johnsone/initiation · Datasets at Hugging Face

text stringlengths 1 711
$4,570
$1,022 $1,111
20.9%
24.3%
19.0%
20.0%
21.0%
22.0%
23.0%
24.0%
25.0%
$0
$1,000
$2,000
$3,000
$4,000
$5,000
$6,000
2019 2022
Sales Segment OI Segment OI Margin
Source: Company reports.
Figure 26: Essential Health Profit/Margin Improvement Despite Lower
Sales
-6.7%
8.7%
+340 bps
-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
Sales 2022 vs. 2019 Segment OI 2022 vs. 2019 Segment OI Margin 2022 vs. 2019
Source: Company reports.
We expect the company to continually evaluate opportunities to streamline its portfolio
by eliminating tail SKUs (likely an annual exercise as it is with any CPG company),
although from our perspective it appears that much of the 􀋘heavy lifting􀋙 of portfolio
optimization is largely behind the company at this point. Looking ahead, M&A figures
to continue to play a role in shaping of the portfolio, likely continuing in the higher
growth/margin segments within Consumer Health (e.g., Self Care and Skin Health &
Beauty), and we expect M&A to be more bolt-on in nature vs. transformational
transactions. With strong FCF generation and a healthy balance sheet (post-IPO net
debt-to-TTM EBITDA likely ~2.1x) KVUE should have ample dry powder to deploy to
M&A if it deems fit, and we think management is likely earmarking $500-750M for
acquisitions in the years ahead (vs. JPMe FCF $2.4B/$2.5B/$2.8B in 2023/2024/2025),
although we note that we don􀋖t account for any M&A benefit within our P&L estimates.
Supply Chain Optimization to Reduce Complexity, Increase Efficiency and
Resiliency
While supply chain challenges plagued KVUE during 2022 given input shortages and
transportation challenges, the company has undertaken efforts since 2019 to structurally
improve its supply chain by investing in digitization to increase efficiency and resiliency
and by reduced complexity through external manufacturer rationalization.
Pre-pandemic, KVUE􀋖s supply chain focus was mostly on operational excellence,
quality control, and margin maximization, but COVID tested the resilience and
flexibility of the supply chain and uncovered a lack of redundancy that impacted
product availability and service. The company noted that in 2021/2022 64%/63% of its
scheduled capital spend for supply chain investments was allocated to digitization
(automation), which ultimately allows for better demand planning, capacity, and
resilience. Some examples include 1) shift to conditions-based maintenance from
scheduled maintenance given better monitoring capabilities allows for better capacity
availability while also alleviating labor challenges; 2) complexity reduction through
SKU rationalization and product design standardization (e.g., bottle types) and reducing
the number of small external manufacturers (e.g., company eliminated 60% of small
external manufacturers); 3) increasing dual sourcing and reducing specification on
critical ingredients to improve availability/resilience; and 4) integrated business
planning to optimize forecasting and inventory management, leading to better
profitability and cash flow.
This document is being provided for the exclusive use of DAVID WANG at MARLOWE PARTNERS LP.
20
Andrea Teixeira, CFA AC
(1-212) 622-6735
andrea.f.teixeira@jpmorgan.com
North America Equity Research
29 May 2023 J PMORGAN
All in, the company􀋖s in-house manufacturing footprint of 25 facilities accounted for
56% of production volume in 2022 while the remaining 44% of production was handled
by seven JNJ facilities under transition manufacturing agreements and 230 external manufacturers (as noted above, a 60% reduction since 2019). Within the segments, Skin
Health & Beauty tends to be more out-sourced while Self Care is more in house. The company also operates 114 distribution centers and 38 customer service centers globally,
with distribution often operated in partnership with third parties.
Digital Marketing Improving ROI as Company Shifts to Omnichannel About 6% of KVUE􀋖s sales are through pure-play e-commerce, but mix more than
doubles to 13% including retailer.com (largely in line with CPG peers), and the company􀋖s online sales have grown at a +20% CAGR from 2020 to 2022. One of the drivers beyond the general shift of consumption to online channels is the company􀋖s
focus on digital marketing, which has taken shape over the past several years. In North
America, for example, the digital marketing spend accounted for 73% of total marketing
spend in 2022, which was up from 59% in 2020 and 49% in 2019 and drove a +29%
increase in media ROI as of October 2022 and collective 13 points increase in U.S.
household penetration from 2019 to 2021. The company has pointed to digital investments driving improved social media engagement including for Neutrogena a 660% increase in followers from August to December 2021 as a result of its SkinU
campaign on TikTok, which generated over 300 million social media impressions. The company has also focused a lot of its digital efforts outside of the U.S., in particularly in
APAC, which accounted for 63% of global e-commerce sales in 2020. Investments
behind digital media are largely table stakes for CPG companies at this stage as a cost-
efficient and effective way to engage with consumers. Digital focus is likely to continue to be important, especially for segments or brands appealing to younger digitally-native consumers like within Skin Health & Beauty. The company does continue to invest in
traditional media, although it largely depends on where the consumer is in that particular
market.
Opportunity for Margin Expansion as KVUE Exits TSA/TMA
Looking ahead, one of the bigger areas for margin expansion opportunity for KVUE will likely be in exiting transition services agreements (TSA) and transition
manufacturing agreements (TMA) with JNJ post-separation, which run on a cost-plus
model. Of the roughly $100M in incremental costs associated with being a stand-alone company, we estimate that the TSA and TMA could be roughly 50-60% of the incremental costs (i.e., 30-40 bps margin opportunity of roughly 130 bps EBITDA margin expansion modeled for 2022-2025).

$4,570

$1,022 $1,111

20.9%

24.3%

19.0%

20.0%

21.0%

22.0%

23.0%

24.0%

25.0%

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

2019 2022

Sales Segment OI Segment OI Margin

Source: Company reports.

Figure 26: Essential Health Profit/Margin Improvement Despite Lower

Sales

-6.7%

8.7%

+340 bps

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

Sales 2022 vs. 2019 Segment OI 2022 vs. 2019 Segment OI Margin 2022 vs. 2019

Source: Company reports.

We expect the company to continually evaluate opportunities to streamline its portfolio

by eliminating tail SKUs (likely an annual exercise as it is with any CPG company),

although from our perspective it appears that much of the 􀋘heavy lifting􀋙 of portfolio

optimization is largely behind the company at this point. Looking ahead, M&A figures

to continue to play a role in shaping of the portfolio, likely continuing in the higher

growth/margin segments within Consumer Health (e.g., Self Care and Skin Health &

Beauty), and we expect M&A to be more bolt-on in nature vs. transformational

transactions. With strong FCF generation and a healthy balance sheet (post-IPO net

debt-to-TTM EBITDA likely ~2.1x) KVUE should have ample dry powder to deploy to

M&A if it deems fit, and we think management is likely earmarking $500-750M for

acquisitions in the years ahead (vs. JPMe FCF $2.4B/$2.5B/$2.8B in 2023/2024/2025),

although we note that we don􀋖t account for any M&A benefit within our P&L estimates.

Supply Chain Optimization to Reduce Complexity, Increase Efficiency and

Resiliency

While supply chain challenges plagued KVUE during 2022 given input shortages and

transportation challenges, the company has undertaken efforts since 2019 to structurally

improve its supply chain by investing in digitization to increase efficiency and resiliency

and by reduced complexity through external manufacturer rationalization.

Pre-pandemic, KVUE􀋖s supply chain focus was mostly on operational excellence,

quality control, and margin maximization, but COVID tested the resilience and

flexibility of the supply chain and uncovered a lack of redundancy that impacted

product availability and service. The company noted that in 2021/2022 64%/63% of its

scheduled capital spend for supply chain investments was allocated to digitization

(automation), which ultimately allows for better demand planning, capacity, and

resilience. Some examples include 1) shift to conditions-based maintenance from

scheduled maintenance given better monitoring capabilities allows for better capacity

availability while also alleviating labor challenges; 2) complexity reduction through

SKU rationalization and product design standardization (e.g., bottle types) and reducing

the number of small external manufacturers (e.g., company eliminated 60% of small

external manufacturers); 3) increasing dual sourcing and reducing specification on

critical ingredients to improve availability/resilience; and 4) integrated business

planning to optimize forecasting and inventory management, leading to better

profitability and cash flow.

This document is being provided for the exclusive use of DAVID WANG at MARLOWE PARTNERS LP.

20

Andrea Teixeira, CFA AC

(1-212) 622-6735

andrea.f.teixeira@jpmorgan.com

North America Equity Research

29 May 2023 J PMORGAN

All in, the company􀋖s in-house manufacturing footprint of 25 facilities accounted for

56% of production volume in 2022 while the remaining 44% of production was handled

by seven JNJ facilities under transition manufacturing agreements and 230 external manufacturers (as noted above, a 60% reduction since 2019). Within the segments, Skin

Health & Beauty tends to be more out-sourced while Self Care is more in house. The company also operates 114 distribution centers and 38 customer service centers globally,

with distribution often operated in partnership with third parties.

Digital Marketing Improving ROI as Company Shifts to Omnichannel About 6% of KVUE􀋖s sales are through pure-play e-commerce, but mix more than

doubles to 13% including retailer.com (largely in line with CPG peers), and the company􀋖s online sales have grown at a +20% CAGR from 2020 to 2022. One of the drivers beyond the general shift of consumption to online channels is the company􀋖s

focus on digital marketing, which has taken shape over the past several years. In North

America, for example, the digital marketing spend accounted for 73% of total marketing

spend in 2022, which was up from 59% in 2020 and 49% in 2019 and drove a +29%

increase in media ROI as of October 2022 and collective 13 points increase in U.S.

household penetration from 2019 to 2021. The company has pointed to digital investments driving improved social media engagement including for Neutrogena a 660% increase in followers from August to December 2021 as a result of its SkinU

campaign on TikTok, which generated over 300 million social media impressions. The company has also focused a lot of its digital efforts outside of the U.S., in particularly in

APAC, which accounted for 63% of global e-commerce sales in 2020. Investments

behind digital media are largely table stakes for CPG companies at this stage as a cost-

efficient and effective way to engage with consumers. Digital focus is likely to continue to be important, especially for segments or brands appealing to younger digitally-native consumers like within Skin Health & Beauty. The company does continue to invest in

traditional media, although it largely depends on where the consumer is in that particular

market.

Opportunity for Margin Expansion as KVUE Exits TSA/TMA

Looking ahead, one of the bigger areas for margin expansion opportunity for KVUE will likely be in exiting transition services agreements (TSA) and transition

manufacturing agreements (TMA) with JNJ post-separation, which run on a cost-plus

model. Of the roughly $100M in incremental costs associated with being a stand-alone company, we estimate that the TSA and TMA could be roughly 50-60% of the incremental costs (i.e., 30-40 bps margin opportunity of roughly 130 bps EBITDA margin expansion modeled for 2022-2025).