogena, is strengthened, I would say, with the innovation we are launching this quarter with our new hydrogel cream and new options within our hydrogel gels -- Hydro Boost gels, sorry. And this allows to have a halo effect on the entire Hydro Boost range, and you will see displays and brand activations for the entire range beyond the innovation but building on this innovation. So absolutely, innovation is part of our algorithm for success and helps us activate brands in a much bigger way in store and online.

Our next questions come from the line of Filippo Falorni with Citi.

Hey, good morning, everyone. Question on China, obviously you talked about being a headwind in the quarter. Can you give us some sizing of the -- your China business and some color on where your main exposure is but on a segment basis? And longer term, clearly, the macro picture is still challenging there, but like what are your expectation of improvement in China consumer trends and your business performance there? Thank you.

Yes. China represents about 7% of our global revenue, Filippo, so that gives you a sense of our exposure to China that is not disproportionate, I would say. We see, as I said, a couple of consumers to be cautious and choiceful in their spending, and we see that reflecting in our portfolio of skin health. And essential health segment has been impacted by this behavior in China, and we don't expect short-term recovery in that area. On the other hand, on the self-care side, we continue to see vibrant demand for our brands, in allergy, analgesics, as an example. So a lot – again, the power of the Kenvue portfolio that allows us to continue to be confident in the long-term outlook in this market. We continue to innovate in this market. We -- I talked about Motrin fever patches and as an example of the type of innovation we are launching in the market. So for China, the power of the portfolio will continue to be agile and move resources to see -- to the areas where we get a good return. Clearly, today, it's more in the self-care side than in other parts of the business. But our teams on the ground are agile, and we'll continue to be ready. We have been in China for decades. We are in China for the long term, and we remain confident in the long-term prospect of this market given the size of the middle class, the Healthy China 2030 agenda, and other underlying factors in that market.

Our final questions will be from the line of Susan Anderson with Canaccord Genuity.

Hi. Good morning. Thanks for taking my question. 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 costs flowing through, just kind of wrapping around? Or have things elevated further? And then maybe if you could just talk about between commodity costs, labor, etc., what the drivers are there when you expect it to potentially fall off. Thanks.

Thank you, Susan. And as I said, we still see some elevated inflation, although it is slowing down. If you think about the pockets of our cost spine, we still see some elevated inflation in particular in two areas. Number one, it's in energy and labor. On the areas where we see the declines, it's already in resins, hydrochemicals, logistics, a significant decline given the normalization of the -- particularly the freight lines, both in -- on the sea and on land. So overall, we see a diminishing inflation. We are also adjusting our pricing accordingly. Remember, asset principle, we are aiming to maintain our gross margins through value realization and premiumization to ensure that we maintain our gross margins and nothing more, so we have healthy margins to be able to invest back in our brands. So that's our principle. We're living into it, and we are 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. Just the 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?

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. The other thing that is particular in our business is we moved the resources around. And when we see the opportunity to invest, like in this case, when we see the new innovation, we're actually moving resources to be able to drive that innovation. In the end, it's a temporary, more phasing matter when it comes to the quarterly margins. But if you look at it on a normalized basis, on a full year basis, you will not see those ups and downs. It's just how the phasing of our advertising spend, but we are focusing our efforts on the healthy gross margins to be able to invest back in our brands and not only in skin health but in general.

We have reached the end of our question-and-answer session. I would now like to hand the call back over to Thibaut 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. It was another healthy quarter for Kenvue. We believe they reflect the strength of our model, the power of our portfolio of iconic brands with 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 all of you again to keep you updated on our continuous progress on our future earnings call. So have a great day, and thank you, everyone.