Earnings Call Transcript - KVUE Q1 2024

Tina Romani, Head of Investor Relations

Good morning, everyone and welcome to Kenvue's first quarter 2024 earnings conference call. 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've also referenced certain non-GAAP financial information. The presentation of this non-GAAP financial information is not intended to be considered in isolation as a substitute for financial information presented in accordance with U.S. GAAP. These non-GAAP financial measures should be viewed in conjunction with the most comparable GAAP financial measures. A reconciliation of these items to the nearest U.S. GAAP measure can be found in this morning's press release and our presentation available on our IR website, investors.kenvue.com. With that, I'll turn it over to Thibaut.

Thibaut Mongon, CEO

Thank you, Tina and thank you to everyone for joining us today. I'm pleased to be here with you this morning to discuss our solid start to the year with Q1 results coming in ahead of expectations. Earlier this year, I shared with you how we are committed to transforming our organization with 3 clear strategic priorities in 2024: Reaching more consumers, freeing up resources to invest for growth, and fostering a culture of performance and impact. Our teams around the world are focused on executing with precision the changes required to bring these 3 priorities to life. And everywhere in the organization, you start seeing Kenvue shaping up as a different company. We are early in this journey and this transformation will not happen overnight but this quarter's encouraging performance, the key programs initiated throughout the organization, and the high level of employee engagement do reinforce my confidence in our ability to deliver the plan this year and deliver our long-term value-creation algorithm from 2025 onwards. The solid financial performance this quarter, beginning with our 1.9% organic growth on top of 11.2% last year, reflects the power of the Kenvue portfolio and the quality of our people. As anticipated, volumes are not yet a contributor to our growth with a 3.1% decline versus the prior year and we are not yet where we want to be in Skin Health and Beauty. But at the same time, we continue to strengthen our leadership position in Self Care and our innovations are a strong contributor to our growth in Essential Health. And we do all of this while exiting TSAs, reinventing our ways of working, freeing up resources to invest behind our brands and nurturing our new culture of performance and accountability. All of this positions us well for the future. So let's have a closer look at our progress on each of our 3 strategic priorities. Beginning with reaching more consumers and starting with our largest segment, Self Care, let me first share with you what we see in the Self Care market. We see consumers continuing to look for science-based, efficacious solutions to take care of themselves and their loved ones. But this quarter, volumes were affected by 2 factors: First, the cough, cold and flu season was shorter and slower than last year. And second, we saw some U.S. retailers reducing their inventory levels. These factors will continue to have a meaningful impact on Q2 volumes and in a quarter where we will lap tough compares, will mask the underlying strength of our brands. In this context, our teams delivered outstanding performance. In Self Care, we delivered 4.2% growth on top of 15.3% growth last year and continued to outperform the market, owing to the breadth of our portfolio in terms of categories and geographies. In the U.S., for example, each one of our largest brands grew share during the quarter. Tylenol, the number 1 pain care brand in the world, achieved its seventh consecutive quarter of share growth in the U.S., further widening the spread between us and our next competitor. Regardless of the intensity of the season, our objective is always to advance the category and continue to gain share. And this is what our teams actively pursued this quarter despite a softer season, with stronger media investment, expanded distribution and a significant increase in in-store display support. We also continue to launch category-leading innovation. This quarter, we launched Tylenol Easy to Swallow with Gentleglide technology aimed at helping approximately 20% of people who hesitate to take a pill. We are activating the same playbook in allergy. While the category is down so far this year on colder weather and sporadic storm patterns, Adult Zyrtec is the only brand in the category increasing penetration and has now been number 1 in value share for 102 consecutive weeks. Similar to Tylenol, you see Zyrtec building on its category leadership ahead of the season with expanded distribution, strengthened in-store execution with a higher number of displays and continued excellence in health care professional and consumer engagement activities. This quarter, we also relaunched Zyrtec Oral Dissolve Tablets that melt in your mouth and dissolve in seconds, a strong benefit for consumers in oral antihistamines. And we actively deploy the same recipe in the rest of the world and see the same strong performance in Asia with brands like Tylenol and Motrin growing double digits in China, or in Europe, with brands like Imodium or Microlax in Digestive Health and Nicorette in smoking cessation driving double-digit growth. All of this is a result of the precision in the execution of our brand activation plans by our teams in each market. So another solid quarter for our Self Care brands. Next, moving to Essential Health, where we grew 4.9% this quarter on top of 4% last year. The team's focus on executing initiatives to reach more consumers and expand our categories is yielding positive results. In Oral Care, where Listerine is 5 times larger than the next name competitor, we see growth across all regions. In the U.S., our scaled business has now delivered more than 63 weeks of continued consumption growth and we are not stopping there. At CAGNY, I told you about our launch of Listerine Clinical Solutions, our new premium line of alcohol and non-alcohol mouthwash focused on specific health benefits which is a great example of what we do to expand the categories in which we are leaders. Early reads indicate this innovation already accounts for 0.6% share of the U.S. market and is highly incremental, bringing 72% incremental shoppers to the Listerine brand. You see us doing the same thing in the baby category. Our global leadership remains strong with Johnson's Baby and Aveeno Baby as the number 1 and number 2 brands in baby toiletries globally. We are now expanding our penetration in children's toiletries, building Aveeno Kids as the fastest-growing brand for children in the U.S. We see an opportunity to develop this new market where we are seeing increased demand. And we will continue to deploy this strategy across the segment with relevant innovation powered by increased investments, precise in-store execution and expanded distribution. Now moving to Skin Health and Beauty, where we saw our business decline 4.5% in the quarter with a 6.9% decline in volume. As we have discussed, stabilizing this business is a key priority for us. In the U.S., our team is activating a 3-pronged approach: Increasing in-store presence, elevating consumer and dermatologist engagement and amplifying innovation. While more work needs to be done and it is too early to see results, I'm encouraged with the progress the team is making against each priority and I believe we are moving in the right direction. The U.S. team is laser-focused on strengthening in-store presence and prominence through better planning with customers, enhanced packaging that clearly articulates dermatological benefits and more prominent in-store brand activation. For example, the teams have moved quickly to improve the awareness and shopability of Neutrogena Hydro Boost water cream, the latest Neutrogena innovation launched last year. New packaging with updated graphics is underway; media investments are up nearly 15%; and in-store, we implemented on-shelf signage that more effectively communicates our product's dermatological benefits to shoppers. As part of our strategy to increase our impact with dermatologists, Kenvue showed up strong at the American Academy of Dermatology Annual Meeting in March, where more than 10,000 dermatologists came together. We presented 22 new pieces of scientific research and hosted a panel moderated by Neutrogena brand ambassador, Jennifer Garner, to showcase our science-led approach to innovation. We amplified our presence on social media and achieved number 1 share of voice, ahead of all other skin care brands. With a positive showing at AAD, coupled with an expanded detailing sales force and a significant increase in our in-practice sampling, we quickly won 3 points of dermatologist recommendations for Neutrogena face and moisturizing treatment, regaining our position as the number 1 recommended brand by dermatologists in this category. We are also strengthening consumer engagement through compelling and modern marketing campaigns appealing to young consumers. A good example of this is the activation of our partnership with the Coachella Festival in April, where Neutrogena was the exclusive sun care partner. Beyond offering great sun protection to the more than 650,000 festival-goers with over 120 gallons of sunscreen, the Neutrogena team amplified our activation on social media and through influencers, earning number 1 share of voice in the U.S. skin care category during the festival, similar to what we achieved at AAD the month prior. We are encouraged by the early indications that we are moving in the right direction. That said, we are not where we want to be in terms of market share. The recovery will take time and will not be linear but as you can tell, we are laser-focused on executing on our plan to improve our market performance and better reflect the strength of our brands. To amplify these efforts, during the quarter, we announced a decision that will allow us to operate in a more integrated manner. Recruitment for a new global segment leader to be located in the U.S. is underway and we are in the process of relocating our Los Angeles office to New Jersey, where our brand team will work side-by-side with R&D to drive innovation, cohesive execution and growth. Now moving to our next priority, freeing up resources to invest behind our brands. As discussed with you previously, we continue our journey of transforming Kenvue from a segment of Johnson & Johnson to an independent company focused on accelerating growth. This quarter, we started investing more behind brand activation, where we see opportunities to unlock profitable growth, in line with our plan to increase our investment by 15% in 2024. And we fund these investments through the continued expansion of our gross margins and the transformation of our cost structure as we exit TSAs. I'm pleased with the progress we are making on both fronts. Adjusted gross margin expanded 290 basis points in Q1, adding to our strong track record in this space and freeing up resources to invest in the brand activation plans I described earlier. In parallel, we are taking action to structurally change our cost base, leveraging the unique opportunity we have in front of us as we exit TSAs. You will hear from Paul more details about our view forward in our program to become a leaner, more agile and fast-moving organization ultimately with a lower cost base. The team is focused on executing with precision this program that spans over 2024 and 2025. We are at the beginning of this journey but every day, we see Kenvue transforming a bit more into a company focused on unleashing the full potential of its portfolio of brands, better positioned to deliver on our long-term algorithm of earnings growth ahead of sales growth and durable cash flow generation. Which brings me to our third priority: To foster a culture of impact and performance, where we are moving in the right direction, transforming our company operationally and culturally. Starting with strategic alignment, we rallied all Kenvuers behind our 3 company priorities via our robust goal-setting process, part of our new approach to performance and pay. In addition, we clarified the responsibilities and decision rights throughout the company. We streamlined processes, encouraging faster decision-making, improved execution, heightened accountability and enhanced collaboration. As we continue our journey to grow Kenvue into the undisputed leader in consumer health, we are intentionally bringing in high-performing external talent. A couple of weeks ago, I was pleased to announce that Russ Dyer will be joining my leadership team as Chief Corporate Affairs Officer; an important leadership role as we continue our journey to grow. In addition to instilling an owner mindset across the organization to elevate operational performance, we are also committed to operating the business responsibly. With the understanding that human health is inseparably linked to environmental health, during the quarter, we affirmed our commitment to our Healthy Lives Mission, our ESG strategy aiming to advance the well-being of both people and the planet. And last week, we announced that Kenvue's near-term greenhouse gas emissions reduction targets were validated by the Science-based Targets Initiative and this in less than 1 year since becoming a public company, demonstrating our team's passion and commitment on this front. We look forward to publishing our inaugural Healthy Lives Mission Report in June, where you will see how Kenvue is maximizing its impact for good. So as you can tell, you are starting to see a different Kenvue in action in 2024. We are off to a good start for the year. Our teams are laser-focused on our 3 strategic priorities, we are making progress on our journey to transform our company, all of which makes us confident in our ability to deliver our plans for the year and execute on our long-term algorithm in 2025 and beyond. Before I turn it over to Paul, I would like to thank our Kenvuers around the world. Every day, they help consumers realize the extraordinary power of everyday care. They embrace change and are actively contributing to our transformation. They are the ones delivering the results I just shared with you and it is an honor to work alongside such a great team. And now over to you, Paul.

Paul Ruh, CFO

Thank you, Thibaut and good morning, everyone. I'll start by echoing Thibaut's sentiment that I am proud of how our teams are coming together. Our colleagues are embracing change, rallying behind our transformation and executing on our strategic priorities, all while delivering strong results this quarter. Our teams began executing against our first priority: To reach more consumers. Across the portfolio, we deploy more relevant, impactful and distinctive brand experiences. We're beginning to see a difference in how our portfolio is coming to life in store and with our consumers. Now this work is just beginning but we are energized by the opportunities we see to continue strengthening our relationships with new and existing consumers all around the world which brings me to the next priority: To free up resources to invest more behind our brands. In our press release this morning, we announced that our Board formally approved our initiatives to build on Kenvue's strength and optimize its cost structure. This initiative is part of our program to optimize the way we work. We call this Our Vue Forward. Thibaut spoke about the unique opportunity we have to reinvent work and lower our cost base as we exit TSAs with J&J. Our Vue Forward equips us to do 4 things: First, to optimize our geographic footprint to drive connection, collaboration and synergy across our teams and maximize our service hubs. Second, to eliminate redundancies across the organization as we broaden spans of control and reduce layers of hierarchy to drive faster decision-making, creativity and innovation and more effective organizational communication. Third, to implement new systems and automation to strengthen our capabilities in areas, like our ability to uncover and apply consumer insights, improving forecasting and responding in real-time to market dynamics. And finally, to better leverage our procurement partnerships, ensuring we build strategic relationships with our suppliers that are rooted in shared value creation. As an example, next week, we will bring our top suppliers from around the world together with our team to share knowledge and align on priorities. Our Vue Forward will enable Kenvue to operate more effectively and ultimately more competitively. We have already begun to realize efficiencies to support our investments in 2024 and expect the ongoing annualized benefit after full implementation of the initiative to be approximately $350 million per annum beginning in 2026. This initiative will result in a net reduction to our global workforce of approximately 4% and we expect to incur restructuring costs totaling approximately $550 million, split roughly evenly between 2024 and 2025 with a payback period of approximately 18 months. Importantly, as I am sure you may have the question, there is no change to our capital allocation priorities. Our healthy balance sheet allows for strategic investment in our business for growth, our number 1 priority, in addition to commitments to a strong dividend, our delevering program and share buyback to offset dilution. In this unique moment of transformation, we believe Our Vue Forward will generate the greatest long-term value creation for our stakeholders, accomplishing 2 goals: Reducing our cost base; and as importantly, allowing Kenvue to deploy best-in-class ways of working that move us towards our ambition to become the undisputed leader in consumer health. These initiatives, along with continued adjusted gross margin improvement will enable us to fund an incremental $300 million investment behind our brands that we committed to in 2024. As such, there is no change to our adjusted earnings per share guidance. Beyond this year, this initiative will continue through 2025, supporting continued incremental investment behind our brands while staying aligned to the delivery of our long-term algorithm centered around earnings growth ahead of sales growth. Moving to our first quarter results which demonstrate progress against our third priority: Fostering a culture of performance and impact with heightened accountability. Coming in ahead of expectations, first quarter organic sales growth of 1.9% was strong, particularly when considering our 11.2% organic growth last year. Momentum in Self Care and Essential Health continued, partially offset by underperformance in Skin Health and Beauty, as anticipated. Value realization contributed 5 points to growth with approximately 75% carryover and the remaining coming from new value realization primarily outside the U.S. It's important to note that even as volume is at the forefront of conversations today, value realization will continue to play an important role in our growth algorithm as the superiority and the efficacy of our products fosters loyalty in our categories and specifically with our brands. Now talking about volume. Volume improved meaningfully from fourth quarter trends across all segments, in line with our expectations. Taken together, approximately 2/3 of the 3.1% volume decline is attributable to the expected lapping of a one-time inventory rebuild last year and the impact of retailer trade inventory reduction by some U.S. customers this year. We have continued opportunity here and we expect volume to stabilize and grow in the second half of the year. Now let's take a look at our segments. Self Care performance was strong at 4.2% organic growth on top of 15.3% last year. Notably, we continue to gain share even on strong value realization of 5.6 points. As Thibaut mentioned, this performance reflects not only the diversity of our portfolio and strength across geographic markets but also consumers' ongoing demand for efficacious health solutions they trust. Volumes were down 1.4 points, driven entirely by the lapping of a large one-time inventory rebuild as retailers replenish supply following the tripledemic last year. As you consider your models for Q2, in addition to factoring the strong 2023 compare of 14.2%, there are also a couple of unique dynamics to bear in mind. First, in Europe, due to a shorter cold, cough and flu season this year compared to a more prolonged season last year, we do not expect the same level of replenishment that we saw in 2023. Second, in Asia Pacific, we do not expect the same level of incidence in China, where we experienced a large surge following the reopening last year. And lastly, in the U.S., we expect continued trade inventory contraction at some retailers. Given these dynamics, alongside the soft start to the allergy season that Thibaut spoke about, we expect growth to be low single-digit negative in Q2, masking the continued strength of in-market performance we expect to see in the quarter. We remain confident in the underlying strength of the Self Care sellers portfolio and there are no changes to expectations for growth to accelerate in the back half, particularly as we lap easier compares. Moving to Essential Health, where momentum continued. Organic growth of 4.9% was comprised of 6.8 points value realization, partially offset by 1.9 points of volume decline. Similar to self-care, the strength and diversity of our Essential Health portfolio fueled our growth. Thibaut shared a few examples of how we are driving growth in Oral Care and Baby Care. We are doing the same thing in our Women's Health businesses across EMEA, LatAm and Asia Pacific. In India, for example, we are seeing strong growth in our Stayfree brand through consistent efforts in premium product distribution expansion, supported by strong media presence as we build strength in the growing women's health category internationally. Overall, Q1 performance and sequential volume improvement reflect the value of our brands to consumers and we are confident in our ability to drive growth for the year. Moving now to Skin Health and Beauty. While Q1 performance is in line with our expectations, as Thibaut discussed, our results do not demonstrate our ambition nor the full potential of our brands. Organic sales declined 4.5% with 6.9 points of volume decline, partially offset by 2.4 points of positive value realization. The U.S. Skin Health and Beauty team is heads-on focused on stabilizing the business and we are still a few quarters away from seeing the impact of this work in our results. However, what I am seeing today is a team that is operating differently. As Thibaut mentioned, we are in the process of bringing our U.S.-based teams together under one roof to drive more collaboration and innovation. We are increasing our engagement with health care professionals, with dermatologists' recommendations increasing for Neutrogena Face. We're also increasing engagement with our customers. For example, last week, we met our customers at NACDS to collaborate on long-term innovation pipelines. Simply put, the teams are executing the plan that we laid out at the start of the year with focus and energy to stabilize the business this year. We are seeing encouraging signs but we certainly recognize there is more work to do. Moving to adjusted gross margins. Value realization alongside continued executional excellence in supply chain productivity drove 290 basis points of margin expansion as our teams have accelerated efforts to free up resources and generate the fuel to invest behind our brands. This quarter's strong performance benefited from moderating inflation which was a slight benefit as market favorability in logistics, energy, and agrochemicals outpaced increasing labor pressure alongside slightly favorable currency movements. We have a strong track record of preserving and expanding gross margin and you can expect that to continue as we move through 2024 and beyond. At the start of the year, we shared that we expected adjusted gross margin to near 2021 levels or 59%. Given where foreign exchange and net input cost inflation have moved, we now expect to be slightly above this level, though recognizing the environment in terms of inflation and FX continues to be volatile. Turning to adjusted operating income. First quarter adjusted operating income increased 70 basis points to 22%. This increase is primarily due to strong gross margin, partially offset by incremental stand-alone public company costs that we did not have in the first quarter of last year and increased investment behind our brands. Let me clarify what we mean when we say increased investment behind our brands. We are referring to advertising investment as well as consumer and product promotion and health care professional spend. It is important to note that, similar to our U.S. peers but the difference from some of our international peers, our advertising disclosure in our 10-K only represents our pure advertising spend: Digital advertising, television, radio and print media. The disclosure does not include other consumer or product promotion or health care professional spend. When we speak about our $300 million incremental investment, we are referring to the increased brand investment across all 3 categories of spend. Now as you think about SG&A for the remainder of the year, given our increased investment behind our brands, it is fair to assume SG&A as a percentage of net sales will be at similar levels as Q1 for the remainder of the year. Interest expense net for the quarter was $95 million, in line with our guidance. For taxes, the first quarter adjusted effective tax rate was 28.3%. The increase in the adjusted effective tax rate versus the prior year is primarily attributable to the jurisdictional mix of earnings, release of prior year tax reserves due to statute of limitations expiring and the negative impact of share-based compensation in the current period. For the full year, we continue to expect an adjusted effective tax rate of 25.5% to 26.5% which reflects changes in tax laws as well as tax-optimization strategies that the company intends to pursue. And finally, adjusted net income was $547 million for the quarter. Adjusted diluted earnings per share was $0.28. On a like-for-like basis, normalizing for interest expense, public company costs, share count and tax rate, earnings per share grew 7.7% versus last year which brings me to the outlook for the remainder of the year. We are maintaining our outlook for organic growth in the range of 2% to 4% and earnings per share to be in the range of $1.10 to $1.20. This range assumes about a $0.04 foreign exchange headwind based on current rates. Our outlook balances our solid first quarter while acknowledging macroeconomic dynamics impacting consumer confidence. Our guidance also considers the possibility for unknowns in our seasonal businesses, including sun; allergy; and cold, cough and flu. As we talked about, Q2 has a few unique dynamics, including strong compares and expected U.S. retailer trade inventory reduction that will impact our results. We continue to expect an acceleration in the back half of the year as compares ease and our plans take hold. All other guidance metrics which can be found in the slides accompanying our remarks remain unchanged. In summary, I would like to leave you with 3 key takeaways: We had a strong start to 2024; we're executing against our strategic priorities for the year; and we have the right plans, talented people and strategic investments in place to deliver our long-term algorithm. Thank you. And with that, we will take your questions.

Operator, Operator

And your first question comes from Andrea Teixeira from JPMorgan.

Andrea Teixeira, Analyst

Thibaut and Paul, you both indicated that the destocking in the Self Care business is likely to persist in Q2, and you provided some insight on what to anticipate regarding organic sales growth. However, regarding the Skin Health and Beauty divisions, how should we be thinking about them? I understand there is still work to be done, as you mentioned, Paul, possibly over several quarters. Should we expect improvements to occur sequentially? How should we approach Skin Health and Beauty moving forward?

Thibaut Mongon, CEO

All right. Andrea. So many questions in your question, let me take the first one very quickly on inventory. We mentioned that we saw an impact of the inventory reduction in some U.S. retailers in Q1 in Self Care but across categories, I would say. And we expect this to continue in Q2 but not last beyond Q2 in terms of this.

Tina Romani, Head of Investor Relations

Hi, everyone. Apologies for that. We had some technical difficulties in our room. We will just go back to Thibaut answering your first question from Andrea.

Thibaut Mongon, CEO

All right, Andrea. I was responding to your question, and I'm not sure how much clarity my answer provided. To revisit the beginning of your inquiry about retail inventory reduction and its potential impact in Q2, we did observe an effect in Q1 regarding the retail inventory reduction with some U.S. retailers in Self Care and across various categories. We anticipate that this impact will carry into Q2 but will not extend beyond the first half. Regarding the Skin Health segment and our expectations moving forward, our assessment remains unchanged. I've consistently stated that our recovery won't occur overnight and will not be a straight line. We have devised a thoughtful plan, and it is a priority for us. Jan and his team in the U.S. are intensely focused on executing this plan, aiming to stabilize the brand in 2024, with improving volumes as the year progresses and growth anticipated starting in 2025. While it's early, I am encouraged by the anecdotal evidence indicating that we are on the right path. This quarter, we again observed that when we properly activate our brands, whether with dermatologists or consumers, we see a quick response. However, we understand that we will need more of these initiatives to impact the business at scale, and we recognize that these efforts take time to convert into sales and market share gains. We are definitely committed to executing the plan throughout 2024 to stabilize this business, focusing on our in-store presence and prominence, enhancing consumer and dermatologist engagement, and amplifying innovation.

Bonnie Herzog, Analyst

So I wanted to ask because we're hearing from some of your peers that they're seeing a step-up in promotional intensity and they're expecting this going forward. So could you talk about what you're seeing in your markets and some of your key categories and if that's consistent? And basically what your approach will be for the rest of the year. And then how do we think about this in the context of robust gross margin delivery in the quarter? And finally, how does that feed into your expectations for continued contribution from net price realization going forward?

Thibaut Mongon, CEO

Yes. In our categories, we observe that they remain resilient and strong, which is likely due to the distinct characteristics of the consumer health sectors compared to other stable categories. Consumers in these areas are seeking effective solutions that offer a good value, and that’s exactly what Kenvue provides. One indicator to note is the penetration of private label products in our categories; this hasn't changed much globally. In fact, it actually decreased in the U.S. in the latest data, which is associated with the strength of our Kenvue brands. We often rank number one or two in our categories, providing a robust value proposition with various price points for different consumer types. We address the diverse needs of consumers through our portfolio. This is not something we take lightly; our teams consistently work to enhance the relevance of our brands with consumers and our credibility with healthcare professionals to sustain our leadership position.

Paul Ruh, CFO

Let me take the other part of your question. When we think about the impact of promotional spend on gross margin, we always look at all activation and investment with an eye to return on investment. So when we think about how we deploy our promotional spend, as well as media, we look at how we can maximize the spend in investable propositions. So we do balance growth and profitability. In fact, we're very pleased with how our gross margin is evolving so far. I had mentioned the 290 basis points of gross margin expansion, that comes from both value realization and the excellent work that our supply chain team is doing across the board. And we expect this to continue in the balance of the year.

Stephen Powers, Analyst

Thibaut, I wanted to ask about Our Vue Forward program. It seems like it was really just approved by the Board yesterday. So maybe you could give some perspective on just initial reactions internally across the organization and what steps you've taken to maybe help ensure that this is a program that's viewed as a program of acceleration that people can rally around versus maybe a potential source of disruption. And in that vein, if you could talk a little bit about where you see reinvestments to be prioritized as the savings are realized over the next couple of years, that would be great as well.

Thibaut Mongon, CEO

Yes. I'll address the first part of your question. Our Vue Forward has always been a crucial aspect of our strategy. We view the opportunity to exit TSAs not only as a way to replicate the successful working methods we had as part of J&J but also as a chance to transform our operations to enhance Kenvue's competitiveness and drive profitable growth. That’s the essence of Our Vue Forward. We have strategically developed a comprehensive program that encompasses our global operations. As you noted, our Board officially approved this initiative recently, and we are excited to share the details with you. Everyone at Kenvue is committed to transforming our company. We started this journey from day one, and we are significantly increasing our efforts as we embark on our first full year as an independent entity. Everyone recognizes the TSA exits as a vital opportunity for us to reinvent our operations, making us more nimble, agile, and connected to consumers. This includes clearly defined roles, co-located teams for enhanced collaboration, innovation, and creativity. This is the goal we are striving for through this program.

Paul Ruh, CFO

Yes. Let me provide some more details about how we're spending the $275 million both in '24 and '25. First, a large portion is going towards streamlining operations, mostly in our functions, where we are clarifying roles and responsibilities, simplifying processes, eliminating redundancies and the associated costs are primarily related to severance and footprint. A second large bucket is related to the upgrade of IT infrastructure that will allow us to be more competitive with our peers, allowing for faster and more informed decision-making. That is the second part of our investment. Ultimately, all of these investments position Kenvue to be much more agile at a lower cost of infrastructure and allowing us to be more competitive. I want to reiterate all of this has been contemplated in our guidance and it bolsters the delivery of our long-term algorithm on growing income faster than sales.

Nik Modi, Analyst

I would like to clarify how you overdeliver and understand the source of the upside. Additionally, Thibaut, as you consider new leadership for Skin Health and Beauty, what specific characteristics are you seeking in this new leadership? Any insights on that would be appreciated.

Paul Ruh, CFO

Thank you, Nik. And let me take the first one, what drove the outperformance in Q1. Remember, we guided to about flat and the outperformance was driven by price, a little bit by volume as well. And from a regional perspective, Europe is doing very well, slightly ahead of our expectations and Essential Health from a segment perspective is also performing very well both in EMEA and LatAm. The rest is performing in our expectations. So pockets of strength across the portfolio as we execute against our priorities. I'll let you answer the second part of your question.

Thibaut Mongon, CEO

On Skin Health, we have made the decision this quarter to relocate our segment leader position from Asia to the U.S. to work more closely with, again, in the spirit of being co-located with the majority of our teams and foster collaboration and creativity. As we look for a new leader for this segment, you will see a new leader coming in with experience in the dynamic skin care category but also with experience in growing global megabrands because that's what you're talking about when you are talking about brands like Neutrogena, Aveeno and others that are megabrands present all over the world. So that's what you will see moving forward.

Tina Romani, Head of Investor Relations

And then, Nik, maybe just to add on because it's an important point just in terms of Q1's outperformance. Paul talked through some of the unique dynamics. There's also unique dynamics in the second quarter that will absorb some of that. So overall for the first half, kind of in line with expectations in terms of performance.

Thibaut Mongon, CEO

And for the full year, in line with our expectations as well.

Anna Lizzul, Analyst

I just wanted to follow up on Bonnie's question. I wanted to ask how you plan to split some of the incremental investment in your brands, maybe between marketing and promotion. And how should we think about a potential increase of promotion or trade spend on price/mix as we move through the year? And then in Skin Health and Beauty, how much of the volume weakness was driven by Dr.Ci:Labo in China? Are you beginning to see a recovery there? And how should we think about the volume performance in Skin Health and Beauty by region this quarter?

Paul Ruh, CFO

Thank you for the question, Anna. Let me take the first part and Thibaut will take the second one. In terms of how we plan to spend our investments in our brands, remember, we always take a digital-first ROI-driven approach. We are on track to invest the $300 million more that we mentioned at our Q4 earnings. And we began Q1 with a focus on our 15 priority brands, considering what we call investable propositions and those are the ones where we maximize the return on investment. We are increasing investment across a spectrum of activities, from in-store activation to media, digital influencers and also HCP endorsement with a focus to amplify our innovation. Now the timing of the payback, you may ask, may vary. For example, in-store promotion has a more immediate but short-lived payback. And when we think about on the other extreme, HCP engagement is generally more of a long-term, more durable impact. But we're balancing all of those activities, focusing on the 15 priority brands and we're encouraged by what we are seeing in Q1. And we'll continue to deploy in the balance of the year to maximize reach and return on investment. Thibaut, let me pass on the second question to you.

Thibaut Mongon, CEO

Your question about volume in China and Dr.Ci:Labo is a great opportunity to discuss our China business, which may not be well understood. China experienced solid growth last year and continued to perform well in Q1, achieving double-digit growth. To highlight a few key points, China accounts for about 7% of our business, indicating significant growth potential for Kenvue in this market. Most of our operations in China are within the Self Care segment, which continues to expand as macro trends favor growth, particularly with the government's ambitious Healthy China 2030 agenda. Chinese consumers are increasingly drawn to our science-based, effective solutions. We have been operating in China for many years, supported by a strong team, and we are investing in our Self Care pipeline. Interestingly, last year we introduced more innovations in China than in the previous 11 years combined in Self Care. We hold a robust leadership position in that market across various categories, including analgesics, pediatrics, allergy, and antifungals. When discussing our business in China, it's clear why we are pleased with our team's performance there. Additionally, a smaller portion of our business involves brands like Dr.Ci:Labo, which has shown a slow-down in performance. We have observed that consumers are being more cautious, and as mentioned earlier this year, we are not planning to invest prematurely in that segment. We do not anticipate any recovery in the later part of the year, as reflected in our outlook. Nonetheless, we remain committed to the long-term potential in China, a market that is a positive contributor to our growth and is expected to continue driving growth into 2024.

Filippo Falorni, Analyst

Just a quick clarification. In the Q1 results, in the 1.9% organic, was there any impact from hyperinflation or repricing? Most of your peers have called it out. So I just wanted to check on that. And then a bigger question. You mentioned Q2, you expect low single-digit declines in Self Care. Maybe you can give some color for the other segment on expectations as well. And as you think about the second half, what gives you that confidence that volume will accelerate? Some of it is easy comps? Is it benefit from your investment action and investment in marketing advertising? Any more color there would be helpful.

Paul Ruh, CFO

Yes. Thank you for the question, Filippo. Hyperinflation, particularly in both Argentina and in Turkey, represented about 90 basis points in Q1 with no impact on earnings. We are taking the appropriate pricing. That's why there's no impact on earnings. Hyperinflation is expected to have about 50% benefits for the top line for the full year as this 90 basis points in Q1 was particularly high given the compares versus last year. Do you want to take the second one?

Thibaut Mongon, CEO

I will address the second question regarding the unique dynamics of the Self Care segment in the second quarter. Filippo, there are several factors to keep in mind as you consider the Self Care segment specifically for Q2. First, we will be dealing with challenging comparisons since we experienced double-digit growth in the second quarter of last year, which sets a strong benchmark. Second, we do not anticipate the same seasonal strength we witnessed in China during the second quarter when the country reopened. Additionally, we expect ongoing impacts from trade inventory reductions among some customers in the U.S. Furthermore, we have observed a slow start to the allergy season, which will affect volumes in Q2. That said, you should also view this as non-operational factors obscuring the true in-market performance of our Self Care business. This context informs our current outlook for Self Care in Q2. As for the latter half of the year, we do not foresee any changes to our expectations, which is why we have reaffirmed our guidance for 2024 this morning. It will involve a mix of easier comparisons and the implementation of our plans as we work towards our 2024 priorities.

Korinne Wolfmeyer, Analyst

I'd like to touch a little bit more on the gross margin. It came in a little bit higher this quarter. I know you talked a little bit about some of the drivers there. Is there any way you can help us quantify the specific drivers and help us better understand which ones are going to be more sticky throughout the course of the year? And then any color on how to think about the cadence of the gross margin throughout the remainder of the year?

Paul Ruh, CFO

Yes, Korinne, thank you for your question. We're very proud of the work our team is doing. Gross margin is strong for Kenvue, and along with pricing that reflects value realization, it continues to enhance our gross margin through ongoing efficiencies in our operations. The impact of inflation is moderating, with agrochemicals now acting as a tailwind, although we still face some challenges in labor and energy costs. We're aware of the unique dynamics and volatility in the commodity markets, but we're confident that we will achieve our goal of 59% gross margin this year, as I mentioned in my prepared remarks. We are optimistic that enhancing our gross margin will support our brand activation efforts and bring us closer to our consumers and customers. As for the timing throughout the year, there's always a natural seasonality in our business, but it's reasonable to expect that our gross margins will be slightly better than we initially anticipated, which will enable us to continue investing in our brands.

Thibaut Mongon, CEO

So thank you all for participating on today's call and apologies again for the technical glitch at the beginning. As you can see, we are pleased with our solid start to the year. As we have discussed, we are committed to continue to transform our organization with our 3 clear strategic priorities: Reaching more consumers, freeing up resources to invest in our brands and fostering a culture of performance and impact at Kenvue. So our teams are all focused on executing with excellence and we look forward to updating you on our progress throughout the year. Have a great day, everyone.

Operator, Operator

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