Kenvue Inc. Price & Performance (KVUE)

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 U. S. GAAP. These non GAAP financial measures should be viewed in conjunction with the most directly comparable U. S. GAAP financial measures and are not presented as substitutes for or superior to those most directly comparable U. S. GAAP financial measures. Those most directly comparable U. S. GAAP financial measures and a reconciliation of our non GAAP items to their respective nearest U. S. GAAP measures can be found in this morning's earnings press release and our presentation available on our IR page of Kenvie's website investors.kenvue.com. With that, I'll turn it over to Thibault.

Thank you, Sofia. Good morning, everyone, and thank you for joining us today. I'll begin by sharing our performance and progress in 2024, then provide a review of our results for the fourth quarter. I will close by discussing our outlook for 2025, with Paul building on some of these topics later in the call. Our organic sales growth for the year was 1.5%, This was below our expectations and we are not satisfied with it.

As we will discuss later, this was due in part to lower than expected incidences of cough, cold and flu, which negatively impacted our pediatric pain franchise and a reduction in distributor orders in Asia Pacific, particularly China. While top line meets our expectations, met or exceeded our expectations on other fronts. We meaningfully expanded our adjusted gross margin and took significant costs out of our infrastructure which enabled us to increase investments in our brands. And we delivered adjusted diluted EPS for the year of $1.14 squarely within our guidance range. At the start of 2024, we outlined three priorities for Kenvue View. Reaching more consumers, freeing up resources to invest behind our brands and fostering a new culture of that rewards performance and impact. While we still have work ahead of us to accelerate growth, made progress on each one of these priorities. So let me take each one in turn. First, to reach more consumers across our three segments, we strengthened our presence and prominence in store and online, launched impactful innovation and expanded and deepen our engagement with consumers and has care professionals. In self care, we strengthened our leadership positions with nearly 80% of the segment gaining share, including our largest brands, Tylenol, Zirtec and Nicorette amongst others.

In Essential House, we grew mid single digits and we delivered volume growth in North America, EMEA and Latin America, And in Skinheads and Beauty, we grew both volume and value in EMEA in Latin America, while exiting the year with volume growth in The U. S. We expect to build on this momentum to accelerate volume and organic sales growth Second, we are taking significant costs out of the business enable us to increase investment in our brands. And here, we are ahead of our plans. We continue to expand adjusted gross margin with an increase of 200 basis points year over year to a competitive 60.4% driven in large part by strong productivity enhancement in our operations, muscle that we continue to build at Canvue. To put this into a longer term perspective, is more than 400 basis points ahead of pre COVID levels. In addition, we successfully executed the first year of AOVOO Forward, our two year initiative to become a more agile organization with a more efficient cost structure and are well on track to deliver $350,000,000 of annualized savings by 2026. As a result of these actions, we were able to increase our total brand a significant step toward our plan to reinvest more competitively in the growth of our brand.

We invested in three areas: We increased our advertising budget to 10.6% of sales in 2024 compared to 8.7% in the prior year. And pivoted to social media influencer led campaigns which helped us expand our reach and fuel stronger brand health. We also ramped up our investment in Healthcare Professional Engagement. In The U. S, for example, Neutrogena is now at its highest level of average And we invested in stronger in store presence and prominence Where we work to embrace a culture of performance and impact across Kenvue. We introduced a new performance and incentive model directly tied to business outcomes for focusing all Kenvue viewers on our key priorities. And to complement our existing talent, we brought in new team members to elevate our capabilities and expertise across key areas of our business. We also enhanced our operating model establishing global brand development teams and with integrated strategies impactful communications. This model now operational in 2025, is not only more effective, but more efficient avoiding duplications of effort and driving greater accountability. Now I'd like to turn to our fourth quarter results. In Q4, we delivered organic sales growth of 1.7% and adjusted diluted EPS of $0.26 While we were tracking in line with our organic sales growth outlook through November, Growth fell short of our expectations in December primarily due to two factors.

One, much lower than expected incidences of cold, cough and flu had an outsized impact on our pediatric pain franchise in The U. S. And in China. And two, we had a reduction in custom orders in Asia Pacific particularly in China, where we experienced temporary This was driven by secondary distributors who faced liquidity issues and did not fully execute activation programs. We're in the process of replacing these underperforming distributors and reclaiming direct responsibility for activation with key local retailers to avoid this issue in the future. These two factors were unfortunately large enough to mask real progress in the other parts of our business. To help further dimensionalize the impact of the significant decline of pediatric pain incidents on our revenue, total company organic sales growth without this franchise would have been about two points higher in the fourth quarter and about Now looking at each segment, I'll begin with Self Care which grew organic sales by 2.9% in the fourth quarter. As noted, the low flu season led to a double digit decline over last year in our pediatric pain franchise as a category nearly 11% in The U. S, our two largest markets. December was much weaker than our and industry projections, as a typical peak in pediatric incidences did not occur.

Retailers responded by limiting their orders in China by starting to reduce the inventory they built ahead of the season. Without Pediatric Pain, this was a terrific quarter for our Self Care segment with organic sales growing high single digits as Nicorette grew nearly 20% our digestive health franchise grew mid teens and allergy grew high single digits. We continue to drive consumer awareness and amplify innovations such as Thalenol Easy to Swallow through innovative consumer centric campaigns. Importantly, we continue to gain share in self care in the the fourth quarter, including in pediatric pain, where we grew share globally by 70 basis points versus last year. In Essential Health, where organic sales decreased 0.7% in the fourth quarter, we faced a material headwind from the decline in customer orders in the Pacific, particularly China that I discussed earlier. Importantly, we do not see this decline in orders reflecting the rate of consumption in the region. Outside of Asia Pacific, the segment grew at a healthy mid single digit rate in Q4 with a third consecutive quarter of volume growth. Innovation continues to play an important role as we drive household penetration in these categories where we command leadership positions.

For example, we continue to expand Listerine clinical solution in The U. S. Where the line was the number one innovation in 2024. Our Abino Kids Range Is A Fastest Growing Line In Its U. S. Category, And our Bound Aid Pro Hero innovation continues to do very well, driving more than a third of our wound care growth in The U. S. For the year. Finally, in Skin Health and Beauty, we delivered volume led 2.6% organic sales growth for the quarter albeit on a soft base. EMEA in Latin America continue to be growth engines for the segment, and we drove volume led double digit organic sales growth in the quarter across both regions. In EMEA specifically, Q4 was our eleventh consecutive quarter of organic sales growth with all our major brands, Neutrogena, Avino and OGX growing nicely. We continue to expand in the region with the launch of Aveeno in 12 Central European markets. In North America, we delivered mid single digit organic sales growth during the quarter, as we continue to see improvements in the areas we have prioritized thus far. For example, during the fourth quarter, Neutrogena, our largest brand in skin health, regains its position as the number one face care brand in all U. S. Offline and online.

In our Neutrogena cleansing platform, important entry point for the brand, grew share in the brick and mortar channels in the fourth quarter with a combined effect of increased points of distribution, attractive entry price points on influencer led consumer communication and innovation with our new gentle cleanser line. While 2024 showed the recovery is not linear and is taking longer than anticipated, we remain encouraged by this progress. In 2025, we will amplify our innovations and further strengthen our competitiveness. As an example, as part of our strategic collaboration with Doctor. Shah that we announced in Q4, we launched a new major campaign earlier this week featuring artist, Tate MacRae, our newest NutriGen ambassador. This is a great example of our ambition for the brand with a popular global Gen Z music sensation and the most followed dermatologist from social social media getting together to recommend the number one face care brand in America. So let's now turn to our outlook for 2025. We are entering 2025 with a challenging external environment. Economic uncertainty, geopolitical tensions and a stronger dollar. Parallel, consumers continue to look for convenience and value are not compromising on their health. So given this backdrop, we expect our weighted categories to grow below historical average in 2025 in the range of 2% to 3% in the geographies where we compete.

At SkinView, we are now approximately ninety days from completing what has been a long resource intensive operational separation from J and J. To put it in perspective, we exited over 2,000 TSAs in more than 50 countries through the end of twenty twenty four, without business disruption. Having now completed approximately 85% of the planned exits, our team continue to find better, simpler and more cost effective ways to operate as an independent company. And as one of the last steps in this separation, we'll officially open our new Canvue headquarters in Summit, New Jersey next month. With TSA exits behind us in 2025, we are ready to enter the next chapter of our journey as an independent company with our number one priority being centered on accelerating profitable growth generating sustainable value creation. We expect to deliver 2% to 4% organic sales growth in 2025 and grow revenue faster than our categories in the second half of the year. We are confident in our outlook for 2025 for several reasons. First, we will realize the compounding benefits from structural changes we implemented in 2024. This year, we will fully activate our new operating model with strong talent a leaner organization, greater efficiencies clear roles and responsibilities.

Our brands will benefit from a second year of higher investment levels supported by a healthier P and L with stronger gross margins and lower and we will be more agile and move faster enabled by technology and capabilities that are right for Kenvue as a standalone consumer health company. And second, we have strong plans to drive momentum across our three segments in 2025. We will launch 40% more innovation compared to 2024, which will further strengthen our portfolio through premiumization extension into agencies and attractive entry price points. We expect net distribution gains this year driven by the healthy innovation lineup strengthened retailer partnerships leading to higher prominence of our brands, and our brands will be supported by more competitive trade and market investments stronger partnerships with celebrities, influencers and healthcare professionals. We have streamlined our roster of advertising agencies and have recently launched our new global content factory which will drive more impactful content with greater efficiencies. Have the opportunity to talk more about our 2025 plans and our next chapter CAGNY later this month. While our innovation and marketing support are expected to be equally strong throughout the year, our first half results will not reflect the underlying health of our business as they will be negatively impacted by two main factors, destocking largely due to the lingering impact of the weak pediatric paint season and the disruption we are correcting in China, the strategic investment we are making in selective price reductions and trade spend in The U. S. To improve our competitiveness.

Importantly, while reinvesting in our brands, we will continue to be extremely disciplined in the management of our P and L, and we expect to expand adjusted operating margin in 2025. And with that, I'll turn it over to Paul. Thank you, Thibault, and good morning, everyone. I'll start with an overview of results for the fourth quarter and the year and then close with the details around our outlook for 2025. Fourth quarter organic sales grew 1.7% versus last year, which was disappointing. Due to the reasons that Thibault highlighted, Organic sales growth in the quarter was relatively balanced between value realization and volume. We drove favorable value realization across all segments and volume growth in both self care and skin health and beauty. Overall, volume increased 0.7% year over year. Primarily driven by incremental pricing outside The U. S. For the year, organic sales increased 1.5% with value realization of 2.7% and consolidated volume declines of 1.2%. Going forward, we expect a more normal balance between value realization and volume with a skewed to volume increases to drive our organic sales growth. Taking a look at our segments, In the fourth quarter, [indiscernible] as volumes and value realization contributed 1.71.2% of growth respectively.

As Tivo mentioned, the segment delivered very strong organic sales growth except for Pediatric Paint, was a significant drag on the segment and the company growth. Importantly, in Healthcare, we continue to gain share across categories globally for the quarter and full year. In Skin Health and Beauty, organic sales grew 2.6% year over year in the quarter as volume increased 2.1% on easier comparisons and value realization Pricing actions abroad more than offset the impact of our strategic investment behind select price reductions, and in store activation in The U. S. We remain focused on building further traction with our commercial efforts to strengthen this segment's performance. And for Essential Health, organic sales declined 0.7% in the quarter value realization increasing 1.2% year over year, which was more than offset by volume declines of 1.9%.

While organic sales for Essential Health grew 4.1% for which was the fastest growth in recent years fourth quarter was an outlier. Primarily due to a reduction in customer orders in Asia Pacific, particularly in China. Without Asia Pacific, organic sales for Essential Health mid single digits in the fourth quarter with Latin America and North America leading the charge. Moving now to adjusted gross margin. Our operations team drove meaningful productivity improvements in 2024, expanding adjusted gross margin by 200 basis points versus last year, 60.4%. As anticipated, in the fourth quarter, adjusted gross margin came in at 58.7% versus 59.5% last year, which as you may recall included a non recurring benefit of approximately 50 basis points. In Q4, we continued to generate supply chain efficiencies and value realization, which helped offset inflationary headwinds. Adjusted operating margin was 19.2% in the quarter, and landed at 21.5% for the full year. Right at the midpoint of our 21% to 22% guidance range. Recall, raised our total brand investment in 2024 by about 20%. We with cost savings and gross margin improvement funding this spend. As of 2024 year end, we're more than halfway through realizing our Q4 savings and are well on track to get the full annualized run rate $350,000,000 by 2026.

Closing out the P and L, net interest expense was $95,000,000 for the quarter and $378,000,000 for the full year of 2024, in line with our expectations. For taxes, fourth quarter adjusted effective tax rate was 17.7%, and full year adjusted effective tax rate was 25.5%. Slightly below our expectations due to the realization of discrete tax benefits. And finally, adjusted net income was $499,000,000 for the quarter, which or $0.26 of adjusted diluted EPS. Full year adjusted net income was $2,200,000,000 dollars or $1.14 adjusted diluted EPS within our 2024 guidance range. Before discussing the outlook for this year, I I'd like to take you through two internal initiatives that we are deploying to upgrade data and analytics across multiple facets of Kenvue. Part of the evolution of our company. First, as we continue our revenue growth management efforts, we are deploying a global center of excellence that will support our markets with strategic pricing and promotion capabilities. We're also implementing new trade spend management technology in select markets which will facilitate more robust management of trade investment and better inform promotional spending decisions. All to further improve effectiveness. Second, we will complete the global rollout of integrated business planning with enhanced digital capabilities in 2025.

The new IBP process and AI driven tools will improve the level of information that supports our financial forecasting enhancing planning accuracy. Also, these upgraded systems and processes do not protect against some demand changes, they collectively enable greater agility and more timely decision making significantly enhancing our ability to respond to shifting market trends. Now to summarize our expectations for the full year 2025. We expect organic sales growth to be in the 2% to 4% range representing an acceleration from 2024 levels with growth expected to be volume led. Our assumptions are grounded on approximately 2% to 3% growth across the categories and markets where we compete. Based on current spot rates, we are assuming currency will be an approximately 3% headwind our top line resulting in expected net sales in the range of down 1% to up [indiscernible] As you heard from Tivo, we have strong commercial plans for the year for each one of our segments as we bring and amplify more innovation to market leverage our growing marketing muscle continue to build distribution and realize benefit from revenue growth management. At the same time, coming into 2025, with more competitive brand support levels We also expect our teams to execute at a higher level in 2025, behind the full adoption of our new operating model.

Looking at our segments for the full year, we expect sales care organic sales growth will accelerate from 2024 levels building on our strong leadership positions and continue In Skin, Health and Beauty, we expect to return this segment on a global basis back to organic sales growth in 2025 as we continue to strengthen our U. S. Business while driving ongoing solid performance in EMEA and Latin America. And finally, in Essential Health, as pricing rose off, we expect to deliver more moderate organic sales growth in 2025 with broad based growth across the categories. From a quarterly progression, as Tivo mentioned, destocking and strategic price investments will impact the cadence of Canvida's top line and margin performance in the first half of the year. Combined, we estimate these factors will account for a three to four point headwind in the first quarter. As a result, we expect organic sales decline low single digits in Q1. We expect these headwinds on top line to moderate in the second quarter. These dynamics will mask the underlying health of the business in the first half of the year, As we cycle through them, organic sales growth is expected to be much stronger in the back half of the year relative to the front half.

In parallel, expect 2025 to be another year of strong productivity and efficiencies for our company. We are continuing to accelerate automation streamline end to end processes optimize spend, leverage digital and AI to enhance logistics and demand management, and are on track to realize the balance of our go forward savings. These combined savings will more than offset the investments we're making behind the business increase our brand's competitiveness, as well as inflationary and foreign exchange related headwinds that we're facing this year. As a result, planning for adjusted operating margin to expand year over year. Given the fluidity of the recent tariff announcements, We have not factored in any impact in this outlook. We are assuming a fairly similar net interest expense to 2024 and adjusted effective tax rate of 25.5% to 26.5% with about 1,930,000,000.00 diluted weighted average shares outstanding. We're planning to grow adjusted diluted EPS on a constant currency basis slightly ahead of organic sales growth even as we continue to reinvest at higher rates behind our brands. Adjusted diluted earnings per share are expected to be flat to up 2% including a mid single digit headwind from currency. In closing, 2025 will be an important year for Canvio Kenvue, As we put our separation from J and J behind us, we entered the next chapter of our journey as an independent company and aim to unleash acceleration in our profitable growth.

Our teams around the world are ready and I want to thank them for their passion and focus on helping more consumers realize the extraordinary power of everyday care. Before we open the call for questions, may have seen the filing that was recently made by Starboard Value. We engage regularly with our shareholders and are open to constructive dialogue and suggestions from all Kennedy shareholders. With that said, the purpose of today's call is to discuss our 2024 results and 2025 outlook. Appreciate you keeping your questions focused on these topics. And we will not be making any further comments on our shareholder conversations or the nominations at this time. With that, will open the call for questions. Thank you. At this time, we'll be conducting In the interest of time, we ask that you please limit yourself to one question Our first question comes from the line of Filippo Filoni with Citi.

Please proceed with your question. Hey, good morning, everyone. So I wanted to ask two clarification on the organic sales growth guidance for 2025. First, in terms of like the negative impacts that you saw in Q4, both on cold and flu and essential health, can you give us a sense of like what is the contribution of the drag in Q1? Particularly in cold and flu, it seems like the case count has really picked up in the December, January. So are you assuming you're not going to get a restocking in your cold influence, especially the pediatric call them through Madison that you called out. And then on the kind of Asia Pacific inventory issues, can you walk us through like what impact are you expecting going forward and how long it will take you to fix the disruptions that you called out? Thank you. Yes. Good morning, Filippo. And so your question about our guidance for 2025, Let me start by talking about how we feel confident about our guidance overall. If you think about our starting point, we grew 1.5% in twenty twenty twenty four. You heard me say in the prepared remarks that if you without pediatric pain, we would have grown one point higher as a company.

So I would say our run rate exceeding 2024 is about two point five If you add to that, the stronger plans we have for 2025 and the fact that we are going to benefit from the compounding impact of the structural changes we did in 2024 that's what gets us to the to the midpoint of our guidance. [indiscernible] what will bring us up or down versus this midpoint will be driven by the quality of the execution and how consumers respond, but also The seasonal businesses and how the seasons are going to behave in 2020, 2025. So if the seasons are positive, will tilt towards the higher end of the guidance. If it's not the case, it will tilt towards the lower end of the guidance. Now as you said, We expect while we have strong operational plans through the full year, we expect in 2020 in the first quarter to have two factors.

That will depress our results and mask the underlying health of the business. The first one is a linear impact of the low pediatric pain incidents that we saw in Q4. And you are right, we are not expecting [indiscernible] in Q1, for two reasons. In a market like The U. S, While we see while we saw an uptick at the January, then a decline in the January and we see a slight uptake again recently. It has been pretty erratic I think it's too soon to call for an upside in The U. S. In China, The go to market is different. Distributors and stores tend to stock up ahead of the season. They had a low season in Q4 as we talked about. And so even if the incidents goes up in Q1, we would expect them to destock and to bleed the inventory in Q1 with no impact on our shipments. And the second reason that will impact the the first quarter on that front. Is the lingering impact of the distribution disruption we saw in China will take a little bit of time to fix. Paul, do you want to add something? Thank you, Tivo.

Yes. And I said in my prepared remarks, Filippo, the factors that Tivo referred to are a drag of about three to four points. So the combination of the low start to the season, particularly in pediatrics, and also the lingering impacts of the distribution issues we have in China and Asia Pacific in general. And there's one more factor that I would like to mention that gets us to the top line of low single digits in Q1, which is trade investments that we're stepping up in the first half of twenty twenty five. As we think holistically about our brand investment, we're not only have brand marketing investments through advertising, but we are also making sure that our promotional spend in store is competitive and we're doing that primarily in The U. S. Through trade investment and promotional programs. So that's how I get to the number that I explained before. This is temporary. It does not say much about the underlying health of the business. Because as those impacts are cycled through, we will see the acceleration in the second half of the year. As we see the full impact of our plans, including the benefits of RGM the full impact of our brand plans, and some of the absence of the headwinds we saw in 2024.

So strong operational plans underlying these impacts [indiscernible] Thank you. Our next question comes from the line of Peter Grom with UBS. Please proceed with your question.

Thanks, operator. Good morning, everyone. Maybe just to follow-up on that.

I would love to get some perspective on just the category growth assumptions. I think you mentioned 2% to 3% globally. Can you maybe share how you see that playing out in The U. S. Versus what you might expect internationally?

And then just on the guidance, right, I think you just mentioned an acceleration in the back half of the year. So should we interpret that as 2Q organic sales growth is going to be muted as well. And then maybe just taking the flip of Filippo's question. I mean, what are you assuming in the fourth quarter? Are you assuming that you get these headwinds that you dealt with from weaker cough and cold from the inventory disruptions, are you assuming they come back that's part of the improvement that you're embedding in the back half of the year? Thanks.

Yes, Peter, good morning. So let me take the question your question on the category assumptions for 2025 and Paul will follow-up on the phasing.

In 2025. So we indeed expect our categories to slow down from a 3% to 4% to a 2% to 3% in 2025. I would say the main reason Peter, is the fact that you will have a much lower impact [indiscernible] price in 2025 compared to 2024. From a consumer point of view, what we see is, on one hand, consumers are clearly focused convenience and value. [indiscernible] they are also extremely focused on their health and the health of their loved ones and they are not ready to compromise on this. And we see it with the example of private label penetration that continues to be I would say, about flat on a global basis. And actually, if I look at most recent periods, private label penetration in our category is going down in aggregate. So I would expect a consumer to be to be continue to be focused on high quality differentiated superior health solutions. But we will have a lower role of pricing in 2025 definitely. Or do you want to take to speak about the phasing?

Sure.

Thank you, Thibault and Peter, good morning. I described the dynamics in Q1 particularly for the second quarter. We will see we do see an acceleration. We expect an acceleration. And it's going into positive territory. It's not all the way to the full strength of our plans.

Because the dynamics in China will take more than one quarter to be fixed. So again, it does not demonstrate the full impact of our plans. When it comes to the fourth quarter assumptions, you're right. What we are talking about in Q4 is the absence of the headwinds that we saw in Q4 of twenty twenty four. We ex cold, cough and flu. And we also see selective price actions outside The U. S. And the full impact of our plants with the most strength being seen in Q4 of twenty twenty five.

Thank you. Our next question comes from the line of Ana Luzwold with Bank of America. Please proceed with your question.

Hi, good morning. Thank you so much for the question.

I wanted to ask on skin health and beauty in particular. The volumes starting to recover here in the fourth quarter. I was wondering just if you can give more insight on the innovation pipeline and any potential for shelf space gains in 2025 in the fall. Thank you. All right. Good morning, Anna. Let me take this one.

So as far as Skin Health and Beauty is concerned, our recovering Our recovery as we saw in 2024 is taking longer than initially anticipated, adding [indiscernible] see that our plants are working when you see our progress in the areas where we focus our effort we continue to see very strong traction in Europe and Latin America. And we would expect continued traction in 2025 in this region. We have strong plans in terms of distribution, innovation and communication. And in North America, we are very encouraged by the positive signs we keep seeing in the region. And you saw that we got our leadership back across all channels in the fourth quarter of online and offline. And so in 2025, we will amplify this effort to more part of the portfolio We have I would say, largely to a large extent, we've been at Skinheads and Beauty team with strong talent in 2024 and you start seeing the impact of what this team is doing We are going to roll out a much stronger innovation pipeline in 2025 in The U. S. And around the world. And this will be supported by strong and I would even say stronger campaigns as we pivot to social media influencer led campaigns and really execute them at a stronger level.

If you look at the campaign, we just released this week with State MacRae, We got 1,000,000,000 ad media impressions in the first twenty four hours. That's five times the engagement rate on organic social media. That is what we would expect from industry benchmarks. So up to a very good start. Our investment has kept Professionals is working as well. And we will continue to invest in this area. So more innovation in Skin Health and Beauty. I will not get into the details of what it will look like. For obvious reasons. That we are starting with revitalized hydro boost session campaign in the first quarter. We are building on the innovation we launched in the fourth quarter, our new cleanser lines, and our Collagen Bank line, which is up to a good start. We will also increase distribution To your question about Sun Care, we feel good about the upcoming season in terms of Retailer partnerships we'll see how the season plays out, but we feel we are well prepared getting into the season and we will continue to invest behind our healthcare professional recommendation. So all in, that's what makes us confident that we will return the segment to growth in 2025 on a global basis Thank you.

Our next question comes from the line of Andrea Teixeira with JPMorgan. Please proceed with your question.

Thank you, operator, and good morning, everyone. Can you just elaborate more on the temporary trade investments you're embedding in guidance. Should we expect to understand like the 3% midpoint of organic sales growth to be mostly driven by volumes and in the second half and then the price realization to be negative in The U. S. But positive abroad with FX led pricing.

So hopefully, like if you can kind of break it down if it's fair to assume, number one, that you obviously will have potentially less price realization, but some as you mentioned before, Tibo, I think you to another question had said you expect to have pricing to the back end of the year. And then on the operating margin guidance that Paul had mentioned, to be above 2024, I understand the puts and takes here is like the synergies are coming in line with what you expected. And then but that's going to be a gross margin accretion. And then your SG and A will have that A and P investment. And I think that's one of the things that we haven't discussed on the call yet. Is the 11% still holds in 2025 or you're actually investing even more because when you say investment in trade and spending, it's obviously above the line, but you also had said that you are putting more programs in place. The retailer. So I was wondering if that number is is appropriate and if you feel this is going to be where you're going to land in 2025? I'll stop here.

Okay. It's Panera, thank you for your question. I will start your question on what we really mean by our strategic pricing investments. And then Paul, will take your question on SG and A and gross margin. So what are we talking about when we talk about pricing investments? As we reposition Kenvue for activity growth, you see that we are taking deliberate actions across the business to make us more competitive. One aspect of this competitiveness is making sure that our brands are at the right price points for consumers versus our competition. In 2025, are making adjustments to our business, especially in The U. S. To ensure that this happen, We are not doing it across the board. We are doing it in select brands, in select codes.

That where we see an opportunity to be more competitive and be rewarded with higher volume if we become more and more competitive. I will not give you more details for obvious competitive reasons, but I can give you examples of what it looks like. An example is One thing we are correcting is that in the past, we have made some price increases. And for certain codes, we crossed set certain price thresholds that impacted our volumes. So after doing a few successful pilots in 2024, where we have checked that going back down below this price ratios, we're driving volume. We are doing we are implementing those, again, on select codes in 2025. Another example of an investment we are making is simplifying the number of price points within specific brands. In certain brands, over time, the number of price points had grown prohibiting us from co promoting different products within the same brand at the same price point. We are simplifying this in 2025, reducing the number of price points, which will allow us to co promote our products more effectively and make our displays more effective. So all of that ends up being an investment in the short term, but we are confident that it will turn into a volume growth in the mid to long term.

Great. Thank you, Thibault. And let me put some numbers behind your questions. First of all, you said you asked whether these will have an impact on volumes or are we going to have negative value realization in The U. S. The answer is yes. We do expect negative value realization in The U. S. Primarily in Q1 and in Q2 behind these promotional spend investments. We see brand investment holistically push and pull. That's how every other consumer company does it. And our marketing mix will allow us to be much more competitive at the point of sale and also supported by our brand investments. So what do we expect in the balance of the year? In the second half, those will be rolling out. We will be in the right with the right price points. We will also taking price in the balance of the world, and that will allow us to have positive value realization overall towards the second half of the year. How are we funding all of these? That's your second part of your question. We do have very concrete and strong plans both on the gross margin line and on the operating margin line.

So when it comes to gross margin, you know that we have delivered a trajectory of gross margin enhancement We do have line of sight to more building blocks particularly driven by efficiencies end to end in our value chain not at the same pace as in the past, of course, but we do see gross margin accretion modest gross margin accretion in 2025. And when it comes to SG and A, we do believe we have still some room to go in terms of our A and P investment. Again, but a much more moderate level, we're thinking about these push and pull marketing mix model and we will be very thoughtful about the ROI of both our top and brand marketing investments, but we still want to invest more while we are able to deliver on our algorithm that we talked about our guidance that we talked about, which is growing our operating margins year over year. So those are the puts and takes, and we believe we have strong efficiency plans because we want to continue to fuel our brands both from a push and pull perspective.

Thank you.

Our next question comes from the line of Bonnie Herzog with Goldman Sachs. Please proceed with your question.

All right. Thank you. Good morning, everyone. I actually had a question on your self care segment margins, which contracted a lot in Q4 and then for the full year. So So as you guys called out, the flu season has been tracking much weaker, I guess, than expected. But just hoping for a little more color on how we should think about segment margin trajectory from here, especially in context of maybe subdued pricemix growth moving forward and then certainly some of your reinvestment plans. Thank you. Bonnie, thank you for the question. I would not place too much emphasis on the quarterly gross on the quarterly margin by segment. Remember, there's fluidity between the different segments. And also it is impacted by mix. We talked about the fact that our pediatrics business was seesaw declines and that certainly impacted our mix. Temporarily, I would say, it had the lowest gross margin self care in the end of the year, but that is temporary. If you think about our overall operating margin performance, we were squarely within the guidance that we talked about. So overall, consolidated operating margin was 21.5%. So we contemplated all of these investments and there are puts and takes when it comes to mix how we drive our brand investments, And we do see as we think about 2025, a little bit of an acceleration in self care gross margin will continue to invest in skin health as we talked about both in the push and the pull and essential health continue will continue to be driving operating margin enhancement for that incremental operating margin that I described.

So those are the puts and takes between the different segments. And also how mix plays and all of this is supported by strong efficiency programs overall.

Thank you. Our next question comes from the line of Corinne Wolf Meyer with Piper Sandler. Please proceed with your question.

Hey, thanks so much for the question. Would like to touch a little bit more on kind of like the cadence of the margin trajectory. I know you're talking about a little bit of modest expansion for the full year, but any more deeper color you can provide us on what to expect for Q1 for the gross margin or operating margin line and how that should progress over the year? And then maybe you could touch a little bit on some of your risk mitigation plans as it relates to potential tariffs. I know it's still pretty dynamic situation right now and a lot of uncertainty. But how much flexibility do you think you have to offset with pricing and some supply chain enhancements to drive better productivity if tariffs were to take hold. Thank you for the question, Corinne.

When it comes to our margin evolution throughout the year, both on the gross margin and on the operating margin level. It will be follow a little bit of the top line trajectory given the leverage that we're seeing, the investment levels that we're seeing, the pricing that I talked about, So it will be more muted towards the first half of the year, particularly in Q1, and we will see an acceleration towards the second quarter and particularly the third quarter. Remember, we talked about the normal cadence that our gross margin follows. Usually, the second quarter is the highest one. We will see some investments. So we'll probably see a little bit of a shift more towards the third quarter. And normally, the fourth quarter has the associated costs related to plant maintenance, etcetera, So it will follow that trajectory Net net, we see a more muted Q1 accelerating towards the second quarter, third quarter as well and then going to the normal levels in Q4. So that's the cadence of our gross margin [indiscernible] of course, that we're following closely. We established a team that's dedicated end to end to tracking the impact of these tariffs And we have very, very plans that we're ready to trigger.

And our exposure is mostly between at this point between The U. S. And Canada. That's where the majority of the cross border trade happens. We do see we do have imports from Canada to The U. S, very little from Mexico and a small part from China.

And we have a variety of levers that we are pulling. And those include, of course, alternate sourcing, We are considering potential pricing actions. But we are not triggering at this point given the fluidity We are ready. We have the playbook ready. And we will be ready to take actions in the short term and also in the long term. The guidance that we have does not include any impact of of any tariffs and that's something that we will be of course, working closely with our customers to ensure that we continue to provide consumers with the right value equation. But we are ready whenever it comes our playbook is ready to be activated. [indiscernible] Our next question comes from the line of Nick Modi with RBC Capital Markets.

Yes. Thank you. Good morning, everyone. Thibault, Paul, I was wondering if you could remind us on how the incentive compensation works, particularly for the regional managers, I'm asking this in the context of are they compensated or the targets post FX just given the movement of the dollar versus the rest of the world and sometimes there's a tendency for folks to pull back on spending to hit post FX numbers. And so I just wanted to get some clarity around that. And if you had any thoughts around mitigating that risk, if that is in fact how you compensate? [indiscernible] metrics that we have for everyone in the company And by the way, we have a an approach to one can view. It includes it's all in. So we have the levers to be able to offset as much as possible ForEx impacts. And we do not give any dispensation to any teams regarding ForEx. Our plans are on a as they are reflected externally in line with our guidance talked about organic sales and we also talked about our EPS on a constant currency basis. But we have we track both. An important thing that I wanted to mention is that We do have hedging programs, and we have those for the purpose of predictability.

And we employ them very rigorously. And the last thing that I wanted to mention is that in 2025, we have already factored in the headwinds that I referred to. So mid single digits headwinds in EPS. And that's how we compensate our teams. So it's a holistic approach. It's one team approach. And we are not going to take the foot off the pedal when it comes to investment in our brands. Remember, we talked about in 2024 that we would be investing $400,000,000 more in advertising and that's make other trade offs, but the majority of the efforts will be towards more taking complexity and unrewarded complexity and other non value added cost of out of our P and L to be able to protect investments despite potential swings in currency. Remember, it's organic, it's one team, and that's how we evaluate our teams. Thank you. Our next question comes from the line of Lauren Lieberman with Barclays. Please proceed with your question.

Great. Thanks so much. So sneaking in a clarification and then a real question. Clarification was just In the prepared remarks, I thought you said that Skin Health and Beauty was up mid singles in The U. S. Which if that's the case, in EMEA and Latin America were up double digits in volume. I just wanted to understand [indiscernible] 2.5%. The more interesting question, the go to market in Asia you called out in particular essential health, but I was curious what the route to market is for the other categories there? And also just there's a range of what it means to use distributors in China, right?

There's the we put stuff on a ship and it's like very hands off, which I don't think is what you do. Because I know you have significant local operations. And the other side is It's just getting the product from point A to point B. So just curious to understand where you fall currently on that continuum and where the changes you're looking to make what it will look like after the fact, and if there is investment you need to make in local capabilities, staffing and so on to to complete that journey? Thanks.

Yes. Thank you, Laurence. So very quickly on your first question, you are absolutely right. The U. S. Grew mid single digit in Skin Health and Beauty in the fourth quarter and EMEA in Latin very strongly double digit. We are very pleased with the performance in of the segment in EMEA and LatAm. And we are encouraged to see this these improvements in The U. S. Regarding your question about our route to market in China, So Remember, the majority of our business in China is in self care. And for this part of the business, we have one dedicated route to market with distributors who are specialized in serving hospitals and pharmacies across the country. For the non regulated, if you will, part of the portfolio, by Essential Health and skin health we use different types of distributors. We serve directly what we call our Tier one distributors, who are more at the provincial level and these distributors sell themselves to lower tier distributors, wholesalers, who serve supermarkets, grocery stores, in the different T as of cities and villages in in China. So that's how it works. What we are doing about it as we speak is two things.

One, replacing the distributors who are clearly facing difficulties in the current environment in China, which as we all know continues to see a consumer that is cautious about about consuming products and are facing liquidity issues. The second thing we are fixing [indiscernible] where we relied too much on these lower tier distributors to activate our brands we are deploying our teams with these key local retailers of our brand activation teams. That will give us two benefits. One, a better handle of the activation of our brands in these lower tiers within the country and two, more visibility on the quality of the execution in these lower tier customers.

Thank you. Our last question will come from the line of Steve Powers with Deutsche Bank. Please proceed with your question. Thank you very much and good morning.

Tivo, maybe just to close the loop on Lauren's prior clarification question. If The U. S. And EMEA and Latin America were all sort of comfortably above the segment average, implies a pretty weak Asia Pacific result. So I mean, we can just amplify clarify a little bit little bit on that. My real question was on it's actually on cash flow and just your expectations of cash relative to the $1.14 $1.17 EPS that you called. If my math is right, fiscal twenty twenty four conversion of cash kind of came in around 60%. You've obviously previously framed the evergreen target at 100% plus. So just with the TSA exits winding down, how much progress do you think you'll be able to make against that 100 plus percent target in 2025? And then more broadly, when do we think we can get back to achieving that long term run rate on a more consistent basis? Thank you.

Yeah. So very quickly on your first question, you're absolutely right, Steve. The positive for Asia Pacific for the reason I mentioned in [indiscernible] [indiscernible] Paul, do you want to take the one on free cash flow?

Yes, happy to. So just to set the stage, free cash flow in 2023 was $2,700,000,000 free cash flow in 2024 was $1,300,000,000 If we think about what happened between 2023 and 2024, it's about half and half. The first half is separation related items. For example, in 2023, we had a partial year of interest, a partial year company costs. And the other one were operational elements. In 2024, we had a particular year end, where we didn't have the number of working days at the end of the year. So from an AR perspective, we had a headwind And remember, we're also investing in our few forwards, we're reinvesting to exit the TSAs So we're very thoughtful and prudent about how we invest in our business for long term success. So that explains the 2023 to 2024. So half and half If you think about going forward, we are expecting to get closer to the cash conversion that I talked about, but we will not get there in 2025. We will continue to invest in AURORA. We still are investing in TSAs, particularly TSA exits, particularly in IT. Which requires investment in SAP. And other platforms. And it will give us an opportunity to become much more agile.

So those are the right investments that we're doing. And we also talked about the fact that we're moving to our Summit headquarters It will drive the right energy, the right collaboration within our team.

So those investments behind us, we see very clear line of sight to getting to that 90% to 100% cash conversion. But just you know, the separation and the investments that we're going through to set ourselves up for clear success. Require investment temporarily, and then we will have a very strong cash conversion as we traditionally do. And we have very also clear building blocks to be able to get there from a cash conversion cycle perspective. As we become a fully, fully independent company and operate in a consumer environment with the right payables, with the right inventories, with the right receivables. And because we have two building blocks to get there. So overall, line of sight to that cash conversion, Thank you. We have reached the end of our question and answer session. I would now like to turn the floor back over to Thibault Mangan for concluding comments.

So thank you all for joining us today. We hope that this call gave you some color on our outlook for 2025. And as I said earlier, we entered 2025 very confident in our ability to deliver on our outlook. With the compounding impact of the transformation we led in 2024 and the strength of the plans we have for 2025. So with that, we thank you for joining us today. And we'll talk soon.

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