KVUE - NYSE

Hello, and welcome to the Kenvue Third Quarter 2024 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Sofya Tsinis, Head of Investor Relations for Kenvue.

Good morning, everyone. I'm pleased to be joined today by Thibaut Mongon, Chief Executive Officer; and Paul Ruh, Chief Financial Officer. Before we get started, I'd like to remind you that today's call includes forward-looking statements regarding, among other things, our operating and financial performance, market opportunities and growth. These statements represent our current beliefs, expectations or assumptions about future events and are subject to various risks, uncertainties and changes that are difficult to predict and could cause our actual results to differ materially. For information regarding these risks and uncertainties, please refer to our earnings materials related to this call posted on our website and our filings with the SEC. During this call, we will also reference certain non-GAAP financial information. The presentation of this non-GAAP financial information is not intended to be considered in isolation or as a substitute for financial information presented in accordance with U.S. GAAP. These non-GAAP financial measures should be viewed in conjunction with the most directly comparable U.S. GAAP financial measures and are not presented as substitutes for or superior to those most directly comparable U.S. GAAP financial measures. Those mostly directly comparable U.S. GAAP financial measures and a reconciliation of our non-GAAP items to those U.S. GAAP measures can be found in this morning's press release and our presentation available on the IR page of Kenvue's website, www.investors.kenvue.com. With that, I'll pass the call over to Thibaut.

Thank you, everyone for joining us today. First, I'd like to welcome Sofya Tsinis of our Head of Investor Relations. Many of you know Sofya. She brings over 20 years of experience and expertise in both Investor Relations and Equity Research in the consumer product sector, and we are pleased she is now part of the Kenvue team. In the third quarter, we delivered year-over-year organic growth of 0.9% on top of 3.6% last year. Despite the softer top-line that we are actively addressing, we delivered another quarter of strong productivity and efficiencies, funded our investments in our brands, and generated adjusted diluted earnings per share of $0.28. Throughout the organization, we are fundamentally and rapidly transforming our ways of working to unleash our full potential and fulfill our commitments to create long-term shareholder value. Leveraging our entire portfolio of iconic and trusted brands, we are activating our new Kenvue playbook to strengthen our presence and prominence in store, reach more consumers directly and through healthcare professionals, and amplify our innovation in a more impactful way. Self Care and Essential Health are already benefiting from this new way of working. In Skin Health and Beauty, while we are not yet where we want to be, we are advancing these focus areas to improve our growth trajectory and I will get into more details about the early results we started seeing in a minute. This playbook is powered by the increased marketing investment we discussed with you earlier this year. For 2024, we are on track to invest approximately 20% more than we did last year through advertising, healthcare professional engagement, in-store prominence and direct consumer engagement with an increasing focus on social media marketing powered by analytics and AI. Not only are we investing more, but we are also improving the efficiency and effectiveness of our marketing spend. For example, we announced in August, the creation of our new Global Content Factory, the production agency ecosystem we will leverage to drive relevant content in each market while reducing our costs. We are funding these marketing investments by driving productivity and efficiencies in our business. In Q3, we delivered another quarter of strong adjusted gross margin expansion of 130 basis points versus last year. In addition, as we rapidly transform our organization, we are also starting to see a decline in non-marketing related operating expenses. We have now exited nearly three quarters of our TSAs and remain on track to fully exit these agreements by mid-2025. As we unwind these TSAs, our teams continue to find better, simpler, and more cost effective ways to operate as an independent company. We are also on track to deliver $350 million in annual savings by 2026, through the Our Vue Forward initiative, as we continue to modernize our systems and optimize our organization. Combining these two programs, we are making rapid progress in becoming a leaner, more agile and fast moving consumer health organization with a more efficient cost structure, which in turn allows us to invest in our brands at more competitive levels, build new capabilities, and deliver on our income commitments. Now looking at the key highlights of our performance this quarter. Around the world, we see that consumers continue to prioritize taking control of their own health and are looking for convenience and value. In Self Care, our largest segment, organic sales grew 0.7% in the third quarter in line with our expectations as we lapped a strong year ago comparison of 6.7% growth. In a quarter where we saw volumes impacted by continued low incidence of allergy and pediatric fever, Self Care once again outperformed the market. In the U.S., we continue to strengthen our number one positions in pain and allergy with both Tylenol and

Thank you, Thibaut, and good morning, everyone. Our third quarter organic growth was 0.9% driven by value realization across all segments and volume growth in Essential Health for the second quarter in a row. Overall volumes declined 1.6% year-over-year, driven by Self Care and Skin Health and Beauty. Value realization contributed 2.5% to organic growth with balanced contribution from carryover benefits and incremental value realization actions taken this year. While we expect both price and mix to continue to contribute to growth, we expect volumes will play a bigger role in our growth algorithm going forward. Taking a closer look at our segments, Self Care organic growth was 0.7% year-over-year in line with our expectations as we drove continued share gains across the segment with particular strength in pain and allergy. Value realization contributed 1.8% of growth driven by carryover benefits and incremental pricing actions taken this year. This was partially offset by a volume decline of 1.1%, primarily due to softer incidences in allergy and pediatric fever, as well as some retailers reverting to historical order patterns in cold, cough, and flu instead of stocking up ahead of the season. Smoking cessation once again had a strong quarter overall. Moving to Essential Health, once again, Essential Health grew across all categories and all geographic regions, generating organic growth of 4.5% in line with our expectations. Value realization was 3.7%, driven mostly by carryover pricing, selective price increases outside the U.S. and mixed benefits from innovation such as Listerine Clinical Solutions. For the second consecutive quarter, volume grew year-over-year coming in at 0.8% during the third quarter. And for Skin Health and Beauty, organic sales declined 2.7% with a 4.7% volume decline, partially offset by 2% of positive value realization driven primarily by carryover benefits. As Thibaut mentioned, the pace of recovery in the U.S. slowed in the quarter, underlining our need to strengthen the impact of our actions against an increasingly dynamic environment. We continue to diligently strengthen our teams and capabilities to fully and effectively deploy our new playbook. Moving on to adjusted gross margins, our operations team continued to drive meaningful productivity improvements, which in combination with favorable value realization, and a non-recurring separation related benefit, resulted in a year-over-year expansion of 130 basis points to 60.7%. In fact, we have improved adjusted gross margins year-over-year during the last five quarters. We're laser-focused on fostering a culture of efficiency and operational discipline, and you can see the productivity benefits in our adjusted gross margin this year. Our teams are relentless in driving procurement savings, extracting efficiencies through process automation, and leveraging digital upgrades that increasingly provide real time analytics, helping optimize logistics and demand management. All in the 60.7% adjusted gross margin level in the third quarter was slightly ahead of our expectations, but directionally aligned with the lower sequential progression that is typical in the second half of the year. As a reminder, the fourth quarter is typically our lowest gross margin quarter given the timing of our annual plant maintenance. Turning to adjusted operating margin, which was 22.1% in the third quarter. It reflects strong gross margin improvement and initial benefits from Our Vue Forward, which were more than offset by our decision to increase our marketing investment this year, which is a key driver of our playbook. Our teams have successfully exited hundreds of TSAs with our former parent company without the operational disruptions that often accompany separations. As of today, we have exited approximately 70% of our TSAs and are on pace to exit all by mid-2025. The Our Vue Forward initiative is tracking to plan on efficiencies. Our Vue Forward equips us to operate more effectively and ultimately more competitively as we eliminate redundancies, reduce layers of hierarchy to drive faster decision making and implement new systems and automation to strengthen our capabilities in areas such as consumer insights and forecasting. We continue to expect adjusted operating margin in the range of 21% to 22% in 2024, which factors the benefits from Our Vue Forward and our supply chain efficiencies and increase in brand activation investments. Closing out the P&L, net interest expense for the quarter was $96 million, given our year-to-date trend we for the year to be approximately $380 million. For taxes, the third quarter adjusted effective tax rate was 28.9%, a bit higher than planned, primarily due to shift in jurisdictional mix of income and an increase in non-deductible costs. As such, we now expect a full year adjusted tax rate to be in the range of 26.5% to 27%. And finally adjusted net income was $542 million for the quarter and adjusted diluted earnings per share worth $0.08. Now, to summarize our expectations for the full year 2024, as you heard from Thibaut, we expect organic growth towards the low end of the 2% to 4% range, we shared with you in the beginning of the year due to both the pace of recovery in Skin Health and Beauty and softer category dynamics in the back half of the year in Self Care and Skin Health and Beauty. As it relates to cold, cough and flu, at this point, we're tracking towards a late start to the season, given the levels of incidence we have seen so far. We are assuming foreign exchange will be a headwind of about 1% for the full year. And for adjusted diluted earnings per share, we are confirming a range of $1.10 to $1.20, as we see stronger than planned gains in productivity and efficiencies offsetting the impact of the softer top-line fueling the acceleration in brand investment for future growth and allowing us to deliver within our adjusted EPS outlook for the year. We plan to exit this year of profound transformation with healthy Self Care and Essential Health segments benefiting from our new playbook as well as a Skin Health and Beauty segment showing signs of stabilization in important parts of the business. All this powered by the leaner, more agile and fast moving organization with more opportunities to free up resources and increase investment in our brands. This makes us confident that we are on our way to drive strong value creation over time. Thank you. And with that, we will take your questions.

Thank you. At this time, we'll be conducting a question-and-answer session. [Operator Instructions]. Our first question comes from the line of Bonnie Herzog with Goldman Sachs. Please proceed with your question.

Thank you. Good morning. I guess I had a question on your updated organic sales growth guidance. Although, it's now lower, it does still imply a decent step-up in Q4. So I was hoping for a little more color on the drivers of this. For instance, have you seen your shipments in October improve versus Q3? And I guess, I'm thinking about that in the context of maybe a little bit more of a more normalized flu and cost purchasing cycle. I guess, ultimately I'm trying to understand the visibility you have in light of the U.S. consumer and global macro pressures. Thank you.

Yes. Good morning, Bonnie, and thank you for your question about our updated guidance. So as you remember, the guidance that we provided at the beginning of the year contemplated a number of different scenarios. From an organic growth point of view, from a revenue point of view, to start with, we are seeing several factors that are not helping externally. We talked about the slower category in allergies and pediatric fever we have seen so far the deceleration in the category, the Skin Health category that the whole industry is seeing. The consumer remains cautious in China. And to your question about Q4, so far, we are seeing a late start to the cold, cough and flu season, so that's certainly not helping. Having said that, we have things to do internally and especially in Skin Health and Beauty, as you heard in my prepared remarks. Regarding Q4, we continue to expect Q4 to be our strongest growth quarter for the year and two reasons to that. The first one is that we see -- we start seeing the cumulative impact of our new Kenvue playbook in action. And you heard many examples of that in the prepared remarks. The second reason is that we are having easier year-over-year comparisons in the fourth quarter. Two elements that negatively impacted Q4 last year are not repeating this year. The destocking and the portfolio rationalization we had last year. So these are tailwinds for us this year. Two other elements that negatively impacted Q4 last year are now part of the base with no comp benefits this year, the situation in China, but also the flu season, where we see so far both years comparable in terms of level of low incidence and the fact that we are seeing a slow start to the season. So that's how we see the fourth quarter and what guides our thinking in terms of revenue growth. Paul, do you want to give some color on the EPS?

Thank you, Thibaut. I agree with you completely on the top line. And despite this backdrop on EPS, we are very confident in our ability to deliver towards the middle of our $1.10 to $1.20 guidance range for the full year. And this is despite the investments that we're doing to activate our brands at step top levels and we're maintaining that. And that is fueled by the ongoing productivity improvements that we have been delivering and continue to expect to deliver. And it is both in the gross margin line and also through Our Vue Forward program with efficiencies being realized and we will continue to realize them going forward as well.

Thank you. Our next question comes from the line of Anna Lizzul with Bank of America. Please proceed with your question.

Hi, good morning. Thank you so much for the question. I was wondering if you could frame the most recent trends for Skin Health and what would you say are sort of the first initiatives for Andrew in this new role. And also if you can provide just how much of a drag China was for Dr. Ci:Labo, it sounds like maybe this was a little bit incrementally weaker sequentially. So I was wondering if you could clarify. Thank you.

Yes, Anna. So on Skin Health and Beauty, the external environment is certainly not helping in the back half of the year. We had a slow sun season. You heard it from everybody. Sun care, which is an important business for us, did not contribute to growth as much as we would expect in a normal year. And throughout the third quarter, we started seeing a deceleration in the Skin Care category in the U.S. something that by the way, we expect to continue into Q4. And to your earlier point, we see continued softness in Asia. So the three elements combined are clearly slowing us down. Now there are also things we know we need to do better internally, right, and it's really applying the playbook, executing the playbook consistently with precision and at scale across the portfolio, continuing to secure more distribution, strengthening our in-store prominence, making sure that our marketing campaigns drive stronger conversion and that's what our teams are focused on. And so what are we doing differently in the back half of the year? On top of implementing this playbook, first and foremost, we are strengthening the team. We are bringing new talent, skills and capabilities. You may remember that we are moving next year to Summit New Jersey with our new headquarters. It's also an opportunity for us to build a new Skin Health and Beauty center of excellence with our teams co-located marketing, R&D operations to with new skills and capabilities in Skin Health and us welcoming Andrew this week is the latest addition to this team. We are also augmenting these internal capabilities with external partnerships. And you saw last week another example of that with our partnership with Dr. Bhanusali and Dr. Shah with the objective to strengthen innovation and communication on the Neutrogena brand specifically. And you will see the continued augmentation in our campaigns. So that's what we are focused on. Your question about our new leader for North America and Europe, Andrew, who joined us recently. We are happy to have Andrew join the team and augment our internal skills and capabilities. Andrew brings two decades of experience, strong track record in growing brands, turning around businesses, moving transformation agendas. He has a deep expertise in Skin Health and deep understanding of what it takes to win the math and masstige Skin Health and Beauty market in the U.S. So together with Charmaine, our Chief Growth Officer; Jan, our leader for North America, and the whole team; Andrew and everybody will amplify the green shoots we see with Neutrogena and build the momentum across the balance of our Skin Health and Beauty business.

And Anna, let me answer your last question which is on DCL. On DCL, last year was in Q3, it was the beginning of where we experienced the anti-Japanese sentiment in China. So we are lapping that it's not material -- it was not material in Q3 and will not be a material factor in Q4 as well.

Thank you. Our next question comes from the line of Andrea Teixeira with J.P. Morgan. Please proceed with your question.

Thank you. Good morning. I was hoping to see if you can elaborate a little bit more on what are the green shoots you're seeing and how Andrew is going to amplify, as you pointed out, Thibaut, the initiatives that you have been putting together. Understandably, you have a backdrop of a deceleration in Skin Health and Beauty. But thinking of the innovation that you put together, and you'll be putting for a while now, more digital investments and thinking about how much that increased AMP that you announced in the beginning of the year will translate into an accelerated improvement there. So anything you can give us in terms of timing when we should be expecting this to materialize. And for Paul, given the commentary you expanded a bit on the prepared remarks on the TSAs getting and the TMA is getting out. Just wondering where we should be thinking if you can update us with the savings that we've seen so far and how margins should evolve from here. Thank you.

All right. Good morning, Andrea. And so let me start with a question and then I will hand over to Paul. So your first question about the green shoots, how we are going to amplify them and the impact of our investment. So if you take a step back, this year, we are profoundly transforming the way we operate. We are changing our ways of working and we are increasing our investment and we do that across the portfolio. And we are pleased to see that our Self Care and our Essential Health segments are already responding well to this new playbook with very strong share gains in Self Care and two quarters in a row of volume growth in Essential Health. In Skin Health and Beauty, we are also applying the same playbook but we are disciplined in prioritizing how we are going after our recovery plan. And we have decided to focus on to start with the biggest areas. If you take Neutrogena, its sun and face and it's the in-store execution. And that what makes us confident that the playbook starts working is that where we started implementing our new playbook so far, we are seeing green shoots. So I'll give you a couple examples. We invested in strengthening our presence with dermatologists and we see a strong response in terms of recommendation by dermatologists and we are now back to where we were four years ago with face care. So that's really encouraging. In terms of in-store execution, it's an area where we have focused a lot of energy and it's good to see that since the planogram, where new planograms were put in place approximately mid-August. So halfway through the quarter, we see Neutrogena face going back to number one position in the U.S. in September and by the way, we see that continuing in October. So we now have eight weeks behind us of Neutrogena face being back to number one position in brick-and-motor track channels. So that's very encouraging. Same thing from a direct-to-consumer marketing and the effect of our marketing campaigns, our pivot to social media, our partnership with celebrities is clearly working in having us connect in a much more effective way with a younger audience and Gen

Of course. Andrea, good morning. So on TSAs, let me step back. TSAs were exiting them on track. I feel very pleased that we have not encountered any operational disruptions. So thank you team for doing that with excellence. And remember, the TSA exits will not necessarily allow us to exit in an optimized manner. That's why we have Our Vue Forward program. We are going to realize a few benefits, but given the time limitation we have to exit TSAs by mid next year. It's not necessarily an optimized exit. That's why we have Our Vue Forward program and we're tracking well. We announced it last quarter. We have started to realize some of the benefits of that Our Vue Forward program. We are on track to deliver the $350 million savings by 2026 where we'll be seeing the full impact. And it's not only about effectiveness, efficiency as well, and finding new ways of working in a leaner, more agile manner. Specifically on savings, what actions we have taken, we have taken a lot of the functional actions, procurement actions as well, and largely some of the org actions we have already taken as well. But we will continue to progress throughout the balance of the year and into 2025 as well. Your question is also around the impact to margins. We are starting to see some of the benefits of both, particularly Our Vue Forward and we expect to see the full impact more towards 2025 that will continue to be fueled for incremental marketing investments as well. So we are not there where we want to be from a competitive perspective in terms of investing behind our brands and the fuel that we get from Our Vue Forward, TSA exit and of course, gross margin expansion will allow us to continue to invest and deliver on our algorithm as well. So that's how I see things. Good progress so far and we will continue throughout the balance of the year and into next year as well.

Thank you. Our next question comes from the line of Peter Grom with UBS. Please proceed with your question.

Thanks, operator. Good morning, everyone. Hope you're doing well. So Thibaut, you kind of mentioned the two key reasons for weaker growth this year is kind of the weaker U.S. category trends and kind of the slower recovery in Skin Health and Beauty. And I guess, as we look forward here, I guess, I totally understand some of the one-offs you're going to be cycling in 4Q that would put organic growth more in line with the long-term algorithm. But just as you look out to next year, I'd be curious how you're thinking about the potential for weaker category growth to persist and maybe for a long recovery in Skin Health and Beauty to really impact your ability to return to on algorithm growth. I know we'll probably get 2025 guidance in a few months. But just curious if, based on where things stand today, would you anticipate some of these headwinds persisting into next year? Thanks.

Peter, good morning. This is Paul. So thank you for the question. We're not going to talk about 2025 today. Look forward to our conversation in the future. But I can tell you that 2024 has been a year of profound transformation. We're very pleased with the progress we've made so far and that transformation will also continue into 2025. The transformation will allow us to accelerate our top-line growth from this year and grow at a faster pace than we are doing this year. Income will grow faster than sales. That's part of our algorithm. And we will continue to invest in our business. We're not at competitive levels yet as I mentioned, so that is part of our algorithm that will drive acceleration in top line sales. And of course, from a cash perspective, we will continue to return cash to shareholders with attractive dividends. All that is part of our shareholder returns. Specifically, in terms of categories, we are monitoring performance of categories. We contemplate a variety of scenarios. In the case of seasonal businesses, particularly in Self Care, we're seeing more a trend towards normalization. We will assess what that means in terms of normalization. But it's certainly some of the factors that we're going to be considering as we think about 2025. We do believe that 2024 has become a little bit of a new base. And from there, we will assess how things will continue to work. And on top of that, we'll continue to -- we will deliver in 2025 and beyond on our algorithm.

Thank you. Our next question comes from the line of Filippo Falorni with Citi. Please proceed with your questions.

Hi, good morning, everyone. I wanted to ask a question on retailer inventory levels. Some of your peers have talked about retailers being more cautious with their inventory ordering patterns, particularly in the Skin Care category. So I was wondering if you saw any impact in Q3 and what are your expectations for Q4. And then specifically for the drug channel, given the importance of the channel for your business, are you seeing any impact from the recent store closures from some key customers? And how should we think about that potential impact into Q4? Thank you.

Okay. Good morning, Filippo. So let me take the first one on inventory level. If I look around the world, in the U.S., we believe inventory levels are on the low side. If you remember, we had some destocking in some channels in first half of 2024 that did not continue in the third quarter. And we would not expect that to continue to happen in Q4 either given the low levels of inventory we see across channel. In general, in around the world, we see more cautious ordering patterns in healthcare categories given the low levels of incidence. And we would -- we have seen that in Q3. We certainly continue to see that in happening in Q4 until the season happens post. We are clearly in a post-pandemic, post-COVID world where supply chain are stable. And so we don't see retailers stocking up ahead of the season. And they are going to wait until they see demand pick up to order what they need. And as you heard from Paul and I, so far, we have not seen levels of incidents moving in the direction of a peak. For those of you live in the Northeast, you suddenly have seen that we had good weather so far. So net-net, I would expect us at Kenvue to exit 2024 with healthy levels of inventory around the world. Your specific question on the drug channel, I believe it's in the U.S. drug and pharmacy overall is a strong channel for us worldwide. It's doing very well outside of the U.S. In the U.S., the drug channel has indicated the decline in traffic coming off the pandemic highs. There has been recent announcement regarding future footprint consolidation that has not happened yet. And so we work very closely with our customers to make sure that we offer the right assortment to their shoppers. And so we will continue to work very closely with our retail partners when they move on with their consolidation plans. Every time, the store closes you see a short-term impact as the inventory present in this store is really ready into other stores. And so you may see a short-term impact when a store closes, but over time, it certainly does normalize. We do not sell discretionary products at Kenvue. By and large, we sell products you need and you are looking for very clear reason. And so if you cannot find your product or products in one store, we usually see consumers going to another store and to get the brand they trust and need.

Thank you. Our next question comes from the line of Steve Powers with Deutsche Bank. Please proceed with your question.

Thank you, and good morning. Paul, your initial comments on 2025 were helpful. I wanted to sort of drill down and link it back to what Thibaut was talking about with respect to Skin Health and Beauty. In that business, you talked about the signs that the playbook is working in green shoots, which is great. On the other hand, the market backdrop is choppy. You're still sort of in the earlier sort of innings, I guess, of a real full turnaround in Skin Health and Beauty. Andrew just arrived, for example. So I guess, just as you think about 2025, in the context of that business, is the mentality and the objective that you're taking into 2025 one of just merely stabilizing that business year-over-year or is the ambition sort of the realistic ambition and the goal to actually grow that business next year? I'm hearing, I'm just not sure what I'm -- when I parse between all the different commentary, I'm not sure if you feel like the business is ready to grow next year or if we're still attempting to stabilize in 2025.

Yes, Steve, very good question. Let me be very clear. We are focused on returning the segment to growth and expect to do that in 2025. To your point, we need to see what happens to the category overall. From what we see today, I don't think we can count on an improvement in consumer sentiment in Asia. So for us 2025, it's really about fueling expansion in EMEA. It's working very well. How do we fuel this growth we are seeing and countering the deceleration we see in the category in the U.S. with a better execution of our playbook, better innovation, better campaign. So that's our plan for 2025. I gave you examples of green shoots in early green shoots in the parts of the portfolio we have prioritized thus far. Now, we need to expand across the segment with precision, at scale, continue to secure more points of distribution as the planograms flip in the back half of next year. In the meantime, strengthen in-store prominence, making sure that our marketing content drives stronger conversion and continuing to add new talent, skills, capabilities. So that's what we are going for.

Thank you. Our next question comes from the line of Keith Devas with Jefferies. Please proceed with your question.

Hey, thank you. Good morning. Thank you for the question. I just wanted to I guess, double back on a theme that I guess has been mentioned a couple of times, but it's not there's unique category softness yet you're proceeding with your reinvestment plans. And so I guess, I'm interested in how you guys think about if the category trends persist how that might change your thinking on where to reinvest and/or if it changes your expectations for a timeline on the return. It sounds like 2024 is a heavy investor in the year and 2025 will be as well. And so in light of the category trends, can a recovery or I guess, a rebound or a reinvigoration of growth still occur with some of reinvestments or how you might think about altering them in the context of the macro pressures. Thank you.

Thank you for the question, Keith. We are confident in our ability to continue to source funds to invest in our brands from both our gross profit, our gross margins, and also Our Vue Forward. Remember, Our Vue Forward is a two-year program and we have been successful in getting the efficiencies and productivity out of that. We're not done in terms of investing at competitive levels. So we do believe we have the right building blocks to continue to fuel the funds for that growth. Of course, we're monitoring the -- our own performance and the category performance as well. But our algorithm calls for continued investment in our brands. This is not a one-time step-up and we will continue to approach in a very thoughtful manner a continued investment and thoughtful, what I mean is always based on return on investments, which is something what we have done all along. And we will make sure that our brands get the proper investment to not only get the right return but also the reach that we need to drive the penetration particularly in Skin Health and Beauty and continue to gain in Essential Health and in Self Care as well. So across the Board, we'll continue to invest thoughtful approach and we have the fuel to continue to drive the investment.

Thank you. Our next question comes from the line of Nik Modi with RBC Capital Markets. Please proceed with your question.

Thank you. Good morning, everyone. Thibaut, I just was curious how you think about the skincare kind of portfolio complexity. In your view, what would kind of be the hero products within the Neutrogena brand family and is there an opportunity maybe to streamline and simplify use transferable demand to kind of make sure that you're focusing on the right SKUs and allocating the right amount of money to the right SKUs. Thank you.

Yes, Nik, very good question. The team does a good job prioritizing the biggest parts of the portfolio for each brand. So for example, I told you in Neutrogena; they are currently focused on sun and face that approximately 80% of our revenue in the U.S. for this brand. So we need to start by getting this part right. It's about making sure that we push the platforms. So Hydro Boost, for example, is one of our mega platforms, so we get a lot of synergies by promoting these range of products. It's also about doing a better job at unifying the brand and you will see initiatives in that area in 2025. And it's also making sure that the navigation and shopability is easier for consumers and shoppers in-store. And here I'm pleased with the progress that we are making in a number of retail partners this fall. You will see stronger brand blocks, easier to navigate with a shelving organization that helps consumers to pick the right products for what they need. That will certainly make our brands easy to shop in brick-and-mortar stores.

Thank you. Our next question comes from the line of Korinne Wolfmeyer with Piper Sandler. Please proceed with your question.

Hey, good morning. Thanks for taking the question. I'd like to touch a little bit on the gross margin this quarter. It did come in a little bit stronger and maybe you can talk through some of the puts and takes there. And as we think about Q4 and then even into 2025, what are some of the headwinds or even tailwinds that we should be cognizant of, especially around input cost inflation, transportation costs, et cetera. Thanks.

Thank you for the question, Korinne. We are very pleased with the performance on gross margin. The team is very dedicated to making sure that we get the fuel for the growth for the brands and we have confidence in continuing to expand our gross margins going forward. The sources are value realization. Pricing will be less of a lever, but it will always be a component. Manufacturing and supply chain efficiencies are a big building block to improve our gross margins. When it comes to commodities, commodity trends are helping offset some of the increased labor and logistics inflation that we have recently seen, but the benefits of commodity tailwinds are probably going to start winding down. So we are continuing to balance all of the elements of how we build our gross margins. We, remember from a seasonality perspective or the progress throughout the year. Q4 is our highest investment year in plant maintenance, as I mentioned in my prepared remarks. So it's typically our lowest gross margin period, but it should not be within -- without outside our expectations. I said that we are close to the 60% for the full year and that's where we are at this point we're maintaining our outlook. Margin progression is not linear. Given all these dynamics that I mentioned. As I think about going forward, I do believe that these improvements are going to be closer and more to the targeted long-term gross margin expansion goals that we talked about, which are in the range of 20 basis points to 30 basis points on a sustainable basis in the long-term. So pleased with the performance. It will continue to be a strength of ours. We have the building blocks and it will be the fuel for our growth.

Thank you. Our last question will come from the line of Jeremy Fialko with HSBC. Please proceed with your question.

Hi there, thanks for taking the question at the end of the call. So just a couple of things from me. So I guess, the first thing is, you've talked about all of these reasons why I guess, you're incrementally a little bit more cautious on the top-line. But I guess, a lot of them sound relatively transitory for me in terms of sun care kind of baked into the flu season. So I just wanted to draw out particularly focus on the U.S. the extent to which this is a kind of an underlying softening in the consumer rather than just a kind of accumulation of some of these slightly unfavorable phasing factors. And the second thing linked to that is, are there any areas where you might have seen some sort of a pickup in the price discounting or promotion? Thanks.

Okay, Jeremy, let me start with your first question about the external environment and the consumer in the U.S. When you look at the levels of incidence we had all year long across all geographies in terms of sun allergy, pediatric fever, it seems like flu is moving in the same direction, these low levels of incidence is -- we don't know yet if it's a new normal or not. But I would say, it's pretty unusual to have such low levels of incidence across geographies, across all these categories. In terms of -- but it doesn't reflect the state of the consumer. What we see with the consumer is the consumer continues to prioritize their health and the health of their loved ones, they don't compromise on that. Having said that, they are looking for convenience and value and you need to be very agile to make sure that you are present in all channels, which we are. And with price points that cater to the different needs of different consumers, so you can meet the consumer where they are and that's where we focus a lot of our attention. We don't see a trade down in terms of private label. You heard me give frequent reports on that. This quarter again, we didn't see a significant change in worldwide penetration of private label. Even in the largest highest penetrated category, which is the U.S. OTC category. We see private label penetration going down this quarter again. So that's what we see broadly for the consumer. From a promotional intensity point of view, when we look at all categories in the U.S. specifically, we don't see any increase in promotional intensity in the Self Care segment. We see a slight low-single-digit increase in Self Care and in Essential Health and Skin Health categories. But I would say nothing out of the ordinary and something that is more in line with, I would say, the new normal.

So thank you for all your questions. That concludes our report on our Q3 performance. Thank you everyone for joining us this morning. As you can tell, Kenvue continues to be in transformation with a strong progress on efficiencies and productivity, new ways of working, a continued investment in our new Kenvue playbook that will allow us to deliver within our outlook in terms of EPS despite a softer revenue in the back half of the year. With that, we wish you all a great rest of the good day.