On the Morgan Stanley side, please see Morgan Stanley's research website at www.morganstanley.com, Research Disclosures, for research disclosures. And if you have any questions, you can reach out to your Morgan Stanley representative. And then on the Kenvue side, Kenvue would also like to remind you that today's discussion will include forward-looking statements. These statements represent Kenvue's current beliefs about future events. Please refer to Kenvue's annual report on Form 10-K and subsequent filings with the SEC for a discussion of factors that could cause the company's actual results to differ materially from these projections. Additionally, today's discussion will include certain Non-GAAP financial information, and the company has posted on its investor relations website, at investors.kenvue.com, a reconciliation of these measures to the nearest GAAP measure. So with that out of the way.
With that.
I'm very pleased to welcome Thibaut Mongon, Kenvue's CEO, and Paul Ruh, CFO, to the fireside chat today. So maybe to start off with, it's been one and a half years since you've become a public company. Just level set us today on where you stand versus that period of separation, what the key focus points or strategies are here going forward to drive a sustainable return to the top-line algorithm you've laid out, and what are the key focus points going forward?
Yeah, Dara, thank you. That's a big question, so good to be back here this year. As you said, it has been a bit more than a year since us going public. We have made significant transformation in the way we operate as a business, as we transitioned from being a division of J&J primarily focused on cash to an independent company focused on profitable growth. So we have made strong progress on our separation. The financial separation is totally behind us. J&J got out of the stock fully six months ago in May of this year. The physical separation is on track. We are about 70% done with our TSA exit program. We'll be fully done by Q2 next year.
And that's great news for us because every time we exit a TSA, it's an opportunity for us to reinvent the way we work and find a simpler, easier, faster, sometimes cheaper way to get things done. So this part is going well. And then we are implementing what we call our new Kenvue Playbook. And this is really about reaching more consumers, unleashing efficiencies in our business that we can reinvest in brand activation, and driving a culture of performance and impact at Kenvue. And here, good progress. We are still in the middle of transforming. But if I think about our progress so far, we are implementing our new Kenvue Playbook, reaching more consumers, driving more distribution, more prominence in store, reaching more consumers either directly or through healthcare professionals, and amplifying our innovation.
All of that, we have, I would say, rewired the organization and changed our way of working to really deliver this growth in an organization that was primarily focused on cash generation before. And so that's well on its way. It's funded by our second priority. And on this one, we are doing, I'm very proud of the quality of the work the team is delivering month in, month out. We have taken significant cost out of the business in this very first year of operation. Our gross margin continues to expand nicely, 290 basis points this year. That's on top of a long track record of margin expansion.
And we have our TSA exit program that is complemented by our modernization program, which we call Our Vue Forward, which is an investment program of two years, 2024 and 2025, to modernize the company, having a more fit for purpose organization and investing in technology and automation to really leapfrog and have the infrastructure systems and costs that allow us to invest in the business at a very competitive level. And here, very proud to say that all the programs are on track and deliver the cost savings that we anticipated. And that's why you see us in year one as an independent company already able to invest $400 million more in brand activation investments. That was money that was stuck before, partly in a large OPEX structure that we inherited from our previous company. And so this cost takeout initiative is working very well.
That allows us to quickly activate our new Kenvue Playbook. All of that combined, it gives us confidence in our ability to deliver a long-term algo, which is really growing competitively with our categories, growing income faster than sales. You combine with that disciplined capital allocation framework, you get to a very attractive high single-digit, low double-digit TSR, which is our goal. That's the state of the business 18 months in. I would just add that from an outcome point of view, it's great to see that we are quickly able to take cost out and invest them in the business. It's also great to see that a number of our brands are already responding very well to this new Kenvue Playbook. If you look at our Self Care business, we are outperforming the market. Our Essential Health business reacted very well to the new Playbook.
We see volumes moving in the right direction. And in Skin Health and Beauty, we are not yet where we want to be. We knew all along that it would take a longer time to recover. But we start seeing some green shoots. And all of that combined bolsters our confidence in the future.
Great. Well, that's very comprehensive and helpful. Can you spend a little bit of time on category growth versus market share? There's been some volatility in category growth. So just some perspective there, given the historical volatility and confidence in market share performance as you look going forward, given some of the strategies that you mentioned that you put in place.
Yeah. If you look at category growth and the consumer in general, that's an area where you need to differentiate a little bit the consumer health space from traditional CPG categories, I would say. Some of it is similar. Some of it is different. So the consumer in general, we see that the consumer continues to be very, very focused on their own health and the health of their loved ones. They want to take their health in their own hands. They go to brands that are efficacious, they can trust, that have been in their cabinet, in their bathroom for decades, generations. And that's really what Kenvue is all about. So that's all good. If you take one level—if you look at one level down, we see two dynamics this year.
One, mostly in the Self Care space, the incidence-driven businesses are impacted negatively from a volume point of view by lower levels of incidence. Think about flu as we speak, where we see lower levels of incidence compared to last year. That's an area where we clearly see trends reverting back to the norms we had pre-pandemic, and so it has nothing to do with the health of the consumer or the health of the brands. Actually, we continue to gain significant share, but in a category that is negatively impacted by lower levels of incidence. But the brands are stronger than ever. The other category where we see some softness is in Skin Health and Beauty, with Asia not showing signs of improvement, and U.S., halfway through Q3, we started seeing some deceleration in the categories in the U.S.
So that's something that we are looking at and need to deal with moving forward.
Great. Given you've only been in the public markets for a year and a half, it's probably a good time to step back. Is there any areas maybe that you think investors don't fully appreciate at this point, given you're young as a public company, or any just under-penetrated areas from a business standpoint that you're particularly focused on going forward?
I think it has been a great journey of getting to know each other better and understand the consumer health space. That was not an investable space before. And so a couple of things. One is, I think, the size, the scale, the magnitude of the transformation we are talking about. You are talking about a very large transformation and separation from organizations that had been operating as one for more than 100 years, 130 years. So that's why I'm so proud of the quality of the work the teams have delivered, because delivering this type of scale and magnitude of separation and transformation in this short period of time, all on budget, on time, and with zero disruption to the business, I wouldn't say is unheard of, but it's certainly a very, very strong performance.
The positive side of that is that it really gives us an opportunity to leapfrog and set up the company with processes, technologies, and capabilities that will position us very, very well for the future. The second thing that I think is specific about the consumer health space is that our categories are not fully penetrated. So it's very different from traditional consumer staples, where your only way to grow is either to premiumize or to go into what we call emerging markets. In consumer health, every market is an emerging market because all the categories where we play tend to be underdiagnosed, undertreated, underpenetrated. So for us, it's really an opportunity to understand the consumer better, get the right insights, innovate the right way, be where the consumer is and needs us to help drive penetration in our categories.
You take Tylenol, that is a well-penetrated brand in the U.S. You still have tens of millions of Americans who don't know that they have an underlying condition that should prevent them from using any other analgesics than acetaminophen or Tylenol. That's a work of education. That's not an easy one, right? But that's a penetration opportunity for us that we are going after in partnership with healthcare professionals and some retailers. Mouthwash, right, from 10%-50% category penetration. Huge opportunity globally. Sunscreen. Only half of Americans use sunscreen on a regular basis, when we know that it's a major source of melanoma. So you look everywhere. You have opportunities for household penetrations. And that's what we are going after.
Right. Great. That's helpful. And maybe from a top-line perspective, you can give us some perspective on volume versus pricing and mix and how you're thinking about those dynamics as we look into next year, given some of the volatility recently. I know it'll be different by product category, by geography, right? So there are different ways to slice it. But some overall perspective would be helpful.
Maybe I can take that question. So from a volume and price mix perspective, we, as well as the rest of the industry, come from a high inflationary environment where we relied a lot on pricing and mix. So if we look at the last couple of years, it was growth mostly driven by pricing. As we enter into 2024, that's more of a balance between price and volume. And we're taking less and less pricing. So this year, we are relying less on carryover pricing. And new pricing is also significantly lower. If we think about the future, we believe that we're going to get to our algorithm, which is about two-thirds volume, one-third pricing. Pricing will always be an important component of our growth algorithm, but pricing in a holistic sense. Pricing in terms of RGM, in terms of value-added innovation, in terms of mix management.
So that's the levers that we're pulling. And there's many examples of that. This year, we launched Tylenol Easy to Swallow, and that's an example of value-attributive innovation. When it comes to volume going forward, we know that our categories are under-penetrated. So that's an area of volume growth. And the other one is we come up with innovation that is exactly what our consumers are looking for. So we do believe that R&D efforts and marketing efforts, whether it's directly or indirectly, will allow us to penetrate more households to get to that two-thirds, one-third.
Great. That's helpful. And given you only have recently separated into a public company, there are often big cost opportunities when sort of the sunshine of being standalone as an operating company occurs. So just as we think out longer term, obviously, you've already identified some cost savings opportunity, and you spent some time discussing it. But maybe thinking out long-term as you think about potential cost buckets versus where you stand today, how much opportunity there is, what areas there may be, how do you think about that conceptually looking out?
It's an infinite game.
It is an infinite game, I agree, Thibaut, and we look at it in two areas: on the gross profit side and on the OPEX side. If you think about gross margin, we have been quite successful in extracting efficiencies or productivity out of the gross margin, whether it is through inflation management, network optimization, on automation. Those are the levers that we constantly use, and we are in this unique moment where we are looking at our processes end-to-end as we exit the TSAs, and we're not only exiting the TSAs with more efficiency, but also more agility. So that takes cost out, and that's why we have been able to extract the 290 basis points that Thibaut talked about as of Q3, year over year. We do believe that that's probably a high mark.
But going forward, there's plenty of building blocks that we see that we will be able to continue to capture. And the gross margin efficiencies will be more moderated in the range of 20-30 basis points. But we will continue to drive the levers that I just talked about, including, of course, value realization or pricing mix that I just talked about. From an efficiency point of view on the OPEX side, SG&A, also the opportunity that the separation allows us is to look at the processes end-to-end. And when we have a separation in a specific process, we ask ourselves the question, do we automate? Do we put the process in a low-cost location? Or do we actually stop doing the work? And that's the process we go systematically through. And to be able to enable that, that's why we put Our Vue Forward program in place.
It will allow us to deliver about $350 million as of 2026 and beyond. We're being very deliberate in each one of those building blocks and ask ourselves the question, is this an opportunity to take cost out and invest back in our business? Overall, we have opportunities at the gross margin, at the OPEX side, to be able to extract more efficiencies and invest back in our brands while delivering on the algorithm that Thibaut described, which is growing income faster than sales.
Right. Great. That's helpful, and given you're in a period where you're really looking to drive market share, maybe you can just give us some perspective. There's always a tension between investing the business to drive top-line growth and market share versus delivering earnings growth and dropping that to the bottom line, so just as we look out beyond this year, maybe you can discuss that tension and how you think about managing the business strategically.
Yeah. If you look at where we are today, we are clearly in investment mode. So we increased our budget 20% this year, funded by the initiative that Paul just referred to. We believe that we are not yet at competitive level in terms of brand activation budget. If you look at one proxy for that, which is our ratio advertising to revenue, we were at 8.7% last year, so well below competitive norms. We are going to end the year with our investments between 10%-11% of revenue. So significant improvement, but still below where our competitors are. So if you think about the future, and certainly in 2025, we'll continue to be in investment mode, but always with an eye towards ROI, right?
We are very disciplined in making sure that we get returns on every dollar we invest behind our brands, whether it's media, promotions, investment in healthcare professional reach, you name it. So that's what's ahead of us. But to Paul's point, that will not forbid us from delivering on our long-term algorithm. We will continue to leverage the P&L to drive income faster than sales. Probably not in the phase we are in right now, which is a phase of investment, probably not leveraging the P&L to the full extent. But as we progress in the years to come, we will certainly move in this direction.
That's helpful. Maybe we can move into the segments themselves. Self Care brands have been performing well in terms of market share over the last few years. Essential Health, we've started to see a recovery in volume growth, so maybe we could start on those two businesses. Where you stand today, strategies going forward to drive growth in each of those businesses.
Self Care, the segment is doing very well. We are stronger than ever. We are consistently outperforming the market. Our brands are very strong. In the U.S., we had now more than a year of share gains in Tylenol, more than two years of share gains in allergy. We are reaching more. We are applying our Kenvue Playbook, so gaining distribution, reaching more consumers, either directly and through increased investment behind doctors. Our innovation is very well received. Paul talked about Tylenol Easy to Swallow. We have a lot more innovation in this segment, and it's very well received. Outside the U.S., same thing, very strong performance in smoking cessation with Nicorette. So I could go on and on and on, but the segment is doing very well. You see some pressures this year on the low level of incidence, as I talked about.
As the levels of incidence are probably going back to pre-COVID, pre-pandemic levels, we'll see how this particular flu season ends. We talked about a late start in our Q3 earnings score. We were right. We have not seen improvements since then. We'll see how it performs between now and the end of the winter in the March timeframe. You will always have these short-term peaks and valleys, but overall, a very strong business. That's our largest business, Self Care. Essential Health, our second largest segment. As you said, we deliver ahead of expectations. Here, it's great to see that the Kenvue Playbook starts working as well. Second quarter of volume growth, we drive distribution. We increase our level of investment. It's a sector where we have an opportunity to reach many more consumers because these are categories that are really where we are really strong.
In baby care, we are, I think, eight or nine times bigger than the next competitor. In mouthwash, significantly bigger than the next competitor. So for us to grow in this segment, we need to grow the pie. We need to increase household penetration. That's what we are driving successfully with our new Kenvue Playbook. Then you have the remaining third of the business, which is the Skin Health and Beauty segment, where we have some more work to do, right? We are in recovery mode. We said that all along. It would not be linear. It would not happen overnight. Where we are very excited is to see that the new Kenvue Playbook starts producing results in this segment as well. You heard us talking in our Q3 earnings call about the green shoots we started seeing. We are focusing our attention on core priorities.
We are not going after everything everywhere at the same time, but in the areas where we have focused our strategy, which is expansion of our brands in Europe, you saw double-digit growth in the last quarter. That's going extremely well with Aveeno and Neutrogena expanding very quickly in this region, where you have a lot of competition, which shows the strength of our brands and the effectiveness of our playbook, and in the US, which is our largest part of the business, where we focused, we start seeing results, so we started focusing on face and sun for Neutrogena as an example, and we saw in Q3 we outperformed the market in sun care, and in face care, we got back, we got our number one position back in the face care segment in America in the tracked channels, so brick-and-mortar channels.
That's something that we are very excited about. And we have retained this number one position for the last three months now, 12 weeks, where we see one of our key competitors losing share and Neutrogena being a strong number one. So that's very encouraging for us. It's an encouragement for us to amplify these green shoots across Neutrogena, but across the rest of the portfolio. And that's what makes us confident in our ability to return this business to growth in the future and accelerate from where we are today.
Right. Okay, and in Skin Health and Beauty, what's sort of the biggest unlock, I guess, looking forward versus history?
Yeah. We have changed many, many things across the organization, but in Skin Health and Beauty in particular, we had a team that was scattered across different sites. We are putting everybody together, co-located, marketing insights, innovation, operations. We all moved to our new headquarters in Summit, New Jersey, in February of 2025. Very excited about that. We have significantly changed the marketing playbook. So with a very strong focus on execution in terms of distribution and prominence in store, with our brands much more visible, we have clearly invested more in reaching more consumers, but also reaching more consumers differently with a strong pivot to social media, to influencers. And you saw some of that showing up in the back half of the year. And it's only going to be amplified moving forward. We announced in Q3 that our partnership with two mega derm influencers, so influencer dermatologists, Dr.
Bhanusali and Dr. Shah. We are very excited about this partnership. They have a very, very strong followership on social media, are clear innovators. And you are going to see an impact of this partnership in both innovation and communication. And then you start seeing stronger innovation. You saw some of that in the back half of this year with Neutrogena Collagen Bank, acne patches, a new cleanser line. You will see more of that in 2025, in 2026, in 2027. So I would say we are changing more than many things, everything in Skin Health and Beauty. And you start seeing the impact of that in the back half of this year.
Great. That's helpful. Maybe we can turn more to the margin side of things. And from a gross margin standpoint, some of the commodity tailwinds are winding down in the group in general. Just line of sight from here to long-term gross margin expansion. We obviously talked about it earlier in terms of productivity. But how do you think about the different buckets, productivity, pricing, mix, costs, as you think longer term from a gross margin standpoint?
Of course, so on the gross margin side, we have the two major components. One is the value realization and pricing. We have clear building blocks and line of sight to making sure that we have the right components of value realization, and it's for the whole portfolio as a whole. Mix and innovation play an important role, and in the case of pricing, we will do surgical pricing where it's necessary. I agree, and we all see that inflation is at the lower level. However, pricing surgically in certain parts of the world is necessary to make sure that we maintain our gross margins. Our philosophy, as we talked about before, is about taking enough pricing to maintain a gross margin, offsetting inflation and forex, and the efficiencies will allow us to enhance our margins, so that's something that we live by.
And we will continue to employ pricing in a smart way to be able to get there. So that's on the gross margin side from an RGM perspective. We talked about the three components of gross margin enhancement that are more through efficiencies, through automation. More and more automation is being leveraged now, especially as we exit the TSAs. We have opportunity to look at automation opportunities, leveraging our capability center that we opened earlier this year in Bangalore. And that's just an example of how we're leveraging technology. Inflation management on the deflationary environment and also going forward is another component. And we have building blocks that are related to network optimization, whether it's our distribution footprint, our warehousing, or even our manufacturing footprint, whether it's internal or external. That's something that we do day in and day out. That's an infinite game.
And we have the building blocks to get there. We are counting on efficiencies on a value chain perspective across the board. So we do believe that that will allow us to get the 20-30 basis points that I just talked about going forward by managing all these different levels. And of course, we have the rest of the P&L that we will be working with to make sure that we invest back in our brands in a balanced way. 2024 was a year where we needed to catch up. It was a reset year. Remember, in the beginning of the year, we talked about the insignificant investment. We're not done in 2024. And as we approach competitive levels, we will put our long-term algorithm to work while making sure that we deliver income growth faster than sales. So that's how we think about it.
The most important thing is a very disciplined approach to all of these components and having visibility of those building blocks early on so that we can activate them and plan for them ahead of time.
Right. That's a perfect jumping-off point for my next question, which was around advertising spending. You mentioned getting towards competitive levels. I think you're increasing ad spend by 20% roughly this year. Obviously, a pretty large increase. Are you expecting continued outsize increases beyond this year? Do you think you're sort of at the right level as a percent of sales leaving this year? And earlier, we touched on the ROI from advertising spending. So maybe you can touch on the ROI you're getting from that higher ad spend, how much you think it's paying off, and any shifts in strategy going forward from a spending perspective.
So we are still in this investment phase that I referred to earlier. So this was certainly true this year. You should expect us to continue to up our investment level next year. We are not yet where we want to be. On one hand, yes, in terms of competitiveness versus our peer sets. But I think more importantly, the fact that we are talking about under-penetrated categories. And so we have an opportunity to talk to many more consumers and attract them to our categories and our brands. And so you should expect us to continue to invest while leveraging the P&L, as Paul said, maybe not to the full extent while we are in this accelerated investment phase, I would say. But you will definitely see us continuing to do that in 2025. Now, your point on ROI is a very important one.
It's a method that we have developed pretty well over years of scarcity in investments that every dollar counts, and so over the years, we have developed processes and technology that allows us to be pretty surgical in the way we invest our money, and we track. I'll give you the example of media planning, where we have an agency system, technology, and talent and capabilities that allow us to get industry-leading ROIs on our media investments, but we do the same with promo efficiency or return on our healthcare professional investments. We track every week the average weekly recommendation for our brands from dentists, dermatologists, pediatricians, you name it, and you can see very well that, for example, our investment in sales force or sampling this year is giving us a very strong return. Same thing in our investment in merchandisers.
So, we have pretty good processes with Paul's team tracking, together with our marketing teams, the efficiencies of our spend. And we'll continue to do that. So, I would say, think about these early years of Kenvue as catching up from an investment point of view and then getting into the normal rhythm of traditional ROI management, I would say.
Great. That's helpful. We spent a lot of time talking about the income statement and how the strategies are evolving there and spending behind the business, etc. Maybe you can take a minute and just focus on capital allocation priorities here. If anything's changed in your infancy as a public company, how that's maybe evolving in your thought process over the last year and a half here?
We look at our capital allocation and analyze it and make sure that it's the right one, and the priorities are very clear for us, and that is what we have put in place last year, this year by investing, number one, in our business. The investment in Our Vue Forward is about $550 million between this year and next year. That's leveraging our balance sheet, a restructuring charge, so that is the number one priority, and we're seeing the benefits of it. The second priority is making sure that we provide healthy dividends to our shareholders. That's part of our TSR algorithm, and it will continue to be so. Deleverage is another component, and we have a goal to be able to get to two times gross leverage at the end of next year, towards the end of next year, and we're tracking there.
We have solid cash flow generation capabilities, and then with the excess cash, once we get to that point, we will look at other opportunities to create value-enhancing activations for our shareholders, primarily enhancing our share buyback program. So far, it's only to offset stock-based compensation. We will assess whether we can do more or M&A. M&A is not on the radar screen at this point in time. We're focused on our transformation, and we believe that the right time will come later. We look at everything that comes our way, but that's the sequence of the priorities that we believe are very tied to our TSR algorithm, so growing our TSR algorithm is high single digits, low double digit TSR, investing in our business, and through smart utilization of our cash flow.
Great. That's very helpful. Thanks so much for joining us here today. We appreciate you guys being here.
Thank you.
All right.
Thank you, Paul Ruh.
Thank you.
Good to be here.
Thank you, Dara.