20-F 1 u52204e20vf.htm FORM 20-F e20vf
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 20-F
     
o   REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR SECTION 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
     
þ   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED 31 DECEMBER 2006
OR
     
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT of 1934
OR
     
o   SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT of 1934
Commission file number 2-90552
CADBURY SCHWEPPES
Public Limited Company
(Exact name of Registrant as specified in its charter)
England and Wales
(Jurisdiction of incorporation or organization)
25 Berkeley Square, London, England W1J 6HB
(Address of principal executive offices)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
     
Title of each class   Name of each exchange on which registered
Ordinary Shares of 12.5p each
American Depositary Shares, each representing four Ordinary Shares, 12.5p per Ordinary Share
  New York Stock Exchange
New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None
(Title of Class)
SECURITIES FOR WHICH THERE IS A REPORTING OBLIGATION
PURSUANT TO SECTION 15(d) OF THE ACT:
None
(Title of Class)
The number of outstanding shares of each of the issuer’s classes of capital or common stock as of 31 December 2006 was: 2,094,561,996 Ordinary Shares of 12.5p each
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
þ Yes o No
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
o Yes þ No
Note – Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
þ Large accelerated filer      o Accelerated filer      o Non-accelerated filer
Indicate by check mark which financial statement item the Registrant has elected to follow:
Item 17 o Item 18 þ
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes þ No
 
 

 


 

TABLE OF CONTENTS
             
INTRODUCTION       Page
           
  IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS     1  
  OFFER STATISTICS AND EXPECTED TIMETABLE     1  
  KEY INFORMATION     1  
  INFORMATION ON THE COMPANY     10  
  UNRESOLVED STAFF COMMENTS     31  
  OPERATING AND FINANCIAL REVIEW AND PROSPECTS     32  
  DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES     59  
  MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS     86  
  FINANCIAL INFORMATION     86  
  THE OFFER AND LISTING     87  
  ADDITIONAL INFORMATION     87  
  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK     94  
  DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES     95  
           
  DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES     95  
  MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS     95  
  CONTROLS AND PROCEDURES     95  
  AUDIT COMMITTEE FINANCIAL EXPERT     97  
  CODE OF ETHICS     97  
  PRINCIPAL ACCOUNTANT FEES AND SERVICES     97  
  EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES     97  
  PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS     97  
           
  FINANCIAL STATEMENTS     98  
  FINANCIAL STATEMENTS     98  
  EXHIBITS     98  
 EXHIBIT 4.3
 Exhibit 4.5
 EXHIBIT 8
 EXHIBIT 12.1
 EXHIBIT 12.2
 EXHIBIT 13.1
 EXHIBIT 13.2
 EXHIBIT 15
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INTRODUCTION
In this Annual Report on Form 20-F (the “Report”) references to the “Company” or the “Group” are references to Cadbury Schweppes public limited company, and its subsidiaries, except as the context otherwise requires.
Forward looking statements, within the meaning of Section 21E of the Securities Exchange Act of 1934, are made throughout this Report. Forward looking statements are based on management’s current views and assumptions, and involve risks and uncertainties that could significantly affect expected results. For example, results may be affected by external factors such as: international economic and political conditions; changes in laws and regulations, including changes in accounting standards; fluctuations in the cost of funding retirement benefits; distributor and licensee relationships and actions; effectiveness of spending and marketing programmes; and unusual weather patterns.
This Report has been prepared from the Cadbury Schweppes Report & Accounts 2006, which has been distributed to shareholders. The relevant sections of the Report & Accounts 2006 that are responsive to the requirements of Form 20-F have been excerpted and repeated herein. In addition, certain additional information required by Form 20-F that is not included in the Report & Accounts 2006 has been included herein. The Report & Accounts 2006 has been furnished to the Securities and Exchange Commission, or “SEC”, on Form 6-K dated April 16, 2007.
PART I
ITEM 1: IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS
Not applicable.
ITEM 2: OFFER STATISTICS AND EXPECTED TIMETABLE
Not applicable.
ITEM 3: KEY INFORMATION
Selected Financial Data
The tables below show selected financial data derived from our consolidated financial statements included in “Item 18. Financial Statements” in this Report. In 2005, the Company adopted International Financial Reporting Standards (IFRS) and as permitted by IFRS and the instructions to Form 20-F has prepared comparative financial information for 2004 on a consistent basis. As a result, selected IFRS financial data for only 2004 to 2006 is included below. Selected financial data under US GAAP is presented for 2002 to 2006.

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IFRS Financial Record
                           
    2006         2005     2004  
Income Statement   £m         £m     £m  
 
Continuing Operations
                     
Revenue
  7,427           6,432       6,012  
Trading costs
  (6,425 )         (5,391 )     (5,072 )
Restructuring costs
  (133 )         (71 )     (139 )
Non-trading items
  40           25       18  
 
Profit from operations
  909           995       819  
 
                         
Share of result in associates
  (16 )         28       22  
 
Profit before financing and taxation
  893           1,023       841  
 
                         
Investment revenue
  48           42       48  
Finance costs
  (203 )         (230 )     (253 )
 
Profit before taxation
  738           835       636  
 
                         
Taxation
  (215 )         (135 )     (144 )
 
Profit for the period from continuing operations
  523           700       492  
 
                         
Discontinued operations1
                         
Profit for the period from discontinued operations
  642           76       55  
 
Profit for the period
  1,165           776       547  
 
Attributable to:
                         
Equity holders of the parent
  1,169           765       525  
Minority interests
  (4 )         11       22  
 
 
  1,165           776       547  
 
Earnings per share
                         
From continuing and discontinued operations
                         
Basic
  56.4 p         37.3 p     25.9 p
Diluted
  55.9 p         36.9 p     25.7 p
 
                         
From continuing operations
                         
Basic
  25.4 p         33.6 p     23.2 p
Diluted
  25.2 p         33.2 p     23.0 p
 
     
1   In 2005, the Group’s beverage business in Europe and Syria were classified as discontinued operations. In 2006, we completed the disposal of our South African beverage business. As this disposal was part of our strategic decision to exit beverages outside the Americas and Australia, it has also been classified as discontinued operations. This has required the re-presentation of the 2005 and 2004 financial statements on a comparable basis.

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    2006       2005     2004  
    £m       £m     £m  
 
Cash Flow Statement
                       
 
Net cash from operating activities
  620         891       745  
Net cash generated from/(used in) investing activities
  522         (308 )     (195 )
Net cash used in financing activities
  (1,212 )       (592 )     (539 )
 
Net (decrease)/increase in cash and cash equivalents
  (70 )       (9 )     11  
Opening net cash and cash equivalents
  276         284       275  
Effect of foreign exchange rates
  (20 )       4       (2 )
Less: Net cash and cash equivalents included in discontinued operations
          (3 )      
Closing net cash and cash equivalents
  186         276       284  
 
Balance Sheet
                       
 
Assets employed
                       
Intangible assets and goodwill
  5,903         5,648       5,757  
Property, plant and equipment
  1,664         1,446       1,464  
Assets held for sale
  22         945       5  
Other non-current assets
  248         567       419  
Inventory and trade and other receivables
  1,914         1,893       1,859  
Other current assets
  87         114       30  
Cash and short-term investments
  395         379       346  
 
Total Assets
  10,233         10,992       9,880  
Total current liabilities, excluding borrowings and provisions
  (1,862 )       (1,841 )     (1,696 )
Liabilities directly associated with assets classified as held for sale
  (9 )       (291 )      
Total non-current liabilities, excluding borrowings, provisions and retirement benefit obligations
  (1,085 )       (1,124 )     (1,106 )
Borrowings
  (3,249 )       (4,216 )     (4,130 )
Obligations under finance leases
  (55 )       (63 )     (86 )
Provisions
  (73 )       (53 )     (77 )
Retirement benefit obligations
  (204 )       (369 )     (485 )
 
Net Assets
  3,696         3,035       2,300  
 
 
                       
Equity
                     
Equity attributable to equity holders to the parent
  3,688         3,008       2,071  
Minority interest
  8         27       229  
 
 
  3,696         3,035       2,300  
 

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US GAAP Financial Record
The financial statements are prepared in accordance with International Financial Reporting Standards (IFRS) which differs in certain significant respects from US Generally Accepted Accounting Principles (US GAAP).
A reconciliation to US GAAP is set out in Note 40 to the Financial Statements for the years ended 31 December 2006, 1 January 2006 and 2 January 2005. The selected financial data for 2003 and 2002 has been derived from the company’s consolidated financial statements not included in this Form 20-F.
                                         
    2006     2005     2004     2003     2002  
    £m     £m     £m     £m     £m  
 
Amounts in accordance with US GAAP
                                       
Revenue
    7,427       6,432       6,012       5,665       4,697  
Operating income
    855       905       755       543       849  
Income from continuing operations
    466       540       425       276       483  
Discontinued operations (net of tax)3
    568       64       59       97       82  
Cumulative effect of change in accounting principle net of tax
          (19 )                  
Net income
    1,034       585       484       373       565  
 
Basic earnings per ADR from continuing operations
    0.90       1.05       0.83       0.55       0.97  
Basic earnings per ADR from discontinued operations
    1.10       0.13       0.12       0.19       0.16  
Basic earnings per ADR arising from cumulative effect of change in accounting principle1,2
          (0.04 )                  
Basic earnings per ADR
    2.00       1.14       0.95       0.74       1.13  
Diluted earnings per ADR from continuing operations
    0.89       1.04       0.83       0.55       0.96  
Diluted earnings per ADR from discontinued operations
    1.09       0.13       0.12       0.19       0.16  
Diluted earnings per ADR from cumulative effect of change in accounting principle
          (0.04 )                  
Diluted earnings per ADR
    1.98       1.13       0.95       0.74       1.12  
Dividends per ADR
    0.56       0.52       0.50       0.48       0.46  
 
Net assets
    4,793       4,640       3,790       3,913       3,909  
Total assets
    10,993       11,979       10,939       11,880       9,081  
Long-term debt
    1,814       3,029       3,598       3,594       2,927  
Called up share capital
    262       260       259       258       258  
Share premium account
    1,171       1,135       1,098       1,071       1,050  
Shareholders’ funds
    4,785       4,613       3,769       3,669       3,692  
Number of shares outstanding (million)
    2,095       2,084       2,072       2,064       2,057  
 
1   The Company adopted SFAS 158 during 2006. There was no cumulative effect recognised in the income statement for the change in accounting policy recognised on adoption.
2   The Company adopted SFAS 123(R) during 2005 which required the cumulative effect of the change in accounting policy to be recognised in the 2005 income statement.
3   Discontinued operations represents the Group’s beverage businesses in Europe, South Africa and Syria.
 
Each ADR represents four ordinary shares.
Dividends
The interim dividend for 2006 of 4.10 pence per ordinary share was paid on October 20, 2006. The interim dividend for American Depository Receipts (“ADRs”) of $0.3083 per ADR was paid on October 20, 2006. The proposed final dividend for 2006 of 9.90 pence per ordinary share was announced by the Directors on February 20, 2007 and, subject to approval at the Annual General Meeting, will be paid on May 25, 2007 to those shareowners and ADR holders who are on the register at the close of business on April 27, 2007.
The Company has paid cash dividends on its ordinary shares in respect of every financial year since the merger of Cadbury Group Limited with Schweppes Limited in 1969. Dividends are paid to owners of ordinary shares on dates which are determined in accordance with the guidelines of the UK Listing Authority. A final dividend is normally recommended by the Board of Directors following the end of the financial year to which it relates and is paid in the following May, subject to shareowners’ approval at the Company’s Annual General Meeting. An interim dividend is normally declared by the Board of Directors following the end of the first half year to which it relates.
The dividends for holders of ADRs are paid to ADR holders on the same date as to ordinary shareholders, giving ADR holders equal treatment to ordinary Shareowners. The dividend conversion rate was set as at the rate of the US dollar against pound sterling on February 19, 2007, being the last trading day before the preliminary results announcement.
Future dividends to be paid by the Company will be dependent upon the Company’s earnings, financial condition and other factors, including the amount of dividends paid to it by its subsidiaries. There is no UK governmental restriction on dividend payments to foreign shareholders which is applicable to the Company.
The tables on the next page detail the amounts of interim, final and total dividends declared in respect of each financial year indicated, translated into US dollars per ADR (each representing four ordinary shares) at the Noon Buying Rate on each of the respective payment dates or the latest practical date for the proposed 2006 final dividend.

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Dividend Rates per Ordinary Share
                                         
Financial Year   2006     2005     2004     2003     2002  
 
Pence per ordinary share
                                     
Interim
    4.10       4.00       3.80       3.65       3.50  
Final
    9.90 (a)     9.00       8.70       8.35       8.00  
 
Total
    14.00       13.00       12.50       12.00       11.50  
 
(a)   To be paid on May 25, 2007 to ordinary shareowners
Dividend Rates per ADR
                                         
Financial Year   2006     2005     2004     2003     2002  
 
£ per ADR
                                       
Interim
    0.16       0.16       0.15       0.15       0.14  
Final
    0.40       0.36       0.35       0.33       0.32  
 
Total
    0.56       0.52       0.50       0.48       0.46  
 
US Dollars per ADR
                                       
Interim
    0.30       0.28       0.27       0.24       0.21  
Final
    0.77 (a)     0.63     0.63       0.61       0.52  
 
Total
    1.07       0.91       0.90       0.85       0.73  
 
(a)   To be paid on May 25, 2007 to ADR holders (conversion rate as at February 19, 2007: £1.00=$1.95)
Exchange Rates
                         
    High     Low     Average (b)  
Financial Year (a)   US$     US$        
 
2002
                1.51  
2003
                1.64  
2004
                1.84  
2005
                1.81  
2006 September 1.91 1.86 1.88
October
    1.90       1.85       1.88  
November
    1.97       1.88       1.91  
December
    1.98       1.94       1.96  
Full year
                1.84  
2007 January
    1.98       1.93        
February
    1.97       1.92        
March
    1.96       1.92        
 
(a)   The Company’s financial year ends on December 31 (see Note 1(c) on page F-13).
 
(b)   Calculated by using the average of the exchange rates on the last day of each month during the period.
On December 29, 2006, the last dealing day of the Company’s financial year, the noon buying rate for pound sterling was £1.00 = $1.96. Fluctuations in the exchange rate between pound sterling and the US dollar will affect the US dollar equivalent of the pound sterling prices of the Company’s ordinary shares listed on the London Stock Exchange and, as a result, are likely to affect the market price of the ADRs in the US. Such fluctuations will also affect the US dollar amounts received by holders of ADRs on conversion by the Depository of cash dividends paid in pounds sterling on the ordinary shares represented by the ADRs.

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Risk Factors
Our business, financial condition, results of our operations or share price could be materially adversely affected by any or all of the following risks, or by others that we cannot identify. In addition to the following risk factors, we face certain market risks that are discussed under the headings Treasury Risk Management, Liquidity Risk, Interest Rate Risk Currency Risk, Fair Value Analysis, Commodities and Credit Risk on pages 52 to 54.
WE OPERATE IN HIGHLY COMPETITIVE MARKETS IN WHICH OUR PERFORMANCE COULD BE ADVERSELY AFFECTED IF WE WERE UNABLE TO RESPOND TO RAPID CHANGES IN CONSUMER PREFERENCES OR OTHER COMPETITIVE FACTORS.
Both the beverage and confectionery industries are highly competitive. We compete with other multinational corporations which have significant financial resources to respond to and develop the markets in which both we and they operate. These resources may be applied to change areas of focus or to increase investments in marketing or new products. Furthermore, consumer tastes are susceptible to change. If we are unable to respond successfully to rapid changes in demand or consumer preferences, our sales or margins could be adversely affected.
OUR PRODUCTS COULD BECOME CONTAMINATED, WHICH COULD BE EXPENSIVE TO REMEDY, CAUSE DELAYS IN MANUFACTURING AND ADVERSELY AFFECT OUR REPUTATION AND FINANCIAL CONDITION.
Despite safety measures adopted by the Group, our products could become contaminated or not meet quality or safety standards. We use many ingredients in manufacturing beverages and confectionery, which increases the risk of either accidental or malicious contamination. Any contamination or failure to meet quality and safety standards may be expensive to remedy and could cause delays in manufacturing and have adverse effects on our reputation and financial condition.
WE DEPEND ON LICENSING ARRANGEMENTS WITH BOTTLERS, AND ANY TERMINATION OR MODIFICATION OF THESE ARRANGEMENTS, COULD SIGNIFICANTLY ADVERSELY AFFECT OUR REVENUES AND PROFITABILITY.
Around 60% of our soft drinks business in the US is conducted through licensing arrangements with third-party bottlers, in some of which our major competitors have substantial equity interests. These bottlers may come under pressure to replace our brands with competitor products, and although we would be able to re-license these brands, such a change could adversely affect volumes and profit, particularly in the short-term.
In addition, inappropriate action by or an incident at a licensee partner involving our brands could impact the reputation of Cadbury Schweppes brands or the Group as a whole.
THE FAILURE OF THIRD PARTIES TO WHOM WE HAVE OUTSOURCED BUSINESS FUNCTIONS COULD ADVERSELY AFFECT OUR REPUTATION AND FINANCIAL CONDITION.
An increasing proportion of our business functions is outsourced to third parties. Failure of the third parties to deliver on their contractual obligations or failure of Cadbury Schweppes to structure or manage our agreement with them effectively could lead to adverse effects on our reputation and financial condition.
CONCENTRATION OF OUR CUSTOMER BASE COULD LEAD TO INCREASED PRICING PRESSURES AND DECLINING MARGINS.
There is a trend towards a greater concentration of our customer base around the world, due to consolidation of the retail trade. Pricing pressures from customers in countries with concentrated retail trades could adversely impact our sales or margins.

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WEATHER AND CLIMATIC CHANGES COULD ADVERSELY IMPACT OUR BUSINESS.
Short-term fluctuations in weather or longer-term climatic changes may impact our business by affecting the supply or price of raw materials, or the manufacturing, distribution or demand for our products.
WE DEPEND ON ENTERPRISE-WIDE TECHNOLOGY AND ANY SIGNIFICANT DISRUPTION TO OUR EQUIPMENT OR COMMUNICATIONS NETWORK COULD CAUSE US TO INCUR MATERIAL FINANCIAL LOSSES.
We depend on accurate, timely information and numerical data from key software applications to aid day-to-day decision-making. Any disruption caused by failings in these systems, of underlying equipment or of communication networks, for whatever reason, could delay or otherwise impact day-to-day decision-making, or cause us material financial losses.
WE DEPEND ON OUR SUBSTANTIAL INTELLECTUAL PROPERTY RIGHTS AND ANY CLAIM OF INFRINGEMENT COULD REQUIRE US TO EXPEND SIGNIFICANT RESOURCES AND, IF SUCCESSFUL, COULD ADVERSELY AFFECT OUR BUSINESS.
We and our major competitors have substantial intellectual property rights and interests which could potentially come into conflict. If any patent infringement or other intellectual property claims against us are successful, we may, among other things, be enjoined from, or required to cease, the development, manufacture, use and sale of products that infringe others’ patent rights; be required to expend significant resources to redesign our products so that they do not infringe others’ patent rights, which may not be possible; and/or be required to obtain licences to the infringed intellectual property, which may not be available on acceptable terms, or even at all. There is also the risk that intellectual property litigation against us could significantly disrupt our business, divert management’s attention, and consume financial resources.
OUR BUSINESS COULD SUFFER AS A RESULT OF CHANGING GOVERNMENTAL REGULATION IN THE COUNTRIES IN WHICH WE OPERATE.
Production, distribution and sale of many of our products are subject to governmental regulation regarding the production, sale, safety, labelling and composition/ ingredients of such products in the various countries and governmental regions in which we operate. In addition, the manufacture of many of our products, and other activities, are subject to governmental regulation relating to the discharge of materials into the environment, and the reclamation and re-cycling of packaging waste. At all times we are subject to employment and health and safety legislation in those countries in which we have operations. Compliance with these regulations increase our costs and any violation could lead to reputational damage to our business.
WE OPERATE IN MANY COUNTRIES GLOBALLY AND OUR OPERATIONS ARE, THEREFORE, SUBJECT TO THE RISKS AND UNCERTAINTIES INHERENT IN DOING BUSINESS IN THESE COUNTRIES.
We are subject to substantial government and other regulation, customs and practice which vary from country to country, and which may change dramatically as a result of political, economic or social events. Such changes may be wide-ranging and cover cross-border trading, accounting practices, taxation, data confidentiality and protection, employment practices and environment, health and safety issues, and involve actions such as product recalls, seizure of products and other sanctions. A number of countries in which we operate maintain controls on the repatriation of earnings and capital. Our failure to respond successfully and rapidly to the above or to changes in any or all of them, or to have controls and procedures in place which allow us to do so, could cause adverse effects to our reputation and financial condition.
Our operations in individual countries are dependent for the proper functioning of their business on other parts of the Group in terms of product, technology, funding and support services. Any failure of one part of the Group, or a failure by the Group to exercise proper control of its operations in one or more countries, could materially adversely impact the financial performance and condition, and reputation, of other business units or the Group as a whole.

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ANY SIGNIFICANT MANUFACTURING OR LOGISTICAL DISRUPTION COULD AFFECT OUR ABILITY TO MAKE AND SELL PRODUCTS WHICH COULD CAUSE OUR REVENUES TO DECLINE.
Our manufacturing and distribution facilities could be disrupted for reasons beyond our control, such as extremes of weather, fire, supplies of material or services, systems failure, workforce actions or environmental issues. Any significant manufacturing or logistical disruptions could affect our ability to make and sell products which could cause revenues to decline.
OUR ONGOING RESTRUCTURING OF PRODUCTION FACILITIES AND OPERATIONS COULD LEAD TO UNFORESEEN ADVERSE EFFECTS ON OUR REVENUES AND EARNINGS.
There is an ongoing programme of restructuring our production facilities and operations across the Group. Major unforeseen difficulties arising in connection with such restructuring could reduce our revenues and earnings.
THE KEY RAW MATERIALS THAT WE USE IN OUR BUSINESS COULD BE SUBJECT TO SIGNIFICANT VOLATILITY IN PRICE AND SUPPLY, AND THIS COULD INCREASE OUR COSTS.
Our business depends upon the availability, quality and cost of raw materials from around the world, which exposes us to price and supply fluctuation. Key items such as cocoa, milk, sweeteners, packaging materials and energy are subject to potentially significant fluctuations. While we take measures to protect against the short-term impact of these fluctuations, there can be no assurance that any shortfalls will be recovered. A failure to recover higher costs or shortfalls in availability or quality could decrease our profitability.
BECAUSE OUR RETIREMENT BENEFIT PLANS ARE FUNDED THROUGH INVESTMENTS IN VOLATILE CAPITAL MARKETS, WE COULD EXPERIENCE A SHORTFALL IN FUNDING OF RETIREMENT BENEFITS, WHICH WOULD SIGNIFICANTLY ADVERSELY AFFECT OUR FINANCIAL POSITION.
We have various retirement and healthcare benefit schemes which are funded via investments in equities, bonds and other external assets. The scheme liabilities reflect our latest estimate of life expectancy, inflation, discount rates and salary growth. The values of such assets are dependent on, among other things, the performance of the equity and debt markets, which are volatile. Any shortfall in our funding obligations may require significant additional funding from the employing entities.
GOVERNMENTAL ACTION, OR CHANGES IN CONSUMER PREFERENCES, IN RESPONSE TO CONCERNS REGARDING RISING OBESITY LEVELS OR OTHER HEALTH ISSUES COULD ADVERSELY AFFECT OUR FINANCIAL PERFORMANCE.
Many countries face rising obesity levels due to an imbalance between energy consumed via food and expended through activity. The reasons for the changes in society and for some individuals having a greater inclination to obesity are multifaceted and complex. There are risks associated with the possibility of government action against the food industry, such as levying additional taxes on or restricting the advertising of certain product types. This could increase our tax burden or make it harder for us to market our products, reducing sales and/or profits. Also, consumer tastes may change rapidly for health-related reasons, and if we are unable to respond our sales or margins could decline.

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ACTIONS OF GOVERNMENT, THE MEDIA OR NON-GOVERNMENTAL ORGANISATIONS IN COUNTRIES WHERE WE OPERATE MAY LEAD TO AN INCREASE IN REGULATION OR ADVERSE REPUTATIONAL IMPACTS.
In many countries where we operate there is increasing scrutiny of major multinational companies such as ours in relation to our operations and the products that we manufacture and market. There are a diverse range of issues and trends that may be manifested through this including: the role of foreign owned companies; employment issues relating to outsourcing and off-shoring and other labour practices; the role of corporations in relation to environmental issues such as climate change; the marketing of products that are considered high in fat and sugar in the context of growing concerns relating to obesity and ethical and sustainable raw material sourcing policies. These trends may be a risk through the actions of government, the media or non-governmental organisations, such as lobby and pressure groups, who may influence the regulatory and consumer environment against which we operate with reputational and financial impacts.
RISKS INHERENT IN THE ACQUISITION OF BUSINESSES AND PRODUCTS MAY HAVE AN ADVERSE IMPACT ON OUR BUSINESS OR FINANCIAL RESULTS.
From time to time, the Group makes acquisitions of businesses and products. There can be no assurance that the Group has anticipated all problems, or that all losses associated with the recently acquired business may come to light prior to the expiration of any warranty and indemnity protections. Any failure in the Group’s due diligence of the operating and financial condition of these acquired businesses, or of their integration into the Group’s operations, could have an adverse impact on the Group’s businesses or the Group as a whole.
WE CAN OFFER NO ASSURANCES REGARDING THE ULTIMATE EFFECT OF THE IMPLEMENTATION OF THE SEPARATION OF OUR AMERICAS BEVERAGES BUSINESS.
On March 15, 2007, we announced our intention to separate our confectionery and Americas Beverages businesses, and we are evaluating the options for separation. Structuring and effecting this separation will require significant attention from management, who may as a result be diverted from other strategic actions, and will be subject to all the risks inherent in a significant divestiture. We can offer no assurance as to the ultimate effect this intention to separate will have on our share price.

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ITEM 4: INFORMATION ON THE COMPANY
The legal and commercial name of the Company is Cadbury Schweppes Public Limited Company. The Company was incorporated on May 6, 1897 and is registered under the laws of England and Wales as a public limited company. Its registered number is 52457. Its principal executive offices are located at 25 Berkeley Square, London, England W1J 6HB, (telephone +44 20 7409 1313). The legislation under which the Company operates is the Companies Act 1985, as amended (the “Companies Act”).
Our Business
Introduction
Our principal businesses are confectionery and non-alcoholic beverages. We have the largest share of the global confectionery market with broad participation across its three categories of chocolate, gum and candy and by geography. In beverages, we have strong regional presences in North America and Australia.
On March 15, 2007, we announced our intention to separate our confectionery and Americas Beverages businesses, and we are evaluating the options for separation.
Origins and portfolio development
Our origins date back to the founding of Schweppes, a mineral water business, by Jacob Schweppes in 1783, and the opening of a shop which sold cocoa products by John Cadbury in 1824. The two businesses were merged in 1969 to create Cadbury Schweppes plc. Many of our key brands are long established, having been launched in the late 19th and early 20th centuries, most notably Cadbury Dairy Milk, Dr Pepper and Halls.
Confectionery brands
             
Brand   Product   Date Launched
 
Cadbury
  Cocoa powder     1824  
Bassett’s
  Candy     1842  
Maynards
  Candy     1880  
Halls Cough Tablets
  Cough drop     1893  
Dentyne
  Gum     1899  
Cadbury Dairy Milk
  Milk chocolate bar     1905  
Chiclets
  Sugar-coated gum     1914  
Clorets
  Breath freshener     1951  
Stimorol
  Gum     1956  
Trident
  Sugar-free gum     1962  
Bubblicious
  Bubble gum     1977  
Sour Patch Kids
  Candy     1985  
 
Beverages brands
             
Brand   Product   Date launched
 
Schweppes
  Carbonated water     1783  
Mott’s
  Apple juice     1842  
Schweppes Tonic Water
  Quinine-based carbonated drink     1870  
Dr Pepper
  Carbonated soft drink     1885  
7 UP
  Carbonated soft drink     1929  
Hawaiian Punch
  Non-carbonated soft drink     1937  
Clamato
  Tomato-based drink     1969  
Snapple
  Non-carbonated soft drink     1972  
 
Over the last 25 years we have significantly changed our geographic and product participation within the confectionery and beverages markets, mainly through a programme of acquisitions and disposals.
We have extended and strengthened our position in certain markets and categories where we believed we could generate faster growth at higher margins, and exited other markets and categories where we felt we had no sustainable competitive advantage and where a sale created value for our shareowners.

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The most significant strategic moves over this period have been:
  >1986   and 1987 – sale of the food and beverage and health & household divisions
 
  >1995   – purchase of Dr Pepper/Seven Up, a carbonated soft drinks business mainly in the US
 
  >1997   – sale of Coca-Cola & Schweppes Beverages, a soft drink bottling operation, in the UK
 
  >1999   – sale of beverage brands in approximately 160 markets around the world
 
  >2000   – purchase of Snapple, a non-carbonated premium beverages business mainly in the US
 
  >2003   – purchase of the Adams confectionery business, a gum and medicated candy business with strong positions in
   North, Central and South America
 
  >2006   – sale of Europe Beverages
 
  >2006   – purchase of remaining 55% stake in Dr Pepper/Seven Up Bottling Group
 
  >2007   – announcement of intention to separate our confectionery and Americas Beverages businesses
Following the sale of Europe Beverages which completed on 2 February 2006, and pending the separation of our Americas Beverages business, we have four regional operating units: Americas Beverages; Americas Confectionery; Europe Middle East and Africa (EMEA), which sells confectionery; and Asia Pacific, selling both beverages and confectionery.
In 2006, we purchased a number of US bottling businesses to strengthen our route-to-market for our US beverages business as discussed on page 14. Our confectionery acquisitions in 2006 are discussed on page 12.
In October 2005, we announced that we intended to dispose of a number of small non-core businesses and brands with estimated proceeds of between £250 million and £300 million. We sold Holland House Cooking Wines in 2005, and Grandma’s Molasses in early 2006. The combined proceeds were £37 million. In April 2006, we sold Slush Puppie for £13 million, and in August 2006, we completed the sale of Bromor Foods, our South African beverages business for ZAR 1,160 billion (£109 million). We have also announced that we intend to sell the Monkhill and Allan Candy confectionery businesses, which are based in the UK and Canada respectively, and the Cottee’s Foods jams, marmalades and toppings business in Australia.
Confectionery
Our confectionery strategy is to be the biggest and best global confectionery company by significantly growing our market share through organic growth and acquisition, in our three categories of chocolate, gum and candy. We believe that our strong positions in confectionery markets, by geography and by category, provide us with a robust platform for future growth.
Our growth to date has been both organic and through acquisition, notably Wedel in Poland (1999), Hollywood in France (2000), Dandy in Scandinavia (2002) and Adams (2003). The Adams business is now fully integrated and has exceeded our expectations. The returns from Adams exceeded its cost of capital in 2005, one year ahead of our target schedule.
In 2005, as in 2004, we had the number one share of the global confectionery market (source: Euromonitor 2005), and extended our share lead. We have the largest share of the global confectionery market at 9.9%, an increase of 20 basis points over the previous year (source: Euromonitor 2005). This compares with a market share of 5.2% in 2001 (source: Euromonitor 2005).
We have strong positions in many of the world’s important confectionery markets. We have number one or two market shares in 22 of the top 50 (see table below), and strong positions in all of our geographic regions. We continued to strengthen our confectionery business in 2006, both through investment behind organic growth and through acquisitions.

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We made acquisitions in three developing markets in 2006. In June 2006, we acquired Dan Products, South Africa’s leading chewing gum business. In April 2006, we purchased a further 30% stake in Kent, our Turkish confectionery business, taking our stake to 95%. In February 2006, we increased our shareholding in Cadbury Nigeria to 50.02% (see table below).
Number of No. 1 or No. 2 positions in the Top 50 confectionery markets by geography
                                                         
    Cadbury Schweppes     Nestlé     Kraft     Mars     Wrigley     Ferrero     Hershey  
No. 1 position
    15       4       4       2       5       1       1  
No. 2 position
    7       10       5       5       2       4       1  
Total confectionery
    22       14       9       7       7       5       2  
 
Source: Euromonitor 2005
                                                       
Main confectionery acquisitions and disposals 1999-2006
                     
            Acquired/Disposed;        
Date   Company   Country   percent holding   Consideration   Description/Comments
 
Feb-99
  Wedel   Poland   Acquired 100%   £49 million   The number one chocolate brand in Poland at the time of acquisition
 
Aug-00
  Hollywood   France   Acquired 100%   Not disclosed   The number one gum
business in France
 
Feb-02
  Cadbury India   India   Share increased from 49% to 94%   £111 million   Buy-out of the minority shares. By the end of 2006, our shareholding had reached 97.4%
 
May-02
  Kent   Turkey   Acquired 65%   US$95 million   Turkey’s leading candy company
 
Sept-02
  Dandy   Denmark   Acquired 100%   £222 million   Fourth largest gum company world-wide at the time of acquisition with key markets in Scandinavia, Switzerland and Russia
 
Mar-03
  Adams   US   Acquired 100%   US$4.2 billion   Second largest gum
business worldwide
 
Sept-04
  Moirs   South Africa   Disposed 100%   ZAR152 million   South African foods division
 
May-05
  Green & Black’s   UK   Share increased from 5% to 100%   Not disclosed   Leading UK producer of luxury organic chocolate
 
Feb-06
  Cadbury Nigeria   Nigeria   Share increased from 46% to 50.02%   £20 million   Nigeria’s leading candy and food beverages company
 
Apr-06
  Kent   Turkey   Share increased from 65% to 95%   £54 million   Turkey’s leading candy company
 
Jun-06
  Dan Products   Botswana   Acquired 100%   £33 million   South Africa’s leading chewing
gum business
 

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Our confectionery revenue is generated from products spanning the full range of the market: chocolate, gum and candy. The table below shows our leading market share in the global confectionery market (US dollar share), and our shares in each of these three categories.
Market share in the global confectionery market (US$ share)
                                 
    Global            
    confectionery            
    market   Chocolate   Gum   Candy
 
Cadbury Schweppes
    9.9 %     7.5 %     25.7 %     7.2 %
 
Mars
    9.0 %     14.8 %           3.0 %
Nestlé
    7.8 %     12.6 %     0.1 %     3.2 %
Wrigley
    5.8 %           35.9 %     2.7 %
Hershey
    5.5 %     8.2 %     1.1 %     2.7 %
Ferrero
    4.4 %     7.3 %           1.5 %
Kraft
    4.3 %     7.7 %     0.1 %     0.4 %
 
Source: Euromonitor 2005
The table below shows the change in percentage contributions to our confectionery revenue on both a product and a geographic basis between 1997 and 2006. In 1997, around 70% of our confectionery revenue was generated by chocolate. In 2006, chocolate accounted for around 45% of our confectionery revenue, gum 30% and candy 25%.
In 1997, nearly 90% of our confectionery revenues were generated in EMEA and Asia Pacific, particularly in the UK and Australia. In 2006 EMEA accounted for around a half and the Americas around 30%, as compared with just over 10% in 1997. In 2006, around one-third of our confectionery revenue was generated in emerging markets, spread across Latin America, Africa, Asia-Pacific and Eastern Europe/Russia.
Revenue contribution by product
(BAR CHART)
We have 64 (2005: 67) confectionery manufacturing facilities. Further details of these facilities are provided on page 25. Our main confectionery brands are Cadbury, Bassett’s, Dentyne, Halls, Hollywood, Stimorol, Dirol, Trebor, Trident and Wedel. Our brands have regional or local strengths, with the exception of Halls, which is sold in every one of our regions. Details of our main confectionery brands by region can be found on pages 18 to 20.

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Revenue contribution by region
(BAR CHART)
Beverages
Our beverages business is now concentrated in two regions, North America and Australia, where we have strong brands and effective routes to market. As noted above, on March 15, 2007, we announced our intention to separate our confectionery and Americas Beverages businesses, and we are evaluating the options for separation.
During 2006, we sold our beverage businesses in Europe, Syria and South Africa, markets where we did not have sustainable competitive advantage. We also sold a number of non-core beverage brands in the US. The total consideration from these beverage disposals was £1.4 billion. In the Americas we operate in the US, Mexico and Canada, three of the world’s 10 largest beverage markets. The business operates entirely within the North America Free Trade Agreement (NAFTA) region and generates high returns and cash flow. We increased the scale of our operations and expanded our brand portfolio, particularly in the non-carbonated sector of the beverages market, through the acquisition of Snapple in the US (2000), the Orangina brand globally (2001), and Squirt in Mexico (2002). Following the sale of Europe Beverages, we sell the Orangina brand under licence in the US and licence our US non-carbonated brands in Europe.
In the Americas, the combination of our three North American businesses – Dr Pepper/Seven Up, Mott’s and Snapple – into a single cohesive unit during 2003 and 2004 enabled us to leverage our powerful soft drinks brand portfolio, in both flavoured carbonates (including Dr Pepper, 7 UP, Sunkist and A&W), and in non-carbonates (including Snapple and Mott’s). Having increased our share of the US carbonated soft drinks market in 2005 by 40 basis points to 17.0%, we grew our share further in 2006 to 17.6%. Together, our US beverages and confectionery businesses make us the 10th largest food supplier to the US grocery trade. Similarly in Australia, our combined confectionery and full system beverages businesses make us the third largest supplier of food products to the grocery trade.
In 2006, we significantly strengthened the route to market for our US beverages businesses by the acquisition of the 55% we did not already own of Dr Pepper/Seven Up Bottling Group and two other bottling companies as discussed above.

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Main beverages acquisitions and disposals 2000-2006
                     
            Acquired/Disposed;        
Date   Company   Country   percent holding   Consideration   Description/Comments
 
Oct-00
  Pepsi Lion Nathan   Australia   Acquired 100%   Not disclosed   Acquired the bottling and franchise rights to Pepsi’s brands in Australia
 
Oct-00
  Snapple   US   Acquired 100%   £1.2 billion   Leading US premium non-carbonated beverages business. Main brands were Snapple, RC Cola and Mistic
 
Jul-01
  La Casera   Spain   Acquired 100%   £65 million   Spain’s third largest soft drinks producer
 
Oct-01
  Orangina   France   Acquired 100%   £445 million   Soft drink brands in Continental Europe, North America and Australia
 
Feb-02
  Squirt   Mexico   Acquired 100%   Not disclosed   Acquisition of the Squirt brand in Mexico. We already owned the Squirt brand in the US
 
Nov-02
  Apollinaris &
Schweppes
  Germany   Share increased from 28% to 100%   £115 million   Buy-out of the remaining 72% interest in our German associate
 
Feb-06
  Europe Beverages   France, Spain and Germany   Disposed 100%   1.85 billion (£1.26 billion)   Sale of our remaining Europe Beverages businesses
 
May-06
  Dr Pepper/Seven Up Bottling Group   US   Share increased from 45% to 100%   US$353 million (£201 million)   Acquisition of the largest independent bottler in the US; in addition, £343 million of Dr Pepper/Seven Up Bottling Group debt assumed
 
June-06
  All American
Bottling Company
  US   Acquired 100%   £32 million   Acquisition of US independent bottler
 
Aug-06
  Bromor Foods (Pty)
Limited
  South Africa   Disposed 100%   £109 million   Sale of our South African beverages business
 
Aug-06
  Seven-Up Bottling Company of San Francisco   US   Acquired 100%   £26 million   Acquisition of US independent bottler
 
Organisation structure and management
Regions and functions
We are organised into four regional operating units and six global functions. Each region focuses on commercial operations in its geographical and product area, and also maintains teams from each of the six functions. The four regions are: Americas Beverages; Americas Confectionery; Europe, Middle East and Africa; and Asia Pacific. We are currently evaluating options for the separation of our Americas Beverages business.
The functions are Global Supply Chain, Global Commercial, Science and Technology, Human Resources, Finance and Information Technology, and Legal and Secretariat. Responsibility for company secretarial matters has been separated from the legal function. Each function has a small central team based at Group Headquarters and regional presences coordinated by the central team.
This structure enables us to focus on delivering our commercial agenda and top-line growth, and allows the functions to develop and drive global strategies and processes towards best in class performance, while remaining closely aligned to the regions’ commercial interests.
A description of the regions begins on page 17 and of the functions on page 20.

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Board of Directors and Chief Executive’s Committee
The Board is responsible for our overall management and performance, and the approval of our long-term objectives and commercial strategy.
The Chief Executive’s Committee (CEC), which includes the leader of each region and function, reports to the Board and is responsible for the day-to-day management of our operations and the implementation of strategy. This team is responsible to the Board for driving high level performance of our growth, efficiency and capability programmes.
The CEC develops global commercial strategy and addresses supply chain and major operating issues arising in the normal course of business. This includes reviewing the regions’ and functions’ performance contracts, and determining necessary action relating to financial policy, targets, results and forecasts. It approves some capital and development expenditures according to authorities delegated by the Board, reports to the Board on the Group’s sources and uses of funds, cash position and capital structure, and reviews the structure and policy of Group borrowings. The CEC evaluates foreign exchange, interest rate and other risk management policies and submits an annual risk management report to the Board. It also reviews proposed acquisitions and disposals, joint ventures and partnerships before submission to the Board, and reviews and approves legal and human resources matters.
Changes to the composition of the Board and CEC
In 2006 and early 2007 there were a number of changes to the senior management of the Group. Changes were as follows:
Tamara Minick-Scokalo joined the CEC as President Global Commercial on 2 January 2007 replacing Nick Fell who left the Group in May 2006. Tamara was previously Senior-Vice President Europe at Elizabeth Arden Inc. and prior to this she was European Manager for Gallo Wines. Her commercial skills were developed at Procter & Gamble where she held a variety of roles over a career spanning 19 years.
Mark Reckitt was appointed to the CEC as Group Strategy Director on 2 January 2007. Mark has been Group Strategy Director since 2004 and in 2005 also became responsible for Mergers & Acquisitions. Mark has held a variety of roles in the Group since joining us in 1989.
Regions
The following charts show the relative size of the Group’s regions. Market share information, except where otherwise indicated, is sourced from the latest available information from IRI or Nielsen for 2006.
Revenue by region
(PIE-CHART)
Profit from operations1
(PIE-CHART)
(1) Excludes Central

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Americas Beverages
                                     
              % of Group                 % of Group
    2006       Total2       2006       Total2
 
Revenue
  £ 2,566m       35%   No of employees3     18,372       26 %
Profit from operations
  £ 562m       51%   Operating assets   £ 566m       27 %
Underlying profit from operations1
  £ 584m       47%   No of production assets     24          
Operating margin
    21.9%                            
Underlying operating margin
    22.8%                            
 
Main markets:   US, Canada, Mexico
Main brands:   Dr Pepper, Snapple, Mott’s, Hawaiian Punch, Peñafiel, Clamato, 7 UP, Yoo-Hoo, A&W, Sunkist, Diet Rite, Canada Dry, Schweppes, Nantucket Nectars
 
1   For an explanation of Underlying profit from operations and a reconciliation to profit from operations see pages F-7 and F-20.
 
2   Percentage share excludes Central.
 
3   No. of employees has been calculated assuming CSBG was owned for the full year.
The Americas Beverages region comprises operations in the US, Canada and Mexico. The principal products of the business are carbonated and non-carbonated soft drinks.
As noted above, we are currently evaluating options for the separation of our Americas Beverages business.
In carbonated soft drinks, Americas Beverages participates mainly in the flavours (non-cola) segment, where we own the number one or number two brands in most categories in which we compete. Americas Beverages has a 17.6% share of the US carbonated soft drinks market, the world’s largest. Its main carbonated soft drinks brands are Dr Pepper, which has a 7.5% share of the US market – and 7 UP. We own 7 UP in the United States and Puerto Rico only. Other important brands include Canada Dry, A&W and Sunkist, which is a licensed product. Diet drinks account for approximately 25% of our carbonated soft drinks volume. In non-carbonated drinks, Americas Beverages competes in ready-to-drink teas, juice and juice drinks. Our non-carbonated beverage brands include Snapple, Hawaiian Punch, Mott’s and Clamato. Through the acquisition of Dr Pepper/Seven Up Bottling Group, we acquired the Deja Blue water brand, and the distribution rights in certain territories for other brands including Glaceau vitamin enhanced waters, Monster energy drink and Fiji Mineral Water.
Our beverage products are distributed through a number of different routes to market. In North America, our carbonated soft drinks brands are manufactured and distributed through company-owned and third-party bottling and canning operations.
The third-party bottlers source beverage concentrate from Americas Beverages, which operates as a licensor. With the acquisition of Dr Pepper/ Seven Up Bottling Group and other US bottlers in 2006 to form Cadbury Schweppes Bottling Group (CSBG), we increased the proportion of our beverage brands manufactured and distributed through Cadbury Schweppes owned bottlers from under 20% to around 40%, and our carbonated soft drinks brands from under 5% to around one-third. Approximately 70% of Dr Pepper volumes are distributed by companies in which our competitors have a significant stake and the remainder primarily through CSBG. CSBG distributes about 45% of our other carbonated soft drinks brands and around 80% of our non-carbonated soft drinks brands. The processes and operations of the independently-owned bottlers are monitored to ensure high product standards. We also provide marketing, technical and manufacturing support.
In Mexico – the world’s second largest carbonated soft drinks market – we are the third largest beverages company, with 6% of the Mexican carbonated soft drinks market and a 17% share of the non-cola market. Our main carbonated brands in Mexico are Peñafiel, Squirt, Crush and Canada Dry. Peñafiel is the leading brand in the mineral water sector, with a 37% market share.
We manufacture and sell our products both through company-owned bottling operations and third party bottlers. Around 20% of our volume in Mexico is manufactured and distributed by third party bottlers. The balance, including the majority of our brands, is manufactured by company-owned bottling operations.

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Americas Confectionery
                                     
            % of Group                   % of Group
    2006     Total2         2006       Total2
 
Revenue
  £ 1,330m       18%   No. of employees     14,568       21%
Profit from operations
  £ 181m       17%   Operating assets   £ 325m       16%
Underlying profit from operations1
  £ 207m       17%   No. of production assets     10          
Operating margin
    13.6%                            
Underlying operating margin
    15.6%                            
 
Main markets:   US, Canada, Mexico, Brazil, Argentina, Colombia
 
Main brands:   Trident, Halls, Dentyne, Bubbas, Clorets, Chiclets, Cadbury, Swedish Fish, Sour Patch Kids, Beldent, Bazooka, Mantecol, Stride
 
 
1   For an explanation of Underlying profit from operations and a reconciliation to operating profit see pages F-7 and F-20.
 
2   Percentage share excludes Central.
Americas Confectionery operates businesses in all the region’s major countries, including the US, Canada, Mexico, Brazil, Argentina and Colombia. Approximately 55% of sales are in the US and Canada, with the remainder in Mexico and Latin America.
In the US, the world’s largest confectionery market, we have the second largest market share in gum at 32%, mainly through the Trident and Dentyne brands, and the leading share at 53% in cough/cold confectionery through Halls. In 2006, we launched a new gum brand in the US, Stride, which now has a 2.9% share of the US gum market. We are also the largest confectionery company in Canada, the world’s 11th largest confectionery market, with an overall 24% market share and leading market positions in gum, candy and cough confectionery, and a top three position in chocolate. Five brands, Trident, Dentyne, Cadbury Dairy Milk, Caramilk and Mr. Big, account for around 50% of our sales in Canada.
In Latin America, we have the leading overall confectionery market share at 17%, (Source: Euromonitor 2005), more than double that of our nearest competitor. We have a 63% share (Source: Euromonitor 2005) of the Latin American gum market, and leading market shares in gum in Mexico, Brazil, Venezuela, Argentina and Colombia. We also have the leading share of the fragmented candy confectionery market at 8% (Source: Euromonitor 2005). We have a broad-reaching distribution infrastructure in Latin America which enables us to supply a highly fragmented customer base of small shops and kiosks. In Mexico, we have a 78% share of the gum market and 85% of the candy market. Other brands sold in the Americas include Clorets, Swedish Fish, Sour Patch Kids, Beldent, Bazooka and Mantecol. We have manufacturing facilities in Canada, the US, Mexico, Argentina, Brazil and Colombia.

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Europe, Middle East and Africa (EMEA)
                                     
            % of Group                   % of Group
    2006     Total2         2006       Total2
 
Revenue
  £ 2,318m       31%   No. of employees     23,457       34 %
Profit from operations
  £ 205m       19%   Operating assets   £ 828m       40 %
Underlying profit from operations1
  £ 276m       23%   No. of production assets     35          
Operating margin
    8.9%                            
Underlying operating margin
    11.9%                            
 
Main markets:   UK, France, Poland, Spain, Russia, Turkey, Greece, Egypt, South Africa, Nigeria, Scandinavia
 
Main brands:   Cadbury, Hollywood, Halls, Wedel, Bassett’s, Trident, Dirol, Stimorol, Kent, Poulain, Trebor, Maynards, Green & Black’s, Bim Bim, Chiclets, TomTom, Bournvita
 
 
1   For an explanation of Underlying profit from operations and a reconciliation to operating profit see pages F-7 and F-20.
 
2   Percentage share excludes Central.
The EMEA region includes all of our confectionery businesses in Europe (including Russia), Africa and the Middle East.
The UK is our largest confectionery market in EMEA. We have a leading 31% share in the UK, the world’s second largest confectionery market. We sell chocolate and candy products, under brand names including Cadbury, Trebor, Bassett’s, Maynards, Green & Black’s and Halls. In January 2007, we launched Trident gum in the UK.
In Continental Europe, where our main markets are France, Iberia and Poland, we primarily sell gum and candy. France is our largest operating unit and we have the leading position in the French confectionery market – the world’s sixth largest – with a 16% share. We have a 48% share of the French gum market, principally under the Hollywood brand. We also sell candy under the La Pie Qui Chante and Carambar brands, and chocolate, mainly under the Poulain brand. We sell gum under the Trident brand in Spain, Portugal and Greece and Stimorol and V6 in Denmark, Belgium and Sweden. Our candy brands include Halls in Spain and Greece. We sell chocolate under the Wedel and Cadbury brands in Poland, where we have a 15% market share, and also operate in the Netherlands and Switzerland.
Outside Continental Europe, our main businesses in the EMEA region are Russia, Turkey, Egypt, South Africa and Nigeria. In Russia, we have a 27% share of the gum market through the Dirol brand, and we also sell medicated candy under the Halls brand and chocolate under the Cadbury brand. We have the leading share of Turkey’s candy market at 59%, with brands including Kent, Missbon, Olips and Jelibon, and a top three position in gum. We also sell chocolate under the Grand Chocolates and Bonibon brands.
In Africa and the Middle East, our main confectionery operations are in Egypt, South Africa, and Nigeria where we have number one market shares. We are the leading confectionery company in Africa. On 20 February 2006, we announced that we had increased our shareholding in Cadbury Nigeria to 50.02%.
In South Africa we are the number one confectionery company with a share of 35% (Source: Euromonitor 2005). We sell confectionery products under the Cadbury and Halls brands and have a 41% chocolate share. Following the acquisition of the Dan Products business in June 2006, we have a leading share of the South African gum market at 60%. Our Nigerian business sells candy, food beverages and bubble gum. Its lead brands include Tom Tom, the biggest selling candy in Africa, Bournvita, and Bubba bubble gum. In Egypt, we sell products under the Cadbury, Bim Bim and Chiclets brand names and have a 41% share of the confectionery market. We also operate in Morocco, Lebanon, Ghana and Kenya.

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Asia Pacific
                                     
          % of Group                 % of Group
    2006     Total2         2006       Total2
 
Revenue
  £ 1,205m       16%   No. of employees     13,354       19 %
Profit from operations
  £ 142m       13%   Operating assets   £ 354m       17 %
Underlying profit from operations1
  £ 165m       13%   No. of production assets     25          
Operating margin
    11.8%                            
Underlying operating margin
    13.7%                            
 
Main markets:   Australia, New Zealand, India, Japan, Thailand, China, Malaysia, Indonesia, Singapore
 
Main confectionery brands:   Cadbury, Halls, Trident, Clorets, Bournvita
Main beverage and food brands:   Schweppes, Cottee’s (Australia only)
 
1   For an explanation of Underlying profit from operations and a reconciliation to operating profit see pages F-7 and F-20.
 
2   Percentage share excludes Central.
The Asia Pacific region comprises our confectionery operations in Australia, New Zealand, India, Japan, Malaysia, Indonesia, Thailand and China, and Schweppes Cottee’s, an Australian beverages and foods business. In 2006, we also entered the Vietnamese market through a third-party distribution agreement.
Australia and New Zealand are our largest markets in the region. Australia is the 12th largest confectionery market in the world. We are the leading company in the Australian confectionery market, and have the number one position in chocolate with a 53% market share, and a strong presence in candy. Our main chocolate brand in Australia is Cadbury. Our Australian beverages business’s products are sold under the Schweppes, Cottee’s, Solo, Spring Valley, Sunkist and Wave brand names. Schweppes Cottee’s also has a licence to manufacture, sell and distribute Pepsi, Red Bull, 7 UP, Mountain Dew and Gatorade. In Australia, we both manufacture, distribute and market our own products and manufacture concentrate and bottle product for other manufacturers. In New Zealand, our brands include Cadbury and Moro, and we have a number one position in the confectionery market with a 46% share.
Other significant markets in this region include India, Japan and Thailand. Our Indian business has a leading presence in chocolate with a 72% market share, and also sells candy under the Eclairs and Halls brands and food beverages under the Bournvita brand. Our Japanese business sells mainly gum under the Recaldent and Clorets brands, and has a number two position in gum with a 18% market share.
We also have leading market shares in Thailand in gum and candy at 62% and 32% respectively. In Malaysia, we have a number one market share in chocolate at 26%, and in gum, through the Dentyne brand, we have a 17% share.
We have manufacturing facilities in Australia, New Zealand, India, Japan, Malaysia, Pakistan, Thailand, China and Singapore.
Functions
Global Supply Chain
The role of Global Supply Chain is to ensure the reliable supply of product to satisfy our customers’ expectations whether manufactured by us or by a third party. Supply Chain’s role encompasses sourcing of ingredients and packaging materials, planning, manufacturing, distribution and customer services. The function is responsible for managing the fixed assets of nearly 100 manufacturing facilities and over 250 warehouses.
Supply Chain is structured to enable shared accountability at the regional level for results and strategy execution day-to-day, while ensuring that cross-regional and step-change supply opportunities are pursued at the functional level. The function is led centrally by the President, Global Supply Chain, supported by the four regional heads of supply chain. Key functional activities are managed centrally and operate on a global basis. They are focused on Technology and Manufacturing Development; Logistics and Customer Operations; Quality, Environment, Health and Safety; Procurement and Ethical Sourcing.
In 2006, a new strategy was developed which focuses on Fuel for Growth, Customer Focus for Growth, and Fit for Growth. We completed investments in new plants in Ireland, Thailand and India, and started building a new plant in Poland for gum. We invested in increased capacity for new gum packaging innovations, and centre-filled pellet gum in preparation for the UK launch in January 2007. Following the change to global categories, we realigned the Global Supply Chain organisation to support them, and started to develop category Global Supply Chain strategies.

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We initiated a full review of policies, standards and procedures following a product recall in the UK in 2006, and from this we have developed a Quality and Food Safety Improvement programme. This programme follows the model of the successful Safety Improvement programme which in 2006 resulted in a 50% reduction in Lost Time Accidents across the Group.
The focus areas for 2007 build on those started in 2006, especially relating to global supply chain strategy, and supply strategy for developing regions, particularly Africa and India. Margin is a key focus for improvement through reductions in non-production spend and through low-cost country sourcing, initiatives in procurement, and through continued optimisation and improvement of asset productivity. We will step up our focus on the reduction of complexity in our product portfolios and supply chains, and on making sustained progress in working capital reduction.
We have also launched a programme to increase our focus on customers through better product availability, and further development of sales and operations planning.
Finally, through a continued focus on both safety improvement and quality improvement we will create a zero accident mindset and reinforce confidence in our standards and processes.
Global Commercial
The role of Global Commercial is to facilitate higher revenue growth from the business units than they could otherwise achieve on a stand-alone basis. Global Commercial defines category and portfolio strategy; ensures we have best-in-class commercial capabilities; partners with other functions such as Science and Technology and Supply Chain in creating innovation; and co-ordinates brand management, consumer insights, and our strategy for our global customers.
In 2006, we reorganised the function to focus on four global categories of chocolate, gum, candy and beverages. This will enable us to develop consistent, scalable and repeatable strategies for each category to be implemented in multiple markets. We expect that this, in turn, will allow us to co-ordinate, increase the size of, and accelerate the roll-out of our innovation projects, and consequently improve both our efficiency and our execution in the marketplace.
Each global category is led by a Global Category Director who reports to the President, Global Commercial. The Global Category Directors develop overall strategy for their categories with input from the regions and business units. They co-ordinate with regional category directors within each region, and category functional partners in other functions such as Science and Technology, Supply Chain and Finance. The global categories are also supported by innovation, market research and strategy managers.
In 2006, we completed the training element of our commercial capability programme and now have over 2,000 colleagues trained across the Group. The Global Gum Category team ensured the continued roll-out of centre filled gum with launches now in 13 markets and initiated the co-ordinated launch of bottle gum in nine countries starting with France.
Other Global Commercial initiatives included the establishment of world-wide co-ordination for our major global customers which was a key element in achieving higher rates of growth with these customers; as a result, a number of them awarded us preferred status on a global basis. We also established a global centre of excellence to manage our duty free channel and delivered strong growth in sales, profit and market share in this fast growing segment of the market.
Science and Technology
Science and Technology leads our technical innovation programme. This function sets and communicates our global technical priorities, establishes and co-ordinates our science agenda, and facilitates global knowledge management and best-practice transfer. It prioritises and funds technology developments which underpin our innovation agenda, including longer-term globally-applicable development programmes. It also co-ordinates nutrition initiatives as a key element of our food policy and together with Group Legal, creates a strategy for our intellectual property assets.
The function is led by a Chief Science and Technology Officer, supported by Science and Technology heads in each region and heads of the Global Science Centre, of Scientific Affairs, and of Process Technology. The teams in each of our business regions have primary responsibility for developing and executing the innovation programmes. This includes prioritising and resourcing all regionally-driven product packaging and process development activities.
We use our own Science and Technology facilities as well as those of suppliers, and have a growing number of external collaborations with university, consultant and industrial partners. Our major Science and Technology facilities are at Reading, UK; Hanover Park, New Jersey, US; and Trumbull, Connecticut, US. The Reading facility provides science and technology support to the Group both globally and to the EMEA region and also supplies third parties. Hanover Park serves Americas Confectionery. Trumbull serves the Americas Beverages region. We also have several other facilities around the world which support local business units, such as those at Bournville, UK; in South Africa; in Paris, France; in Melbourne, Australia; and in India and Singapore.
In 2006, we continued to invest in our Science and Technology capabilities globally, expanding our headcount to over 800, and making new investments such as the Global Gum Centre in the US. Our enhanced technical skills and resources are now aligned behind our new global category structure. In 2006, we also strengthened our knowledge management processes and systems and formed a joint venture with the National University of Singapore to give us access to external expertise in this area.
A key technology focus area for Science and Technology in 2006 was on the application of new sweetener and flavour technologies in new products such as Stride gum, 7 UP beverages and centre-filled gum. We also strengthened our capabilities in nutrition, by appointing a Global Head of Nutrition, and formed an independent Corporate Nutrition Advisory Board, which comprises external scientific experts, and provides insight and advice on nutrition and health.
In 2007, we will continue to invest in technical capabilities, facilities and talent, and broaden our scientific collaborations with third parties. Our focus will be on continuing to expand our technology platforms, especially in areas such as flavour/taste and ingredient systems.

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Human Resources
The role of our Human Resources (HR) function is to improve our performance by enhancing the effectiveness of our day-to-day working practices, the capabilities of our people and the quality of their output. It is also responsible for ensuring that the working environment at Cadbury Schweppes reflects our core purpose and values, and enhances our culture. HR supports the business in delivering its goals by putting in place the right people for the right job; by helping develop and support the most effective organisational strategies and structures; and by attracting, retaining and developing employees and rewarding the right behaviours and outcomes.
The HR leadership team combines regional HR generalists and central world-wide functional experts. The team leads the development of best practice, the co-ordination and ownership of global processes and the strategy for service delivery. The central team includes heads of specific areas such as remuneration and benefits, organisational effectiveness, resourcing and talent development. The regional HR directors are responsible for employee and organisational strategies for their region, and for managing resources to deliver maximum benefit. All the HR processes are supported by a set of minimum standards which are binding on all regions and business units.
Corporate Communication and External Affairs also report to the Chief Human Resources Officer. The purpose of these two departments is to protect, promote our reputation and facilitate opportunities for being values-led, consumer-informed and commercially astute. Organised on the same principle of regional generalist leaders and central specialist experts, the departments have global accountability for internal communication and change management communication; for driving the Corporate and Social Responsibility strategy within the business; for public relations (including corporate, financial and brand public relations); issue and incident management and communication; our corporate websites; and UK, European Union and US public affairs.
During 2007, we will focus on simplifying and making our global performance management systems more robust and effective and on the roll-out of our Passion for People programme.
Finance
The role of Finance is focused on a strong business partnership with the commercial operators in the Group, while maintaining a robust financial control environment. The function sets low cost, IT-enabled common internal processes and standards for financial reporting and control, and ensures high quality external reporting which complies with all applicable laws and regulations. It is responsible for setting our annual contracts (or budgets), for developing our longer-term strategy and for managing acquisitions and disposals. It seeks to act as a business partner and commercial adviser to the regions and other functions in achieving our goals and priorities. It is also responsible for managing our financial communications and relationship with the investment community.
The Finance function is led by the Chief Financial Officer. It comprises a central team, and units in each of the regions and business units. The central team comprises a number of specialist groups which manage their respective areas on a Group-wide basis, including financial control, financial planning and analysis, tax, treasury, strategy (including mergers and acquisitions), risk management, investor relations and IT.
Key recent priorities have included the implementation of new regulations and accounting standards, compliance with Sarbanes-Oxley legislation, major upgrades to our information systems, and the development of more rigorous capital allocation decision rules.
In 2004 and 2005, we continued to strengthen our finance processes, systems and reporting metrics. We installed major new information systems in many of our major business units including Americas Beverages, Cadbury Trebor Bassett and in our confectionery businesses throughout the Americas region. In addition, we embedded new working capital and budgeting performance indicators into our management reporting.
In mid-2004, we created a shared business service environment in Dallas (the regional head office of Americas Beverages) to provide back-office services for our beverages and confectionery operations across North America. In 2005, this improved the effectiveness of processes and reduced back-office costs. In 2006, we started the process of transitioning the provision of financial transactions and processes for our entire organisation to a third party service provider in India to deliver further cash savings and greater efficiencies.
We also remain focused on the use of capital within Cadbury Schweppes, ensuring the prioritisation of our capital resources as well as the freeing up of underperforming capital. This can be seen in our management of working capital over the last three years and our active programme to dispose of non-core businesses, brands and surplus properties.
Following the appointment of a new Chief Information Officer, we have significantly reorganised the IT function. IT is now a global organisation, and has been changed from a geographically-led to a functionally-led structure.
In 2007, Finance’s emphasis will remain on its role in providing strong business partnership to drive the delivery of the Group’s new financial scorecard. This will be supported by a financial training programme designed to underpin our supply chain capabilities programme. We will continue to embed Sarbanes-Oxley compliant processes in our 2006 acquisitions of Cadbury Nigeria and Cadbury Schweppes Bottling Group.

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Legal and Secretariat
Legal and Secretariat work with and support the regions and other functions by taking responsibility for a broad range of legal activities. These include corporate governance matters; compliance with US and UK securities regulation and legislation; intellectual property; mergers and acquisitions; litigation management; general contract work and incident management.
In each region, a team headed by a regional general counsel works as a proactive business partner to achieve our commercial objectives in a legal and ethical way. The general counsels report both to the regional managing director or president and to our Chief Legal Officer, who has a small central team to provide support on general corporate matters. These teams work closely with the businesses, structuring, drafting and negotiating contracts with suppliers and customers, and advising management on matters such as food law, competition law, health and safety, and environmental issues. In the event of litigation, our legal teams work both to bring it to a satisfactory conclusion and, with management, on compliance activities designed to minimise the risk of further legal actions being brought against us.
We have a dedicated Group Secretary who, together with a centralised Group Secretariat department, is responsible for ensuring that each of our companies complies with all relevant corporate governance legislation and regulation. The department also supports the Board and Committees of Cadbury Schweppes plc, manages the relationship with our share registrar and ADR depository, and ensures compliance with UK and US requirements related to the listing of the Company’s shares on the London and New York Stock Exchanges.
The Intellectual Property department is part of the Legal function. As described above, it works with the Science and Technology function to manage our intellectual property portfolio, including defending our rights against threats or infringements.
We own a large number of registered and unregistered trade marks, copyrights, patents, designs and domain names throughout the world, along with substantial know-how, trade secrets and technology relating to our products and the processes for their production, packaging and marketing. We also possess many licences of these items where needed by the business. £3.3 billion has been included in the Group’s balance sheet at 31 December 2006 to reflect the cost of intellectual property acquired since 1985. For further information on our policy regarding the amortisation of the cost of brands see Note 1(o) to the financial statements on page F-16.
Senior management in the Legal and Secretariat function communicate on a regular basis to ensure a consistent and proactive approach to legal matters and to further enhance the support offered to the business. When necessary, external legal support and advice is provided by leading law firms. In 2006 key legal achievements included: preparing for the launch of Trident gum in the UK and supporting the construction of a new gum factory in Poland; increasing protection of our patents, including by the successful validation and enforcement of the Recaldent patent technology in Australia, and strengthening resources in developing markets in the Asia Pacific region; and in the Americas, supporting the launch of our new gum brand Stride in the US. Legal also worked with the business to strengthen the route to market for Americas Beverages, including by the acquisition of
Dr Pepper/Seven Up Bottling Group and other independent bottlers and enhancing our governance capabilities through the creation of a regional corporate governance initiative in Americas Beverages.

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Production assets
As of December 31, 2006 the Group had a total of 94 manufacturing plants and bottling facilities, of which 35 were located in Europe, Middle East and Africa; 10 in Americas Confectionery; 24 in Americas Beverages; and 25 in Asia Pacific. Of these, 63 are engaged in the manufacture of confectionery products and 31 are engaged in the manufacture and bottling of beverage products. There are no encumbrances or environmental issues that we expect will materially affect our utilisation of our properties.
                         
  Confectionery   Beverages   Total
 
Americas Beverages
          24       24  
Americas Confectionery
    10             10  
EMEA
    35             35  
Asia Pacific
    18       7       25  
 
Total
    63       31       94  
 
The Company owns all of the above facilities, except for three facilities in Europe, Middle East and Africa, one in Americas Confectionery, two in Asia Pacific and six in Americas Beverages, all of which are leased.
All the facilities are considered to be in good condition, adequate for their purpose and suitably utilised according to the individual nature and requirements of the relevant operations. We have a continuing programme of improving and replacing property when appropriate, to meet the needs of the individual operations.
The table on page 25 details our material properties, representing those sites with the most significant unmitigated loss exposures. All are manufacturing facilities and are owned by the Group except where indicated. These properties have a capacity utilisation in the range of 33-100%.

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Material properties
                     
                Production capacity
Location   Principal products   Area in '000 sq ft   in '000 tonnes
Aspers, PA., US
  Beverages     620       737*  
Bertrand, Canada
  Candy and Gum     183       32  
Bournville, UK
(part leasehold)
  Chocolate     1,766       140  
Cali, Colombia
  Candy and Gum     178       72  
Chirk, UK
  Confectionery
feedstocks
    261       53  
Claremont, Australia
  Chocolate     616       64  
Dunedin, New Zealand
  Candy     232       30  
Kent, Turkey
  Gum     820       64  
Overland, MO., US
  Beverages,
Concentrates
    199       161*  
Puebla, Mexico
  Gum     408       101  
Ringwood, Australia
  Chocolate     610       52  
Rockford, ILL., US
  Gum     536       75  
Sheffield, UK
  Candy     503       53  
Somerdale, UK
  Chocolate     933       91  
Williamson, NY., US
  Beverages     578       492*  
 
 
*   In millions of litres
Capital Expenditure
See Item 5 “Operating and Financial Review and Prospects” for a description of our capital expenditure.
Competition
The confectionery and soft drinks industries are highly competitive. Our brands compete with those of many other multinational, national and regional companies and private label suppliers in various markets. We compete actively in terms of quality, taste and price of products and seek to develop and enhance brand recognition by introducing new products and packaging, and extensive advertising and promotional programmes.
We are the world’s leading confectionery group by sales value (see table on page 13). Chocolate confectionery is primarily a branded market. Four groups account for around 43% of the world market, each with market share built on regional strengths. Our 7.5% chocolate share is built on strong positions in the UK, Ireland, Australia, New Zealand and India. The candy market is significantly more fragmented, with a greater presence of local and regional brands and private label products, but our 7.2% share makes us the global market leader. Gum is also a branded market. It is more global in nature with brands and products more consistent across geographies. Two groups account for approximately 62% of the global total: our number two position is built on strong market shares in the Americas, parts of Continental Europe, Japan, Thailand and South Africa.
The soft drinks industry includes a number of brand owners which act as licensors of branded products. We are the third largest carbonated soft drinks group in the US by sales volume (Source: Nielsen). In Australia, we are the second largest beverages company and the third largest supplier of edible products to the grocery trade.

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Industry trends
Both the confectionery and beverages markets in which we operate are growing. The main drivers are population growth and increased consumer wealth (particularly in emerging markets), and product innovation (affecting both emerging and developing markets).
According to Euromonitor 2005 the global confectionery market grew in value by 5.0% in 2005 (2004: 3.9%). Within the overall confectionery market, chocolate grew at 5.5% in 2005 (2004: 4.1%), sugar by 3.3% (2004: 2.4%) and gum by 7.3% (2004: 6.5%). In gum, consumers are switching from sugared to sugar-free products. Approximately 70% of our gum is sugar-free.
Emerging markets are growing faster than developed markets. In 2006, Cadbury Schweppes’ emerging and developed confectionery markets businesses grew by an average of 11% pa and 3% pa respectively. Around one third of our confectionery sales are generated in emerging markets. Our key emerging markets are Mexico and Brazil in the Americas Confectionery region; Russia, Poland, Turkey, Egypt and South Africa in the EMEA region; and India and Thailand in the Asia Pacific region.
                 
            Market growth  
Value   Total market     2005 vs 2004  
 
Chocolate
    54.1 %     5.5 %
Sugar (sweets/candied)
    32.2 %     3.3 %
– Medicated
    3.0 %     3.4 %
Gum
    13.7 %     7.3 %
– Sugar
    2.7 %     2.1 %
– Sugar free and functional
    9.1 %     12.3 %
 
Total confectionery
    100 %     5.0 %
 
Source: Euromonitor 2005
Our main beverages market is the US. According to AC Nielsen, the US refreshment beverages market, which includes non-alcoholic carbonated and non-carbonated soft drinks, grew by 0.4% in volume and 5.3% in value in 2006. Carbonated soft drinks volumes have been flat or declining in recent years and fell by 4.1% in 2006. The decline has been attributed to a combination of above inflation pricing and consumers switching to non-carbonated products, primarily sports drinks and bottled water. Within the carbonated market, volumes of products sweetened with sugar (regular) declined 4.6% in 2005 while those sweetened with low calorie sweeteners (diet) declined by 2.7%. Cola volume declined by 6.2%, while other carbonates declined 1.7%. We have a strong portfolio of non-cola diet carbonated soft drinks in the US, including Diet Dr Pepper, Diet A&W, Diet Sunkist and Diet Rite. In 2006 diet carbonated soft drinks accounted for 23% of our US carbonated soft drinks revenues and grew by 1%. We have a small share of the US bottled water market primarily through our Deja Blue brand. In 2007, we are entering the US sports drink market with the launch of Accelerade. The non-carbonated soft drinks categories in which we participate grew by 2% in volume in 2006.
                 
            Market growth  
US volumes   Total market     2006 vs 2005  
 
Carbonated soft drinks
    50.8 %     (4.1 )%
– Regular
    33.8 %     (4.6 )%
– Diet
    17.0 %     (2.7 )%
Non-carbonated
    45.4 %     4.6 %
– Water
    22.8 %     10.8 %
– Isotonics/Energy
    5.5 %     17.8 %
– 100% Juice
    8.0 %     (6.6 )%
– Juice drinks
    9.1 %     (5.3 )%
Other
    3.8 %     18.9 %
 
Total beverages
    100 %     0.4 %
 
Source: AC Nielsen (December 2006)

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Seasonality
Many of our businesses are seasonal. Their seasonality is primarily influenced either by the weather, or by holidays and religious festivals. Within the Group, our businesses have different seasonal cycles throughout the year depending on their geographical location and the timing of holidays and festivals, which also may vary from year to year. For the Group as a whole, the second half of the year is typically the half with greater revenues and profits.
Consumers and customers
Our products are primarily impulse products and are sold to consumers through many different outlets, ranging from grocery stores to petrol station kiosks to fountain equipment at leisure, food and entertainment venues. In many markets, sales to the large multiple grocery trade account for less than 50% of sales. No single customer accounts for more than 10% of our revenue in any period presented. We have a variety of programmes in place to ensure that consumer insights are built into our commercial strategy. These include our Building Commercial Capabilities programme which is based on our consumer segmentation study of 38 key markets and which gives us an integrated sales and marketing process with a single commercial language and common tools and processes for developing commercial programmes.
Raw materials and suppliers
We use a wide range of raw materials in manufacturing our products, the main ones being cocoa beans, sugar and other sweeteners (including polyols and artificial sweeteners such as aspartame), dairy products (including milk), gumbase and fruit and nuts.
We buy our raw materials from about 40,000 suppliers around the world. No single supplier accounts for more than 10% of our raw material purchases. We developed a Human Rights and Ethical Trading (HRET) policy in 2000 and have an ethical sourcing programme in place. Further details are provided on page 28.
We seek to minimise the impact of price fluctuations and ensure security of supply by entering into forward agreements and long-term contracts wherever available. See “Item 5. Operating and Financial Review and Prospects—Quantitative and Qualitative Disclosure About Market Risk”
We import cocoa beans from West Africa, primarily Ghana, and the Americas. West Africa accounts for over 60% of world production. We buy cocoa beans and cocoa butter from a range of suppliers, and try to minimise the effect of cocoa price movements and secure our future requirements by entering into forward and future contracts. See "Item 5. Operating and Financial Review and Prospects—quantitative and qualitative disclosure about Market risk"
We purchase most of our sugar at prices essentially set by the European Union or maintained by various national governments through quotas and duties. Only a relatively small proportion is purchased at fluctuating world prices. We have not experienced difficulty in obtaining adequate supplies of sugar for our operations, and do not anticipate any future difficulties, given the many available sources.
Employees
                         
Average employee headcount   2006     2005     2004  
 
Americas Beverages
    14,562       6,605       6,774  
Americas Confectionery
    14,568       14,175       14,002  
EMEA
    23,457       20,705       20,450  
Asia Pacific
    13,354       12,624       12,436  
Central
    761       769       662  
 
Continuing operations
    66,702       54,878       54,324  
Europe Beverages
    309       3,703       4,118  
 
Total
    67,011       58,581       58,442  
 
The average employee headcount in the UK in 2006 was 7,847 (2005: 7,460, 2004: 7,468).
The average employee headcount disclosed above reflects the incremental heads for CSBG only for the period since acquisition. On a pro forma basis assuming that CSBG had been acquired at the start of the year the average headcount for Americas Beverages and Continuing Operations would have been 18,372 and 70,512 respectively.

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Marketing, Food, Consumer Trends
Within the overall context of our business as a manufacturer of confectionery and beverages, we aim to contribute to consumer diet, health and lifestyle solutions. We are innovating and evolving our product portfolio to meet changing consumer needs and provide more choice. Responsible consumption of our products is important to us and to the long-term success of our brands. We are including improved nutritional information on products and messages to reinforce the role of treats, encourage responsible consumption and help consumers achieve a balanced lifestyle. We have already begun to introduce alternative products with lower fat, sugar, and salt options, as well as organic, nutrient-enriched, functional, and natural ingredients.
We have a global Food Insights and Action Group, led by Todd Stitzer, Chief Executive Officer, that reviews and establishes our strategy in this area. Our regional Food Strategy into Action Groups help translate strategy into action. We engage with a broad range of stakeholders and work hard to understand their views and expectations of us so that our decisions are based on knowledge and sound science.
We will continue to listen to what our consumers and stakeholders tell us while we remain true to our sustaining core purpose – to create brands that people love and trust.
Environment, Health and Safety (EHS)
We recognise our responsibility to help preserve the future of our planet while continuing to create sustainable value for the business. We will do this by minimising environmental impacts and being cost effective. We are determined to reduce the carbon intensity of our global operations and use energy more efficiently as a key part of our commitment to sustainable growth and to help combat climate change.
We have in place an integrated EHS policy and standards. The standards are based on both ISO 14001 and OHSAS 18001. Our EHS policy and standards deal with environmental issues related to the manufacturing of our products, energy, water, packaging, protecting bio-diversity and the eco-systems from which we source raw materials, the management of our supply chain and the distribution, sale and consumption of our products.
All of our manufacturing sites are audited on a rolling programme by the Group EHS Assurance Department and areas for improvement are identified. Some sites are also externally audited and certified to one or more of the internationally recognised standards, such as ISO 14001 or OHSAS 18001.
Protecting the health and safety of employees is fundamental to Our Business Principles. In 2006, we established a Quality Environment Health & Safety Group, chaired by our President of Global Supply Chain. This group consists of board level representation and senior leadership from different functions to drive forward our agenda in this area. The remit of this committee includes quality and food safety. We are implementing additional programmes to strengthen performance.
Human Rights and Employment Standards, and Ethical Sourcing and Procurement
Ethical trading and respect for human rights are deeply held values at Cadbury Schweppes. Our Human Rights and Ethical Trading (HRET) policy has been developed taking into account international standards – such as the International Labour Organisation conventions, the UN Declaration of Human Rights, and OECD guidelines – as well as cultural and industry best practice from our local markets. Adopted by the Main Board in 2000, it covers core labour rights and dignity at work; health and safety in the workplace; fair remuneration; diversity and respect for differences and opportunity for development.
The HRET policy is there to guide all Cadbury Schweppes’ business units, as well as our suppliers and the business strategy in this area. The review of the effectiveness of policy is led by a group of senior managers who regularly assess progress.
Ethical sourcing and sustainability are two key elements of how we manage our Global Supply Chain. Ethical Sourcing Standards for the Group were put in place in 2002. These standards continue to be underpinned with a system for supplier assessment, training for employees and a programme of engagement with our suppliers. Our aim is to make sure our products are sourced and produced in a sustainable manner.
In 2006, we continued to play a leading role in the multi-stakeholder alliance of the International Cocoa Initiative. We play a significant role with others in our sector to promote responsible labour practices and to stimulate more prosperous and sustainable cocoa farming, working with farmers. Having achieved a target for developing certification in 2005, the next milestone is to introduce the certification process in at least 50% of cocoa farmers in West Africa by July 2008. There is strong support from Governments in Ghana and Ivory Coast although progress in the latter continues to be challenged by civil and military unrest. With 1.5 million smallholder farmers in West Africa, only a fraction of whom are engaged in “FairTrade” infrastructure, we believe we can make a greater impact in ethical trade by working broadly on the root causes of poverty in these areas through education and technological development. Farmer field schools have helped over 25,000 farmer families, both increasing awareness of acceptable labour practices and generating increases in farmer family incomes.
Sustainable agriculture is an important opportunity for us, as well as for the farming communities we work with. We have partnered with the Earthwatch organisation since 2005 in an innovative programme in Ghana with Cadbury Schweppes’ colleagues working with local scientists and farmers on sustainable cocoa growing and biodiversity within cocoa farming.
We continue to be an active member of the Roundtable for Sustainable Palm Oil, and are now part of the newly formed Responsible Sugar Cane Initiative.
At Cadbury Schweppes, we aim to build a business where employees are committed and engaged. We also want to reflect the diversity and inclusiveness in our workforce and in our leadership teams. Our global employee climate survey helps the business assess the commitment and engagement to the business of its employees, including opportunities to embrace CSR in their everyday work. Cadbury Schweppes introduced an equal opportunity and diversity policy in 1993. In 2006, we set up a Diversity & Inclusiveness Leadership Team chaired by our Chief Science and Technology Officer and made up of members from across the business including two Regional Presidents.
Comparative statements
In this Report, Cadbury Schweppes makes certain statements with respect to its market position, or its products’ or brands’ market positions, by comparison with third parties or their products or brands. These statements are based on independent sources, such as Euromonitor and AC Nielsen, and are accurate to the best of the knowledge and belief of Cadbury Schweppes.

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Group Companies
Cadbury Schweppes public limited company is a holding company that operates through its subsidiaries and associated undertakings, which are set forth below.
                         
                    Proportion of  
            Country of   issued share  
            incorporation   capital held if not  
  Activities     and operation   100%  
 
Details of principal associated undertakings
                       
Camelot Group plc*
    (c )   Great Britain (ii)     20 %
Meito Adams Company Ltd
    (a )   Japan     50 %
Crystal Candy (Private) Ltd
    (a )   Zimbabwe (i)     49 %
 
                       
Details of principal subsidiary undertakings
                       
Operating companies (unless otherwise stated)
                       
 
                       
United Kingdom:
                       
Cadbury Trebor Bassett (an unincorporated partnership operating in Great Britain between Cadbury Ltd, Trebor Bassett Ltd and The Lion Confectionery Co Ltd)
    (a )     n/a        
Green & Black’s Chocolate Ltd*
    (a )   Great Britain        
Reading Scientific Services Ltd*
    (c )   Great Britain        
 

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Group companies continued
                         
                    Proportion of  
            Country of   issued share  
            incorporation   capital held  
    Activities     and operation   if not 100%  
 
Europe:
                       
Cadbury Belgium NV
    (a )   Belgium        
Dandy A/S
    (a )   Denmark        
Cadbury Stimorol Danmark A/S
    (a )   Denmark        
Cadbury France
    (a )   France        
Comptoir Européen de la Confiserie
    (a )   France        
Cadbury Hellas AE
    (a )   Greece        
Berkeley Re Ltd
    (c )   Ireland        
Cadbury Ireland Ltd
    (a )   Ireland        
Cadbury Italia SpA#
    (a )   Italy        
Cadbury Nederland BV
    (a )   Netherlands        
Cadbury CIS BV
    (a )   Netherlands        
Cadbury Wedel Sp. zo.o.
    (a )   Poland        
Cadbury Portugal — Produtos de Conféitaria, Lda
    (a )   Portugal        
Dirol Cadbury LLC
    (a )   Russia        
Cadbury España, SL
    (a )   Spain        
Cadbury Sweden A/B
    (a )   Sweden        
Cadbury Switzerland Faguet & Co
    (a )   Switzerland        
 
                       
Americas:
                       
Cadbury Stani Adams Argentina SA
    (a )   Argentina (ii)        
Cadbury Adams Brasil Industria e Comercio de
                       
Produtos Alimenticios Ltda
    (a )   Brazil        
Cadbury Adams Bolivia S.A.
    (a )   Bolivia        
Cadbury Adams Canada Inc
    (a )   Canada        
Cadbury Beverages Canada Inc
    (b )   Canada        
Cadbury Stani Adams Chile Productos Alimenticios Ltda
  (a)   Chile        
Cadbury Adams Colombia SA
    (a )   Colombia        
Cadbury Adams Costa Rica SA
    (a )   Costa Rica        
Cadbury Adams Dominicana S.A.
    (a )   Dominican        
 
        Republic        
Cadbury Adams Ecuador SA
    (a )   Ecuador        
Cadbury Adams El Salvador SA de CV
    (a )   El Salvador        
Cadbury Adams Guatemala, SA
    (a )   Guatemala        
Cadbury Adams Distribuidora Mexico, SA de C.V.
    (a )   Mexico        
Cadbury Adams Mexico, S de RL de CV
    (a )   Mexico        
Cadbury Schweppes Bottling Group, Inc
    (b )   US        
Distribuidora Anahuac, SA de CV
    (b )   Mexico (ii)        
Distribuidora de Aguas Minerales, SA de CV
    (b )   Mexico (ii)        
Cadbury Adams Panama, SA
    (a )   Panama        
Cadbury Adams Peru SA
    (a )   Peru        
Cadbury Adams USA LLC
    (a )   US(i)        
Dr Pepper/Seven Up, Inc
    (b )   US        
Mott’s LLP
    (b )   US        
Pacific Snapple Distributors, Inc
    (b )   US        
Snapple Beverage Corp
    (b )   US        
Snapple Distributors, Inc
    (b )   US        
CAS Uruguay SA
    (a )   Uruguay        
Cadbury Adams, SA
    (a )   Venezuela        
 

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Group companies continued
                         
                    Proportion  
            Country of     of issued share  
            incorporation and     capital held  
    Activities     operation     if not 100%  
 
Operating companies continued
                       
Other overseas:
                       
Cadbury Schweppes Pty Ltd
    (a )(b)   Australia (i)        
Cadbury Confectionery (Guangzhou) Co, Ltd
    (a )   China        
Cadbury Food Co Ltd China
    (a )   China        
Trebor Wuxi Confectionery Company Ltd
    (a )   China        
Cadbury Egypt Group for Food Industries Company
    (a )   Egypt        
The International Company for Gum and Confectionery
                       
S.A.E. ‘Incogum’
    (a )   Egypt        
Cadbury Ghana Ltd
    (a )   Ghana        
Cadbury Four Seas Company Ltd
    (a )   Hong Kong     70 %
Cadbury India Ltd
    (a )   India     97.4 %
PT Cadbury Indonesia
    (a )   Indonesia        
Cadbury Japan Ltd
    (a )   Japan        
Cadbury Kenya Ltd
    (a )   Kenya        
Cadbury Adams Middle East SAL
    (a )   Lebanon        
Cadbury Confectionery Malaysia SB
    (a )   Malaysia     65.5 %
Cadbury Morocco
    (a )   Morocco        
Cadbury Confectionery Ltd
    (a )   New Zealand        
Cadbury Pakistan Ltd
    (a )   Pakistan     96 %
Cadbury Singapore Pte Ltd
    (a )   Singapore        
Bromor Foods (Pty) Ltd
    (a )   South Africa        
Cadbury South Africa (Pty) Ltd
    (a )   South Africa        
Cadbury (Swaziland) (Pty) Ltd
    (a )   Swaziland        
Cadbury Adams (Thailand) Ltd
    (a )   Thailand        
Kent Gida Maddeleri Sanayii ve Ticaret Anonim Sirketi
    (a )   Turkey (ii)     95.4 %
Cadbury Nigeria plc
    (a )   Nigeria     50.02 %††
 
                       
Finance and holding companies:
                       
Cadbury Schweppes Australia Ltd
    (c )   Australia (ii)        
CS Finance Pty Ltd
    (c )   Australia (i)        
Cadbury Schweppes France SAS
    (c )   France        
Berkeley Square Investments Ltd*
    (c )   Great Britain        
Cadbury Schweppes Asia Pacific Pte Ltd
    (c )   Singapore        
Cadbury Schweppes Finance p.l.c.*
    (c )   Great Britain        
Cadbury Schweppes Holdings LLC
    (c )   Great Britain+ (i)        
Cadbury Schweppes Investments plc*
    (c )   Great Britain        
Cadbury Schweppes Overseas Ltd
    (c )   Great Britain        
Cadbury Schweppes US Investments Ltd
    (c )   Great Britain        
Vantas International Ltd*
    (c )   Great Britain        
Cadbury Schweppes Treasury Services
    (c )   Ireland (i)        
Adams MeCCA Holdings BV
    (c )   Mexico        
Cadbury Aguas Minerales, SA de CV
    (c )   Mexico (i) (ii)        
Cadbury Schweppes Investments BV
    (c )   Netherlands (i)        
Cadbury Schweppes Delaware, LP
    (c )   US        
Cadbury Schweppes Holdings (U.S.)
    (c )   US        
CBI Holdings Inc
    (c )   US(i)        
 
 
*   Investment directly held by Cadbury Schweppes plc.
 
  Incorporated in Netherlands.
 
+   Incorporated in US.
 
#   Company disposed on 16 February 2007
 
††   45% until 20 February 2006 50.02% from this date through 31 December, 2006
The nature of the activities of the individual companies is designated as follows:
(a)   Confectionery
 
(b)   Beverages
 
(c)   Other (including holding companies)
The percentage voting right for each principal subsidiary is the same as the percentage of ordinary shares held.
Issued share capital represents only ordinary share of their equivalent except for companies marked (i) where there are also preference shares or (ii) where there are both A and B classes of ordinary shares.
ITEM 4A:      UNRESOLVED STAFF COMMENTS
There are no unresolved comments from the SEC staff regarding the Company’s periodic reports under the Securities Exchange Act of 1934.

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ITEM 5: OPERATING AND FINANCIAL REVIEW AND PROSPECTS
Explanation of performance analysis
Following the disposal of our beverage businesses in Europe, Syria and South Africa (reflecting our strategic decision to exit beverages outside the Americas and Australia) these operations have been classified as a discontinued operation in accordance with IFRS 5 – Non current assets held for sale and discontinued operations (IFRS 5). IFRS 5 requires that the results of discontinued operations be excluded from revenue, profit from operations, financing and taxation and the after-tax result (including any net profit on disposal) of the discontinued operations be shown as a single line item on the face of the income statement below taxation with a corresponding re-presentation of the prior period. Hence in the analysis that follows all reference to revenue growth and profit from operations growth excludes our beverage businesses in Europe, Syria and South Africa. A separate discussion of the discontinued operations is presented on page 37.
IFRS 5 requires that the cash flow statement reflects the cash flows of the Group, including our beverage businesses in Europe, Syria and South Africa until the point of sale and hence all cash flow analysis, including references to Free Cash Flow (as defined on page 51) include the contribution from these businesses.
On 15 March 2007 the Group announced that it intends to separate its confectionery and Americas Beverages businesses. At this date the Board was evaluating the options for separation to maximise shareowner value and will provide further information at the time of the trading update on 19 June 2007. The Americas Beverages business is not classified as an asset held for sale within this document as it has not currently met the required criteria within IFRS 5.
The review below starts with an overview that analyses revenue and profit from operations, including the impact of exchange rates and acquisitions and disposals in 2006 and 2005. As part of the review there is an analysis of marketing, restructuring costs, amortisation and impairment of intangibles, UK product recall, Nigeria adjustment, tax disposal provision and IAS 39 adjustment, share of result in associates, financing, taxation, discontinued operations, minority interests, dividends and earnings per share.
Following the consolidated overview, there is a review of comparative results of each of the four continuing business segments. Revenue and Underlying profit from operations is reviewed for each segment. Underlying profit from operations refers to each segment’s profit from operations before restructuring costs, non-trading items, amortisation and impairment of intangibles, UK product recall, Nigeria adjustment, tax disposal provision and IAS 39 adjustment. This non-GAAP measure is the measure of profit or loss for each reportable segment used by the Chief Executive’s Committee (CEC) and segment management. A reconciliation from the segment’s Underlying profit from operations to profit from operations is provided on page F-7 along with a discussion of the reconciling items on page F-20.
The meanings of certain terms used in this Operating and Financial Review are as follows:
References to “re-presented” information refer to the re-presentation of 2005 information to classify the South Africa beverages business as discontinued. In 2005, our beverage businesses in Europe and Syria were classified as discontinued operations. In 2006 we announced and completed the disposal of our South African beverages business. As this disposal was part of our strategic decision to exit beverages outside the Americas and Australia it was also classified as discontinued operations. As required by IFRS we have re-presented the 2005 and 2004 financial statements on a comparable basis.
References to “constant exchange rates” refer to the method we use to analyse the effect on our results attributable to changes in exchange rates by recomputing the current year result using the prior year exchange rates and presenting the difference as exchange movements.
References to “excluding acquisitions and disposals” are to “base business” growth excluding the first 12 months’ impact of acquisitions and the last 12 months’ impact of disposals. This impact is referred to as growth from acquisitions and disposals. Once an acquisition has lapped its acquisition date it is included within the base business results as there is a comparative period in the prior year results to compare the performance to. Acquisitions and disposals are excluded from the base business results as this provides comparisons of base business performance for users of the accounts.
References to “base business” or “normal growth” refer to changes in revenue, Underlying profit from operations, Underlying earnings per share and other financial measures from year to year not attributable to exchange rate movements, or acquisitions and disposals or the impact of the 53rd week on 2004.
We believe that removing the effect of exchange rates, acquisitions and disposals (and where relevant to 53rd week) provides shareholders with a meaningful comparison of year on year performance of the base business. A reconciliation of the reported results is included on page 35.

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Executive summary
                                 
                    Reported     Constant  
                  currency     currency1  
    2006     2005     growth     growth  
    £m     £m     %     %  
 
Revenue
    7,427       6,432       +15       +16  
 
 
                               
 
Profit from operations
    909       995       -9       -7  
 
Profit before tax
    738       835       -12       -10  
 
Discontinued operations
    642       76                  
 
Basic EPS – continuing and discontinued2
    56.4       37.3                  
 
Dividend per share
    14.0 p     13.0 p     +8       n/a  
 
1   Constant currency growth excludes the impact of exchange rate movements during the period.
 
2   In this review, EPS is presented on a basic total group basis and therefore includes the earnings contribution from the discontinued beverage businesses in Europe, South Africa and Syria, this is to reflect the fact that the financing charge represents the total Group including the funding of the discontinued operations until disposal. All other amounts are presented on a continuing basis.
Revenue in 2006 was £7,427 million, £995 million, or 15%, higher than in 2005. The net effect of exchange movements during the year decreased reported revenue by £60 million (or 1%), mainly driven by a weakening in the US Dollar, the Australian Dollar and the South Africa Rand.
In 2006, acquisitions, net of disposals, resulted in a £799 million increase in reported revenue relative to the prior year. The most significant acquisitions were Dr Pepper/Seven Up Bottling Group (now named Cadbury Schweppes Bottling Group or CSBG), in which we increased our stake from 45% to 100% in May 2006, and Cadbury Nigeria in which we increased our stake from 46% to just over 50% in February 2006.
Base business revenue grew £256 million or 4%, with growth in all four of our continuing business segments, led by Americas Confectionery and Asia Pacific.
Profit from operations at £909 million was down £86 million (9%) compared to 2005. This was principally driven by a £62 million increase in restructuring costs, the £30 million impact of the UK product recall discussed below, a £17 million increase in the amortisation of acquisition intangibles, a £15 million impairment of goodwill recognised in respect of Cadbury Nigeria discussed below, and a £25 million decrease in the IAS 39 adjustment partially offset by the £48 million increase in trading profit.
Consistent with the impact on revenue, currency movements had a £14 million (or 1%) adverse impact on profit from operations. The full-year impact of acquisitions, net of disposals, was £18 million due primarily to CSBG and Cadbury Nigeria.
Profit before tax decreased by 12% to £738 million. The decrease reflected the decrease in profit from operations and a decrease in our share of our associates’ profits partially offset by a decrease in net finance costs.
Earnings per share increased by 51% or 19.1 pence principally reflecting the profit on disposal of our Europe, South African and Syrian beverage businesses offset by a reduction in the reported profit before tax, increases in restructuring costs and amortisation and impairment of intangibles and the UK product recall. Acquisitions, net of disposals, reduced full year earnings per share by 3.1p (9%). Movements in exchange rates reduced earnings per share by a further 2% or 0.5 pence. The base business grew earnings per share by 5% or 1.7 pence.
Sources of revenue and trading costs
Revenue is generated from the sale of branded confectionery products such as chocolate, gum and candy, and the sale of branded carbonated and non carbonated beverage products. Cash is usually generated in line with revenue and there are no significant time lags.
Direct trading costs consisted mainly of raw materials, which for confectionery products are cocoa, milk, sugar and sweeteners, various types of nuts and fruit, and packaging. The raw materials included in beverages are mainly high fructose corn syrup, water, flavourings and packaging. The other major direct cost is labour. Indirect operating costs include marketing, distribution, indirect labour, warehousing, sales force, innovation, IT and administrative costs.
Cash receipts and payments are generally received, and made, in line with the related income statement recognition. The main exceptions to this are:
>   Mark-to-market gains and losses on financial derivatives. The main financial derivatives we employ are cocoa futures, interest rate swaps and currency forwards. At each balance sheet date the fair value of all open financial derivatives are determined and recorded on balance sheet. Where hedge accounting is not available this results in the immediate recognition within the income statement of the movements in the fair value. The associated cash flow occurs when the financial derivative contract matures.
 
>   Up-front contractual payments in Americas Beverages, which are charged to the income statement over the period of the supply contract.
 
>   Depreciation charges for capital expenditure, where the cash is utilised when the capital expenditure is made, and the depreciation is charged to the income statement to match utilisation of the asset.

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UK product recall

On 23 June 2006, we recalled seven of our Cadbury branded product lines in the UK and two in Ireland.
The net direct costs of the UK product recall amounted to £30 million. This comprised £5 million relating to customer returns, £10 million cost of stock destroyed, £17 million of remediation costs and £5 million of increased media spend, offset by a £7 million insurance recovery.
We estimate that the adverse impact of the recall within our trading results was £30-35 million on revenue and an additional £5-10 million (net of insurance recovery) on profit from operations.
Cadbury Nigeria

We increased our stake in Cadbury Nigeria from 46% to just over 50% in February 2006. In November, a significant over-statement of Cadbury Nigeria’s financial position which had existed over a number of years was discovered. In the last few months, the Board of Cadbury Nigeria has undertaken a detailed review to fully understand the scale of the over-statement and put in place a robust recovery plan.
Cadbury Nigeria was reported as an associate for the seven weeks to 20 February 2006 and as a fully consolidated subsidiary for the remainder of the year. For 2006, it contributed a loss of £53 million or 2.6 pence to the Group’s earnings.
Earnings include a £23 million charge in associates reflecting our share of the adjustments required following the discovery of the significant over-statement of Cadbury Nigeria’s financial position. As a consequence of this balance sheet over-statement, a full impairment review has been undertaken and management believes that it is appropriate to reduce the carrying value of Cadbury Nigeria in the Group’s balance sheet. Accordingly, a £15 million impairment of the goodwill held in respect of Cadbury Nigeria has been recorded as at 31 December 2006. Following this impairment the operating assets of the business are approximately £60 million.
Tax disposal provisions

In 2006 we reached agreement with the UK tax authorities as to the tax due in connection with the disposal in 1997 of Coca-Cola & Schweppes Beverages which resulted in a release of unutilised provisions totalling £51 million within discontinued operations.
The Fuel for Growth programme

In mid-2003, the Group began to implement a major four-year cost reduction initiative with the aim of cutting direct and indirect costs by £360 million per annum by 2007. It was expected that the investment required to deliver the £360 million of cost savings would be £800 million, split between £500 million of restructuring and £300 million of capital expenditure. The 2006 Fuel for Growth restructuring spend of £123 million takes the cumulative restructuring spend to around £500 million (at constant exchange rates). The cost phase of the programme is now complete with further savings of £90 million anticipated in 2007.
Future trends

Future revenue and profit from operations may be affected by both external factors and trends that alter the environment in which we carry out our business as well as internal management strategies aimed at improving our business performance.
A discussion of the external factors that affect our business is contained in Item 4 “Information on the Company” (see page 26).
2007 outlook

We expect another good year of revenue growth in 2007, supported by an active innovation programme. We are making a substantial investment in organic growth opportunities in support of a number of large initiatives including:
>   The launch of Trident gum into the UK, leveraging the strength of our existing distribution network
 
>   Higher marketing and innovation in our UK chocolate business
 
>   Further roll-out of centre-filled gum
 
>   The expansion of the Stride brand in the US
 
>   Revitalisation of Snapple, with further innovation in super-premium teas and the launch of a mass market offer
 
>   Entry into the US $6.8 billion, fast-growing, sports drink market in the US with the launch of Accelerade, a differentiated offer for serious athletes.
We are seeing increased costs in our beverage operations in 2007, particularly sweetener costs, but expect energy costs to abate somewhat during the year. We continue to see opportunities to reduce our costs both from our Fuel for Growth programme (which ends in 2007) and other efficiency programmes.
In 2007 the average interest rate on debt is expected to remain at approximately 5%.
The 2007 tax rate will be dependent on a number of factors including the possible resolution of tax cases with various tax authorities and the tax consequences of any acquisitions or disposals in the year. However we expect the tax on Underlying profits to be in the range of 30-31%.

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Operating review 2006 compared to 2005
Executive summary
                                         
            Base                    
            business     Acquisitions/     Exchange        
    2005     growth     Disposals     effects     2006  
Analysis of results   £m     £m     £m     £m     £m  
 
Revenue
    6,432       256       799       (60 )     7,427  
 
Change %
            +4 %     +12 %     -1 %     +15 %
 
Profit from operations
    995       (46 )     (26 )     (14 )     909  
 
Change %
            -5 %     -3 %     -1 %     -9 %
 
Basic EPS – Continuing and Discontinued
    37.3                               56.4  
 
The main features of the financial performance of 2006 were as follows:
>   Revenue growth of 4%, driven by innovation and by emerging markets revenues up 10%
 
>   Confectionery revenues +4%; gum revenues +10%; Trident +23%
 
>   Beverage revenues +4%; 60bps share gain in US carbonates; Dr Pepper +2%
 
>   Increase in restructuring costs of £62 million principally representing the end of the Fuel for Growth expense
 
>   £30 million charge relating to the cost of the UK product recall
 
>   Margins decreased by 3.3% due to increased restructuring costs, UK product recall, trading post acquisition in Cadbury Nigeria and increases in commodity costs and growth investment
 
>   £23 million charge in associates relating to significant over-statement of Cadbury Nigeria’s financial position prior to the acquisition to a subsidiary
 
>   Profit before tax -12%
 
>   Cadbury Schweppes Bottling Group performing in line with acquisition case
 
  (except where stated all movements are at constant exchange rates)
1 Review of 2006 Group income statement
(i) Revenue
Revenue at £7,427 million was £995 million or 15% higher than 2005 sales of £6,432 million. The net effect of exchange movements during the year was to decrease revenue by £60 million, mainly driven by a weakening in the US Dollar, the Australian Dollar and the South African Rand.
In 2006, acquisitions, net of disposals, resulted in a £799 million increase in revenue relative to the prior year. The most significant acquisitions were Dr Pepper/Seven Up Bottling Group (now named Cadbury Schweppes Bottling Group or CSBG), in which we increased our stake from 45% to 100% in May 2006, and Cadbury Nigeria in which we increased our stake from 46% to just over 50% in February 2006.
Base business revenue grew £256 million or 4% with growth in all four of our continuing business segments.
Innovation and emerging markets continued to be the key drivers of performance. Successful innovations during the year included:
>   The launch of Stride, a new gum brand using patented long-lasting flavour technology: Stride now has a 2.9% share of the $3.6 billion US gum market
 
>   The further roll-out of our centre-filled gum technology in Europe under a range of local brands such as Trident, Hollywood, Stimorol and Dirol: annualised sales of centre-filled gum in the US and Europe are now over £100 million
 
>   The launch of new premium chocolate products in the UK and Australia through the Cadbury and Green & Black’s brands
 
>   The launch of a range of super-premium Snapple teas giving us a strong position in this fast-growing functional beverage category
 
>   The relaunch of 7 UP as 7 UP Natural in the US
Our emerging markets grew revenues by 10% with key successes including:
>   10% growth in candy following the launch of affordable offers in Africa, Asia and Latin America
 
>   12% growth in Latin America, driven by growth in all top 5 markets
 
>   17% growth in Asia Pacific, with strong performances in India and South East Asia
Confectionery revenues grew by 4% with the impact of the difficult trading in the UK reducing growth by 2%. Performance was stronger in the second half with an increase in the rate of innovation, particularly in Americas Confectionery. Emerging markets continued to grow strongly across all geographies at 10%.
In gum all regions contributed to a 10% revenue growth. We continued to see strong share gains in the US with Stride, our new longer lasting gum brand, ahead of its launch plan. In EMEA, the roll-out of centre-filled gum and strong growth in Southern Europe benefited performance. In Asia, we are seeing strong growth in sugar-free gum.
Chocolate had a more difficult year given the impact of the product recall in the UK with revenues up 1%. Outside the UK, growth remained healthy at 5%. In Asia Pacific, the growth was driven by premium and indulgent products in Australia and New Zealand, and by the launch of gifting and affordable chocolate offers in India.

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Candy grew strongly in emerging markets at 10%, benefiting from our focus on affordable offers. However, performance in developed markets was impacted by weaker results from Halls in the US, due to lower demand during the cough and cold season, and from non-core brands. Overall candy revenues were flat.
Our beverage operations had another good year with like-for-like revenues ahead by 4%. Americas Beverages outperformed the US carbonated soft drinks market for the third year in a row, with like-for-like CSD revenue growth of 3%.
Despite flat Snapple revenues, total US non-carbonates revenues were ahead by 2%, with the core four brands (Snapple, Hawaiian Punch, Mott’s and Clamato) ahead by 3%. Snapple’s performance improved in the second half mainly due to the launch of Snapple super-premium teas.
Beverages in Australia and Mexico also performed well with revenue growth of 6% and 11% respectively.
(ii) Profit from operations
Profit from operations decreased £86 million (9%) to £909 million compared to 2005. This was driven by:
>   an increase in restructuring costs of £62 million;
 
>   an increase of £32 million in amortisation and impairment of intangible assets, due to the additional amortisation charge from definite life CSBG customer relationships and contracts and the impairment of £15m goodwill relating to the Group’s investment in Cadbury Nigeria;
 
>   a decrease of £25 million in the IAS 39 adjustment; and
 
>   a £30 million charge arising from the UK product recall.
This was partially offset by the improved trading performance.
Currency movements had a £14 million (1%) unfavourable impact on profit from operations. The full-year impact of acquisitions, net of disposals, had a £26 million adverse impact primarily due to CSBG and Cadbury Nigeria.
Operating margin fell by 330 basis points to 12.2%. Excluding the impact of exchange, operating margin fell by 320 basis points. Excluding the impact of acquisitions and disposals (principally CSBG and Cadbury Nigeria) and exchange differences margins were 14.2%.
Marketing
Marketing spend was £693 million in 2006, a 2% increase at actual exchange rates and a 3% increase at constant exchange rates. Marketing spend as a percentage of revenues was 9% compared with 11% in the prior year. Confectionery marketing rose 4% in line with revenue growth. All of the reduction is attributable to the beverage business and primarily reflects the acquisition of CSBG which has a lower marketing to revenue ratio than the Group. In addition, following the acquisition of CSBG, we changed some of our marketing approach which resulted in some spend previously categorised as marketing spend becoming promotional spend (and deducted from revenue) as we are now managing the total route to market.
Restructuring costs
Costs in respect of business restructuring were £133 million compared with £71 million last year. In 2006, the business restructuring related to the continued execution of the Fuel for Growth cost reduction initiative and the integration of CSBG.
                 
    2006     2005  
    £m     £m  
 
Integrating Adams
          16  
Other Fuel for Growth projects in the base business
    123       55  
 
Total Fuel for Growth
    123       71  
CSBG integration
    10        
 
Restructuring costs
    133       71  
 
Of this total charge of £133 million, £70 million was redundancy related and £21 million related to external consulting costs. The remaining costs consisted of asset write-offs, site closure costs, relocation costs and contract termination costs.
Business segment analysis
More detailed information on the restructuring activities in each business segment is provided in the business segments performance section from pages 40 to 42. The table below details the business segment analysis of restructuring costs.
                 
    2006     2005  
Business segment analysis   £m     £m  
 
Americas Beverages
    21       6  
Americas Confectionery
    11       21  
EMEA
    65       21  
Asia Pacific
    15       15  
 
 
    112       63  
Central
    21       8  
 
Restructuring costs
    133       71  
 
The total Fuel for Growth restructuring spend from 2003 to 2006 amounted to £506 million, slightly above the total expected Fuel for Growth restructuring spend of £500 million.

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Amortisation and impairment of intangibles
Amortisation and impairment of intangibles at £38 million was £32 million higher than in 2005. This increase reflects the impairment of £15 million of goodwill relating to the Group’s investment in Cadbury Nigeria and the amortisation charge of £16 million arising on the definite life intangibles (brands and customer relationships) acquired with CSBG.
Non-trading items
During 2006, the Group recorded a net profit from non-trading items of £40 million compared to a profit of £25 million in 2005. The main items within non-trading items were:
>   Profit of £17 million on the sale and leaseback of a UK distribution centre;
 
>   Gain of £25 million arising from a factory insurance recovery following a fire in 2005 at our Monkhill confectionery business in the UK; and
 
>   Profits on disposal of £17 million relating to two non-core beverage brands in the US: Grandmas Molasses and Slush Puppie, which were offset by write-downs to recoverable amount on other non-core businesses classified as held for sale.
IAS 39 adjustment
Fair value accounting under IAS 39 resulted in a charge of £3 million. This principally reflects the fact that in 2006 spot commodity prices and exchange rates were higher than the rates implicit in the Group’s hedging arrangements.
(iii) Share of result in associates
In 2006, our share of the result of our associate businesses (net of interest and tax) was a loss of £16 million. This compares to a profit in 2005 of £28 million. Included in the current year loss is a £23 million charge representing our share of the accounting adjustments required to write-down overstated assets and recognise previously unrecognised liabilities following the discovery of the significant overstatement of results in Cadbury Nigeria over a number of years. Excluding this Cadbury Nigeria write-down, the share of associates’ profits has fallen by £21 million, principally reflecting the reclassification of CSBG and Cadbury Nigeria to subsidiaries.
(iv) Financing
The net financing charge at £155 million was £33 million lower than the prior year. The reduction in the charge reflects the impact of:
>   The overall reduction in net debt following acquisitions and disposals made during the year, principally the disposal of Europe Beverages and the acquisition of CSBG;
 
>   A reduction in average net debt arising from positive operating cash flows;
 
>   A £14 million increase in the IAS 19 pension credit arising primarily from increased asset returns; offset by
 
>   A £6 million increase in the IAS 39 charge and
 
>   A marginal increase in the net interest rate to 5.1%.
The reduced profit from operations (partially offset by a reduced interest charge) resulted in the Group’s interest cover falling to 5.0 times from 5.7 times in 2005.
(v) Taxation
Profit before tax from continuing operations fell by 12% to £738 million and by 10% at constant exchange rates million reflecting increased restructuring costs, amortisation and impairment of intangibles, UK product recall and adverse movement on the IAS 39 adjustment partially offset by the increased trading result. The continuing operations tax rate in 2006 was 29.1% as against 16.2% in 2005 giving a tax charge of £215 million in 2006 compared to £135 million in 2005. The increase in the tax rate reflects the absence of the initial recognition of deferred tax asset in the UK which was recognised in 2005 and an increased exposure of our tax charge to higher rate tax jurisdictions, in particular the US.
(vi) Discontinued operations: Europe, South Africa and Syria Beverages
Discontinued operations at £642 million included an insignificant contribution arising on the trading in the pre-disposal period and a net profit on disposal of our beverage businesses in Europe, South Africa and Syria of £591 million. In addition, a £51 million write-back of total tax provisions has been recorded following agreement with the UK tax authorities in respect of the disposal in 1997 of Coca-Cola & Schweppes Beverages, a UK bottling business and the disposal in 1999 of the Group’s beverage brands in 160 countries.
(vii) Minority interests
In 2006, the Group companies in which we do not own 100% contributed an aggregate loss to the Group. The minority interests share of these losses was £4 million, £15 million lower than the net profits attributable to minority interests in 2005. The movement was due to recognition of the minority interest share of the losses incurred by Cadbury Nigeria after our ownership interest increased to just over 50% and the reduction in the minority interests share in the profits of Kent, our Turkish confectionery business, following our purchase of a further 30% stake in the business.
(viii) Dividends
The Board has proposed a final dividend of 9.90 pence, up from 9.00 pence in 2005, an increase of 10%. Including the interim dividend of 4.10 pence, the total dividend for 2006 is 14.00 pence, an 8% increase on the 13.00 pence dividend in 2005. The dividend cover increased to 4.0 times from 2.9 times in 2005 reflecting the profit on disposal of Europe Beverages and increased continuing group earnings, offset by an increased dividend.

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(ix) Earnings per share
Basic reported earnings per share rose by 51.1% to 56.4 pence principally reflecting the profit on disposal of the Europe Beverage business.
(x) Effect of exchange rates and inflation on 2006 reported results
Over 80% of the Group’s revenues and profits in 2006 were generated outside the United Kingdom. The Group’s reported results have been affected by changes in the exchange rates used to translate the results of non-UK operations. In 2006 compared with 2005, the largest exchange rate impact on the Group’s results was the weakening in the US Dollar, the Australian Dollar and South African Rand.
In 2006, movements in exchange rates decreased the Group’s revenue by 1%, pre-tax profit by 2% and earnings per share by 2%. The impact on profit from operations was consistent with the impact on revenues.
General price inflation in countries where the Group has its most significant operations remained at a low level throughout the year and in general terms was within the 1% to 4% range. In certain developing markets, notably Venezuela, Turkey, Brazil, Russia, Nigeria and Argentina, the rate of inflation was significantly higher than this range, but the impact was not material to the Group results.
2. 2006 compared to 2005 – Business segments performance
Information used by management to make decisions
Regular monthly management accounts are produced for review by the Chief Executive’s Committee (CEC). These accounts are used by the CEC to make decisions and assess business performance.
The key performance measures, which are monitored on a Group wide and regional basis by the CEC, are:
>   Revenue
 
>   Underlying profit from operations
 
>   Underlying operating margins
 
>   Working Capital
 
>   Free Cash Flow
 
>   Net cash from operating activities (a key component of Free Cash Flow)
Explanation of management performance measures
Included within the above performance metrics are a number of management performance measurements, namely Underlying profit from operations, Underlying operating margins and Free Cash Flow.
Underlying earnings measures
As required by US GAAP, a segmental analysis of “Underlying profit from operations” is presented alongside profit from operations on pages F-7 to F-9 of the audited financial statements as well as a segment-by-segment reconciliation from Underlying profit from operations to the corresponding IFRS measure which is profit from operations. We calculate Underlying profit from operations, which is a non-GAAP measure, by adjusting profit from operations to exclude the effects of the following:
>   Restructuring costs
 
>   Non-trading items
 
>   Amortisation and impairment of intangibles
 
>   IAS 39 adjustment
 
>   Certain other items which do not reflect the Group's trading performance (in 2006, UK product recall and Nigeria adjustment)
Underlying operating margins are calculated by dividing Underlying profit from operations by revenue and expressing the result as a percentage.
In addition, as permitted under IAS 33 “Earnings per Share”, we present “Underlying earnings per share”, along with a reconciliation to earnings per share in Note 13 to the audited financial statements. We calculate Underlying earnings per share, which is a non-GAAP measure, by adjusting basic earnings per share to exclude the effects of the following:
>   Restructuring costs
 
>   Non-trading items
 
>   Amortisation and impairment of intangibles
 
>   IAS 39 adjustment
 
>   Certain other items which do not reflect the Group's trading performance (in 2006, UK product recall, Nigeria adjustment and tax disposal provision)
 
>   Tax effect of the above
The reconciling items between reported and Underlying performance measures are discussed in further detail below.
Restructuring costs
The costs we incurred in implementing the Fuel for Growth project and integrating acquired businesses are classified as restructuring costs. Our four year Fuel for Growth initiative aims to reduce direct and indirect annual costs by £360 million by 2007. Achieving these benefits is expected to require total restructuring spend of £500 million over the life of the project, with £300 million of capital expenditure.

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We view these costs as costs associated with investments in the future performance of the business and not part of the Underlying performance trends of the business. Hence these restructuring costs are separately disclosed in arriving at profit from operations on the face of the income statement.
Non-trading items

Our trade is the marketing, production and distribution of branded confectionery and beverage products. As part of our operations we may dispose of subsidiaries, associates, brands, investments and significant fixed assets that do not meet the requirements to be separately disclosed outside of continuing operations. These discrete activities form part of our operating activities and are reported in arriving at profit from operations. However, we do not consider these items to be part of our trading activities. The gains and losses on these discrete items can be significant and can give rise to gains or losses in different reporting periods. Consequently, these items can have a significant impact on the absolute amount of, and trend in, profit from operations and operating margins and are not included in the Underlying performance trends of the business.
Amortisation and impairment of intangibles

Our performance is driven by the performance of our brands, other acquisition intangibles and goodwill, some of which are predominantly internally generated (e.g. the Cadbury brand) and some of which have been acquired (e.g. the Adams brands). Certain of the acquired brands and other acquisition intangibles are assigned a finite life and result in an amortisation charge being recorded in arriving at profit from operations. There are no similar charges associated with our internally generated brands and other intangible assets. In addition, from time to time, the Group may be required to recognise impairments of intangibles and goodwill. No similar charges can occur from our organically grown businesses. We believe that excluding acquisition intangible amortisation and goodwill impairment from our measure of operating performance allows the operating performance of the businesses that were organically grown and those that have resulted from acquisitions to be analysed on a more comparable basis.
IAS 39 adjustment

We seek to apply IAS 39 hedge accounting to hedge relationships (principally under commodity contracts, foreign exchange forward contracts and interest rate swaps) where it is permissible and practical to do so, and it reduces overall volatility. Due to the nature of our hedging arrangements, in a number of circumstances, we are unable to obtain hedge accounting. We continue, however, to enter into these arrangements as they provide certainty of price and delivery for the commodities we purchase, the exchange rates applying to the foreign currency transactions we enter into and the interest rates that apply to our debt. These arrangements result in fixed and determined cash flows. We believe that these arrangements remain effective economic and commercial hedges.
The effect of not applying hedge accounting under IAS 39 means that the results reflect the actual rate of exchange and commodity price ruling on the date of a transaction regardless of the cash flow paid at the predetermined interest rate, rate of exchange and commodity price. In addition, the movement in the fair value of open contracts in the period is recognised in the financing charge for the period. Whilst the impacts described above could be highly volatile depending on movements in exchange rates, interest rates or commodity prices, this volatility will not be reflected in our cash flows, which will be based on the fixed or hedged rate. The volatility introduced as a result of hedge accounting under IAS 39 has been excluded from our Underlying performance measures to reflect the cash flows that occur under the Group’s hedging arrangements.
From time to time events occur which due to their size or nature are considered seperately when discussing the trading performance of the Group. The gains and losses on these discrete items can have a material impact on the absolute amount of, and trend in, the profit from operations and result for the year. Therefore any gains and losses on such items are analysed outside Underlying to enable the trends in the Underlying performance of the business to be understood. Where items are excluded from the Underlying result we provide additional information on these items to enable a full understanding of the events and their financial impact.
Certain other items which do not reflect the Group's trading performance

>   UK product recall – in 2006, the incremental direct costs (net of directly attributable insurance recoveries) incurred in recalling seven Cadbury branded product lines in the UK and two in Ireland have been excluded from the Underlying results of the Group. The impact on trading following the recall is included in Underlying results. Further details regarding the UK product recall are set out on page 34.
 
>   Nigeria – in 2006, the Group’s share of Cadbury Nigeria’s adjustments to reverse the historical over-statement of financial results has been excluded from the Underlying equity accounted share of result in associates on the grounds that these adjustments had accumulated over a period of years and were a consequence of deliberate financial irregularities. The charge is not considered to represent the Underlying trading performance of the business. Further details regarding the overstatement of results of the Group’s Nigerian business are set out on page 34.
 
>   Release of disposal tax provisions – in 2006, we reached agreement with the UK tax authorities as to the tax due in connection with the disposal in 1997 of Coca-Cola & Schweppes Beverages, a UK bottling business and the disposal in 1999 of the Group’s beverage brands in 160 countries. This has resulted in the release of unutilised provisions totalling £51 million within discontinued operations. The original disposal gains, net of tax, were treated as discontinued operations and excluded from the Underlying results in the relevant years. Consistent with the original treatment, the release of the unutilised provisions has been excluded from the Underlying earnings of the Group.
 
>   Recognition of UK deferred tax asset – in 2005, we recognised a deferred tax asset in the UK for the first time, which resulted in a £104 million credit to the 2005 taxation charge. As a consequence of its size and one-off nature, this amount has been excluded from the Underlying earnings of the Group.
In order to provide comparable earnings information the tax impact (where applicable) of the above items is also excluded in arriving at Underlying earnings. In addition, from time to time the Group may make intra-group transfers of the legal ownership of brands and other intangible assets. These transfers may give rise to deferred tax gains or losses which are excluded from the Underlying results.
For the reasons stated above, “Underlying profit from operations”, “Underlying earnings” and “Underlying earnings per share” are used by the Group for internal performance analysis. They are the primary information seen and used in any decision making process by the CEC. The Group also uses Underlying profit as a key component of its primary incentive compensation plans including the Annual Incentive Plan, the bonus scheme for all employees of the Group.

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“Underlying profit from operations”, “Underlying earnings” and “Underlying earnings per share” exclude certain costs, some of which affect the cash generation of the Group. Assessing and managing our performance on these measures alone might result in the concentration of greater effort on the control of those costs that are included in the Underlying performance measures. In order to mitigate this risk, we also manage the business, and set external targets for, cash flow. The costs of restructuring projects are deducted in arriving at the cash flow measures we use and hence the careful monitoring of these costs is ensured.
The CEC does not primarily review or analyse financial information on a GAAP basis for profit from operations, earnings or earnings per share. The CEC bases its performance analysis, decision making and employee incentive programmes based on “Underlying profit from operations”, “Underlying earnings” and “Underlying earnings per share”. For these reasons, and the other reasons noted above, we believe that these measures provide additional information on our Underlying performance trends to investors, prospective investors and investments analysts that should be provided alongside the equivalent GAAP measures.
For discussion on the Group’s cash flow measure used by the CEC, “Free Cash Flow”, see page 51.
Americas Beverages
                                         
            Base     Acquisitions/     Exchange        
Full year results (£m)   2005     business     Disposals     effects     2006  
 
Revenue
    1,781       62       738       (15 )     2,566  
 
 
            +3 %     +42 %     -1 %     +44 %
 
Underlying profit from operations
    524       35       29       (4 )     584  
 
 
            +7 %     +5 %     -1 %     +11 %
 
Underlying operating margins
    29.4 %                             22.8 %
 
– excluding CSBG
    29.4 %                             30.2 %
 
The results of Americas Beverages in 2006 were impacted by:
>   Good revenue growth despite declining volumes in US carbonated soft drinks market
 
>   Profit growth of 7% benefiting from innovation and alignment with bottling operation
 
>   The integration of CSBG on track
Americas Beverages delivered good revenue and profit growth despite declining volumes in the US carbonated soft drinks market, significant cost headwinds and considerable organisational change as the bottling acquisitions were integrated. Performance benefited both from further successful innovations and from the greater focus and alignment through our newly consolidated bottling operations.
In the US, our share of the carbonated soft drinks market grew by 60 basis points, the third successive year of share increases. Volumes and shares were ahead for nearly all of our key flavour brands – Dr Pepper, Sunkist, A&W and Canada Dry. 7 UP volumes were down for the year as a whole, but ahead 7% in the second half following its reformulation and relaunch as 7 UP Natural. Dr Pepper volumes benefited from continued gains in fountain, particularly for Diet Dr Pepper.
Non-carbonates revenues were up 2%, with the core four brands (Snapple, Mott’s, Hawaiian Punch and Clamato) ahead by 3%. Snapple was flat for the year as a whole with a better second half following the launch of a range of Snapple super-premium teas and improved distribution through CSBG.
Mexico continued to grow at more than 10% per annum although the second half was more difficult as competitive activity became more aggressive.
The integration of Dr Pepper/Seven Up Bottling Group and the other bottler and distribution businesses, now collectively known as Cadbury Schweppes Bottling Group or CSBG, is going well. The financial results for 2006 were in line with the acquisition case and we began to see the strategic benefits of the acquisition in terms of: reduced complexity and costs; aligned brand and channel strategies; and better engagement with and service to our retail partners. The performance of our brands through CSBG improved and growth in franchise brands such as Monster and Glaceau Vitamin Water remained strong.
Outside Underlying profit from operations were restructuring costs of £21 million. These costs reflected Fuel for Growth projects and £10 million charge relating to the integration of CSBG. Profit on non-trading items was £17 million representing the gains made on the disposal of non-core brands Grandma’s Molasses and Slush Puppie. The region also recorded an amortisation charge of £19 million relating primarily to the customer relationships and contracts acquired in the year as part of the CSBG transaction.
On 15 March 2007 the Group announced that it intends to separate its confectionery and Americas Beverages businesses.

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Americas Confectionery
                                         
            Base     Acquisitions/     Exchange        
Full year results (£m)   2005     business     Disposals     effects     2006  
 
Revenue
    1,228       92             10       1,330  
 
 
            +7 %           +1 %     +8 %
 
Underlying profit from operations
    172       34             1       207  
 
 
            +20 %                 +20 %
 
Underlying operating margins
    14.0 %                             15.6 %
 
The results of Americas Confectionery in 2006 were impacted by:
>   Revenue growth of 7%, driven by gum growth
 
>   Margin growth of 160bps following further improvements in Canada and Brazil
 
>   Emerging markets growth with revenue growth of 12%
Americas Confectionery had another excellent year with good results in nearly all its key markets. Further improvements in profitability in Canada and Brazil benefited margins, which were 160 basis points ahead.
Gum revenue growth was strong, notably in the US, where results were outstanding with our share growing 300 basis points in a market which grew by 8%. Flavour, packaging and format innovation on our main Trident brand and the launch of Stride in June were the key drivers of our share gain.
Halls growth in Latin America remained strong as we rolled out low-cost affordable offers through our well-established distribution networks. In the US, while Halls had a slow start as a result of a weak cough and cold season, performance improved in the fourth quarter following increased innovation and marketing support. Overall however, Halls growth was disappointing.
In Canada, profitability continues to benefit from our focus on a smaller, more profitable core range. However, the second half was impacted by significant structural change to the important wholesale trade.
Emerging markets continued to grow strongly up 12%, with an improved second half innovation programme in Mexico boosting performance.
Outside Underlying profit from operations were restructuring costs of £11 million. These costs reflect the completion of the spend on the Fuel for Growth initiative. Non-trading items contributed a loss of £14 million. This charge represented a write-down to recoverable value of the non-core element of our Canadian confectionery business which is classified as held for sale at 31 December 2006 following the announcement of our intention to dispose.
Europe, Middle East and Africa (EMEA)
                                         
            Base     Acquisitions/     Exchange        
Full year results (£m)   2005     business     Disposals     effects     2006  
 
Revenue
    2,257       19       61       (19 )     2,318  
 
 
            +1 %     +3 %     -1 %     +3 %
 
Underlying profit from operations
    328       (37 )     (11 )     (4 )     276  
 
 
            -11 %     -4 %     -1 %     -16 %
 
Underlying operating margins
    14.5 %                             11.9 %
 
– excluding Nigeria
    14.5 %                             12.8 %
 
The results of EMEA in 2006 were impacted by:
>   Lower revenue growth, reflecting the difficult year in the UK
 
>   Margin reduction due to challenging trading in UK and Russia and investment behind growth
 
>   Strong emerging market growth of 9% in Africa and the Middle East
In Europe, Middle East and Africa (“EMEA”), like-for-like revenues were only modestly ahead as a result of significant challenges in a number of markets. Profits were materially lower driven by declines in the base business and losses from Cadbury Nigeria where we moved to majority ownership. The profit reduction in the base business was due to difficult trading in the UK and Russia and by a significant increase in investment, particularly in the second half. We estimate that the product recall in the UK reduced revenues and Underlying profit from operations by £30-£35 million and £5-£10 million respectively. The profit impact was reduced by an insurance recovery.
In the UK, despite the poor third quarter which was impacted by the combination of the hot summer and the product recall, the confectionery market was broadly flat year-on-year. We maintained our share of the total market at 31% and our chocolate share at 34%. Our business benefited from the combination of strong performance in seasonal products, particularly at Easter, and increased innovation and marketing activity in the fourth quarter.
Our emerging market business in Africa and the Middle East grew by 9%. This was driven by South Africa where increased investment behind the expansion of our affordable confectionery offers across our entire confectionery range resulted in strong growth in chocolate, candy and gum.
Outside Underlying profit from operations were restructuring costs of £65 million. These costs include the rationalisation of our Irish production facilities (£29 million) and the reorganisation of the UK distribution facilities (£9 million). In addition, an

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impairment charge of £15 million relating to the goodwill held in respect of Cadbury Nigeria and £30 million charge relating to the UK product recall were recorded. Non-trading items contributed a gain of £38 million primarily related to a profit of £17 million on disposal of a UK distribution centre and an accounting gain of £25 million arising from a factory insurance recovery following a fire in 2005 at our Monkhill confectionery business in the UK.
Asia Pacific
                                         
            Base     Acquisitions/     Exchange        
Full year results (£m)   2005     business     Disposals     effects     2006  
 
Revenue
    1,157       84             (36 )     1,205  
 
 
            +7 %             -3 %     +4 %
 
Underlying profit from operations
    157       15             (7 )     165  
 
 
            +10 %             -5 %     +5 %
 
Underlying operating margins
    13.6 %                             13.7 %
 
The results of Asia Pacific in 2006 were impacted by:
>   Strong revenue growth of 7%, driven by emerging market growth of 17%
 
>   Margin improvement despite significant increase in commodity input costs
 
>   Market share gains across the region
Our Asia Pacific region had another good year with strong growth in both developed (+5%) and emerging markets (+17%). Margins were ahead in the year with operational leverage and continued tight cost control more than offsetting significant commodity headwinds.
In Australia, confectionery revenues grew by 5% with successful launches in premium and dark chocolate and continued growth of The Natural Confectionery Company range in candy. In beverages, we grew our share of non-carbonates following the relaunch of Spring Valley. In carbonates, while we lost share, the market grew strongly during the year and revenues were ahead by 5%.
In New Zealand, a 300 bps share gain was driven by strong growth in chocolate and candy. In Japan, although the gum market was soft, we grew our share by over 150 bps following the relaunch of Recaldent and Clorets.
In emerging markets, performance in India was exceptional with revenues ahead by over 20% as we increased innovation and marketing support behind the whole of our chocolate, candy and food beverage range. In South East Asia, our key markets of Thailand, Malaysia and Singapore performed well with strong top-line growth and share gains in each market. In Thailand, our share of gum rose by 300 bps to 61.6% driven by Trident sugar-free. During the year, we entered the Vietnamese market through a third party distribution arrangement.
Outside Underlying profit from operations were restructuring costs of £15 million. These costs were all incurred as part of our Fuel for Growth initiative and primarily related to head count reductions.
Central
                                         
            Base     Acquisitions/     Exchange        
Full year results (£m)   2005     business     Disposals     effects     2006  
 
Revenue
    9       (1 )                 8  
 
 
            -11 %                     -11 %
 
Underlying profit from operations
    (156 )     (3 )                 (159 )
 
 
            -2 %                 -2 %
 
Underlying operating margins
    n/a                               n/a  
 
Central revenue arises on the rendering of research and development services to third parties.
Central costs have remained broadly flat at £159 million.
Outside Underlying profit from operations were restructuring costs of £21 million. These costs were all incurred as part of our Fuel for Growth initiative and primarily relate to the IT transformation project and the outsourcing of shared business services.

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Operating review 2005 compared to 2004
Reference to “excluding the 53rd week” reflects the fact that in 2005, Cadbury Schweppes’ financial year consisted of 52 weeks. In 2004, Cadbury Schweppes had an additional week’s trading: the statutory results for 2004 were for the 53 weeks to 2 January 2005. The extra week in 2004 resulted in additional revenue and profit from operations compared to 2005. In order to provide more meaningful comparisons and consistent with the approach adopted in the prior year, estimates of the additional revenues and profits generated in the 53rd week of 2004 have been excluded from the analysis of base business (2004-52 weeks). Management believes this provides the most consistent Underlying 52 week like-for-like analysis. In 2004, it was not possible to quantify the exact profit impact of the 53rd week and in determining the impact on the prior year, management had to exercise judgement. Operating costs were allocated on a reasonable and consistent basis across the Group. These costs included direct costs allocated as a determinable gross margin percentage consistent with base business, costs separately identifiable as relating to the 53rd week and indirect costs pro-rated with additional days of sales. Interest has been adjusted for on a pro-rated basis. These adjustments were tax effected at the Group’s 2004 Underlying tax rate.
Executive summary
                                                 
Analysis of results           Base                          
            business     Estimated     Acquisitions/     Exchange        
    2004     growth     53rd week     Disposals     effects     2005  
    £m     £m     £m     £m     £m     £m  
 
Revenue
    6,012       372       (49 )     (6 )     103       6,432  
 
Change %
            +6 %     (1 %)     0 %     +2 %     +7 %
 
 
                                               
 
Profit from operations
    819       170       (11 )     2       15       995  
 
Change %
            +21 %     (2 %)     0 %     +2 %     +21 %
 
Basic EPS — continuing and discontinued
                                               
 
— Reported
    25.9p                                       37.3p  
 
The key highlights of 2005 were as follows:
>   Revenue growth ahead of goal ranges at 6.2% (5.4% including Europe Beverages)
 
>   6% confectionery growth: Trident +21%; Halls +9%; Cadbury Dairy Milk +7%
 
>   6% beverage growth: US carbonates outperform the market, driven by Dr Pepper
 
>   Operating margins +190bps reflecting reduced restructuring costs partially offset by a challenging cost environment
 
>   Profit before tax +31% at £835 million
 
>   Earnings per share +44% at 37.3 pence
 
>   Significant increase in Free Cash Flow to £404 million
 
>   Adams performance strong and growing ahead of the acquisition plan
 
>   Successful sale of Europe Beverages for 1.85 billion (£1.26 billion)
(except where stated all movements are at constant exchange rates and exclude the impact of the 53rd week in 2004)
1 Review of 2005 Group income statement
(i) Revenue
Revenue at £6,432 million was £420 million or 7% higher than 2004 sales of £6,012 million. The net effect of exchange movements during the year was to decrease reported revenue by £102 million, mainly driven by a strengthening in the Australian Dollar and Mexican Peso.
In 2005, acquisitions, net of disposals, resulted in a £6 million reduction in reported revenue relative to the prior year. The reduction was driven principally by the disposal of Piasten, our German confectionery business, offset by additional revenues arising following our acquisition of Green & Black’s. The absence of a 53rd week in 2005 reduced revenues by an estimated £49 million, or 1%.
Base business revenue grew £372 million or 6% driven by growth in all four of our business segments, led by the Americas Confectionery and Asia Pacific business segments. Growth was also broadly based across categories and brands. The growth rate was the highest growth rate for over a decade, as we began to see the benefits of our investments in our brands, capabilities and people.
Confectionery revenues grew by 6.3% reflecting a combination of healthy market growth and market share gains. We gained share in 16 out of our top 20 markets with innovation in all categories playing a key role.
All our major brands grew strongly during the year. The ex-Adams brands, including Halls, Trident, Dentyne and the Bubbas, continued to grow strongly with revenues up 11% (2004: +11%). Cadbury Dairy Milk revenues were 7% ahead as we rolled out the successful master-branding concept to Canada and South Africa. Trident grew by 21%, with sales growth boosted by the launch of Trident Splash, a centre-filled gum, in North America and a number of Continental European markets. Dentyne grew by 5% following the launch of Dentyne soft chew in the US and Canada, and the expansion of the brand into the Malaysian market. Halls revenues were ahead by 9%, benefiting from growth in the EMEA business segment where we continue to broaden Halls’ distribution by using our existing route to market.

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Emerging markets, which account for around 30% of our confectionery revenues, grew by 12% overall. All markets contributed to this performance with confectionery revenues ahead by 13% in Latin America; by 10% in Africa; by 32% in Russia and, by 11% in Asia Pacific. Developed market growth of 4% was driven by US, Canada, Australia and Japan. In the UK, a 2% rise in revenues was achieved in a year in which innovation activity was reduced to allow the business to focus on a major systems implementation programme. Green & Black’s (acquired in May 2005) continued to perform strongly with year-on-year revenue growth of 49%.
Our beverage businesses in the Americas and Australia grew sales by 6.2% during the year with all markets performing strongly. Our business in North America continued to reap the benefits of consolidating three separately run businesses into one. In Australia, we are leveraging our increased scale following the integration of our full system beverage business with our confectionery operations.
In the Americas, our US carbonates business significantly outperformed the market during the year with a 40 basis points increase in market share to 17.0%. Dr Pepper was the primary driver of performance with volumes ahead by 6% as Dr Pepper Cherry Vanilla (launched in late Q4 2004) moved into national distribution at the beginning of the year. Non-carbonate volumes in the US were up 5% with the improved performance reflecting our focus on core brands and some sell-in to the trade ahead of a January price increase. In Mexico, we continued to generate strong profitable growth with revenues up 14% in a competitive market. In Australia, we had another good year with sales up 7% as we focused on a smaller range of brands.
(ii) Profit from operations
Group profit from operations increased £176 million (21%) to £995 million compared to 2004. This was driven by an improved trading performance, reduced restructuring costs and the impact of the change in the fair value of our derivatives.
Currency movements had a £16 million (2%) favourable impact on Underlying profit from operations. The full-year impact of acquisitions, net of disposals, was minimal at £1 million as the Green & Black’s profits more than offset the impact of the Piasten disposal. The lack of the 53rd week in 2005 gave rise to an estimated £11 million reduction in Underlying profit from operations.
Operating margins increased by 190 basis points to 15.5% from 13.6%. Exchange rate movements had an insignificant impact on margins.
After excluding the impact of the 53rd week in 2004 margins grew by 180 basis points with Fuel for Growth savings of £90 million (excluding discontinued operations), £68 million of reduced restructuring spend and the £22 million credit arising from the adoption of IAS 39 being partially offset by sharply escalating raw material and oil related costs and higher investment behind growth initiatives. In 2005, we invested an additional £75 million in growth and capability related initiatives, including innovation, information technology, science and technology, commercial and sales force capabilities, and the understanding of our consumers.
Marketing
Marketing expenditure during the year was £680 million, an increase of £17 million (3%) over 2004. Changes in exchange rates contributed £10 million of this increase. This represents a marketing to sales ratio of 10.7%.
Restructuring costs
Costs in respect of business restructuring were £71 million compared with £139 million last year.
In 2005, all of the business restructuring related to the continued execution of the Fuel for Growth cost reduction initiative.
                 
    2005     2004  
    £m     £m  
 
Integrating Adams
    16       55  
Other Fuel for Growth projects in the base business
    55       53  
 
Total Fuel for Growth
    71       108  
Write down of IT assets
          31  
 
Restructuring costs
    71       139  
 
Of this total charge of £71 million, £37 million was redundancy related and £18 million related to external consulting costs. The remaining costs consisted of asset write-offs, site closure costs, relocation costs and contract termination costs.
Business segment analysis
More detailed information on the restructuring activities in each business segment is provided in the business segments performance section from pages 46 to 48. The table below details the business segment analysis of restructuring costs.
                 
    2005     2004  
Business segment analysis   £m     £m  
 
Americas Beverages
    6       23  
Americas Confectionery
    21       41  
EMEA
    21       21  
Asia Pacific
    15       18  
 
 
    63       103  
Central
    8       36  
 
 
    71       139  
 
The total Fuel for Growth restructuring spend undertaken to date amounts to £374 million, or 75% of the total expected Fuel for Growth restructuring spend of £500 million.

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Amortisation of brand intangibles
Amortisation of brand intangibles at £6 million was £1 million lower than in 2004.
Non-trading items
During 2005, the Group recorded a net profit from non-trading items of £25 million compared to a profit of £18 million in 2004. The main items within non-trading items were:
>   a £20 million profit from the disposal of Holland House Cooking Wines;
 
>   a loss of £1 million on the disposal of Piasten, our German confectionery subsidiary;
 
>   a net gain of £4 million on the sale of trade investments; and
 
>   a net profit of £2 million through disposals of surplus properties.
IAS 39 adjustment
Fair value accounting under IAS 39, which was adopted from 2 January 2005, resulted in a credit of £22 million to our reported results principally reflecting the fact that spot commodity prices and exchange rates were lower than the rates implicit in the Group’s hedging arrangements and as used in the Underlying results.
(iii) Share of result in associates
The Group’s share of profits in associates (net of interest and tax) at £28 million was £6 million higher than in 2004, with the year-on-year increase due to improved trading performance from our US bottling associate, Dr Pepper/Seven Up Bottling Group and the 5% increase in the Group’s stake in June 2005.
(iv) Financing
The net financing charge at £188 million was £17 million lower than the prior year. There is no net impact of IAS 39 adjustments on the net financing charge. The reduction in the charge reflects the impact of:
>   the incremental interest charges of £5 million resulting from the additional borrowing required to redeem the Group’s US$400 million Quarterly Income Preferred Stock (“QUIPS”) in April 2005; offset by:
 
>   a reduction in average net borrowing arising from positive operational cash flows in the year; and
 
>   the impact of exchange rates and the absence of the additional week relative to 2004.
The combination of a reduced interest charge and increased profit from operations resulted in the Group’s interest cover rising to 5.7 times from 4.4 times in 2004.
(v) Taxation
Profit before tax rose by 31% to £835 million reflecting the improved trading performance of the business, lower restructuring costs and the favourable impact of fair value accounting under IAS 39. In 2005, we have concluded that recognition of a net deferred tax asset in the UK is now appropriate. This has resulted in a credit of £104 million to the current year tax charge which has significantly reduced the reported tax charge of £135 million.
(vi) Discontinued operations
Revenue was £725 million, flat versus 2004, down 1% at constant exchange rates. Profit from operations of £106 million. represented a 9% increase, or 8% at constant currency. The 53rd week in 2004 had a negligible impact on the year-on-year comparatives. The key drivers of the improved performance were:
>   a £12 million reduction in restructuring costs; offset by
 
>   a £3 million decline from other factors reflecting a combination of weak markets in France and Spain and the management time spent on the sale process.
The net profit from discontinued operations of £76 million consists of profit from operations of £106 million (including restructuring costs of £15 million), financing cost of £1 million, taxation of £20 million and disposal costs of £9 million,
The reported tax charge for discontinued operations is £20 million representing a rate of approximately 19.0%. In connection with the disposal, the Group has recorded a deferred tax credit of £11 million arising on the transfer of certain intellectual property assets out of the discontinued operations prior to disposal that significantly reduced the reported tax rate.
(vii) Minority interests
Profit attributable to minority interests in 2005 of £11 million was £11 million lower than 2004. The decrease reflects the redemption of the Group’s $400 million Quarterly Income Preferred Stock (QUIPs) in April 2005.
(viii) Dividends
The final dividend was 9.00 pence in 2005, up from 8.70 pence in 2004, an increase of 3%. Including the interim dividend of 4.00 pence, the total dividend for 2005 was 13 pence, a 4% increase on the 12.5 pence dividend in 2004. The dividend cover increased to 2.9 times from 2.1 times in 2004.
(ix) Earnings per share
Basic earnings per share rose by 44% to 37.3 pence principally reflecting the improved business performance, the reduction in restructuring costs and the £104 million credit arising on the recognition of a deferred tax asset in the UK.

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(x) Effect of exchange rates and inflation on 2005 reported results
Over 80% of the Group’s revenues and profits in 2005 were generated outside the United Kingdom. The Group’s reported results have been affected by changes in the exchange rates used to translate the results of non-UK operations. In 2005 compared with 2004, the biggest exchange rate impact on the Group’s results was the strengthening in the Australian Dollar and Mexican Peso.
The overall impact of exchange rate movements on the Group’s revenue and profit growth is shown separately. In 2005, movements in exchange rates increased the Group’s revenue by 2%, pre-tax profit by 2% and earnings per share by 1%.
General price inflation in countries where the Group has its most significant operations remained at a low level throughout the year and in general terms was within the 1% to 3% range. In certain developing markets, notably Venezuela, Turkey, Brazil, Russia and Argentina, the rate of inflation was significantly higher than this range, but the impact was not material to the Group results.
2. 2005 compared to 2004 — Business segments performance
For an explanation of the underlying measures which are used by management to make decisions see page 38.
Americas Beverages
                                                 
            Base     Acquisitions/     53rd week     Exchange        
Full year results (£m)   2004     business     Disposals     est     effects     2005  
 
Revenue
    1,686       99             (19 )     15       1,781  
 
 
            +6 %           -1 %     +1 %     +6 %
 
Underlying profit from operations
    503       24             (6 )     3       524  
 
 
            +5 %           -1 %     0 %     +4 %
 
Underlying operating margins
    29.8 %                                     29.4 %
 
The results of Americas Beverages in 2005 were significantly impacted by:
>   Strong revenue performance with revenue growth of 6%
 
>   Margins adversely impacted by 40 basis points reflecting a challenging cost environment
 
>   Improved non-carbonated soft drinks performance in the US with revenue ahead 4%
 
>   Continued good growth in Mexican beverages where revenue grew by 14%
Americas Beverages had another good year. Revenues grew by 6% for the year and 7% in the second half reflecting the combination of strong carbonated soft drink performance and improving non-carbonated soft drink (non-CSD) sales.
In the USA, carbonated soft drink revenues rose by 6%. We outperformed the carbonated soft drink market for the second year in a row, gaining 40 basis points of share to 17.0%. Performance was driven by a 6% volume growth in Dr Pepper which benefited from the national roll-out of Dr Pepper Cherry Vanilla, strong growth in diets and fountain. Performance of our flavour brands was impacted by 7UP where volumes fell by 8%.
Non-carbonated soft drink performance in the USA improved through the year with revenues ahead by 4% in the year and 8% in the second half reflecting strong performance from the core four brands (Snapple, Mott’s, Clamato and Hawaiian Punch) and some buy-in by our customers ahead of price increases scheduled for the first quarter of 2006. Revenues in Mexico were up by 14%.
Margins were slightly lower year-on-year mainly due to the sharp increase in oil, glass, PET and transport related input costs. Price increases on our non-carbonated soft drink portfolio were taken in late 2005 and early 2006 in order to recover these cost increases.
Americas Confectionery
                                                 
            Base     Acquisitions/     53rd week     Exchange        
Full year results (£m)   2004     business     Disposals     est     effects     2005  
 
Revenue
    1,093       111             (3 )     27       1,228  
 
 
            +10 %     0 %     0 %     2 %     +12 %
 
Underlying profit from operations
    143       26             (1 )     4       172  
 
 
            +18 %     0 %     -1 %     3 %     +20 %
 
Underlying operating margins
    13.1 %                                     14.0 %
 
The results of Americas Confectionery in 2005 were significantly impacted by:
>   Excellent revenue growth of 10%, driven by power brands
 
>   Market share gains reflecting strong innovation pipeline
 
>   Continued margin improvement — led by Canada
 
>   Strong growth in emerging markets with revenue growth of 13%
Americas Confectionery had another excellent year with revenue ahead by 10% and margins up by 100 basis points to 14.0%. Performance was balanced across all territories and was driven by our five power brands, Trident, Dentyne, Halls, Cadbury and the Bubbas, which account for almost 70% of sales. Growth was particularly strong in Trident up 22%, where we had major innovation initiatives during the year including the launch of Trident Splash in the US and Canada.
In North America, revenue growth in the US of 11% was led by gum. A strong innovation pipeline, including the launch of Trident Splash and Dentyne soft chew drove healthy market share gains particularly in the second half. We gained 80 basis points of gum share during the year with the latest four week period over 300 basis points up at 30%. In Canada, branded revenue rose by 8% and total revenue by 4% reflecting a focus on a smaller range of profitable brands. This focus on more profitable growth led to over 150 basis points increase in margins in Canada.
In emerging markets, revenue grew by 13% with double-digit growth in all territories, including Mexico up 10% and Brazil up 15%.

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Strong margin performance was due to the combination of revenue growth, focus on profitable growth in Canada and the cost benefit arising from the successful execution of key Fuel for Growth projects including the consolidation of production in Brazil and the transfer of Halls production from Manchester to Canada and Colombia.
Outside Underlying profit from operations were restructuring costs of £21 million. These costs reflect the completion of the Adams integration projects in the US (£6 million), including the completion of the transition off the Pfizer shared services system. Restructuring costs in Canada (£9 million), reflected the costs of transition off the Pfizer shared services systems as well as the cost required to rationalise the Canadian brand range and packaging options. Further costs were incurred, mainly in Brazil, following the closure of the Cumbica site and transfer of production to Bauru.
Europe, Middle East and Africa (EMEA)
                                                 
            Base     Acquisitions/     53rd week     Exchange        
Full year results (£m)   2004     business     Disposals     est     effects     2005  
 
Revenue
    2,173       82       (7 )     (18 )     27       2,257  
 
 
            +4 %     0 %     -1 %     +1 %     4 %
 
Underlying profit from operations
    316       12       1       (3 )     2       328  
 
 
            +3 %     0 %     -1 %     +1 %     3 %
 
Underlying operating margins
    14.5 %                                     14.5 %
 
The results of EMEA in 2005 were significantly impacted by:
>   Revenue growth of 4%, driven by our emerging markets in Africa and Russia
 
>   Developed market revenue growth was modest, reflecting the difficult retail environment in Continental Europe
 
>   UK revenue ahead 2%, reflecting a planned reduction in innovation at the time of a major new IT implementation
 
>   Margins were flat year-on-year, with Fuel for Growth savings offset by IT implementation costs of £20 million in the UK
The 4% increase in revenue in the EMEA region was driven by our emerging market businesses in Africa and Russia, which in total grew by 11%. Developed market sales were modestly ahead reflecting the difficult retail environment in Continental Europe, particularly in France, and the planned reduction of innovation activity in the UK as we installed a major new information system.
In the UK, revenue was ahead by 2%. Our overall market share rose by 10 basis points due to a focus on the Maynard and Bassett master-brands in sugar and growth in premium chocolate. The Green & Black’s organic chocolate range grew year-on-year by 49%.
While Western European markets remain difficult, our focus on the growing gum and value-added sugar categories enabled our businesses in the region to register modest growth overall.
We grew our gum share in most countries, with share boosted by the highly successful launch of centre-filled gum under local brand names: such as Trident Splash in Greece; Hollywood Sweet Gum in France; and Stimorol Fusion in Sweden, Switzerland and Benelux.
Revenue in Russia rose by 32% benefiting from investments in upgrading the quality of our Dirol and Stimorol brands using Adams product technology and in sales force capabilities. Strong growth in South Africa was driven by the re-launch of Cadbury Dairy Milk.
Margins were flat year-on-year largely reflecting the £20 million cost of IT implementation in the UK. Fuel for Growth cost reduction projects included the final closures of the Manchester and Chesterfield plants in the UK, and our Adams Cape Town facility in South Africa.
Outside Underlying profit from operations were restructuring costs of £21 million. These costs include the expenses associated with the relocation our Irish gum production facilities from the existing Pfizer site (£5 million), headcount reductions in our South African (£3 million) and French (£3 million) supply chain operations, the completion of the closure of the Manchester and Chesterfield plants in the UK (£2 million) and the integration of our Spanish and Portuguese businesses (£2 million).

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Asia Pacific
                                                 
            Base     Acquisitions/     53rd week     Exchange        
Full year results (£m)   2004     business     Disposals     est     effects     2005  
 
Revenue
    1,050       81       1       (9 )     34       1,157  
 
 
            +8 %     0 %     -1 %     +3 %     +10 %
 
Underlying profit from operations
    134       19             (2 )     6       157  
 
 
            +14 %           -2 %     +5 %     +17 %
 
Underlying operating margins
    12.8 %                                     13.5 %
 
The results of Asia Pacific in 2005 were significantly impacted by:
>   Strong revenue growth of 8%
 
>   Developed market revenue growth of 7% and emerging markets ahead 11%
 
>   Good margin growth reflecting the benefits of cost reduction projects and a focus on profitable growth
Our business across the Asia Pacific region had an excellent year with a particularly strong second half performance. We had good results in both our developed and emerging market businesses which grew at 7% and 11% respectively. Shares were increased in most major markets and all categories showed good growth in revenues.
Our confectionery operations in Australia and New Zealand grew revenues by 7% following a number of highly successful new product launches in Australia (Cadbury Caramel Whip, Boost and Brunch Bar) and share recovery in New Zealand. Our beverage business in Australia grew revenues by 7% despite discontinuing a number of its smaller less profitable brands.
In Japan, innovation in gum, particularly in the Clorets and Whiteen brands, led to a 140 basis point increase in share to 16.8% and a further improvement in margins.
In emerging markets, India grew strongly with revenue up 14% and chocolate share ahead by 120 basis points to 70.5%. Performance was also boosted by a resurgence in our business in Pakistan. In South East Asia, we continued to extend our share leadership in gum in Thailand (by 80 basis points to 58.9%), driven by the focus on sugar-free gum. The successful launch of Dentyne in Malaysia, using product sourced from our Thailand operations, saw our gum share increase by nearly 10 percentage points to 17.0%. In China, where we have been refocusing the business, revenue was 11% ahead as we relaunched our Cadbury Dairy Milk range of products.
Margins in the region were 80 basis points ahead due to the benefits of cost reduction projects and a focus on profitable growth. Key efficiency projects during the year included supply chain optimisation in Australia and New Zealand; manufacturing consolidation in China; and automation of Bournvita production in India.
Outside Underlying profit from operations were restructuring costs of £15 million. The main costs arose from headcount reductions in the Australian and New Zealand supply chain operations (£6 million), in the Indian supply chain operations (£5 million) and the reorganisation of the Chinese route-to-market (£2 million).
Central
                                                 
            Base     Acquisitions/     53rd week     Exchange        
Full year results (£m)   2004     business     Disposals     est     effects     2005  
 
Revenue
    10       (1 )                       9  
 
 
            -10 %                       -10 %
 
Underlying profit from operations
    (149 )     (8 )           1             (156 )
 
 
            -5 %           0 %           -5 %
 
Underlying operating margins
    n/a                                       n/a  
 
Central revenue arises on the rendering of research and development services to third parties. Central costs have increased from £149 million to £156 million, principally reflecting incremental investments in innovation and capabilities, notably the Building Commercial Capabilities programme.

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Capital structure and resources
Capital structure
During 2006, our market capitalisation remained largely unchanged at approximately £11.4 billion. The impact of a 4 pence decrease in the share price during the year to 546 pence at 31 December 2006 (550 pence at 1 January 2006) was offset by the issuance of 10.7 million shares to satisfy employee share awards. Net debt decreased during the year from £3,900 million at the end of 2005 to £2,909 million at the end of 2006, reflecting principally disposal proceeds from Europe Beverages.
We continue to proactively manage our capital structure to maximise shareowner value, whilst maintaining flexibility to take advantage of opportunities which arise, to grow our business. One element of our strategy is to make targeted, value-enhancing acquisitions. It is intended that these will, where possible, be funded from cash flow and increased borrowings. The availability of suitable acquisitions, at acceptable prices is, however, unpredictable. Accordingly, in order to maintain flexibility to manage the capital structure, the Company has sought, and been given, shareholders approval to buy back shares as and if appropriate. This authority has only been used once, in 1999, when 24 million shares (representing approximately 1% of the Company’s equity) were purchased. Renewal of this authority will be sought at the Annual General Meeting in May 2007. Additionally, many of the obligations under our share plans described in Note 26 to the financial statements will be satisfied by existing shares purchased in the market by the Cadbury Schweppes Employee Trust (the “Employee Trust”) rather than by newly issued shares. The Employee Trust purchased £50 million shares during 2006 (none in 2005) and held 19 million shares at the end of 2006, representing approximately 0.9% of the Company’s issued share capital.
Borrowings
At the end of 2006, the total of gross short-term and long-term borrowings was £3,304 million compared with £4,279 million at the end of 2005. Cash and cash equivalents decreased to £269 million at the end of 2006 compared to £332 million at the end of 2005. Our borrowings, net of cash and cash equivalents and short-term investments, decreased to £2,909 million at the end of 2006, from £3,900 million at the end of 2005. The reduction has been driven by the net proceeds from disposals (principally Europe, South Africa and Syria beverages) offset by acquisitions (principally CSBG) and the Free Cash Flow for the period. At the end of 2006 £1,843 million of our gross debt was due after one year, however, 68% of the £1,461 million of debt due within one year was supported by undrawn committed facilities of £1 billion maturing after more than one year.
Gearing is calculated as follows:
                         
    2006     2005     2004  
    £m     £m     £m  
 
Net debt (see page 50)
    2,909       3,900       3,870  
 
Ordinary shareholders’ funds
    3,688       3,008       2,071  
 
Equity minority interests
    8       27       21  
 
 
    3,696       3,035       2,092  
 
Gearing ratio %
    79       129       185  
 
At the end of 2006, 75% of our net borrowings were either at fixed rates or converted to fixed rates through the use of interest rate swaps. It should be noted, however, that the year end is the low point in our seasonal borrowing cycle. Further information on our use of derivative financial instruments is given below. The reduced profit from operations (partially offset by a reduced interest charge) resulted in the Group’s interest cover falling to 5.0 times from 5.7 times in 2005.
At 31 December 2006, we had undrawn committed borrowing facilities of £1 billion. This relates to a revolving credit facility, which matures in 2010. The interest rates payable on this borrowing facility are LIBOR plus 0.225% to 0.375% per annum. This facility is subject to customary covenants and events of default, none of which are currently anticipated to affect our operations. In view of our committed facilities, cash and cash equivalents, short-term investments and cash flow from operations, we believe that there are sufficient funds available to meet our anticipated cash flow requirements for the foreseeable future.
Our long-term credit rating remained unchanged during 2006 at BBB.
For 2007, debt levels at constant currencies are expected to reduce following further operational cash inflows. The Group’s debt is largely denominated in foreign currencies (see page F-48).
The Group’s debt will depend on future movements in foreign exchange rates, principally the US Dollar and the Euro.

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Details of the currency and interest rate profile of our borrowings are disclosed on page F-50 to the financial statements.
Net debt
References to “Net debt” refer to the total borrowings of our business, including both short-term and long-term bank loans, bonds and finance leases, after offsetting the cash and cash equivalents held by the business and our short-term investments.
The table below reconciles Net debt, as we define it, to the corresponding IFRS balance sheet captions.
                         
    2006     2005     2004  
    £m     £m     £m  
 
Short-term investments
    126       47       21  
Cash and cash equivalents
    269       332       325  
Short-term borrowings and overdrafts
    (1,439 )     (1,194 )     (610 )
Obligations under finance leases
    (22 )     (20 )     (20 )
Borrowings – non current
    (1,810 )     (3,022 )     (3,520 )
Obligations under finance lease- non current
    (33 )     (43 )     (66 )
 
Net debt
    (2,909 )     (3,900 )     (3,870 )
 
“Net debt” is not a defined term under IFRS or US Generally Accepted Accounting Principles (US GAAP) and may not therefore be comparable with other similarly titled non-GAAP debt measures reported by other companies. Net debt is the measure we use for internal debt analysis. We believe that Net debt is a useful measure as it indicates the level of indebtedness after taking account of the financial assets within our business that could be utilised to pay down debt. In addition the net debt balance provides an indication of the net borrowings on which we are required to pay interest.
Contractual obligations
As at 31 December 2006:
Contractual obligations
                                         
    Payments due by period  
    Total     <1 year     1-3 years     3-5 years     5 years +  
    £m     £m     £m     £m     £m  
 
Bank loans and overdrafts
    297       167       60       69       1  
Estimated Interest payments — borrowings
    303       93       69       95       46  
Estimated Interest payments — interest rate swaps
    110       74       36              
Finance leases
    55       22       25       4       4  
Other borrowings
    2,952       1,272       1,095       77       508  
Operating leases
    380       66       107       83       124  
Purchase obligations
    300       273       27              
Expected payments into pension plans
    358       120       238              
Other non-current liabilities
    53             53              
 
Total
    4,808       2,087       1,710       328       683  
 
Estimated future interest rate payments on borrowings are based on the applicable fixed and floating rates of interest as at the end of the year for all borrowings or interest rate swap liabilities. The interest obligations in the above table have been calculated assuming that all borrowings and swaps in existence at year end will be held to maturity and are on a constant currency basis.
Other non-current liabilities comprise trade and other payables, tax payable and long term provisions. Deferred tax liabilities have not been included within other non-current liabilities as these are not contractual obligations that will be settled by cash payment.
Expected payments into pension plans represents the best current estimate of the payments to be made into the scheme over the next three years. We do not believe that it is possible to estimate with any accuracy the contribution rates that will arise subsequent to this valuation.
The Company has guaranteed borrowings and other liabilities of certain subsidiary undertakings, the amounts outstanding and recognised on the Group Balance Sheet at 31 December 2006 being £3,520 million (2005: £4,064 million). In addition certain of the Company’s subsidiaries have guaranteed borrowings of certain other subsidiaries. The amount covered by such arrangements as at 31 December 2006 was £2,658 million (2005: £3,607 million). Subsidiary undertakings have guarantees and indemnities outstanding amounting to £14 million (2005: £14 million).
Off balance sheet arrangements
The Group has no off balance sheet arrangements.

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Cash Flows
Free Cash Flow
We define Free Cash Flow as the amount of cash generated by the business after meeting all our obligations for interest, tax and dividends and after all capital investment excluding share sales or purchases by the Employee Trust (see page F-58).
“Free Cash Flow” is not a defined term under IFRS or US generally Accepted Accounting Principles (US GAAP) and may not therefore be comparable with other similarly titled non-GAAP cash flow measures reported by other companies. Free Cash Flow is the measure we use for internal cash flow performance analysis and is the primary cash flow measure seen and used by the CEC. We believe that Free Cash Flow is a useful measure because it shows the amount of cash flow remaining after the cash generated by the Group through operations has been used to meet purposes over which the Group has little or no discretion such as interest and taxation costs or those which are characteristic of a continuing business, for example capital expenditure and dividends. Free Cash Flow therefore represents the amount of cash generated in the year by the business and provides investors with an indication of the net cash flows generated that may be used for or are required to be funded by other discretionary purposes such as investment in acquisitions, business disposals and the drawing and repayment of financing.
                         
    2006     2005     2004  
 
  £m     £m     £m  
 
Net cash from operating activities
    620       891       745  
Add back
                 
Additional funding of past service pensions deficit
    67     31    
Income taxes paid on disposals
    83        
Less:
           
Net capital expenditure
    (300 )     (261 )     (259 )
Net dividends paid
    (270 )     (257 )     (257 )
Free Cash Flow
    200     404     229
 
Net capital expenditure includes purchases of property, plant and equipment (£384 million) less proceeds on disposal of property, plant and equipment (£84 million). Net dividends paid includes dividends paid (£272 million), dividends paid to minority interests (£4 million) less dividends received from associates (£6 million).
We generated Free Cash Flow (after dividend payments) of £200 million, a decrease of £204 million compared to 2005 when Free Cash Flow was £404 million (2004: £229 million).
At the exchange rate ruling in 2003 (the year when the £1.5 billion Free Cash Flow target was set), Free Cash Flow was £242 million, taking cumulative Free Cash Flow to £957 million.
The Free Cash Flow has been adversely impacted by £100 million of one off items, including CSBG, Cadbury Nigeria and the product recall, increases in the tax paid in the year, higher capital expenditure and dividend payments. We remain strongly cash generative, reflecting the high margin and cash generative nature of the Group’s business.
Net cash flow from operating activities as shown in the cash flow statement on page F-6 was £620 million (2005: £891 million; 2004: £745 million).
Cash flows on acquisitions and disposals
The net cash inflow in 2006 on acquisitions and disposals was £898 million. This comprised £1,295 million of proceeds from disposals offset by acquisitions of £375 million, principally the purchase of the remaining 55% of the share capital of CSBG for £201 million.
The cash outflow in 2005 on acquisitions was £71 million. This included the acquisition of Green & Black’s and the final settlement in respect of the purchase of Adams China. In addition we purchased an incremental 5% share in our associate, Dr Pepper/Seven Up Bottling Group and acquired a further investment in our Nigerian associate, taking ownership closer to majority. Disposal proceeds of £41 million arose on the disposal of our investment in Gumlink, a Danish gum production business, and Holland House Cooking Wines, a US beverages brand.
The cash outflow in 2004 on acquisitions was £62 million. This included the acquisition of the balance of Orangina from Pernod Ricard and the completion of the purchase of the Adams Confectionery business in China from Pfizer Inc. Disposal proceeds of £11 million arose principally from the disposal of the South African food division.
Net cash flow before financing in 2006 was £1,142 million (2005: £583 million; 2004: £550 million).
Financing cash flows
The net cash outflow from financing during 2006 was £1,212 million. This included payment of dividends of £272 million to shareholders. In the year net repayments of borrowings were £949 million.
The net cash outflow from financing during 2005 was £592 million. This included payment of dividends of £261 million to shareholders. In the year borrowings of £193 million were repaid. This was offset by the £219 million of incremental borrowings required to repay the Group’s US$400 million Quarterly Income Preferred Securities (QUIPs).
The net cash outflow from financing during 2004 was £539 million. The most significant element of this was the payment of dividends of £246 million and the net repayment of borrowings of £397 million.
Net cash
Cash and cash equivalents (net of overdrafts) increased during 2006 by £90 million to £186 million and decreased during 2005 by £8 million to £276 million. We invest our cash predominantly in instruments with investment grade credit ratings and the maximum exposure to any single counterparty is strictly limited.

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Capital expenditure
Capital expenditure in 2006 was £384 million (2005: £298 million; 2004: £285 million), an increase of 29% over the level of expenditure in 2005. Key areas of capital expenditure increase related principally to CSBG (where, as we envisaged at the time of the acquisition, we need to increase capital investment to deliver the acquisition case) and investment in the production capacity and facilities of the Group, in particular gum capacity. All these projects were funded from internal resources.
For 2007 we expect capital spend to be between 5% and 5.5% of revenue. At 31 December 2006 we had capital commitments of £11 million. We expect to continue to fund this from internal resources.
Treasury risk management
We are exposed to market risks arising from our international business. Derivative financial instruments are utilised to lower funding costs, to diversify sources of funding, to alter interest rate exposures arising from mismatches between assets and liabilities or to achieve greater certainty of future costs. These instruments are entered into in accordance with policies approved by the Board of Directors and are subject to regular review. Other than as expressly stated, the policies set out below apply to prior years as well as being forward looking.
Substantially all financial instruments economically hedge specifically identified actual or anticipated transactions; movements in their fair value are highly negatively correlated with movements in the fair value of the transactions being hedged and the term of such instruments is not greater than the term of such transactions or any anticipated refinancing or extension of them. Such anticipated transactions are all in the normal course of business and we are of the opinion that it is highly probable that they will occur. However, such transactions do not always meet the stringent conditions prescribed by IAS 39 to obtain hedge accounting.
(i) Liquidity risk
We seek to achieve a balance between certainty of funding, even at difficult times for the markets or ourselves, and a flexible, cost-effective borrowings structure. Consequently the policy seeks to ensure that all projected net borrowing needs are covered by committed facilities. The objective for debt maturities is to ensure that the amount of debt maturing in any one year is not beyond our means to repay and refinance. To this end the policy provides that at least 75% of year-end net debt should have a maturity of one year or more and at least 50%, three years or more. Committed but undrawn facilities are taken into account for this test.
(ii) Interest rate risk
We have an exposure to interest rate fluctuations on our borrowings and manage these by the use of interest rate swaps, cross currency interest rate swaps and forward rate agreements. The objectives for the mix between fixed and floating rate borrowings are set to reduce the impact of an upward change in interest rates while enabling benefits to be enjoyed if interest rates fall.
The policy sets minimum and maximum levels of the total of net debt and preferred securities permitted to be at fixed or capped rates in various time bands, ranging from 50% to 100% for the period up to six months, to 0% to 30% when over five years. These percentages are measured with reference to the current annual average level of debt.
75% of net debt was at fixed rates of interest at the year end (2005: 84%; 2004: 85%). Assuming no changes to the borrowings or hedges, we estimate that a rise of 1 percentage point in interest rates in all currencies in which we have borrowings would have affected 2006 profit before tax by 2% (2005: less than 1%; 2004: 2%).
(iii) Currency risk
We operate internationally giving rise to exposure from changes in foreign exchange rates, particularly the US dollar. We do not hedge translation exposure and earnings because any benefit obtained from such hedging can only be temporary.
We seek to relate the structure of borrowings to the trading cash flows that service them. Our policy is to maintain broadly similar fixed charge cover ratios for each currency bloc and to ensure that the ratio for any currency bloc does not fall below two times in any calendar year. This is achieved by raising funds in different currencies and through the use of hedging instruments such as swaps.
Based on our results for the year ended 31 December 2006, a 1% fluctuation in the value of sterling relative to each of the other currencies in the countries in which we sell our products would result in a £63 million and £9 million change in our revenues and profit from operations respectively.
We also have transactional currency exposures arising from our international trade. Our policy is to take forward cover for all forecasted receipts and payments for as far ahead as the pricing structures are committed, subject to a minimum of three months’ cover. We make use of the forward foreign exchange markets to hedge these exposures.
While there are exchange control restrictions which affect the ability of certain of our subsidiaries to transfer funds to the UK, the operations affected by such restrictions are not material to our business as a whole and we do not believe such restrictions have had or will have any material adverse impact on our business as a whole or our ability to meet our cash flow requirements.

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(iv) Fair value analysis
The table below presents the changes in fair value of our financial instruments to hypothetical changes in market rates. The fair values are quoted market prices or, if not available, values estimated by discounting future cash flows to net present values.
The change in fair values for interest rate movements assumes an instantaneous 1% (100 basis points) decrease in interest rates of all currencies, from their levels at 31 December 2006, with all other variables remaining constant. The change in fair values for exchange rate movements assumes an instantaneous 10% weakening in sterling against all other currencies, from their levels at 31 December 2006, with all other variables remaining constant. Further information on fair values is set out in Note 28 to the Financial Statements.
The sensitivity analysis below shows forward-looking projections of market risk assuming certain adverse market conditions occur for all financial instruments except commodities. This is a method of analysis used to assess and mitigate risk and should not be considered a projection of likely future events and losses. Actual results and market conditions in the future may be materially different from those projected and changes in the instruments held and in the financial markets in which we operate could cause losses to exceed the amounts projected.
As at 31 December 2006:
                         
    Fair value changes arising from  
                    10% weakening  
                    in £ against  
            1% decrease in     other  
            interest rates     currencies  
            favourable/     favourable/  
    Fair Value     (unfavourable)     (unfavourable)  
    £m     £m     £m  
 
Cash-cash equivalents
    269             14  
 
Short-term investments
    126             11  
 
Borrowings
    (3,277 )     55       304  
 
Currency and interest rate swaps
    10       (1 )     1  
 
Interest rate swaps
    (4 )     2        
 
Currency exchange contracts (including embedded derivatives)
    10             1  
 
As at 1 January 2006:
                         
    Fair value changes arising from  
                    10% weakening  
                    in £ against  
            1% decrease in     other  
            interest rates     currencies  
            favourable/     favourable/  
    Fair Value     (unfavourable)     (unfavourable)  
    £m     £m     £m  
 
Cash-cash equivalents
    332             19  
 
Short-term investments
    47             4  
 
Borrowings
    (4,277 )     (96 )     (364 )
 
Currency and interest rate swaps
    11       2       1  
 
Interest rate swaps
    (9 )     (6 )     (1 )
 
Currency exchange contracts (including embedded derivatives)
    (2 )           4  
 
As at 2 January 2005:
                         
    Fair value changes arising from  
                    10% weakening  
                    in £ against  
            1% decrease in     other  
            interest rates     currencies  
            favourable/     favourable/  
    Fair Value     (unfavourable)     (unfavourable)  
    £m     £m     £m  
 
Cash-cash equivalents
    201             17  
 
Short-term investments
    145             8  
 
Debt
    (4,254 )     (97 )     (312 )
 
Currency and interest rate swaps
    (5 )     4       20  
 
Interest rate swaps
    (25 )     (28 )     (2 )
 
Currency exchange contracts
    (10 )           32  
 
Quarterly Income Preferred Securities (see Note 30)
    (219 )     (2 )     (22 )
 

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(v) Commodities
In respect of commodities the Group enters into derivative contracts for cocoa, sugar, aluminium and other commodities in order to provide a stable cost base for marketing finished products. The use of commodity derivative contracts enables the Group to obtain the benefit of guaranteed contract performance on firm priced contracts offered by banks, the exchanges and their clearing houses.
The Group held the following commodity futures contracts at 31 December 2006:
                         
    2006     2005     2004  
    Fair     Fair     Fair  
    value     value     value  
    £m     £m     £m  
 
Commodities (asset)
    3       13       5  
 
Commodities (liabilities)
    (5 )     (1 )     (7 )
 
Total £ equivalent notional
    (2 )     12       (2 )
 
Commodity derivative contracts were held in Sterling and US dollars. The equivalent notional value of commodities held at the year-end increased from £135 million in 2005 to £160 million in 2006, the majority of which matures within one year.
The commodities derivative contracts held by the Group at the year-end expose the Group to adverse movements in cash flow and gains or losses due to the market risk arising from changes in prices for sugar, cocoa, aluminium and other commodities traded on commodity exchanges. Applying a reasonable adverse movement in commodity prices to the Group’s net commodity positions held at the year end would result in a decrease in fair value of £7.0 million (2005: £6.8 million; 2004: £11.6 million). The price sensitivity applied in this case is estimated based on an absolute average of historical monthly changes in prices in the Group’s commodities over a two year period. Stocks, priced forward contracts and estimated anticipated purchases are not included in the calculations of the sensitivity analysis. This method of analysis is used to assess and mitigate risk and should not be considered a projection of likely future events and losses. Actual results and market conditions in the future may be materially different from the projection in this note and changes in the instruments held and in the commodities markets in which the Group operates could cause losses to exceed the amounts projected.
(vi) Credit risk
We are exposed to credit related losses in the event of non-performance by counterparties to financial instruments, but we do not expect any counterparties to fail to meet their obligations given our policy of selecting only counterparties with high credit ratings. The credit exposure of interest rate and foreign exchange derivative contracts is represented by the fair value of contracts with a net positive fair value at the reporting date.
Review of accounting policies
Critical accounting estimates
The preparation of our financial statements in conformity with IFRS and US GAAP, require management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and revenue and expenses during the period. Our significant accounting policies are presented in the notes to the financial statements.
Critical accounting estimates are those that are most important to the portrayal of our financial condition, results of operations and cash flow, and require management to make difficult, subjective or complex judgements and estimates about matters that are inherently uncertain. Management bases its estimates on historical experience and other assumptions that it believes are reasonable. Our critical accounting estimates are discussed below.
Actual results could differ from estimates used in employing the critical accounting policies and these could have a material impact on our results. We also have other policies that are considered key accounting policies, such as the policies for revenue recognition, cost capitalisation and cocoa accounting. However, these policies, which are discussed in the notes to the Group’s financial statements, do not meet the definition of critical accounting estimates, because they do not generally require estimates to be made or judgements that are difficult or subjective.
(i) Brands and other acquisition intangibles
Brands and other intangibles that are acquired through acquisition are capitalised on the balance sheet. These brands and other intangibles are valued on acquisition using a discounted cash flow methodology and we make assumptions and estimates regarding future revenue growth, prices, marketing costs and economic factors in valuing a brand. These assumptions reflect management’s best estimates but these estimates involve inherent uncertainties, which may not be controlled by management.
Upon acquisition we assess the useful economic life of the brands and intangibles. We do not amortise over 99% of our brands by value. In arriving at the conclusion that a brand has an indefinite life, management considers the fact that we are a brands business and expects to acquire, hold and support brands for an indefinite period. We support our brands through spending on consumer marketing and through significant investment in promotional support, which is deducted in arriving at revenue. Many of our brands were established over 50 years ago and continue to provide considerable economic benefits today. We also consider factors such as our ability to continue to protect the legal rights that arise from these brand names indefinitely or the absence of any regulatory, economic or competitive factors that could truncate the life of the brand name. No amortisation is charged on franchise rights acquired through acquisitions where the rights relate to brands owned by the Group and there brands have been assigned an indefinite life. This is because the Group believes that these rights will extend indefinitely. Where we do not consider these criteria to have been met, as was the case with certain brands acquired with Adams and CSBG, a definite life is assigned and the value is amortised over the life.

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The cost of brands and other acquisition intangibles with a finite life are amortised using a methodology that matches management’s estimate of how the benefit of the assets will be extinguished. Each year we re-evaluate the remaining useful life of the brands and other intangibles. If the estimate of the remaining useful life changes, the remaining carrying value is amortised prospectively over that revised remaining useful life.
A strategic decision to withdraw marketing support from a particular brand or the weakening in a brand’s appeal through changes in customer preferences might result in management concluding that the brand’s life had become finite. Were intangible assets to be assigned a definite life, a charge would be recorded that would reduce reported profit from operations and reduce the value of the assets reported in the balance sheet. We have consistently applied our estimate of indefinite brand lives since the date we first recognised brands as intangible assets in 1989 except for one brand where we amended our original estimate from an indefinite life to a definite life asset as the products had been re-branded.
(ii) Recoverability of long-lived assets
We have significant long-lived asset balances, including intangible assets, goodwill and tangible fixed assets. Where we consider the life of intangible assets and goodwill to be indefinite the balance must be assessed for recoverability on at least an annual basis. In other circumstances the balance must be assessed for recoverability if events occur that provide indications of impairment. An assessment of recoverability involves comparing the carrying value of the asset with its recoverable amount, typically its value in use. If the value in use of a long-lived asset were determined to be less than its carrying value, as is the case for Cadbury Nigeria as at 31 December 2006, an impairment is charged to the income statement.
The key assumptions applied in arriving at a value in use for a long-lived asset are:

> The estimated future cash flows that will be derived from the asset; and

> The discount rate to be applied in arriving at a present value for these future cash flows.
(iii) Future cash flows
In estimating the future cash flows that will be derived from an asset, we make estimates regarding future revenue growth and profit margins for the relevant assets. These estimates are based on historical data, various internal estimates and a variety of external sources and are developed as part of the long-term planning process. Such estimates are subject to change as a result of changing economic and competitive conditions, including consumer trends. Higher estimates of the future cash flows will increase the fair values of assets. Conversely, lower estimates of cash flows will decrease the fair value of assets and increase the risk of impairment. We attempt to make the most appropriate estimates of future cash flows but actual cash flows may be greater or less than originally predicted.
(iv) Discount rates
The future cash flows are discounted at rates that we estimate to be the risk adjusted cost of capital for the particular asset. An increase in the discount rate will reduce the fair value of the long-lived assets, which could result in the fair value falling below the assets carrying value and an impairment being realised as part of the annual impairment review. On the other hand a decrease in the discount rate will increase the fair value of the long-lived assets and decrease the likelihood of impairment.
Future changes in interest rates, the premium the capital markets place on equity investments relative to risk-free investments and the specific assessment of the capital markets as to our risk relative to other companies can all affect our discount rate. Increases in interest rates and/or the risk premium applied by the capital markets would both result in increased discount rates. Conversely a reduction in interest rates and/or the risk premium applied by the capital markets would both result in decreased discount rates. These factors are largely outside of our control or ability to predict. For the past five years management has applied a Group discount rate of between 8.0% and 8.5%.
Where applicable, we review the reasonableness of all assumptions by reference to available market data including, where applicable, the publicly quoted share price of the Company. Changes in the assumptions used by management can have a significant impact on the estimated fair value of assets and hence on the need for, or the size of, an impairment charge.

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(v) Trade spend and promotions
Accrued liabilities associated with marketing promotion programmes require difficult subjective judgements. We utilise numerous trade promotions and consumer coupon programmes. The costs of these programmes are recognised as a reduction to revenue with a corresponding accrued liability based on estimates made at the time of shipment or coupon release. The accrued liability for marketing promotions is determined through analysis of programmes, historical trends, expectations around customer and consumer participation, revenue and payment trends, and experiences of payment patterns associated with similar programmes that have previously been offered, often in consultation with external advisers. Management has significant experience in making such estimates. However each programme is different and it is possible that the initial estimate of the costs of such programmes and therefore the reduction in revenue recorded based on such estimates, may differ from the actual results. To the extent that the period end accrual proves different to the actual payments required in the subsequent period an adjustment is recorded in the subsequent period.
Up front payments are made to secure product installation in the fountain and food service channel of several of our beverage products. These payments are amortised (as a deduction to revenue) based upon a methodology (time or volumes sold) consistent with our contractual rights under these arrangements. The total unamortised up front payments as at the year end amounted to approximately £42 million. The weighted average period over which the up front payments are being amortised is approximately 14 years with the longest period being 18 years. Were we unable to enforce our rights under the relevant contracts we may be required to accelerate the recognition of such costs, which would reduce future revenue.
(vi) Pensions
Several subsidiaries around the world maintain defined benefit pension plans. The biggest plans are located in UK, Ireland, US, Canada, Mexico and Australia. The pension liabilities recorded are based on actuarial assumptions, including discount rates, expected long-term rate of return on plan assets, inflation and mortality rates. The assumptions are based on current market conditions, historical information and consultation with and input from our actuaries. Management reviews these assumptions annually. If they change, or if actual experience is different from the assumptions, the funding status of the plan will change and we may need to record adjustments to our previously recorded pension liabilities.
The cost of providing pension benefits is calculated using a projected unit credit method. The assumptions we apply are affected by short-term fluctuations in market factors. We use external actuarial advisers and management judgement to arrive at our assumptions.
In arriving at the present value of the pension liabilities, we must estimate the most appropriate discount rate to be applied. We are required to base our estimate on the interest yields earned on high quality, long-term corporate bonds. As the estimate is based on an external market variable the subjectivity of the assumption is more limited, however actual interest rates may vary outside of our control, so the funding status and charge will change over time. A decrease in the discount factor will increase the pension liabilities and may increase the charge recorded. An increase in the discount factor will decrease the pension liabilities and may decrease the charge recorded.
In calculating the present value of the pension liabilities we are also required to estimate mortality rates (or life expectancy), including an expectation of future changes in mortality rates. The Group uses actuarial advisers to select appropriate mortality rates that best reflect the Group’s pension scheme population. If the mortality tables, or our expectation of future changes in the mortality tables, differ from actual experience then we will be required to revise our estimate of the pension liabilities and may be required to adjust the pension cost.
In calculating the pension cost, we are also required to estimate the expected return to be made on the assets held within the pension funds. We have taken direct account of the actual investment strategy of the associated pension schemes and expected rates of return on the different asset classes held. In the case of bond investments, the rates assumed have been directly based on market redemption yields at the measurement date, whilst those on other asset classes represent forward-looking rates that have typically been based on other independent research by investment specialists. A decrease in the expected rate of return will increase the pension charge for the year. Conversely an increase in the expected rate of return will increase the pension charge for the year. If the actual returns fall below the long-term trend estimate the charge recorded in future periods will increase. If the actual returns exceed the long-term estimate the charge recorded in future periods will decrease.
An indication of the variability of the main assumptions applied by management over the past three years is set out below:
                         
    2006     2005     2004  
 
Discount rate
    5.2 %     5.0 %     5.4 %
 
Rate of asset returns
    6.8 %     7.2 %     7.4 %
 
Rate of salary increases
    4.4 %     4.2 %     4.4 %
 
A 25 basis point decrease in the estimate of the discount factor would have resulted in an approximate £3 million increase in the pension costs. A 25 basis point decrease in the estimate of the long-term rate of return on assets would have resulted in an approximate £6 million increase in the pension costs.

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(vii) Income taxes
As part of the process of preparing our financial statements, we are required to estimate the income tax in each of the jurisdictions in which we operate. This process involves an estimation of the actual current tax exposure together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within the balance sheet.
Significant management judgement is required in determining the provision for income tax and the recognition of deferred tax assets and liabilities. However, the actual tax liabilities could differ from the provision. In such an event, we would be required to make an adjustment in a future period, and this could materially impact our financial position and results of operations.
We operate in numerous countries but the tax regulations in the US and the UK have the most significant effect on income tax and deferred tax assets and liabilities, and the income tax expense. The tax regulations are highly complex and whilst we aim to ensure the estimates of tax assets and liabilities that are recorded are accurate, the process of agreeing tax liabilities with the tax authorities can take several years and there may be instances where the process of agreeing tax liabilities requires adjustments to be made to estimates previously recorded.
In the last three years the impact that revising the initial estimates has had on the recorded charge for current taxes and the corresponding increase in profits is set out below:
                         
    2006     2005     2004  
    £m     £m     £m  
 
Increase/(reduction) in current tax charge
    4       (38 )     (60 )
 
Increase/(reduction) in deferred tax charge
    (46 )     (96 )     8  
 
We recognised deferred tax liabilities of £1,050 million at 31 December 2006 (2005: £954 million; 2004: £895 million), and have recognised deferred tax assets of £170 million (2005: £123 million; 2004: £17 million). There are further unrecognised deferred tax assets for losses of £187 million (2005: £165 million; 2004: £115 million). These losses relate to unrelieved tax losses in certain countries. We are required to assess the likelihood of the utilisation of these losses when determining the level of deferred tax assets for losses to be recognised. We do this based on the historical performance of the businesses, the expected expiry of the losses and the forecast performance of the business. These estimates continue to be assessed annually and may change in future years, for example if a business with history of generating tax losses begins to show evidence of creating and utilising taxable profits. In 2005, the annual assessment of the recoverability of the UK tax position resulted in the recognition of a deferred tax asset in the UK for the first time and a credit to profits of £104 million. £74 million of such unrecognised tax losses have no time limits and hence these tax losses have a greater probability of future recognition. Any change in the recognition of deferred tax assets for losses would generate an income tax benefit in the income statement in the year of recognition and an income tax cost in the year of utilisation.
Accounting policy changes
There have been no significant changes in our IFRS accounting policies during 2006.
In September 2006, the FASB issued SFAS 158 “Employers’ Accounting for Defined Benefit Pension and other Postretirement Plans – an Amendment of FASB Statements No. 87, 88, 106 and 132(R)”. This Statement, which is effective at 31 December 2006 for the Group, requires employers to recognise the funded status through comprehensive income and provides for additional disclosures. SFAS 158 also establishes the measurement date of plan assets and obligations as the date of the employer’s year end. The Group has adopted the provisions of SFAS 158 that are applicable for the year ended 31 December 2006, but has elected to defer the change of measurement date as permitted by SFAS 158. The impact of the adoption of SFAS 158 on the Group was to decrease net assets by approximately £78 million.

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Summary of significant IFRS to US GAAP differences
The significant IFRS to US GAAP differences applicable to the Group are explained in Note 40 to the Financial Statements.
The required disclosures on changes and proposed changes to US GAAP and IFRS are given in Note 41 to the Financial Statements. These disclosures cover:
US GAAP
 
  SFAS 155 – Accounting for Certain Hybrid Financial Instruments and Amendment of FASB Statements No. 133 and 140
 
  SFAS 156 – Accounting for Servicing of Financial Assets
 
  SFAS 157 – Fair Value Measurements
 
  SFAS 158 – Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans
 
  SFAS 159 – The Fair Value Option for Financial Assets and Financial Liabilities
 
  FIN 48 – Accounting for Uncertainty in Income Taxes
IFRS
  IFRS 7 – Financial Instruments: Disclosures
 
  IFRS 8 – Operating Segments
 
  IFRIC 7 – Applying the Restatement Approach
 
  IFRIC 8 – Scope of IFRS 2
 
  IFRIC 9 – Reassessment of Embedded Derivatives
 
  IFRIC 10 – Interim Financial Reporting and Impairment
 
  IFRIC 11 – IFRS 2 – Group and Treasury Share Transactions
 
  IFRIC 12 – Service Concession Arrangements
The Group is assessing the impact that the adoption of any of these changes and proposed changes to US GAAP and IFRS will have on its operations and financial position.

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ITEM 6:      DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
BOARD OF DIRECTORS
We are managed by our Board of Directors. The following sets forth information concerning each of the directors of the Company as of March 31, 2007.
Sir John Sunderland,
Chairman
Term of office: Appointed as Chairman in May 2003. Sir John was last re-elected in 2004 and is retiring by rotation and standing for re-election in 2007.
Skills and experience: Sir John has 38 years of experience working within the Cadbury Schweppes Group in the UK and overseas on both the confectionery and beverage side of the business. Sir John has held senior leadership roles within the Company, including being CEO from 1996 to 2003. Sir John’s experience, together with his roles in key trade and business organizations, is invaluable to the business and makes him ideally placed to chair the Board as it seeks to create enhanced shareowner value.
Other directorships and offices:
  President of the Confederation of British Industry
 
  Non-executive Director of Barclays PLC
 
  Director of the Financial Reporting Council
 
  Advisory Board member of CVC Capital Partners
 
  Advisory Board member of Ian Jones & Partners
 
  Advisory Board member of Marakon Associates
Board Committee membership:
  Chairman of the Nomination Committee
 
  Corporate and Social Responsibility Committee
Roger Carr,
Deputy Chairman and Senior Independent Non-Executive Director
Term of office: Appointed to the Board in January 2001 and Deputy Chairman and Senior Independent Non-Executive Director since May 2003. Roger was last re-elected in 2006 and is not retiring by rotation or standing for re-election in 2007.
Skills and experience: Roger’s experience as both a Chairman and Chief Executive of other FTSE 100 companies enables him to provide highly valued advice and support to the executive management team of the Company. He is responsible for consulting with major UK shareowners on matters of corporate governance.
Other directorships and offices:
  Non-executive Chairman of Centrica plc
 
  Non-executive Chairman of Mitchells & Butlers plc
 
  Senior Adviser to Kohlberg Kravis Roberts Co. Ltd
 
  Fellow of the Royal Society for the Encouragement of Arts, Manufacturers and Commerce
  Chairman of Chubb plc (2000-2002)
 
  Chairman of Thames Water (1998-2000)
 
  Chief Executive Officer of Williams plc (1994-2000)
Board Committee membership:
  Audit Committee
 
  Remuneration Committee
 
  Nomination Committee

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Todd Stitzer,
Chief Executive Officer
Term of office: Appointed to the Board in March 2000. Appointed CEO in May 2003. Todd was last re-elected in 2006 and is not retiring by rotation or standing for re-election in 2007.
Skills and experience: Todd joined Cadbury Schweppes North America in 1983 as assistant general counsel and has gained extensive international experience in senior legal, marketing, sales, strategy development and general management roles within the Company. Todd’s business leadership, legal and commercial expertise make him well placed to lead the organization as it delivers on its commitment to deliver superior shareowner performance. Todd was President & CEO of Dr Pepper/Seven Up, Inc. between 1997 and 2000 and Chief Strategy Officer between March 2000 and May 2003.
Other directorships and offices:
  Non-executive director of Diageo plc
Board Committee membership:
  Corporate and Social Responsibility Committee
Ken Hanna,
Chief Financial Officer
Term of office: Appointed to the Board in April 2004. Ken was last re-elected in 2006 and is not retiring by rotation or standing for re-election in 2007.
Skills and experience: Ken has a broad range of experience gained while working as the Group Finance Director of United Distillers plc (1993-1997) and the Chief Executive Officer and Group Finance Director of Dalgety plc (1997-1999). In addition, Ken’s focus on consumer goods while an Operating Partner at the private equity firm Compass Partners (1999-2004) makes him particularly qualified to lead the Cadbury Schweppes finance function.
Other directorships and offices:
  Non-executive director of Inchcape plc
Board Committee membership:
None

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Bob Stack,
Chief Human Resources Officer
Term of Office: Appointed to the Board in May 1996. Bob was last re-elected in 2005 and is not retiring or standing for re-election in 2007.
Skills and experience: Bob has wide international Human Resources expertise. Bob joined Cadbury Beverages in the US in 1990 as Vice-President, Human Resources for the global beverages business. In 1992 he moved to the UK as Group Director of Strategic Human Resources Management, being appointed to the Board as Chief Human Resources Officer in 1996. Bob’s responsibilities also include corporate and external affairs and corporate communications.
Other directorships and offices:
  Non-executive Director of J Sainsbury plc
 
  Visiting Professor at Henley Management College
Board Committee membership:
  Corporate and Social Responsibility Committee
Dr. Wolfgang Berndt,
Independent Non-Executive Director
Term of office: Appointed to the Board in January 2002. Wolfgang was last re-elected in 2005 and is not retiring or standing for re-election in 2007.
Skills and experience: Wolfgang’s broad range of executive and operational experience gained over a career managing consumer goods companies enables him to contribute significantly to the Board.
Other directorships and offices:
  Non-executive Director of Lloyds TSB Group plc
 
  Non-executive Director of GfK AG
 
  Non-executive Director of Telekom Austria
 
  Board member of the Institute for the Future
 
  President Global Fabric & Home Care sector of The Procter & Gamble Co (1998-2001)
Board Committee membership:
  Audit Committee
 
  Remuneration Committee
Rick Braddock,
Independent Non-Executive Director
Term of office: Appointed to the Board in June 1997. Rick was last re-elected in 2004 and is retiring from the Board at the 2007 AGM.
Skills and experience: Rick brings to the Board a broad range of consumer, marketing and management experience across several sectors. His business experience in North America benefits the Group, especially with regards to its significant businesses in that region.
Other directorships and offices:
  Non-executive Director of Eastman Kodak Company
 
  Non-executive Director of Marriott International, Inc
 
  Non-executive Director of the Lincoln Center for the Performing Arts
 
  Chairman of MidOcean Partners
Board Committee membership:
  Chairman of the Remuneration Committee
 
  Audit Committee
 
  Corporate and Social Responsibility Committee
 
  Nomination Committee

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Lord Patten,
Independent Non-Executive Director
Term of office: Appointed to the Board on 1 July 2005. Lord Patten was last re-elected in 2006 and is not retiring by rotation or standing for re-election in 2007.
Skills and experience: Lord Patten’s distinguished career in public office enables him to bring a great deal of experience and expertise to the Board, especially in the area of international relations, which is valuable to a Group that has a presence in almost every country in the world.
Other directorships and offices:
  Chancellor of Oxford University
 
  Chancellor of Newcastle University
 
  Advisory Board member of Bridgepoint Capital Ltd
 
  Advisory Board Member of AIG
 
  European Commissioner for External Relations (1999-2004)
 
  Governor of Hong Kong (1992-1997)
Board Committee membership:
  Chairman of the Corporate and Social Responsibility Committee
  Nomination Committee
David Thompson,
Independent Non-Executive Director
Term of office: Appointed to the Board in March 1998 and last re-elected in 2004. David is retiring and standing for re-election in 2007.
Skills and experience: David has considerable financial and retail experience, enabling him to provide a significant contribution to the Board and Audit Committee.
Other directorships and offices:
  Chairman of the Nottingham Building Society
 
  Finance Director of The Boots Company plc (1990-2002)
Board Committee membership:
  Chairman of the Audit Committee
 
  Corporate and Social Responsibility Committee
 
  Remuneration Committee
 
  Nomination Committee
Rosemary Thorne,
Independent Non-Executive Director
Term of office: Appointed to the Board in September 2004. Rosemary was last re-elected in 2005 and is retiring and standing for re-election in 2007.
Skills and experience: Rosemary brings a wealth of financial reporting and corporate governance expertise to the Board and its committees gained during her corporate career and participation in key external organizations.
Other directorships and offices:
  Group Finance Director of Ladbrokes plc (January 2006 - March 2007)
 
  Non-executive Director of Abbey National plc
 
  Group Finance Director of Bradford & Bingley plc (1999-2005)
 
  Member of the Financial Reporting Council
 
  Council member of The University of Warwick and Royal College of Art
Board Committee membership:
  Audit Committee
 
  Remuneration Committee
 
  Corporate and Social Responsibility Committee
 
  Nomination Committee

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Sanjiv Ahuja,
Independent Non-Executive Director
Term of office: Appointed to the Board on 19 May 2006. Sanjiv will stand for re-election in 2007 at the first Annual General Meeting since his appointment.
Skills and experience: Sanjiv has wide ranging international experience from some of the largest consumer-facing industries in the world and a strong information technology background.
Other directorships and offices:
  Chief Executive Officer of Orange SA
 
  Member of France Telecom’s Group Management Committee
 
  Non-executive Director of Mobistar SA
 
  Non-executive Director of Williams Sonoma, Inc.
Board Committee Membership
  Nomination Committee
 
  Corporate and Social responsibility Committee
Raymond Viault,
Independent Non-Executive Director
Term of office: Appointed to the Board on 1 September 2006. Raymond is standing for re-election in 2007 at the first Annual General Meeting since his appointment.
Skills and experience: Raymond’s extensive international experience in confectionery, food and consumer products companies enables him to contribute significantly to the Board.
Other directorships and offices:
  Director of Safeway, Inc.
 
  Director of Newell Rubbermaid, Inc.
 
  Director of VF Corporation
 
  Vice Chairman of General Mills, Inc. (1996-2004)
Board Committee Membership
  Audit Committee
 
  Remuneration Committee
 
  Nomination Committee
Hester Blanks,
Group Secretary
Term of office: Appointed Group Secretary on 1 July 2005.
Skills and experience: Hester started her career in Cadbury Schweppes as a lawyer in 1984, having previously worked at Clifford Turner in London. She became Board Secretary to Coca-Cola & Schweppes Beverages in 1987 and then held a variety of senior legal roles within the business, latterly in 2003 as Legal Director (Group).

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UK corporate governance
In 2006, we fully complied with the provisions of the Code of Best Practice set out in Section 1 of the July 2003 FRC Combined Code on Corporate Governance.
US corporate governance
Because we are a UK company with our shares listed on the New York Stock Exchange (the NYSE) as well as the London Stock Exchange, we are required to comply with some of the NYSE Corporate Governance rules, and otherwise must disclose any significant ways in which our corporate governance practices differ from those followed by US companies under the NYSE listing standards. We comply with all the NYSE rules which apply to non-US issuers. The NYSE rules require the Nomination Committee to be composed entirely of independent directors, and require this Committee to consider corporate governance matters on behalf of the Board. Our Nomination Committee is not entirely independent, as it is chaired by Sir John Sunderland. Our Audit Committee considers corporate governance matters on behalf of the Board, and is composed entirely of independent directors. The NYSE rules allow a committee other than the Nomination Committee to fulfill this role as long as all of its members are independent directors.

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Corporate governance report
In managing the affairs of the Company, the Board of Cadbury Schweppes plc is committed to the principles of good corporate governance and dedicated to achieving high standards of business integrity, ethics and professionalism across all our activities. The Board adopted a Statement of Corporate Governance Principles on 16 February 2007 and this can be found on our website. It explains the fundamental principles which guide corporate governance for the Group and ensures that the Group acts in the best interests of its stakeholders. The Group also has both a Financial Code of Ethics (that applies to the Chief Executive Officer, Chief Financial Officer and senior financial executives in the Group) and a code of conduct (Our Business Principles) that apply at Board level and to all managers across the Group. All executive members of the Board, the CEC, the Global Leadership Team, and managers are required to sign up to Cadbury Schweppes’ Business Principles on an annual basis to confirm that they will abide by them. We have in place a confidential, all employee Speaking Up helpline in most languages, which enables employees to report concerns of breaches of the Business Principles and any other breach of standards of good behaviour. Both the Code and the Business Principles are available on the Group’s website, www.cadburyschweppes.com.
The Board
As at the date of this report, the Board has 12 members: three Executive Directors, and nine non-executive Directors all of whom (except the Chairman) are deemed independent under the provisions of the Combined Code. No individual or group of individuals dominates the Board’s decision-making. Collectively, the non-executive Directors bring a wide range of international experience and expertise as they all currently occupy or have occupied senior positions in industry and public life and as such each contributes significant weight to Board decisions.
In 2006 we appointed two new Directors: Sanjiv Ahuja, Chief Executive of Orange SA, on 19 May and Raymond Viault, former Vice Chairman of General Mills, Inc., on 1 September. Baroness Wilcox retired from the Board on 31 December 2006, following a commitment to the Company of almost 10 years. David Thompson and Rick Braddock will have both served on the Board for over nine years as at the date of this report. Rick Braddock will therefore retire at the AGM; David has agreed, at the request of the Board, to remain on the Board for a further period to enable a smooth succession for the key role as Chairman of the Audit Committee. As such he will be proposed for re-election by the shareowners at the forthcoming AGM. As noted below, the Board has considered David Thompson’s independence and determined that he remains independent. With effect from 1 June 2007, Ellen Marram will join the Board as a non-executive Director. Biographies of each of the Directors as at the date of this report, can be found on pages 59 to 63.
Board meetings and attendance: The attendance of the individual Directors at Board and Committee meetings during 2006 was as follows:
                                                 
                            Corporate              
                            and Social              
    Board     Strategy     Audit     Responsibility     Nomination     Remuneration  
    (7 meetings)     (1 meeting)     (4 meetings)     (24 meetings)     (34 meetings)     (4 meetings)  
 
Sir John Sunderland
    7       1       n/a       2       3       n/a  
Roger Carr(2)
    6       1       3       1       2       4  
Todd Stitzer
    7       1       n/a       2       n/a       n/a  
Ken Hanna
    7       1       n/a       n/a       n/a       n/a  
Bob Stack
    7       1       n/a       2       n/a       n/a  
Sanjiv Ahuja(1)
    5       1       n/a       1       1       n/a  
Wolfgang Berndt(2)
    7       1       4       1       1       4  
Rick Braddock(2)
    6       1       2       0       0       3  
Lord Patten(2)
    7       1       n/a       2       1       n/a  
David Thompson(2)
    7       1       4       2       1       4  
Rosemary Thorne(2)
    7       1       4       1       1       4  
Raymond Viault(3)
    3       1       n/a       n/a       n/a       n/a  
Baroness Wilcox(2)
    7       1       n/a       2       2       n/a  
 
NB. n/a means that the specified Director is not a member of that Committee, although he or she may attend meetings at the invitation of the chairman of the Committee.
 
1   Sanjiv Ahuja was appointed a non-executive Director on 19 May 2006. He has not missed a Board meeting since his appointment.
 
2   When Directors have not been able to attend meetings due to conflicts in their schedule, they receive and read the papers for consideration at that meeting, and have the opportunity to relay their comments in advance, and if necessary follow up with the relevant chairman on the decisions taken at the meeting.
 
3   Raymond Viault was appointed a non-executive Director on 1 September 2006. He has not missed a Board meeting since his appointment.
 
4   The Nomination Committee and Corporate and Social Responsibility Committee memberships were amended in July 2006 to include all the non-executive Directors.

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Role of the Board
The Board has responsibility for the overall management and performance of the Group and the approval of its long-term objectives and commercial strategy. Whilst the Board has delegated the day to day management of the Group to the Chief Executive Officer, there is a formal schedule of matters reserved for the Board which provides a framework for the Board to oversee control of the Group’s affairs. The Chief Executive Officer is supported by his Executive Committee. The Board met 7 times during 2006, with an additional meeting on 19 October 2006 dedicated to a review of the Group’s strategy. The Board is also assisted in carrying out its responsibilities by the various Board committees, including a Standing Committee consisting of any two Directors which was formed on 17 February 2006 and which deals with routine business between Board meetings; following a formal decision, the Board may also delegate authority to the Committee to facilitate finalising matters within agreed parameters. The work of the Board committees is described on pages 68 and 69.
How the Board operates
Reserved and delegated authorities: The Board has a formal schedule of matters reserved to it for decision, which includes:
 
>   Responsibility for the strategic direction of the Group;
 
>   Committing to major capital expenditure, acquisitions and disposals;
 
>   Satisfying itself as to the integrity of financial information;
 
>   Reviewing the effectiveness of the Group’s system of internal control and risk management process;
 
>   Authorisation of any material borrowings and any issue of equity securities;
 
>   Agreeing treasury policy including the agreement of foreign currency and interest risk parameters;
 
>   Ensuring adequate succession planning for the Board and senior management and appointing and removing Directors and Committee Members;
 
>   Approval of annual and interim results;
 
>   Dividend policy;
 
>   Monitoring institutional investor guidelines and corporate governance principles;
 
>   Undertaking a formal and rigorous review annually of its own performance, that of its committees and individual Directors; and
 
>   Reviewing the Company’s corporate governance arrangements.
Other matters are delegated to Board Committees or to individual executives.
Information flow: Senior executives below Board level attend certain Board meetings and make presentations on the results and strategies of their business units. Board members are given appropriate documentation in advance of each Board and Committee meeting. In addition to formal Board meetings, the Chairman and Chief Executive Officer maintain regular contact with all Directors and hold informal meetings with the non-executive Directors to discuss issues affecting the business.
Independent professional advice: The Board has approved a procedure for Directors to take independent professional advice if necessary, at the Company’s expense (up to a maximum cost of £25,000 p.a. each). Before incurring professional fees the Director concerned must consult the Chairman of the Board or two other Directors (one of whom must be a non-executive). No such advice was sought by any Director during the year.
Group Secretary: The Group Secretary is responsible for advising the Board on all corporate governance matters, ensuring that all Board procedures are followed, ensuring good information flow, facilitating induction programmes for Directors and assisting with Directors’ continuing professional development. All Directors have direct access to the advice and services of the Group Secretary. Any questions shareowners may have on corporate governance matters, policies or procedures should be addressed to the Group Secretary.
Board effectiveness
Induction: On joining the Board, Directors are given background information describing the Company and its activities. Raymond Viault and Sanjiv Ahuja, who were appointed as Directors during 2006, received an induction pack of information on our business following their appointment. This included guidance notes on the Group, the Group structure, its operations, information on corporate governance and brokers’ reports. Meetings were arranged with the members of the Chief Executive’s Committee (see page 69) and other senior executives below Board level from each Group function, as well as some of our advisers. Appropriate visits have been arranged to our sites. Meetings are also arranged with the Group departments who provide support to the relevant Board Committee the Directors will serve on.
Continuing professional development: During 2006 we held two seminars for Board members. The first covered the Market Abuse Directive and a briefing on corporate governance and company law. The second session dealt with further corporate governance and company law matters including the Transparency Directive and the Takeover Code; there was also a presentation on social, environmental and ethical issues and regulatory compliance. These formal sessions are in addition to written briefings to the Board on areas of regulatory and legislative change.
Performance evaluation: During the year the Board has undertaken a formal and independent evaluation of its performance and effectiveness using external consultants, Egon Zehnder. The review combined qualitative dialogue and a quantitative questionnaire to establish a comprehensive foundation from which to track Board effectiveness going forward. The review covered Board effectiveness in terms of dynamics and processes and individual Director contributions. The Board discussed the findings and recommendations at its meeting in October. Subsequently, the Chairman and the Senior Independent non-executive Director (as described below) reviewed the personal feedback collated for each Director and shared their respective feedback with each other, facilitated by Egon Zehnder. Overall the review concluded that the Board is well functioning and captures the benefits of a unitary board with issues generally raised in good time for consultation, debate and effective decision-making. The Executive team is responsive to challenges from the non-executives who were engaged and probing. Governance and Board processes in general are robust and recommendations on improvements are already well in hand. Each of the committees was also reviewed and progress has been made.

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The CEO and Chairman’s job descriptions
The roles of the Chairman and Chief Executive Officer are separate and their responsibilities are clearly defined as follows:
Chairman
Sir John Sunderland, the Chairman, spends 2-3 days a week on the business of the Group. Sir John’s role and responsibilities are as follows:
  >   Ensures the effective running of the Board, its agenda and processes;
 
  >   Ensures the Board agrees the strategy for the Company and checks on its implementation;
 
  >   Promotes the highest standards of corporate governance and ensures appropriate communication with shareowners on these and our financial performance;
 
  >   Ensures the maintenance of our “Purpose and Values” (a framework for our strategic intent);
 
  >   Ensures we have an adequate succession planning process at the Board and senior management level;
 
  >   Acts externally in maintaining appropriate relationships and projects the Company and our views; and
 
  >   Works with the Chief Executive Officer and the Chief Executive’s Committee to provide support and advice as appropriate.
Chief Executive Officer
Todd Stitzer is our Chief Executive Officer. Todd’s role and responsibilities are as follows;
  >   Develop and translate strategies into a manageable set of goals and priorities and communicate and implement these;
 
  >   Provide motivation and leadership to the regions and functions; chairing the Chief Executive’s Committee and setting its style and tone;
 
  >   Manage and lead on major transactions and operating issues facing the business;
 
  >   Set the overall policy and direction of our business operations, investment and other activities within a framework of prudent and effective risk management, and ensure that functions to control those risks operate satisfactorily;
 
  >   Ensure the soundness of our financial structure, results (including cash flow) and forecasts and take corrective action when necessary;
 
  >   Ensure that our financial management is performed to the highest levels of integrity, quality and transparency and in the interests of shareowner value;
 
  >   Ensure that our business standards are of the highest order, fully in compliance with laws and regulations and that we operate in a manner consistent with ‘Our Business Principles’;
 
  >   Ensure that growth in shareowner value is compatible with an increased accountability for social and environmental performance;
 
  >   Develop policies and strategies for managing health and nutrition issues and related obesity concerns;
 
  >   Develop and maintain strong communication programmes and dialogues to inform shareowners, analysts etc. of our results and progress; and
 
  >   With the Chairman, provide external leadership and represent the Company with major customers and industry organisations.
External directorships for executive Directors
Subject to certain conditions, and unless otherwise determined by the Board, each executive Director is only permitted to accept one appointment as a non-executive director of another listed company. The Board considers that executive Directors can gain valuable experience and knowledge through such appointments.
Details of the fees received by the Directors for external appointments can be found in the Directors’ Remuneration Report on page 79.
Non-executive Directors
The Board reviews the independence of all non-executive Directors annually and have determined that all such Directors (except Sir John Sunderland) are independent and have no cross-directorships or significant links which could materially interfere with the exercise of their independent judgement.
Senior independent non-executive Director: Roger Carr is the Senior independent non-executive Director and our Deputy Chairman. Roger’s responsibilities include meeting major shareowners as and when requested and chairing meetings of the non-executive Directors without executive management or the Chairman being present.
Terms of appointment: Sir John Sunderland was appointed for an initial term of one year which has now been extended to 2008. All other non-executive Directors are appointed for an initial term of three years. Thereafter, subject to satisfactory performance, they may serve one or two additional three-year terms, with a thorough review of their continued independence and suitability to continue as Directors being undertaken if they are to remain on the Board for more than nine years. The terms and conditions of appointment for the non-executives are summarised in the Directors’ remuneration report on page 80 and are available on request from the Group Secretary.
Meetings of non-executive Directors: The non-executive Directors meet separately (without the Chairman being present) at least once a year principally to appraise the Chairman’s performance. During September 2006, they held one such meeting chaired by Roger Carr and attended by all the non-executive Directors except for Sanjiv Ahuja.

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Key Committees
The terms of reference for all our committees are reviewed on a regular basis by the Board and were last reviewed in February 2007. Committees are authorised to obtain outside legal or other independent professional advice if they consider it necessary to do so.
Audit Committee
Members: David Thompson (Chairman), Rick Braddock, Roger Carr, Wolfgang Berndt, Rosemary Thorne and from 16 February 2007 Raymond Viault.
The Committee consists solely of independent non-executive Directors, all of whom have extensive financial experience in large organisations. All Committee members, except Raymond Viault, held office throughout the year and at the date of this report. The Board has determined that David Thompson is an audit committee financial expert as defined by the US Securities and Exchange Commission.
At the invitation of the Committee, the Chairman of the Board, Chief Executive Officer, Chief Financial Officer, Chief Legal Officer, Group Secretary, Director, Financial Control, Director of Business Risk Management, Head of Internal Audit and the external auditor attend meetings. The Director of Group Secretariat attends and is Secretary to the Committee. The Committee met four times in 2006, meeting separately with the external auditors in February and July, and with the internal auditors in July. The Chairman also holds preparatory meetings with the Group’s senior management as appropriate prior to Committee meetings. All Directors have access to the minutes of all the Committee’s meetings and are free to attend.
The composition and role of the Audit Committee is reviewed annually against the recommendations made in the Smith Report published in 2003, and complies with all of that Report’s recommendations.
Key duties:
  >   Responsible for all accounting matters and financial reporting matters prior to submission to the Board for endorsement;
 
  >   To monitor the integrity of the Company’s financial statements and ensure that they meet the relevant legislative and regulatory requirements that apply to them, and are in accordance with accepted accounting standards;
 
  >   To review major changes in accounting policies and practices;
 
  >   To review the Company’s internal controls and their effectiveness;
 
  >   To review the Company’s statements and practices on internal controls (including section 404 Sarbanes-Oxley certification) and other aspects of corporate governance;
 
  >   To review the effectiveness of the external audit process, the Group’s relationship with the external auditors including fees, and make recommendations on the appointment and dismissal of the external auditors;
 
  >   To consider the annual report on internal audit and the effectiveness of internal control, reviewing the Group’s internal audit process and the audit plan for the following year;
 
  >   To review the provision and scope of audit and non-audit work by the external auditor and the fees charged;
 
  >   To receive reports from the Speaking Up programme (established to investigate complaints in confidence from employees and others);
 
  >   To receive semi-annual reports on Group legal matters including litigation;
 
  >   To receive an annual review of the effectiveness of the Committee;
 
  >   To review corporate governance developments in the UK and US and the Group’s response to these developments; and
 
  >   To monitor the Group’s risk management and business ethics processes.
In 2006, the Committee’s agenda included the programme for ensuring compliance with section 404 Sarbanes-Oxley (which applied to the Group for the first time this year), changes to UK corporate legislation, restructuring of the Group’s risk processes (including the establishment of the Risk and Compliance Committee led by Todd Stitzer) and work to redefine the role and operation of Internal Audit. The Committee was also heavily involved in considering the Group’s response to the accounting irregularities and other issues in Cadbury Nigeria, explained elsewhere in this document.
Non-audit services: In line with the requirements of Sarbanes-Oxley, Group policy prohibits the external auditor from carrying out certain categories of non-audit services.
The external auditor is permitted to undertake some non-audit services, for example due diligence activities associated with potential acquisitions or disposals of businesses by the Group, but these services and their associated fees must be approved in advance by the Committee. Where such services are considered recurring in nature, approval may be sought for the full financial year at the beginning of that year. Approval for other permitted non-audit services has to be sought on an ad hoc basis. Where no Committee meeting is scheduled within an appropriate time frame, the approval is sought from the Chairman of the Committee.
Auditor independence: Ensures that the external auditor remains independent of the Company. In addition, the Committee receives written confirmation from the external auditor as to any relationships which may be reasonably thought to influence its independence. The external auditor also confirms whether it considers itself independent within the meaning of the UK and US regulatory and professional requirements, as well as within the meaning of applicable US federal securities laws and the requirements of the Independence Standards Board in the US.
Other issues: In appropriate circumstances, the Committee is empowered to dismiss the external auditor and appoint another suitably qualified auditor in its place. The re-appointment of the external auditor is submitted for approval annually by the shareowners at the Annual General Meeting.
Details of the fees paid to the external auditor in 2006 can be found at Note 6 in the financial statements.
Nomination Committee
Members: All non-executive Directors except Wolfgang Berndt and David Thompson. The membership was amended in July 2006 to include all current non-executive Directors; prior to this the Committee consisted of Sir John Sunderland, Roger Carr and Baroness Wilcox. Raymond Viault joined the Committee in February 2007.

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The Chief Executive Officer and Chief Human Resources Officer attend meetings at the invitation of the Chairman of the Committee. The Group Secretary also attends and is secretary to the Committee. This Committee is empowered to bring to the Board recommendations as to the appointment of any new executive or non-executive Director, provided that the Chairman, in developing such recommendations, consults all Directors and reflects that consultation in any recommendation of the Nomination Committee. The Committee ensures that a review of Board candidates is undertaken in a disciplined and objective manner.
The Nomination Committee is responsible for succession planning for the Board. The Board as a whole is responsible for development plans, including the progressive refreshing of the Board, which are reviewed on an annual basis. The plans involve an annual objective and comprehensive evaluation of the balance of skills, knowledge and experience of the Board. We have recently appointed three new non-executives, and two of the longest serving non-executives have retired or will soon retire. The re-elections proposed at the AGM reflect the Board’s policy on its development. No Director participates in the discussions considering his or her successor.
During 2006, the Committee met three times to review succession planning and the appointment of Sanjiv Ahuja, Raymond Viault and Ellen Marram as new non-executive Directors. External search consultants were engaged to produce a list of candidates for this appointment. This list was then reduced to a short list of candidates which was discussed between the Chairman and the other members of the Nomination Committee. The Directors then met Sanjiv, Raymond and Ellen and their nominations were presented to the Board for approval at the February and September 2006 and February 2007 Board meetings respectively.
Remuneration Committee
Details of the Remuneration Committee and its policies, together with the Directors’ remuneration, emoluments and interests in the Company’s share capital, are set out on page 73.
Corporate and Social Responsibility Committee
Members: Lord Patten (Chairman), Bob Stack, Todd Stitzer, Sir John Sunderland, David Thompson, and, from July 2006, Sanjiv Ahuja, Rick Braddock and Rosemary Thorne. Baroness Wilcox was Chairman until 31 December 2006. The terms of membership of the Committee were amended in July 2006 to include all non-executive Directors as members.
This Committee focuses on corporate and social responsibility matters in relation to the environment, employment practices, health and safety, equal opportunities and diversity, community and social investment, ethical trading and human rights, and other aspects of ethical business practice. Lord Patten was appointed Chairman on 1 January 2007 on the resignation from the Board of Baroness Wilcox on 31 December 2006.
Chief Executive’s Committee (CEC)
Members: Todd Stitzer (Chairman), Hester Blanks (also Secretary to the Committee), Gil Cassagne, Jim Chambers, Steve Driver, Ken Hanna, David Macnair, Tamara Minick-Scokalo (from 2 January 2007), Matt Shattock, Bob Stack, Hank Udow, Rajiv Wahi and Mark Reckitt (from 2 January 2007).
The CEC deals with major operational and management issues including the review of monthly financial results and forecasts, proposals for capital expenditure and major operating issues.
Relations with shareowners
Our shareowners are very important to us. All shareowners receive regular communications from the Group and a full Annual Report is available by election or on request. Regular trading updates are published via the London Stock Exchange and by press release, and appear on our website. Presentations and webcasts on the development of the business are available on the website.
Annual General Meeting (“AGM”)
The Board views the AGM as an opportunity for individual shareowners to question the Chairman, and through him the chairmen of the various Board Committees and other Directors. At the AGM there will be statements by the Chairman and Chief Executive Officer, and all the Directors plan to attend.
Directors are submitted for reappointment by the shareowners at regular intervals. At each Annual General Meeting, not less than one-third of the Directors must retire by rotation. In addition, any Director who has been a Director at either of the two previous Annual General Meetings but who has not retired by rotation, and any Director who was appointed since the last Annual General Meeting, must retire.
Details of the meeting and the resolutions to be proposed together with explanatory notes are set out in the Notice of Meeting which is sent to shareowners. Shareowners attending will be advised of the number of proxy votes lodged for each resolution, in the categories “for” and “against”, together with the number of “votes withheld”. All resolutions will be voted on by taking a poll, the results of which will be announced to the London and New York Stock Exchanges.
Institutional investors
The Company engages with its institutional investors on a day-to-day basis via the Chief Executive Officer and the Chief Financial Officer. The senior independent non-executive Director and other members of the Board are also available to meet major shareowners on request. The Chairman contacts the top 10 shareowners each year with an offer to meet them. As part of his role as the senior independent non-executive Director, Roger Carr is also available to shareowners when contact with the executive Directors or the Chairman may not be appropriate.

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The Chief Executive Officer and Chief Financial Officer meet with institutional investors in the UK, the US and continental Europe on a regular basis. In October 2006, they hosted a seminar for institutional investors, analysts and brokers in New York and London.
The Directors are supported by our Investor Relations department (IR), which is in regular contact with institutional investors, analysts and brokers. An IR report is produced for each Board meeting: this includes direct feedback from institutional investors provided by our external advisors including Goldman Sachs, UBS and Makinson Cowell. In addition, the Board commissions an annual independent audit of institutional investors’ views on our management and strategy. These measures ensure Board members develop an understanding of the views of our major shareowners.
Company website
Our website, www.cadburyschweppes.com, is a primary source of information on the Company. The site includes an archive of financial announcements and presentations, as well as detailed information on our corporate governance practices. This includes:
>   Our Financial Code of Ethics;
 
>   Our Business Principles;
 
>   Our Statement of Corporate Governance Principles;
 
>   Details of how we comply with the Combined Code on Corporate Governance;
 
>   Terms of reference for the Audit, Corporate and Social Responsibility, Nomination and Remuneration Committees;
 
>   Summary of the terms and conditions of the appointment of our non-executive Directors;
 
>   Full schedule of matters reserved for the Board;
 
>   Details of our approach to corporate and social responsibility;
 
>   Documentation sent to shareowners, including AGM material and our report and accounts; and
 
>   Voting figures from the AGM.
Shareowners can register to receive a notification when any press releases are made. Information contained on our website is not incorporated by reference or otherwise as part of this Report on Form 20-F.
Internal control
The Directors have responsibility for the system of internal control that covers all aspects of the business. In recognition of that responsibility, the Directors set policies and seek regular assurance that the system of internal control is operating effectively. Strategic, commercial, operational and financial areas are all within the scope of these activities which also include identifying, evaluating and managing the related risks.
The Directors acknowledge their responsibility for the system of internal control. However, the Directors are aware that such a system cannot totally eliminate risks and thus there can never be an absolute assurance against the Group failing to achieve its objectives or a material loss arising.
The key elements of the system may be described as the control environment, and this is represented by the following:
>   The key business objectives are clearly specified at all levels within the Group;
 
>   “Purpose and Values”, a framework for our strategic intent, and “Our Business Principles”, a set of guidelines on legal compliance and ethical behaviour, are distributed throughout the Group;
 
>   The organisation structure is set out with full details of reporting lines and accountabilities and appropriate limits of authority for different processes;
 
>   Procedures to ensure compliance with external regulations;
 
>   The network of disclosure review committees which exists throughout the Group (described below);
 
>   Procedures to learn from control failures and to drive continuous improvement in control effectiveness;
 
>   A wide range of corporate policies deal, amongst other things, with control issues for corporate governance, management accounting, financial reporting, project appraisal, environment, health and safety, information technology, and risk management generally;
 
>   Individual business units operate on the basis of multi-year contracts with monthly reports on performance and regular dialogues with Group senior management on progress;
 
>   On an annual basis the CEC, Audit Committee and then the Board consider and agree the major risks facing the business and these risks are used to focus and prioritise risk management, control and compliance activities across the organization. The key risks facing the Group are summarised on pages 6 to 9;
 
>   Various internal assurance departments, including Group Audit, carry out regular reviews of the effectiveness of risk management, control and compliance processes and report their findings to the business unit involved as well as to Group management and the Audit Committee; and
 
>   The Audit Committee approves plans for control self-assessment activities by business units and regions as well as the annual Group Audit activity plan. The Committee also deals with significant issues raised by internal assurance departments or the external auditor.
The management of all forms of business risk continues to be an important part of ensuring that we continue to create and protect value for our shareowners. The processes involved call for the identification of specific risks that could affect the business, the assessment of those risks in terms of their potential impact and the likelihood of those risks materialising. Decisions are then taken as to the most appropriate method of managing them. These may include regular monitoring, investment of additional resources, transfer to third parties via insurance or hedging agreements and contingency planning. For insurance, there is a comprehensive global programme which utilises an internal captive structure for lower level risks and the external market only for cover on major losses. Hedging activities relate to financial and commodity risks and these are managed by the Group Treasury and Procurement departments with external cover for the net Group exposures (see pages 52 to 54).
All business units are required to regularly review their principal business risks and related strategies (i.e. the chosen management methods). The internal assurance departments and other Group functions report on any further business risks evident at a regional, global or corporate level. Regional and global status reports assessing the extent to which all major risks have been effectively mitigated are prepared every six months and are reviewed by the Audit Committee. A structure of central Group and regional risk and compliance committees came into operation from January 2007.

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The Group also established in 2002 a network of disclosure review committees (DRC) throughout the organisation. The Group DRC, chaired by the Chief Legal Officer and comprising senior executives at and below Board level, reviews financial and trading statements and releases, and the verification process which underpins these. Meetings are attended by the Group’s external auditors, and UK and US legal advisors. It ensures that such statements and releases are accurate and complete and comply with all relevant legislation and regulation. Each region and function is required to have its own DRC reporting to the Group DRC to ensure that interim and full year financial reporting is accurate and that all matters which may be material to the Group as a whole have been reported to the Board. The Group DRC reports its findings to the Audit Committee and through that Committee to the Board.
At the year end, the Group’s only significant associate is Camelot, which is managed in line with its shareholder agreement.
The Group is subject to the requirements of the US Sarbanes-Oxley Act as a result of the listing of its American Depository Receipts (ADRs) on the New York Stock Exchange. Throughout 2006, progress has been made on the evaluation of controls and their enhancement where necessary to comply with section 404 of that Act. See page 93 for Managements Annual Report on Internal Control over Financial Reporting.
On 20 February 2006, Cadbury Schweppes plc acquired a majority holding of Cadbury Nigeria, a listed entity in which the Group previously had been a minority investor and which it had treated as an associate for accounting purposes. Subsequently significant mis-statements of Cadbury Nigeria’s balance sheet and profit and loss account were identified. Following an investigation, management ascertained that these irregularities dated back over a number of years and comprised inappropriate recognition of revenue, overvaluation of assets (including working capital balances and fixed assets) and the undervaluation of liabilities. These accounting mis-statements have been corrected in the consolidated financial statements of Cadbury Schweppes plc in 2006. The adjustment has been recorded within the associate line as the irregularities occurred in the period in which Cadbury Nigeria was treated as an associate. Consequently the Group has recognised a charge of £23 million reflecting its share of the adjustments. Both the former CEO and CFO of Cadbury Nigeria have now left the business. The CEO has been replaced with a former Cadbury Schweppes General Manager who has extensive operational experience in Africa and the CFO with an experienced Cadbury Schweppes Finance Director.
The Group is performing a full review of the financial processes, systems and people capabilities in place at Cadbury Nigeria and anticipates further changes will be made in 2007. Our Group Internal Audit will also separately perform full audit reviews of the business in 2007.
Other than in relation to Nigeria, the Board’s review of the system of internal control has not identified any failings or weaknesses which it has determined to be significant, and therefore no remedial actions are necessary. Accordingly, the Directors confirm that in compliance with principle C.2 of the Combined Code, the system of internal control for the year ended 31 December 2006 and the period up to 9 March 2007 has been reviewed in line with the criteria set out in the Turnbull guidance currently applicable.
See “Item 15: Controls and Procedures” for information regarding the Group’s disclosure controls and procedures and the Group’s internal control over financial reporting as defined under the Sarbanes-Oxley Act and related rules promolugated by the SEC.

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Management Compensation
Introduction
This report describes the current arrangements for the remuneration of executive Directors and, where relevant, other Board members and senior executives, as agreed by the Remuneration Committee (the Committee) in 2006. Except as detailed below, these arrangements are likely to continue to apply in future years, unless there are specific reasons for change, in which case shareowners will be informed appropriately.
This report complies with the requirements of the Companies Act 1985 (in particular Schedule 7A – Directors’ Remuneration Report) and of the Combined Code.
The Board has delegated to the Committee authority to review and approve the annual salaries, incentive arrangements, service agreements and other employment conditions for the executive Directors, and to approve awards under our share based plans. The Committee is tasked with ensuring that individual rewards are linked to performance and aligned with the interests of the Company’s shareowners. This requires that cost effective packages are provided which are suitable to attract and retain executive Directors of the highest calibre and to motivate them to perform to the highest standards. The Committee also oversees remuneration arrangements for our senior executives to ensure they are also aligned with shareowner interests. The terms of reference of the Committee are available for inspection on our website.
Changes to reward arrangements
Reward arrangements for executive Directors and other senior executives need to remain in line with prevailing practices among other UK-parented companies and be competitive for a global consumer goods company. In 2006, the Committee reviewed arrangements and incentives to ensure that they remain effective and appropriate to the Company’s circumstances and prospects and to monitor the level of potential awards. In the light of the introduction of IFRS and the evolving views of investors opposed to the re-testing of performance conditions applicable to share options, the Committee made the following changes to the policy with effect from 2 January 2006:
>   No more discretionary share options will be granted unless general market conditions change or if there are particular circumstances that arise where an option grant would be appropriate;
 
>   As a consequence, for executive Directors, the target and maximum levels of award under the AIP (defined on page •) increased from 80% and 120% to 100% and 150% of salary respectively, and the annual LTIP (defined opposite) award increased from 120% to 160% of salary. The percentage of the LTIP award which vests for threshold performance will reduce from 40% to 30% and this will reduce the percentage of shares vesting for all levels of performance below the 80th percentile. LTIP awards can now be made up to a maximum value of 200% of salary, but any award significantly higher than the proposed 160% level will only be made in exceptional circumstances;
 
>   The BSRP (defined on page 76) performance related scale was changed from step vesting to a straight line sliding scale;
 
>   Also, in setting performance ranges for cycles for all our long-term plans from 2006 onwards, the economic profit and earnings per share ranges are expressed in absolute rather than real (post inflation) terms. This is partly because there is no one satisfactory inflation index against which to measure our performance (given that our earnings are generated in numerous currencies), and secondly because an absolute measure is simpler and in line with the way in which we communicate our results.
Similar changes were made to AIP, BSRP and LTIP for executives below Board level. For those who are not eligible for LTIP awards, we widened the scope of the International Share Award Plan. This gives conditional share awards if performance targets are met, so that the expected value of remuneration for these employees is maintained at broadly the same level as previously.
The chart below shows the fixed and variable elements of an executive Director’s remuneration for 2007, and a range of outcomes for each component. Expected value is the present value of the sum of all the various possible outcomes at vesting or exercise of awards, and was calculated using industry accepted methodologies.
(BAR CHART)
In line with recognised good practice and previous commitments, the Committee will undertake a fundamental review of remuneration policy and all incentive plans for submission to shareowners for approval at the AGM in 2008. The review will focus on the following key areas:
>   The structure of senior executive remuneration packages and the balance between fixed and variable remuneration, short and long term incentives and local against international based remuneration;
 
>   An assessment of the current incentive plans, individually and in the context of overall remuneration, including appropriate performance measures and the balance between Group, regional and local unit results and individual contributions;
 
>   The issue of an appropriate comparator group for the purpose of remuneration comparisons; and
 
>   The levels of shareownership required from executives in the context of the market.

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Remuneration Committee members and advisers
The Committee consists of:
Rick Braddock
  (Chairman of the Committee)
Roger Carr
   
Wolfgang Berndt
   
David Thompson
   
Rosemary Thorne
   
All are independent non-executive Directors, and all were members of the Board and Committee at the year-end. No other person was a member of the Committee at a time when any matter relating to the executive Directors’ remuneration for 2006 was considered. Raymond Viault joined the Committee on 16 February 2007, and Rick Braddock will leave it when he retires as a Director at the May 2007 Annual General Meeting. Wolfgang Berndt will then take over as chairman of the Committee.
The Committee met four times and passed one written resolution in 2006 to consider and approve, amongst other things:
>   The Directors’ remuneration report for 2005;
 
>   Proposed salary increases and changes to other compensation elements of the executive Directors’ remuneration;
 
>   AIP and share based grants to the executive Directors and members of the Chief Executive’s Committee;
 
>   A review of our share plans and pension arrangements; and
 
>   Performance measures, weights, targets and allocation guidelines for share based remuneration.
No Committee member has any personal financial interest (other than as a shareowner), conflicts of interest arising from cross-directorships, or day-to-day involvement in running the business. Other Directors and employees who attended some or all of the meetings and who provided material advice or services to the Committee during the year were:
Sir John Sunderland
  Chairman
Todd Stitzer
  Chief Executive Officer
Bob Stack
  Chief Human Resources Officer
Ken Hanna
  Chief Financial Officer
Hester Blanks
  Group Secretary
Don Mackinlay
  Group Remuneration and Benefits Director
John Mills
  Director of Group Secretariat and Secretary to the Committee
Hester Blanks, Don Mackinlay and John Mills were appointed by the Company and have the appropriate qualifications and experience to advise the Committee on relevant aspects of our policies and practices, and on relevant legal and regulatory issues. The Company appointed, and the Committee sought advice from, Slaughter and May and the Committee appointed and sought advice from Towers, Perrin, Forster & Crosby, Inc. Representatives from the latter have attended meetings of the Committee and in addition have provided advice, primarily in the area of remuneration matters, to the Group’s operations outside the UK. This advice included information on the remuneration practices of consumer products companies of a size and standing similar to those of the Company, including competitors and other businesses which trade on a worldwide basis. Slaughter and May has advised the Committee on legal and regulatory issues and have also provided advice on a broad range of legal issues for the Group during 2006.
Overview of remuneration elements for executives including executive Directors
Element   Objective   Performance period   Performance conditions
 
Base salary
  Reflects market value of role and individual’s skills and experience   Not applicable   Reviewed annually, following external benchmarking and taking into account individual performance and the increases awarded to other employees
 
           
Annual Incentive Plan
(AIP)
  Incentivises delivery of performance goals for the year   One year   Award subject to achievement of revenue and Underlying economic profit (UEP) targets for the year
 
           
Bonus Share Retention Plan (BSRP) Note: This is a voluntary investment programme
  Incentivises sustained annual growth Aids retention of executives Supports and encourages share ownership   Three years   Basic award and an additional match subject to continued employment and to achievement of compound annual growth in aggregate UEP
 
           
Long Term Incentive Plan
(LTIP)
  Incentivises long-term
value creation
  Three years   Half of award subject to total shareowner return (TSR) ranking relative to an international peer group
 
           
 
  Aids retention of executives       Half of award subject to achievement of compound annual growth in aggregate Underlying earnings per share (UEPS)
 
           
Discretionary Share
Option Plans
(No awards made since 2005)
  Incentivises earnings growth Aids retention of executives   Three to ten years   Vesting subject to achievement of compound annual growth in (point to point) UEPS. First test at end of three, then five years
 
  Incentivises increasing
share price
      Value of award comes from share price growth at time of exercise
Whether particular performance conditions are met is assessed with reference to our annual accounts or to external data which is widely available. These methods have been chosen as they are or can be independently audited. Remuneration received in respect of each of these elements by the executive Directors is shown on pages 81 to 84.
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Remuneration policy principles
Our remuneration policy for executives, including executive Directors, is based on the following core principles:
>   Basic salary is targeted generally between median and upper quartile of the Company’s comparator group and at upper quartile for consistently strong or outstanding individual performance. This, combined with performance related variable elements, is designed to result in upper quartile total remuneration against delivery of superior business results and returns to shareowners;
 
>   A portfolio of incentives and rewards balance the achievement of short and long-term business objectives;
 
>   The performance conditions for our incentive plans (including the BSRP, LTIP and discretionary share options) are based on the measurable delivery of strong financial performance at constant currency (and on superior shareowner returns for the LTIP) and are widely understood by shareowners;
 
>   Total remuneration potential is designed to be competitive in the relevant market, thereby enabling us to attract and retain high calibre executives;
 
>   The total remuneration programme includes significant opportunities to acquire Cadbury Schweppes shares, consistent with building a strong ownership culture;
 
>   Executive Directors are expected to meet a share ownership requirement set at four times base salary, which is at the top end of such requirements in the FTSE 100. For new appointments, the Director is given a period of three to five years in which to satisfy this requirement. The share ownership policy applies to all senior executives in the business with a range from one to three times salary, depending on their level of seniority.
Competitive positioning of remuneration
The Committee carefully considers on a regular basis the market positioning of all executives for whose remuneration it is responsible against the most recent and relevant market data available. For example, for the Chief Executive Officer, market data for the CEO position in companies of comparable size, complexity and international spread in the UK FTSE 100 index is used, with relevant US company details referenced for a broader context.
A similar approach is taken for other senior executives. We benchmark against similar positions in companies of comparable size, complexity and international spread and also participate in several of the leading global surveys of executive remuneration in global consumer goods companies.
In making assessments, the Committee takes into account the overall value of the potential remuneration that packages represent, including salary, short and long-term incentives and share ownership requirements. It focuses, in particular, on the ‘on-target’ level and expected value of remuneration. The Committee also takes into account the proportions of total compensation that are fixed and those which are variable because they are subject to various conditions, including performance and, in the case of share-based incentives, future share price performance.
Balance between fixed and variable pay
Around two-thirds of each executive Director’s remuneration is variable and is linked to performance. The performance conditions for each variable element are the same for each executive Director. The following chart shows the fixed (base salary only) and variable elements of the remuneration package for executive Directors for 2006 and 2007 assuming the target (AIP only) and expected value levels of remuneration are achieved.
Fixed and variable elements
(PIE CHART)
Share-based awards and dilution
We ensure that the aggregate of all share-based awards does not exceed the guidelines laid down by the Association of British Insurers. These suggest that the number of awards granted in respect of all share-based schemes should not exceed 10% of the current issued share capital in any rolling ten-year period. The number of awards granted in respect of discretionary schemes should not exceed 5% of the current issued share capital in the same period. Many of the share option plans we operate use shares purchased in the market to satisfy awards at maturity, thereby ensuring that shareowner value is not unduly diminished or diluted.
The available dilution capacity on this basis expressed as a percentage of the Company’s total issued ordinary 12.5p share capital on the last day of each of the last five financial years was as follows:
                                         
Outstanding capacity   2002   2003   2004   2005   2006
 
For all employee schemes
    5.16 %     4.66 %     4.53 %     4.58 %     5.27 %
 
For discretionary schemes
    2.55 %     1.97 %     1.75 %     1.74 %     2.36 %
 

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Performance graph
The following graph shows the Company’s performance measured by total shareholder return (TSR) for the five years to 31 December 2006 compared with the TSR performance of the FTSE 100 companies over the same period. TSR is the product of the share price plus reinvested dividends. The FTSE 100 has been selected for this comparison because this is the principal index in which the Company’s shares are quoted. The graph has been prepared in accordance with the Companies Act 1985 (as amended) and is not an indication of the likely vesting of awards granted under any of the Company’s incentive plans. In particular, it is not the basis on which we measure LTIP TSR performance which is measured against a more appropriate and consistently demanding peer group.
Historical TSR performance growth in the value of a hypothetical £100 holding over five years. FTSE 100 comparison based on 30 trading day average values
(PERFORMANCE GRAPH)
Service contracts
All executive Directors have contracts which are terminable by the Company giving one year’s notice, or by the executive Director giving six months’ notice, and expire in the year in which the executive Director reaches their current contractual retirement age of 60. The contracts include provisions on non-competition and non-solicitation. These provisions state that if the executive Director leaves voluntarily he will not, for a period of one year after leaving, be engaged in or concerned directly or indirectly with a predetermined list of companies which are in competition with us. Also, the executive Director agrees for a period of two years after termination of employment not to solicit or attempt to entice away any employee or Director of the Company. If any executive Director’s employment is terminated without cause, or if the executive Director resigns for good reason, payment of 12 months’ worth of base salary and target AIP will be made, together with benefits for up to 12 months, or for a shorter period if the executive Director secures new employment with equivalent benefits. If it is not possible or practical to continue benefits for one year they will be paid in cash. There would be no special payments made after a change in control. For the BSRP/LTIP provisions which apply on a change of control or termination of employment refer to page 76.
Under their secondment arrangements, Bob Stack and Todd Stitzer are entitled to six months’ employment with their employing company in the USA if there are no suitable opportunities for them when their secondments end. All the executive Directors’ contracts are 12 month rolling contracts, and accordingly, no contract has a fixed or unexpired term. All the executive Directors’ contracts are dated 1 July 2004 except for Ken Hanna’s, which is dated 1 March 2004.
Salaries and benefits in kind for executive Directors
In setting the base salary of each executive Director, the Committee takes into account market competitiveness and the performance of each individual executive Director, any changes in position or responsibility and pay and conditions throughout the Group. This structure takes account of the reward structure in place for executives below Board level, and that used by comparable companies. In addition to base salary, the executive Directors also receive benefits in kind. In 2006, the rate of base salary increases for executive Directors was between 5.7% and 8.9%. These included adjustments relating to changing circumstances. Salaries received by the Executive Directors in the 2006 financial year are shown on page 81.
Annual Incentive Plan (AIP)
Annual incentive targets are set each year to take account of current business plans and conditions, and there is a threshold performance below which no award is paid. AIP awards are based on financial tests, subject to appropriate adjustments, as determined by the Committee. In 2006, awards were based on the delivery of underlying economic profit (UEP), defined as underlying profit from operations less a charge for the weighted average cost of capital, and growth in revenue, both key elements of the annual contract. The award is weighted 60% on the delivery of UEP and 40% on the growth in revenue, and these weightings will remain the same for 2007. For both years, if our trading margin is below the contracted level, the revenue element of the award will be reduced at all levels of performance except at the threshold level. Furthermore, if targets are only achieved at the expense of lowering returns on total invested capital, the Committee reserves the right to reduce AIP payments accordingly.
The target incentive award for an executive Director is 100% of base salary, with the maximum award being at 150% for exceptional performance. AIP awards to executive Directors for 2005 and 2006 were 91% and 74% respectively of base salary, and in 2006, this represented 43.1% on the delivery of UEP and 31.1% on the growth in revenue. AIP received by the executive Directors in respect of the 2006 financial year is shown on page 81.

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Bonus Share Retention Plan (BSRP)
The BSRP is an essential element of our total reward programme and has been a key factor in helping and encouraging executives to meet the share ownership guidelines that we apply. The BSRP is available to a group of approximately 170 senior executives including the Executive Directors and aims to encourage participants to reinvest a cash award into the Company’s shares.
The BSRP enables participants to invest all or part of their AIP award in, or take their AIP Award as an award over, our shares (“deferred shares”) together with a Company match of additional shares after three years. During the three year period, the shares are held in trust. If a participant leaves the Group during the three year period, they forfeit some of the additional shares and in certain cases it is possible that all of the deferred shares and the additional shares may be forfeited. Each year the Executive Directors have chosen to invest all their AIP awards into the BSRP.
The number of matching shares that will be provided for grants in 2006 is as follows:
     
Absolute compound annual growth in   Percentage of matching
aggregate UEP over the three-year   shares awarded at the
deferral period equivalent to:   end of the period:
 
            below 4%
  40% (Threshold)
            4%
  40%
            8%
  70%
12% or more
  100% (Maximum)
 
There is a straight line sliding scale between those percentages. UEP is measured on an aggregate absolute growth basis, the levels of growth required to achieve the highest levels of share match being demanding. For awards made before 2006, UEP performance was measured on a real basis, with a stepped vesting scale between the threshold and maximum. Awards under the BSRP will vest in full following a change in control but only to the extent that performance targets have been met at the time of the change in control unless the Committee decides that the awards would have vested to a greater or lesser extent had the performance targets been measured over the normal period. The 2005-2007 and 2006-2008 cycles are currently expected to result in around two-thirds of the matching shares available being awarded. Actual vesting will depend on performance over the full vesting period. AIP awards received by the Executive Directors in respect of the 2006 financial year and reinvested into the BSRP are shown on pages • and •.
Long Term Incentive Plan (LTIP)
Around 85 senior executives (including the executive Directors) are granted a conditional award of shares under the LTIP. This award recognises the significant contribution they make to shareowner value and is designed to incentivise them to strive for sustainable long-term performance.
In 2006, awards for the 2006-2008 performance cycles were made to senior executives, including the executive Directors. Details of the Directors’ LTIP interests are set out in the table on page 82.
One half of the conditional shares that vest are transferred immediately. The transfer of the remaining half is deferred for two years and is contingent on the participant’s employment with us not being terminated for cause during that period. Participants accumulate dividend equivalent payments both on the conditional share awards (which will only be paid to the extent that the performance targets are achieved) and during the deferral period. This part of the award is calculated as follows: number of shares vested multiplied by aggregate of dividends paid in the performance period divided by the share price on the vesting date.
The current LTIP has been in place since 1997. In 2004, the Committee made a number of changes to the LTIP, and the table below sets its key features. As explained above, from 2006, performance ranges for the growth in Underlying Earnings Per Share (UEPS) are expressed in absolute rather than post-inflation terms.
The TSR measure is a widely accepted and understood benchmark of a company’s performance. It is measured according to the return index calculated by Datastream on the basis that a company’s dividends are invested in the shares of that company. The return is the percentage increase in each company’s index over the performance period. UEPS is a key indicator of corporate performance. It is measured on an absolute basis (real prior to 2006 after allowing for inflation). Sustained performance is therefore required over the performance cycle as each year counts in the calculation.
(FLOW CHART)

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    Awards made prior to 2004   Awards made for 2004 onwards
 
Face value of conditional share award made to executive Directors
  80% of base salary   120% of base salary (2004 and 2005)
160% of base salary (2006 onwards)
 
       
Performance
conditions
  Award is based on TSR relative to the Comparator Group with a UEPS hurdle   Half of the award is based on growth in UEPS over the three year performance period. The other half of the award is based on TSR relative to the Comparator Group
 
       
UEPS vesting
requirement*
  For the award to vest at all UEPS must have grown by at least the rate of inflation as measured by the Retail Price Index plus 2% per annum (over three years)   The extent to which some, all or none of the award vests depends upon annual compound growth in aggregate UEPS over the performance period:
 
     
>   30% of this half of the award will vest if the absolute compound annual growth rate achieved is 6% or more
 
     
>   100% of this half of the award will vest if the absolute compound annual growth rate achieved is 10% or more
>   Between 6% and 10%, the award will vest proportionately
 
       
TSR vesting
requirement*
  The extent to which some, all or none of the award vests depends on our TSR relative to the Comparator Group:   The extent to which some, all or none of the award vests depends upon our TSR relative to the Comparator Group:
 
 
>    The minimum award of 50% of the shares conditionally granted will vest at the 50th percentile ranking
 
>   30% of this half of the award will vest at the 50th percentile ranking
 
 
>    100% of the award will vest at the 80th percentile ranking or above
 
>   100% of this half of the award will vest at the 80th percentile ranking or above
 
 
>    Between the 50th and 80th percentiles, the award will vest proportionately
 
>   Between the 50th and 80th percentiles, the award will vest proportionately
 
       
 
       
Re-tests
  If the TSR performance criteria is not satisfied in the initial three year performance period, the award will be deferred on an annual basis for up to three years until the performance is achieved over the extended period (i.e. either four, five or six years). If the award does not vest after six years, then it will lapse   There are no re-tests and the award will lapse if the minimum requirements are not met in the initial three year performance period
 
       
Comparator Group
  A weighting of 75% is applied to the UK companies in the Comparator Group, and 25% to the non-UK based companies   The Comparator Group has been simplified and amended to include companies more relevant to the Company, and there will be no weighting as between UK and non-UK companies
 
*   For cycles beginning in 2004 and 2005, threshold vesting was 40% of the award, and performance ranges for the growth in Underlying Earnings Per Share (UEPS) was expressed in post-inflation terms.

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The TSR measure is a widely accepted and understood benchmark of a company’s performance. The TSR is measured according to the return index calculated by Datastream on the basis that a company’s dividends are invested in the shares of that company. The return is the percentage increase in each company’s index over the performance period. UEPS is a key indicator of corporate performance. It is measured on a real basis after allowing for inflation, based on a weighted average inflation index computed using the published annual Consumer Price Index inflation rates for the UK, USA, Euro Zone and Australia. The real growth rates are aggregate per annum compound and sustained performance is therefore required over the performance cycle as each year counts in the calculation.
The following companies were selected as comparator companies (the “Comparator Group”) to reflect the global nature of our business:
         
 
UK Based Companies   Non-UK Based Companies   Head Office Location
 
Allied Domecq #
  Campbell Soup   US
Associated British Foods
  Coca-Cola   US
Diageo
  Coca-Cola Enterprises+   US
Northern Foods
  Colgate-Palmolive   US
Reckitt Benckiser
  Conagra+   US
Scottish & Newcastle+
  CSM+   Netherlands
Six Continents*
  Danone   France
Tate & Lyle
  General Mills   US
Unilever
  Heinz   US
Uniq*
  Hershey Foods   US
Whitbread*
  Kellogg   US
 
  Kraft Foods+   US
 
  Lindt & Sprungli+   Switzerland
 
  Nestlé   Switzerland
 
  Pepsi Bottling Group+   US
 
  PepsiCo   US
 
  Pernod Ricard   France
 
  Procter & Gamble   US
 
  Sara Lee Corp   US
 
  Suedzucker*   Germany
 
  Wrigley+   US
 
     
*   indicates a company dropped from the Comparator Group in 2004
 
+   indicates a company added to the Comparator Group for 2004 onwards
 
#   indicates a company dropped from the Comparator Group in 2005, due to its no longer being a publicly quoted company
Awards under the LTIP (both before and after 2004) will vest in full following a change in control, but only to the extent that performance targets have been met at the time of the change in control. The actual vesting of awards will be based on performance over the full vesting period and future results will be reflected in the outcome.
                         
    Performance     TSR percentile     Current status  
    against     ranking as at     (% of maximum  
Cycle   UEPS target     1 January 2007     award)  
 
2001-2003
  hurdle met       27     lapsed  
2002-2004
  hurdle met       35     extended  
2003-2005
  hurdle met       41     extended  
2004-2006
  threshold exceeded       74     paid 69.1%  
 
The 2005-2007 and 2006-2008 cycles are currently expected to pay around half of the maximum award available. Actual vesting will depend upon performance over the full vesting period.
Discretionary Share Option Plans
Share options are granted to over 2,000 Group employees. All our discretionary share option plans use the following criteria:
         
    Annual grants made prior to 2004 AGM   Annual grants made after 2004 AGM
 
Market value of option grant made to Executive Directors
  Customary grant was 300% of base salary and the maximum was 400% of base salary   Maximum of 200% of base salary. From 2006 onwards, we propose that no such grants are made other than in exceptional circumstances
 
Performance
condition
  Exercise is subject to UEPS growth of at least the rate of inflation plus 2% per annum over three years   Exercise is subject to real compound annual growth in UEPS of 4% for half the award to vest and 6% real growth for the entire award to vest over three years, measured by comparison to the UEPS in the year immediately preceding grant
 
Re-tests
  If required, re-testing has been on an annual basis on a rolling three-year base for the life of the option   If the performance condition is not met within the first three years, the option will be re-tested in year five with actual UEPS growth in year five measured in relation to the original base year
 
The growth in UEPS for these purposes is calculated on a ‘point to point’ basis, using a formula which incorporates the UEPS for the year prior to the start of the first performance period and for the last year of the performance period based on a weighted average inflation index (as for the LTIP). The UEPS is measured on a real basis after allowing for inflation. The actual vesting of awards will be based on performance over the full vesting period and future results will be reflected in the outcome.
Other Share Plans
The Group also has a share option scheme for all employees of the Group. All Options are normally forfeited if the employee leaves the Group before the options vest. The Group has an International Share Award Plan (ISAP) which is used to reward exceptional performance amongst employees.
An expense is recognised for the fair value at the date of grant of the estimated number of shares that will be awarded to settle the options over the vesting period of each scheme.

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The growth in UEPS for these purposes is calculated on a ‘point to point’ basis, using a formula which incorporates the UEPS for the year prior to the start of the first performance period and for the last year of the performance period based on a weighted average inflation index. The UEPS is measured on a real basis after allowing for inflation. Options granted in 2004 and 2005 are expected to meet their performance targets and vest in full. The actual vesting of awards will be based on performance over the full vesting period. All options granted prior to 2004 achieved their UEPS targets and vested in full.
Other share option plans
Each executive Director also has the opportunity to participate in the savings-related share option scheme operated in the country in which his contract of employment is based. Further details on these share plans are provided in Note 26 to the financial statements.
Effect of IFRS on performance measures
The Group adopted International Financial Reporting Standards (IFRS) as its primary generally accepted accounting principles (GAAP) with effect from 3 January 2005. Performance measures for the 2005 financial year onwards are based upon the Underlying IFRS performance measures. Where past performance measures continue to be applicable or are retested, these will either be restated on a consistent basis with IFRS or the comparable current measure will be restated on a consistent basis with the past performance measure.
Retirement benefits
We operate a number of retirement benefit programmes throughout the world. Such benefits reflect local competitive conditions and legal requirements.
In the UK, all new employees (from 2001) are offered membership of a revalued career average defined benefit pension plan which provides benefits based on total earnings. Employees entitled to final salary benefits (calculated on basic earnings plus annual incentive awards limited to a further 20% of basic salary) receive benefits in line with those arrangements. Both of these arrangements are contributory and senior managers pay between 4% and 5% of pensioned earnings. No current executive Director participates in the UK plans. Pension arrangements in the US provide that all of any incentive awards under the AIP for all employees are pensionable, in line with normal practice in that country.
Sir John Sunderland was a member of the final salary pension arrangements from which he retired on his 60th birthday in 2005. Under the rules of the arrangements he received a pension of 2/3rds of his pensioned earnings (basic salary plus annual incentive bonus payment, limited to 20% of basic salary and averaged over three years). Ken Hanna is not a member of the Group’s pension schemes and receives a cash allowance of 30% of his base salary in lieu of a pension contribution.
Bob Stack and Todd Stitzer are members of the US Supplemental Executive Retirement Plan (SERP) as well as the US cash balance pension plan and excess plan. The SERP is a defined benefit retirement plan with a pension paid on retirement based on salary and length of service. Combined benefits are 50% of a three year average of final pensionable earnings after 15 years’ service and 60% after 25 or more years’ service. Bob Stack and Todd Stitzer are required under their current service contracts to retire at age 60 without a reduction factor applied to accrued benefits. The SERP has a ten year vesting period and the benefits of these Executive Directors are fully vested. Further details of these arrangements are set out on page 65.
Executive Directors – outside appointments
We recognise the benefits to the individual and to the Company of involvement by executive Directors as non-executive directors in companies outside the Group. Subject to certain conditions, and with the approval of the Board, each executive Director is permitted to accept only one appointment as a non-executive director in another company. The executive Director is permitted to retain any fees paid for such service. Details of fees received by executive Directors are as follows:
                 
 
Ken Hanna
  £ 51,000     (Inchcape plc)
Todd Stitzer
  £ 61,250     (Diageo plc)
Bob Stack
  £ 55,000     (J Sainsbury plc)
 

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Chairman and non-executive Directors
Sir John Sunderland, non-executive Chairman, is provided with a car and chauffeur. This benefit was expected to be reduced to three days per week from June 2006 but will remain at its current level of five days per week while Sir John retains his involvement with the CBI.
We normally appoint non-executive Directors for an initial period of three years but Sir John Sunderland’s term as non-executive Chairman expires at the 2008 Annual General Meeting. Unless otherwise determined by the Board, the maximum term for a non-executive Director is nine years.
Fees for non-executive Directors are determined by the Board within the limits set by the Articles of Association. To ensure that the interests of the non-executive Directors are aligned with those of the shareowners, all non-executive Directors (except Sir John Sunderland) have chosen to utilise a percentage of their fees (between 50% and 100%) to purchase shares in the Company, which are bought within five business days of each relevant payment. Each non-executive Director has undertaken to hold such shares during the term of his or her appointment. The non-executive Directors do not have service contracts with the Company.
                         
Non-executive   Date of initial appointment to Board   Commencement date of current term   Expiry date of current term
 
Sanjiv Ahuja
  19 May 2006   19 May 2006   19 May 2009
Wolfgang Berndt
  17 January 2002   18 February 2005   18 February 2008
Rick Braddock
  27 June 1997   9 May 2006   24 May 2007
Roger Carr
  22 January 2001   26 November 2006   26 November 2009
Lord Patten
  1 July 2005   1 July 2005   1 July 2008
Sir John Sunderland
  5 May 1993   24 August 2006   22 May 2008
David Thompson
  9 March 1998   16 February 2007   8 March 2008
Rosemary Thorne
  6 September 2004   6 September 2004   6 September 2007
Raymond Viault
  1 September 2006   1 September 2006   1 September 2009
Baroness Wilcox
  5 March 1997   20 February 2006   Retired 31 December 2006
 
Baroness Wilcox retired as a non-executive Director on 31 December 2006. Rick Braddock will retire at the 2007 AGM and will not offer himself for re-election.
Fees for the independent non-executive Directors were reviewed in 2006 and the following table sets out the new rates of fee payable with effect from 1 October 2006:
Annual fees payable with effect from 1 October 2006
         
 
Chairman
  £ 400,000  
Deputy Chairman
  £ 105,000  
Other non-executive Directors:
       
– non-US based
  £ 55,000  
– US based
  $ 140,000  
 
Fee supplement for Committee Chairmen
       
– Audit
  £ 15,000  
– Remuneration
  $ 15,000/£12,500  
– Corporate and Social Responsibility
  £ 10,000  
 

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Directors’ remuneration tables
All the executive Directors invested their total AIP award in the Company’s shares through the Bonus Share Retention Plan rather than taking it as cash.
In the following tables, references to CEC members mean the individuals who are members of the Chief Executive’s Committee (our senior management) but who are not executive Directors. One CEC member left the Group in 2006 and two new members were appointed. Remuneration shown for the CEC includes remuneration paid to the CEC member who left the Group as part of his termination package. In 2006, there were a maximum of nine individuals at any one time who were members of the CEC but who were not executive Directors.
Directors’ remuneration summary (table one)
                 
    2006     2005  
    £000     £000  
 
Total remuneration:
               
Fees as Directors
    902       534  
Salaries and other benefits (a)
    3,198       3,493  
Annual Incentive Plan/Bonus Share Retention Plan awards (b)
    2,019       2,922  
Gains on share plans
    3,263       2,734  
Pensions paid to former executive Directors
    33       32  
 
Notes    
 
(a)   The highest paid Director was Todd Stitzer: £3,422,000 (2005: Sir John Sunderland: £3,441,000).
 
(b)   These amounts relate to the Annual Incentive Plan awards for each year. The total shown includes the service related match to be awarded under the Bonus Share Retention Plan to each Director based on the AIP award which they have invested and which will vest (normally) in three years’ time. The performance related matching award is shown in table six.
Executive Directors’ and CEC members’ remuneration (table two)
                                                 
                    Other             2006     2005  
    Base salary     Allowances (a)     benefits (b)     AIP/BSRP(c)     total     total  
    £000     £000     £000     £000     £000     £000  
 
Ken Hanna
    560       192             592       1,344       1,378  
Bob Stack (d)
    474       270       155       498       1,397       1,386  
Todd Stitzer (d)
    877       511       156       929       2,473       2,381  
CEC members (f)
    2,995       1,464       1,173       3,057       8,689       9,214  
 
Directors’ and CEC members’ gains on share plans (table three)
                                 
    LTIP awards     Gains on              
    earned in     exercise of     2006     2005  
    2006     share options     total     total  
    £000     £000     £000     £000  
 
Ken Hanna
    558             558        
Bob Stack
    512       2       514       429  
Todd Stitzer
    949             949       266  
Sir John Sunderland (e)
    594       648       1,242       2,039  
CEC members (f)
    1,862       1,108       2,970       660  
 
Notes to tables two and three above
 
(a)   The majority of the amount shown as Allowances for expatriate Directors (Bob Stack and Todd Stitzer) and expatriate CEC members relates to income tax payments. As taxation rates in the US are lower than in the UK, US tax payers are protected from a higher tax burden by means of a tax equalisation programme funded by the Company. Under this programme, we pay an amount equal to the incremental tax resulting from the assignment of individuals to the UK. This ensures that they are not penalised financially by accepting roles of an international nature which would result in higher taxation costs than would have been the case if they had remained in their home country. Due to the nature of taxation payments, some of the amounts shown are in respect of previous financial years. For all Directors and CEC members, Allowances include flexible benefits and car allowances. Ken Hanna’s allowances include an amount equal to 30% of his base salary in lieu of a pension contribution.
 
(b)   Other benefits include company cars and, for expatriates, housing support and other allowances necessary to ensure that they are not penalised financially by accepting roles of an international nature which result in higher costs than would have been the case if they had remained in their home country.
 
(c)   The total AIP award shown was awarded in respect of 2006 performance and invested in the BSRP on 5 March 2007 by each eligible Director. The AIP and BSRP are described on pages 75 and 76. The amount shown includes the service related matching award to be awarded under the BSRP to each Director and the aggregate for CEC members. The performance related conditional matching awards are shown in table six.
 
(d)   Todd Stitzer’s and Bob Stack’s base salaries are calculated in US dollars as follows: Todd Stitzer – US$1,618,846; Bob Stack – US$874,038. (e) Sir John Sunderland was appointed as non-executive Chairman on 25 August 2005. Table three shows his gains in the year on share plans arising out of awards made whilst he was an executive Director. Sir John Sunderland had until 24 August 2006 to exercise his remaining share options following his retirement as an employee.
 
(e)   Sir John Sunderland was appointed as non-executive Chairman on 25 August 2005. Table three shows his gains in the year on share plans arising out of awards made whilst he was an executive Director. Sir John Sunderland had until 24 August 2006 to exercise his remaining share options following his retirement as an employee.
 
(f)   For all remuneration, the aggregate amounts shown for the CEC are only those amounts paid to individuals whilst they were CEC members. Other benefits for CEC members include payments made in connection with the cessation of employment.

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Non-executive Directors’ fees and benefits (table four)
                                         
                    Fee for              
    Other             chairing     2006     2005  
    benefits     Board fee     a committee     total     total  
    £000     £000     £000     £000     £000  
 
Sanjiv Ahuja (a)
          32             32        
Wolfgang Berndt
          51             51       46  
Rick Braddock
          76       8       84       82  
Roger Carr
          101             101       93  
Lord Patten
          51             51       24  
Sir John Sunderland (b)
    3       381             384       132  
David Thompson
          51       15       66       57  
Rosemary Thorne
          51             51       46  
Raymond Viault (a)
          24             24        
Baroness Wilcox
          51       10       61       54  
 
Notes    
 
(a)   Sanjiv Ahuja was appointed as a non-executive Director on 19 May 2006 and Raymond Viault was appointed as a non-executive Director on 1 September 2006.
 
(b)   Sir John Sunderland was appointed as non-executive Chairman on 25 August 2005. Table three shows his gains on share plans arising out of awards made whilst he was an executive Director. Other benefits relate to the provision of a car and chauffeur as described on page 80.
 
(c)   None of the non-executives (other than Sir John Sunderland) received any other emoluments during the 2006 financial year.
Directors’ and CEC members’ interests in the Long-Term Incentive Plan (table five)
                                                 
    Interest                             Interest in        
    in shares                             shares as at        
    at 1 January     Interest             Interest     31 December     Dividend  
    2006 (or date     in shares     Shares     in shares     2006 (or date     Shares  
    of appointment     awarded in     vested     lapsed     of resignation     awarded and  
    if later) (a)     2006 (b)     (c)     (d)     if earlier) (e)     vesting (c)  
 
Ken Hanna
    328,875       164,028       95,520       42,714       354,669       7,438  
Bob Stack
    447,206       139,714       87,774       103,004       396,142       6,834  
Todd Stitzer
    740,900       260,484       162,567       158,263       680,554       12,659  
Sir John Sunderland (f)
    618,173             101,789       169,623       346,761       7,926  
CEC members
    1,648,231       652,082       318,980       324,147       1,657,186       24,836  
 
Notes    
 
(a)   Interests as at 1 January 2006 are potential interests shown at their maximum number in respect of the extended 2001-2003 and the 2002-2004 cycles, and the 2003-2005, 2004-2006 and 2005-2007 cycles.
 
(b)   The interests in shares awarded in 2006 relate to the 2006-2008 cycle. The mid-market price on 7 April 2006 when these awards were made was £5.61. The criteria under which these awards would vest in full are explained on page 77.
 
(c)   Shares vested on 4 March 2007 were in respect of the 2004-2006 cycle and include those deferred into trust for a further two years and (shown separately) shares which were awarded and vested in respect of dividends paid during the performance period, in accordance with ABI guidelines. The shares deferred into trust will only vest if the participant fulfils specified employment conditions during that time. If they do vest, a further award of shares will vest in respect of the dividends paid on these shares while they have been in trust, calculated on a similar basis. The mid-market price on 4 March 2007 was £5.41. On 5 March 2007, the following individuals disposed of ordinary shares which vested under the 2004-2006 cycle of the Company’s Long Term Incentive Plan on 4 March 2007, the price received in each case being £5.28 per share: Sir John Sunderland – 109,715 shares; Bob Stack – 20,848 shares; Todd Stitzer – 38,614 shares.
 
(d)   All interests in shares in respect of the 2001-2003 cycle lapsed at the end of the financial year as did that part of the 2004-2006 cycle which did not vest.
 
(e)   Interests as at 31 December are potential interests shown at their maximum number in respect of the extended 2002-2004 and 2003-2005 cycles, and the 2005-2007 and 2006-2008 cycles. The current status of each cycle is shown on page 60. At the present time it is anticipated that no cycle will vest at maximum.
 
(f)   Sir John Sunderland’s employment ceased on 24 August 2005 and consequently a proportion of his outstanding LTIP awards lapsed in accordance with the rules of the plan.
 
(g)   All awards are in shares. Qualifying conditions for the awards shown above have to be fulfilled by 31 December 2008 at the latest.

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Executive Directors’ and CEC members’ performance related interests in the Bonus Share Retention Plan (table six)
This table shows the maximum performance related matching award granted to each Director in respect of the investment made by the Director of his AIP award in the BSRP.
                                         
    Maximum performance     Maximum performance                     Total of maximum  
    related award in     related award in             Interest in shares     performance related  
    respect of     respect of     Shares vested in     lapsed in     awards in respect of  
    2004 and 2005     2006 (b)     2006     2006     2004 to 2006 (c)  
 
Ken Hanna
    106,439       45,768                   152,207  
Bob Stack
    87,748       38,515                   126,263  
Todd Stitzer
    160,566       71,809                   232,375  
CEC members
    316,786       175,284                   492,070  
 
Notes    
 
(a)   The monetary value of the service-related awards for the 2006-2008 cycle (in respect of 2005 AIP) and for the 2007-2009 cycle (in respect of 2006 AIP) is included in the AIP/BSRP awards shown in tables one and two. The interests shown in this table are performance related awards shown at their maximum number in respect of the 2005-2007, 2006-2008 and 2007-2009 cycles. Performance related matching awards are made in March in respect of the previous year’s AIP investment (i.e. in March 2007 for 2006 AIP). Shares purchased by Directors for the 2007-2009 cycle using their AIP investment were acquired on 5 March 2007 at a price of £5.546 per share as follows: Ken Hanna – 76,280 shares, Bob Stack – 64,193 shares, Todd Stitzer – 119,681 shares. The service related awards for this cycle are: Ken Hanna – 30,512 shares, Bob Stack – 25,677 shares, Todd Stitzer – 47,872 shares.
 
(b)   The mid-market price on 4 March 2007 when these awards were made was £5.41. Qualifying conditions for these awards are set out on page 76.
 
(c)   All awards are in shares. Qualifying conditions for the awards shown above have to be fulfilled by 31 December 2009 at the latest.
Executive Directors’ pensions and retirement benefit arrangements (table seven)
                                                         
                                                    Transfer  
                                                    value of  
                                                    the increase  
                                            Increase in     in accrued  
                    Transfer     Transfer     Increase     accrued     pension  
            Increase in     value of     value of     in transfer     pension     (net of  
    Accrued     accrued     accrued     accrued     value over     during the     inflation)  
    pension     pension     pension at     pension at     the year, less     year     less  
    at 1 January     during     1 January     1 January     Directors’     (net of     Directors’  
    2007     the year     2007     2006     contributions     inflation)     contributions  
    £000     £000     £000     £000     £000     £000     £000  
 
US pension arrangements
                                                       
Bob Stack
    360       70       3,370       2,596       774       64       602  
Todd Stitzer
    737       189       6,337       4,506       1,831       179       1,535  
 
Notes    
 
(a)   The pension arrangements for Bob Stack and Todd Stitzer are made in US dollars and converted, for the purpose of this table only, at the rate of US$1.959 = £1.
 
(b)   As noted on page 79, Ken Hanna receives an amount equal to 30% of his base salary in lieu of a pension contribution.
 
(c)   The accrued pensions represent the amount of the deferred pension that would be payable from the member’s normal retirement date on the basis of leaving service at the relevant date.
 
(d)   The transfer values have been calculated in accordance with the guidance note GN11: Retirement Benefit Schemes – Transfer values published by the Institute of Actuaries and Faculty of Actuaries, and by reference to investment market conditions at the relevant date. Under the Stock Exchange Listing Rules, the transfer value of the increase in accrued pension has been calculated using investment conditions at the date of retirement.
 
(e)   The aggregate amount set aside in 2006 to provide for pensions and post retirement medical benefits for the executive Directors and CEC members was £1.045m. This consists of approved pension arrangements of £0.728m, unapproved pension arrangements of £0.313m and post medical retirement benefits of £0.003m. Arrangements made in US dollars were converted at a rate of US$1.959 = £1.

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Directors’ remuneration report continued
Directors’ and CEC members’ options over ordinary shares of 12.5p each (table eight)
                                                                 
                    As at                                  
    As at             31 December                                  
    1 January 2006             2006                                  
Name of   (or date of             (or date of             Market price     Gain made              
Director   appointment             resignation     Exercise     at exercise     on exercise     Exercisable        
and Scheme   if later)     Exercised(e)     if earlier)     price £     date £     £000(i)     from     to  
 
Ken Hanna
                                                               
SOP94 (a)
    125,000             125,000       4.2475                     27 Mar 2007   26 Mar 2014
SOP04 (b)
    205,000             205,000       4.395                     28 Aug 2007   27 Aug 2014
SOP04 (b)
    200,000             200,000       5.255                     2 Apr 2008   1 Apr 2015
SAYE (c)
    4,699             4,699       3.5160                     1 Feb 2010   31 Jul 2010
 
 
    534,699             534,699                                          
 
Bob Stack
                                                               
SOP94 (a)
    250,000             250,000       4.09                     2 Sep 2003   1 Sep 2010
SOP94 (a)
    250,000             250,000       4.77                     1 Sep 2004   31 Aug 2011
SOP94 (a)
    250,000             250,000       4.825                     24 Aug 2005   23 Aug 2012
SOP94 (a)
    350,000             350,000       3.515                     10 May 2006   9 May 2013
SOP04 (b)
    177,000             177,000       4.395                     28 Aug 2007   27 Aug 2014
SOP04 (b)
    151,500             151,500       5.255                     2 Apr 2008   1 Apr 2015
ESPP (d)
    1,512       1,520           $ 6.613       5.37       2     17 Apr 2006   28 Apr 2006
 
 
    1,430,012       1,520       1,428,500                       2                  
 
Todd Stitzer
                                                               
SOP94 (a)
    275,000             275,000       4.77                     1 Sep 2004   31 Aug 2011
SOP94 (a)
    300,000             300,000       4.825                     24 Aug 2005   23 Aug 2012
SOP94 (a)
    500,000             500,000       3.515                     10 May 2006   9 May 2013
SOP04 (b)
    327,000             327,000       4.395                     28 Aug 2007   27 Aug 2014
SOP04 (b)
    284,000             284,000       5.255                     2 Apr 2008   1 Apr 2015
 
 
    1,686,000             1,686,000                                          
 
Sir John Sunderland (g)
                                                               
SOP94 (a)
    200,000       200,000             4.77       5.85       216     1 Sep 2004   24 Aug 2006
SOP94 (a)
    500,000       500,000             4.825       5.41-5.85       425     24 Aug 2005   24 Aug 2006
SAYE (c)
    3,117       3,117             3.248       5.50       7     1 Feb 2006   31 July 2006
 
 
    703,117       703,117                             648                  
 
CEC members
    4,249,883       512,302       3,609,459       3.34       5.51       1,108     28 Sep 1999   25 Nov 2015
 
Notes    
 
(a)   Share Option Plan 1994.
(b)    Share Option Plan 2004.
 
(c)   Savings-Related Share Option Scheme 1982.
 
(d)   US and Canada Employee Stock Purchase Plan 1994. Under the rules of this Plan, interest which accrues on the money saved can also be used to purchase shares at the option price.
 
(e)   No options lapsed during the year and no options were granted during the year in respect of Directors. 139,000 options lapsed when a CEC member left the Group and 10,878 options in all-employee plans were granted to CEC members.
 
(f)   No payment was made on the granting of any of these options.
 
(g)   Non-executive Directors are not granted share options. Sir John Sunderland had until 24 August 2006 to exercise his remaining share options following his retirement as an employee.
 
(h)   The market price of an ordinary share on 29 December 2006 (the last dealing day in the financial year) was £5.46. The highest and lowest market prices of an ordinary share in the year were £5.90 and £4.99 respectively.
 
(i)   Where some or all of the shares were sold immediately after the exercise of an option, the gain shown is the actual gain made by the Director or CEC member. If some or all of the shares were retained, the gain is a notional gain calculated using the market price on the date of exercise. When an option was exercised or shares were sold in parts on a number of different days in the year, the gain shown is the aggregate gain from all those exercises.

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Share ownership (table nine)
                         
    As at     As at        
    1 January 2006     31 December 2006     As at  
    (or date of appointment     (or date of resignation     9 March 2007  
    if later)     if earlier)     (unaudited)  
 
Sanjiv Ahuja (a)
    877       2,287       3,693  
Wolfgang Berndt
    76,072       81,439       82,939  
Rick Braddock
    47,528       55,152       56,916  
Roger Carr
    38,423       47,368       49,755  
Ken Hanna (b)(c)
    378,143       499,260       678,552  
Lord Patten
    1,021       5,448       6,698  
Bob Stack (c)
    764,725       838,558       890,248  
Todd Stitzer (c)
    551,835       611,000       822,331  
Sir John Sunderland (c)
    938,658       939,075       939,075  
David Thompson
    39,825       45,610       47,201  
Rosemary Thorne
    4,564       9,035       10,285  
Raymond Viault (a)
          9,736       11,328  
Baroness Wilcox (d)
    27,343       33,291       N/A  
CEC members (c) (e)
    1,132,326       1,496,139       1,862,486  
 
Notes    
 
(a)   Sanjiv Ahuja was appointed as a non-executive Director on 19 May 2006 and Raymond Viault was appointed as a non-executive Director on 1 September 2006.
 
(b)   Ken Hanna’s shareholding includes an award of 225,000 restricted shares, vesting in three tranches of 75,000 shares each in March 2007, 2008 and 2009 if he is still employed by the Company at that time.
 
(c)   Holdings of ordinary shares include shares awarded under the BSRP and the all-employee share incentive plan and LTIP shares held in trust. The following executive Directors sold shares which vested under the 2004-2006 BSRP cycle on 4 March 2007: Bob Stack 20,070 shares at a price of £5.28 per share; Todd Stitzer: 81,174 shares at a price of £5.28 per share.
 
(d)   Baroness Wilcox retired as a non-executive Director on 31 December 2006.
 
(e)   Shareholdings of CEC members also include restricted share awards, the release of which is dependent upon specified performance conditions.
 
(f)   To accurately reflect the share ownership for each Director, as shown in the Register of Directors’ Interests (maintained under Section 325 of the Companies Act 1985), the holdings for each Director in tables eight and nine should be added together.
The following executive Directors had interests in the Common Stock of US$0.01 each of Dr Pepper/Seven Up Bottling Group, Inc (DPSUBG) (the holding company of the Group’s American bottling operations) prior to the acquisition of all the shares in DPSUBG by a Group subsidiary on 2 May 2006:
         
 
Bob Stack
    250  
Todd Stitzer
    2,500  
 
These shares were purchased at the same price ($125 per share) as that paid for all the other shares in DPSUBG not already owned by the Group.
Changes in the Directors’ share interests since the year end
There were the following changes in the Directors’ share interests between 1 January 2007 and 9 March 2007:
Ken Hanna purchased the following shares through participation in the Company’s all-employee share incentive plan: 24 shares on 8 January 2007 at a price of £5.46 per share; 25 shares on 5 February 2007 at a price of £5.79 per share; and 25 shares on 5 March 2007 at a price of £5.42 per share.
The non-executive Directors elected to surrender part of their Directors’ fees and on 5 January 2007 purchased the following number of shares at a price of £5.45 per share:
         
 
Sanjiv Ahuja
    1,406  
Wolfgang Berndt
    1,500  
Rick Braddock
    1,764  
Roger Carr
    2,387  
Lord Patten
    1,250  
David Thompson
    1,591  
Rosemary Thorne
    1,250  
Raymond Viault
    1,592  
 
Save as disclosed, there have been no other changes in the interests of the Directors between 1 January 2007 and 9 March 2007.
All the interests detailed above are beneficial. Save as disclosed, none of the Directors had any other interest in the securities of the Company or the securities of any other company in the Group. The Register of Directors’ Interests, which is open to inspection, contains full details of Directors’ shareholdings and share options.
Employees
See Item 4 “Information on the Company — Employees” for information on the Group’s employees during each of 2004, 2005 and 2006.

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ITEM 7: MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
Share capital
Changes in our share capital are detailed in Note 29 to the Financial Statements.
At the 2007 Annual General Meeting, renewal will be sought of the authorities: (a) for the Directors to allot relevant securities and to allot equity securities for cash other than on a pre-emptive basis, shareowners having approved similar resolutions annually since 1982; and (b) for the Company to purchase its own shares as and if appropriate, shareowners having approved a similar resolution annually since 1998. The Directors have no present intention to issue shares in the Company for cash other than in connection with its share option and incentive schemes. The authority to purchase shares has not been used since 1999.
Exchange controls and other limitations affecting Security Holders
There are at present no UK foreign exchange control restrictions on remittance of dividends on the Company’s ordinary shares or on the conduct of the Company’s operations. There are no restrictions under the Company’s Memorandum and Articles of Association or under English law that limit the right of non-resident or foreign owners to hold or vote the Company’s ordinary shares. In the event that a person who is or was interested in ordinary shares fails to give the Company any information required by a notice given pursuant to Section 212 of the Companies Act 1985 (as amended) (the “Companies Act”) (which confers upon public companies the power to require information with respect to interests in their voting shares) within the time specified in the notice, the Company may apply to the Court for an order, inter alia, that no voting rights be exercisable in respect of such shares and that no shares be issued or (except on liquidation) payment be made by the Company in respect of such shares. The owner shall not be entitled to attend or vote at meetings, and (in the case of a person who owns at least 0.25% in number or nominal value of the shares, or any class of shares in issue) the Board of Directors of the Company may withhold payment of all or part of any dividends. The owner shall not be entitled to receive shares in lieu of dividend and the Board of Directors of the Company may decline to register a transfer of shares in circumstances, if (a) the Company has given notice to the registered holder requiring the delivery of an ownership declaration by the beneficial owner pursuant to the Articles of Association (the “Articles”) of the Company; (b) no such declaration has been delivered during the period of 14 days since the service of the notice; and (c) the Company has given a further notice to the registered holder in accordance with the Articles.
Under the Companies Act, any person who acquires (alone or, in certain circumstances, with others) a material interest in the voting share capital of the Company equal to, or in excess of, 3% or a non-material interest equal to, or in excess of, 10% comes under an obligation to disclose prescribed particulars to the Company in respect of those ordinary shares. An obligation of disclosure also arises where such person’s notifiable interest subsequently falls below the notifiable percentage or, where, above that level, the percentage (expressed in whole numbers) of the Company’s voting share capital in which a person has a notifiable interest, increases or decreases.
As of March 9, 2007, the Company holds three notifications of interests amounting to 3% or more in the issued share capital of the Company in accordance with sections 198 to 208 of the Companies Act. The table below details notifications of interests, in accordance with the Companies Act, from January 1, 2002 to March 9, 2007. The ordinary shares and any ADRs held by the shareholders identified in the below table have the same voting rights as the other ordinary shares.
Notifications of Share Interests
                 
          Number of shares in    
Date of         which there is an   Interest in issued
Notification   Interested Party     interest (in millions)   share capital (in %)
2003
               
13 February
  Barclays PLC     61.8     Increase to 3.0
27 February
  Franklin Resources, Inc.     62.3     Increase to 3.0
19 March
  Franklin Resources, Inc.     83.0     Increase to 4.0
6 May
  Barclays PLC     60.4     Decrease to 2.9
24 July
  Franklin Resources, Inc.     103.2     Increase to 5.0
2004
               
5 January
  Franklin Resources, Inc.     123.7     Increase to 6.0
10 May
  Franklin Resources, Inc.     119.2     Decrease to 5.8
2005
               
1 June
  Barclays PLC     80.9     Increase to 3.9
12 September
  Franklin Resources, Inc.     103.1     Decrease to 5.0
2006
               
12 January
  Barclays PLC     62.5     Decrease to 2.9
1 February
  Barclays PLC     62.6     Increase to 3.0
29 November
  Barclays PLC     61.9     Decrease to 2.9
2007
               
13 February
  Legal & General Investment Management     61.7     Increase to 3.47
ITEM 8: FINANCIAL INFORMATION
The financial statements filed as part of this Report are included on pages F-1 through F-84 hereof.

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ITEM 9: THE OFFER AND LISTING
The Trading Market
The principal trading market for the ordinary shares of 12.5p is the London Stock Exchange. ADRs have been traded on the New York Stock Exchange since May 2, 1996 under the ticker symbol CSG. Since the two for one share split in 1999, each ADR represents four ordinary shares of 12.5p.
The table below details for the stated periods the high and low market prices for the ordinary shares, as derived from the Daily Official List of the London Stock Exchange, and for the ADRs, as reported on the New York Stock Exchange composite tape. The ADR price is affected by the exchange rate between the pound sterling and the US dollar.
Share Prices: Ordinary Shares and ADRs
<
                                     
                        American  
          Ordinary Shares       Depositary Receipts  
        High     Low     High     Low  
Financial Year   £     £     US$     US$  
 
2002
        5.34       3.78       31.75       24.40  
2003
        4.11       3.01       29.89       19.76  
2004
        4.87       3.93       38.00       29.15  
2005
  First Quarter     5.31       4.66       40.70       35.45  
 
  Second Quarter     5.67       5.22       43.27       38.33  
 
  Third Quarter     5.95       5.33       43.15       37.89  
 
  Fourth Quarter     5.87       5.29       41.25       37.40  
 
  Full Year     5.95       4.66       43.27       35.45  
2006
  First Quarter     5.90       5.43       41.81       38.32  
 
  Second Quarter     5.73       4.99       41.50       36.80  
 
  Third Quarter     5.72       5.15       43.45       37.99  
 
  October     5.66       5.27       43.11       40.32  
 
  November     5.42       5.17       41.90       39.49  
 
  December     5.50       5.27       43.52       41.08  
 
  Fourth Quarter     5.72       5.17       43.52       39.49  
 
  Full Year     5.90       4.98       43.52       36.80  
2007
  January     5.77       5.41       45.43       41.94  
 
  February     5.81       5.45       46.08