Operator: Our next question comes from the line of Olivia Tong with Raymond James.
Olivia Tong: First question, just given obviously the focus on cash flow, if you could talk about what that implies with respect to your commitment to the dividend at current levels.
Mark Erceg: Yes. Look, I think we feel pretty good about where we are. We made an intervention earlier this year to rightsize the dividend. We said that our strategy as it relates to that is to be somewhere in the 30% to 35% dividend payout ratio, and we’re going to continue to tackle along with that going forward. So we feel really good about our cash position. I mean, it’s important to note that we paid down a significant amount of debt. So far, net debt is down $500 million year-over-year, $400 million year-to-date. So, we feel really good about the work that we’re doing. The other thing I would just take this opportunity to point to out and speak out to is you’ll recall that our inventory kind of peaked at $2.6 billion in the third quarter of last year.
And as we go forward and kind of do our year-end projections, we think by the end of this year, we’re going to have literally drawn down inventory by $1 billion on top of the market contraction that we’re obviously contending with. So the fixed cost absorption from having that market contraction and the trade destocking and our self-selecting decision to basically hold back production in order to kind of clear the inventory, release the cash and then set the right base point for the next years going forward is really quite notable. The other thing that we haven’t talked about as much is just the carryover inflation effects that we’ve had to incur because of the way we do our inventory costing. At the end of last year, when we saw inflation running high single digits, this year kind of low single digits, we suspended an awful lot of inflation charges into our inventory balance.
And over the first, second and third quarters of this year, we’ve been bleeding out that value in effect. And it’s honestly been over $200 million of inflation that was basically incurred in the prior year that’s now basically being bled through the P&L this year, which at the end of the third quarter here, it now stops and it actually reverses and starts going the other way. So we feel really good about our cash position, we feel really good about our gross margin position, and we’re excited about the difficult decisions we’ve been taking to set the business up for success in the future as we then make the capability investments to really start driving the front end of the operation.
Olivia Tong: Got it. And then, it sounds like ‘24 is obviously — the challenges are expected to continue. As you think about a lot of the moving pieces, eventually, would imagine that innovation and focusing on innovation in order to drive sales recovery will become part of the plan. Can you talk about that and other actions that you can take in the interim that can improve your ability to combat the tough environment maybe a little bit more? You briefly talked about the back-to-school categories but maybe some more specifics around some of the other moving parts within the division, ones that you think can recover faster versus ones that will clearly still have structural challenges that will take even more time to address. And just walking through sort of the different businesses and thinking about the recovery path. Thank you.
Chris Peterson: Yes. So, let me try from a company standpoint first, which is I think where you started. So we are doing a tremendous amount of change to get the front-end capability in a place where we think we can consistently drive market growth and market share gains in the categories in which we compete. And we talked about, in my prepared remarks, the innovation process that we put in place. We’re putting in place a brand management structure. And importantly, it’s not just the brand manager but we’re also putting multifunctional teams against the top 25 brands, which did not exist before. We’re putting in place a selling capability that is a new selling capability focused on going after incremental distribution opportunities, which we believe there are a significant amount of.
We’ve started to put in place now a measurement system to look at our distribution, our selling, our merchandising and our promotion, which many other CPG companies have but we were not measuring. And what we’re finding is that in many of our categories, our share of shelf is below our market share. So, we think we’ve got a big opportunity to change the retail environment to get our brands more appropriately distributed. We also are focused on something that we’re calling internally pillars of competitive advantage. And we’re starting to measure our brands and our products against superiority on product performance, on packaging and claims, on brand communication, on retail execution, both in-store and online and on value from a pricing standpoint.
And when I say value, I’m not talking about low price. I’m talking about representing a good value for the feature benefit set that we’re offering, really focused on the MPP-HPP part of the market. And that all is new capability with KPIs that we are putting across the front end of the organization. It is a lot of change on the front end, but it is all the right things, and we’re seeing significant opportunities for improvement. Some of them are going to take time because if you put a new innovation idea in the funnel, it might take 18 to 24 months before it comes out and it’s ready to launch. Some of them are faster, things like distribution — new distribution opportunities where we’re underspaced with our existing brands and products.
That can go faster. And so, that’s why when we announced the strategy in June, we said this is a multiyear turnaround, and we said that it’s going to take 4 to 6 quarters for this to really all come together. But it’s across all of those vectors that we’re driving improvement on the front end. I will say — the other thing I’ll say on your question on categories is because the Company was operating previously in seven business units effectively, the capability of each of those business units was highly variable because they were all operating effectively independently. And so, we have some business units that are starting from a position of relatively strong capabilities where there’s plus-up opportunity but they already were 60% of the way of where we needed to be.
And an example of that would be the Writing business, which we’re growing market share in. It’s our most profitable business. We do have very strong products that are superior in the market that represent great value. There are other categories where there’s — we’re starting from almost zero front end capability that we need massive improvement. And an example there would be more like the Outdoor & Rec business where in that business, there’s more work to do on the capability improvement to get that business back to performing and getting back to growth.
Operator: And our next question comes from the line of Lauren Lieberman with Barclays.
Lauren Lieberman: You’ve covered so much ground. But I just thought maybe it would be interesting to ask about dialogue with retailers. So, you talked about 2 points less in the fourth quarter from eliminating some of these money-losing promotions. But retailers also lose on that. I mean, it’s good for your P&L, obviously, and better for the health of the business long term but that does detract a bit from retailer trends in some of these categories. So I guess what can you tell us about the conversation with retailers, how they feel about the time line of progression, some of the band-aid ripping off you’re doing in the near term? And how are they factoring into their sort of planning for next year and thoughts about category growth? Thanks.
Chris Peterson: Yes. Thanks, Lauren. And it’s been a big focus of ours, as we’ve talked a little bit about in the past, and it continues to be. I’ve had top-to-top meetings with several of our top retailers, both in the U.S. and internationally. And as we’ve done those meetings, I would describe our relationships as very strong. And I would say our relationships with retailers today are significantly better than where we were two years ago. And the reason for that is really the implementation of Ovid and the simplification work that we’ve done. This may be a little bit in the weeds, but if I take an example of our largest retail customer, we used to operate with them with 23 different legal entities, 23 different vendor numbers.
