NWL - NASDAQ

Good morning, and welcome to Newell Brands' Third Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. After a brief discussion by management, we will open up the call for questions. In order to stay within the time schedule for the call, please limit yourself to one question during the Q&A session. Today's conference call is being recorded. A live webcast of this call is available at ir.newellbrands.com. I will now turn the call over to Joanne Freiberger, VP of Investor Relations, Ms. Freiberger, you may begin.

Thank you. Good morning, everyone, and welcome to Newell Brands' third quarter earnings call. On the call with me today are Chris Peterson, our President and CEO; and Mark Erceg, our CFO. Before we begin, I'd like to inform you that during today's call, we will be making forward-looking statements, which involve risks and uncertainties. Actual results and outcomes may differ materially and we undertake no obligation to update forward-looking statements. I refer you to the cautionary language and risk factors available in our earnings release, our Form 10-K, Form 10-Q and other SEC filings available on our Investor Relations website for a further discussion of the factors affecting forward-looking statements. Please also recognize that today's remarks will refer to certain non-GAAP financial measures, including those referred to as normalized measures. We believe these non-GAAP measures are useful to investors, although they should not be considered superior to the measures presented in accordance with GAAP. Explanations of these non-GAAP measures are available and reconciliations between GAAP and non-GAAP measures can be found on today's earnings release and tables that were furnished to the SEC. Thank you. And now, I'll turn the call over to Chris.

Thank you, Joanne. Good morning, everyone, and welcome to our third quarter earnings call. Before we begin, I want to welcome Joanne who recently joined us as our new Vice President of Investor Relations and will be Newell's primary investor contact going forward. With that, let's turn to the results. We had a strong third quarter and executed well against our new corporate strategy, which we rolled out in June of 2023. Results came in at the high end or ahead of plan across most of our key metrics. Core sales year-over-year performance continued to improve sequentially. Gross margin increased versus last year for the fifth consecutive quarter as outstanding productivity results more than offset inflation. Normalized operating margin came in above plan once again despite planned higher A&P investments. Normalized earnings per share was at the high end of plan, driven by strong operational performance. We reduced tool's cash conversion cycle versus a year ago, and we significantly delevered the balance sheet to under 5x. The strong performance in the first nine months of 2024 gives us confidence to once again raise our outlook for the full year. We are increasing our full year expectations on normalized operating margin improvement, normalized earnings per share and operating cash flow. Mark will share the specifics later in the call. Over a year ago, we announced our new corporate strategy, which focuses on disproportionately investing in innovation, brand building and go-to-market excellence in our largest and most profitable brands and markets, while driving further standardization and scale efficiencies across the supply chain and back-office functions. And just nine months ago, we transitioned into a new operating model, which is designed to accelerate the new strategy by enhancing organization effectiveness and agility while creating a high-performing, innovative and inclusive culture. While we are still in relatively early days, we believe the new strategy and operating model changes are clearly beginning to yield results, as evidenced by improving top line trends, margin expansion, strong cash flow. Since introducing the new strategy, we have now reported five quarters of results, and we have improved the rate of core sales growth sequentially in each period. We also delivered year-to-date positive core sales growth in our most profitable segment learning and development as well as our combined international business. We have improved normalized gross margins for five quarters in a row versus prior year, and are up 500 basis points year-to-date versus a year ago. We have improved year-to-date normalized operating margin by over 200 basis points versus last year despite significantly increasing investment in A&P. We've reduced net debt by over $560 million in the past five quarters. Normalized EBITDA has increased by 2% on a trailing 12-month basis versus prior year, from $739 million to $903 million. We have taken 1.5 turns out of Newell's leverage ratio going from 6.5x in June of 2023, down to 4.9x this quarter. And we continue to make significant progress improving the Company's front-end capabilities of consumer understanding, innovation, brand building and go-to-market. From a segment perspective, Learning & Development delivered a third consecutive quarter of positive core sales growth, driven by the Baby business and Home & Commercial improved core sales growth by 200 basis points sequentially. The Outdoor & Recreation segment, which is the smallest segment in Newell's portfolio, improved core sales growth sequentially moving to negative 16.8% year-over-year in the third quarter versus 18.2% year-over-year decline in the second quarter. While performance has been challenged, and we believe it will take additional time before we fully unlock the potential of iconic brands such as Coleman, we believe the business bottomed earlier in the year, and it is encouraging to see our trends improve sequentially starting in the third quarter. Newell's focus on new product innovation continues. Last quarter, we shared several that we have recently launched or were soon to be launched. Touching on a few today, we will continue with brand investment and 360-degree support new MPP HPP propositions, including Graco's SmartSense Soothing Bassinet and Swing, which detect and respond to babies cries in seconds with suing sound in motion. We have had strong performance at launch as these innovative products deliver enhanced benefits at a much better value than the leading competitor. Mr. Coffee Perfect Brew, its most advanced coffeemaker yet to help home brewers create barista-quality beverages at home. This new pot free coffeemaker uses intelligent technology to automatically adjust brew time, temperature and water to unlock best tasting coffee and tea flavor certified by experts. The Mr. Coffee Perfect Brew is one of the few at-home brewers certified by the Specialty Coffee Association and recognized by professional coffee tasters at the gold standard for at-home brewing. And this month, in time for peak season for the holidays, we introduced a new food safe handheld Plus machine, which is the first-to-market cordless handheld and countertop vacuum sealer in one with unmatched versatility. Combining the power of a countertop vacuum sealer with the convenience of a cordless handheld vacuum, this innovative sealer keeps food fresh up to 5x longer compared to ordinary storage methods and helps print freezer burn as the only vacuum sealing system on the market to include a detachable cordless handheld unit, users can easily vacuum seal, heat seal and marinade all with one device. The investments we are making in key brands are on trend in creating positive results. A couple of programs include Contigo's debut of a new limited edition water bottle collection designed in partnership with renowned fitness expert Ally Love. This collaboration comes as the first of many as Contigo is adding Ally to its C-suite as the brand's first-ever Chief Hydration Officer. In this role, Ally will bring her love for fitness, fashion and hydration to Contigo to create an unbeatable hydration experience. Over the next three years, Ally will serve as Contigo's Head Product Stylists collaborating closely with the brand to develop trendy, reliable water bottles that encourage healthy hydration habits. Some of you may have seen that Coleman launched a new campaign on Thursday Night Football on Amazon Prime, marking the first time Coleman has done a TV spot in more than 10 years. The early measurable results are encouraging, with a strong double-digit increase in sales in the days after the ad aired versus year ago. The new campaign focuses on addressing the broader outdoor market instead of the traditional camping subsection, consistent with our strategy reset for the brand. We continue to make progress on new business development, expanding our brand's distribution across both new and existing retailers which has been one of the of the strength in top line results in recent quarters. International continues to be a growth engine for the Company, and we have positive core sales growth in the first nine months of 2024. Before turning the call over to Mark, I want to provide some perspective on recent consumer trends and behavior. We continue to see the broader general merchandise market is down low single digits this year, consistent with our expectations. This is an improvement to the high single-digit decline last year. Importantly, within that, we are seeing a market bifurcation and consumer dynamics between low income versus higher-income households. At lower income levels, there has been a significant decrease in unit volume compared with pre-pandemic market levels as these households are prioritizing spending on basic needs like food, rent and insurance due to the cumulative impact of inflation outpacing wage increases. Conversely, the higher income households have increased spending significantly in both units and dollars as these consumers are benefiting from home price appreciation and stock market gains. With higher income consumers driving the market, we are seeing stronger demand for more premium priced products that represented good consumer value. Our strategy to focus on our largest brands with superior innovation, targeting MPP and HPP points positions us well to capitalize on this trend. Since implementing the new corporate strategy, we've taken bold and decisive actions that have improved the Company's top line progression towards growth, significantly increased margins through productivity, delevered the balance sheet and improved cash flow performance. Strong results have allowed us to increase our outlook twice in 2024. We deployed our new forward strategy five quarters ago. And based on the results today, Newell's business transformation is well underway. While we still have much more work to do, we are confident in our ability to continue to strengthen the Company's performance and create value for our shareholders over time. I would like to thank our employees for their continued commitment to operating with excellence and delighting our consumers by lighting up everyday moment. I'll now hand the call over to Mark.

Thanks, Chris, and good morning, everyone. As Chris indicated during his prepared remarks, we believe our third quarter results provide additional evidence that Newell's new corporate strategy, coupled with strict operational discipline and its execution is positively impacting the current business and setting the stage for future progress. For example, core sales came in at minus 1.7% during the third quarter of 2024, which represented a vast improvement versus our 2023 run rate and meaningful progress versus the first half 2024. Pricing in international markets, particularly Latin America, was a meaningful contributor to Q3 core sales performance and a 3% headwind from currency accounted for most of the difference between core sales at minus 1.7% and net sales at minus 4.9%. Q3 also represented another quarter of significant gross margin expansion. Strong fuel productivity savings were once again center stage with some early positive signs from our strategy shift, which places much more emphasis on providing consumers with MPP and HPP offerings have also started to emerge as a contributing factor. Consistent with this and as a direct result of the cost reduction efforts we are pursuing and the new commercialization strategies we have implemented, third quarter normalized gross margin increased by 470 basis points versus last year to 35.4%, which built on the 130, 450, 390 and 600 basis point expansions that occurred during the four sequential quarters that preceded it, respectively. Now you may have noticed that the numbers just cited are slightly different than the ones previously provided. This is because we recently completed a routine review of our public disclosures with the SEC. Upon completion of that process and starting the third quarter, but retroactively back to 2022, we have adjusted our normalization approach to no longer exclude restructuring-related accelerated depreciation and inventory charges and a prior period adjustment related to a bad debt reserve and its subsequent recur for an international customer. These adjustments take our 2023 normalized gross margin through the third quarter, down from the previous reported 29.5% to 28.9%, which when compared to 2024's fiscal year-to-date norms gross margin of 33.9%, produces a year-over-year improvement of nearly 500 basis points. It also bears mentioning that the 35.4% normalized gross margin we just posted for the third quarter of 2024 is in the absolute, the highest that Newell has achieved since at least 2020. During Q3, Newell's normalized operating margin also rose sharply, increasing by 210 basis points versus last year to 9.5%. The increase versus last year was due to strong productivity and positive pricing as well as ongoing organizational restructuring-related savings, partly offset by higher year spending in three areas. First, we purposely increased A&P investment levels in absolute dollar terms and as a percentage of sales. Second, we continue to make targeted overhead investments in several critical front-end commercial capabilities. Third, based on the strong financial results we've delivered to date and are projecting for the full year, incentive compensation is being accrued at a higher level than last year. Net interest expense increased by $6 million to $75 million, primarily due to higher interest rates and a normalized tax provision of about $34 million was recorded in the quarter. Normalized diluted earnings per share came at $0.16 versus our $0.14 to $0.17 guidance range. However, please note that absent the changes in our normalization approach mentioned earlier, our third quarter normalized earnings per share been $0.02 higher. Turning to cash flow. Newell generated $346 million of operating cash flow during the first nine months of 2024, which was driven in part by a nine-day improvement in our year-over-year third quarter cash cycle. And we are very pleased to report that our leverage ratio was 4.9x at the end of Q3. Our leverage ratio once again improved sequentially and is now 1.5 full turns better than Q3 of 2023. The year-over-year improvement was driven by $250 million of net debt reduction and a 22% increase in our trailing 12-month normalized EBITDA. Moving on to our fourth quarter. We've assumed the following: Core sales are expected to be down 2% to 5% with net sales declining in the range of 4% to 7%. The two-point differential between core net sales is largely due to foreign exchange. We recognize and acknowledge that our fourth quarter core sales guidance range on the surface represents a slight step backwards from our third quarter results. However, we believe that is more a function of retail selling windows that ending inherent to the implementation of our new business model. In fact, as Chris and I have both repeatedly stated, we believe our corporate turnaround is a game of halves, not quarters. Consistent with that philosophy, our core sales run rate was minus 14.7% during the first half of 2023. In the second half of 2023 was minus 9.3%. The first half 2024 was minus 4.5%. And taking our third quarter actuals and the midpoint of our fourth quarter guidance suggests that the back half of 2024 will come in around minus 2.5%, which we believe is solid progress towards an expected positive and sustainable inflection in our core sales growth rate at some point during fiscal 2025. Getting back to the fourth quarter of 2024, we expect normalized operating margin of 7% to 7.7% as an increase in SG&A expense in both absolute dollars and as a percentage of sales, due in part to our decision to fund higher levels of A&P investment should be more than offset by gross margin improvement. Finally, we expect a slight year-over-year increase in interest expense, a normalized tax rate in the single digits and normalized earnings per share of $0.11 to $0.14. For the full year, we are leaving our full sales and net sales range unchanged at minus 3% to 4% and minus 6% to 7%, respectively. But we are increasing our outlook for normalized operating margin to 8.1% to 8.3% from 8% to 8.2% previously. We are also increasing our normalized EPS guidance range to $0.63 to $0.66 from $0.60 to $0.65, and raising our operating cash flow forecast by $50 million to $500 million to $600 million. This is the second time we've increased guidance for these three critical financial targets this year. We should also point out a few additional things. First, we expect a high single to low double-digit full year tax rate. Second, we still incur about $150 million in cash restructuring and related charges through year-end. Third, we expect Newell's year-end leverage ratio to be slightly below 5x with our long-term goal of achieving an investment-grade credit rating unchanged. In closing, it's been five full quarters since we deployed our new strategy. And while there's still plenty of work ahead, we feel exceedingly good about the progress of Newell Brands passionate and highly capable employees have allowed us to make. Top line results are improving and margins are expanding with five consecutive quarters of robust year-over-year gross margin improvement with Q3 being the highest gross margin quarter since 2020. And three straight quarters of year-over-year normalized operating margin expansion while investing more in advertising and promotion and beefing up several critical front-end capabilities. During that same period, our strong cash performance and EBITDA growth have allowed us to pay down debt and lower our leverage ratio. As we start to think about 2025, we are confident that the capabilities we are developing in part of our new corporate strategy and the operational rigor we are bringing to all aspects of the business will allow us to make additional progress on our multiyear journey to transform Newell Brands into a world-class consumer products company that delivers exceptional financial returns for our shareholders. Operator, if you could, please open the call for questions.

[Operator Instructions] Our first question comes from Olivia Tong with Raymond James. You may proceed.

Perhaps, can we start with just a walk around the categories given such a divergence in performance across division, particularly as you think about planning for next year? And then secondly, you talked about the price/mix contribution this quarter and favorability around that. Could you talk about a little bit more about that in terms of the impact of sales and gross margin, not only this quarter, but your expectations going forward as you pivot your portfolio more towards mid and higher price point from the OPT and MPP area?

Yes. Thanks, Olivia. Happy to do it. So let me start with the walk around sort of the divisions. So, as we've talked in the past, the starting point of capabilities in our different business units was different. And as a result, as we put the new strategy in place, focused on building capability on consumer understanding, innovation, brand building and go-to-market, the front-end capabilities, that is showing up at different speeds in the different businesses. We're very encouraged that our largest and most profitable business, learning and development continues with three straight quarters of core sales growth. We feel good about the Writing business and the baby business. We've recently finished, as you know, the back-to-school period in writing, and we gained market share during the back-to-school season this year. The Baby business has had strong for sales growth behind very good innovation. We are gaining market share on car seats, on play yards. And with the recently newly launched SmartSense Soothing Bassinet and Swing product that we're pretty excited about. So, we believe that business is from strength to strength. And we believe that business, we've got a strong capability and a strong innovation pipeline heading into next year. The Home and Commercial business is in a slightly different state. It's next in terms of improvement. We're excited that we improved the rate of core sales growth in the third quarter for Home and Commercial by 200 basis points versus the prior period. I think we've talked about the Commercial business being in pretty good shape and driving core sales growth, which it did in the third quarter. The Home Fragrance business with Yankee Candle is just launching a new marketing campaign that we're pretty excited about that we believe will bode well heading into next year. And we've got some very exciting innovation coming on the kitchen business, some of which we talked about with things like the Mr. Coffee Cold Brew product that we recently launched. I think we announced it a week or two ago that allows consumers to Brew, Cold Brew at home in 10 minutes, which is a new concept under the Mr. Coffee brand that was previously unavailable to name an example. And then Outdoor & Rec is the segment that is going to take the longest to turn around because that's the one where we feel good about progress we've made. We've recapped the team. We've reset the strategy to move Coleman, which is the largest brand from a camping focus to more of outdoor focus. We talked about the television spot that we just put on Amazon, which has been good traction. The Contigo partnership with Ally Love, which is off to a great start. And I think the team that we built in Outdoor & Rec is building a very positive innovation pipeline that is going to be coming to market in 2026. And so that is the one that will take the longest. From a price mix standpoint, what I would say there is, as we look going forward, we're not taking price increases on our base products. We're driving productivity benefits through the supply chain, but we are driving mix benefit by launching products that are gross margin accretive. And so, the plan going forward really is more dependent on mix benefit than it is on pricing.

And if I'd just add a little bit to that because in addition to the work that we've done to basically make sure that all the initiatives that got the door are proactive, we've done number of other things. We've looked at all the businesses and our categories and for those that were structurally unsound. We either took pricing actions or we've effectively started to walk away from those businesses. We also have put in place a real strong cost analyst capability that hitherto we didn't have that allows us to titrate in and understand SKU level economics better than previously. We've also been doing a lot of work on our price line logic, which we believe presents a real opportunity for us to access additional pricing, but in a way, that's not really viewed as a price increase to the consumer set. It's just simply a matter of fixing all the price line logic where sometimes there's inconsistency. So, there's a lot of things we're doing on price mix. Right now, to be fair. The 470 basis points were up on the gross margin in Q3 versus the prior period, largely driven by our fuel productivity efforts, but we really believe that managing price/mix favorability in the peer will be a bigger part of that story.

Our next question comes from Chris Carey with Wells Fargo Securities. You may proceed. Chris Carey, your line is now open. One moment for our next question. Our next question comes from Lauren Lieberman with Barclays. You may proceed.

So, the guidance range for the fourth quarter implied is really -- is pretty wide. And so, I just wanted to get a sense if you're seeing or hearing anything that's giving you pause around retailer inventory destock. You spoke very clearly about high end versus middle- and lower-income consumers. But just curious on kind of the -- frankly, the lower end of the range on sales it's effectively on the table for 4Q. And then also, you mentioned I think the language has changed a little bit on the inflection in core sales growth on time in '25. So, I just wanted to kind of check in on that front, if that's really driven by the lower progress in outdoor or if it's something else?

Yes. So let me start with the fourth quarter guide. I think the fourth quarter, we're entering the holiday season, and everything we're hearing from sort of the prognosticators on market growth would suggest that we're headed for a holiday season where consumers are likely to spend more money this year than last year. However, that money is likely going to be spent in areas that are more focused on food and essential items as opposed to general merchandise. So, our planning stance for the fourth quarter is a continuation of a market that is sort of down low single digits. We may be wrong on that, but that's what we've got embedded in our guidance. That has been decent, we're not assuming a turnaround in terms of market growth in the fourth quarter. The range that we've given has more to do with what Mark talked about in his prepared remarks on retailer shipping windows. It's not about inventory destocking. We think retailer inventories are in a very good place. This is more about the timing of when retailers take inventory to reset their store sales, which doesn't neatly line up with our quarters. We tend to look at it more in terms of halves, and we're pretty excited that we are continuing to make sequential progress in the second half of this year versus the first half. As we go to next year in terms of core sales growth, we are working through the plan right now. We will provide guidance on our normal cadence at the February call. But what I will say is that we are pretty excited about the capability investments that we're making on the front end, and we expect next year to have a stronger innovation pipeline next year than this year. We expect our rate of core sales growth to be better next year than this year. What we do is sort of how the market dynamics are going to be from an overall are growth standpoint. As we stand today, most of what we're hearing is that we think that the general merchandise market is going to improve next year versus this year from being down low single digits to maybe being closer to flat next year. But there's a lot of volatility in that, not to mention the least of which is an election that's coming up in two weeks with very different economic policies attached to it. So, I think we're monitoring the situation closely. We feel good about the progress we're making on the front-end capability. And I believe that we're going to have a plan that strengthens our core sales delivery next year versus this year. And we'll provide guidance on our normal cadence.

Our next question comes from Bill Chappell with Truist Securities. You may proceed.

I just want to talk a little bit more about the categories. I understand you're making strides and relating share and merchandising and what have you, but trying to specifically look at the outlook for kitchen electrics, fragrance, baby, I mean, camping, like are these categories you think that will actually return to growth and solid and consistent growth as we move to '25 and '26? Are you seeing specific trends that get you encouraged? And then with that, just you talked about how you're encouraged by the sequential movement, but -- some of the business is seasonal. So maybe a few more examples of what gets you so encouraged on business, that would be great.

Yes. So, I think a number of our categories, we have different types of categories, but let me examples. Some of our categories have long purchase cycles. So, if you think about kitchen, for example, and kitchen appliances, purchase cycles in that category tend to be three or four years. There was a surge of demand during COVID that happened in '21. We're now seeing that pull forward, if you will, which caused a normalization in demand in the following years in '23 and '24 is beginning to be behind us. And so, we're seeing real evidence and real forecast prognosis that those consumers that bought during the COVID pandemic period are now likely going to come back into the market. And in fact, we recently met with Circana who is projecting that, that business category is going to be back to core sales growth next year because of this dynamic of lapping the pull forward dynamic. I think that's also true in some of the other categories like Outdoor & Rec. On Baby and Writing, I think it's more the case, not so much of the pull-forward dynamic. On Baby and Writing, I think it's the case that we've got a strong innovation pipeline that we feel very good about. This Graco SmartSense Soothing Bassinet and Swing that we've launched just recently, it's a pretty big deal. A lot of people are familiar with NUK. NUK is selling a similar product at $1,500. We've come out with these products at $400, and we believe our product has more features and benefits. So, we think we've got a huge opportunity to grow and gain market share behind innovative products that we're launching in the marketplace. Similarly, on Writing, we've launched, as you know, the creative markers under Sharpie. We've also recently launched a copper S-Gel pen as we're premiumizing the portfolio. When we launched the first S-Gel pen, the pen was $1. We launched metal barrel pens at $2.50. We've just launched a copper S-Gel at $10 that's getting very strong support. And so, we're driving trade up and we're driving category growth in categories like that. We continue to do well with the Paper Mate InkJoy Gel Bright pens as well. And then I think on home fragrance, we've got a relaunch on Yankee Candle that is going to play out over the course of next year that gives us confidence that we're going to be able to return that business to growth next year. So, I'm feeling pretty good about the stuff that within our control. I'm also feeling that we, as the market leader, again to start to drive category growth, so that it doesn't happen to us, but we take a little bit more ownership of driving category growth with some of our innovation that is more mid and premium segments. So that's sort of what we're looking at. What we don't control is the consumer dynamics and certainly, there is a lot of volatility in the market. But I believe that for the stuff that's in our control, we are making real progress. And I believe we have a longer plan heading into next year from a commercial standpoint than we did heading into this year.

Our next question comes from Andrea Teixeira with JPMorgan. Your may proceed.

I was hoping to see and I appreciate all the commentary about the kitchen appliances and now also the innovation in other areas of the business as you get out of more sluggish category environment. But I was thinking more long term in your ING investment and innovation in general. I mean not surprise you vest typically less than some of the other peers and the disruptors out there. Is there any way you can kind of help us like where you want to take that number, I believe, is about 5% at this point? And think about also how much you're contributing you're reinvesting sales as a percentage of sales in advertisement and promotion if -- how we should be thinking of where that's going to be the best in class? And then more short term, how we should be thinking of distribution, are you completely -- how you'd be thinking of the holidays as well in terms of the categories you compete in? How we should be thinking of distribution as we go into the fourth quarter and into 2025?

Yes. So let me try to take those in turn. And maybe I'll start with distribution. So, distribution, I expect to be a more positive tailwind next year compared to this year. So, if you think about the journey we've been on, one of the things that we did when we put the new strategy in place was, we looked at the structurally unprofitable parts of the business, and we exited some of those structurally unprofitable business. We also exited some of our smaller brands. Recall, we were starting with 80 brands. We expect at the end of this year to be down closer to 50 brands and these brands to be out of our base period. And as we've exited that structurally unattractive business, distribution has been a headwind in 2024, which is embedded in our guidance. As we go into next year, we no longer have that headwind. And in fact, I think we're going to be on our front foot, trying to gain distribution as opposed to have it as a headwind. So, I'm expecting and what we're seeing so far from the line reviews that we've had is that distribution is going to be much more positive driver, of course, sales trends next year compared to this year, is sort of the first point, which is consistent with the strategy. See the second question...

About the ING part.

Innovation, yes, the margins. So, historically, we've been spending on A&P about 4%. This year, we have ramped that up, and I expect that we'll probably come close to 5% in -- where we net out this year because of the increase and support behind the new innovations as we're ramping that up. I expect over time, when we look at our categories and the mix of categories that we have, that probably the right long-term target for us is somewhere around 6% or 7%. So, it's a little bit higher than where we are today. But we don't want to -- we want to be ROI driven on this. And so, we're not ramping up the spending before we have the innovation. We're ramping up consistent with when the innovation is coming is sort of the first point. The second is we still have a lot of opportunity to go on gross margin improvement and on overhead reduction. And so, we continue to expect that the gross margin improvement and the overhead reduction as a percent of sales, is going to be significantly more meaningful than the ramp-up in A&P, which is why we think that we've got an opportunity to take our operating margins significantly higher as part of our strategy. And so, you've seen this year, despite ramping up A&P from, let's call it, 4% to 5%, we're up 200 basis points in operating margin through the first nine months of the year, and that's really been driven by gross margin improvement. I think you're going to see something similar longer term where we continue to take the operating margins of the business up. We reinvest some of the gross margin and overhead improvements in higher A&P, but we bring a significant amount to the bottom line as well.

And then, can you quantify -- this is super helpful, Chris, but can you quantify how much of a headwind was the distribution losses -- were the distribution losses this year?

Yes. It's a little bit hard to get at. But I would say probably a couple of points is what I would say as best we can tell. And what I would say about that is they were purposeful. I mean, there -- there's a reason why our trailing 12-month EBITDA is up 22%, which is a remarkable number. I mean, there's not that many companies in consumer products that drive a 12-month EBITDA growth of 22% in absolute dollar terms, particularly in an environment where revenue is going down. And that's a function of incredible productivity results from the supply chain and from the centralization of the supply chain and the back office. It's also a function of structural profitability improvement across the business and walking away from some of these businesses where the Company, frankly, was losing money. And so, I think we have a stronger portfolio today than we did five quarters ago when we started the strategy. So, the quality of our portfolio is also improving as we go forward.

And it's hard to parse out that from -- also from the SKU rationalization that you're still at the back end of it, right, towards the end of 2024? But partially, that's also embedded

Yes, that's right. And we're going to -- we're down to -- as we sit here today, we're down to about 20,000 SKUs. So, recall when we started the journey back in 2019, we had over 100,000. So, we've gone from over 100,000 down to 20,000. And we've made again, a significant progress this year and our revenue per SKU has more than tripled now versus when we started. So, we feel good about where we are from a SKU count standpoint. We still have some opportunities ahead, but I think the opportunity ahead is different than the opportunity we've had previously.

Our next question comes from Chris Carey with Wells Fargo Securities. You may proceed.

Just a couple of questions, if I could. One is the question that I've asked on these earnings calls in the past, but I'm always curious on progress. There was a major maybe pull forward of demand in a number of your categories during COVID, and we've seen that normalization carry out for some time now. And as you talk about the sequential improvement in core sales growth, do you think that some of that is the consumer coming back for replenishment? Are we at the tail end sort of cycle normalization and we're reapproaching a new cycle? I know you're looking at, I think, flattish general merchandise category growth next year. How much of that is just this renormalization phase? And then if I just could, you did have a quick nod to elections, be remiss if I didn't ask. I know there's been an effort to diversify or your geographic basis of sourcing and manufacturing. How do you think about that evolution in the context of some policies that can go different ways depending on how the election plays out?

Yes. So, I think your comment on normalization from COVID pull forward of demand is right. And I think we are seeing that pull forward of demand and subsequent category decline as a result of that come to an end. And so, we do think that's a factor that will affect next year and -- which is why from what we're seeing today, we expect the category growth dynamics to be a little better next year than this year. At the same time, we also expect that our market share is going to be better next year versus this year because we are gaining in terms of our innovation portfolio, our brand building, A&P investment and our go-to-market capability. And so, we think the market is improving. We think our ability to grow market share is improving, and we think the combination of those two things is what we're focused on with regard to the top line. On your question on the election, I think the biggest thing we've been focused on is tariff risk, and I talked about that at the last quarter's call. I feel very good about where we are with regard to that. We have spent the last several years diversifying our supply chain. Several years ago, we had over 30% of our cost of goods sold was coming from China and being sold in the U.S. That number today is down below 15%. And by the end of next year, we expect that number to be below 10%. We also have a very strong U.S. manufacturing presence with a large writing plant in Tennessee with our Rubbermaid food storage manufacturing plant in Ohio, with a cooler plant in Kansas, with a Rubbermaid commercial products large plant in Virginia. And so, we believe in a number of categories, if there were tariffs implemented, we would benefit, and we would be in a position to benefit from that. And so, we're watching it closely. We've been preparing for the potential for tariffs. And I think we are as well positioned as we can be to benefit in some categories. There are some categories that we still would be subject to risk. The biggest exposure we have from a China tariff standpoint, as we've talked in the past, is the Baby business. But that has been exempted in the past from 301 tariffs altogether because of the difficulty of moving the supply chain on those products and the impact on families of putting tariffs in place. And so, that's the primary exposure that we expect we would have as we head into next year.

Very helpful. If you humor me for one follow-up. The profitability you mentioned is very impressive miss the revenue trend of the business. How would you think about the sustainability of profit improvement as growth remains uneven said on the way? Are you finding women? Of course, you're not going to see the same level of recovery, but just maybe talk about your ability to sustain some level of profit growth even if the revenue line has been exactly growing as demonstrably as you would have wanted in the past?

Yes. Yes. I think we continue to see strong opportunities for profit improvement. So, we do expect the revenue line to improve going forward, as I mentioned. That's both a function of category growth and a function of the front-end capability investments that we're making; we also continue to have a strong pipeline of productivity savings projects, both across the supply chain and across a lot of our back-office functions. And so, I expect that you're going to see us continue to drive margin improvement on both the gross margin line and the operating margin line as a result of that. And so that gives us confidence that we can continue to drive absolute dollar EBITDA growth going forward. Now, I will say 22% EBITDA growth in a year is an exceptional performance. I'm not sure we're going to be able to drive EBITDA growth at a 22% rate. I don't think that's likely going forward. But I think we can drive very strong EBITDA growth going forward. I also think we've got an opportunity to continue to drive cash conversion cycle down and continue to delever the Company going forward, which we've had very strong progress on over the last five quarters, as I mentioned, going from 6.5x net debt-to-EBITDA ratio down to 4.9%, which I think is very encouraging.

Yes. And I'll add operate is we've built a scale distribution and a scaled supply chain at this point in time. And once we do see the top line in flex, if we just get a little additional volume into our facilities, the marginal economics on that are going to be very, very attractive for us.

Our next question comes from Brian McNamara with Canaccord Genuity. You may proceed.

So, the turnaround looks to be achieving strong improvement in a number of areas outside of the top line thus far, particularly margins. But the biggest investors ask us is kind of when this company will sustainably grow again? I know you're not guiding for 2025 yet. You mentioned your performance will be impacted by the general merchandise environment next year. But what should give investors confidence in the Company achieving its long-term evergreen target of kind of low single-digit annual growth?

Well, I think a good question, and it's something that we talk about every day in the Company. And we are acutely aware that we have set out a goal of returning the Company to sustainable profitable top line growth. That's why as part of the strategy, we've invested in building a consumer insights function, completely redesigning our innovation pipeline, changing the way and implementing a brand management model, focused on our top 25 brands, consolidating our U.S. selling organization and putting a new business development function in place and driving a One Newell international approach across the enterprise. I think all of those things at this point are -- have been implemented. We moved to the new operating model just nine months ago, if you recall, in January. Those teams are now in place. Those teams are working. And you can see the improvement sequentially in the rate of top line growth. I mean, we've gone from -- last year, as Mark mentioned, the core sales that was down double digits to this quarter, we were down 1.7%. So, it's -- we've had a meaningful improvement. We've also started to see improvement in market share trends, a significant number of our top 25 brands. Not all of them, but we are gaining market share in more top 25 brands today than we were 12 months ago. And so, I think those are the things that we look at that give us confidence and we are focused on getting there. And we think when we get there, we have a real opportunity to sort of prove it to the Street that the investments that we've made on the front end can do this. I expect that we're going to get to top line growth at some point during next year, during 2025, but it's a little premature for us to give guidance at this point given the uncertainty in the macro context.

That's helpful. And if I could just squeeze a follow-up in here. There's a large player with a strong focus on innovation and marketing that went public about 15 months ago and compete with you in some categories. In your view, is this competitor good for your categories, particularly kitchen appliances? Or does it represent another headwind? And from our vantage point, it doesn't appear that retailers are allocating incremental shelf space to a number of our categories, especially in kitchen appliances?

Yes. We actually think it's good because -- and I'll describe why because what it shows is that we're on the right strategy. What it shows is that the categories we compete in are responsive to innovation. They responded to consumer insights and the responsive to strong branding. So, the strategy that we put in place focused on improving our consumer insights, improving our innovation behind eating brands, we think has been demonstrated and the Company you're talking about shows what's possible when you do that. We inherited a front end that was breadth of those capabilities. And I think we've been racing to put them in place. And I think we're starting to see strong results and progress from the work we've done over the last five quarters. And if we continue on the journey that we're on, I think it shows you what's possible in the categories with the brands that we have. So, we look at it as the glass is half full on that.

Our next question comes from Filippo Falorni with Citi. You may proceed our final question.

I wanted to go back to profitability. You clearly delivered very strong results, and you sounded pretty positive about next year. I was looking at your disclosure, particularly on the organizational realignment and the savings there. It does seem based on your run rate saving what you're realizing this year, you still have another $10 million to $20 million of savings from there. Maybe -- I know you're not going to give guidance, but maybe can you give us a sense of what other savings you have line of sight for next year in terms of thinking like how much of the profitability is under your control versus how the general merchandise category is going to outperform?

I would say maybe I'll start and then Mark can add. The biggest savings program that we have in the Company is the fuel productivity program across the supply chain. This year, that fuel productivity program, which is an all-encompassing program that has more than 2,000 projects that we are executing as part of the program, some big and some smaller is going to generate over 6% cost of goods sold takeout. So, that's a huge positive impact on the cost of goods sold line. Now that's being partially offset inflation and other things. But that's been a big driver of the gross margin improvement has been that program. And that program is continuing as we go into next year. So, I'm expecting that we will have continued strong fuel gross productivity savings as we go into next year that will deliver gross margin improvement. On the overhead side, I think there's a number of things that we're looking at. As part of the strategy, we have put our -- a lot of our back-office functions into a centralized organization structure. And I think on those areas, we've got opportunity to drive greater scale and drive greater productivity. We've started implementing things like artificial intelligence in a few of the areas. So, we've turned on artificial intelligence in our customer service and some of our consumer service functions. And that's driving better quality service results for our customers and our consumers and driving a productivity benefit at the same time. And I think there's more that we can do in those areas to drive overhead efficiency as well.

Yes. And I'll just offer a few other areas that we're super excited about. We touched on this a little bit earlier, but just getting the structural economics of our innovation, the programs correct upfront is a huge enabler for us. If you think about that right now, our capacity utilization is roughly 40% and anything that we do on the volume side is going to have, as I said earlier, really attractive structural economics associated with it. We put a huge amount of automation programs in place. If you think about automation and you think about the marginal cost of getting that next unit off an automated line, it's really, really attractive. And we've talked about the invoice to net trade fund management system that we are standing up in January that's going to let us basically put a performance-based program in place with our retailer partners. And be able to do proper joint business planning with proper promotion analysis, that's a big, big unlock because there's literally over about $1 billion in just the U.S. alone that to this point in time, we haven't really been able to have the diagnostic tools to properly managed. So, we're really excited, and we think that we still have a lot of runway as it relates to cost takeout.

Okay. I think we'll conclude the call there, and thank everybody for joining the call, and we look forward to talking with any of you in follow-up calls as you'd like.