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Figure 46: EBITDA Margins vs. Peers
CY22
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
RKT HLN PG KVUE CL OR CHD ELF EL COTY ULVR KMB BEI CLX NWL HNST
EBITDA Margin Average Median
Source: Company reports and J.P. Morgan estimates.; *OLPX EBITDA Margin 60.9% removed for ease of comparison.
Balance Sheet, FCF, CapEx
Following the company􀋖s IPO, balance sheet leverage is around 2.1x net debt to trailing
12-month adjusted EBITDA (or roughly 2.4-2.5x gross debt to trailing 12-month
adjusted EBITDA) assuming roughly $9.0 billion in senior notes and commercial paper
and roughly $1.2 billion in cash. With EBITDA growth and strong FCF generation, we
see KVUE deleveraging to around 1.8x net debt to BITDA by 2024 and 1.6x by 2025.
The company could potentially delever faster (or increase cash returns to shareholders)
in the event it doesn􀋖t pursue acquisitions as we believe the company is building in
cushion to its cash/balance sheet outlook to accommodate bolt-on M&A. Relative to its
peer set, KVUE􀋖s balance sheet leverage is largely middle of the pack with PG (1.2x)
and CL (1.6x) lower and HLN (3.6x) higher.
Figure 47: KVUE Leverage Outlook
2.4x
2.2x
2.1x
1.9x
2.1x
2.0x
1.8x
1.6x
0.0x
0.5x
1.0x
1.5x
2.0x
2.5x
3.0x
Post-IPO 2023E 2024E 2025E
Gross Debt to EBITDA Net Debt to EBITDA
Source: Company reports and J.P. Morgan estimates.
This document is being provided for the exclusive use of DAVID WANG at MARLOWE PARTNERS LP.
31
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 a free cash flow perspective, the company is targeting >100% FCF conversion (%
of adjusted net income) in each of 2023-2025, and we model for free cash flow to grow
at a three-year CAGR of +11% to $2.8 billion in 2025. The free cash flow outlook is
supported by solid adjusted EBITDA growth (as described above) and some tailwind
from working capital management as inventory normalizes following a step-up in 2022
(more below), which more than offsets cash separation costs expected to be incurred
from 2023-2025 (around $595M post-tax) and some step-up in capital expenditures.
We note that 2022 was a tougher year from a cash flow perspective (FCF conversion
79% and overall FCF -27% YOY) as the company had a significant working capital
headwind due to supply chain disruption, inflation, and also building inventory ahead of
the JNJ separation (safety stock). As we mentioned, we expect inventory normalization
to be a tailwind to free cash flow ahead, and we model for working capital as a percent
of sales to decline from 16.8% in 2022 to 13.5% in 2025.
Figure 48: KVUE Free Cash Flow Outlook
0%
20%
40%
60%
80%
100%
120%
$0
$500
$1,000
$1,500
$2,000
$2,500
$3,000
2021 2022 2023E 2024E 2025E
FCF $m (left-axis) FCF % of adj. Net Income (right-axis)
Source: Company reports and J.P. Morgan estimates.
Figure 49: KVUE Working Capital Outlook
17.7%
13.6% 12.9%
16.8%
15.2%
14.0% 13.5%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
18.0%
20.0%
$0