So I mean the benefit of the way we structured those contracts as we need the capacity, we can get access to it. We don’t have a hard floor fixed-cost structure, where we would be paying if they weren’t using it.
Jeff Siemon: Jason, this is Jeff Siemon, I would just add on that second point, we were able to close down an internal [manufacturing] (ph) factory, so we weren’t adding capacity to the system, we were just reshuffling where that capacity on treats specifically was located, and this supplier is — we have a strategic partnership. We have our HMM cost savings program built into that contract. So we like what that can do for us from a profitability standpoint on that business.
Kofi Bruce: And that’s actually a lower-cost alternative to the internal production in this case.
Jason English: Got it. That’s really helpful. I appreciate that. And one more question on margins. Foodservice, it dipped sequentially. So, historically, looking back, there’s not a lot of seasonality there, but we’ve seen margin slip for two consecutive quarters and we’re now at 11%. What’s driving the sequential dip? Is there anything unique about this quarter? Or is this like 11% rate, something we should take to the bank for the rest of the year? Thank you.
Kofi Bruce: No, I would expect that we will see margins improve on this business. I do think one of the big factors has been the volatility in flour pricing as we’ve worked through this environment, which is a significant — has been a significant headwind in the deconstruction of margins. So that’s been a put and a take as we’ve moved through the past several quarters, including the last couple. I think long-term, the challenge and the opportunity on this business will come from stabilization of the supply chain, giving us access to a more stable HMM delivery. We are seeing that come through closer to our historical levels in the mid-single-digit range on this business, and we’d expect that it had — the pricing benefits from last year’s significant pricing will also help buoy margins as we move through the back of the year.
Jason English: Thanks a lot. I’ll pass it on.
Kofi Bruce: You bet.
Operator: Our next question comes from Chris Carey with Wells Fargo Securities. Please proceed.
Chris Carey: Hey, good morning, everyone. So just on the Pet business, you noted SRM and pack size would be one of the methods that you’re using to kind of like stimulate sales. How long does it take to get those right pack sizes in market? And is SRM your current thinking kind of exclusively or are you starting to think about any pricing adjustments beyond just pack size and just overall SRM?
Jeff Harmening: Yeah, Chris, on the — good questions. On the Pet business, we’re doing a couple of things. First — and someone asked this question earlier about the amount of marketing spend, but also what we’re spending it on. What we’re spending it on, the first thing I would say is that we’re going back to some more hard-hitting advertising that really gives pet parents a very rational reason to believe why Blue Buffalo feeds them like family. The equity is held up well, and we think in this environment, direct comparative advertising on why exactly pet parents should pay for Blue is really important. So, we’re going back to that. That’s the first thing I would say. On the pricing itself and price pack architecture, we’re doing it along several lines of our products.
I’ll give you just a couple of examples. In our dry pet food line, we didn’t have a medium size. We had a lot of large sizes, but not some medium sizes. So, we’re introducing those. And those start rolling out now, but it takes a while for them to get going. The same would be in treating. We are introducing some sizes, hit some more entry-level price points. That doesn’t mean lower margin for us. It just means lower price points so it’s good for pet parents. And then, in wet food, we’re looking at some variety packs and things like that, which would probably be more weighted toward the back half of the year. So those are just a few examples of things we are doing to make sure that consumers understand the value. What we’re not going to do is disrupt the value proposition of Blue Buffalo, which is a premium brand.
And consumers know it as a premium brand. We spent lots of money and lots of years making it the best brand in the premium part of the category. And what I can assure you we’ll do is not disrupt that.
Chris Carey: Okay, very helpful. Just one quick follow-up. In the press release, you noted that gross margin had benefited from favorable mark-to-market. Can you just remind us of the typical hedging strategy [and where you sit] (ph) for the year? Basically trying to understand where there might be some variability if we see any moves in. Thanks a lot.
Kofi Bruce: Sure. So, as a reminder, our adjusted gross margin, obviously, does not include that mark-to-market benefit, so that is an effect of our gap reporting where we do not get the hedge accounting treatment on our commodity hedging programs. As a reminder, we’re generally trying to hedge out at the beginning of the year about 50%. So, given where we are in the year, we’re about 65% hedged across all of our four businesses and across all the inputs.
Operator: Our next question comes from Rob Dickerson with Jefferies. Please proceed.
Rob Dickerson: Great. Thanks so much. Maybe we just move to cereal for a minute. It sounds like just from various sources, I believe yourselves included, there’s not necessarily a tremendous amount of growth expected in the category over the next few years. So, Jeff, it’s probably easier to kind of comment on the category, maybe reverting, right, back to kind of pre-COVID dynamics, but at the same time, I felt like during that period of time, there was some acceleration for General Mills specifically, just speaking to the quality and the power of the brands. So, you own Cheerios, Cinnamon Toast Crunch has done really well. So, I’m just curious, because you think forward, next year, next three years, kind of like why even state that you would think that category might not grow kind of relative to overall food, just as a reminder.
And then, just secondly, just given the power of your portfolio, like within that dynamic, like I guess what’s the conviction level and your ability to continue to gain share like you’ve done for, let’s say, the prior seven years or so? Thanks.
Jeff Harmening: Yeah, thanks, Rob. Let me provide some commentary and then, Jon, follow up as necessary. The first reminder I would let you know is that cereal is still the number one item to eat in the morning for breakfast. And it’s almost 20% of breakfast eatings, I think it’s 19%, so that’s here in the U.S. So, it’s still a highly consumed item in the morning. We’ve been doing very well in cereal. As you noted, we’ve grown more than 20% over the last five years. We’ve gained share, I think, five years in a row. We have the two biggest brands in the category in Cheerios and Cinnamon Toast Crunch. We have almost 50% of the category’s new product volume and — I think it’s 47%, and four of the last five big items are from General Mills.
So, we’re innovating well. We’re developing, our equity is well. We continue to grow. And so, my expectation for our cereal business is that we’d grow a little bit every year and hopefully take a little bit of share every year, but keeping in growth. What everybody else does, you’ll have to ask the rest of the competitors in the category. But we like cereal. We like our brands. I love how we’ve been competing. So Jon, anything you want to add to that?
