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 growth
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.
In
fiscal
2023,
we
continued
to
successfully
adapt
to
the
dynamic
operating
environment
and
deliver
strong
performance.
This
included
growth
in
organic
net
sales,
adjusted
operating
profit,
and
adjusted
diluted
EPS
that
was
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
more
than
50
percent
of
our
global
priority businesses for
the fifth consecutive
year, when
adjusting for an
unusual competitive
dynamic in cereal
in fiscal 2022
and
assessing
that
platform
on
a
2-year
basis.
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 13 percent input cost inflation.
We
continued
to
invest
for
the
future,
including
a
17
percent
increase
in
media
and
advertising
expense,
a
double-digit
increase
in
investment
in
our
digital
and
technology
capability,
and
a
strong
increase
in
capital
investment
related
to
new
growth capacity.
We
continued
to reshape
our portfolio,
including
closing
on one
acquisition and
two divestitures
that further
improved our
portfolio’s ability to generate profitable
growth over the long term.
Our
consolidated
net
sales
for
fiscal
2023
rose
6
percent
to
$20,094 million.
On
an
organic
basis,
net
sales
increased
10
percent
compared
to
year-ago
levels.
Operating
profit
of
$3,434 million
was
down
1
percent.
Adjusted
operating
profit
of
$3,457 million
increased 8 percent on
a constant-currency basis.
Diluted EPS of $4.31 was
down 2 percent compared
to fiscal 2022
results. Adjusted
diluted
EPS
of
$4.30
increased
10
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
$2,779 million in
fiscal 2023,
representing a
conversion rate
of 106
percent of
net earnings,
including earnings attributable
to redeemable and noncontrolling
interests. This cash generation
supported capital investments
totaling
$690 million, and our resulting free cash flow was $2,089
million at a conversion rate of 80 percent of adjusted
net earnings, including
earnings attributable
to redeemable
and noncontrolling
interests. We
returned cash
to shareholders
through dividends
totaling $1,288
million and net
share repurchases totaling
$1,171 million. (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
2023
performance
compared
to
fiscal
2022
appears
below
in
the
section
titled
“Fiscal
2023
Consolidated Results of Operations.” A detailed review of
our fiscal 2022
performance compared to our fiscal 2021
performance is set
forth
in Part
II, Item
7 of
our Form
10-K for
the fiscal
year
ended
May 30, 2022
under the
caption
“Management’s
Discussion and
16
Analysis of
Financial Condition
and Results
of Operations
– Fiscal
2022
Results of
Consolidated Operations,”
which is incorporated
herein by reference.
In fiscal 202
4, we expect
to build on
our positive momentum
and continue
to advance our
Accelerate strategy.
Our key priorities
are
to
continue
to
compete
effectively,
to
improve
our
supply
chain
efficiency,
and
to
maintain
our
disciplined
approach
to
capital
allocation.
We
expect
the
largest
factors
impacting
our
performance
in
fiscal
2024
will
be
the
economic
health
of
consumers,
the
moderating
rate of
input cost
inflation,
and the
increasing stability
of the
supply chain
environment. We
expect to
drive organic
net
sales
growth
in
fiscal
2024
through
strong
marketing,
innovation,
in-store
support,
and
net
price
realization
generated
through
our
Strategic Revenue
Management (SRM) capability,
most of which
will be carried
over from SRM
actions taken in
fiscal 2023. For
the
full year,
input cost inflation
is expected to
be approximately
5 percent of
total cost of
goods sold, driven
primarily by labor
inflation
that
continues
to
impact
sourcing,
manufacturing,
and
logistics
costs.
We
expect
to
generate
higher
levels
of
Holistic
Margin
Management (HMM) cost savings compared to fiscal 2023.
Based on these assumptions, our key full-year fiscal 2024 targets
are summarized below:
●
Organic net sales are expected to increase 3 to 4 percent.
●
Adjusted operating profit
is expected to increase
4 to 6 percent in
constant-currency from the
base of $3,457 million
reported
in fiscal 2023.