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4.0%
6.0%
8.0%
10.0%
2020 2021 2022 2023E 2024E 2025E
Volume Price/Mix
Source: Company reports and J.P. Morgan estimates.
Figure 24: Essential Health 2022/2023E Organic Growth by Halves
-5.9% -6.6% -6.0% -5.0%
3.2%
6.7%
9.2% 8.5%
-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
1H22 2H22 1H23E 2H23E
% volume % price/mix
Source: Company reports and J.P. Morgan estimates.
The company sounds particularly optimistic around Listerine given the category
penetration opportunity and marketing of new scientific claims. We noted before that
mouthwash penetration is 1.8x higher in the U.S. and U.K. vs. other larger markets in
ROW, and the company is rolling out claims from a scientific study that Listerine is 5x
more effective at destroying plaque above the gum line vs. flossing (has led to 5 point
increase in share of healthcare professionals recommending Listerine to 63%).
The +LSD% top-line outlook for the segment appears reasonable, in our view, given the
mature categories in which KVUE competes in the segment, although we note that
KVUE􀋖s market share trends have been quite challenged over the past couple years,
which management attributes in part to the SKU rationalization effort that likely led to
some lost points of distribution and shelf space. Typically we would view SKU
This document is being provided for the exclusive use of DAVID WANG at MARLOWE PARTNERS LP.
17
Andrea Teixeira, CFA AC
(1-212) 622-6735
andrea.f.teixeira@jpmorgan.com
North America Equity Research
29 May 2023 J PMORGAN
rationalization as 􀋘normal course of business,􀋙 and we would be surprised if elimination
of non-core SKUs with low velocity (as is typically the case in an SKU rationalization
effort) led to that material market share losses as normally one would expect sales to
flow back to the higher velocity, core SKUs. As such, perhaps the market share losses
could be more tied to less than ideal execution and differentiated offerings from competitors (e.g., CHD􀋖s TheraBreath in mouthwash).
This document is being provided for the exclusive use of DAVID WANG at MARLOWE PARTNERS LP.
18
Andrea Teixeira, CFA AC
(1-212) 622-6735
andrea.f.teixeira@jpmorgan.com
North America Equity Research
29 May 2023 J PMORGAN
Margin Trajectory Improving Post-Strategic
Transformation and Investments
Following the current management team coming into the business around 2019, KVUE saw improvement in margin trajectory driven by a strategic transformation and series of
investments aimed at both improving profitability and also driving top-line momentum.
Some of the actions we outlined above (e.g., 15 divestitures and 10 acquisitions to
reshape the portfolio since 2016, SKU rationalization, investments in higher ROI digital media), but others included supply chain simplification (e.g., rationalizing smaller
external manufacturers) and investments in supply chain digitization (e.g., automation,
resiliency), and there was also a margin mix benefit from faster growth in the higher-
margin Self Care segment. Together these areas helped lead to a +290 bps expansion in
KVUE gross margins from 2019 to 2021.
KVUE􀋖s EBITDA margins improved +445 bps in 2020 (26.1%) vs. 2019 (21.6%) but finished -78 bps YOY in 2021 given reinvestment behind advertising (-120 bps
headwind as advertising expense increased to 9.7% of sales) to 25.3% but still about 365
bps ahead of 2019 levels. Pressure continued in 2022 driven by supply chain, inflation,
and FX pressures with margins compressing another -119 bps YOY. Looking ahead,
with pricing actions now in place (mostly a 2H22 event) to begin to help offset inflationary cost pressures and incremental pricing in 2023 (we estimate ~45% of 2023
pricing is carryover from 2022), KVUE􀋖s EBITDA margins should begin to recover
even after burdening the P&L with stand-alone company costs (e.g., transition services
and manufacturing agreements, public company costs, incremental hires to support standalone organization), which likely total ~$100M.
Deliberate Portfolio Optimization Toward Core and Faster Growing Consumer Health Categories
M&A has played a significant role in shaping the KVUE portfolio with some of its
largest brands the result of acquisitions including Tylenol (1958), Neutrogena (1994),
Aveeno (1996), and Listerine (2006). More recently, the company has undertaken efforts
to streamline its portfolio to core brands and 􀋘local jewels􀋙 (i.e., leveraging same active ingredient/technology at platform brand) while exiting slower growth, lower margin
brands/categories and making acquisitions in faster growth, higher margin brand/
categories. As noted, since 2016 the company has actively shaped the portfolio by
completing 15 divestitures and 10 acquisitions. Recent notable acquisitions include Vogue International (OGX) in 2016, NeoStrata in 2016, Zarbee􀋖s in 2018, and Dr.
Ci:Labo in 2019; some notable divestitures include RoC and Nizoral in 2018 in the Skin
Health & Beauty segment and Compeed (2017) and Reach (2021) in the Essential Health segment.
Beyond M&A, KVUE also undertook an extensive SKU rationalization effort over the past few years that has resulted in a 21% reduction in the number of SKUs from 2019-
2022 and was a roughly ~$100M headwind to the top line in the Essential Health
segment with some additional impact to Skin Health & Beauty as well.
The SKU rationalization and M&A efforts, while detrimental to the top line and the company􀋖s market share performance, helped to improve the margin structure by
reducing complexity and eliminating lower profitability items as evidenced by Essential Health segment adjusted operating income margins expanding approximately 340 bps
This document is being provided for the exclusive use of DAVID WANG at MARLOWE PARTNERS LP.
19
Andrea Teixeira, CFA AC
(1-212) 622-6735
andrea.f.teixeira@jpmorgan.com
North America Equity Research
29 May 2023 J P M O R G A N
from 2019 to 2022 despite organic sales CAGR of just +0.9% and reported sales down -
6.7% from 2019 levels.
Figure 25: Essential Health Segment Sales, OI, Margin 2022 vs. 2019
$ m
$4,896