7109cover section 1/4/1998 12:24 pm Page 1 CADBURY SCHWEPPES PUBLIC LIMITED COMPANY CADBURY our objective... ANNUAL 1997 REPORT Annual Report 1997 7109cover section 1/4/1998 12:21 pm Page 2 1996 1996 at 1997 1997 as reported % change exchange rates % increase Sales (a) Trading profit (a) Trading margin (b) Profit before tax and disposals Profit on sale of subsidiaries, before tax Earnings per Ordinary Share (FRS 3) Underlying Earnings per Ordinary Share Net Dividend per Ordinary Share Capital expenditure (a) Marketing expenditure (a) Free cash flow Total Group employees (a) From continuing operations (b) Excluding restructuring costs Contents 1 Strategy 10 Letter to our Shareowners 14 Beverages Stream Review 18 Confectionery Stream Review 22 Corporate Governance 24 Board of Directors 26 Report of the Directors 33 Report of the Remuneration Committee 42 Financial Review 48 Financial Ratios and Stream Analysis 50 Group Financial Record 52 Statement of Directors’ responsibilities 52 Auditors’ Report on Financial Statements 53 Accounting Policies 56 Group Profit and Loss Account 57 Recognised Gains and Losses 57 Movements in Shareholders’ Funds The Annual General Meeting will 58 Balance Sheets be held on Thursday, 7 May 1998. 59 Group Cash Flow Statement The Notice of Meeting, details of 60 Sales, Trading Profit, Operating Assets the business to be transacted and and Trading Margin Analysis arrangements for the Meeting are 61 Notes on the Accounts contained in the separate Annual 81 US GAAP General Meeting booklet sent to 82 Additional Shareholder Information all shareholders. 86 Index Cadbury Schweppes’ governing objective is growth in Shareholder value We will deliver this by competing in growth markets, with strong brands, focused innovation and value enhancing acquisitions. Our organisation is increasingly energised to manage for value. 1 growth Schweppes is one of the world’s most famous soft drinks brands. It is enjoyed by consumers in 129 countries. In 1997 Schweppes’ volumes grew by 8% worldwide. 2 The Cadbury Masterbrand is the largest confectionery brand in the world. Cadbury Schweppes’ chocolate and sugar confectionery is markets available in 195 countries. Our potential for profitable growth stems from our global representation in the two growth markets of Beverages and Confectionery. Over the last five years these markets have increased in volume by 25% and 20% respectively. 3 strong Introduced in 1885, Dr Pepper is the oldest non-cola soft drink in the US. Its growth has outstripped the market for each of the last ten years. 4 Since its introduction in 1992, Cadbury’s TimeOut has been launched into 16 major markets worldwide, including the UK, Ireland, Australia, New Zealand and, most recently, Canada, making it one of our most successful product innovations of the 1990s. brands We compete in these markets with strong brands which earn high margins and generate substantial cash flows. Timeless classics and rising stars build value and competitiveness in markets around the world. 5 focused Launched in Australia in 1997 to great acclaim, Cadbury Yowie is the first chocolate brand to combine an educational programme about the environment with a new concept in children’s confectionery. In the 1 6 months since launch, 1/2 Yowies have been sold for every man, woman and child in Australia. 6 innovation Growth in volume and market share are fuelled by innovation – in products, packaging and route to market. Successful innovation has been a key contributor to our growth in recent years. Mott’s new, award winning “Easy-Grip” bottle is lightweight, shatterproof and constructed from innovative multi-layered plastic to keep the product fresher for longer. Sales volumes of Mott’s Apple Juice in North America increased by 28% in 1997. 7 value enhancing La Pie Qui Chante, acquired in December 1997, fits well with our existing French confectionery operations. Together with established brands such as Poulain and Bouquet d’Or, it gives us a strong position in the French confectionery market. The acquisition of Bim Bim in early 1997, added to Cadbury Egypt, has made us market leader in the Middle East/North Africa and we are well placed to benefit from further growth in that region. acquisitions We continue to build profitable growth through value enhancing acquisitions in prioritised markets around the world. 9 Sir Dominic Cadbury Chairman (right) John Sunderland Group Chief Executive Letter to our Shareholders 1997 was an excellent year for your Company. Sales from continuing operations of £4.2 billion increased by 7%, after excluding the adverse exchange effects from the strength of sterling. On a similar basis, profit before tax and disposals of £575 million increased by 20%. In addition, disposals realised a profit before tax of £412 million, including the sale in February of Coca-Cola & Schweppes Beverages Ltd (“CCSB”) for £623 million. Underlying earnings per share of 37.2p were 9% higher than last year, or 16% when reported at constant exchange rates. Year end net borrowings of £649 million were 47% lower than at the end of 1996, due mainly to the sale of CCSB and our strong cash flows. Strategy Our strategy is based on: ■ global representation in the two growth markets of beverages and confectionery ■ competing in these two markets with strong brands which earn high margins and generate substantial cash flows ■ growing volume and market share by innovation – in products, packaging and routes to market ■ development through value enhancing acquisitions ■ creating an organisation increasingly energised to “manage for value”. In beverages, our strategy is to develop and expand the markets for our various brands by the most efficient and value creating manner in each market. This may take the form of licensing agreements, joint venture arrangements or company-owned bottling operations. Our key international brands are Schweppes, Dr Pepper and Crush. 10 In chocolate and sugar confectionery, our strategy is to build strong positions in prioritised markets through internal growth and acquisitions. We strengthen and develop our key confectionery brands through the marketing of existing products and through new product development. In addition, we identify best practice within our operations and implement it across the Confectionery stream to realise efficiencies and enhance competitiveness. Managing for Value Our governing objective is to increase Shareholder value over time. In April 1997, we launched a major new initiative to meet this objective, which we have called “Managing for Value”. The key elements are: ■ raising the bar of financial performance ■ applying the principles and techniques of Value Based Management to the development of strategy throughout the Group ■ sharpening our culture through greater accountability, aggressiveness and adaptability ■ developing an outstanding management team with the required qualities of leadership ■ aligning the financial rewards of the management team with those of our Shareholders. Managing for Value is a long term philosophy to which the whole organisation is committed. Progress achieved so far includes: ■ making public our medium term internal financial targets to: double Shareholder value over the next five years, consistently deliver double digit earnings per share growth and generate free cash flow in excess of £150 million per annum. In 1997, our underlying earnings per share Profit from continuing grew 16%, after excluding the effects of strong sterling, and free cash flow was £157 million. operations £m Total Shareholder return was 17%, based on the growth in the average share price in 1997 Operating profit compared with 1996, plus the dividend income received by Shareholders during 1997, Profit before tax compared with the 15% compound annual growth rate needed to hit our target and disposals ■ communication of the new Managing for Value initiative and extensive training in its 700 implications throughout the Group ■ introduction of full Value Based Management reviews at two business units. These are being 600 used as pilot units prior to the extension of this process throughout the Group 500 ■ an independent assessment of our top management team against our new leadership criteria ■ revision of incentive programmes to align the interests of management more closely with those 400 of our Shareholders. 300 Business Overview Branded sales volumes from continuing operations increased by 4% in both the Beverages and 200 Confectionery streams. This performance was stimulated by higher levels of marketing investment 100 behind our brands, as well as the continued successful introduction of new products and international expansion of existing brands in both streams. Trading margin grew again, to 14.5%, 0 with increases from both streams. 93 94 95 96 97 11 Letter to our Shareholders continued Beverages Confectionery Stream (a) Stream Stream Sales and Trading profit £m £m Sales 1,953 2,220 Trading profit (b) 342 282 Sales Trading profit £4,173m £624m (a) From continuing operations (b) Excluding major restructuring costs Acquisitions and Cash Flow We made three acquisitions during the year: Underlying Earnings ■ In January we acquired Jaret, a US sales operation which has been in partnership with Trebor per Ordinary Share* Allan of Canada for some time, and which has been linked with the US broker sales system for Dividends per Ordinary Share over 70 years. It has an excellent record with over 30 US food and confectionery brokers. pence ■ In February we acquired Bim Bim, an Egyptian based