Hi, good afternoon, everyone. I'm Dara Mohsenian, Morgan Stanley's household products and beverage analyst. Just before we begin, a quick disclosure: please see the Morgan Stanley Research website at www.morganstanley.com for our research disclosures. And if you have any questions, you can reach out to your Morgan Stanley representative. With that, I'm very pleased to welcome back Chris Peterson, Newell Brands' President and CEO, and Mark Erceg, CFO, to the Fireside Chat today. So why don't we start with the news from yesterday? You announced the new productivity plan with a reduction of 10% of the professional clerical employees. First, strategically, why is this plan being put in place now? You've had a large amount of restructuring already. What sort of originated behind this plan? And I guess, can you tie that intent to what actually is occurring under this plan organizationally?
What are the changes that you're making and the different bucket of actions you're taking across the function?
Yeah, this is a different type of restructuring productivity plan that we announced yesterday morning than what we've done historically. We're not changing the company's operating model. We're not changing the company's strategy. This is really about harvesting the work that we've done since we put the new strategy in place. Over the last couple of years, we've taken our number of brands from 80 brands down to 52. We've taken our number of legal entities from 500 legal entities down to 200. We've taken our ERP systems from 42 down to 6. We've taken our SKU count down from 100,000 to 20,000. All of that complexity reduction work is enabling us to take this productivity step. In addition to that, about a year and a half ago, as part of the turnaround plan, we got pretty aggressive at going after artificial intelligence. We started looking at use cases.
And about 9 months ago, we moved aggressively into Agentic AI. We now have fully implemented over 100 use cases across the company. And we're seeing significant productivity gains. And so it's really the combination of the complexity reduction work that we've been doing and the AI work that's enabling us to go after this productivity savings. And we've been working on this for the past couple of quarters. And the thing that's different about this plan is this plan will largely be implemented in the U.S. this month. So it's not a plan that's going to come in the future. It's a plan that's happening right now. And then in the international markets, it'll be largely complete by the middle of next year, subject to Works Council and local regulatory requirements.
Okay. And you've talked about $110 million-$130 million in pre-tax cost savings. How quickly does that ramp up? Is that mainly employee savings? Is there other buckets in there? And as you think about those savings versus your prior long-term margin goals, does this help you get there? Was it always something you had in mind? Or is this incremental to your prior goals?
Yeah, starting with the third quarter of this year, we had seen our overhead as a % of sales trend down. And at that time, both Chris and I said very definitively on the earnings call that that is something we expect to see now on an ongoing basis. So this particular action will probably reduce our 2026 overhead as a % of sales by roughly 100 basis points. That won't all fully drop to the bottom line because there's a lot of moving parts within the P&L. Next year is an example, despite having made massive movements in our gross margin progression. Next year, it might be flat to slightly down because there will be more tariff impacts impacting next fiscal year versus 2025.
In fact, we think right now all else being equal to be about $0.28 of headwind to the P&L versus what this year was $0.23, so next year $0.05. We also plan to continue to invest more money in A&P. Next year will be our highest level of A&P spending in absolute dollars and as a percent of sales to support a very robust innovation program. And so we'll probably see 20-30 basis points get reinvested in the A&P line as well. So when you put all that together, next year, I think we'll have another year where we have our op margin growing roughly 50 basis points, which is consistent with our evergreen financial targets.
Okay. Great. That's helpful. And what about the long term as we think sort of multi-year, right? Because some of these savings will take time to ramp up.
Yeah, we're really excited because we have said at the time of the initial strategy reveal that we wanted to take our op margin from the 6% range, which is where we were in 2023, up to like the 12%-15% arena. And in order to do that, we needed to get our gross margin to 37%-38%. We're roughly at 34.5% as we sit here today, up from 29.5%. So massive progress has been made there. We said that the A&P needs to be somewhere in the 6%-7% range. We started the journey when we were at 4%. This year, we'll finish closer to 6%. And then we said that we need to get our overhead as a percent of sales into the 17%-18% range.
And if we did all those things, we'd be somewhere in the 12%-15% arena. This action on the overhead side was always contemplated. And it's something that we're now in a position to affect due to the AI enablement. And we're very confident that over time, we'll get to that 12%-15% as a result of this and the other actions we've taken.
Great. That's helpful. Chris, maybe you can touch on the organizational changes you've already made in recent years. There's been a lot of work with Project Phoenix, Renewal, supply chain work. Can you just give us a report card on where you stand organizationally today versus what you expected if you go back a few years ago and the progress you've made?
Yeah, we feel pretty good about the progress we've made. And we believe the capability of the company has dramatically improved today versus where it was when we unveiled the strategy a little over two and a half years ago. When we unveiled the strategy, we made a deliberate set of where to play, how to win choices that was based on a capability assessment. But perhaps more importantly, we changed the operating model of the company that we intended to move in. Some of the big changes that we went after was we wanted to create a consumer understanding and consumer insights function. We have now fully developed that function. It is fully AI-enabled. And we feel like we are at the leading edge of that capability. We put in place a brand management system.
We now have fully formed brand management teams across all of the top 25 brands in the company. We didn't have brand management in place as a company prior to that. We also have been focused on integrating the supply chain. The supply chain historically was operated business by business. We have fully consolidated the global supply chain at this point and are now operating in an integrated supply chain that's operating with world-class productivity results, the best ever customer service results we've seen. We also, on the geographic side, wanted to move to a One Newell go-to-market approach. We were going to market as 6 or 7 independent businesses. We are, I would say, 80% of the way through that journey.
One of the big steps that was required to do that was these ERP conversions, which allow us to consolidate sales forces and orders and move to one order, one invoice, one delivery to retail customers. We've gone from 42 ERP systems down to 6. 2026 will be the final year when we get fully to one effective global system. Right now, of our top 10 countries, we are fully in the One Newell model in six out of the top 10. By this time next year, we'll be fully in the One Newell model in all 10. The last big implementation that needs to happen is the Mapa Spontex and NUK business in Europe that we have planned for next fall.
So we believe that that will be a big enabler for us for another round of sort of simplification, complexity reduction. By the way, we also have done a lot of investment in CapEx to make this happen. And so as we head into next year, because of all of this progress we've made, we expect CapEx to come down next year, which should be a material positive impact for free cash flow going into next year.
Great. Maybe we can turn to the short-term environment. Clearly, a difficult consumer backdrop across household products categories in the U.S. Your business has seen some particular pressure also from retailer inventory cuts, as well as some market share pressures. You took pricing for tariffs earlier than some competitors. So maybe just starting with the U.S. geography, can you just give us an update on the consumer environment, the competitive environment, and also touch on any retailer actions, whether it's continued inventory adjustments, acceptance of pricing, and what you're seeing from competitors also on the pricing side given the tariff situation?
Yeah, there's a lot to unpack in that. And let me try to bucket it into a few pieces. So I think this year has been highly volatile in the general merchandise categories. We came into the year thinking that the category growth was going to be about flat this year versus last year. Our assumption that category growth was going to be flat proved to be completely false. And in our most recent update, we've guided the category to be down 2%-3% this year, which is what we expected to be. Now, at the time we provided guidance on category growth at the beginning of the year, we didn't know about tariffs. We didn't know about supply chain disruption. There were a lot of things that happened during the year that impacted that.
If you unpack from a consumer standpoint on general merchandise what's happening, there's really two trends that stand out. If you look in the U.S. market at income dispersion, the bottom third of U.S. households are pulling back on general merchandise spending this year by about 15%. So it's a huge reduction in general merchandise spending amongst that bottom third of U.S. households. The middle income and higher income are still spending more on general merchandise this year, but it's that lower income group that is driving the category decline this year, and I think it's because they're under pressure with food prices, with the cumulative effect of inflation, with housing prices, car insurance prices, et cetera, that's causing them to pull back on general merchandise categories that are more discretionary in nature.
The other thing we can see from the consumer data is if you look at age cohorts, we're seeing the 18- to 24-year-old cohort pull back on general merchandise spending by about 10% this year. All other age groups, interestingly, are relatively flat. And we think that that 18- to 24 group that's pulling back is largely due to student debt restarting, unemployment among that group being higher than typical. And so that's the trends that we're watching from a consumer standpoint. We've had to take, if I turn to more short-term dynamics, we've had some retail inventory reduction that hit us in the third quarter as customers, retail customers in several of our big categories moved from direct import to domestic delivery. So instead of taking possession of the product in Asia, they've asked us to bring it onshore, and they take possession of the product in the U.S.
That creates a one-time retailer inventory effect. That is largely behind us. Today, over 95% of our business now in the U.S. is domestic delivery. That number of direct import used to be at the beginning of this year about 8%. As we sit here today, it's probably 4% of our business that's direct import. So we think that's behind us from a retail inventory perspective. As we look at retail inventory from what retailers have in their warehouses, in their stores, we feel pretty good about where retail inventories right now are on our business. We have a clear line of sight at the major retailers of where we are. I will say retailers and general merchandise, as they went into the holiday season, did reduce their open-to-buy dollars because they didn't want to take markdown risk, particularly on seasonally oriented merchandise heading into this holiday season.
So we did see that impact in the third quarter. But at this point, our retail inventories are in pretty good shape. So we think we're shipping to consumption sort of from here going forward. And then on the pricing side, to your point, there's a lot of different dynamics depending on the category. And about 55% of our U.S. business, we manufacture in our 15 U.S. manufacturing plants or our two plants in Mexico that are USMCA-compliant. We have not needed, nor have we taken pricing in those markets because we're not subject to tariffs. The biggest one we've been watching is the writing business, which is our largest and most profitable business. We expected our competitive set, which is subject to tariffs, to take pricing during the replenishment part of back to school in September. That didn't happen.
But the update is in mid-October. They all took pricing. And so most of our competitive set has moved up 10%-15% at this point. We have not. And so we believe our brands are now, as of the fourth quarter, representing even better value for consumers because of our U.S. manufacturing presence in that business. And some of our other businesses, the 45% that we import where we are subject to tariffs, we took three rounds of pricing. And we took pricing early and pretty aggressively to maintain the structural economics of the business. The last round of pricing that we put in the market was July 28th, which fully priced for the current tariff environment. We felt like as the market leader in most of the categories in which we compete, we needed to lead the pricing higher for the tariff impact.
In many cases, the competition followed. So for example, in the baby category, where most baby gear products are made in China for us and for the industry, we've seen competition move up as we've moved up in price. Our innovation in that category is very strong. So despite taking pricing, we are gaining market share at the same time despite the pricing we've put in the market. And some other categories, primarily the kitchen business and primarily the kitchen appliance business, we saw competitors lag us in terms of taking pricing. And we lost share while we had taken price as they sort of delayed their pricing actions. That situation has gotten a lot better in the last 30 days. First of all, they've taken more pricing up. And secondly, where they haven't, we've gotten more promotionally competitive to close price gaps.
So we think we're doing the right thing. It's never fun to go through this type of an environment. But we feel pretty good about where we are from a pricing competitive standpoint right now.
Okay, and any thoughts on the U.S. consumer going forward from here? We haven't spent a lot of time talking about.
Yeah. You know, the thing that we're excited about as we look into next year is we have a lot of tailwind that gives us confidence that we believe we're going to grow faster than the category for the first time heading into 2026. So when we put the turnaround strategy in place in 2023, one of the things we got focused on was rebuilding the company's innovation capability, really focused on consumer-oriented innovation. And at that point in time, we put in a tiering system. And tier one and tier two are our two largest categories of innovation. In 2023, we had one tier one and tier two innovation. 2024, we had eight. 2025, we had 15. Next year, we have over 20. And it's not just the number in one year. These innovations that we're launching, we support for 2 to 3 years.
So the cumulative effect of that will have us with the best innovation portfolio that we will be ready to launch next year in the history of the company. And the business that was the biggest laggard when we got started, and we were very clear on that, was outdoor and recreation, where we needed to really rebuild the team. So we shut the whole office down in Chicago, rebuilt the team in the company's headquarters in Atlanta. That team got going. And we now have a full slate of innovation ready in that business to hit the market next year, which we're excited about. So every single business unit will have a full slate of innovation next year for the first time, really ever.
As a result of that, plus the tariff advantage selling that we've done to date, our forward-looking indicators would suggest that our net distribution next year will be up for the first time as far back as we can look since the Jarden acquisition. So we're headed to the strongest innovation pipeline that we've ever had, supported by the highest advertising and promotion budget we've ever had, with our net distribution going higher next year from wins that we've gotten with retailers, which gives us confidence that we think we're set up to grow faster than the market heading into next year. The biggest question mark for us is category growth. So what happens to the category? Does the category stay being down 2%-3%? Does it get better? Does it get worse? I'm not ready to forecast that yet.
My track record was not very good heading into this year on that. But we'll provide a guidance update when we give our normal guidance update on our February call.
Okay. Great. That's helpful. And Mark, maybe some of the sourcing in terms of tariffs, some of the sourcing wins you can get, has that been substantial as you think about your portfolio? Chris, you talked about the distribution expansion or net distribution being up next year. How much of that is related to sourcing post-tariffs? How much of that is around the innovation?
No, it's a great question. So we have a very talented supply chain and procurement team. And they have been effecting a re-domestication strategy for a number of years now. It wasn't that long ago that roughly 30% of our business globally was effectively being imported in from China. When we finish this year, that number will be less than 10%. And that 10% will be largely centered on our baby gear business, which is kind of a universal phenomenon. 87% of the strollers in the U.S. are sourced in from Asia. A higher percentage of car seats are sourced in from Asia. But that is something that we have been aggressively pursuing. And that really creates the backbone, which we call our fuel productivity program, the supply chain team and the procurement team. They, in any given year, have 1,800-2,000 projects that they've identified.
And they drive that through the stages of our PEAK program, which is kind of our Lean Six Sigma program. That team has been taking out averagely probably call it 4% or 5% of COGS each and every year since we put this strategy in place. And it predated that a little bit. But over the last many years, it's really ramped up as we've really driven automation and other things as well. The thing we're super excited about is we've gone from 29.5% as our gross margin in 2023, and we'll finish this year more around 34.5%. So that's a 500 basis points improvement in two years. And prior to this new program and the new strategy being put in place, we had lost gross margins structurally every single year since the Jarden acquisition. So that's a major inflection.
And our teams have been able to do that with no unit volume growth because obviously our business has been, for a number of reasons, getting a little bit smaller, which we knew we would have to affect in order to then grow from a more consolidated base. But once we start getting a little bit of wind in our sales, we're going to have really strong monetization of that through our manufacturing network because it's highly automated. And because of it being highly automated, we've increased our capacity utilization. So we're running around 40% globally. And so we believe that the next incremental unit that goes through those factories, all else being equal, will have a gross margin of roughly 50% and a net margin of roughly 45%.
So we think we still have tremendous runway ahead of us as it relates to gross margin expansion in the years ahead. And then that innovation program that Chris talked about, which we're super excited about, we put a dictate in place that every new innovation that comes out from our design teams has to be 500 basis points accretive to whatever it is that's replacing in market. And so that's another huge lever that we're going to be able to drive in the years ahead as that takes hold.
Great. And can you guys dimensionalize the distribution expansion a bit more and sort of where it's coming from, which product categories, which geographies?
Yeah. So it's fairly broad. And what I would say is because those innovations are across every single business unit, we're seeing innovation-driven distribution expansion fairly universally. About probably 60%-70% of the distribution expansion is driven by the innovation. There's another 30% that's driven by either tariff advantage selling or things that we're doing like aisle reinvention. So as an example, with a large retailer that we are the category captain, we looked at their entire aisle in writing. And they were carrying 16 brands. The bottom six brands had market share of 1%-2%. My point to them was, "Hey, 99% of consumers are choosing not to buy these items every day. Why are you carrying them?" They said, "Well, show us." So we did a test. And we laid out the aisle completely differently from a navigation standpoint with 10 brands instead of 16.
By the way, none of the six bottom brands were our brands. And so we did the test in four stores. And lo and behold, the test worked. The category growth in those four stores was higher than the control environment because the conversion of the shopper was better. The shopper found it easier to navigate, easier to find an item. They didn't give up as easily because the store was confusing. And based on that test, the retailer agreed that we were going to launch it across their entire chain. And so those types of things that is in our go-to-market capability build, we're now starting to roll across many retailers across many categories in our business.
And so it's sort of a combination of the innovation coming, the category work that we're doing, and then finally the tariff advantage selling that we're doing where, based on our U.S. manufacturing and our USMCA-compliant manufacturing, we are, as part of line reviews, pitching retailers at shifting their source of supply to U.S.-manufactured brands that we have. And on that, I think we've been pretty public this year. We got started early on that. Frankly, we were a little bit faster than the retailers were capable of digesting it. I think the retailers were digesting the tariff moves so much that, and the tariff moves were changing so much that they were a little reluctant to make permanent decisions. So we got about $35 million of incremental revenue from that tariff advantage selling this year. But most of that was promotional.
In other words, we captured end caps. We captured holiday displays. We captured those types of things. What's happening now that the tariff environment has started to become more clear is in the line review process where you're talking about permanent distribution, we're starting to make plays to take incremental shelf space as part of that to de-risk the retailers and get the retailers back to U.S.-manufactured goods. And we're seeing some really strong traction there. The distribution gains that I mentioned that we've secured for next year, we're still in the hunt for even more. So we're in the middle of line reviews on a number of categories that would have our distribution gains next year as being even higher than what we've got on the books right now.
Okay. Great. Maybe we can turn to international. We talked about the US. That was a source of weakness in Q3, particularly Brazil, down 25% year over year. It's been growing at more like a high single-digit rate. And obviously, in the release yesterday, you mentioned corporate core sales at the lower end of guidance as Latin America hasn't recovered as much as was expected. So can you just give us an update on what you're seeing from a consumer standpoint in Brazil, in Latin America, and the key international markets? Why were trends so weak in Q3? And this weakness is lingering in Q4. But more importantly, what's the path to recovery as we look out over the next few quarters?
Yeah, sure. So prior to Q3 of this year, we had six consecutive quarters of core sales growth in the international business. In Q3, our core sales in international was down 6%, which broke that streak. And really, if you go within that, the biggest driver was Latin America. And within Latin America, as you rightly say, we called out Brazil. And the other one is Argentina that was part of that mix. Both Brazil and Argentina are top 10 countries for Newell in terms of revenue. Two different issues. In Brazil, which had been growing high single digits, almost 10%, we saw down 25%, as you rightly say, in Q3. We think that was because of the 50% tariff that Trump put on Brazil, which caused supply chain issues as well as retailer ordering pattern issues. It was less of a consumer issue than it was a retailer issue.
But it was still a little bit of a consumer issue. I mean, the GDP in Brazil has gone from 3%-4% down to flat. It hasn't gone to -25%. But so that was sort of the issue in Brazil. In Argentina, there was an election that happened in September that was sort of their version of a midterm election. Everybody thought Malay, who's the president, was going to lose his coalition. Retailers literally stopped ordering in the month of September. He actually won a bigger mandate. So we thought they would turn back on post that. What we've seen quarter to date is that -25% sort of in Brazil, Argentina that we saw in Q3 is tracking now at about -10% in October/November. So it's improved. But we sort of thought it was going to go back to being maybe flat.
And so what we put in the release was that we announced yesterday morning with the productivity initiative was we affirmed our operating margin guidance. We affirmed our earnings per share guidance. We affirmed our operating cash flow guidance. So no change to any of those ranges. But we said that we expected our core sales and our net sales guidance to be toward the lower end of our previously announced range because that bounce back, particularly in Brazil and Argentina, seemed to be slower than what we had thought might happen.
Okay. Great.
So, as you look forward into 2026, it's a little bit hard to tell. I don't think we're going to see if we've seen -25% turn to -10%. I don't think you're going to see -10% next year. So, we still are pretty confident that the international business is set up to get back to growth, core sales growth in 2026.
Okay. Great. And maybe we could talk about core sales growth across the business globally in 2026. You mentioned the heightened innovation. There's a multi-year platform of innovation, higher spending, distribution gains, international bouncing back. So are you comfortable at some point you return to core sales growth in 2026? How do you think about that? Conceptually, I know there's a lot of volatility from a category standpoint.
Yeah. We haven't guided to 2026 yet. Our guidance will be in February as we always do. We're not changing our guidance philosophy here. What I'm confident in is that we've got a plan that should allow us to grow faster than the category next year for the first time. I'd like to say that if you look at what the category growth is likely to be, there are reasons for optimism. The new tax bill that was passed this summer, if you think about what's driving the category decline, that low-income consumer growth group provides stimulus directly to low-income consumers. That starts in January, and so there's reason to believe that as that stimulus gets into the market, that consumer group generally spends that stimulus that could have them returning to the market.
Also, we've seen real wages begin to turn positive over the last 6 to nine months in the country. That also is a good leading indicator. And finally, if you think the low-income consumer group was down 15% this year, it's hard to believe they're going to be down 15% again next year on top of the minus 15% this year. And we haven't seen really a pullback from the middle and higher-income consumer. So those are the reasons to believe that category growth is going to be much better next year than this year. On the flip side, if you believe unemployment is going to spike next year, that would be a headwind for us. And so we're not great macroeconomic forecasters.
So we're trying to plan the business in sort of multiple scenarios so that in either of those scenarios for category growth, we're going to try to drive growth faster than the market. And we're going to try to improve operating margin. And we're going to have a meaningful step up in operating cash flow and free cash flow. And we're going to get back to delevering the company's balance sheet.
Great. And Mark, maybe you can touch on capital allocation. Your leverage is near five times. How would you sort of characterize your capital allocation priorities from here? And cash flow, as you look out over the next few years, is there working capital opportunity left for you to go after?
Yep. Good question. So we started this transformation when we were six and a half times levered. We, in pretty short order, were able to drive that down to five. And that's where we ended last fiscal year. When we started this year and we thought category growth was going to be flat, we had predicted that we would take another half turn off our leverage and end this year at four and a half. Because of what has happened with respect to tariffs and the second and third derivative effects of that, we're likely still going to be at five times at the end of this year. Now, if you look through that, what you'll see is that we're going to have about $900 million of EBITDA this year, which is exactly what we had in the prior year.
So we have been able to handle this 23% headwind to the P&L because of tariffs, I think, fairly well and fairly adroitly. And I think it's a real testimonial to the team itself. Now, as we think about next year, our operating cash flow will be substantively better than it is in the current year. The current year, we're guiding from $250-$300 million. Next year, it'll be sizably larger than that for a number of factors. One is the tariff cash impact will actually step down. So this year, we had $180 million of cash tariff impacts and $115 million of P&L impacts. Next year, those numbers, as we sit here today, all else being equal, is that the cash impact next year will be $120 million, and the P&L impact will be $140 million, which is 28 cents, which I alluded to earlier.
That's a $60 million reversal year over year. And that will present itself in the form of lower working capital, principally inventory. So that's the first thing. Second thing is we expect, all else being equal, that we would be able to drive our cash conversion cycle, putting tariffs aside, to be a better and lower number in 2026 than 2025 as we get back on our fill rate improvements and our weighted forecast improvement accuracy programs. Because this year, there was a disconnect right in the third quarter when the sales kind of backed up for the reasons that Chris gave voice to. We found ourselves in a situation where our cash conversion cycle actually increased by three, four days. And we don't have enough time this year to then drive that back down.
If you look at what we did the prior year, we took our cash conversion cycle down by eight. And the year before that, we took it down by 23 days. So next year, if you put the cash tariff impact aside, we will still be able to, in our view, take the working capital number down as it relates to that. Then we have a number of other factors. We know that our cash taxes next year will be less than our cash taxes this year. We have a very sophisticated tax team. And we do advanced tax strategy work. And we know definitively that our cash taxes next year will be lower than this year. And then we had a well above average bonus payout that we paid out in February of this calendar year.
And next year, based on where we're trending, we'll probably have a slightly below target bonus payout. And that would be paid out in February of 2026. And that alone is probably worth a $60-$70 million reversal. So you take all those pieces into account, plus the fact that Chris talked about CapEx going from 250 this year probably more to like 200 next year as we finish the ERP programs, as we've considered and finished a lot of the large consolidation programs across the distribution and the supply chain. You can see that we'll have a much, much, much stronger operating cash and free cash flow result in 2026, we believe, irrespective of what happens on the top line. And so we will continue to fund the business. Most businesses say the first call on cash is funding working capital expansion. We think we can contract working capital.
Second call on cash for us is basically funding high-return fuel productivity programs. We have kind of a 30% ROR threshold. And if we can fund projects internally at 30%, we'll do that all day long. And then our focus really becomes on debt paydown, right? Because we are committed to getting ourselves back to investment grade. And we have a ways to go as it relates to that. But it's something we're very strongly committed to.
Great. That's helpful. Maybe we can end on AI. You touched on it in a couple of instances already in our conversation. How impactful is this to your business? How are you using it? And which functional areas?
Yeah. We're using it broadly across all areas of the company. And I think it's going to change every area of consumer products going forward. As I said, we got started on it about a year and a half ago. We moved to Agentic AI about nine months ago. And we're really sort of taking a three-pronged approach to this. The first is we've rolled out AI tools to all employees with things like Copilot 365, ChatGPT, to enable everybody in the company to be more efficient in their work. And we've implemented training across the board for that. The second is in each function, we've looked at processes that are capable of being AI-enabled. And we've made significant progress there. The biggest areas that we've made progress are probably in consumer understanding, in marketing, in customer service, consumer service, a lot of the back office capability, supply chain.
All of those areas, we've made meaningful progress in terms of AI implementation, and then the third thing that we're looking at are difficult cross-multifunctional processes across the company that can be reimagined and redefined. And we've made think of things like planning that go across a lot of the organization that can be automated with artificial intelligence. Finally, our strategy has been a little different than most. Because we were on this capability-based turnaround, we wanted to move and change the company's capabilities anyway and the company's processes anyway. We decided to, in many of these functions, take a leapfrog approach. And so we went to the leading technology companies directly and volunteered to be a beta client. And we're pretty successful. And so we are the beta client with a number of leading tech firms that are sort of co-developing the AI capability in these areas.
I think it's different in terms of where we are in each of the functions. But in several of the functions, I think we're now in the lead in the industry and consumer products. We're demonstrably ahead of where everybody else is in terms of capability. I mean, as an example, we've increased our digital marketing assets this year by 500% with less people. We've taken our customer service, which is our interface with retailers. We've taken our response time from three hours to 15 minutes. We've increased our productivity by 300 or 400%. In our innovation process and consumer understanding, we've done consumer segmentation work to segment the consumers we're going after. We've then built digital personas.
And we're now doing consumer testing against the digital personas and using that feedback from the digital personas to then create sketches, which we can, with AI, separately create digital assets, which we can then convert into 3D CAD. That whole product development cycle, we've taken from four months to two to three weeks on the front end through this implementation. So it's a massive impact. I think we're just getting started in some ways. And we're excited about it because of our starting point, we were able to leapfrog a little bit.
Right. Great. Well, with that, we're out of time. So we really appreciate both of you being here today. Thank you.