New York, March 03, 2023 — Moody’s Buyers Service (“Moody’s”) right this moment assigned first-time scores to Kenvue, Inc. (“Kenvue”), together with an A1 long-term issuer score and Prime-1 industrial paper score. The score outlook is steady.
That is the primary time Moody’s has rated Kenvue in reference to its deliberate separation from Johnson & Johnson (“J&J”). Moody’s anticipates within the scores that Kenvue will search to boost roughly $9 billion of lengthy and short-term debt with proceeds to be utilized to pay $7.5 – $8.0 billion to J&J as partial consideration for J&J’s client well being enterprise and to fund steadiness sheet money. Kenvue plans to finish an preliminary public providing within the second quarter estimated to be as much as a 20% curiosity within the firm, and J&J has indicated it plans to get rid of majority of its remaining curiosity in Kenvue by the tip of 2023.
Assignments:
..Issuer: Kenvue Inc.
…. Issuer Score, Assigned A1
….Senior Unsecured Industrial Paper, Assigned P-1
Outlook Actions:
..Issuer: Kenvue Inc.
….Outlook, Assigned Secure
RATINGS RATIONALE
Kenvue’s A1/Prime-1 scores mirror the significant scale, good product and geographic diversification, wonderful liquidity, average leverage and high-quality model and product portfolio that Kenvue will personal after its separation from J&J. Effectively established manufacturers embody, however will not be restricted to, Band-Support, Listerine, Tylenol, Motrin, Aveeno, Neutrogena, OGX, Nicorette, and Johnson’s, which offer a agency income and profitability platform from which Kenvue can develop and keep market share. The corporate’s robust retail relationships, ongoing analysis & development-led innovation, broad distribution capabilities and main market positions give rise to appreciable working money circulation and monetary flexibility. The general robust qualitative profile helps to partially mitigate dangers akin to important competitors, a reasonably leveraged beginning profile, a comparatively excessive anticipated dividend payout, and potential product legal responsibility dangers. Moody’s expects that closing debt to EBITDA leverage of about 2.5x (incorporating Moody’s commonplace changes) might be diminished to round 2.0x over the subsequent 2-3 years. Moody’s expects that the corporate will chorus from materials share repurchases till this leverage degree is achieved. Moody’s expects that after curiosity prices and in Moody’s view, a comparatively giant focused dividend, that the newly separated firm will nonetheless generate free money circulation within the $700 million to $1 billion vary in every of the subsequent 3 years. Dangers stay not solely within the aggressive nature of the classes, a few of which have publicity to personal label competitors, but additionally within the separation from J&J below varied transition service preparations, its lack of observe document as a separate firm and litigation danger. To mitigate litigation danger, J&J will indemnify Kenvue from all US and Canadian talc-related liabilities, however the indemnification doesn’t lengthen to worldwide talc liabilities or to different litigation that would come up.
Kenvue will keep wonderful liquidity over the subsequent 12 to 18 months supported by robust and rising free money circulation, a big money steadiness and an undrawn $4 billion revolver that expires in March 2028. Moody’s expects that Kenvue will generate over $700 million in annual free money circulation in 2023 professional forma for a full yr internet of curiosity and dividends. The forecast contains Moody’s expectation of serious one-time separation prices, no less than $400 million of capital expenditures and Moody’s estimate that the annual dividend may very well be within the $1.5 billion vary. Moody’s expects free money circulation to extend to nearer to $1 billion by 2024. Extra money circulation is predicted for use in direction of debt discount as Kenvue focuses on deleveraging, though small acquisitions are potential. Share repurchases are anticipated to be minimal, not exceeding the quantity essential to cowl dilution no less than for the primary two to a few years. The revolving credit score facility doesn’t comprise basic or litigation materials antagonistic change (MAC) situations to drawdowns and has no monetary upkeep covenants. The revolver is out there on a same-day foundation in each USD and Euros, with a $500 million dollar-equivalent swing line denominated in Euros.
Money balances are anticipated to be maintained at between $1 and $1.5 billion on the shut of the potential preliminary public providing and on an ongoing foundation no less than $1 billion. Kenvue’s $4 billion USD industrial paper program is totally backstopped by the $4 billion revolving credit score facility. Moody’s expects that the corporate could have roughly $1 billion of economic paper excellent initially to permit for early debt compensation.
ESG CONSIDERATIONS
Kenvue’s ESG Credit score Affect Rating is impartial to low (CIS-2) indicating impartial to low influence from ESG elements on the scores. The corporate’s publicity to environmental and social dangers are thought-about reasonably destructive due to dangers round sourcing inputs for its merchandise, the usage of packaging supplies, and the necessity to keep good buyer relations together with dangers related to recollects and product litigation, in addition to well being and security requirements for its workforce. Governance concerns are impartial to low and mood the environmental and social dangers given the corporate’s conservative monetary insurance policies.
Kenvue’s publicity to environmental dangers are reasonably destructive (E-3) with waste and air pollution dangers round land, water, uncooked supplies, power utilization, and particularly packaging and waste. These dangers are partially offset by good enterprise range and good capacity to cross on rising prices to fulfill environmental requirements and altering buyer preferences to customers. Kenvue’s publicity to bodily local weather dangers is minimized by a big and world property footprint consisting of 25 firm owned manufacturing websites globally supplemented by 230 world third-party producers and 114 distribution facilities. Impartial to low pure capital dangers mirror that Kenvue is much less reliant on naturally sourced supplies as a share of complete prices than another client sectors akin to meals or extra concentrated packaged items corporations.
Social dangers are reasonably destructive (S-3) and primarily mirror Kenvue’s publicity to buyer relations and accountable manufacturing dangers associated primarily to manufacturing and product litigation. The corporate should cost-effectively handle a broad provide chain that helps its numerous and world product portfolio, and responsibly supply inputs akin to important oils, resins, pulp, tropical oils, lubricants, tallow, corn, poultry, soybeans, silicon and packaging elements. As well as, the corporate has reasonably destructive publicity to well being and security dangers because of giant manufacturing amenities that embody the dealing with of doubtless dangerous substances akin to chemical compounds. Buyer relations dangers are current and symbolize reasonably destructive danger due to the potential for recollects and for litigation. Litigation dangers associated to talc within the US and Canada have been indemnified by Johnson & Johnson however worldwide talc litigation danger stays with Kenvue, as does every other potential non-talc litigation dangers. The corporate’s giant and numerous model portfolio serve to partially mitigate this danger. Whereas many merchandise are used orally or are topically in touch with pores and skin, the danger can be considerably much less given Kenvue’s huge product vary, than for client merchandise corporations that focus solely on ingestible merchandise akin to meals corporations. Nevertheless, the corporate should make investments to restrict publicity to dangers associated to product labeling, advertising, recollects, and contamination. Kenvue’s portfolio of merchandise with well-known manufacturers leaves the corporate uncovered to model notion/ reputational danger associated to those points if not correctly managed. By way of social concerns, the corporate helps range and inclusion and successfully adapts its product portfolio and advertising in response to altering demographics and societal traits akin to ageing populations.
Kenvue’s governance danger is impartial to low (G-2). The corporate has a conservative monetary coverage and Moody’s expects that it’s going to goal to maintain debt to EBITDA at or about 2x after lowering debt associated to the separation from Johnson & Johnson over roughly 2 years. That is balanced by a excessive dividend payout though free money circulation is predicted to be wholesome and share repurchases might be, no less than initially, restricted to these essential to offset dilution. Following the separation and subsequent anticipated distribution of J&J’s stake, Kenvue is predicted to be a broadly held, publicly traded firm. The corporate will take pleasure in retaining various key managers which have operated the enterprise for years, however it’ll take time to construct a observe document as an unbiased firm. As soon as public, Moody’s expects that the corporate could have a largely unbiased board of administrators, and separation of the CEO and board chairman roles.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
The steady outlook displays Moody’s expectation that Kenvue will develop income and EBITDA in a low single digit share vary over the subsequent two years, generate greater than $700 million of annual free money circulation, and make the most of money to fund debt compensation and small periodic acquisitions. Moody’s additionally assumes the corporate will keep robust liquidity to handle enter, labor and freight price pressures and any non permanent demand weak spot because of financial slowdown.
An improve may happen if the corporate maintains or improves market share, demonstrates constant earnings efficiency, debt/EBITDA is sustained beneath 2x and retained money circulation (RCF)/Web Debt is sustained above 20%.
A downgrade may happen if the corporate’s market shares constantly weaken, demand or price pressures meaningfully cut back EBITDA, if debt/EBITDA is sustained above 2.75x, or RCF/Web Debt doesn’t enhance to no less than 15%. A deterioration in liquidity or giant debt funded acquisition may additionally result in a downgrade.
The principal methodology utilized in these scores was Client Packaged Items revealed in June 2022 and obtainable at https://scores.moodys.com/api/rmc-documents/389866. Alternatively, please see the Score Methodologies web page on https://scores.moodys.com for a replica of this system.
Kenvue Inc., primarily based in Skillman, New Jersey, might be one of many world’s largest pure-play client healthcare corporations by income. The corporate manufactures and markets over-the-counter client well being merchandise in self care, skincare, magnificence, and important private care. Kenvue’s portfolio consists of among the most iconic manufacturers akin to Tylenol, Motrin, Neutrogena, Listerine, OGX, Johnson’s, Band-Support, Aveeno, Stayfree, Zyrtec and Nicorette. The corporate is predicted to separate from Johnson & Johnson, which expects to exit its remaining Kenvue holding by the tip of calendar 2023. Kenvue generated roughly $15 billion in annual revenues in 2022.
REGULATORY DISCLOSURES
For additional specification of Moody’s key score assumptions and sensitivity evaluation, see the sections Methodology Assumptions and Sensitivity to Assumptions within the disclosure type. Moody’s Score Symbols and Definitions might be discovered on https://scores.moodys.com/rating-definitions.
For scores issued on a program, collection, class/class of debt or safety this announcement offers sure regulatory disclosures in relation to every score of a subsequently issued bond or notice of the identical collection, class/class of debt, safety or pursuant to a program for which the scores are derived solely from current scores in accordance with Moody’s score practices. For scores issued on a assist supplier, this announcement offers sure regulatory disclosures in relation to the credit standing motion on the assist supplier and in relation to every explicit credit standing motion for securities that derive their credit score scores from the assist supplier’s credit standing. For provisional scores, this announcement offers sure regulatory disclosures in relation to the provisional score assigned, and in relation to a definitive score which may be assigned subsequent to the ultimate issuance of the debt, in every case the place the transaction construction and phrases haven’t modified previous to the task of the definitive score in a way that will have affected the score. For additional info please see the issuer/deal web page for the respective issuer on https://scores.moodys.com.
For any affected securities or rated entities receiving direct credit score assist from the first entity(ies) of this credit standing motion, and whose scores might change because of this credit standing motion, the related regulatory disclosures might be these of the guarantor entity. Exceptions to this strategy exist for the next disclosures, if relevant to jurisdiction: Ancillary Providers, Disclosure to rated entity, Disclosure from rated entity.
The scores have been disclosed to the rated entity or its designated agent(s) and issued with no modification ensuing from that disclosure.
These scores are solicited. Please discuss with Moody’s Coverage for Designating and Assigning Unsolicited Credit score Scores obtainable on its web site https://scores.moodys.com.
Regulatory disclosures contained on this press launch apply to the credit standing and, if relevant, the associated score outlook or score assessment.
Moody’s basic rules for assessing environmental, social and governance (ESG) dangers in our credit score evaluation might be discovered at https://scores.moodys.com/paperwork/PBC_1288235.
A minimum of one ESG consideration was materials to the credit standing motion(s) introduced and described above.
The World Scale Credit score Score on this Credit score Score Announcement was issued by considered one of Moody’s associates exterior the EU and is endorsed by Moody’s Deutschland GmbH, An der Welle 5, Frankfurt am Important 60322, Germany, in accordance with Artwork.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit score Score Businesses. Additional info on the EU endorsement standing and on the Moody’s workplace that issued the credit standing is out there on https://scores.moodys.com.
The World Scale Credit score Score on this Credit score Score Announcement was issued by considered one of Moody’s associates exterior the UK and is endorsed by Moody’s Buyers Service Restricted, One Canada Sq., Canary Wharf, London E14 5FA below the legislation relevant to credit standing companies within the UK. Additional info on the UK endorsement standing and on the Moody’s workplace that issued the credit standing is out there on https://scores.moodys.com.
Please see https://scores.moodys.com for any updates on modifications to the lead score analyst and to the Moody’s authorized entity that has issued the score.
Please see the issuer/deal web page on https://scores.moodys.com for extra regulatory disclosures for every credit standing.
Linda Montag
Senior Vice President
Company Finance Group
Moody’s Buyers Service, Inc.
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John E. Puchalla, CFA
Affiliate Managing Director
Company Finance Group
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Shopper Service: 1 212 553 1653
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