John Sunderland gives an overview of the Group's performance in 2005 and the outlook for 2006
A year of strong revenue growth
2005 was another successful year for Cadbury Schweppes. We achieved our highest rate of revenue growth for a decade, with all of our major businesses making a significant contribution. We are now over halfway through the four-year plan upon which we embarked in 2003. In the plan are specific financial commitments against which shareowners can monitor our performance. These are to: grow revenues by 3-5% each year; improve our profit margins by 50-75 basis points per annum; and generate a four-year cumulative free cash flow of £1.5 billion.
In 2005, we achieved two of these three targets, namely excellent revenue growth and higher free cash flow. We made slightly less progress than we would have liked on margin improvement. This is disappointing, but mainly the consequence of a very challenging cost environment, particularly in energy, transport and packaging. Reported sales were £6.5 billion, which, on a like-for-like basis, represented an increase of 6%. Operating margins were 15.9%, an increase of 30 basis points and free cash flow was £404 million. Underlying earnings per share were ahead by 9% on a like-for-like basis.
Sale of Europe Beverages
During 2005, we undertook a strategic review of our Europe Beverages business and decided to dispose of this part of the Group. This will allow us to focus financial and management resources on our confectionery and other beverage businesses which have greater potential for higher growth and returns. On 21 November 2005, we announced that we had received a binding offer of £1.26 billion from a private equity consortium formed by the Blackstone Group and Lion Capital. The proceeds from the sale have been used to reduce the Group's net debt, which at 1 January 2006 was £3.9 billion. The transaction completed on 2 February 2006, and the price achieved and the quick resolution represent an excellent outcome.
Management
Our performance is a testament to the achievements of our management team led by Todd Stitzer. During 2005, we further strengthened our senior management cadre with two key external appointments: Jim Chambers as President of Americas Confectionery and Steve Driver as President of Global Supply Chain. Following Mike Clark's retirement, his joint role as Chief Legal Officer and Company Secretary was split between two internal appointees, Hank Udow and Hester Blanks respectively. The strength of our management team continues to be recognised and for the tenth year in a row Cadbury Schweppes was voted amongst the top ten in Britain's Most Admired Companies in Management Today's poll of our UK peers. We have also received 50 other awards around the world for differing aspects of our performance.
Governance
The United Kingdom now enjoys probably the highest standards of corporate governance in the modern business world. The revised Combined Code is two years old and I am pleased to report that your Company is compliant with it in all key aspects. Our four main Committees and the Board have all benefited from the Code's revisions. In particular, the Board evaluation exercise has both refined the Board's processes and strengthened the rigour of our discussions and oversight.
Corporate and Social Responsibility
We regard our responsibility as a wealth creator in society as of the utmost importance. However, while our prime obligation is always to our shareowners, we work hard to ensure that our obligations to our other stakeholders - consumers, employees, suppliers, customers and the communities in which we operate - are fully discharged.
In particular, the impact of our community programmes around the world broadens every year. We seek to recognise individual and team contributions through the Chairman's Award scheme bi-annually. This year we received 89 submissions, a third up on 2003. All of these programmes have made substantial impacts upon the local communities in which we operate. Choosing the winner from such a list was not easy!
Food issues
Last year I described the challenge which the food industry faces as society tackles the problem of obesity. We remain convinced that this is a whole-life problem, not simply a food problem. Our way of life has changed, manual work and exercise have diminished, and patterns of food consumption have altered in adaptation to modern lifestyles. However the industry has been keen to use its knowledge of consumers to help deliver better understanding and information with regard to the achievement of a balanced lifestyle. Product development has focused on the reduction of salt, removal of trans fats and the increasing use of natural ingredients.
Most importantly, in January, Cadbury Schweppes announced a change to the labelling of our products under the 'Be Treatwise' banner. This will provide consumers with substantially enhanced information about our brands' composition and calorific content, expressed as proportions of recommended Guideline Daily Amounts. This is a major advance in helping consumers achieve a balanced lifestyle, and much preferred by them to some of the more bizarre schemes that have been proposed such as 'traffic light' labelling. It is illustrated on the right.
Pensions
The growing concern around pension deficits as a consequence of increased longevity and long-term stock market performance has been much discussed. Cadbury Schweppes has always been committed to the provision of appropriate overall compensation to our employees. This includes post-retirement benefits through defined benefit and defined contribution schemes.
In common with many other large pension funds, our schemes have an overall accounting deficit under IAS19, currently £369 million. As a proportion of our market capitalisation at the year end, Cadbury Schweppes' deficit was only 3%, smaller than many of our peers. Nevertheless, we have decided to address this deficit. Following the successful disposal of Europe Beverages we will make payments into our pension funds totalling some £125 million, of which £31 million was paid in advance in 2005, the remainder being paid this year. Over £75 million of this is in respect of our UK commitments. In addition, we will provide sufficient additional funding in excess of the normal employer and employee contributions over the following three years to ensure that any deficit remaining on these schemes is adequately managed.
Colleagues around the world
We have over 55,000 employees around the world and it is they who individually and collectively deliver the results described in this Annual Review. We recognise this and are indebted to their commitment to both their individual roles and the Company overall. The Board and I are grateful for this continuing contribution.
The Board
Our Board has changed relatively little over recent years and we have gained much from this consistency. However, two of our non-executive colleagues are approaching a decade of service and will therefore be retiring in the near future. I am delighted, therefore, that we have been able to strengthen the Board with two further non-executive appointments.
Lord Patten joined at the beginning of July. His time in political office and extensive experience of international relations will be of great value to our business since we are now represented in almost every country in the world.
Secondly, we have just announced the appointment of Sanjiv Ahuja, Chief Executive Officer of Orange SA. He has substantial experience of international business, having worked in the USA and Europe. We look forward to the addition of his broad business acumen to the Board.
Dividend
The Board is recommending a final dividend of 9.0 pence, taking the total dividend to 13.0 pence, a 4% increase on last year. It will be paid on 26 May to those of our shareowners who are on the register at 28 April.
Outlook
In 2006, we expect to continue the good progress we have made over the last two years.
The flexibility provided by the sale of Europe Beverages and disposals of other non-core assets will enable us to strengthen further our confectionery and beverage platforms through strategic capital investments and bolt-on acquisitions. We expect to deliver results within our financial goal ranges in 2006.
John Sunderland
Chairman
