ITEM 7 - Management’s Discussion and Analysis of
Financial Condition and Results of Operations
EXECUTIVE OVERVIEW
We
are
a
global packaged
foods company.
We
develop
distinctive
value-added
food
products
and
market
them under
unique
brand
names.
We
work
continuously
to
improve
our
core
products
and
to
create
new
products
that
meet
consumers’
evolving
needs
and
preferences.
In
addition,
we
build
the
equity
of
our
brands
over
time
with
strong
consumer-directed
marketing,
innovative
new
products,
and
effective
merchandising.
We
believe
our
brand-building
approach
is
the
key
to
winning
and
sustaining
leading
share
positions in markets around the globe.
Our fundamental
financial goal is
to generate competitively
differentiated returns
for our shareholders
over the long
term. We
believe
achieving
that
goal
requires
us
to
generate
a
consistent
balance
of
net
sales
growth,
margin
expansion,
cash
conversion,
and
cash
return to shareholders over time.
Our long-term growth objectives are to deliver the following performance
on average over time:
●
2 to 3 percent annual growth in organic net sales;
●
mid-single-digit annual growth in adjusted operating profit;
●
mid- to high-single-digit annual growth in adjusted diluted earnings per share
(EPS);
●
free cash flow conversion of at least 95 percent of adjusted net earnings after
tax; and
●
cash return to shareholders of 80 to 90 percent of free cash flow,
including an attractive dividend yield.
We
are executing
our Accelerate
strategy to
drive sustainable,
profitable gro
wth and
top-tier shareholder
returns over
the long
term.
The
strategy
focuses
on
four
pillars
to
create
competitive
advantages
and
win:
boldly
building
brands,
relentlessly
innovating,
unleashing
our scale,
and
being a
force for
good. We
are prioritizing
our core
markets, global
platforms,
and
local gem
brands
that
have
the
best
prospects
for
profitable
growth
and
we
are
committed
to
reshaping
our
portfolio
with
strategic
acquisitions
and
divestitures to further enhance our growth profile.
We
expect that
changes in
consumer behaviors
driven by
the COVID-19
pandemic will
result in
ongoing elevated
consumer demand
for food at home, relative to pre-pandemic levels. These
changes include more time spent working
from home and increased consumer
appreciation
for cooking
and baking.
We
plan to
capitalize on
these opportunities,
addressing evolving
consumer
needs through
our
leading brands, innovation, and advantaged capabilities to generate profitable
growth.
In fiscal 2022,
we successfully adapted
to the volatile operating
environment, responding quickly
to significant increases in
input cost
inflation and supply chain disruptions and keeping
our brands available for our customers and consumers.
As a result, we were able to
grow organic
net sales, adjusted
operating profit,
and adjusted diluted
EPS ahead of
our initial targets.
We
achieved each
of the
three
priorities we established at the beginning of the year:
We
continued
to
compete
effectively,
including
holding
or
growing
market
share
in
70
percent
of
our
global
priority
businesses.
We
generated organic
net sales
growth across
each of
our four
operating segments,
fueled by
compelling brand
building
and
innovation
across our
leading
brands,
and
supported
with
strong
levels
of
net price
realization
in
response
to
significant input cost inflation.
We
successfully navigated
the dynamic supply
chain environment, which
was characterized by
steadily increasing input
cost
inflation,
reaching
8
percent
for
the
full
year,
and
record
levels
of
supply
chain
disruptions
affecting
our
sourcing,
manufacturing,
and logistics
operations.
We
leveraged
our Strategic
Revenue
Management
(SRM) capability
to accelerate
pricing actions in
the face of increasing
inflation, generating 7
points of positive
organic net price
realization and mix
for the
year.
And
we
moved
quickly
to
address
supply
chain
disruptions
and
outpace
our
competition
in
terms
of
on-shelf
availability for our brands.
We
executed
our
portfolio
and
organizational
reshaping
actions
without
disrupting
our
base
business.
We
announced
or
closed
seven
different
acquisitions
and
divestitures
during
the
year,
helping
further
upgrade
the
growth
profile
of
our
portfolio.
And we
successfully implemented
significant changes
to our
organizational
structure, including
streamlining our
North
America
Retail
operating
unit
structure,
realigning
our
North
America
Foodservice
segment
and
shifting
our
U.S.
convenience stores
business into North
America Retail, creating
a new International
segment and adjusting
our go-to-market
model
across
many
global
markets,
and
establishing
a
new
Strategy
&
Growth
organization
tasked
with
advancing
many
aspects of our Accelerate strategy.
Our consolidated net
sales for fiscal
2022 rose 5
percent to $19.0 billion.
On an organic
basis, net sales
increased 6 percent
compared
to year-ago
levels. Operating
profit of
$3.5 billion increased
11 percent.
Adjusted operating
profit of
$3.2 billion increased
2 percent
on a constant-currency
basis.
Diluted EPS of $4.42
was up 17 percent
compared to fiscal 2021
results. Adjusted diluted EPS
of $3.94
18
increased
4
percent
on
a
constant-currency
basis
(See
the
“Non-GAAP
Measures”
section
below
for
a
description
of
our
use
of
measures not defined by generally accepted accounting principles (GAAP)).
Net
cash
provided
by
operations
totaled
$3.3 billion
in
fiscal
2022
representing
a
conversion
rate
of
121
percent
of
net
earnings,
including earnings attributable
to redeemable and noncontrolling
interests. This cash generation
supported capital investments
totaling
$569 million, and
our resulting
free cash flow
was $2.7 billion
at a conversion
rate of 113
percent of
adjusted net
earnings, including
earnings
attributable
to
redeemable
and
noncontrolling
interests.
We
returned
cash
to
shareholders
through
dividends
totaling
$1.2
billion and net share repurchases
totaling $715 million. Our ratio
of net debt-to-operating cash flow
was 3.3 in fiscal 2022, and our
net
debt-to-adjusted earnings before net interest, income taxes, depreciation
and amortization (net debt-to-adjusted EBITDA) ratio was 2.8
(See the “Non-GAAP Measures” section below for a description of our use of
measures not defined by GAAP).
A
detailed
review
of
our
fiscal
2022
performance
compared
to
fiscal
2021
appears
below
in
the
section
titled
“Fiscal
2022
Consolidated Results of Operations.” A detailed review
of our fiscal 2021 performance compared to our fiscal 2020
performance is set
forth
in Part
II, Item
7 of
our Form
10-K for
the fiscal
year
ended
May 30, 2021
under the
caption
“Management’s
Discussion and
Analysis of
Financial Condition
and Results
of Operations
– Fiscal
2021 Results
of Consolidated
Operations,” which
is incorporated
herein by reference.
In fiscal 2023,
we expect to
build on our
positive momentum
and continue
to advance our
Accelerate strategy.
Our key priorities
are
to
continue
to
compete
effectively,
invest
in
our
brands
and
capabilities,
and
reshape
our
portfolio.
We
expect
the
largest
factors
impacting
our
performance