This document is being provided for the exclusive use of DAVID WANG at MARLOWE PARTNERS LP.
J P M O R G A N North America Equity Research
29 May 2023
Initiation
Kenvue Overweight
KVUE, KVUE US
(cid:728)No More Tears(cid:729) as Separation from Parent to Price (26 May 23):$26.30
Accelerate Growth, FCF, Dividends; Initiate with OW Price Target (Dec-23):$29.00
We are initiating coverage of Kenvue (NYSE ticker: KVUE) with an OW rating Beverage, Household & Personal
and a Dec 2023 price target of $29 (70/30 mix of peer multiples and DCF). As the Care Products
largest pure-play consumer health company in the world following its separation Andrea Teixeira, CFA AC
from parent Johnson & Johnson (N-rated by Chris Schott), we view KVUE as (1-212) 622-6735
uniquely positioned to benefit from consumer mega trends (self-care, aging). We andrea.f.teixeira@jpmorgan.com
expect KVUE to deliver resilient growth ahead in large addressable markets (TAM Bloomberg JPMA TEIXEIRA <GO>
~ $369bn) with iconic brands that form strong consumer connections from birth in Drew Levine, CFA
a portfolio spanning cold, flu, pain, allergy, and smoke cessation OTC medicines, (1-212) 622-0374
drew.levine@jpmorgan.com
skincare, mouthwash, baby care, and wound care, among others. As a stand-alone
Shovana Chowdhury
company, we believe Kenvue board and management will be more focused and
(1-212) 270-2184
accountable for the growth and profitability of the business following the
shovana.chowdhury@jpmorgan.com
separation that began in 2019, with significant opportunities to scale in many J.P. Morgan Securities LLC
adjacencies and markets around the world organically and through tuck-in M&A
(would be incremental to our estimates and not needed to meet algorithm).
Quarterly Forecasts (FYE Dec)
• Large Categories That Benefit from Wellness Tailwinds and Sustainable Adj. EBITDA ($ mn)
Growth Momentum, Even after Lapping COVID Tailwinds. With 10 2022A 2023E 2024E
Q1 800 867A 968
iconic brands with sales greater than $400M (Neutrogena, Listerine, Tylenol,
Q2 1,022 940 1,000
Johnson(cid:726)s Baby, Aveeno, Nicorette, Zyrtec, Band-Aid, Stayfree/Carefree, Q3 971 1,007 1,014
OGX) as well as over 37 regional brands, KVUE is poised to offer investors at Q4 812 983 1,001
least ~4-5% three-year CAGR in organic sales (OSG) , in line with top peers. FY 3,606 3,797 3,983
We note that due to supply chain constraints and SKU rationalization, KVUE
Style Exposure
lost share with OSG 3Y CAGR of+3.4% while the broader categories grew
+4.8%. KVUE still holds solid market shares in key categories and markets,
and like OW-rated PG, KVUE is still US-centric, which provides room to
regain share and (cid:728)lift and shift(cid:729) some of the most iconic brands abroad.
• Further Margin Expansion Opportunity. KVUE already delivered
impressive +200/250 bps GM/EBITDA expansions vs. 2019, outperforming
peers and despite cost and supply chain challenges. But we still see see KVUE
generating profit growth ahead of sales growth from 2023-2025 with a three-
year CAGR of +6.1% vs. top-line CAGR of +4.3%, implying EBITDA margin
expansion to 25.4% in 2025 from 24.1% in 2022 (roughly +130 bps expansion)
and 25.3% in 2021.
• Attractive Valuation & Dividend Yield for Best-in-Class Growth
Compounder. We believe KVUE offers upside to investors at current levels
even after rallying from IPO price of $22 on May 3. At our $29 Dec 2023 price
target, KVUE will be valued at ~16x EV/EBITDA 24E, which is
approximately where OW-rated CL trades currently for 2023E (still ~2x
cheaper than PG). As KVUE builds its track record as a public company (if our
estimates for solid quarters ahead materialize) and post-potential distribution
of shares that JNJ owns to current JNJ shareholders, we believe KVUE should
trade with the major-league high-quality multinationals that have defensive
sales, compounding growth, and solid free cash flow conversion.
Sources for: Style Exposure – J.P. Morgan Quantitative and Derivatives Strategy; all other tables are company data and J.P. Morgan estimates.
See page 92 for analyst certification and important disclosures.
J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that
the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single
factor in making their investment decision.
www.jpmorganmarkets.com


Andrea Teixeira, CFAAC North America Equity Research JPMORGAN
(1-212) 622-6735 29 May 2023
andrea.f.teixeira@jpmorgan.com
Price Performance Summary Investment Thesis and Valuation
Investment Thesis
We rate Kenvue (KVUE) Overweight. As the largest pure-play
consumer health company in the world, reaching 1.2 billion
consumers daily, KVUE benefits from participating in large
categories where reliability and performance matter for
consumers. As such, we highlight five KVUE attributes that
underpin our positive view: (1) resilient top-line growth
expected, (2) room for margin expansion, (3) high cash flow
conversion and shareholder-friendly capital allocation, (4)
management has a strong background not only with JNJ but with
YTD 1m 3m 12m other blue-chip CPGs with solid relationships with key
Abs - - - - customers, and (5) attractive valuation.
Rel - - - -
Valuation
Company Data
Despite the strong share performance since the IPO, we view
Shares O/S (mn) 1,935
current valuation as attractive. Our Dec 2023 target price of $29
52-week range ($) 27.80-25.25
Market cap ($ mn) 50,893.83 is based on a blended average of EV/EBITDA (based on blended
Exchange rate 1.00 average of HLN, Consumer Health, HPC & Beauty peers) and
Free float(%) 10.4%
a DCF based on perpetual growth method. We assign a 70%
3M - Avg daily vol (mn) -
3M - Avg daily val ($ mn) - weighting to EV/EBITDA as the primary valuation method
Volatility (90 Day) - embedding 15.1.x EV/EBITDA off our 2024E EBITDA
Index S&P 500
estimate of $4.0B (implies $27 per share) and 30% weighting to
BBG BUY|HOLD|SELL -
DCF as the secondary valuation method embedding $32 per
Key Metrics (FYE Dec)
share. KVUE currently trades at 15.5x our 2023E EBITDA and
$ in millions FY22A FY23E FY24E FY25E was priced at the IPO at 13.3x our 2023E EBITDA.
Financial Estimates
Revenue 14,950 15,662 16,289 16,973
Adj. EBITDA 3,606 3,797 3,983 4,308
Adj. EBIT 3,310 3,487 3,648 3,957
Adj. net income 2,589 2,404 2,451 2,693
Adj. EPS 1.34 1.24 1.27 1.39
BBG EPS - - - -
Cashflow from operations 2,407 2,821 2,953 3,268
FCFF 2,032 2,405 2,471 2,763
Margins and Growth
Revenue growth (0.7%) 4.8% 4.0% 4.2%
Total Organic Growth Rate (%) - - - -
Gross margin 55.8% 56.6% 56.7% 57.3%
EBITDA margin 24.1% 24.2% 24.5% 25.4%
EBITDA growth (5.4%) 5.3% 4.9% 8.2%
EBIT margin 22.1% 22.3% 22.4% 23.3%
Net margin 17.3% 15.4% 15.0% 15.9%
Adj. EPS growth (4.5%) (7.1%) 1.9% 9.9%
Ratios
Net debt/EBITDA NM 2.0 1.8 1.7
ROIC - - - -
ROE 13.0% 15.5% 21.6% 22.7%
Valuation
FCFF yield 4.0% 4.7% 4.9% 5.4%
Dividend yield 0.0% 1.5% 3.1% 3.2%
EV/Revenue 3.4 3.8 3.1 3.0
EV/EBITDA 14.0 15.7 12.7 11.8
Adj. P/E 19.7 21.2 20.8 18.9
Source: J.P. Morgan Quantitative and Derivatives Strategy for Performance Drivers; company data, Bloomberg Finance L.P. and J.P. Morgan estimates for all other tables. Note: Price history may not be
complete or exact.
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Andrea Teixeira, CFAAC North America Equity Research JPMORGAN
(1-212) 622-6735 29 May 2023
andrea.f.teixeira@jpmorgan.com
Table Of Contents
Summary of Investment Thesis ........................... 4
Risks to Rating and Price Target........................... 6
Company Description ..................................... 7
Resilient Sales Growth in Large Categories Driven by
Consumer Mega Trends.................................... 8
Growth Strategy Focused on Five Pillars ......................... 10
Balanced Portfolio Shaped through Strategic
Transformation............................................ 12
Self Care (40% of Sales, 53% of OI, OSG +8.6% 3-YR CAGR) ........ 12
Skin Health & Beauty (29% of Sales, 18% of OI, OSG +0.1% 3-YR
CAGR)...................................................... 14
Essential Health (31% of Sales, 28% of OI, OSG +0.9% 3-YR CAGR)... 15
Margin Trajectory Improving Post-Strategic Transformation
and Investments........................................... 18
Financial Outlook.......................................... 22
Path to ~+4% Top Line over Next Few Years with Upside If Elasticities
Hold Up ..................................................... 22
Gross Margins Poised to Improve – Can Return to 2021 Peak by 2025 .. 26
Post-2023 Leverage in Middle of P&L to Help Drive Solid Earnings
Growth ...................................................... 27
Balance Sheet, FCF, CapEx................................... 30
Valuation.................................................. 33
KVUE Deserves Premium to HLN with Potential to Converge to CL Over
Time........................................................ 33
Benchmarking Against Peers – HLN Anchor at Low End, Already at CL
Levels, PG Aspirational ......................................... 34
Price Target Derivation....................................... 37
Most Recent Point of Sales Trends in the U.S. (NielsenIQ).. 41
Key Brands POS Performance in the U.S. ........................ 44
Financial Statements...................................... 49
Income Statement Historical & Estimates......................... 49
Balance Sheet Historical & Estimates............................ 50
Cash Flow Historical & Estimates............................... 51
Strong, Global Management Team......................... 52
Global and U.S. Sales and Market Share Trends............ 53
Global Category Market Share............................. 61
Self Care ................................................. 61
Skin Health & Beauty........................................ 69
Essential Health............................................ 77
U.S. Pricing, Share and Volume by Category - Tracked
Channels.................................................. 86
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Andrea Teixeira, CFAAC North America Equity Research JPMORGAN
(1-212) 622-6735 29 May 2023
andrea.f.teixeira@jpmorgan.com
Summary of Investment Thesis
Kenvue (KVUE) As the largest pure-play consumer health company in the world, reaching 1.2 billion
Overweight consumers daily, KVUE benefits from participating in large categories where reliability
and performance matter for consumers. As such, we highlight five KVUE attributes that
underpin our positive view: (1) resilient top-line growth, (2) room for margin expansion,
(3) high cash flow conversion and shareholder-friendly capital allocation, (4)
management(cid:726)s strong background not only with JNJ but other blue-chip CPGs with solid
relationships with key customers, and (5) attractive valuation.
• Resilient Top-Line Growth in Large Categories. KVUE has strong leadership in
three main categories (self-care, skin health & beauty, essential health) that
combined represent around $369bn in sales globally. The company boasts a portfolio
of seven #1 global brands and 37 #1 regional brands, with the top 10 brands above
$400M in sales. Based on market data, KVUE(cid:726)s largest brands are Neutrogena,
Listerine, Tylenol, and Johnson(cid:726)s baby. Management expects the categories to grow
at a compounded annual growth rate of 3-4% globally through 2025 and for the
company to drive growth competitive with the market, implying organic growth of
about 4%, which we believe is doable and somewhat conservative. Given the strong
start of 2023 with 11% organic sales growth (OSG) in Q123, we anticipate that
KVUE will grow 6% organically this year, but as the company laps pricing, we
expect it to decelerate (similar to most peers) to ~4% OSG in the following years.
• Accelerating Growth with Innovation, Digital Marketing, Omnichannel
distribution... From an innovation standpoint, KVUE spends about 2.5% of sales on
R&D, introducing products that meet unsolved needs rooted in clinical trials. KVUE
has launched roughly 100 new products per annum over the past several years, and
innovation introduced over the rolling preceding three-year period has accounted for
about $1.5 billion in net sales each year since 2020 (about 10% sales mix). As with
most CPGs, KVUE has been directing more of its marketing spend (~9-10% of
sales) into digital media (about 71% of total in 2022). With that and its increased
relationship with key e-commerce retailers, the company was able to grow its online
sales at a +20% CAGR from 2020 to 2022 to 13% online and double its Skin Health
& Beauty e-commerce sales. 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 average consumer review on Amazon is 4.6 stars vs. category of 4.4 ,
including Neutrogena, Aveeno, Lubriderm, and Clean & Clear.
• ….and Through New Product Adjacencies & Introducing Successful Brands in
International Markets. Despite having many #1 positions, many of the sub-
categories are fragmented, as we discuss in the market share analysis later in this
report. For instance, Neutrogena is the #1 facial care brand in the U.S. but still the
#3 facial care brand globally. In the facial cleansing category, Neutrogena is the #3
brand in the U.S. among Hispanics and the #2 brand in the U.S. among Millennials.
It is also the #1 most reviewed brand in the skin care category on Amazon in 2022.
This allows KVUE to build scale behind core priority brands that are not fully
distributed in all markets. While KVUE has presence in 165 markets globally, it
prioritizes eight markets: the U.S. (#1 market), Canada (#3), the U.K. (#5), Germany
(#7), Brazil (#4), India (#6), Japan (#8), and China (#2). We think the company
could follow the CPG playbook of (cid:728)lift-and-shift(cid:729) successful products to additional
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Andrea Teixeira, CFAAC North America Equity Research JPMORGAN
(1-212) 622-6735 29 May 2023
andrea.f.teixeira@jpmorgan.com
geographies over time.
• Optionality in M&A as KVUE Evaluates Acquisitions to Enhance Core
Portfolio and Capabilities. The company has undertaken a number of acquisitions
and divestitures over the past seven years with 15 divestitures and 10 acquisitions
since 2016. While not necessary to achieve its growth algorithm, the company plans
to continue looking at M&A opportunities, although it sounds like management is
intent on remaining focused squarely on the consumer health space and would be
looking more for tuck-in vs. transformational M&A. We expect M&A to be focused
on faster growing, premium categories, as has been the case with recent transactions
(e.g., Dr.Ci:Labo and Zarbee(cid:726)s). We do not include M&A in our P&L estimates, but
we do budget around $500M for M&A in cash flow.
• Room for Profitability to Continue to Expand and Lead to Operating Leverage.
We expect the reorganization of brands, lower costs, better availability of key raw
materials (shortage of silicone impacted SH&B division), and supply chain
optimization will lead to better profitability ahead. While there are some
(cid:728)dis-synergies(cid:729) from the separation (e.g., TSAs and TMAs – as we discuss below),
we expect the phasing out of these expenses to become a tailwind to margins. From
an EBITDA perspective, however, we do see KVUE generating profit growth ahead
of sales growth from 2023-2025 with a three-year CAGR of +6.1% vs. top-line
CAGR of +4.3%, implying EBITDA margin expansion to 25.4% in 2025 from
24.1% in 2022 (roughly +130 bps expansion) and 25.3% in 2021. For context,
KVUE has a good track record of 200 bps gross margin and 250 bps EBITDA
expansion in the last three years.
• Reliable Cash Flow (~100% Conversion in 2023-25). We expect KVUE to
deliver>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.
• Best-in-Class Dividend Yield. KVUE dividend policy post-IPO will be a quarterly
dividend of $0.20 per share beginning in 3Q23 (fiscal quarter ending October 1,
2023), which at the current price of $26.30 implies an annualized dividend yield of
about 3.0% (at the IPO price of $22, the annualized dividend yield was closer to
3.6%). Looking ahead, we expect the company to target an annual dividend payout
ratio of around 55-65% (JPMe 2024E 64%), and we model for 3% dividend growth
in both 2023 and 2024 as the company targets moderate growth in dividend per
share.
• Management Has Strong Expertise in Categories, Already Operating
Independently for +3 Years. KVUE has a strong, seasoned management team that
will benefit from continuity as many of the c-level executive ushered in the strategic
transformation beginning in the 2019 time frame through the IPO. Moreover, the
consumer segment largely operated independently within JNJ historically, and as
such, even after the separation, the organization should be well positioned to
continue life as a public company. The management team has around 18 years of
experience in consumer goods and healthcare on average and is a diverse group
including over 58% women and representing nine different nationalities.
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Andrea Teixeira, CFAAC North America Equity Research JPMORGAN
(1-212) 622-6735 29 May 2023
andrea.f.teixeira@jpmorgan.com
Risks to Rating and Price Target
• Execution Risk Tied to the Separation from JNJ. While the separation started in
2019, KVUE has never operated as a stand-alone company, and there is inherent
execution risk tied to the separation from JNJ. The company will operate under
transition services and manufacturing agreements ranging from two to five years,
and there is no guarantee that Kenvue will be able to exit the agreements in a timely
manner in order to drive cost savings. Moreover, Kenvue may be unable to
successfully develop internal systems from an operational, financial, administrative,
or IT perspective as a stand-alone company or may be unable to successfully source
new manufacturing for regulated OTC products that are currently being produced by
JNJ under the TMAs. Currently, the TMA covers certain SKUs of Tylenol, Motrin,
Benadryl, and others that account for less than 10% of KVUE sales.
• Potential Talc Litigation outside North America. Kenvue could be subject to talc-
related litigation outside the U.S. and Canada relating to claims that talc causes
cancer. We note that JNJ released a statement on April 27: (cid:728)As unequivocally and
unambiguously stated, Johnson & Johnson has agreed to retain all the talc-related
liabilities and indemnify Kenvue for any and all costs – arising from litigation in the
United States and Canada.(cid:729) While our understanding is that there are currently only
a few active claims relating to talc outside North America, the company has not
taken any reserves against these claims, and there could be additional lawsuits in the
future exposing KVUE to talc-related liabilities. On April 5, JNJ proposed an $8.9
billion settlement to resolve about 60,000 talc claimants in the U.S.
• Seasonal Factors Could Impact Performance of Some OTC Products. Kenvue(cid:726)s
Self Care business as of 2022 represented 40% of sales and 53% of segment-level
operating income and over the past three years generated 90% of KVUE(cid:726)s organic
growth. The segment has benefitted from tailwinds to its pain relief and cold and
cough businesses from various waves of the COVID-19 pandemic and recent
(cid:728)triple-demic(cid:729) (COVID-19, RSV, flu). Additionally, the company has exposure to
seasonal allergy trends. If upcoming cold, cough, and flu and/or allergy seasons are
more mild than expected, there could be downside risk to estimates.
• Inflation and Supply Chain Volatility May Impact Cost Outlook. As with other
consumer products companies, Kenvue over the past two plus years has had to
navigate significant inflationary cost pressures and a challenging supply chain
environment. Ingredient, packaging, transportation, and labor shortages have
impacted service levels, product availability, and KVUE profitability, and while the
cost and supply chain environment appears to be improving, inflationary cost
pressures persist and the supply chain environment could again worsen.
• Consumer Demand May Weaken in Response to Macroeconomic Environment
or Pricing Actions. While elasticities thus far have held up better than historically
in response to material pricing actions undertaken by the company beginning in
2H22, a deterioration in the macroeconomic environment or higher sensitivity to
incremental pricing actions may dent consumer demand for Kenvue(cid:726)s products. In a
softer macroeconomic environment, consumers may choose to trade down to private
label products or other lower priced branded offerings.
• Distribution of KVUE Shares by JNJ Could Put Pressure on KVUE Share
Price. Following Kenvue(cid:726)s IPO, JNJ still owns approximately 89.6% of KVUE
shares. JNJ intends to effect a tax-free distribution of KVUE shares, which would
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Andrea Teixeira, CFAAC North America Equity Research JPMORGAN
(1-212) 622-6735 29 May 2023
andrea.f.teixeira@jpmorgan.com
entail lowering its ownership stake to below 20%. If JNJ decides to pursue a
distribution of its KVUE shares, there could be selling pressure on the stock
depending on the structure of the distribution or discount implied by a share
exchange offering.
Company Description
Kenvue Inc. (KVUE) is the largest pure-play consumer health company in the
world with a history dating back over 135 years and a presence in over 165
countries with an estimated 1.2 billion people utilizing the company(cid:726)s products
daily. Kenvue(cid:726)s portfolio includes a number of iconic brands including Tylenol,
Listerine, Band-Aid, Johnson(cid:726)s, Neutrogena, Aveeno, Zyrtec, and Nicorette, among
others. The company boasts 10 brands that generated over $400 million in annual
net sales in 2022, and seven of its brands hold leading positions across global
categories. All in, Kenvue generated roughly $15 billion in sales and $3.6 billion
EBITDA in 2022. The company operates three segments, Self Care (40% of 2022
sales), Skin Health & Beauty (29% of 2022 sales), and Essential Health (31% of
2022 sales), and by geographic region the company generates roughly 50% of sales
in North America, 21% of sales in Europe, the Middle East & Africa, 21% of sales
in Asia Pacific, and 8% of sales in Latin America. Kenvue owns 25 in-house
manufacturing sites in addition to seven manufacturing sites under transition
manufacturing agreements and employs more than 22,000 people globally.
Prior to its IPO on May 3, 2023, Kenvue operated as the Consumer Health
Business of Johnson & Johnson (JNJ), and following the offering JNJ holds a
roughly 89.6% stake in the company. J.P. Morgan acted as a lead book-running
manager for Kenvue(cid:726)s initial public offering.
Table 1: EV/EBITDA Valuation vs. Key Comps - Full Table in Valuation Section
EV/EBITDA FCF Yield
Ticker 2023E 2024E 2023E 2024E
KVUE 15.5x 14.7x 4.8% 4.9%
HLN 14.0x 13.3x 5.0% 5.7%
PG 17.8x 16.7x 4.5% 4.7%
CL 15.8x 14.7x 4.0% 4.5%
RKT 13.4x 12.7x 5.4% 6.1%
CHD 19.4x 18.3x 3.0% 3.7%
Source: Bloomberg Finance L.P and J.P. Morgan estimates.
Figure 1: Select KVUE Brands
Source: Company reports.
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Andrea Teixeira, CFAAC North America Equity Research JPMORGAN
(1-212) 622-6735 29 May 2023
andrea.f.teixeira@jpmorgan.com
Resilient Sales Growth in Large Categories
Driven by Consumer Mega Trends
Kenvue is the largest pure-play company in the Consumer Health sector with 135+
years of history and a portfolio of iconic and trusted brands (science-backed, healthcare
professional recommendations) that many consumers are introduced to at a young age or
when they(cid:726)re most vulnerable (e.g., provided to you when you(cid:726)re not doing well by
someone that cares for you – like for a cut or an illness).
The company(cid:726)s portfolio is split into three segments: Self Care (40% of 2022 sales),
Skin Health & Beauty (29% of 2022 sales), and Essential Health (31% of 2022 sales).
All told, the categories in which KVUE competes represent a $369 billion market
globally that has grown at a three-year CAGR of +4.8% from 2019-2022 (or +3.5%
from 2018-2021 vs. overall CPG sector growth of around +3.1% over the same time
period).
Figure 2: KVUE 2019 Revenue Mix Figure 3: KVUE 2022 Revenue Mix Figure 4: KVUE 2025E Revenue Mix
2019 Self Essential 2022 Self Essential 2025E Self
Essential Care, Health, Care, Health, Care,
Health, 34.2% 33.6% 30.6% 40.3% 28.7% 41.7%
Skin Skin Skin
HealthH &e alth & Health & Health &
Beauty, , Beauty, Beauty,
32.2% 29.1% 29.7%
Source: Company reports. Source: Company reports. Source: J.P. Morgan estimates.
Figure 5: KVUE Category Sales Mix Figure 6: KVUE Geographic Sales Mix
% of FY22 Sales % of FY22 Sales
OTHER ESSENTIAL COUGH, COLD AND LATIN AMERICA, 8%
HEALTH (WOMEN'S ALLERGY, 12%
HEALTH AND
WOUND CARE), 11% PAIN CARE, 11%
OTHER SELF CARE ASIA PACIFIC,
BABY CARE, 10% (DIGESTIVE HEALTH, 21% NORTH AMERICA,
SMOKING 50%
CESSATION AND
ORAL CARE, 11% OTHER), 15%
HAIR, SUN AND FACE AND BODY EMEA, 21%
OTHER, 8% CARE, 22%
Source: Company reports. Source: Company reports.
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Andrea Teixeira, CFAAC North America Equity Research JPMORGAN
(1-212) 622-6735 29 May 2023
andrea.f.teixeira@jpmorgan.com
Bottom up, the company(cid:726)s $369 billion TAM consists of:
• $114 billion in Self Care categories (e.g., analgesics, gastrointestinals,
dermatologicals, cough & cold, lifestyle CHC, allergy, eye care, smoking control)
• $217 billion in Skin Health & Beauty categories (e.g., conditioners and treatments,
hair loss treatment, shampoos, medicated shampoos, skin care, adult sun care)
• $38 billion in Essential Health categories (e.g., baby and child products ex-wipes,
mouthwash/dental rinses, sanitary protection ex-U.S./Canada/China, wound care)
Figure 7: KVUE TAM Build Figure 8: TAM Mix by Category vs. KVUE Revenue Mix
$ bn
$400 $369 70%
$350 $38 59%
60%
$300
$250 50% 40%
$200 $217 40% 31% 29% 31%
$150 30%
$100 20% 10%
$50 $114 10%
$0 0%
Self Care Skin Health & Beauty Essential Health Total Self Care Skin Health & Beauty Essential Health
% of TAM % of KVUE 2022 Sales
Source: Company reports. Source: Company reports.
Growth across the categories has been broad based over the past three years with a
+MSD% CAGR including +6.2% in Essential Health categories, +5.1% in Self Care
categories, and +4.5% in Skin Health & Beauty categories, although we note that the
category growth rates over the past few years were impacted by pandemic-related
tailwinds and more recently pricing actions from inflationary cost pressures. Typically
(as we detail later), Essential Health categories grow slower relative to Skin Health &
Beauty (fastest growing) – albeit KVUE was negatively impacted in this segment by
self-inflicted SKU rationalization – and Self Care (slightly below Skin Health &
Beauty).
Figure 9: Category Sales CAGR - Each Category CAGR Accelerated vs. Historical Trend
7% 6.2%
6% 5.1%
4.8%
5% 4.5%
4% 3.4% 3.6% 3.5%
3.0%
3%
2%
1%
0%
Self Care Skin Health & Beauty Essential Health Total
CAGR '18-'21 CAGR '19-'22
Source: Company reports.
We view KVUE(cid:726)s category exposure as a sweet spot in CPG at the intersection of
healthcare and consumer goods – both with long-term secular tailwinds that should lead
to consistent +3-4% growth globally through 2025. At a high level from a category
perspective, growth should be enabled by increased focus on health by consumers and
retailers alike, which was accelerated by the pandemic era, aging population and rising
middle class globally, premiumization, and digitization.
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Andrea Teixeira, CFAAC North America Equity Research JPMORGAN
(1-212) 622-6735 29 May 2023
andrea.f.teixeira@jpmorgan.com
Growth Strategy Focused on Five Pillars
KVUE aims to grow the top line competitively with its underlying category exposure
(+3-4%) driven largely by reinvesting behind its iconic core brands and supplementing
with expansion into new category adjacencies and geographies and bolt-on M&A
focused on consumer health.
The company is primarily focusing its investments behind its top 15 global brands
(Tylenol, Zyrtec, Rhinocort, Motrin, ORSL, Benadryl, Nicorette, Zarbee(cid:726)s, Aveeno,
Neutrogena, Dr.Ci:Labo, OGX, Johnson(cid:726)s, Listerine, Band-Aid) and eight priority
markets (U.S., Canada, U.K., Germany, Brazil, India, Japan, China) where it sees the
greatest opportunity for growth ahead with long runway.
Below, we outline our view on KVUE(cid:726)s growth strategies and thoughts on the
company(cid:726)s prospects.
1. Grow Brand Relevance and Salience
The biggest driver for long-term growth is likely to be household penetration and
incidence opportunity as even KVUE(cid:726)s largest brands have significant usage gaps.
Relevance and salience to consumers should be enabled by marketing campaigns
(predominately digital-focused at this point – more below) and continued focus on
clinical claims and working with healthcare professionals to secure recommendations
(also applicable to innovation).
For example, in the pain relief category in the U.S. there are 4.5x more consumers using
some form of non-steroidal anti-inflammatory drugs (NSAIDs) vs. consumers
exclusively using acetaminophen (generic name for Tylenol); in skin care there are 2.7x
more consumers who suffer from sensitive skin vs. sensitive product contribution to the
body care category in the U.S.; and in oral care household penetration for mouthwash is
1.8x higher in the U.S. and U.K vs. larger markets in ROW (e.g., Spain, Italy, France,
China, Japan, Thailand, Indonesia, Philippines). See deep-dive analysis in the back of
this report for market sizes, household penetration, and market share globally and in the
most relevant countries and categories.
Figure 10: 4.5x More Consumers in U.S. Use Figure 11: 2.7x More Consumers Have Figure 12: Household Penetration Opportunity
Some Form of Pain Care vs. Acetaminophen Sensitive Skin vs. Sensitive Skin Product in Mouthwash
Alone Share of Body Care
118M 71% 50%
29%
26%
26M 15%
Consumers with certain medical conditions exclusively usingConsumers with certain medical conditions using some form Sensitive skin product contribution to body care category in Suffer from sensitive skin in the U.S.
acetaminophen in the U.S. of pain relief in the U.S. the U.S. Household penetration in China Household penetration in Japan Household penetration in U.S. and U.K.
Source: Nielsen Homescan Panel. Source: Aveeno State of Skin Sensitivity Report. Source: Company reports.
2. Increase Product Availability through Omnichannel Strategy
The largest areas of opportunity are to expand presence in pharmacy and e-comm, in our
view. In retail, the opportunity is for incremental shelf space gains as retailers devote
more space to consumer health categories with KVUE well positioned to gain share
given its scale, market share position, and investments behind marketing and consumer
insights, in addition to deeper penetration in the faster growing pharmacy channel in
EMEA, India, and China (APAC is ~21% of sales, and China and India combined are
around 50% of APAC sales with China the #2 market globally and India the #6 market
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T h is d o c u m e n t is b e in g p r o v id e d f o r t h e e x c lu s iv e u s e o f D A V I D W A N G a t M A R L O W E P A R T N E R S L P .


Andrea Teixeira, CFAAC North America Equity Research JPMORGAN
(1-212) 622-6735 29 May 2023
andrea.f.teixeira@jpmorgan.com
globally for KVUE). KVUE(cid:726)s e-commerce opportunity is largely consistent with the rest
of CPG as KVUE(cid:726)s sales mix to pure-play e-commerce is around 6%, which about
doubles to 13% when including retail.com. Looking from 2020-2022, KVUE(cid:726)s e-
commerce sales grew at a roughly +20% CAGR. KVUE is aiming to increase product
availability in the e-commerce channel and increased investment in digital marketing
over the past few years to help accelerate e-commerce mix; for example, 71% of
KVUE(cid:726)s marketing spend was on digital in 2022, up from 44% in 2019. The company is
also expanding in the DTC channel with brands like Dr.Ci:Labo (63% of sales in Japan
DTC in 2022), although it is still early days.
3. Deliver Consistent Cadence of Consumer-Centric Innovation
The company(cid:726)s innovation strategy is centered on elevating the core brands, enhancing
the consumer experience, and solving for unmet needs. The company(cid:726)s innovation
agenda is supported by 1,500 dedicated R&D employees (R&D is ~2.5% of KVUE
sales, which is above the peer average of ~2.0%); over the past several years the
company has launched roughly 100 new products per annum, and innovation introduced
over the rolling preceding three-year period has accounted for about $1.5 billion in net
sales each year since 2020 (about 10% sales mix).
The company(cid:726)s innovation leverages its relationships with healthcare professionals and
also relies on clinical claims. Recent examples include: 1) Listerine rolling out claims
that the product reduces 5x more plaque above the gumline vs. flossing; 2) Children(cid:726)s
Zyrtec Oral Chewables and Dissolve Tabs and Tylenol Dissolve Packs for adults and
children who find it difficult to swallow pills; 3) Neutrogena Rapid Firming Peptide
Contour Lift Face Cream, which contains an anti-aging ingredient (acetyl dipeptide)
designed for sensitive skin; 4) sustainable packaging solutions that reduce plastic
including Neutrogena Hydro Boost refillable pods, Aveeno Body Wash refill packs, and
Listerine concentrate kits; and 5) Aveeno Calm + Restore focused on the underserved
segment of consumers with sensitive, extra-dry skin.
4. Expand into New Product Adjacencies and Geographic Markets
The company is in 165 markets globally but prioritizes eight markets: the U.S. (#1
market), Canada (#3), the U.K. (#5), Germany (#7), Brazil (#4), India (#6), Japan (#8),
and China (#2). Back to the Listerine example, there is still has a significant household
penetration opportunity as the overall United States mouthwash category penetration
rate was only 50% as of December 2022, while in APAC, category penetration was only
29% in Japan and 15% in China, each as of 2022.The company does plan for growth
outside of these markets as well but will generally look to build scale behind core
priority brands and then expand portfolio offerings or enter adjacencies by leveraging
priority brands. The company gave the example of launching Aveeno in Indonesia,
Malaysia, and the Philippines, and we think the company could follow the CPG
playbook of (cid:728)lift-and-shift(cid:729) successful products to additional geographies over time.
5. Continually Evaluate Acquisitions to Enhance Core Product Portfolio and
Capabilities
The company has undertaken a number of acquisitions and divestitures over the past
seven years with 15 divestitures and 10 acquisitions since 2016. While not necessary to
achieve its growth outlook, the company plans to continue looking at M&A
opportunities, although it sounds like management is intent on remaining focused
squarely on the consumer health space and would be looking more for tuck-in vs.
transformational M&A. We expect M&A to be focused on faster growing, premium
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Andrea Teixeira, CFAAC North America Equity Research JPMORGAN
(1-212) 622-6735 29 May 2023
andrea.f.teixeira@jpmorgan.com
categories, as has been the case with recent transactions (e.g., Dr.Ci:Labo and Zarbee(cid:726)s).
Balanced Portfolio Shaped through Strategic
Transformation
Self Care (40% of Sales, 53% of OI, OSG +8.6% 3-YR CAGR)
Self Care is KVUE(cid:726)s largest segment with $6.0 billion in sales (~40% of FY22 sales)
and $2.1 billion in adjusted operating income (34.6% margin and 53.4% of KVUE
segment-level adjusted OI). Categories represented in Self Care primarily include
cough, cold and allergy, pain care, digestive health, and smoking cessation. Key brands
include Tylenol, Nicorette, Zyrtec, Motrin, Rhinocort, Benadryl, Zarbee(cid:726)s, ORSL, and
Imodium.
Figure 13: Self Care 40% of Revenues and 53% of Segment OI Figure 14: Self Care Category Revenue Mix
% of FY Sales
100% 100%
90%
90% 80% 37.6% 35.5%
80% 70%
70% 60%
60% 50% 26.7% 32.2%
50% 40%
40% 30%
30% 40% 53% 20% 35.7% 32.2%
20% 10%
0%
10%
2019 2022
0%
% of FY22 Sales % of FY22 Segment OI COUGH, COLD AND ALLERGY PAIN CARE OTHER SELF CARE
Source: Company reports. Source: Company reports.
Self Care Has Been the Key Driver of KVUE(cid:726)s Improved Sales Trajectory in L3Y
Self Care has been aided by tailwinds from COVID and recent (cid:728)tripledemic(cid:729) (RSV, flu,
COVID) and resulting increased consumer focus on health (e.g., increased smoking
cessation attempts during the pandemic). In fact, from 2020-2022 Self Care drove ~91%
of KVUE(cid:726)s organic sales growth with the segment posting a 3Y CAGR of +8.6%
relative to total company 3Y CAGR of +3.4%. Within the Self Care +8.6% 3Y CAGR,
volume growth contributed about 6.3% to the organic CAGR with price/mix
contributing about +2.5%. Impressively, the company(cid:726)s 3Y CAGR has remained
resilient sequentially through most of 2022 and even accelerated in 1Q23 behind higher
incidence of cold and flu in EMEA and inventory replenishment at retail.
Figure 15: Self Care Organic Growth Trends and Outlook Figure 16: Self Care 2022/2023E Organic Growth by Halves
12% 14%
10% 12% 1.4%
8% 1.9% 4.1% 10 8%% 7.3%
6.6%
46% 1.5% 6.4% 1.5% 246 %%% 10.9%
% 7.5% 7.0% 2.4% 3.7% 4.5% 5.4%
2% 4.4% 1.7% 2.2% 0% -0.9%
0% 3.3% -2%
2020 2021 2022 2023E 2024E 2025E 1H22 2H22 1H23E 2H23E
Volume Price/Mix % volume % price/mix
Source: Company reports and J.P. Morgan estimates. Source: Company reports and J.P. Morgan estimates.
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Andrea Teixeira, CFAAC North America Equity Research JPMORGAN
(1-212) 622-6735 29 May 2023
andrea.f.teixeira@jpmorgan.com
Following a strong three years of growth, which some could argue would have been
even stronger if not for supply chain challenges on Tylenol, and outlook for a fourth
strong year in 2023, we see the biggest question facing the segment as whether KVUE
will be able to (cid:728)comp the comp(cid:729) and deliver on roughly +4.7% organic growth post-
2023 as the inflationary environment normalizes and the company contends with
lapping years of strong tailwinds to pain care and cough, cold & flu. That is, the
question is whether the category growth trends normalize to historical growth levels or
have a reversion to the mean. While acknowledging the vagaries of virus/allergy
seasonal trends, there are a number of drivers both at the macro and company-level that
provide a pathway to solid, albeit more normalized growth ahead.
Growth Is Not Only Driven by the Pandemic...
In pain care, KVUE should see ongoing tailwinds from deeper penetration for its brands
given unmet medical needs of consumers and wide gap between the number of
consumers using some form of pain relief vs. those using acetaminophen (active
ingredient in Tylenol) exclusively (i.e., some consumers using NSAIDs or a
combination of sometimes NSAIDs/sometimes acetaminophen). As we noted above, in
the U.S. there are roughly 26M consumers with chronic health conditions using
exclusively acetaminophen vs. 118M consumers with chronic health conditions using
some form of pain relief (i.e., NSAIDs or dual-users of NSAIDs or acetaminophen). We
expect the company to prioritize the opportunity for household penetration and usage
expansion in North America (usage gap vs. overall pain care) and APAC (middle class
becoming more open to Western medicine) over the next few years. There should also
be growth opportunity through form factor extensions that provide ease of use/
convenience for consumers (e.g., dissolvable tablets) and line extensions targeted at
specific indications (e.g., arthritis, back pain).
...Strong Growth in Allergy Medicines Proves Power of Brand Equity and
Innovation
In allergy, KVUE should benefit long term from increasing allergy incidence (e.g.,
number of allergy days per season has grown by over 20 days from 1990-2018 given
impacts from factors like climate change, and pollen concentration has increased 21%
over the same period) and penetration in the U.S. (through Zyrtec) and China (through
Rhinocort). Like in pain care, we also expect form factor extensions to aid in driving
growth; for example, the company introduced Children(cid:726)s Zyrtec Chewables to enhance
the consumer experience and drive adoption given challenges many children have with
swallowing pills. This innovation helped to drive accelerated category growth for
pediatric allergy (U.S. growth accelerated 5x for 2H22) with Zyrtec the #1 brand in
pediatric allergy.
Smoke Cessation Benefits from Self-Care Tailwinds Prior to the Pandemic and
Accelerated Post COVID-19
In other self-care categories, KVUE should see continued benefit from quit attempts in
smoking cessation supported by new scientific claims, products (e.g., Nicorette
QuickMist and app), and marketing campaigns (e.g., (cid:728)Do Something Incredible(cid:729)
campaign drove 74% improvement in media ROI and 2.6 points of market share gains
globally), as well as potential entry into vaping cessation. The company also plans to
selectively invest to drive growth in digestive health through ORSL.
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Andrea Teixeira, CFAAC North America Equity Research JPMORGAN
(1-212) 622-6735 29 May 2023
andrea.f.teixeira@jpmorgan.com
Skin Health & Beauty (29% of Sales, 18% of OI, OSG +0.1% 3-
YR CAGR)
Skin Health & Beauty ((cid:728)SHB(cid:729)) generated sales of $4.4 billion in 2022 (~29% of FY22
sales) and $0.7 billion in adjusted operating income (16.3% margin and 18.1% of
KVUE segment-level adjusted OI). Categories represented in SHB primarily include
face and body care, hair care, and sun care, and key brands include Neutrogena, Aveeno,
OGX, Dr.Ci:Labo, Le Petit Marseillais, Lubriderm, Rogaine, Dabao, and Clean & Clear.
Figure 17: Skin Health & Beauty 29% of Revenues and 18% of Segment Figure 18: Skin Health & Beauty Category Revenue Mix
OI % of FY Sales
100% 100%
90% 89 00 %% 25.4% 31.3%
80% 70%
70% 60%
60% 50%
45 00 %% 34 00 %% 74.6% 68.7%
30% 20%
20% 29% 18% 10%
0%
10%
2019 2022
0%
% of FY22 Sales % of FY22 Segment OI FACE AND BODY CARE HAIR, SUN AND OTHER
Source: Company reports. Source: Company reports.
Flat OSG Performance in Last 3 Years Ending 2023, Due to Supply Chain
Constraints...
Despite the category growing at a +4.5% CAGR from 2019-2022, KVUE(cid:726)s SHB
segment has underperformed (3Y CAGR through 2022 just +0.1%) as the business
suffered through supply chain challenges that seemed to have a greater impact relative
to competitors, partially attributable to KVUE(cid:726)s exposure to sun care, which went
through challenges last year given silicone shortages, in addition to impacts from lost
usage occasions during the COVID pandemic (also impacted competitors). With that,
over the past three years SHB essentially contributed nothing to KVUE(cid:726)s organic
growth, and as of 2022, SHB volumes still stood around 3% below 2019 levels.
… Turning the Corner Accelerating to MSDs OSG in 2H22 and Low Teens in 1Q23
That said, KVUE appears to be turning a corner more recently in top-line trajectory
(albeit against a low bar) as the company undertook actions to streamline its supply
chain and build resilience (in addition to general easing of supply chain situation
globally). Specifically, 2H22 organic growth in the segment came in at +5.3% (+MSD%
in each of 3Q/4Q) vs. a -4.0% organic growth decline in 1H22, implying a 3Y CAGR in
2H22 of +1.5% vs. -0.8% in 1H22. Momentum has continued thus far in 1Q23 with
organic growth of +13.2%, and the segment seems to be on stronger footing now to take
advantage of favorable secular trends in the categories of body, face, and sun care.
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Andrea Teixeira, CFAAC North America Equity Research JPMORGAN
(1-212) 622-6735 29 May 2023
andrea.f.teixeira@jpmorgan.com
Figure 19: Skin Health & Beauty Organic Growth Trends and Outlook Figure 20: Skin Health & Beauty 2022/2023E Organic Growth by Halves
10% 12%
8% 10%
8%
6% 1.8% 6% 8.4%
4% 7.9% 2.6% 4% 4.1% 7.4%
2% 20 .. 36 %% 2.8% 2.5% 02% % 1.6% 1.1% 1.0%
-20% % -0 3.8 .3% % -2.3% -2.1% 3.5% --- 642 %%% -5.6% -5.1%
-4% -8%
2020 2021 2022 2023E 2024E 2025E 1H22 2H22 1H23E 2H23E
Volume Price/Mix % volume % price/mix
Source: Company reports and J.P. Morgan estimates. 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(cid:726)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 ((cid:728)local jewel(cid:729) 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(cid:726)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(cid:726)s health, and wound care, and key brands include Listerine, Johnson(cid:726)s
Baby, Stayfree / Carefree, Band-Aid, Neosporin, and o.b.
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Andrea Teixeira, CFAAC North America Equity Research JPMORGAN
(1-212) 622-6735 29 May 2023
andrea.f.teixeira@jpmorgan.com
Figure 21: Essential Health 31% of Revenues and 28% of Segment OI Figure 22: Essential Health Category Revenue Mix
% of FY Sales
100% 100%
90%
90% 80% 32.7% 34.6%
80% 70%
70% 60%
60% 50% 35.1% 32.7%
50% 40%
40% 30%
30% 20% 32.2% 32.7%
20% 31% 28% 10%
0%
10%
2019 2022
0%
% of FY22 Sales % of FY22 Segment OI ORAL CARE BABY CARE OTHER ESSENTIAL HEALTH
Source: Company reports. Source: Company reports.
Essential Health has been the main area of focus of KVUE(cid:726)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 Figure 24: Essential Health 2022/2023E Organic Growth by Halves
10.0% 10%
8.0% 8%
6.0% 6%
24 .. 00 %% 2.2% 1.4% 4.9% 8.9% 1.6% 0.8% 24% % 3.2% 6.7% 9.2% 8.5%
0.0% 0.3% 0.6% 0.6% 1.6% 0%
-- 42 .. 00 %% -6.2% -5.5% -- 42 %% -5.9% -6.6% -6.0% -5.0%
-6.0% -6%
-8.0% -8%
2020 2021 2022 2023E 2024E 2025E 1H22 2H22 1H23E 2H23E
Volume Price/Mix % volume % price/mix
Source: Company reports and J.P. Morgan estimates. 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(cid:726)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
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Andrea Teixeira, CFAAC North America Equity Research JPMORGAN
(1-212) 622-6735 29 May 2023
andrea.f.teixeira@jpmorgan.com
rationalization as (cid:728)normal course of business,(cid:729) 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(cid:726)s TheraBreath in mouthwash).
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Andrea Teixeira, CFAAC North America Equity Research JPMORGAN
(1-212) 622-6735 29 May 2023
andrea.f.teixeira@jpmorgan.com
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(cid:726)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(cid:726)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 (cid:728)local jewels(cid:729) (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(cid:726)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(cid:726)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
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Andrea Teixeira, CFAAC North America Equity Research JPMORGAN
(1-212) 622-6735 29 May 2023
andrea.f.teixeira@jpmorgan.com
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 Figure 26: Essential Health Profit/Margin Improvement Despite Lower
$ m Sales
$6,000 $4,896 24.3% 25.0% 10% 8.7%
$5,000 $4,570 24.0% 8%
$4,000 23.0% 6%
+340 bps
$3,000 22.0% 4%
2%
$2,000 20.9% 21.0%
$1,022 $1,111 0%
$1,000 20.0% -2%
$0 19.0% -4%
2019 2022 -6%
Sales Segment OI Segment OI Margin -8% -6.7%
Sales 2022 vs. 2019 Segment OI 2022 vs. 2019 Segment OI Margin 2022 vs. 2019
Source: Company reports. 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 (cid:728)heavy lifting(cid:729) 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(cid:726)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(cid:726)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.
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Andrea Teixeira, CFAAC North America Equity Research JPMORGAN
(1-212) 622-6735 29 May 2023
andrea.f.teixeira@jpmorgan.com
All in, the company(cid:726)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(cid:726)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(cid:726)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(cid:726)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).
The TSAs generally run for 24 months following the separation, although some services
could be provided for a longer period of time (less than 60 months) in certain
circumstances such as if the functions are limited by regulatory approval. The company
noted that it plans on working with JNJ in establishing its own stand-alone IT functions,
which would run concurrent to the TSA and could account for less than a 100 bps
headwind to profitability and decline post-2023.
The TMAs cover Self Care products including certain Tylenol, Zyrtec, Mortin, Benadryl
and other OTC products that represented less than 10% of KVUE(cid:726)s 2022 sales. Within
the TMAs, KVUE is responsible for demand forecasting (both binding and non-
binding), and JNJ will be responsible for sourcing raw materials and manufacturing. The
TMAs have different lengths depending on product but in all cases phase out over a
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Andrea Teixeira, CFAAC North America Equity Research JPMORGAN
(1-212) 622-6735 29 May 2023
andrea.f.teixeira@jpmorgan.com
five-year period (could be extended for three additional 12-month periods under certain
circumstances), and the company aims to exit most of the TMAs within three years.
Generally speaking the TMAs take a longer time to exit vs. TSAs given the time line for
regulatory approvals or marketing authorization transfers. The TMA periods are 3-60
months for Tylenol products and 21-60 months for Zyrtec, Motrin, and Benadryl
products.
To be fair, some of the potential savings opportunity could be eroded if KVUE opts to
select another third party to facilitate any G&A or manufacturing function, although it(cid:726)s
possible that a different third-party fee could be lower than JNJs (because JNJ now has
to make a margin on these contracts), and/or KVUE could look to drive efficiencies out
of processes and manufacturing. Additionally, there is risk that KVUE standing up its
own functions or in-sourcing manufacturing could run into challenges if it or third
parties are unable to replicate JNJ processes.
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Andrea Teixeira, CFAAC North America Equity Research JPMORGAN
(1-212) 622-6735 29 May 2023
andrea.f.teixeira@jpmorgan.com
Financial Outlook
Path to ~+4% Top Line over Next Few Years with Upside If
Elasticities Hold Up
KVUE(cid:726)s long-term algorithm calls for organic top-line growth to be competitive with
category growth rates, which the company expects to be around +3-4% per annum
through 2025. This growth rate is consistent with the recent past where KVUE(cid:726)s
categories grew at a roughly +3.5% CAGR from 2018-2021 (although category organic
growth CAGR accelerated in 2019-2022 given COVID tailwinds and pricing to +4.8%).
Figure 27: KVUE Organic Growth Drivers by Year Figure 28: KVUE Historical and Forward 3Y CAGR Drivers
10% 5%
8% 5%
4%
6% 4%
024 %%% -11 0.. .47 2%% -21 0.. 62 .3%% -4 0. .0 11% -7 1.6 .6% 12 .. 82 %% 21 .. 84 %% 12233 %%%% 2.3% 3.7%
% % - 0 . %% % %
-2% 1% 1.3% 1.0%
-4% 0%
2020 2021 2022 2023E 2024E 2025E L3Y (2020-2022) N3Y (2023-2025)
Volume Price/Mix Other* Volume Price/Mix
Source: Company reports and J.P Morgan estimates; *Other relates to carve-out financial Source: Company reports and J.P. Morgan estimates.
adjustments
That said, based on historical data it appears that KVUE has been underperforming the
overall category growth rate over the same period (we estimate organic growth CAGR
+2.6% 2018-21), although the company has been transforming the business to put it on
a better footing for organic growth by sharpening resource allocation and optimizing the
portfolio (e.g., SKU rationalization, acquisitions/divestitures). In fact, KVUE(cid:726)s organic
growth trends have accelerated for three consecutive years since 2019 – ramping from
+1.4% in 2019 to +3.8% in 2022 with the 2019-2022 CAGR +3.4%. As we noted,
organic growth over the past few years has been hampered by supply chain disruptions,
SKU rationalization, and COVID-19, and excluding these items the company estimates
that its organic growth CAGR from 2019-2022 would have been about +5.4%.
Figure 29: KVUE Historical Sales Bridge
$ m
$16,000
+4.0%
$15,500 +1.5% $15,054 -0.1%
+1.2% $14,950
$15,000 +1.4% +1.7% $14,467 +2.6% -0.3% -0.9% -0.1% -4.2% -0.3%
$14,500 $14,324 -0.2%
-1.8% -0.1%
$14,000
$13,500
$13,000
Source: Company reports.
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Andrea Teixeira, CFAAC North America Equity Research JPMORGAN
(1-212) 622-6735 29 May 2023
andrea.f.teixeira@jpmorgan.com
KVUE Lagged Peers in OSG Due to Delayed Pricing, Improving Recently
As such, in the past three years KVUE(cid:726)s organic growth trends have underperformed
peers with KVUE(cid:726)s +3.4% below the median of +5.2% and the average of +9.5%
(+5.8% ex-OLPX). While adjusting for the aforementioned headwinds would have
resulted in KVUE organic growth CAGR just slightly above the median (i.e., +5.4% vs.
median +5.2%), we don(cid:726)t see it as a fair comparison as peer companies faced many of
the same headwinds as KVUE between supply chain disruptions and COVID-19.
Timing is also a driver of the underperformance vs. peers over the last three years as
KVUE was late vs. peers in putting through pricing actions and at a more moderate level
vs. most of HPC (i.e., KVUE just in 2H22 began putting through pricing in the ~HSD
range overall while HPC peers took multiple rounds of pricing ranging from MSD-LDD
in some cases), although we also aren(cid:726)t projecting KVUE to grow much faster vs. peers
ahead despite delayed pricing benefit.
Figure 30: Organic Sales 3Y CAGR vs. Peers
CY20-CY22
25%
20%
15%
10%
5%
0%
-5%
ELF HNST RKT OR PG CL CLX HLN ULVR CHD BEI KMB KVUE NWL EL COTY
Organic 3Y CAGR Average Median
Source: Company reports and J.P. Morgan estimates.; *OLPX 3Y Organic CAGR +68.1% removed for ease of comparison
2023 Should Still Be Above Algorithm at ~6% OSG, Normalizing to Peer Average
~+4% in 2024+
Looking ahead, we see KVUE as well positioned for +6% organic top line in 2023 and ~
+4% organic top-line growth over the following two years (3Y CAGR +4.7%) with
potential for upside if elasticities hold up better than expected (we believe KVUE is
modeling internally for elasticities to revert to historical mean vs. relatively more
limited elasticities experienced thus far and positive volume growth of +2.4% in 1Q23
despite +8.8% price/mix). Underpinning the expected top-line growth is the underlying
category growth trends, which we detailed earlier. Within KVUE(cid:726)s portfolio, we expect
top-line growth to be led by Self Care and Skin Health & Beauty segments, while
Essential Health contributes relatively less given category dynamics.
Specifically, we estimate Self Care to grow at a three-year CAGR of +5.8% and
contribute ~50% to KVUE(cid:726)s organic growth through 2025, Skin Health & Beauty to
grow at a three-year CAGR of +5.4% and contribute ~33% to KVUE(cid:726)s organic growth
through 2025, and Essential Health to grow at a three-year CAGR of +2.6% and
contribute ~17% to KVUE(cid:726)s organic growth through 2025. We note that in the prior
three years (2020-2022), Self Care grew at a +8.6% three-year CAGR and contributed
nearly ~91% to KVUE organic growth, Skin Health & Beauty grew at a +0.1% three-
year CAGR and contributed ~1% to KVUE organic growth, and Essential Health grew
at a +0.9% three-year CAGR and contributed around ~8% to KVUE organic growth.
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Andrea Teixeira, CFAAC North America Equity Research JPMORGAN
(1-212) 622-6735 29 May 2023
andrea.f.teixeira@jpmorgan.com
Figure 31: Segment Contribution to YOY Organic Growth Figure 32: Segment Contribution to L3Y and N3Y Organic CAGR
7% 5.0%
23456 %%%%% 1 31. ..0 27% 0.7% 223344 ...... 050505 %%%%%% 10 .. 68 %%
1.5% 00 .. 03 %%
0 3. .6 2% 00 ..7 9% 40 .. 12 %% %% 10 .. 56 %%
%
%
1% 2.0% 1.9% 1.5% 3.1%
0% -0.9% -0.5% 2.0% 1.0% 2.4%
-1% 0.5%
-2% 0.0%
2020 2021 2022 2023E 2024E 2025E L3Y (2020-2022) N3Y (2023-2025)
Self Care Skin Health & Beauty Essential Health Self Care Skin Health & Beauty Essential Health
Source: Company reports and J.P. Morgan estimates. Source: Company reports and J.P. Morgan estimates.
Figure 33: Segment Organic Growth by Year Figure 34: Segment L3Y and N3Y Organic CAGR
12% 10.9% 10% 8.6%
10% 9.5% 9%
8.1% 8%
468 %%% 5.4% 4.6%4.8% 5.8%5.1%5.3% 2.9%3.5%3.8%6.0% 4.0%4.2% 4567 %%%% 5.8% 5.4% 4.7%
2.8% 1.9%2.1% 3.4% 2.2%2.3% 2.6% 3.4%
2% 0.5% 3%
0% 2% 0.9%
1% 0.1%
-2% -1.4% 0%
-4% -2.8% Self Care Skin Health & Beauty Essential Health Total
Self Care Skin Health & Beauty Essential Health Total L3Y (2020-2022) N3Y (2023-2025)
2020 2021 2022 2023E 2024E 2025E
Source: Company reports and J.P. Morgan estimates. Source: Company reports and J.P. Morgan estimates.
Expect OSG to Be Mostly Driven By Pricing (as Peers) But Normalize Ahead
Within the top-line outlook, we expect 2023 growth to be driven exclusively by price/
mix as the company benefits from carryover pricing actions put through in 2022 as well
as some incremental pricing in 2023, partially offset by expected volume decline likely
from elasticity and continued normalization post tailwinds from COVID-19 and recent
(cid:728)triple-demic.(cid:729) 2022 organic growth was likewise driven entirely by price/mix, although
volumes were relatively flattish as volume growth in Self Care was offset by the other
segments, which was partially impacted by SKU rationalization, product exits in Russia,
COVID-19 lockdowns, and supply disruptions. Excluding these items management
estimates 2022 volumes would have been up +1.7%. Historically, volume represented
around two-thirds of KVUE organic growth with price/mix one-third, and looking ahead
past 2023 we expect a return to this top-line growth mix as the company laps materially
higher pricing increases, likely by mid 2024.
For 2023, we estimate that roughly 45% of our +7.6% price/mix forecast results from
carryover pricing actions and that price/mix will contribute +8.2% to the top line in
1H23 and +6.9% in 2H23. We estimate total volumes -1.6% for 2023 with 1H23
volumes roughly flat (+0.2%) and 2H23 volumes down around -3.4%. As noted above,
1Q23 volumes came in +2.4% against +8.8% price/mix with strong volume
performance in Self Care (+7.1%) and Skin Health & Beauty (+4.3%) more than
offsetting the decline in Essential Health (-5.5%). There were a number of drivers to the
stronger than expected volume performance in 1Q23: 1) Self Care benefitted from a
strong cold, cough, and flu season in EMEA, driving higher incidence, and the segment
also benefitted from retailer restocking in the U.S. as most retailers exited 4Q22 with
lower inventory levels; and 2) the Skin Health & Beauty segment benefited from easy
comparisons (lapped -8.6% volume decline in 1Q22) and inventory rebuild at retailers
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Andrea Teixeira, CFAAC North America Equity Research JPMORGAN
(1-212) 622-6735 29 May 2023
andrea.f.teixeira@jpmorgan.com
with strength in Neutrogena (Hydro Boost) and Aveeno. Some of the tailwinds to 1Q23
could continue into 2Q23, including in Self Care as usage occasions likely remained
elevated in EMEA in the weeks following quarter-end, and the company will also
continue to lap material supply chain challenges. We model for a normalization in
volume trends in 2H23 as the comparisons get tougher and the company may not benefit
as much from inventory replenishment and there remains uncertainty on consumer
elasticities ahead, although more conservative 2H estimates could provide a source of
upside should the consumer landscape hold up better than anticipated or if there are
strong allergy seasons in Self Care.
Figure 35: KVUE 1Q23 Organic Growth Performance by Segment Figure 36: KVUE Organic Growth Drivers 1H23E vs. 2H23E
20% 10%
15% 8%
10% 8.2% 8.9% 6%
05 %% 7.1% 4.3% 9.4% 28 .. 48 %% 24 %% 8.2% 6.9%
-5% -5.5% 0% 0.2%
-10% -2% -3.4%
SELF CARE SKIN HEALTH AND ESSENTIAL HEALTH TOTAL -4%
BEAUTY 1H23E 2H23E
% volume % price/mix % volume % price/mix
Source: Company reports. Source: Company reports and J.P. Morgan estimates.
For 2024 we model for price/mix of +2.2% and volumes of +1.8% and for 2025 price/
mix of +1.4% and volumes +2.8%. We see 2024 as benefiting early in the year from
carryover pricing from 2023 before the drivers of the top-line should normalize more
toward the company(cid:726)s longer-term algorithm of two-thirds volume and one-third price
mix.
Figure 37: KVUE Forward Estimated Sales Bridge
$ m
$17,500 +1.4% $16,973
+2.8%
$17,000
+2.2% $16,289
$16,500 +1.8%
$16,000 +7.6% $15,662
$15,500
$14,950
$15,000
$14,500
-1.6%
$14,000
$13,500
$13,000
2022 Volume Price/mix 2023E Volume Price/mix 2024E Volume Price/mix 2025E
Source: Company reports and J.P. Morgan estimates.
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Andrea Teixeira, CFAAC North America Equity Research JPMORGAN
(1-212) 622-6735 29 May 2023
andrea.f.teixeira@jpmorgan.com
Gross Margins Poised to Improve – Can Return to 2021 Peak
by 2025
KVUE(cid:726)s gross margins expanded by +125 bps in 2020 and another +164 bps in 2021
before compressing -88 bps in 2022 to 58.1% as the company dealt with inflationary
cost pressures seen throughout CPG (raw material inputs, freight, packaging) and supply
chain challenges, primarily in the Skin Health and Beauty segment. Prior to 2022, gross
margin expansion over the past few years has been driven by productivity (e.g., ZBB),
rationalization of smaller third-party manufacturers (60% of small external
manufacturers eliminated), portfolio optimization (21% SKU reduction), and favorable
segment mix (higher margin Self Care growth).
Figure 38: KVUE Gross Margin Bridge
62%
1.7%
61%
60% 0.4%
2.1% 59.0% 0.1%
59% 0.5% 1.0%
58% 1.1% 57.4% 0.4% 58.1%
57% 0.7%
56.1% 0.1% -1.2% -4.0%
56% -0.6%
55%
Source: Company reports.
We model for +54 bps gross margin expansion in 2023, slight -6 bps compression in
2024, and +38 bps expansion in 2025, which would return gross margins to 2021 levels
at 59.0%.
We see a number of drivers of gross margin expansion: 1) further optimization of
supply chain and COGS efficiencies; 2) rollover of 2022 pricing actions as well as
incremental pricing in 2023 and beyond; 3) abating cost headwinds; and 4)
favorable segment mix with continued faster growth in higher margin Self Care
and Skin Health and Beauty segments (although some Skin Health and Beauty profit
growth likely to be reinvested). Relating to our estimates, expectations for 2024 could
admittedly be conservative as we leave our margin assumptions unchanged despite a
stronger than expected start to 2023 – the aforementioned drivers and abating
inflationary pressures could lead to better gross margin performance than we have
modeled.
Inflation should remain a headwind in 2023 (perhaps roughly -240 bps to gross
margins), albeit to a lesser extent than 2022 where we estimate costs could have been a -
400 bps headwind. On COGS, we estimate roughly 40% is in raw materials and inputs,
30% in internal and external manufacturing costs, and the remaining 30% in other
overhead, freight, and amortization. Within KVUE(cid:726)s cost buckets, raw materials are
relatively diversified, in our view, with resins, pulp and paper, agro chemicals (like
ethanol and glycerin), and packaging materials the largest exposures, although in total
these represent less than 20% of total COGS. From an FX perspective, the company
hedges its transactional exposure for forecasted revenues, purchases, receivables, and
payables, but it does not hedge translational risk. Key currencies include EUR, GBP,
JPY, CNY, CAD, BRL, and INR.
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Andrea Teixeira, CFAAC North America Equity Research JPMORGAN
(1-212) 622-6735 29 May 2023
andrea.f.teixeira@jpmorgan.com
Exit of TSA and TMA Is Another Source of Margin Improvement Longer Term
Within the cost outlook, we also note that KVUE entered into a Transition
Manufacturing Agreement (in addition to Transition Services Agreement that sounds
more related to operating services), which covers pharmaceutical products like Tylenol,
Zyrtec, Motrin, and Benadryl, among others. The company noted that the products
covered under the TMA accounted for less than 10% of its sales in 2022. The TMA is
based on a cost-plus model and ranges in terms from 3 to 60 months depending on the
product (3-60 months for Tylenol, 21-60 months for Zyrtec, 21-60 months for Motrin,
and 21-60 months for Benadryl), although the company notes that these terms could be
extended for up to three additional 12-month periods if there are issues, which we think
would be mostly due to regulatory processes and facility validation. Management
expects to be out of the TMA within three years for most of the products. Exiting these
TMA agreements should allow for better margin profile over time as the company no
longer pays the markup associated with the agreement.
Relative to peers, KVUE(cid:726)s adjusted gross margins (including amortization of definite
life intangible assets to make more comparable) compare favorably to most HPC and
consumer health peers (ranks below only HLN, RKT, and BEI) but are well below those
of more pure-play beauty names. Overall, KVUE(cid:726)s category exposure to OTC and
beauty lends itself to strong gross margin profile vs. HPC more exposed to everyday
essentials, and many companies in the peer set have also faced greater inflationary cost
pressures given COGS exposure more weighted to the oil complex, pulps, and
transportation/logistics costs.
Figure 39: Gross Margins vs. Peers
CY22
80%
70%
60%
50%
40%
30%
20%
10%
0%
Gross Margin Average Median
Source: Company reports and J.P. Morgan estimates.; *KVUE adjusted gross margins including amortization of definite life intangibles;
**CL adjusted gross margins adding back shipping & handling costs
Post-2023 Leverage in Middle of P&L to Help Drive Solid
Earnings Growth
Following 2023, which will be burdened both by costs related to TSA and separation
costs, we see SG&A as a lever to help drive operating growth in the years ahead as the
company 1) continues to exercise disciplined cost management with zero-based
budgeting practices; and 2) works to take out costs over time related to the ~$100M
incremental costs associated with the separation from JNJ, including exiting transition
services agreements, primarily over the next two years as well as transition
manufacturing agreements, which we estimate account for roughly 60% of the
incremental stand-alone costs. At the same time, we expect KVUE to further support its
brands through increased advertising spending in the near term following a period of
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Andrea Teixeira, CFAAC North America Equity Research JPMORGAN
(1-212) 622-6735 29 May 2023
andrea.f.teixeira@jpmorgan.com
being more selective in 2022.
Specifically, we are modeling for SG&A as a percent of sales to be 42 bps unfavorable
YOY in 2023, roughly neutral in 2024, and 51 bps favorable in 2025, which would then
put SG&A as a percent of sales just below 2022 levels. Within SG&A, advertising has
been a bit lumpy and oscillated between favorable and unfavorable to margins over the
past three years. Investments increased in 2021 to support top-line growth and key
brands but were lower in 2022 as the company made more discriminating decisions on
advertising given the supply disruptions and inflationary cost environment (balancing
investment with profitability). We see the company stepping up investments in 2023 to
support the top-line growth, primarily in the Self Care segment.
Figure 40: KVUE Operating Expense Outlook Figure 41: KVUE Advertising Expense
37% 250 10.5% 100
333 456 %%% 2.7% 2.4% 2.5% 2.6% 2.6% 2.6% 5112 0 050 000 10 9..0 5% % 9.7% 9.5% 9-10% 050
9.1%
33% 2.2% 0 9.0% 8.8%
33 12 %% 33.2% 33.6% 33.4% 33.9% 33.9% 33.3%-- 15 00 0 8.5% 8.5% -50
30% 31.7% -- 21 05 00 8.0% -100
29% -250 7.5% -150
2019 2020 2021 2022 2023E 2024E 2025E 2019 2020 2021 2022 2023E Target
SG&A % of Sales R&D % of Sales YOY Favorable/(Unfavorable) bps Advertising Expense % of Sales YOY Favorable/(Unfavorable) bps
Source: Company reports and J.P. Morgan estimates. Source: Company reports and J.P. Morgan estimates.
A&P Spend Is Up but Still Trails Most Peers, Yet...
KVUE(cid:726)s advertising spend of about 9.1% of sales is a bit below close HPC peers like
CL (11.1%) and PG (9.9%), although as we noted above we expect A&P spending to
step up 40 bps in 2023E to 9.5%. We note that some of the comparisons vs. peers are not
apples to apples as some companies account for go-to-market activities (e.g., sampling,
sales force, etc.) within advertising expense, which makes spend appear elevated. Also,
we note that marketing productivity has been up, which helps explain the relatively
higher efficient ratio (lower A&P as a percentage of sales). Historically, the company
had made efforts to improve SG&A efficiency through organization redesign (reduced
head count 10% from 2019-2022) and also increasing ROI on media spend by 28% from
2019-2021.
Figure 42: Advertising Expense vs. Peers
CY22 or Last Fiscal* where noted
35%
30%
25%
20%
15%
10%
5%
0%
Advertising % of Sales Average Median
Source: Company reports and J.P. Morgan estimates.
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Andrea Teixeira, CFAAC North America Equity Research JPMORGAN
(1-212) 622-6735 29 May 2023
andrea.f.teixeira@jpmorgan.com
R&D Is Higher Than Peers
On the other hand, KVUE(cid:726)s R&D spending is in the top quartile vs. peers at 2.5%
(average 2.0% and median 1.8%), which speaks to the company(cid:726)s commitment to
spending behind developing innovation and driving unique claims for its products.
Figure 43: Research and Development Expense vs. Peers
CY22 or Last Fiscal* where noted
3.5%
3.0%
2.5%
2.0%
1.5%
1.0%
0.5%
0.0%
R&D % of Sales Average Median
Source: Company reports and J.P. Morgan estimates.
Longer term, KVUE(cid:726)s financial algorithm calls for earnings growth ahead of sales
growth, although given the burden of stand-alone company costs and incremental
interest expense, earnings per share growth will likely fall below this target in 2023 and
2024 before seeing faster growth in 2025 as the company sees leverage throughout the
P&L for the aforementioned reasons. From an EBITDA perspective, however, we do see
KVUE generating profit growth ahead of sales growth from 2023-2025 with a three-
year CAGR of +6.1% vs. top-line CAGR of +4.3%, implying EBITDA margin
expansion to 25.4% in 2025 from 24.1% in 2022 (roughly +130 bps expansion) and
25.3% in 2021.
Figure 44: KVUE EBITDA Growth Outlook Figure 45: KVUE EBITDA vs. Sales Growth Outlook
$$$5 44, ,,0 050 000 00 $3,77521.7% $3,810 $3,606 $3,797 $3,983 $4,308 225 0% % 67 %% 6.1%
$3,500 $3,101 15%
$3,000 10% 5% 4.3%
$2,500 8.2% 4%
$$ 12 ,, 50 00 00 0.9% 5.3% 4.9% 05 %% 3%
$1,000
$500 -5.4% -5% 2%
$0 -10% 1%
2019 2020 2021 2022 2023E 2024E 2025E
EBITDA $ m (left-axis) EBITDA YOY Growth (right-axis) 0%
EBITDA CAGR (2023-2025) Sales CAGR (2023-2025)
Source: Company reports and J.P. Morgan estimates. Source: J.P. Morgan estimates.
For ease of comparison, we prefer to look at EBITDA as the primary profit KPI for
KVUE as the company(cid:726)s adjusted earnings per share excludes the impact of
amortization of definite life intangible assets, which it treats 100% of brands/
trademarks, while competitors do not adjust this expense out. As such, KVUE(cid:726)s adjusted
earnings appear higher than they otherwise would following the accounting convention
across our coverage universe. In our model we present adjusted earnings per share both
with and without the impact of amortization of intangible assets, but we think investors
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Andrea Teixeira, CFAAC North America Equity Research JPMORGAN
(1-212) 622-6735 29 May 2023
andrea.f.teixeira@jpmorgan.com
may prefer to look to EBITDA.
Versus the peer set, KVUE(cid:726)s EBITDA margins are in the top quartile at 24.1% vs.
average 21.3% and median 21.8% (ex-OLPX average 18.8% and median 20.9%), but
still trail closest peer HLN (25.1%), and are between PG (25.0%) and CL (23.5%). We
see opportunity for KVUE to expand EBITDA margins ahead as pricing flows through,
inflation abates, and the company works to take out costs to stand up the company (e.g.,
TSA, TMA).
Figure 46: EBITDA Margins vs. Peers
CY22
30%
25%
20%
15%
10%
5%
0%
-5%
-10%
RKT HLN PG KVUE CL OR CHD ELF EL COTYULVR 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(cid:726)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(cid:726)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(cid:726)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
3.0x
2.4x
2.5x 2.1x 2.2x 2.1x
2.0x 1.8x 1.9x
2.0x 1.6x
1.5x
1.0x
0.5x
0.0x
Post-IPO 2023E 2024E 2025E
Gross Debt to EBITDA Net Debt to EBITDA
Source: Company reports and J.P. Morgan estimates.
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Andrea Teixeira, CFAAC North America Equity Research JPMORGAN
(1-212) 622-6735 29 May 2023
andrea.f.teixeira@jpmorgan.com
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
$3,000 120%
$2,500 100%
$2,000 80%
$1,500 60%
$1,000 40%
$500 20%
$0 0%
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
$3,000 17.7% 20.0%
16.8%
15.2% 18.0%
$2,500 13.6% 12.9% 14.0% 13.5% 16.0%
$2,000 14.0%
12.0%
$1,500 10.0%
8.0%
$1,000 6.0%
$500 4.0%
2.0%
$0 0.0%
2019 2020 2021 2022 2023E 2024E 2025E
Net Working Capital Net Working Capital % of Sales
Source: Company reports and J.P. Morgan estimates.
Capital expenditures begin to step up slightly in 2023 (we model for 2.7% of sales from
2.5% in 2022 and 2.0% in 2021) and a bit more in 2024/2025 (3.0% of sales), although
the historical level is not necessarily apples to apples as the 2.0% range didn(cid:726)t allocate
enterprise-level costs that are now incurred as a stand-alone company. Capital
investments will likely continue to focus on digitization of the supply chain and also
building out capacity for growth.
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Andrea Teixeira, CFAAC North America Equity Research JPMORGAN
(1-212) 622-6735 29 May 2023
andrea.f.teixeira@jpmorgan.com
KVUE(cid:726)s capital expenditures are generally lower than peers historically, although we do
expect a step-up ahead as the company works to build capacity and capabilities as a
stand-alone company. As of 2022, KVUE(cid:726)s 2.5% capital expenditures as a percent of
sales benchmarks below peer average of 3.1% and median 3.3%, but we also note that
KVUE is relatively more asset light vs. HPC peers with 44% of volumes produced
externally. For comparison CLX has returned to a more normalized 80/20 split between
in-house and external manufacturing from around 50/50 during the pandemic.
Figure 50: Capital Expenditures vs. Peers
CY22
7%
6%
5%
4%
3%
2%
1%
0%
BEI EL KMB CL PG COTY OR CHD NWL CLX RKT HLN ULVRKVUEENRHNST ELF OLPX
CapEx % of Sales Average Median
Source: Company reports and J.P. Morgan estimates.
KVUE announced its intention to pay a quarterly dividend of $0.20 per share
beginning in 3Q23 (fiscal quarter ending October 1, 2023), which at the current price of
$26.30 implies an annualized dividend yield of about 3.0% (at the IPO price of $22,
the annualized dividend yield was closer to 3.6%). Looking ahead, we expect the
company to target an annual dividend payout ratio of around 55-65% (JPMe 2024E
64%), and we model for 3% dividend growth in both 2023 and 2024 as the company
targets moderate growth in dividend per share.
Figure 51: KVUE Dividend Yield Compares Favorably to Peers Even after Share Rally
4.0%
3.5%
3.0%
2.5%
2.0%
1.5%
1.0%
0.5%
0.0%
ULVR KMB NWL KVUE CLX RKT PG CL HLN OR EL CHD BEI COTY ELF HNSTOLPX
Dividend Yield Average Median
Source: Bloomberg Finance L.P. and J.P Morgan estimates.
Other capital allocation priorities include likely bolt-on M&A. We see management
budgeting roughly $500-750M per annum for acquisitions, although we don(cid:726)t build in
any benefit from M&A into our model, and as such the M&A (cid:728)placeholder(cid:729) could lead
to increased cash returns to shareholders. At this point, we expect share repurchases to
be limited to offset share creep from stock-based compensation expense, although the
company could look to evaluate opportunistic share repurchases over time.
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Andrea Teixeira, CFAAC North America Equity Research JPMORGAN
(1-212) 622-6735 29 May 2023
andrea.f.teixeira@jpmorgan.com
Valuation
KVUE Deserves Premium to HLN with Potential to Converge to
CL over Time
Initial Discount Is an Opportunity, in Our View Should Fade Post Spin/Split
KVUE shares were priced at $22 at the IPO (toward the high end of initial $20-23
range) and closed +22.3% higher on its first day of trading on May 4, 2023. As of May
26, KVUE shares remain +19.5% above the IPO price. From a valuation perspective, at
the IPO price KVUE shares implied around 13.3x/12.7x our 2023E/2024E EBITDA
estimate and 19.9x/19.3x our 2023E/2024E EPS including amortization of definite life
intangible assets (or 17.7x/17.4x 2023E/2024E EPS excluding amortization of definite
life intangible assets as the company reports its adjusted earnings). Following the IPO,
KVUE now trades at 15.5x/14.7x our 2023/2024 EBITDA estimates and 23.8x/23.1x
our 2023/2024 EPS estimates.
We view the discounted valuation implied at the IPO price and attractive dividend yield
(~3.6% at IPO) as compensating investors for potential overhangs arising from 1) JNJ
still owning ~89.6% of KVUE shares post-IPO with the intention to make a tax-free
distribution of additional shares likely by the end of 2023 (i.e., reduce ownership below
20%); and 2) KVUE retaining potential outside–North America liabilities tied to talc
litigation. We also believe JNJ wanted to set KVUE up for a successful offering given it
would still own such a meaningful stake in the business (i.e., price the ~10.4% well so it
would have better monetization on remaining ownership).
De-Consolidation Process on a Tax-Free Spin-Off or Split
On the potential overhang from additional liquidity coming to the market, we highlight a
few items to consider: 1) there are a number of ways ways JNJ could effect reducing its
stake – a spin-off (i.e., pro-rata distribution of KVUE shares to current JNJ shareholder)
or a split-off (i.e., exchange of JNJ shares for KVUE shares often at a discount), with a
split-off more of an (cid:728)active(cid:729) decision to hold KVUE shares and thus may limit selling
pressure; 2) JNJ could decide to delay and/or not pursue a distribution of shares pending
market conditions; and 3) while there is a 180-day lock-up on selling/disposing of
shares post-IPO, our understanding is that the provision can be waived by the
underwriters. There are a number of precedent transactions including recently the split-
off of Elanco (ELAN) from Lilly (LLY) in 2019 whereby LLY offered exchange for
ELAN shares at a 7% discount and in 2013 the split-off of Zoetis (ZTS) from Pfizer
(PFE) whereby PFE offered exchange for ZTS shares at a 7% discount.
Talc Liability Outside the US & Canada
On the potential talc liability, JNJ management on April 27 stated, (cid:728)As unequivocally
and unambiguously stated, Johnson & Johnson has agreed to retain all the talc-related
liabilities – and indemnify Kenvue for any and all costs – arising from litigation in the
United States and Canada.(cid:729) KVUE will retain potential liabilities relating to talc
litigation outside of North America, but our understanding is that as of now there are
only a handful of active claims outside of the U.S. and Canada, but to date KVUE
management has not recorded any reserve liabilities relating to these claims, and the tort
laws and consumer protections outside of the U.S. and Canada are not as robust. KVUE
plans to discontinue the sale of talc-based Baby Powder globally this year (already
discontinued in the U.S. and Canada).
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