Kenvue (KVUE) Q2 FY25 earnings call: guidance and Q&A

How does the immediate focus on reducing complexity (biggest brands, countries, innovations) relate to the broader strategic review, especially concerning tail brands and smaller businesses?

Management confirmed that focusing on core brands and markets, and reducing complexity, is an immediate operational priority. The strategic review, which includes evaluating the brand portfolio, is a parallel 'and' process, not an 'or'. They aim to improve execution quickly, citing examples like e-commerce penetration, core brand strength, and media ROI.

“So at a high level, what you said is absolutely true. We need to focus, and as I mentioned, in terms of the number of brands as an example, that contribute 3/4 -- 3 course of our sales, the long tail of SKUs that make up less than 1% of our sales, great innovation pipeline, but just too many initiatives.”

asked by Lauren Lieberman · answered by Kirk Perry

What were the biggest surprises upon joining, and where is management most excited/challenged regarding the top-line turnaround across brands, categories, or regions?

Kirk Perry was most surprised by the 'self-induced complexity' hindering agility. He is excited by pockets of success like Tylenol's 12 consecutive quarters of growth and Aveeno Baby's 9 quarters, and the performance in EMEA and Latin America. Challenges remain in APAC and North America, particularly in Skin Health and Beauty due to a long tail of brands, but sequential improvements in Neutrogena Face are encouraging.

“So what was I most surprised about when I came in? I would tell you that -- and I mentioned this when I had my prepared remarks, I was surprised by what I would call the self-induced complexity that we have created. It's just an inhibitor to be able to move faster to be agile and to be able to drive the results we need to drive on the businesses.”

asked by Peter Grom · answered by Kirk Perry

Given P&G's turnaround involved divestitures in attractive categories, how does Kenvue's Board view unlocking value beyond SKU rationalization, especially for segments like Skin Health with lower profitability and tough competitive dynamics?

Management reiterated that the strategic alternatives review and operational excellence are an 'and' strategy, not an 'or'. They are looking at every value creator but will not comment on individual segments during the review. Kirk Perry emphasized focusing on controllable factors like demand creation, consumer understanding, brand building, innovation, and go-to-market excellence, drawing parallels to his P&G experience.

“We're in lockstep with the Board on that, and we're going to continue to look at every single value creator that we can. And so that is going to happen. We're not going to obviously comment on any individual business segment -- individual business or segment while we do that, but I also know and believe that execution has played a big role in our performance to date, our underperformance and getting that right with strong capabilities is going to go a long way.”

asked by Javier Escalante Manzo · answered by Kirk Perry

How will Kenvue measure success in the Skin Health and Beauty turnaround, and how can shareholders monitor progress using external data sources?

Kirk Perry stated that ultimate success will be measured by consumers 'voting for us every day at the shelf' and seeing sequential improvement in market share. Key focus areas include having the right leaders and capabilities, being more choiceful in strategy, improving execution (e.g., e-commerce, core brand strength, media ROI), and optimizing operating structure. He emphasized that the goal is sequential improvement in consumer preference and share.

“And so we are expecting, as we fine-tune our model, I mentioned earlier what those things are in focus areas for me and what it's going to take to improve. I think it's making sure we have the right leaders in the right chairs and build the right capabilities.”

asked by Andrea Teixeira · answered by Kirk Perry

What is the potential headwind to organic growth from reducing complexity (cutting tail SKUs), and what are the potential incremental restructuring costs to achieve the desired operational efficiency?

Amit Banati indicated it's premature to comment on specific restructuring costs or the exact impact on growth. He noted that the Board's strategic review will inform these choices. He mentioned that addressing the long tail of SKUs can be done fairly quickly. Regarding cash flow, he stated that despite lower earnings, they expect to be in the same neighborhood as last year, driven by timing benefits.

“I'd say -- Steve, this is Amit here. I'd say I think it's a little premature to comment on the specifics. I think as Kirk mentioned, right, firstly, right now, the Board is undertaking a strategic review that's looking at all potential alternatives and it's a broad range of alternatives.”

asked by Stephen Robert Powers · answered by Amit Banati

For the updated guidance, is the expectation for continued low single-digit declines in H2, or a return to modest positive growth? What are the assumptions for category growth and inventory changes? Also, can management elaborate on the drivers of the implied margin contraction in the EPS guidance?

Amit Banati explained that the full-year guidance of 'down low single digits' means H2 does not necessarily need to improve to positive growth. He noted that Q4 has softer comps due to trade accruals and China weakness in the prior year, which could lead to the top end of the range. Category softening and cautious consumer sentiment are factored in. Margin contraction is expected from strategic price investments, fixed cost deleverage, and inflationary pressures, not fully offset by productivity.

“I think if you look at -- given that we are giving guiding for a low single-digit decline for the full year on the top line, and we closed the first half at around minus 2.7%. So the guidance range includes what we basically did in the first half and does not have to improve to be within the guidance.”

asked by Filippo Falorni · answered by Amit Banati

Have Q3 trends shown a pickup from the Q2 seasonal impact? What are the other moving parts underpinning the H2 flat to down organic sales growth guide, such as U.S. retailer inventory destocking and China supply chain disruptions?

Amit Banati stated that July trends are similar to Q2, with consumption ahead of organic sales and weak seasonal categories. These trends are incorporated into the guidance. He reiterated that softer comps in Q4 (due to prior year trade accruals and China weakness) are key factors for the second half, but did not specifically address ongoing retailer destocking or China supply chain disruptions beyond their Q2 impact.

“So I think so far in July, we're seeing similar trends to quarter 2. So consumption is ahead of organic sales. I think the seasons are similar to what we saw. So seasons continue to be weak. Now this has been incorporated into our guidance.”

asked by Bonnie Herzog · answered by Amit Banati