Hello. And welcome to the Kenvue Fourth Quarter and Full-Year 2023 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. [Operator instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Tina Romani, Head of Investor Relations for Kenvue.

Good morning, everyone. I'm pleased to be joined today by Thibaut Mongon, Chief Executive Officer, 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'll 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 subject for financial information presented in accordance with US GAAP. These non-GAAP financial measures should be viewed in conjunction with the most comparable GAAP financial measure. A reconciliation of these items to the nearest US GAAP measure can be found in this morning's press release and our presentation available on the IR website. With that, I'll turn it over to Thibaut.

Thank you, Tina. And thank you to everyone for joining us today. 2023 was a year of transformational change for our company and for 22,000 Kenvuers around the world. Our teams accomplished a tremendous amount, successfully standing up Kenvue as an independent public company, while continuing to drive profitable growth. While we accomplished a lot in 2023, we know we have areas where we need to increase our focus and improve. So as we enter 2024, we have identified three key priorities that will enable our continued transition as an independent company, while continuing to grow the business. This year, we will reach more consumers, with a stronger focus on our 15 priority brands, free up resources to invest behind our brands and foster a culture that rewards performance and impact. In 2023, we delivered on our long-term value creation algorithm centered around profitable growth, durable cash flow generation and disciplined capital allocation. Our 5% organic growth was broad-based across all three segments, all four regions, and all eight product categories. Self Care delivered another banner year of 8.4% organic growth, sustaining the momentum we have built over the past several years, resulting, once again, in strong revenue growth and share gain. Essential Health grew ahead of our long-term expectations, with 3.6% organic growth, while continuing to execute our strategy to drive gross margin enhancement through successful value realization and premiumization initiatives. And in Skin Health and Beauty, organic growth was 1.8%, less than we expected, mostly due to specific missteps around in-store execution in the US, which we are actively addressing, and I'll give you more details about that in just a moment. We continued our successful multiyear program to expand gross margins in 2023 with 30 basis points of expansion through thoughtful revenue management initiatives and relentless supply…

Thank you, Thibaut. And good morning, everyone. 2023 was a transformational year, where we delivered strong top line, gross margin expansion, and robust cash generation, even in the face of a dynamic macro backdrop and significant cost headwinds. I will start with an overview of results for the fourth quarter and the year, then close with our outlook for 2024. As you heard from Thibaut, fourth quarter performance did not meet our expectations as in-store execution fell short of plan in the US Skin Health and Beauty business. While we don't expect recovery overnight, I'm encouraged by what the new leadership team has accomplished in the past couple of months, diagnosing the issue and putting an action plan in place that is already underway. Now getting to results. Fourth quarter organic sales declined 2.4%. It's important to consider our fourth quarter performance in the context of 6.2% organic growth last year, where we experienced outsized growth in Self Care, primarily driven by unprecedented demand for our OTC products. In this context, fourth quarter growth was 3.8% on a two-year stack basis. Value realization contributed 5.8 points to fourth quarter growth, offset by a volume decline of 8.2 points. Let me deconstruct the volume decline as there are several unique drivers impacting volume that do not reflect the underlying strength of our brands. First, about 3 points come from lapping an early and strong cold, cough and flu season that drove double-digit organic growth last year. Further, this year saw a later start to the season, combined with approximately 15% lower incidence levels. As we have shared previously, in parts of our OTC business, volume is characteristically linked to incidence levels, which can go up or down in any given season. For Kenvue, our focus is to be prepared to serve…

[Operator Instructions]. Our first question comes from the line of Stephen Powers of Deutsche Bank.

Maybe to start just on the top line. I think just given the momentum that we have exiting 2023, I think some people could look at the call for flat organic in the first quarter, given the comparisons as ambitious and also the 2% to 4% for the full year as potentially ambitious. So maybe just a little bit more color on your visibility to that organic forecast and some of the building blocks that we should be looking for as we get into the year.

Regarding your question on the top line and our ambitions for 2024, we continue to see our categories growing 3% to 4% in 2024 and beyond. Our guidance for 2024 reflects a range of scenarios. It does embed a sequential improvement as we move through the year and as we lap the unusual compares of 2023 that we talked about, but also the fact that we expect our increased investment and the plans that I outlined earlier generate impact, especially in the second half of the year. So that's what makes us confident in our plan for the year. But we also think it's prudent to acknowledge some of the dynamics at play in 2024, and that's why our guidance also contemplates certain headwinds that could materialize, such as further softness in China, the time it will take to improve in-store execution in Skin as well as the possibility for unknowns in our seasonal businesses. But I reiterate that we are confident in our plans for the year.

Maybe this is for Paul on the margin forecast. I guess just some clarifications. The press release talked about the strong gross margin outlook that you talked about just a few minutes ago as well. But it contemplates 50 basis points of FX headwinds. I just wanted to clarify, is that 50 basis points all within SG&A? And maybe you can give some color as to the drivers of that transactional headwind in SG&A, number one? And number two, you talked about year-over-year rates of increase in advertising. I guess I'm a little curious as to where we finished 2023. I'm sure it's going to be in the K, but maybe just give a little color on where advertising finished as a percentage of sales in 2023 and how you expect that to trend into 2024?

In regards to your first part of the question, yes, we are very pleased with our gross margin trajectory. As you know, and Thibaut mentioned, we have developed a muscle in terms of continued sustained gross profit margin enhancement. And the FX that I talked about is embedded in gross margin and also in SG&A, but primarily in gross margin. To your second question, year-over-year rates of advertising, we will disclose advertising in our K. Advertising year over year versus 2022 was slightly down. But I can tell you that we have very strong plans to increase our advertising. I mentioned 15%. We're approximately $300 million more that will fuel the progressive growth enhancement that Thibault talked about.

Our next question comes from the line of Anna Lizzul of Bank of America.

I wanted to ask on Q4 Skin Health and Beauty. I know you said the volume weakness was mostly driven by the US. But can you be more specific on how much of the weakness was driven by China on Dr.Ci:Labo? And are you expecting this to recover in Q1 in terms of your guidance? And then also in the US on Skin Health and Beauty, in Q3, you had highlighted some innovation in sun care for Neutrogena, which helped last quarter, but volumes saw a significant deceleration here in Q4. So in terms of the recovery in distribution, where are you at in your conversations with retailers?

So let me answer your question on Skin Health and where – what do we see in China and the US. So in China, we saw a weak demand for our brands, especially Dr.Ci:Labo due to temporary PR issues that you are familiar with. We believe that these PR issues are dissipating as we speak. But we are going to be thoughtful about continuing to monitor how the categories are doing, how the consumer sentiment is going in China. And while we are going to see gradual recovery in 2024, we are not contemplating in our guidance a strong recovery, especially in the first half of the year in our Skin Care brands in China. I remind you that China is about 7% of our revenue as a total company, but we have our total portfolio represented in China, and Skin Health is not the largest part of our portfolio in China. Regarding the US, we had an ambitious recovery plan in Q4. And as I said in my prepared remarks, the outcome of this plan was not what we expected. What's good is that we understand exactly what is going on. Our brands are healthy. Neutrogena, for example, has a very high penetration in the US. Our online sales are doing well. We grew double-digit on Amazon with a brand like Neutrogena, for example. So what we really need to improve is execution, and Jan and his team are laser-focused on improving this execution. And it's going to be broad-based. It goes beyond just distribution, but it starts with our in-store presence and prominence. And here, I'm talking about better on-shelf execution, increasing displays, increasing fixtures, updating the packaging where needed to make our range easier to shop, making sure that we have the price back architecture everywhere and, ultimately, making it easier for our consumers to shop in-store for their needs. It's also about engaging with consumers in a bigger way than what we did in 2023. We have industry-leading ROI on advertising. So, really 2024, it's about increasing the reach and frequency of our engagement activities – brand activation activities with both consumer and healthcare professionals. We are going to put more products in their hands, think about samples, because we know that once they try our product, they'll love them. And lastly, we will deploy innovation at a bigger scale, amplifying our 2023 programs, and we are excited about what we have in the plan for 2024 in terms of innovation. And retailers are excited about it as well. So, in a nutshell, it's a heightened focus, more precision around execution, more presence with consumers, amplified innovation. As I said, it's not going to happen overnight. The recovery will not be linear, but we are confident that this stronger plan will help stabilize the business. And with, again, a higher level of precision in our execution, we expect growth in 2024 to definitely be ahead of 2023.

And if I can ask a follow-up on Self Care in Q4. Just outside of cold, cough and flu, could you comment on the rest of the portfolio? I think you had mentioned last quarter you were seeing some gains in your other categories. So I was wondering if there are some bright spots there? Or if they were also somewhat of a drag in the quarter?

It's a great question because we talk a lot about the season and Paul described very well the dynamics there and how pleased we are with our performance during the season, but the strength of our leadership position doesn't happen by accident. It's an outcome of a lot of work that permeates throughout the entire Self Care portfolio, and that's true for analgesics, but it's also true for allergy, for digestive health, for smoking cessation. And in these other areas of the business, we are very pleased with our performance. We see continued performance in smoking cessation, good performance in digestive health. Allergy, while we had lower incidences, strong share gains on innovation, like Zyrtec chewables continues to do very well. So our strong performance in Self Care is broad-based across the portfolio.

Our next question comes from the line of Andrea Teixeira of J.P. Morgan.

I have a question and a follow-up. Thibaut, can you elaborate more on the time of the displays? You just mentioned the fixtures and the shelf space recovery in the US, in particular, ahead of the spring. I heard that a large retailer is probably moving some of the beauty restock into the summer. Is that impacting your expectations, number one? And number two, like you had mentioned you're seeing progress throughout the year, which obviously has to do also with the comps. But is it fair to assume flat to slightly negative Q1 or first half of the year for organic turning positive, potential inflecting in Q2 and then the second half of the year is where we should be able to see significant progress on that? And a follow-up, in terms of the shipments against consumption on POS, I know it's hard to really focus on Nielsen, but unfortunately, that's what we can see in terms of consumption. Should investors expect that track channel data will remain weak for most of the first half of the year and should start to see better trends toward June and July, given the reset? Or are you confident that with the innovation that you called upon, all the work that you have done to simplify the SKUs and also lapping those SKU simplifications, which is probably going to be a tailwind, all else equal? So should we be seeing slightly better than progress as you look in the first quarter against fourth quarter?

That's a big question, Andrea. It's an important one. So let me unpack your question in terms of phasing in what we plan to see unfolding in Skin Health and Beauty for the year. First of all, I think the way you are describing the year is directionally correct. We are not guiding by segment, by quarter. But I think the way to describe the phasing throughout the year is directionally correct and in line with the way we see it, given the noise you have in the comps. You talked about the impact of discontinuation, the suspension of our sales in Russia in the first half of the year, these are going to be tailwinds in terms of growth rate. But we have headwinds like, for example, in Q1, the large replenishments we saw in retailer inventory once we got out of the majority of our supply chain issue in the back half of 2022. That's going to be a headwind for us. If you exclude these comp dynamics, what we are laser-focused as an organization is deploying the plan that I just highlighted, and making sure that we execute with precision. That does include the stronger presence in-store, but that also includes amplifying our reach to consumers and healthcare professionals. And so, that's where you will have different phasing of the impact of these different aspects of the plan throughout the year. I can tell you that we are executing our higher investment plan in terms of media as of January. So you will see a lag, as we all know, between the spend in advertising and the consumption that has already started. In terms of in-store activation, that will happen throughout the year, depending on the rhythm each retailer has. So, we are laser-focused on executing these building blocks. You also mentioned that we are doing very well online, where the brand experience is very strong, and we grew the brand, like Neutrogena, double digit. That's something that is not easy for you to track, but that continues to be a source of strength for us. And so, we are laser-focused on the tracked channel, if you will, which is what you see and which is where we have the biggest area for improvement.

If I can squeeze one question for Paul in terms of like the cadence for gross margin. You did call out the TSA/TMA phasing, and I understand it's about $100 million potential savings. Is that fully included in potentially second half? Should we think about, okay, part of it be impacted in this outlook for operating margin being flattish given all the investments that you're making? So in other words, whatever you gain this year is going to be reinvested into marketing and the 15% that you called out in A&P. And then you're still going to have more benefit into 2025. Is that the way we should be thinking?

Yes. Directionally correct, Andrea. As you know, gross margin is the result of several elements, including value realization. We have about 60% of the value realization as a carryover from last year, and we will take surgical pricing in addition to another 40%. So that's one in addition to premiumization and mix. And also, the efficiency that we talked about. In addition, of course, you have the inflation and forex impact. Inflation is still positive, but it's coming down. So you will see a progression to contribution to gross margin enhancement in terms of that inflation. We're exiting TSAs as we speak. Day by day, we're talking about hundreds of TSAs, and that impact both our gross profit line and also our operating income line, and those are spread throughout the year, where you will be seeing is the investment starting right out of the gate. Some of that will bear fruits later. If it's more equity advertising or promotional spend will deliver the benefits in the shorter term. So that's how I see the cadence. So it's definitely more of a – it's a balance with an enhancement toward the second half, and we intend to continue that into 2025. We're not running into 2025, but that philosophy of heightened investment should continue beyond 2024.

Our next question comes from the line of Filippo Falorni of Citi.

I wanted to go back to the question on marketing investment. I think the initial plan was to spend more in 2023. But I think, Paul, you said advertising was slightly down in 2023. So maybe what drove, I guess, the decline? As you think about the investment into 2024, can you give us a little more concrete examples of where you're spending the advertising by product, by category, and your expected ROI on those investments?

Let me start with the first part of the question, and maybe I'll turn it over to Thibaut for your second one. Particularly, the investment in advertising, yes, was slightly down year-over-year, and that was primarily the result of a reduction in Asia-Pacific, where we did not see investable propositions towards the back half of the year. But looking into 2024, investing in our brand is a key priority to fuel the growth. I mentioned approximately 15% is about $300 million more. We want to start out of the gate. And the most important thing is our philosophy of maximizing ROI is what we're going after. And it will be applied to all the categories as long as we see those investable propositions, and we maximize ROI across the portfolio. Thibaut, anything you want to add?

Filippo, this overall investment is broad-based to activate our brands with consumers and with healthcare professionals. So I remind you that our advertising line only captures part of our investment to activate our brands as everything that's related to healthcare professional engagement is not reflected in that line. In 2024, we are going to increase our investment in both areas. And we are going to apply this additional investment across the portfolio, but very focused behind our 15 priority brands that I highlighted in my prepared remarks. So, it's a very focused plan, but with more fuel behind a philosophy that Paul highlighted of extremely high ROI. We have, I believe, industry-leading ROIs on our marketing investment. This is a capability that we have developed over the years with state-of-the-art analytics, systems and capabilities. So we intend to continue to use this disciplined approach to deploy a higher level of dollars. And so, that's, once again, what makes us confident in our ability to deliver the plan we outlined this year.

If I can follow-up quickly on the Skin Health and Beauty segment. That is a segment that has been underperforming over the last couple of quarters. You mentioned, obviously, this quarter, the challenges. I guess can you review a little bit more like what are you changing in the way you manage this business? And what gives you the confidence in the improvement as you get through 2024 for Skin Health and Beauty?

Filippo, what's very clear about Skin Health and Beauty is that the opportunities to improve are really isolated to two areas – two important areas, but two areas. One is the China market. And the other one is, I would say, in-store performance in the US. So our plan is laser focused to improve our performance in these two areas, while we continue to fuel growth in the other areas where it's working well, namely Europe and Latin America. So, in China, it's not entirely in our hands, and that's why I talked about our position to thoughtfully track how the categories are developing in that market, make sure that we do not invest ahead of the curve to get a strong return. So we are monitoring consumer sentiment. And as we see the right conditions for our skin care brand in China, we will invest appropriately. In the US in-store, what's different in 2024 compared to 2023 is a higher level of precision in the execution, the heightened focus. I can tell you that many people in the organization are focused on this plan. The plan that Jan, our new leader for North America, and his team, with the support of the entire organization, have put together and started executing, as we speak, is very precise. And this heightened focus, increased level of precision, and higher level of investment, again, we would expect this to deliver stronger results, especially in the back half of the year. It's not going to happen overnight. But over time, we are confident that we are going to see the full potential of our brands being unleashed in the market.

Our next question comes from Susan Anderson of Canaccord Genuity.

Alec Legg on for Susan. Lot of color, so thank you for that. But on the gross margin, you said you expect it to get to fiscal 2021 levels. I guess, what are the key drivers of those gains in fiscal 2024 versus 2021? And how should we think about how that progresses through the year?

It's a great question and one that I'm happy to talk about because this is an area of strength for Kenvue. And we've been on this journey of increasing our margins and enhancing our margins through a complete suite of levers that include value realization and efficiencies throughout the value chain since 2019. I would actually say that we are managing our gross margin profile in a very competitive way. And I would say, above average compared to our industry peers. If I think about the dynamics of the balance of the year, I would continue to see all those things – continued value realization, mix management, premiumization. We are starting to see some of the tailwinds of the inflation now that were previously headwinds. Although we still have forex, something that we are mindful of, the efficiencies that we have in place and the discipline that we have in terms of managing that value chain will allow us to continue to – in this journey of driving gross margin enhancement.

Potentially a quick follow-up. Are you able to comment on the acetaminophen lawsuit? It seems like the judge had a positive ruling for the defendants.

We really don't have any update there. We're going through the process to dismiss the MDL.

Our next question comes from the line of Navann Ty of BNP Paribas.

We understand low marketing expense drove the underperformance in the product activation. But was there something else, such as not the right product display, or maybe the packaging not highlighting enough the healthcare recommendation would be helpful to know. And what are the right levels of overall SG&A and maybe R&D to address that?

Let me take this one. I think, overall, the execution of our recovery plan in the fourth quarter fell short of expectations on a number of elements that I talked about. In a nutshell, it's making sure that our brands are more prominent in-store, easier to shop and supported by the appropriate level of engagement activities, both at the consumer and healthcare professional level. While all these elements were included in the plan, the level of investment or the precision of the execution was not what we expected, and the outcome was not what we expected. Now lessons learned. All these lessons are included in the buildup of the plan for 2024. And that's why you see us in the US executing a plan that is different from what we had in 2023 in these different dimensions. And so, you will see this broad-based activation plan put in place. But I would say, if you think about the three priorities I outlined for the company more broadly in 2024, you will see a different Kenvue in 2024 compared to what you saw in 2023. It's going to be our first full year as an independent company. And so, you will see, especially our 15 priority brands, being activated at a much higher level in 2024, with strong building blocks across these 15 brands and across our three segments. You are going to see us being much more agile and moving with speed and urgency to capitalize on all the opportunities we see in the market and unleash the full potential of our portfolio. That requires investment. That investment is going to be fueled by the continued and, I would say, accelerated gross profit margin enhancement that Paul referred to. As we exit our TSAs with Johnson & Johnson, it's also an opportunity for us to reinvent the way we work, work faster, better, make it easier for our teams to operate, but also do it at a lower cost base. And this combination of expanded margin and efficiencies in the organization is what's going to fuel this investment and allow us to fuel growth in 2024. Now, the year will be a bit noisy due to the unusual compares we have in 2023. But if you look at the underlying strength of the business and the building blocks we have to drive growth in 2024 and profitable growth in 2024 and bring our long-term algo to life, we are confident in our plans.

Can I ask actually a follow-up on the litigation? If you can discuss at all the next steps to end the litigation?

Navann, like I said, there's really not much I can share. We're going through the process, now that the court has granted our motion to exclude expert testimony. So we're going through the process to allow the court to determine whether the cases are dismissed.

Our final question for the day comes from Peter Grom of UBS.

I guess I had a more conceptual question on the guidance. But over time, we've kind of seen some of your staples tiers that have underperformed from a top line perspective or a share perspective. We kind of rejigger investments to try and fuel growth. In many cases, that coincides with rebasing earnings to set the company up for a stronger growth, not in the current year, but more in future years. Is that what's going on here? Like, has your thought process on the need for investment and innovation evolved versus where we were six, nine months ago? Or has this kind of earnings performance been contemplated for some time? I guess as a follow-up to Steve's question earlier on the organic growth. Is the flat performance in 1Q a function of weaker category growth and the improvement just is something that the category accelerates? Or is the underlying improvement assuming that your performance relative to the category improved substantially? Because it would just seem that if you're kind of exiting the year at more mid-single-digit growth that that would imply some pretty decent share gains. So just any color on kind of the share assumptions would be helpful.

To answer quickly your Q1 question, Peter, and we included in our slide deck a slide that I think you will helpful as you model 2024 with all the puts and takes in the different quarters of 2023. You will see that Q1 has a number of items that are going to make the compares very challenging for us. So, it's really about a unique event that happened last year. I talked, for example, about the inventory replenishment, but also the fact that we expect the season to continue to be below last year as we exit the winter, similar to what we have seen in Q4 of 2023. So, it's a mix of unique items to what happened at Kenvue last year and a continued lower level of incidence in Q1, similar to what we saw in Q4. To your broader question about whether or not we are changing our philosophy, I would say our commitment to our long-term algorithm is stronger than ever. Our commitment to deliver strong TSR through a 3% to 4% top line growth year over year, growing earnings faster than share and having a disciplined capital allocation strategy is what we started deploying in 2023. You are going to see, as we moved through 2024 and 2025 and also we become fully independent and exit our transition service agreements with Johnson & Johnson, you are going to see this long-term algorithm brought to life in a meaningful way. And that was always the plan to make sure that we exit our TSAs and reinvent our ways of working. So, we make it fit for purpose for our company, with ways of working that fit what we need to be successful as Kenvue, but also do it at a low base. And the combination of this lower cost base and the continued improvement in gross margin that we have demonstrated our ability to do for years, again in 2023, and we're having to do it again in 2024. This is what brings a fuel to bring more investment to our brands. There is no limit to our investment in our brands. We are very disciplined in our approach. We go for a return on investment approach. We believe that we have strong investable propositions in terms of building blocks and activities for 2024, as an example. And that's why we feel confident that the higher investment that we mentioned will give us good results in 2024 and beyond.

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

All right. So thank you all for participating on today's call. 2023 was, as we talked about, a transformational for Kenvue. I think we have been very clear about our priorities for 2024, reaching more consumers, investing in our brands and foster a culture that rewards performance and impact. So we look forward to updating you throughout the year as we continue to advance these efforts. And for now, have a nice day. And thank you again.

Thank you. This concludes today's conference call. We thank you for your participation. Have a wonderful day. You may disconnect your lines at this time.