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.
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 Revenue Growth of 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.
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.
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 are webcast on the Group's website 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 this site. 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