Conference Transcript - NWL 2026-06-03

Speaker 2

All right. Good morning and welcome back, everybody. For this next session, it is my pleasure to welcome Newell Brands back to the stage. With us this morning is President and Chief Executive Officer Chris Peterson and Chief Financial Officer Mark Ersig. Thanks, Chris.

Christopher Peterson, CEO

Before we get started today, I just want to say that we may make some forward-looking statements and refer to some non-GOT measures. you can refer to our website in our Q1 investor presentation for description of risk factors and non-gap reconciliations.

Speaker 2

Great and with with that out of out of the way I guess we can jump right in. Chris just a bigger picture question to set the scene like it was at this conference three years ago that you unveiled the new strategy around how to where to play and how to win choices relative to that starting point, how would you frame where Newell is today and where have you made the most tangible progress and what do you want investors to appreciate most about the story at this point in Newell's turnaround?

Christopher Peterson, CEO

Yeah, thanks, Chris. Yeah, three years ago we unveiled a new strategy and since that time we've made tremendous progress. The strategy was a capability-based improvement strategy. We have significantly improved the capabilities of the company. If you look at the company today, our gross margins are 500 basis points, roughly higher than where we were three years ago. By the end of this year, we'll take almost two turns out of our net debt-to-EBITDA ratio, so we have delevered the company, and we continue to expect to do that going forward. The longer piece was building the front-end capability in terms of consumer understanding, innovation, go-to-market capability. We have now got that in place. We have a full slate of innovation and we have guided that this quarter that we're in now, the second quarter, is going to be the quarter that the company returns to top line revenue growth, which will be the first quarter since COVID. So I believe that we're in a position now going forward, starting with this quarter, where we are going to return to sustainable, profitable growth, which is a big departure from where the company had been three years ago.

Speaker 2

Got it. No, I do want to pick up on a couple of those points, but just first, Mark, from a financial lens, I mean, the margin improvement over the same period has also been pretty impressive, and that's even before this return to core sales growth. Obviously, it's not quite what you wanted it to be because of some of the external headwinds that have come your way. But can you just help us think about how you'll build upon that trajectory as you get back to core sales growth and what's underpinning your confidence that the next phase of recovery is top-line led?

Mark J. Erceg, CFO

Yeah, great question. So, look, we're really proud of what the team's accomplished over the last three years. Um, if you look at where we started from, we had a business situation where our gross margin had fallen away and decayed every single year since the jargon acquisition, we stopped that dead in its tracks and made a meaningful inflection against it. As Chris indicated, we're up over 500 basis points, um, in this relatively short period of time. And that's despite having to incur, you know, these tariff challenges and more recently some commodity headwinds as well. You know, our normalized op margin when we started the journey was six. If you take the midpoint of our guidance for this year, it'll finish at nine. So basically, over this three-year period, we've added 100 basis points to op margin, despite all those challenges, while the top line was compressing and when we were drawing inventory down. The good news is, you know, we don't have to ask the question, how long can we continue to take cost out while not having sales improve? Because as Chris just indicated, sales are improving. And we are going to turn positive in the second quarter. And once that starts to happen, the flywheel really starts to kick in. because since 2017 we've spent two billion dollars automating our production facilities we have highly automated operations today we've effectively taken out over 5 000 roles through that automation work a good example is on sharpie where we used to make 25 sticks per minute we now make basically 20 times that that rate as just one example and because of that the incremental marginal value coming off those production lines on a gross margin basis will be in excess of 50 percent and on an op margin basis it'll probably be at excess of 45 percent so the good news is we have an incredible team that have demonstrated the ability to be very agile take a lot of costs out of the system in a very efficient and productive way while building capability and now that the top line is inflecting

Speaker 2

we're gonna get all that fixed cost leverage coming through not just the manufacturing facilities but the overhead lines as well got it no that's very helpful and then just around the inflection in core sales what are the key building blocks that give you confidence that this inflection is truly durable and sustainable and not just a function of distribution timing and I know you have a lot of tier one tier two innovations coming out this year but how do we think about just the the durability of that sure so as we headed into this year we have 25 tier one and tier two which are our larger largest tier of innovation launching this year.

Christopher Peterson, CEO

For perspective, three years ago when we launched the strategy, we didn't have a tiering system. We put a tiering system in place. We completely rebuilt the innovation process and pipeline. We invested in consumer insights. We invested in brand building. We put brand management in place. We completely retooled the way we do innovation and we went from at that time when we put the tiering system in place one tier one and tier two innovation and we've now built up to 25 across every one of our business units. The exciting part about those 25 is that all of those 25 we sold into retailers last year as part of the line review process so we know and we have firm commitments that our distribution is going to be higher this year, both as a share of shelf and in absolute terms. And gaining distribution across the entire retail landscape is a good start to the innovation. The retailer response has been terrific. We've started to launch the innovation in some of the categories at the beginning of this year and in the fourth quarter of last year. When we reported Q1, we beat sort of the midpoint of our guidance range by two and a half points on the top line that was largely driven by innovation initial innovation response from consumers being stronger than we expected which allowed us to not only beat but raise guidance on the top line for the current year we also indicated that this quarter is going to be the quarter we return to sales growth as a company and we are on track to do that so our guidance for the second quarter is to have core sales growth between zero and plus two percent, which will be a meaningful inflection. We expect that to continue as we go beyond the first quarter. Some of the exciting examples of what we've launched, if you take the baby business, we launched a Graco 360 turning car seat. It was the number one launch in the baby gear category in the United States last year as ranked by revenue and growth of the category. Over the last four or five months, we've gained 300 basis points of market share in the baby gear category in the U.S. based on that innovation, along with innovations on strollers, innovations on other parts of the baby gear category. That returned the business from a consumption standpoint to over 4% core sales growth in the first quarter. If you take Coleman, another example in the outdoor and rec business, which has been one of the businesses that we said is going to inflect this year, we launched the Snap and Go cooler at the beginning of this year. That innovation, which is a patented new innovation that allows you to collapse a cooler to a third the size of a regular cooler, which allows for easier transportation and easier storage is running 900% higher than plan to date. So we've had to increase our supply plan six times in the last four months. We've got full distribution at REI, one of the leading retailers in the US. It's allowed us to crack into Dick's Sporting Goods for the first time, which we're very excited about. It's been rated, I think, on Amazon as the best new cooler launch in the industry. And so a couple of examples that's having us be excited. So I think, and then if you look at the first quarter, six of our top ten brands were growing market share now. So it's the first time that we've seen that type of consumer response, and I think it's a Testament to the capabilities that we've built and that we're bringing to bear. And this is before all of the innovation fully launches, which will happen over the next few months.

Speaker 2

Great. And then just to build on that, obviously, the categories have categories remain modestly under pressure, but you're driving a lot of new growth and new excitement in baby and coolers, like you just mentioned. And can you, like, how long do you think you can sustainably grow the top line in such an environment? Or, like, is it become incumbent upon you to drive that category outperformance?

Christopher Peterson, CEO

Yeah, we think there's a real opportunity for us to drive, to play a more direct role in driving the category growth. And so we're driving innovation both to gain market share but also to begin to drive category growth and we're seeing that in a number of places. Some of our categories there was a pull forward in COVID that in things like home appliances and in some baby gear categories where people bought forward and on a few of our categories that have longer purchase cycles we're now seeing consumers return to the category and we can entice those consumers when they return to the category with a superior value product that has better features and benefits that entices the consumer to return as the product lifecycle wears out we can start to drive category growth we're also driving premiumization in a number of our categories we generally played three years ago in and And the bulk of our brands in the opening price point and middle price point parts of the categories, we've made a deliberate choice as part of that strategy to move more into the medium price point and higher price point categories. That choice has worked very well for us because what we're seeing is that across our business in general merchandise, the middle and higher income consumers in the U.S. continue to buy more. And so we're seeing growth in general merchandise from those consumers, which is very well situated for the innovation that we're bringing, which is targeting those consumers specifically.

Speaker 2

And just around all of this new innovation, you've done a lot of work over the past couple of years rationalizing SKUs. And, like, so how do you ensure that you can maintain high quality without reintroducing a lot of the complexity that you work so hard to?

Christopher Peterson, CEO

Yeah, we've done a number of other things. So we've, what we're trying to do is drive fewer, bigger innovations supported for longer periods of time. And one of the things we've put in place is innovation portfolio leaders across each of our segments. And so this is a new capability that we put in place about a year ago. When we started three years ago, we had to rebuild the whole innovation process pipeline capability. By the way, when we did that, we did it with an AI-first mentality. So we are very advanced on AI in our product development and our consumer insights capability. I think we're among the leaders in the industry now in consumer products at AI adoption on that front end capability. And we can talk more about that. But if you look at that, these innovation portfolio leaders we put in place across the segments, look at the entire portfolio of innovation that the segments are working on that are slated to launch over the next three to five years. They evaluate sufficiency from a top-line standpoint to ensure that the innovation portfolio is going to deliver consistent top-line growth. They also weed out small programs and recommend choices to ensure that we're driving fewer bigger and we're not allowing the organization to proliferate SKU and brand complexity. You know, over the last several years, we've taken our SKU count from 100,000 down to 20,000. In the last three years, we've taken our brand count from 80 down to 50. We have 25 brands that represent over 90% of our sales and profit that are the priority brands that we focused on. those brands are growing faster than the balance of the company. So we are driving an improvement in the quality of the portfolio at the same time that we're returning to growth as a total company.

Speaker 2

Great. And I mean, yeah, let's dig into your AI program. At Cagney, you mentioned Quantum Leap.

Christopher Peterson, CEO

So where are you seeing the most tangible impact around speed to market, marketing effectiveness and just execution on shelf and yeah we we've taken sort of as part of the quantum leap program which we launched we got started on AI a couple years ago but we pivoted to be sort of an AI first under this quantum leap program about a year ago and there's really three planks to the program the first is rolling out AI tools that enable personal productivity so we've rolled that out to the top 2,000 leaders across the company we have fully trained people on using things like Microsoft Copilot 365 in their individual daily work to make individuals more productive. The second part of the strategy was an AI navigator strategy where we named 33 navigators for every function in the company. We have now developed what is a fully AI enabled function look like for every function in the company five years from now. From that, we've developed a roadmap of what is the best way to get from where we're starting to that. And then the third part of the plank is to take a look at multifunctional processes. If you look broadly across the company today, we have well in excess of 100 use cases of AI stood up. We're probably approaching 200 at this point. But really, the areas where we've made the biggest progress is on product development, marketing, consumer service, customer service, and supply chain. If I just take the product development and the marketing section as an example, as we put the brand management system in place, we segmented brands into consumer targets that each brand was focused on. We now have developed digital personas that represent those consumer segments. We've developed enough digital personas that we now have digital focus groups that allows us to do consumer insight testing at a much more rapid pace. From there, we've built AI applications in our entire product development cycle. So we're able to go from insights to sketches to finished photography to prototype products in what used to take four months, now in about five days. So it's a dramatic acceleration of speed, which is allowing us to repopulate the innovation cycle at a much more rapid pace. On the marketing side, we've automated our digital content development process, both in terms of copyright, still photography, and video. And this is a big improvement. So last year, our digital content creation team generated 500% more digital assets without any additional people. So we're driving dramatic productivity. We could have chosen to take that and downsize the team by 80 percent, but instead we chose to accelerate the digital content, which is also, we think, contributing to the company's return to core sales growth. That process is continuing. We started off the process focused on the U.S. We're now focused on leveraging that digital content and enabling it to travel with AI globally in all of our international markets. And so we think there's a big opportunity for us in that area as well. On the supply chain, we're getting much more efficient in things like demand and supply planning. We believe it's going to unlock working capital, which is going to unlock cash flow. And then on consumer service, customer service, we're driving efficiency and speed, which is helping us drive overhead cost savings. so and then and generally the other thing I would say about the AI program we've taken an approach of building the capability inside the company so we're not using outside consultants because we think we know as much or more than they do we're not following AI for AI sake we're following it in the service of our strategy and the ROI that we're seeing is measured in months not years and so in In many cases, we're seeing paybacks from the investments we're making in AI of two, three months. So it's a very rapid payback, the way we've approached it and the internal capability that we've built.

Speaker 2

Got it. And then, Mark, maybe you could just frame for us how these capabilities, like Chris just mentioned, higher margins, unlocking some overhead savings, improving cash conversion. Maybe if you could just help us frame the magnitude of these unlocks.

Mark J. Erceg, CFO

Yeah, Chris did a great job of sharing, you know, from a broad standpoint, how we're thinking about AI and how that's actually translating into tangible benefits for us. I guess one of the things I would offer up is if you think about, you know, what we've been able to achieve, and if you looked at our Q1 print, you know, our normalized gross margin on a three-year stack basis was up 610 basis points. Within that, our normalized op margin on a three-year stack basis with up 270. And that was while we increased our A&P spend by over 50%, right? So all these capabilities that Chris spoke to are all coming together and now converging to allow us to drive the top line because using AI enablement to drive the top line is the best way for us to monetize it through the rest of the P&L itself. And we're starting to see that. The other thing I would point out is if you look back to the third quarter of last year, that was the first time our overhead as a percent of sales arced down since we started this journey. And that was because over the course these last three years we've had a whole bunch of capability sets we had to build out that we simply didn't have a lot of the front end capabilities chris spoke to it's not a coincidence that chris talked about the fact that we started this ai journey well over a year ago and it was in the third quarter of last year that overhead arced down for the first time if you look at the guide we've provided for the current year we've said that overhead is a percent of sales will come down somewhere in the 70 80 basis point range that's a meaningful point of inflection for us because we've done a great job driving gross margin up to this point but our overhead as a percent of sales structurally is too high right we have a target of getting down to 17 to 18 percent this will help in that regard you know a great deal and then Chris touched on a lot of the other things that are happening as well you know allowing us to have better deduction management

Speaker 2

through the use of AI that drives cash conversion cycle that drives operating cash flow right all these other pieces Chris largely gave voice to so I won't I won't repeat them here great and And look, I mean, Newell's been, you've navigated a highly dynamic tariff environment over the last couple of years, like, is this, like, how are you managing this internally? Is this just a new, is it just a new cost of doing business in this environment?

Mark J. Erceg, CFO

Or like, do you see a structural competitive advantage, just noting you have such a strong domestic footprint? we do you know when we started this journey when we were here three years ago we talked about our capability sets across these 11 you know key capabilities that are required to win in our industry at that time we graded ourselves largely red on the front end capabilities but you'll recall we also graded ourselves largely yellow to slightly green on a lot of the back-end capabilities like supply chain and procurement at this point in time our supply chain and procurement teams and trade management teams are i think best in class and they've allowed us to be very agile with respect to tariff management it wasn't that long ago that we had over 30 percent of our business that was tariff exposed right particularly to china we'll finish this year with less than 10 percent of our business in that situation and that 10 is largely concentrated in the baby gear business which is pretty much a push from a competitive standpoint because just about every car seat and stroller in the u.s is imported from that same market right so we're not relatively disadvantaged as it relates to that we are relatively advantaged however because we do have this very strong domestic manufacturing base we have 15 production facilities in the us we have two on the border that are 98 usmca compliant and that gives us tariff advantages in 19 key categories so for example we make coolers in in kansas we make river made food storage products in ohio we make nook baby care products up in wisconsin we make writing in tennessee we make candles up in massachusetts right we make brute refuse products in virginia could go on and on and on and on that is a meaningful competitive advantage that we have now it's taken us a little longer than we initially thought to fully leverage that because frankly when you think about you know how much dislocation there was when the tariff announcements came out most retailers were caught a little flat-footed as most industries were and they didn't decide to go to some of the discretionary categories that we compete in as the first order of business as far as resetting their thinking and their supply chains now that we've had a chance to go through the full cycle and bring consumer-led innovation to bear as part of those normalized line reviews and make the pitch about how having a very strong domestic supply base with really strong fill rates is an advantage for them and for us, we're seeing a lot more of those wins. And when Chris talked about the net distribution gains we're seeing this year, a lot of that traces back to the strong domestic footprint that we have.

Speaker 2

So I think it's an absolute advantage, and I think it's one that's only going to continue to give us higher rates of monetization in the years ahead got it so the the innovation coupled with with the the footprint is helping secure these wins so so you are seeing retailers like retailers are still focused on like maintaining like a de-risk supply chain from that standpoint like yes yeah not only that but so they are definitely focused on de-risk supply chain but the other thing we've done over the last several years is we've integrated Newell.

Christopher Peterson, CEO

So Newell historically operated as a series of independent business units, and we've moved the company effectively to an integrated operating company. So we were operating 23 supply chains independently in the U.S. We now have one integrated supply chain. As an example, our shipping to retailers, 20 percent of our shipments five years ago were in truckload. Today, 80 percent of our shipments are in full truckload. We would go to market and ask retailers to give us 23 different purchase orders, 23 different less than truckload shipments, 23 different invoices. Today, it's all one. And that integration, we've not just done in the U.S., but we've now done in the international markets. We're complete in Asia, we're complete in the Americas, and will be done in Europe by the end of this year. And that is having a huge advantage because now we're able to go to retailers based on the scale of Newell and our brand portfolio and be a scaled provider, which is allowing us to have much more strategic joint business creation discussions with retailers. And it's opening new doors. In fact, I met with one of the leading retailers in Europe on Monday, their CEO, and they do zero business with us today. And they said, look, we couldn't do business with you when you were operating as a series of 23 different companies. but now that you have one integrated we want all of your brands and so we're seeing that opportunity unfold because we are in many places the largest general merchandise or one of the largest general merchandise suppliers for for many major retail markets and many major retailers based on based on the strength of our portfolio and I guess I just wanted to just touch on like we're like how are you guys seeing the the consumer this the consumer broadly both in the US and maybe in some of your major international markets like where yeah I think you know it's interesting I think that the consumer demand picture is about from the most recent data I think there's been a narrative in the US market that the consumer is falling off a cliff or something in the month of May we just haven't seen it in our business and and perhaps in our categories we haven't seen it either. It may be in some other categories. It might be in parts of the consumer segment. But broadly, as we went into this year, we planned the market growth for the year down 2% as part of our base plan. Through the first quarter, we actually did about a point better than that. So the market was down about 1% in the first quarter versus 2%. I mentioned we over-delivered versus our plan by 2.5 points on the top line in the first quarter. A point of that was market growth being better than we thought in the first quarter and a point and a half of that was because of the strength of our innovation and the response consumers had which was stronger than we expected on innovation. As we go to Q2 and beyond we've got the business plan for a market that's down two percent. We haven't certainly seen anything that would cause us to come off of that and we actually think there's some potential that it might be better than that but we don't want to get ahead of ourselves. It may be different if you're talking about the food part of the business, but we're not in the food industry. In general merchandise, we've seen the high-income consumer, the middle-income consumer hold up pretty well and continuing to drive growth. And our innovation that's focused against that consumer is driving growth in our categories. The low-income consumer, which has been under pressure, remains under pressure, but we're not seeing any type of a downward acceleration versus last year in terms of year-over-year offtake trend. Last year, the low-income consumer in the U.S. in general merchandise was down 10% to 15%, which started in March. I think it's going to be very interesting. It's hard to believe that they are going to be down 10% or 15% on top of down 10% or 15%. So I actually think on a year-over-year basis, there's some reason for optimism, although we don't have that in our outlook at this point because we didn't want to get ahead of ourselves.

Speaker 2

And to the extent you do see some of this optimism come through, how is the organization set up to deliver against that if core sales remains, market share gains, innovation, strength?

Christopher Peterson, CEO

We did get a little bit, we made a strategic decision a couple of months ago at the beginning of the Iran conflict that we wanted to protect ourselves from any supply disruption. And so we did lean a little bit forward on inventory purchase selectively, top SKUs, top brands, top innovations, and that's been a good move because as I mentioned, some of the places we've leaned forward, we've sold out. Some are still in chase mode, but I feel pretty good about our ability to supply the upside. I also feel like we haven't leaned out overly aggressive where we're going to wind up with an inventory problem. We've continued to bring our day's inventory down and consolidate. The other thing I'll say is we're seeing a little bit of a divergence among the retail, our retail customers. So retail customers that are more focused on the low-income consumer, we're seeing a little bit more pressure in their business. retail customers that are more focused on middle and upper income consumers were driving tremendous growth. And so if you listen to a specific retailer talk about the consumer dynamic, it's important to understand who is their main consumer that they're going after because there is a divergence that we're seeing in general merchandise amongst those that are serving middle and higher income versus those that are primarily serving low income consumers.

Speaker 2

Got it. No, that's helpful. Mark, just switch gears talking around costs. On the last earnings call, you mentioned a $5 per barrel change in oil equates to a $5 million swing in EBIT before any offsetting factors. I mean, clearly crude has been volatile from May 1st to now, but can you just remind us in your 8.6 to 9.2 operating margin target for the year, what price of oil is embedded as a base case? And to the extent oil stays at this mid-90s level, like how should we think about it?

Mark J. Erceg, CFO

So we assumed that oil was going to peak in the second quarter. For our modeling purposes at that time, we took basically the spot and forward rates. That dictated that the price of oil would be roughly, you know, $100 a barrel in the second quarter, averagely, with that then trailing off a little bit into 3Q and 4Q. For the full year, our average at the time that we used was about $85 a barrel, just so you have that as a point of reference. Now, it's important to point out that as we sit here today, effectively at the start of June, there's really two things that are at play, right? One is the impact that oil has on resin, and the other one, obviously, is what it does with respect to transportation. As we sit here today, we're almost inoculated from additional moves on the resin side, because by the time that worked its way through the system, it would get capitalized in our inventory system, and it wouldn't actually bleed through the current year, just as a point of order. Second, we have taken select pricing in very targeted ways for resin-impacted businesses. Think about things like domestically produced coolers, as an example, or some of the polyethylene impacted businesses like our, you know, Brute Rubbermaid products in certain regards, right? So we've already affected, you know, that action as well. And then there is the piece that directly tries back to transportation because obviously diesel is incurred at the pump, you know, in real time. That sensitivity that we gave you largely speaks to that because any resin impacts, like I said, will get suspended and capitalized through the balance of the year.

Speaker 2

And just around that resin piece, 2026 is more or less safeguarded, but on cash flow, is that what's putting you toward the low end of $350 million?

Mark J. Erceg, CFO

Put us towards the lower end. We got it to be $350 to $400 on operating cash flow. And during the last earnings call, we said we might be towards the lower end of that range, specifically because of the comments that Chris just made. We decided to lean in and make additional inventory purchases based on what we saw in the strength of our sales forecast and wanting to make sure that we had supply. That's what drove us towards that lower end. Now, importantly, offsetting that pressure is we do expect to gain about $60 million of cash this year from the unwinding of some company-owned life insurance policies that we also gave voice to during the course of the first quarter earnings call. So all in, we actually think we're going to have a good cash year. We're going to continue to drive our cash conversion cycle lower. You know, we are going to continue to deleverage the enterprise. We think we will end the year someplace, you know, maybe a little north of four and a half times. You know, that's going to be principally driven by having our EBITDA grow, you know, mid-single digits.

Christopher Peterson, CEO

Yeah, and that $60 million that Mark spoke of on the corporate-owned life insurance, that doesn't flow through operating cash flow. It flows through investing cash flow, but it gives us that cash that we can use for debt reduction. So, you know, we're expecting to fully fund the business, to fully fund our CapEx, and to pay debt down this year as well.

Speaker 2

Yeah, because your CapEx is also slated to come down meaningfully, just as you've done a lot of ERP investments over the last couple of years, a lot of restructuring, so now you're starting to see the savings.

Mark J. Erceg, CFO

We spend a great deal, you know, automating our production facilities and integrating the entirety of the operation. You know, it wasn't that long ago that we literally had dozens of ERP systems operating across Newell brands. by the fall of this year, we will have gotten to our end state on our SAP journey. 95-plus percent of our sales will be on one instance of SAP, and the other 5% is unique and not even something that we would contemplate bringing online for regulatory reasons. For example, we would need to have our own ERP in the country of Turkey, just by way of example. So that is going to be an enormous milestone for the company, because it does take a lot of money to affect those types of integrations. But it also takes a great deal of time away from the business leaders in order to make those go smoothly. So that is going to be, I think, a real meaningful release of complexity across the business that we can then redirect towards delighting consumers every day. Gotcha.

Speaker 2

And at Cagney, you outlined a path back to like 12% to 15% operating margin over the long term, obviously not a target for this year, likely not next year's either. But can you just frame what are the biggest building blocks to that margin expansion, getting the top line back, volume leverage, throughput, productivity mix, like maybe just talk through some of that.

Mark J. Erceg, CFO

So what you're referring to is our algorithm whereby we said if we could have gross margin somewhere in the 37 to 38 percent range, have A&P spending around 6 to 7, and have overheads in the 17 to 18 percent range, that would give us a normalized op margin somewhere between 12 and 15. We started this journey at 6. We'll finish this year closer to 9 or around in about that number, and that's that 100 basis points of increment I cited earlier for each of the past three years. Now, on a going forward basis, the thing that's really exciting is, again, we're going to start getting top line leverage going through our highly automated production facilities. And that's going to give us a real boost because the underlying fuel productivity programs are as strong as ever. I think the team's ability to be agile has only been demonstrated to be improving as the years have gone by. We now have AI enablement, which is also another arrow in our quiver that we can deploy because the productivity enhancements we're seeing there are real and tangible with great ROIs that are paying out in a matter of months, not years. And so we're going to be able to now start arcing down that overhead number in tandem with gross margin expansion. We've largely done the entirety of our op margin work on the back of gross margin up to this point without any benefit of sales volume, right? Going forward, we're going to continue to do that with sales volume coming on top, and we're going to be getting after the overhead elements, and we've already pre-funded all the A&P spend effectively. So it's entirely conceivable that that op margin rate that we've seen to date, and we're not prepared to change our algorithm right now, but it's entirely reasonable to assume that that 100 basis points that we've been able to deliver each of the past three years could continue or maybe even accelerate in given years, depending on how everything comes together. So we're actually really excited as we sit here today. It's been a long three years. We told everyone it was a capability-based turnaround. We said that cash was going to inflect first, and it did. We said gross margin would follow, and it did. And we said sales would inflect at the last point because that was the longest pull in the tent. A year ago when we sat here, we expected to return to growth in the back half of 25. And absent the tariff impacts, which required us to take three rounds of pricing in April, May, and July of last year, we're confident we would have done that. That's all behind us. The team is a year stronger and a year more capable and as Chris said we think Q2 is the quarter in which we we inflect.

Speaker 2

Great and with a couple minutes left I guess just capital allocation priorities like we're getting expect to finish north of 4.5 times leverage at the end of the year, gold toward two and a half times. How are you thinking about return to Evergreen and returning capital shareholders?

Mark J. Erceg, CFO

Our first priority is always to fund the business. And as the business now is in a position to start expanding, normally one would think that working capital would be a draw on cash. We actually think we have the ability to continue to drive our cash conversion cycle. So maybe that's a bit of a push. We do still have the ability to fund internal projects with really strong rates of return. We typically used to talk about that in the context of supply chain, where we were basically having a threshold and a hurdle rate of 30-plus percent in order to get funding. But now we have a lot of AI projects that are competing and are bringing really strong ROIs associated with them as well. So we'll continue to fund and earmark cash towards those efforts and those endeavors. And then everything else that we have at this point, frankly, will be put towards debt paid out because we are committed to becoming an investment-grade credit issuer again. We've made good progress from the second quarter of 23 to where we think we'll finish this year. We think we could have taken up to two turns out of our leverage ratio, but we have more to do and more to go.

Speaker 2

Yes. All right. And I guess just, Chris, if we wrap things up a year from now and we're sitting on the stage, what do you hope investors will point to as the clearest evidence that the near-term inflection and turnaround are taking shape?

Christopher Peterson, CEO

Yeah, I think a year from now, if we come back and what we're committed to do is say we're now growing market share as a company, we've returned the company sustainably to top line growth, we've delivered margin improvement, we've delivered EPS improvement, we have delivered cash improvement that's allowed us to de-lever. I think there's a real opportunity for the company to re-rate, because I don't believe that the company is trading. I'm not an expert, but I don't believe the company is trading, assuming that's going to happen. But I can tell you inside the company, the company is very excited about the progress because the organization can see it coming. And I believe we're going to be here a year from now and be talking about the inflection on all key financial metrics and the sustainability of that, which will be an exciting discussion.

Speaker 2

Great. We'll leave it there. Thank you, Chris and Mark, and thank you, everyone, for attending. Look forward to seeing you guys next year.