Cadbury Schweppes Unveils New Confectionery Strategy
Cadbury Schweppes is holding presentations in London today and in New York
tomorrow to update on progress on the separation of Americas Beverages, its
confectionery strategy, and current trading. A separate press release has been
issued updating on current trading.
* Good progress on Americas Beverages separation
The separation of confectionery and Americas Beverages is progressing well and
we continue to pursue a twin track process of either a sale or demerger. The
sale process is actively underway, and following expressions of interest, we
now believe that a sale is the more likely outcome. The tax and transaction
costs are expected to be modest in either case, at around 5% of the value of
the business. On separation, we intend to return capital to shareowners
consistent with a BBB+ credit rating for the new confectionery company.
* Cadbury plc: the world's number one confectionery business
Following separation, the business will be renamed Cadbury plc. With revenues
of nearly £5 billion, it is the world's biggest confectionery company,
operating in a large, growing and profitable market. It has strong brands and
broad geographic participation, with excellent competitive positions in all
three confectionery categories and leadership positions in nearly half of the
world's top 50 confectionery markets.
* Significant under-exploited confectionery potential
As a focused confectionery group, we believe Cadbury plc can generate strong
revenue growth coupled with a significant improvement in margins and returns as
we reduce complexity and focus our resources on fewer, bigger and more value
creating initiatives. The move to a centrally-led category structure and other
organisational changes are key to delivering this potential.
* Revenue growth goal increased to 4% - 6%
Our exposure to higher growth categories and geographies coupled with our more
focused category strategy underpins the increase in our like-for-like revenue
growth goal to 4% - 6% per annum, while accommodating some rationalisation of
our brand portfolio. Given our organic growth focus, our acquisition policy
will be targeted at bolt-ons which enhance our existing positions in growing
categories and markets.
* Trading margin goal of mid-teens margin by 2011
Our target of increasing margins from around 10% to mid-teens by 2011 will be
driven by a major group-wide cost reduction initiative which will result in the
closure of around 15% of our confectionery sites and a 15% reduction in
headcount. We are also announcing today a closer working relationship in
chocolate and cocoa with Barry Callebaut to improve returns and reduce
complexity.
* Disciplined capital management
We are targeting strong dividend growth, while maintaining an efficient balance
sheet and growing our return on invested capital. The Board intends to target a
dividend payout ratio of 40% - 50% with a higher payout ratio in the near term
reflecting confidence in the earnings potential of the new Group.
Todd Stitzer, Chief Executive Officer, said: "Over the past three years, we
have made great strides in improving our business performance. The plans
announced today represent the next step in transforming our confectionery
business from being the biggest global confectionery company to being the
biggest and the best. I am confident we have the strategy and the team to
deliver continued strong growth and substantially increased returns."
Introduction
Today, we are announcing the strategy for our new confectionery business,
Cadbury plc, post the separation of Americas Beverages. We believe the business
has significant under-exploited potential. Our new strategy aims to leverage
our scale and category benefits to realise this under-exploited potential to
deliver superior returns for our shareowners.
Over the last 20 years, we have moved from a Commonwealth focused chocolate
business to the number one player in confectionery globally, with unrivalled
product and geographic breadth and depth. We are the only major confectionery
company which operates across all three categories of chocolate, candy and gum,
and have the largest and most broadly spread emerging markets business of any
confectionery company. Our growth rate has been transformed in recent years as
we have invested in all aspects of our commercial capabilities, funded by our
Fuel for Growth cost reduction programme.
While we have transformed our performance, we believe there is significant
under-exploited potential to come from managing our operations more centrally
to focus on fewer, bigger and more value-creating initiatives, and from
significantly reducing complexity across all aspects of the business. This will
allow us to drive more sustainable growth while at the same time improving
margins.
Over the next four years our aim is to simplify our organisational structure to
allow better execution of a more focused commercial strategy, and improve
performance and efficiency to deliver revenue growth of 4% - 6% per annum,
increase our margins to mid teens (from around 10%) while strongly growing
dividends, maintaining an efficient balance sheet and growing return on
invested capital.
Background to the Separation of Americas Beverages
Since 1997, Cadbury Schweppes has had a governing objective of Managing for
Value with the aim of delivering superior returns for our shareowners. We have
made disciplined capital allocation decisions which have seen us maintain our
focus on the two growing and profitable markets of confectionery and beverages.
At the same time we have refined our portfolio through an active acquisition
and disposal programme to improve our participation and strengthen our
competitive position. Since 2003, our renewed focus on innovation and market
place execution has doubled our organic revenue growth, with a significant
increase in our investment behind growth funded by the Fuel for Growth cost
reduction programme.
Today, Cadbury Schweppes comprises two world-class consumer goods companies:
* In confectionery, we have created the leading global confectionery company
with unrivalled product and geographic reach. The acquisition of Adams in
2003 transformed our business, and our investments behind organic growth
and in bolt-on acquisitions, such as the recently announced purchases of
Intergum in Turkey and Kandia-Excelent in Romania and the tender offer for
Sansei in Japan, will further strengthen and extend our position.
* In beverages, we have significantly narrowed our geographic participation
while strengthening our presence in a small number of retained markets. We
have improved the performance of the US beverages business, and secured its
long-term sustainability by strengthening its route to market through the
acquisition last year of a number of our largest independent bottlers in
the US, including the Dr Pepper/Seven Up Bottling Group.
In March, we announced the separation of confectionery and beverages reflecting
the Board's belief that the two businesses had reached a position where they
would deliver greater value for shareowners as focused and independent
businesses.
Americas Beverages Separation
We announced that we were pursuing a twin track process to either sell or
demerge Americas Beverages, and earlier this month we sent out the sale
information memorandum. Expressions of interest have been strong and, while we
continue to pursue the twin track process, we now believe a sale is the more
likely outcome.
The tax and transaction costs of separation are expected to be around 5% of the
value of the Americas Beverages business. Tax costs relate to the cost of
separating the Group's North American beverage and confectionery operations
which were consolidated following the Adams acquisition in 2003. The tax
differential between a sale and a demerger is not expected to be material.
It is our intention on separation to return capital to shareowners consistent
with a BBB+ rating for the new confectionery Group. Further details will be
provided as appropriate.
Cadbury Confectionery
Confectionery - An Attractive Growing Market
The global confectionery market is worth an estimated $137 billion at retail.
It is the fourth largest packaged food category globally and has shown
sustained growth of around 5% per annum over the last 5 years. This growth has
been driven by premium and wellness products in developed markets and
increasing per capita consumption in developing markets. Over the last 5 years
developed markets have grown at an average of 3% per annum and emerging markets
10% per annum.
Stable and high returns in the confectionery industry are underpinned by the
combination of: long-established and well invested brands; a broad-based sales
base with around 50% of sales through the consolidated grocery multiple trade;
and low levels of private label penetration.
Cadbury plc - The World's Number One Confectionery Business
Following the separation of Americas Beverages, the Group will change its name
to Cadbury plc.
Over the past 4 years, we have significantly strengthened our participation in
this attractive market. The Cadbury confectionery business:
* Is now the world's largest confectionery business with a 10% share of the
global confectionery market;
* Has number one or two positions in nearly half of the world's top 50
confectionery markets;
* Is the only confectionery business with strong brands and competitive
positions in all three confectionery categories of chocolate, gum and
candy;
* Has a significant exposure to faster growing categories with gum and other
"better-for-you" products accounting for around 30% of our total portfolio;
and
* Has the largest and most broadly-based emerging markets presence,
accounting for around one third of total revenues.
Over the same period, we have improved our commercial execution through
increasing our investment in Science & Technology, commercial capabilities and
consumer insights. Confectionery innovation has more than doubled from 6% to
13% of revenues between 2003 and 2006 and our investment in Science &
Technology has increased by 50%. Our Fuel for Growth cost reduction initiative,
which, as planned, will by the end of 2007 generate £360 million of savings,
has provided the additional resources to fund these growth investments: around
50% of our Fuel for Growth savings have been re-invested in the business.
As a result of these improvements, our confectionery revenue growth increased
from 2% - 3% per annum between 1996 and 2002 to an average of 5.6% per annum
between 2003 and 2006.
Our Vision into Action Plan
Our strategy is embodied in our Vision into Action business plan. Under it, our
governing objective remains to deliver superior shareowner returns, and we aim
to achieve this objective by delivering on our vision of being the biggest and
best confectionery company in the world. Our goal is to maintain our market
leadership position, and to leverage our scale and advantaged positions to
maximise growth and returns.
Our new priorities, which provide the focus for the business to achieve this
vision, are:
* To drive growth through a concentration on "fewer, faster, bigger, better"
participation and innovation, supported by our global category structure
introduced last year;
* To drive cost and efficiency gains to help achieve our margin goal; and
* To continue to invest in capabilities to support our growth and efficiency
agendas.
At the same time, we retain our commitments to growing sustainably and to our
strong cultural heritage.
New Financial Scorecard
Our ambition to maintain revenue growth while improving margins and returns is
reflected in our new financial scorecard for the 2008 to 2011 period:
* Annual organic revenue growth of 4-6%
* Total confectionery share gain
* Mid teens trading margin by 2011
* Strong dividend growth
* Efficient balance sheet
* Growth in return on invested capital
Increased RevenueGrowthof 4% - 6% per annum
We have increased our annual revenue goal from 3-5% to 4-6% reflecting the
higher growth prospects of the stand-alone confectionery business. Our revenue
goal is underpinned by global confectionery market growth of around 5% per
annum over the last 5 years and by our greater weighting toward higher growth
categories such as gum and emerging markets, and accommodates some
rationalisation of our brand portfolio.
To help drive further revenue growth, under our category management structure,
we will focus our resources on top markets in each category where we will
develop and launch innovative products. In innovation, we will reduce the
number of smaller, non-advantaged innovation projects and increase the
resources behind larger innovations from which we can derive competitive
advantage.
We will also increase our focus on our biggest, most advantaged brands, and on
our largest customers. As part of this focus, we will also rationalise some of
the smaller brands and products in our portfolio, accounting for around 5% of
our confectionery revenues. We will focus our resources on our top 13 brands
and will manage five brands which have the strongest potential in existing and
new markets (Cadbury, Trident, Halls, Green & Black's and The Natural
Confectionery Company) on a global basis.
Significant Increase in Operating Margins to Mid-Teens by 2011
Our goal is to increase margins from the 2006 confectionery margin of 10.1%
(before restructuring) to mid-teens by 2011 (see Cadbury plc - Key Financial
Information below).
We will be undertaking a radical programme of cost reduction and efficiency
which will result in an exceptional restructuring charge of approximately £450
million of which around £50 million is non-cash. In addition, the programme
will require incremental capital expenditure of around £200 million over the
next 3 years. Delivery of the programme will be supervised by a Global
Performance Director, reporting to Ken Hanna, Chief Financial Officer.
Our cost reduction initiatives will impact all parts of the group, in sales,
general and administration costs (SG&A) and supply chain, in the regions and at
the group centre. Initiatives include:
* Combining the group headquarters in central London with the new BIMA region
and Britain & Ireland business in a new location west of London during the
second quarter of 2008;
* Clustering a number of countries which have previously been run as
individual operations;
* Adopting a more centralised decision making process to category and brand
management; and
* Additional outsourcing opportunities in the areas of back-office
processing, IT and chocolate production.
As a result, over the 2008 to 2011 period we expect to close around 15% of our
manufacturing sites around the world and reduce our headcount by 15%.
In addition to the contribution from our cost reduction programme, we expect
margins to benefit from:
* Improved operating margin performance in key emerging markets, notably
China, Russia and Nigeria, which are currently loss making;
* A disproportionate focus of resource on categories and brands which are
growing faster and which earn above average returns; and
* Strengthened profit performance from our confectionery business in Britain
& Ireland where performance has been below expectations as a result of the
IT systems implementation in 2005 and the product recall in 2006.
Strong Dividend Growth
The separation of Americas Beverages will necessitate a change in the dividend
policy of the new company, Cadbury plc. Over the medium term, Cadbury plc will
target a dividend payout ratio in the range of 40-50% and within this range
will aim to grow the dividend broadly in line with earnings.
Following the separation of beverages (whether by sale or demerger), Cadbury's
share capital will be consolidated according to the value of the distribution
made to shareowners (whether in cash or shares). It is expected that an interim
dividend for 2007 of 5 pence per share will be paid on the existing share
capital, and the final 2007 dividend post-consolidation. It is the Board's
current intention to pay a total dividend per share in 2007 and 2008 in line
with current market expectations for dividends per existing share. The dividend
payout ratio in the short term is likely to be above our medium term target
range, reflecting the Board's confidence in the earnings potential of the new
Group.
Maintaining an Efficient Balance Sheet
We will continue to manage the Group's capital base efficiently. We announced
in October 2006 that we would target a capital structure consistent with
maintaining a BBB+ credit rating: it is our intention to maintain this target
following the separation of Americas Beverages. We will also consider the
potential for further returns of capital to shareowners at the appropriate
time.
Growing Return on Invested Capital
We expect the combination of higher revenue growth and margin improvement to
drive growth in our return on invested capital. We also expect to continue our
disciplined approach to working capital management, and to recycle capital from
low-growth and non-core businesses into organic investment and value-accretive
bolt-on acquisitions with a greater potential for higher growth and returns as
appropriate.
Acquisitions and Non-Core Disposals
As the leading global confectionery company, we will continue to investigate
available confectionery opportunities to grow our platform. Our focus will be
on bolt-on acquisitions to enhance existing positions in growing categories and
markets, and we will only undertake acquisitions if these fit with our strategy
and meet our stringent criteria for value creation.
We have recently announced three acquisitions which have further strengthened
our confectionery position:
* The proposed acquisition of Intergum in Turkey will give us leadership of
the fast growing Turkish gum market;
* Kandia-Excelent, the second largest confectionery company in Romania;
* On 18 June, we announced a tender offer for Sansei Foods, a Japanese
functional candy company, whose acquisition will enhance our presence in
that market.
In addition, we have announced the sale of further non-core businesses in
Australia, Canada and Italy and we remain on track to deliver £250 million from
our non-core disposal programme by the end of 2007.
New Organisational Structure to Drive Growth and Returns
Our new confectionery business had been reorganised into four broadly
equally-sized regions (from three). The four new regions are: Americas; Asia
Pacific; Britain, Ireland, Middle East and Africa (BIMA) and Europe.
The Presidents of these regions are:
Matt Shattock President Britain, Ireland, Middle East and Africa
(BIMA)
Chris Van Steenbergen President Europe (including Russia and Turkey)
Jim Chambers President Americas
Rajiv Wahi President Asia Pacific
Our category structure, which we put in place in late 2006, will be further
embedded in our regions to ensure excellence of execution and increase
efficiency. We will also cluster businesses within regions to reduce the number
of business units and increase focus, and co-locate global, regional and
business unit head offices to reduce building and back office costs. Further
savings will be achieved through allocating dual roles to functional leaders to
reduce headcount and increase efficiency of decision making.
New Incentive Plans
Our new organisation will be rewarded through a new set of incentive plans,
which will include targets aligned with our new financial scorecard. These
plans will be presented to shareowners for approval later in the year.
Cadbury plc - Key Financial Information
The information below is historical financial information for "Cadbury plc",
being the Continuing Group, defined as the total Cadbury Schweppes group
excluding Americas Beverages. It has been derived from previously reported
amounts, as included in the 2006 Annual Report.
In 2006, the new Cadbury plc business had revenues of £4.9 billion and an
operating margin of 10.1% (before restructuring charges). The operating margin
is after the deduction of 100% of the central costs of Cadbury Schweppes. We
intend to reduce these central costs following the separation of Americas
Beverages, reflecting the scale of the new group.
The business has been reorganised into four regions. The Asia Pacific region
includes our Australian beverage business which accounted for around 8% of
Cadbury plc revenues in 2006.
Y/E Dec (£m) 2005 2006
Revenue
BIMA 1,420 1,500
Europe 837 818
Americas 1,228 1,330
Asia Pacific 1,157 1,205
Central 9 8
Total 4,651 4,861
Underlying Profit from Operations before 657 648
central costs
- Central costs (156) (159)
Underlying Profit from Operations 501 489
Underlying Operating Margin (%) 10.8% 10.1%
Increased Co-operation with Barry Callebaut
We are today announcing a closer working relationship with Barry Callebaut
following the signing of a Memorandum of Understanding (MOU).
The MOU anticipates an increase in the outsourcing of cocoa products and
chocolate production to Barry Callebaut, relating to liquor and liquid
chocolate for our existing Polish sites. The outsourcing of these Polish
volumes will increase our total outsourced liquid chocolate volume by around
15% to over 20% of our total needs, and will result in Barry Callebaut
supplying over a third of our outsourced liquid chocolate needs.
We also expect to increase our collaboration with Barry Callebaut in areas such
as cocoa bean sourcing in origin countries, quality and innovation, and
corporate and social responsibility.
Interim Trading Update
We have today also issued our regular trading update ahead of the interim
results which will be announced on 1 August, 2007. A separate press release can
be found at www.cadburyschweppes.com.
Technical Guidance
The separation of Americas Beverages and our cost reduction programme are
considered by the Board to be "significant events" and as such the associated
costs will be treated as exceptional. The total spend on the cost reduction
programme will be approximately £450m of which around £50m will be non-cash.
The costs will be incurred during the period 2007 to 2011.
In October last year we announced that, with effect from 2007, a restructuring
charge equivalent to 1% of revenue would be deducted from underlying profit and
earnings. In the light of the exceptional charges announced as part of the new
cost reduction programme, the underlying restructuring charge is expected to be
around 0.5% of revenue during the period 2007 to 2011.
In the period 2008 to 2011, we expect ongoing capital spend as a percentage of
sales to be around 5% (compared to 5% to 5.5% previously) excluding exceptional
capital spend of £200 million relating to the cost reduction initiative.
Investor Seminar Presentations and Webcast
Presentations will be given by Todd Stitzer, Chief Executive Officer, and Ken
Hanna, Chief Financial Officer, in London on 19 June, and in New York on 20
June.
The London presentations will be webcast live on the Group's website
www.cadburyschweppes.com from approximately 8am (BST) today. A replay of the
webcast will be available from 2.30pm (BST) today.
A dedicated seminar webpage is now available in the investor centre of the
Group's website. Copies of the presentation slides will be available on this
webpage from 7.30am (BST) today and transcripts of the key speeches will be
available from 5pm (BST) tomorrow.
Next Events
Forthcoming Group announcements/events are listed below:
1 August, 2007 Interim Results Announcement
Ends
For further information
Cadbury Schweppes plc
+ 44 20 7409 1313
http://www.cadburyschweppes.com
Capital Market Enquiries
+44 20 7830 5124
Sally Jones
Mary Jackets
Charles King
Media Enquiries
Cadbury Schweppes
+44 20 7830 5011
Andraea Dawson-Shepherd
Katie Bolton
The Maitland Consultancy
+ 44 20 7379 5151
Philip Gawith
Forward Looking Statements
This material may be deemed to include forward-looking statements within the
meaning of Section 27A of the US Securities Act of 1933 and Section 21E of the
US Securities Exchange Act of 1934. These forward-looking statements are only
predictions and you should not rely unduly on them. Actual results might differ
materially from those projected in any such forward-looking statements, which
involve known and unknown risks, uncertainties and other factors which may
cause our or our industry's actual results, levels of activity, performance or
achievements to be materially different from any future results, levels of
activity, performance or achievements expressed or implied by the
forward-looking statements. In evaluating forward-looking statements, which are
generally identifiable by use of the words "may", "will", "should", "expect",
"anticipate", "estimate", "believe", "intend" or "project" or the negative of
these words or other variations on these words or comparable terminology, you
should consider various factors including the risks outlined in our Form 20-F
filed with the SEC. Although we believe the expectations reflected in
forward-looking statements are reasonable we cannot guarantee future results,
levels of activity, performance or achievements. This material should be viewed
in conjunction with our periodic interim and annual reports and registration
statements filed with the Securities and Exchange Commission, copies of which
are available from Cadbury Schweppes plc, 25 Berkeley Square, London W1J 6HB,
UK.