Alexia Howard: So two questions. The first one is a bit more of a take a step back. In my conversations with a lot of investors, people are commenting on the fact that you’re not getting €“ really getting a lot of valuation credit to your faster-growing Snacks business. And they also want you to get the leverage down, which I think you commented on in the prepared remarks. Surely one solution might be to dispose of some of your more mature categories. I’m just wondering how you’re thinking about some of those slower growth businesses, the non-snack areas and whether you might think of that being a way into addressing some of those concerns more quickly? And then I have a follow-up.
Sean Connolly: Yes, great question, Alexia. We’ve said, since I got here that, we are going to pursue consistent improvement in our sales rate and consistent improvement in our margins. And we will do it three ways. we will strengthen the businesses we own. we will acquire new businesses that fit. And we will divest stuff that is a drag on our sales and our margin. And if you look at the sheer amount of down to last 8 years, it’s right up there near the top of the list in terms of activity. So that’s part of our playbook. It will continue to be part of our playbook. We always look at that. And I always tell investors, if you’ve got an idea as to how we might reshape in a way that unlocks shareholder value, you can probably safely assume that we, prior €“ already thought about it and looked at it.
Now with respect to the specific concept that you put out there, the way we look at things like that, particularly, when you’re talking about more material divestitures, we’ve done a lot of kind of one-off. But when you package up big chunks of the business, and you look at doing €“ started spending them out or selling them something like that, you have to look very carefully at what happens with stranded overheads. What happens with the fixed cost base of the company and does it flow back to that which remains and therefore, compress margins. Because you’ve got to be very sensitive to ensuring that these kinds of actions create value and don’t actually end up destroying value. And so that’s one of the things we look at. The other thing we look at is we are basically U.S. company and we have tremendous scale and scope within the U.S. And we think that scale and scope works very well for us in terms of our relationship with our customers, the importance of our total portfolio with our customers, and the ability to leverage part of our portfolio to do very strategic things in other parts of our portfolio, whether that leverage the cash flow or just leverage the fact that it’s €“ these are important items to shoppers.
So we look at all of that stuff. We’re open-minded to anything that truly creates value. And that’s kind of our philosophy on that. It’s always in that way.
Alexia Howard: Great. Thank you very much. And just a quick follow-up, promotional activity, are you seeing any shift in what retailers are expecting or is that all still very much business as usual at the moment, even though I think it’s a lot lower than it was before the pandemic?
Sean Connolly: Yes. That’s a hot topic these days. Let me give you kind of our perspectives on that. First, let me say that from our vantage point, the competitive environment remains rational overall, and that’s usually a good thing. Second, until supply normalizes further, I just can’t see retailers pushing for deals that exacerbate out of stocks. That’s not good for retailers when their shoppers go over the store across the street to get the items that they couldn’t find in their stores. And the third, we are not opposed to smart promotions. In fact, we’re already doing high ROI promotions already, that’s kind of in line with our pre-pandemic levels from a frequency basis. At some point, we may be able to add a little bit more.
But here, I’m talking about surgical €“ really strategically valuable, high ROI and frankly, often seasonal promotions, often holidays, that are emotionally important to our consumers. And in those instances, we want our brands in those promotions. But through COVID, some of those promotions were cut back on, given obvious supply challenges. Going forward, that will get better and some of those quality opportunities will reemerge. But I think the big point is we’re not talking about a surge of deep discount promotions here. That’s not been our playbook for at least 7 years now. And I just don’t see a lot of room for that.
Alexia Howard: Great. Thank you very much. I will pass it on.
Operator: Our next question comes from David Palmer from Evercore ISI. Please go ahead with your question.
David Palmer: Thanks. Thanks guys. Slide 12, the one where you showed the price lag phase being followed by the margin recovery phase. I am wondering, how you think about the shape and the length of this recovery phase. It was five quarters or six quarters long on the lag phase. Do you see it playing out like a similar lines for the recovery phase?
Sean Connolly: Yes. It’s interesting, David. In my office up on my whiteboard for the last year, I have got this little handwritten analysis I have done of the earnings power of a cohort of 10 units and how the P&L unfolds when you are faced with multiple waves of price of inflation, which require multiple waves of pricing. And as I have said to Andrew earlier, it’s very predictable, it’s very mechanical. What’s been unusual in this cycle is the sheer magnitude of the inflation super cycle and the number of waves. So, the reason €“ the shape of that curve on that slide, you see it is, because it reflects multiple waves of COGS inflation and the follow-on pricing effects. The sheer number of those waves is now slowing down.
And that is why you are seeing the sharp recovery and sometimes it slows down faster than you might expect, which is why the recovery might come in faster. But overall, the mechanics of it are very predictable. If we got hit with another 18 months of five waves, it would kind of €“ that’s the rinse and repeat comment. The cycle starts all over again. I can’t find a lot of examples of that happening in history after a super cycle like this. So, I think what you are seeing now is a reflection of good execution on our part and kind of the beginning of the sun-setting of the super cycle. And that’s why we say we think we have got some runway from here as the supply chain continues to improve and productivity continues to ramp up. Dave, do you want to add to that?
Dave Marberger: Yes, just to build on that. And David, back to something I said earlier, for H2 gross margins, we expect that delta of approximately 300 basis points to hold. So, that €“ translated to that chart, that just means that, that relationship for the second half will continue, right, where the sales per unit and the price per unit is above the cost because we are €“ we have already incurred that inflation. Our 3-year inflation number, when you use the 10% estimate for this year, is 33%. So, we have significant inflation that’s in our base. We are now catching up to that. So, that drives that margin improvement for the second half.
David Palmer: Yes. And just a follow-up on that, in the €“ I am looking at the volume numbers in Grocery & Snacks, for example, but those were a little weaker than we would have expected. I wonder just, if you back up a second and say, in prep €“ what is the big worry that people would think of? Is that perhaps, there would be a need for promotion give back to stabilize volume in your higher price elasticity categories out there. Is there something that you are monitoring that would tell you that perhaps there would be a slamming of a door and a quick end to this recovery phase? Are there things that you are really watching out for? And perhaps €“ just leading the witness a little bit on the Grocery & Snacks, is that volume concerning to you at all in that area?
