GIS
#Thanks, <UNK> and good morning, everyone
Let’s jump right into our fiscal ‘17 financial performance starting with the fourth quarter results summarized on Slide 9. Net sales totaled $3.8 million, down 3% on a reported and organic basis
Total segment operating profit totaled $673 million, up 4% in constant currency
Net earnings increased 8% to $409 million and diluted earnings per share were $0.69 as reported
Adjusted diluted EPS, which excludes certain items affecting comparability, was $0.73. Constant currency adjusted diluted EPS increased 14% versus a year ago
Slide 10 shows the components of total company net sales growth in the quarter
Organic pound volume reduced net sales growth by 7 points and was partially offset by 4 points of positive mix and net price realization
Now, let me turn to full year fiscal ‘17 financial results
Net sales totaled $15.6 billion, down 6% as reported and down 4% on an organic basis
Total segment operating profit totaled $3 billion even, down 1% in constant currency
Net earnings decreased 2% to $1.7 billion and diluted earnings per share were $2.77 as reported
Adjusted diluted EPS was $3.08, up 6% in constant currency
For our North America retail segment, organic net sales declined 4% in the fourth quarter, an improvement over the third quarter trend as we saw better performance in measured and non-measured channels
Full year organic net sales were down 5%
At the operating unit level, U.S
snacks posted net sales growth of 1% in the fourth quarter, an improvement over last quarter led by growth in Annie’s, Nature Valley, and Larabar, which offset declines in Fiber 1. Cereal net sales were down 1% in the quarter, with growth on Lucky Charms, Cinnamon Toast Crunch and Cheerios offset by declines on Chex and Kix
meals and baking net sales decreased 1% in the quarter, with growth on Totino’s hot snacks offset by declines on Pillsbury refrigerated dough
The full year net sales decline for U.S
meals and baking was due to the divestiture of Green Giant business in fiscal ‘16 as well as declines on soup and refrigerated dough
Canada constant currency net sales increased 2% in the quarter, with growth on Old El Paso and Betty Crocker
Full year Canada constant currency net sales declined 2% due entirely to the Green Giant divestiture
yogurt net sales declined 22% in the quarter and 18% for the full year
Constant currency segment operating profit growth increased 9% in the fourth quarter behind benefits from net price realization and reduced media expenses
Full year constant currency operating profit declined 2% reflecting the impact of the Green Giant divestiture
Fourth quarter organic net sales for our Convenience Stores & Foodservice segment were comparable to last year
This was the third consecutive quarter of sequential improvement
Full year segment organic net sales declined 3% with 2% growth on our Focus 6 platforms led by mid single-digit growth on cereal and yogurt, offset market index pricing on bakery flour and declines on frozen dough products
Segment operating profit grew 6% for the full year, driven by lower input costs and benefits from our cost savings efforts
In Europe and Australia, organic net sales decreased 9% in the quarter and 4% for the full year
Remember that last year’s fourth quarter included an extra month of results for Yoplait Europe as we aligned that business to our fiscal calendar
Excluding the difference, organic net sales would have been up low single-digits in the quarter led by growth in Häagen-Dazs and Nature Valley
Constant currency segment operating profit declined 26% in the fourth quarter and 9% for the fiscal year, impacted by the difference in reporting periods
Excluding the extra period, Europe and Australia operating profit was down mid single-digits for the full year due to currency driven inflation on imported products in the UK
In our Asia and Latin America segment organic net sales grew 8% in the fourth quarter including a double digit percentage benefit from an extra month of results from Brazil as we aligned that business to our fiscal calendar
Good growth in China and India was offset by the continued challenging environment in Latin America
Full year organic net sales increased to 3%
Segment operating profit declined $5 million in the quarter reflecting higher SG&A expense
For the full year segment operating profit increased to $84 million from $69 million a year ago
Turning to the full year joint venture results on Slide 16, CPW’s fiscal ‘17 net sales grew 3% in constant currency with growth across all regions
Häagen-Dazs Japan constant currency net sales increased 8% for the full year driven by continued momentum on recent innovation
Combined after tax earnings from joint ventures totaled $85 million for the year, down $3 million versus last year primarily due to unfavorable foreign currency and an asset write-off for CPW, which were partially offset by volume gains on Häagen-Dazs Japan
Constant currency after tax earnings were down $5 million
We delivered on our cost saving goals for the year with cost of goods sold HMM savings totaling $390 million and aggregate savings from our previously announced projects totaling $540 million
These cost savings more than offset inflation which rounded down to 1% for the full year and help to drive strong margin expansion
Full year fiscal ‘17 adjusted gross margin was up 50 basis points and adjusted operating profit margin increased 130 basis points to 18.1% of net sales
Turning to the balance sheet, our quarterly core working capital increased 9% year-over-year as the timing of receivables and higher inventory balances were partially offset by continued progress on accounts payable
Despite the increase in core working capital this fiscal year end, we made significant progress in reducing core working capital over the last 5 years
Since 2012 while net sales are up mid single-digits, we have driven core working capital down by over 50%
And importantly, we expect our receivables and inventory balances to normalize in fiscal ’18. In addition, we still see opportunities for further benefits from payables which together should drive down our core working capital this year
Full year operating cash flow was $2.3 billion, down 12% from the year ago, driven by the higher core working capital balance, changes in income taxes payable and lower incentive trade and advertising costs
Fiscal ‘17 capital investments totaled $684 million as a result full year free cash flow was $1.6 billion or 86% of our adjusted after tax earnings
Over the last 3 years our cumulative free cash flow represents 97% of adjusted after tax earnings above our 95% conversion target
And we expect fiscal ’18 cash conversion to be above that 95% as well
We paid $1.1 billion in dividends in fiscal ‘17 and dividends per share were $1.92, up 8% from last year
Net share repurchases totaled $1.5 billion and we reduced average diluted shares outstanding by 2% for the full year
Slide 20 highlights our key assumptions for fiscal ‘18, industry trends in the U.S
in the last few quarters have been challenging and we are not planning for a significant turnaround in those trends this year
We expect our organic net sales trends will steadily improve from the first quarter to the second and improve again in the back half
We estimate we will deliver cost of goods sold HMM savings of approximately $390 million, which will more than offset input cost inflation of 3%
And we will generate $700 million of savings for our previously announced projects of roughly $160 million above fiscal ‘17 levels
Turning on Slide 21 you can see a summary of our fiscal 2018 guidance
We expect organic net sales to decline between 1% and 2%
We plan to increase media investment for the year
We project total segment operating profits to be in the range between flat and up 1% on a constant currency basis
As <UNK> mentioned upfront, we plan to expand our adjusted operating profit margin in fiscal ‘18. We expect both interest expense and our adjusted tax rate to be in line with fiscal ‘17 levels
We are targeting a net reduction of 1% to 2% in average diluted shares outstanding
We expect full year adjusted diluted earnings per share to be up between 1% and 2% in constant currency with EPS down in the first half reflecting lower sales and the phasing of our cost savings initiatives and brand investments
EPS will be up in the second half as sales trends improve
We estimate foreign currency will be $0.01 headwind to full year adjusted diluted EPS in 2018. And finally as I mentioned earlier, we are targeting to convert more than 95% of our adjusted after tax earnings to free cash flow this year
Now, I will turn over to <UNK> to provide more color on our fiscal ‘18 plans
So, <UNK>, as we have talked about in the call, there is several things contributing to profit improvement next year, HMM at $390 million will exceed our inflation, even though inflation will be elevated in F ‘18 versus F ‘17 and 3%
And we have another $160 million in cost savings – incremental cost savings coming through
In addition, while our price mix will be less of a contributor in ‘18 than in ‘17 it will still be a positive contributor
So, we have those three positives
It will be offset by volume declines still in the year and that will be particularly felt in the early part of the year
In Q1, for example, we expect our organic sales to closely near what we saw in ‘17, for example
And then we will see investments
An investment will span a number of areas
We have talked about media being up and that will certainly be one
But we are also investing in things like taking Yoplait to more cities in China to expanding our Häagen-Dazs stick bar business, geographic expansion in Europe, building capabilities like e-commerce and SRM and getting started on our process transformation work
And these will show up – they won’t all show up in media and I want to make that clear, while media will be up, many of these investments will be seen in COGS or in SG&A, but that will be – that is embedded in the guidance
And then as you mentioned, incentive, which I think next year is going to be about $45 million to $50 million drag
So, the combination of those things allows us to be comfortable with the flat to plus 1 SOP
The EPS will expand a bit more, because it will benefit from the share reduction of 1% or 2%
And that’s really the biggest driver between SOP growth and EPS growth next year
And the other thing that I would add <UNK> is that there is momentum we have take into consideration and as you saw F ‘17 unfold, we saw some negative momentum in Q2 and Q3, we began turning that in Q4, but it doesn’t turn overnight and so we will continue to see that momentum improve as year unfolds that’s why I indicated earlier Q1 we don’t expect to see a lot better performance than in Q4, but we expect Q2 to be better and the second half to be better still
So our expectation is that we exit F ‘18 on much better footing than we are today and certainly that will help us get to that guidance
<UNK>, I appreciate the positive comments on our pricing as we said we got a little ahead of ourselves in some cases and hurt on the volume side
But we are pleased that we need to get the pricing in place it was an important contributor this year being ‘17. I won’t bring up precisely the price and mix, but one other things that you see in the pricing is that as we did less merchandising and we had more base line it was a positive mix from that standpoint and it’s also positive mix from a product and category standpoint that helped as the year unfolded
Looking forward, we still expect to see price mix benefit in F ‘17 – it’s F ‘18. Thank you, <UNK>
As I said for the total company it would be less than in ‘17 and it’s really driven by North America and we expect it to be positive, but lower and as <UNK> alluded to it’s really about getting in the right zone on some key brands and particularly Pillsbury and Progresso
But we expect the other segments actually to be up on price mix in F ‘18. Our Convenience and Foodservice business will see a stronger bakery flour pricing as that recovers, we are going to be pricing for some higher inflation which includes the Brexit impact in the UK and higher dairy inflation and obviously in Asia and Lat-Am have a lot of the emerging market inflation that comes through us in pricing
So we expect price mix to still be a contributor in ‘18 albeit at a slightly lower level than we saw in ‘17.
<UNK>, I think you should think about – I think as we think about our investment in you have <UNK> and I think you are referring to media, but we would say more broadly is we expect our investment behind our brands to go ahead of our sales levels
And you are seeing that in F‘18 and I think it is more or less for ‘19 and ‘20 you should assume the same
Well, Chris, I am not going to, I guess, quantify it for you, but again as I listed to <UNK>’s question, we have some margin improvement pluses coming through in HMM over inflation in the cost projects and in price mix and even offsetting some of that with volume declines, I mean, there is still a pretty significant gap between that and the earnings expectations we have for the year and that gap is really filled by the investments that we expect to be making
