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.
Guided by our
purpose to make
food the world
loves, 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
standing
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.
Our
consolidated
net
sales
for
fiscal
2025
declined
2
percent
to
$19.5
billion.
On
an
organic
basis,
net
sales
decreased
2
percent
compared to year-ago levels. Operating
profit of $3.3 billion decreased
4 percent. Adjusted operating profit
of $3.4 billion decreased 7
percent on a
constant-currency basis.
Diluted EPS declined
5 percent to
$4.10. Adjusted diluted
EPS of $4.21
decreased 7 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 $2,918
million in
fiscal 2025
representing a
conversion rate
of 126
percent of
net earnings,
including
earnings attributable
to noncontrolling
interests. This
cash generation
supported capital
investments
totaling $625
million,
and
our
resulting
free
cash
flow was
$2,293
million
at
a
conversion
rate
of 97
percent of
adjusted
net
earnings,
including
earnings
attributable
to
noncontrolling
interests.
We
returned
cash
to
shareholders
through
dividends
totaling
$1,339
million
and
share
repurchases
totaling
$1,203
million
(See
the
“Non-GAAP
Measures”
section
below
for
a
description
of
our
use
of
measures
not
defined by GAAP).
In
fiscal
2025,
the
operating
environment
was
characterized
by
significant
volatility
and
uncertainty,
resulting
in
value-seeking
behaviors by
consumers that
were deeper
and more
prolonged than
we expected.
As a
result, we
made important
changes to
adapt to
the evolving
environment and
put our
business on
a path
back to
growth.
We
increased investment
to bring
consumers greater
value,
which strengthened our
pound volume performance
as we exited the
year.
While the level of
incremental investment
resulted in fiscal
2025
financial
results
below
our
targeted
ranges,
we
expect
the
improved
pound
volume
and
household
penetration
trends
will
translate into stronger top- and bottom-line performance over the long
term.
We
delivered mixed performance against the three priorities we established
at the beginning of the year:
We
did not achieve our objective
of accelerating organic net sales
growth, with full-year organic
net sales declining 2 percent
driven primarily
by unfavorable
organic net
price realization
and mix
resulting from
our increased
investments in
consumer
value (see the ‘Non-GAAP Measures” section below for our use of
this measure not defined by GAAP).
We
successfully
created
fuel
for
our
investments,
including
generating
industry-leading
Holistic
Margin
Management
(HMM) cost savings by increasingly applying digital and technology capabilities throughout
our supply chain.
We
successfully drove
strong cash
generation, with
free cash
flow conversion
finishing at
97 percent,
which was
above our
full-year
target
of
95
percent.
This
enabled
us
to
fund
capital
investment,
raise
our
dividend,
and
continue
our
share
repurchase activity.
We
also continued
to reshape our
portfolio, including
acquisitions and divestitures
that further
improved
18
our portfolio’s
ability to generate profitable growth
over the long term (see the
“Non-GAAP Measures” section below
for our
use of this measure not defined by GAAP).
A
detailed
review
of
our
fiscal
2025
performance
compared
to
fiscal
2024
appears
below
in
the
section
titled
“Fiscal
2025
Consolidated Results of Operations.” A detailed review
of our fiscal 2024 performance compared to our fiscal
2023 performance is set
forth
in Part
II, Item
7 of
our Form
10-K for
the fiscal
year
ended
May 26, 2024
under the
caption
“Management’s
Discussion and
Analysis of
Financial Condition
and Results
of Operations
– Fiscal
2024 Consolidated
Results of
Operations,” which
is incorporated
herein by reference.
In fiscal 2026, we
plan to continue advancing
our Accelerate strategy.
Our key priorities are to
return North America Retail
to volume
growth,
Accelerate
North
America
Pet
growth
with
an
expanded
portfolio,
and
drive
efficiencies
to
reinvest
in
growth.
We
expect
category
growth
to
be
below
our
long-term
projections,
reflecting
less
benefit
from
net price
realization
and
mix
amid
a
continued
challenging
consumer
backdrop.
To
strengthen
our
categories
and
market
share
performance,
we
plan
to
increase
investment
in
consumer
value,
product
news,
innovation,
and
brand
building,
guided
by
our
remarkable
experience
framework.
This
includes
a
significant
strategic investment
to launch
Blue Buffalo
into the
fast-growing
U.S. fresh
pet food
sub-category
in calendar
2025.
We