Newell Brands Inc. ($NWL)

Great. All right. Good morning, and welcome back, everybody. For this next session, it's 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 Erceg.

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

Great. And with that 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 3 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?

Yes. Thanks, Chris. Yes, 3 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 3 years ago. By the end of this year, we'll take almost 2 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 3 years ago.

Got it. And 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?

Yes, great question. So look, we're really proud of what the team has accomplished over the last 3 years. 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 Jarden 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 in this relatively short period of time. And that's despite having to incur these tariff challenges and more recently, some commodity headwinds as well. Our normalized op margin when we started the journey was 6%. If you take the midpoint of our guidance for this year, it will finish at 9%. So basically, over this 3-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 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 $2 billion 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 20x 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%. And on an op margin basis, it will probably be in excess of 45%. So the good news is we have an incredible team that has demonstrated the ability to be very agile, take a lot of cost out of the system in a very efficient and productive way while building capability. And now that the top line is inflecting, we're going to get all that fixed cost leverage coming through not just the manufacturing facility, 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 1, Tier 2 innovations coming out this year, but how do we think about just the durability of that?

Sure. So as we headed into this year, we have 25 Tier 1 and Tier 2, which are our larger -- largest tier of innovation launching this year. For perspective, 3 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 1 and Tier 2 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 when 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. We -- when we reported Q1, we beat sort of the midpoint of our guidance range by 2.5 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 0% and plus 2%, 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 #1 launch in the baby gear category in the United States last year as ranked by revenue and growth of the category. Over the last 4 or 5 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 & Rec business, which has been one of the businesses that we said is going to inflect this year, we launched the Snap 'N Go cooler at the beginning of this year. That innovation, which is a patented new innovation that allows you to collapse a cooler to 1/3 the size of a regular cooler, which allows for easier transportation and easier storage, is running 900% higher than planned to date. So we've had to increase our supply plan 6 times in the last 4 months. We've got full distribution at REI, one of the leading retailers in the U.S. 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, 6 of our top 10 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.

Great. And then just to build on that, obviously, the 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. 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 and...

Yes. 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 life cycle wears out, we can start to drive category growth. We're also driving premiumization in a number of our categories. We generally played 3 years ago in -- 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.

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?

Yes. We've done a number of other things. So we've -- what we're trying to do is drive fewer, bigger innovation 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 3 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 and 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 3 to 5 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. Over the last several years, we've taken our SKU count from 100,000 down to 20,000. In the last 3 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.

Great. And I mean, yes, let's dig into your AI program. At CAGNY, you mentioned Quantum Leap. So where are you seeing the most tangible impact around speed to market, marketing effectiveness and just execution on shelf and...

Yes. We've taken, sort of as part of the Quantum Leap program, which we launched, we got started on AI a couple of 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 3 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 5 years from now. From that, we've developed a road map of what is the best way to get from where we were starting to that. And then the third part of the plan 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 finish photography, to prototype products in what used to take 4 months, now in about 5 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%. 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 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 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's 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 many cases, we're seeing paybacks from the investments we're making in AI of 2, 3 months. So it's a very rapid payback the way we've approached it and the internal capability that we've built.

Got it. And then Mark, maybe you could just frame for us like how these capability -- 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?

Yes, Chris did a great job of sharing, 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 what we've been able to achieve and if you looked at our Q1 print, our normalized gross margin on a 3-year stack basis was up 610 basis points. Within that, our normalized op margin on a 3-year stack basis was 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 are down since we started this journey. And that was because over the course of these last 3 years, we've had a whole bunch of capabilities that we had to build out that we simply didn't have, a bot 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 harked down for the first time. If you look at the guide we've provided for the current year, we've said that overhead as 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%. This will help in that regard, a great deal. And then Chris touched on a lot of the other things that are happening as well, allowing us to have better deduction management through the use of AI, that drives cash conversion cycle, that drives operating cash flow, right? And all these other pieces, Chris largely gave voice to, so I won't repeat them here.

Great. And look, I mean, Newell has 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 the new cost of doing business in this environment? Or like -- do you see a structural competitive advantage? Just noting you have such a strong domestic footprint.

We do. We do. When we started this journey when we were here 3 years ago, we talked about our capability sets across these 11 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% of our business that was tariff exposed, right, particularly to China. We'll finish this year with less than 10% 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 U.S. We have 2 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 Kansas. We make Rubbermaid food storage products in Ohio. We make NUK baby care products up in Wisconsin. We make Writing in Tennessee. We make candles up in Massachusetts, right? We make brewed refuse products in Virginia. I 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 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 in 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. 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 innovation coupled with the footprint is helping secure these wins. So you are seeing retailers like -- retailers are still focused on like maintaining like a derisk supply chain from that standpoint? Like...

Yes, absolutely. Yes. Not only that, but -- so they are definitely focused on derisk supply chain. But the other thing we've done over the last several years is we've integrated Newell. 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 or shipping to retailers, 20% of our shipments 5 years ago were in truckload. Today, 80% of our shipments are in full truckload. We would go-to-market [ NAS ] 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 0 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 many major retail markets and many major retailers based on the strength of our portfolio.

And I guess I just wanted to just touch on like where -- like how are you guys seeing the consumer broadly, both in the U.S. and maybe in some of your major international markets, like where...

Yes. I think 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 U.S. 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 perhaps in our categories, we haven't seen it either. It may be in some other categories that 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 1 point better than that. So we -- the market was down about 1% in the first quarter versus 2%. I've 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 1.5 point 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 planned for a market that's down 2%. 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 is 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.

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

Yes, 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 days 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.

Got it. No, that's helpful. And then 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 1 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...

Great question. So we assume 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 $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 2 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 BRUTE Rubbermaid products in certain regards, right? So we've already affected that action as well. And then there is the piece that directly ties back to transportation because obviously, diesel is incurred at the pump 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.

Got it. And just around that resin piece, like doesn't -- 2026 is more or less safeguarded. But on cash flow, is that what's putting you towards the low end of $350 million?

To put us towards the lower end, we guided to be $350 million to $400 million 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. We are going to continue to deleverage the enterprise. We think we will end the year some place, maybe a little north of 4.5x. That's going to be principally driven by having our EBITDA grow mid-single digits.

Yes. 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 we're expecting to fully fund the business, to fully fund our CapEx and to pay debt down this year as well.

Yes, because your CapEx is also slated to come down meaningfully just as you've -- 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 sales...

We spent a great deal automating our production facilities and integrating the entirety of the operation. 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.

Got you. And -- like -- at CAGNY, 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 either. But can you just frame what are the biggest building blocks to that margin expansion, getting top line back, volume leverage throughout, productivity mix? Like maybe just talk through some of those things.

Yes. So what you're referring to is our algorithm, whereby we said if we could have gross margin somewhere in the 37% to 38% range, have A&P spending around 6% to 7% and have overheads in the 17% to 18% 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 and about that number, and that's that 100 basis points of increment I cited earlier for each of the past 3 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 intangible 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 prefunded all the A&P spend effectively, right? So it's entirely conceivable 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 to the past 3 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 3 years. We told everyone it was a capability-based turnaround. We said that cash was going to reflect 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 pole 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 3 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 inflect.

Great. And with a couple of minutes left. I guess, just capital allocation priorities, like we're getting -- expect to finish north of 4.5x leverage at the end of the year, goal towards 2.5x. How are you thinking about return to evergreen and returning capital to shareholders?

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 strong -- really strong ROIs associated with them as well, so we'll continue to fund an earmark cash towards those efforts and those endeavors. And then everything else that we have at this point, frankly, will be put towards debt paydown because we are committed to becoming an investment-grade credit issuer again. We 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 2 turns out of our leverage ratio, but we have more to do and more to go.

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?

Yes. 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 delever, 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.

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

Thank you.