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6%
8%
10%
12%
1H22 2H22 1H23E 2H23E
% volume % price/mix
Source: Company reports and J.P. Morgan estimates.
With a favorable setup that should benefit from reopening, lapping a low comparison
base, and recent innovation, the company should be able to deliver >+5% organic
growth over the next three years and drive one-third of the company􀋖s organic growth
(vs. just 1% from 2020-2022). Supporting the top-line outlook is execution against
innovation and marketing with larger focus on Neutrogena Hydro Boost in face care,
sun care innovation (both Neutrogena and Aveeno), and more focus on body care with
Aveeno Calm + Restore for sensitive skin. The company is likely also to push more on
growth in the APAC region through its recent acquisition of dermocosmetic brand Dr.
Ci:Labo (acquired in 2019) in the prestige segment (dermocosmetics growing 2x
category rate) and Dabao (􀋘local jewel􀋙 brand) in the mass segment (64% share of
category). In hair care, OGX has seen strong performance in the premium segment in
the U.S., and the company should also benefit from growth in the hair re-growth
category with Rogaine.
The biggest question ahead for SHB, in our view, is simply that the company hasn􀋖t
demonstrated an ability to generate consistent top-line growth and take advantage of the
secular tailwinds to the categories. That said, with improving supply chain situation,
reinvestment behind marketing, and innovation, we do see a path to +MSD% in the
years ahead.
Essential Health (31% of Sales, 28% of OI, OSG +0.9% 3-YR
CAGR)
Essential Health generated sales of $4.6 billion in 2022 (~31% of FY22 sales) and $1.1
billion in adjusted operating income (24.3% margin and 28.4% of KVUE segment-level
adjusted OI). Categories represented in Essential Health primarily include oral care,
baby care, women􀋖s health, and wound care, and key brands include Listerine, Johnson􀋖s
Baby, Stayfree / Carefree, Band-Aid, Neosporin, and o.b.
This document is being provided for the exclusive use of DAVID WANG at MARLOWE PARTNERS LP.
16
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
Figure 21: Essential Health 31% of Revenues and 28% of Segment OI
31% 28%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
% of FY22 Sales % of FY22 Segment OI
Source: Company reports.
Figure 22: Essential Health Category Revenue Mix
% of FY Sales
32.2% 32.7%
35.1% 32.7%
32.7% 34.6%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2019 2022
ORAL CARE BABY CARE OTHER ESSENTIAL HEALTH
Source: Company reports.
Essential Health has been the main area of focus of KVUE􀋖s transformation over the
2019-2022 period when the new management team came in with a focus on active
portfolio management and simplification and margin improvement. Specifically, since
2019 the segment has seen a -$100M headwind from divestitures (around 2% of 2019
sales) and another -$100M headwind from SKU rationalization. With that, the segment
has underperformed the category CAGR of +6.2% from 2019-2022 with organic growth
CAGR of +0.9% from 2020-2022 and volumes ending 2022 over 5% lower vs. 2019.
With a lot of the portfolio cleanup now in the past, the segment should be able to return
to growth more consistent with historical levels, aided by significant pricing actions
with modest elasticity and a couple of key marketing campaigns behind core brands
Listerine and Aveeno Baby. We model for Essential Health to grow +3.4% in 2023 and
then grow at a 2Y CAGR of +2.2% in 2024-2025.
Figure 23: Essential Health Organic Growth Trends and Outlook
0.3% 0.6%
-6.2% -5.5%
0.6% 1.6%
2.2% 1.4%
4.9%
8.9%
1.6%
0.8%
-8.0%
-6.0%
-4.0%
-2.0%
0.0%
2.0%