We see Chinese consumers continuing to be attracted to science-based efficacious solutions like ours. We are operating in China for many years with a very strong team. We are investing in our Self Care pipeline. Just a fun fact for you. Last year, we launched more innovation in China than we launched in the past 11 years combined in Self Care. And we have a very strong leadership position in that market across analgesics, pediatrics, allergy, antifungals. So when you hear me talking about our business in China, you see why we are pleased with the performance of our China — the teams in China. Then there is a small part of our business that is not Self Care. That’s where Dr.Ci:Labo and other brands are hosted. And here, as everybody else, we saw a deceleration of that part of business.
We see the consumer being more cautious. As I indicated at the beginning of the year, we are not investing ahead of the curve in that part of the business. We have not assumed any recovery in the back half of our plan — back half of the year in our plan and our outlook for the year. And — but as I’ve always said, we are committed to the long-term prospect in China and that view has not changed. China is a positive contributor to our growth and we expect it to be the case again in 2024.
Operator: Your next question comes from the line of Filippo Falorni from Citi.
Filippo Falorni: Just a quick clarification. In the Q1 results, in the 1.9% organic, was there any impact from hyperinflation or repricing? Most of your peers have called it out. So I just wanted to check on that. And then a bigger question. You mentioned Q2, you expect low single-digit declines in Self Care. Maybe you can give some color for the other segment on expectations as well. And as you think about the second half, what gives you that confidence that volume will accelerate? Some of it is easy comps? Is it benefit from your investment action and investment in marketing advertising? Any more color there would be helpful.
Paul Ruh: Yes. Thank you for the question, Filippo. Hyperinflation, particularly in both Argentina and in Turkey, represented about 90 basis points in Q1 with no impact to earnings. We are taking the appropriate pricing. That’s why there’s no impact to earnings. Hyperinflation is expected to have about 50% benefits for the top line for the full year as this 90 basis points in Q1 was particularly high given the compares versus last year. Do you want to take second one?
Thibaut Mongon: I will take the second one about the unique dynamics of the Self Care segment in Q2. Filippo, there are a few dynamics for you to consider in Q2 as you think about Q2 for the Self Care segment specifically. One, we are going to have compares — the difficult compares to absorb. We grew double digit in the second quarter last year. So that will be a strong compare. The second one is that we do not expect the same seasonal strength that we saw in China in the second quarter when China reopened. We expect continued impact of trade inventory reduction in — by some customers in the U.S. And I told you that, so far, we saw a slow start to the allergy season which will weigh on volumes in Q2. Having said that, we — you should also see it as non-operational elements masking the underlying in-market performance of our Self Care business.
So that’s what is driving our current thinking for Self Care in Q2. Regarding the back half of the year, we see no change in our expectations for the back half and that’s why we reaffirm our guidance for 2024 this morning. It’s going to be a combination of the easier compares, to your point but also seeing our plans taking hold as we execute our — against our 2024 priorities.
Operator: Your last question comes from the line of Korinne Wolfmeyer from Piper Sandler.
Korinne Wolfmeyer: I’d like to touch a little bit more on the gross margin. It came in a little bit higher this quarter. I know you talked a little bit about some of the drivers there. Is there any way you can help us quantify the specific drivers and help us better understand which ones are going to be more sticky throughout the course of the year? And then any color on how to think about the cadence of the gross margin throughout the remainder of the year?
Paul Ruh: Yes. Korinne, thank you for the question. We’re actually very, very proud of the work that team is doing. Gross margin is a strong muscle for Kenvue. And pricing, that is value realization, continues to be a component our gross margin enhancement along with continuous efficiencies in our operations. The impact of inflation is also moderating with agrochemicals becoming now a tailwind and is still offset by some headwinds in labor and energy. And we’re mindful of the unique dynamics and the volatility that we still see in the commodity markets. But we’re very confident that we will be reaching, as I said in my prepared remarks, our stated goal of 59% by — that we had back in 2021 this year. So we’re more optimistic about the gross margin enhancement that will help fuel the brand activation and getting closer to our consumers and customers.
As to what it means in terms of the cadence of the year, there’s always a natural seasonality in our business. But I would — it’s fair to assume that our gross margins will be slightly better than we originally anticipated, that will continue to allow to fuel our investments in our brands.
Operator: We have reached the end of our question-and-answer session. I would now like to turn the floor back over to Thibaut Mongon for closing remarks.
Thibaut Mongon: So thank you all for participating on today’s call and apologies again for the technical glitch at the beginning. As you can see, we are pleased with our solid start to the year. As we have discussed, we are committed to continue to transform our organization with our 3 clear strategic priorities: Reaching more consumers, freeing up resources to invest in our brands and fostering a culture of performance and impact at Kenvue. So our teams are all focused on executing with excellence and we look forward to updating you on our progress throughout the year. Have a great day, everyone.
Operator: This concludes today’s conference. Thank you for your participation. Have a wonderful day. You may disconnect your lines at this time.
