EX-99 2 u55205ex99-1.htm  

Exhibit 99.1


 

Cadbury Schweppes plc Annual Report & Accounts 2007


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  Highlights & Overview    
       

 

Performance highlights 2007

  our
year
   
  Operational highlights*
  Confectionery  
  > Record revenue growth** +7%: best for a decade  
  > Excellent growth in gum and chocolate led by Trident +26% and Cadbury Dairy Milk +5%  
  > Underlying confectionery margins before central and business improvement costs +30bps driven by strong second half growth +80bps  
  Americas Beverages  
  > Americas Beverages revenue growth** +4%: good performance in challenging markets  
  > 40bps Carbonated Soft Drinks share gain led by Sunkist and A&W; Snapple revenue +5% driven by innovation  
  > Underlying beverage margins impacted by bottler acquisitions and Accelerade launch costs  
       
  Financial highlights*  
  > Underlying EPS up 2%  
  > Reported EPS down due to restructuring costs and 2006 profit on Europe Beverages sale  
  > Dividend growth of 11% to 15.5p reflecting the Board’s confidence in future outlook  
       
  *   all numbers at constant exchange rates except where stated
  **   base business growth
    Where we refer to Confectionery we mean the four Confectionery operating regions: BIMA, Europe, Americas Confectionery, Asia Pacific and the Central Functions which will constitute Cadbury plc as it will exist following the demerger including our integrated Australian beverages business. Where we refer to confectionery we mean only the three confectionery categories: chocolate (including cocoa based beverages), gum and candy.
       
                 
               Reported    Constant  
               currency    currency  
£ millions 2007    2006    growth %    growth1 %  









Revenue 7,971    7,427    +7   +11  









Underlying profit from operations2 1,050    1,073    -2   +4  









  Restructuring, exceptional & other items (262 ) (164 )           









Profit from operations 788    909              









Underlying profit before tax2 915    931    -2   +5  









Profit before tax 670    738              









Discontinued operations    642              









Underlying EPS2+3 30.2 p 31.6 p -4   +2  









Reported EPS 19.4 p 56.4 p           









Dividend per share (p) 15.5 p 14.0 p +11        









1 Constant currency growth excludes the impact of exchange rate movements during the period.
2 Cadbury Schweppes believes that underlying profit from operations, underlying profit before tax, underlying earnings and underlying per share provide additional information on underlying trends to shareowners. The term underlying is not a defined term under IFRS, and may not therefore be comparable with similarly titled profit measurements reported by other companies. It is not intended to be a substitute for, or superior to, IFRS measurements of profit (see Note 1(y), page 94).
3 In 2006 EPS is presented on a basic total group basis including earnings contributed by Europe and South Africa Beverages.
   
Cadbury Schweppes Annual Report & Accounts 2007 1

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Chairman’s statement

 

  strong
growth
over 20
years
     
    2007 was a momentous year for Cadbury
Schweppes with the Board’s decision in March
to separate the Beverage and Confectionery
businesses. Subject to shareowner approval, this
will bring to an end almost four decades of
shared history since Cadbury and Schweppes
were merged into one company in 1969.
 
     
    Sir John Sunderland
Chairman
 
       
       

This is therefore the final annual report of Cadbury Schweppes plc. It is also my last Chairman’s statement as I will be retiring following the completion of the Americas Beverages separation, after which the two companies will proceed with newly constituted boards.

I joined Cadbury in 1968 and it seems appropriate to use this occasion to reflect on the evolution of the company over these four decades. Before doing that let me comment on the year as a whole.

2007 performance
Overall, the Group had a strong trading performance in 2007 and, in the case of confectionery, an exceptional year. Both the Confectionery and Beverage businesses benefited from the improvements made in recent years, strategically and commercially. The resilience of the businesses in the face of a deteriorating economic backdrop and sharply rising commodity costs was also evident.

At the Group level, revenues were £8.0 billion, an increase of 11%, and underlying profit was ahead 4%, both at constant exchange rates. Group underlying operating margins fell by 120 bps, mainly due to the impact of beverage acquisitions and Accelerade launch costs. Underlying earnings per share at 30.2 pence were ahead 2% at constant exchange.

Our Confectionery business delivered record base business revenue growth of 7%, driven primarily by double-digit growth in gum and emerging markets and a successful year for Cadbury Dairy Milk. Despite the challenging cost environment, the Confectionery business improved its underlying operating


   
2 Cadbury Schweppes Annual Report & Accounts 2007

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margins before the impact of business improvement costs and foreign exchange rates by 30 bps as a result of better operating leverage and a tight focus on cost control.

Americas Beverages performed well in challenging carbonated soft drinks (CSD) markets with base business revenues up by 4%. US CSD market share rose by 40 bps despite the fact that the business was cycling a year of significant innovation activity. Commodity costs were more than offset through price increases and cost control, but underlying margins fell 340 bps due to the acquisition of lower margin bottling businesses and the losses arising from the launch of Accelerade, a new sports drink.

Four decades of evolution
In a few months time, Cadbury Schweppes plc will once again become almost entirely a confectionery business as our Americas Beverages business begins its new, separate and independent life as the Dr Pepper Snapple Group, Inc (DPS). The Cadbury plc business will be the world’s largest confectionery company, with a number one or number two position in 20 of the 50 largest confectionery markets. It will have revenues of around £5 billion and underlying operating profits of around £500 million. It will be one of only three listed food companies in the FTSE 100.

This is in marked contrast to the situation in 1969. At that time there were around forty listed food companies in the UK (with a dozen in the FTSE 100 as recently as the mid Eighties). The newly merged Cadbury Schweppes had a turnover of £262 million, and made £21 million trading profit. Operations were largely limited to Commonwealth countries.

With hindsight, it might be said that the marriage of Cadbury and Schweppes brought together two very different companies, driven perhaps as much by fear as by affection. It was a time, after all, when the food sector was a ferment of merger activity.

The 1969 annual report commented that the merger “enabled the combined company to develop its brands world wide on a scale which would have been beyond the grasp of either partner on its own”.

By 1980 the company faced a different challenge. Twelve thousand people were employed at Bournville, a factory undertaking activities as varied as printing, carpentry, joinery, engineering and tin can manufacture. This model was redolent of a different age. The decision was taken to dispose of peripheral activities and focus on making and selling chocolate. This chapter in the company’s history was an important step in the development of its UK business.

In 1985, under Sir Dominic Cadbury’s leadership, the company decided to exit the food and hygiene businesses and concentrate on confectionery and soft drinks. This was a significant milestone on the road towards a more focused business.

It was an important year for two other reasons – the first stake was taken in Dr Pepper, eventually to become a key corporate asset, and the decision to merge the Coca Cola and Schweppes beverages businesses in the UK resulted in the 1987 launch of Coca-Cola and Schweppes Beverages (CCSB) as a joint venture.

In 1995 we acquired the remainder of the Dr Pepper brand as well as a number of others such as 7Up in North America.

However, it was becoming increasingly clear that in many markets outside that region we lacked the scale necessary to compete with the two majors of the industry – Coca-Cola and Pepsi. As a consequence we determined to exit those markets where we were relatively weak and bolster those where we were stronger.

This led in the USA to the further acquisition of Snapple and our bottling subsidiary – the Dr Pepper Seven Up Bottling Group.

Elsewhere it led to a strategy of stepped divestment:
> the sale in 1996 of our share in CCSB
> the disposal in 1999 of our drinks interests in 160 markets around the world
> the sale in 2005 of our European Beverages business.

Throughout this period we were also building our confectionery business through acquisition, notably Trebor and Bassett in 1989, but particularly in 2003 the Adams confectionery company. This $4 billion purchase transformed the Group’s confectionery status by creating a strong number two position in gum, broadening our geographical footprint and eventually led to our leadership of the global confectionery industry.

To buy is one thing, to execute another. The successful integration and expansion of this business is best demonstrated by the stellar growth in our U.S. gum market share – from around 27% when we bought Adams to closer to 35% now –and much higher top line total confectionery performance, which grew at a compounded annual rate closer to 6% in 2003-6, and was over 7% last year.

As the above discussion makes clear, the past few decades have seen an enormous amount of change at the Group. But the essence of what makes a great consumer goods company remains unchanged. It is about great brands, great marketing and innovation. And like any successful business, management has to deal with “events” – whether they be weather, commodities, or changing tastes.

2007 gave graphic evidence of a few of these perennial
themes. Thus:
> Brands – 2007 was the year which saw the relaunch of the iconic Wispa brand.
> Innovation and new products – our entry into the UK gum markets with Trident offering new liquid-centre gum technology.
> Great marketing – the Gorilla advertising campaign for Cadbury Dairy Milk has been one of the most successful and talked about campaigns of the year.
> Commodity costs – 2007 saw some very dramatic increases in commodity prices. But we have seen this before. In 1975 the sterling price of sugar rose by 60%, milk 37% and packing materials by 25%. Cocoa rose in price from £776/tonne in 1976 to £3,660/tonne in 1977.
> Changing tastes – in the past five years we have seen the rise in consumer health awareness – reflected in the trends towards diet drinks, sugarless gum and darker chocolates.

   
Cadbury Schweppes Annual Report & Accounts 2007

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Chairman’s statement continued

 

Corporate Governance
In 1969 the disciplines of investor relations and governance, which are now so central to the stewardship of public companies, had hardly been thought of.

As companies evolved beyond family businesses with predominantly small shareowners, the first phase in this evolution was the transfer of powers to professional management. But what we have seen with the subsequent growth of the governance movement has been the increasing influence of institutional shareowners.

Although not without its moments of excess, improved governance has generally been a good thing for corporate Britain, stemming from the publication of Sir Adrian Cadbury’s seminal report “The Financial Aspects of Corporate Governance”, published in December 1992.

Unfortunately, governance has also sometimes served as a Trojan horse for anti-business sentiments. Indeed, the growth of anti-business feeling – the folly of seeing business as somehow standing apart from society, rather than being the engine that allows its needs to be met – has been an unhappy regression in British society.

The first paragraph of Sir Adrian’s review reads “The country’s economy depends on the drive and efficiency of its companies. Thus the effectiveness with which their boards discharge their responsibilities determines Britain’s competitive position. They must be free to drive their companies forwards, but exercise that freedom within the framework of effective accountability. That is the essence of any system of good corporate governance.”

A more succinct statement of the essence of corporate governance has yet to be crafted.

It is not only boards, of course, who hold management to account. So do shareowners – and shareowner registers have been in a state of increasing flux with the rise of activist managers, hedge funds and private equity.

In their different ways, all of them are aggressive agents of accountability, arguably more so than their more conventional fund manager counterparts. Public company life has, in short, become much more demanding. Scrutiny is more intense, and tolerance of failure more limited.

Corporate social responsibility
It is not just financial performance under the microscope. Recent decades have also seen an increasing emphasis on Corporate Social Responsibility, a movement whose central insight has been that in a modern capitalist society it is not just what companies do that matters – whether they meet their targets or not – but how they do it.

This principle has always been part of Cadbury’s genetic code. The family, and later the company, were always keenly interested in doing business the right way, and doing right by all those stakeholders with whom it had dealings –shareowners yes, but also employees, consumers, customers, suppliers and the communities within which we operate.

This cannot of course prevent us from making difficult decisions. This was again captured by Sir Adrian Cadbury in the 1981 annual report. Reflecting on the company’s response to the structural decline in manufacturing jobs, he said “The prime responsibility of an individual company faced with these fundamental changes …. must be to maintain its competitive ability. If it fails in this it puts more jobs at risk and puts an additional burden on the community”.

These dilemmas still engage the company today as it faces the ongoing challenge to remain efficient in a globalising world. And the answers remain the same.

I am confident that some of Cadbury Schweppes plc’s longevity and success is attributable to its ethical heritage which lends substance to the mantra – “Performance driven, values led.” While much has changed both within and beyond the company, the imperative of running the business the right way has never changed. Strong brands, supported by an ethical culture, have remained constant.

It is this heritage of brands and values that underpins my confidence in the future of the company. We have brands that consumers love – and the values which lie at the heart of Cadbury Schweppes resonate with the consumer. This is a powerful competitive advantage.

Board changes
We welcomed Guy Elliott to the Board on 27 July 2007. Guy brings international business experience and financial acumen, both of which will be invaluable. David Thompson retires from the Board and as Chair of the Audit Committee in March. We thank David in particular for his eight year stewardship of the Committee and more broadly for his ten years of wise counsel and service to the Board. The Board also thanks Rosemary Thorne who resigned on 5 September 2007, after serving for over three years on the Audit, Remuneration and Nomination committees.

Dividends
The Board will be proposing a final dividend of 10.5 pence, an increase of 6%, bringing the total increase for the year to 11%. This reflects the Board’s confidence in the future prospects of the businesses.

Outlook
We remain confident in the prospects for both businesses despite these more uncertain economic times.

We have already announced that, following the demerger, two new Chairmen will succeed myself – Roger Carr for Cadbury plc and Wayne Sanders for the Dr Pepper Snapple Group Inc. Both are highly experienced and bring first class credentials to their respective roles.

Finally, it has been my enormous pleasure to work with many colleagues, in many disciplines, in most countries of the world. It is they who delivered success. I thank them, and wish for them even further prosperity in the future.

4 March 2008


   
4 Cadbury Schweppes Annual Report & Accounts 2007

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Chief Executive’s review

moving
cadbury
forward
     
    2007 was another significant year in the evolution of Cadbury Schweppes. It was the year which marked the end of an ambitious four-year strategy which transformed our company. It also was a year during which we embarked on the separation of the Group into two broadly equal-sized businesses, namely Confectionery and Americas Beverages. 
   
   
 
 
 
 
   
   
   
   
   
   
   
   
 
 

Todd Stitzer
Chief Executive Officer

     

The Chairman has put the evolution of our business into its full historical perspective. Here, I’ll first describe the platform we’ve created and the performance we’ve delivered in the last four years, culminating in our achievements in 2007. Then, I’ll focus on how, in the next phase of our journey, we plan to exploit our platform to make Cadbury plc the world’s best, as well as biggest, confectionery company.

Our performance 2004–2007
In October 2003 we set out a four year plan to transform our business – strategically, commercially, operationally, financially and culturally.

Implementation of strategy
On the strategic front, we acquired and integrated Adams ahead of plan. The acquisition of Adams helped to create the world’s largest confectionery company with number one or number two confectionery market positions in 20 of the world’s 50 largest confectionery markets by retail sales value.


   
Cadbury Schweppes Annual Report & Accounts 2007

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Chief Executive’s review continued

 

Chart 1: 2006 Confectionery Revenue by Total Market Leadership Position

We followed it up with bolt-on acquisitions of Green & Black’s, the world’s largest organic chocolate company; Intergum, Turkey’s largest gum business; Dan Products, the number one gum company in South Africa; Kandia-Excelent, Romania’s second largest confectioner; and Sansei, one of Japan’s leading functional candy companies.

On the beverages side, we integrated our US and European beverage businesses. We subsequently sold European Beverages for a very good price and invested part of the proceeds to strengthen our route to market in the US by buying independent bottlers.

In early 2007 we announced the separation of our Confectionery and Americas Beverages businesses to create greater focus and ultimately greater shareowner value.

Commercial perspective
Four years of revenue growth at double the rate of our historic growth is a strong testament to the scale of our commercial performance. This has driven four years of consistent market share growth against our toughest competitors in their home markets.

Chart 2: Cadbury Confectionery Revenue Growth

The improvement in our commercial performance was driven by significantly increased investment in marketing, innovation and commercial capabilities, resulting in the doubling of our innovation rate.

Chart 3: 2003–2006 Confectionery Revenue from Innovation

Operating progress
Operating performance over the duration of the strategy has consistently improved through restructuring, systems implementation and focus.

Between 2004 and 2007 we closed or sold 25% of our factories and distribution centres and reduced our workforce by 10%. In June 2007 when we launched our Vision into Action strategy we announced plans to close another 15% of our factories and distribution centres and also reduce our workforce as a result by the end of 2011.

We’ve implemented a consistent SAP-based IT system, first in Australia then the USA, and finally in the UK, effectively aligning our IT platforms in these markets.

The execution challenge surrounding these changes has been complex and logistically demanding, particularly in the context of simultaneously restructuring and revitalising our commercial organisation.

Financial improvement
From a financial perspective, over the four year period from 2003 to 2007, our total shareholder returns grew by nearly 90%, placing us among the top quartile of our peers.

Chart 4: Cadbury Schweppes TSR against Peer Group 2003–2007

   
6 Cadbury Schweppes Annual Report & Accounts 2007

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The Group is also stronger financially with capital more tightly managed and debt significantly reduced. Working capital has declined three years running and, including 2007, the total improvement in average working capital days has reached 14. The combination of cash flow and proceeds from disposals has reduced the debt taken on to acquire Adams, leaving the Group with an efficient balance sheet.

Cultural progress
Over the last four years, we have transformed the quality and capabilities of our people. We have supplemented our own talent with significant external experience and today, of the top leaders in the organisation, over 25% are new to the company. To create a high performance culture, we have aligned rewards more closely with the value drivers for the business and raised the capability bar across the whole business. Through all this challenge and change our culture has remained resilient and robust, seeking always to act with care and responsibility for our colleagues and the communities in which we do business.

Decision to demerge Americas Beverages
The successful delivery of our 2004 – 2007 plans gave us the confidence that Confectionery and Americas Beverages would deliver more value to our shareowners as independent focused businesses. The businesses are now running independently, and we continue to work towards a demerger in the second quarter of 2008 subject to legal and shareowner approvals and debt refinancing.

2007 performance
Group performance in 2007 is testament to the strong platform we have been building since 2003 and the resilience of our people and business model. Overall, our revenues and underlying profits were up 11% and 4%, respectively, in constant currency. Underlying EPS improved by a modest 2% due to business improvement costs and M&A activity.

Americas Beverages produced credible results in challenging markets. Base business revenues were ahead by 4% as the business reaped the twin benefits of focus on core brands and route to market consolidation. Our core flavour brands continued to benefit from the trend away from colas, and the revitalisation of Snapple has demonstrated real traction. The 40 bps gain in carbonated soft drinks (CSD) in the US market the fourth consecutive year of market share gains.

While underlying operating margins were negatively affected by the consolidation of lower margin bottling acquisitions and Accelerade launch losses, they remain high at around 20% with margins of the base business slightly ahead excluding the impact of Accelerade.

The base business confectionery revenues grew at a record 7% with strong contributions from most of our businesses, including in Britain where the results improved strongly. Underlying operating margins were ahead by 30 bps before business improvements and foreign exchange despite continuing commodity cost challenges and increased investment in growth.

In Confectionery, excellent early progress was made against each key element of our Vision into Action plan (for a more in depth review of Vision into Action see pages 8 and 9). It is worth highlighting these achievements here to give you some insight into our Confectionery plans for the next four years.

Chart 5: Cadbury Schweppes U.S. CSD Market Share 2003-2007

Since we announced our new strategy in June, we have been embedding a new category organisation in our Confectionery business and focusing our efforts on ‘fewer, faster, bigger, better’ initiatives, which helped achieve revenue growth at +7% in our 12 focus markets, +10% in our 13 focus brands and +12% in our focus customers.

One of our focus brands, Trident, had a stellar performance, with revenues ahead on last year by over a quarter. It is now our biggest brand and the largest gum brand in the world. The brand was launched in two white space markets in 2007, Turkey and Britain, with excellent results.

In line with our efficiency drive, we have been right-sizing central overheads in preparation for separation and reorganising regional structures, mainly by clustering commercial units and delayering. Commercial clustering is already driving great results in Latin America. We have also been successfully reconfiguring our chocolate manufacturing in Britain and our candy supply chain in Asia Pacific.

Outlook
As we look ahead to 2008, although economic conditions remain uncertain, we take confidence from the fact that we have created strong foundations for the businesses and that they operate in economically resilient categories.

In 2008, Americas Beverages will continue to benefit from the focus on core advantaged brands and superior route to market capability, with revenues expected to grow between 3–5%. We aim to largely cover the expected margin headwinds through pricing and restructuring benefits. However, taking into account the consolidation of lower margin bottling acquisitions, reported margins are likely to be modestly lower year on year, with the profits weighted toward the second half.

In Confectionery, our strong momentum should help us to achieve revenue growth in the upper half of our 4%–6% goal range. Good operating leverage, particularly in gum, the initiatives in place to deliver savings, early progress on a turnaround in our underperforming markets (China, Nigeria and Russia), and a robust approach to pricing should enable us to deliver meaningful confectionery margin progression in 2008.


   
Cadbury Schweppes Annual Report & Accounts 2007 7

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the world's
biggest & best
confectionery
company

 
       
    With the demerger of the Americas Beverages business under way, our focus is now on how to take the world’s biggest confectionery business and make it into the best.    
         
    At the heart of our plans is our “fewer, faster, bigger, better” strategy which seeks to ensure that we aggressively exploit the strength of our confectionery platform to maintain our strong revenue momentum and deliver a step-change in our margin performance.     
         

 

Well placed to deliver superior performance
We are confident that in Cadbury plc we will have the business that can continue to deliver this superior performance because:
> the global confectionery market is growing robustly;
> the strength and breadth of our market positions, across different geographies and categories, should allow us to capture this growth and deliver high returns;
> the unexploited potential of our business is significant; and
> we have the strategy and management to deliver on our plans, and believe that Cadbury plc will benefit from the focus our management can give the business.

Underpinned by confectionery market growth
The confectionery market is growing around 5% per annum, with revenues growing in low single digits in developed markets and in double digits in emerging markets. Strong brands, a high level of impulse sales and limited private label penetration also mean confectionery is a profitable market for companies with strong brands and effective routes to market.

Chart 7: 2002–06 Key Category Retail Sales Growth

Confectionery’s growth potential is underpinned by these favourable market dynamics. We have strong brands and competitive positions in the confectionery market in three categories: chocolate, candy and gum. We have strong leadership positions in many individual markets.

Additionally, we have a strong presence in the faster growing categories and have the largest emerging markets confectionery business with a 10% share, and stronger positions than all our key global competitors. Emerging markets account for around a third of our total revenues.

In summary, our growth ambitions are underpinned by our favourable category and geographic exposure. Indeed, if we simply held share in our various markets this should be sufficient to generate over 5% annual growth in revenues. Our firm intention, however, is to outperform the market by increasing our focus on the highest return areas and reducing the complexity which is evident in many parts of our business.

Vision into Action and our financial scorecard
Our vision is to be the world’s biggest and best confectionery company. We are currently the biggest, and we have an enduring commitment to becoming the undisputed best.

Our Vision into Action business plan encapsulates how we plan to deliver our goals by outlining key priorities – growth, efficiency, capabilities and sustainability – and our financial scorecard shows the financial targets the business plan sets out to deliver. We give more information on each of these in the Description of Business on pages 10 to 24. I will highlight growth and efficiency priorities here.


   
8 Cadbury Schweppes Annual Report & Accounts 2007

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Growth
Our growth strategy – “Fewer, Faster, Bigger, Better” – has a number of key components:
> Category and geographic focus as a means of providing scale and simplicity. We focus our efforts on a limited number of key markets in each category – those that are biggest today, or will be tomorrow.
> Focusing on our biggest, strongest brands. We have thirteen brands that generate around half our total revenues. In future these brands will get a higher portion of our marketing support.
> Leveraging strength in one category in other categories. A good example of this would be the launch of Trident into the UK market – with our strong chocolate and candy presence providing a base to enter the gum market.
> Targeting customers who offer us the best potential reward which include some of our largest global customers.

There is one final component of our growth strategy. While our main opportunity is to drive performance from better exploiting the inherent potential of our existing business, we want to supplement this with judicious acquisitions which will enhance value and support our strategy. However, our focus in 2007 has been, and in 2008 is likely to be, on integrating and deriving full benefit from our recent acquisitions in Turkey, Romania and Japan.

Efficiency
We recognise that it is not enough to grow faster; we must also be more profitable. Our efficiency target is encapsulated in the ambition to improve our operating profit margins from around 10% in 2006 to mid-teens by 2011.

Our cost reduction and efficiency programme is impacting all parts of the business: in sales, general and administration (SG&A) costs and supply chain; in the regions; and at the centre. By 2011, we expect to close around 15%. of Cadbury’s manufacturing sites around the world and as a result to also reduce gross headcount.

Capability
Our Chairman is fond of saying business is 80% about the people and 20% about the numbers. We will continue to invest in capabilities to support our people to deliver on our growth and efficiency priorities.

We will continue to embed our “Building Commercial Capabilities” programme, which aims to improve commercial decision-making, and marketing and sales expertise by defining a common way of marketing and selling across the business.

Sustainability
At the same time, we are reiterating our commitments to growing sustainably to ensure that we drive change through a culture which remains performance driven and values led.

Within the overriding goal of being performance driven, but values led, we aim to:
> promote responsible consumption of its products;
> ensure ethical and sustainable sourcing of raw materials and other inputs;
> prioritise quality and safety;
> reduce carbon and water use, and packaging;
> nurture and reward colleagues; and
> invest in the communities in which it operates.

Our approach to this area is discussed in detail in its Corporate and Social Responsibility Report.

Delivering superior shareowner returns
Our governing objective remains delivering superior shareowner returns. Our Vision Into Action plan gives our management team a clear roadmap and will focus the energy and efforts of our teams around the world. We have an advantaged confectionery business which has significant under-exploited potential both in revenue and returns. We believe that a balanced delivery of strong growth in revenue and margins, coupled with an increased focus on disciplined capital allocation will allow us to deliver superior returns for our shareowners.


   
Cadbury Schweppes Annual Report & Accounts 2007 9

description
of

business

  Items covered in this section:      
 

   
  Confectionery 12    
 

   
  Americas Beverages 18    
 

   
  Group structure 20    
 

   
  Risk factors 21    
 

   
  Forward-looking statements 24    
 

   
 

References to the Group, Cadbury Schweppes, Confectionery, and Americas Beverages throughout this document are defined as follows:

The Group and Cadbury Schweppes mean the current group which is the Confectionery and the Americas Beverages businesses.

Where we refer to Confectionery we mean the four Confectionery operating regions: Britain, Ireland, Middle East and Africa (BIMA); Europe; Americas Confectionery; Asia Pacific (an integrated confectionery and beverages business) and the Central functions, which collectively, will be the Cadbury plc group as it will exist following the demerger effective date. Where we refer to confectionery we mean the three confectionery categories, chocolate, gum and candy.

Americas Beverages is the non-alcoholic beverage business in the United States, Canada, and Mexico, which will become Dr Pepper Snapple Group, Inc. or DPS following the demerger.

Cadbury Schweppes plc
Introduction
The Group’s current principal businesses are confectionery and non-alcoholic beverages. The Group has 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, it has a strong regional presence in North America and Australia.

Origins
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.

In the last 25 years, Cadbury Schweppes has significantly changed its geographic and product participation in the confectionery and beverages markets, mainly through a programme of business purchases and sales. In 1997, the Group adopted its ‘Managing for Value’ philosophy with the aim of delivering superior returns for its shareowners. The Group subsequently made disciplined capital allocation decisions focused on the two growing and profitable markets of confectionery and beverages, and refined its portfolio

through an active acquisition and disposal programme, which improved its participation in its chosen markets and strengthened its competitive position.

Developments in Confectionery
The acquisition of Adams for US$4.2 billion in 2003 was a significant step-change in the Group’s participation in the global confectionery market, both by category and by geography. Through Adams, the Group nearly doubled its global confectionery market share to 10% and has become the global number two company in gum with a 27% market share, and nearly doubled its global candy market share to 7%. (Source: Euromonitor 2006). By geography, Adams significantly increased the Group’s presence in markets in North and South America, Europe and Asia, and resulted in higher growth in emerging markets representing around 30% of the Group’s confectionery revenues.

  Following the Adams acquisition, the Group focused in confectionery on:
  > integrating the Adams business;
  > improving capabilities and commercial execution to increase revenue growth;
  > further strengthening its confectionery platform through selected bolt-on acquisitions; and
  > reducing costs through its ‘Fuel for Growth’ programme to improve margins and allow investment behind growth initiatives.

The Adams integration was completed one year ahead of schedule in 2005, with the business outperforming the acquisition plan. This was primarily due to the strength of the Group’s performance in major gum markets such as the US, and in the roll-out of Adams products and technologies across the Group, such as in France under the Hollywood brand and in Northern Europe and Russia under the Stimorol and Dirol brands.

Since the Adams acquisition, the Group has also invested in a small number of targeted bolt-on acquisitions in faster-growing, emerging markets and in brands with strong growth potential. The total investment has been approximately £500 million, with acquisitions including: Green & Black’s, the UK premium chocolate brand; Kent and Intergum, the leading candy and gum businesses respectively in Turkey; Dan Products,


   
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the leading gum business in South Africa; Kandia-Excelent, the second largest confectionery company in Romania and Sansei Foods Co. Ltd, a Japanese functional candy company. At the same time, a number of small, low growth and non-core brands and businesses have been sold.

As a result of the investment in growth initiatives, the Group’s organic confectionery revenue growth increased from an average of 2–3% per annum between 1996 and 2002 to an average of 6% per annum between 2003 and 2007.

Developments in beverages
In beverages, the group has significantly reduced its geographic participation while strengthening its position in a small number of retained markets to strengthen these businesses.

In the US, from the 1980s onwards, the Group’s beverages presence was developed from its Schweppes base through acquisition to form a balanced portfolio of strong carbonated and non-carbonated brands. In the late 1990s, the Group began to strengthen its US route to market with the creation of its bottling joint venture (latterly Dr Pepper/Seven Up Bottling Group) in 1998, which subsequently accelerated the consolidation of the independent bottling sector through the acquisitions of several independent bottling companies.

At the same time, the Group sold its beverages businesses in markets where it believed it did not have a sustainable competitive advantage. Disposals included: the Group’s 51% stake in Coca-Cola & Schweppes Beverages (1997), the Group’s beverages brands in approximately 160 markets (1999), and the Group’s remaining European and South African beverages businesses (2006).

In the Americas, the North American operations of Dr Pepper/Seven Up, Mott’s and Snapple were merged under a single management organisation in late 2003. This enabled the business to derive significant cost savings and leverage its scale with customers and suppliers across its portfolio of carbonated and non-carbonated soft drinks.

By concentrating resources on a selection of advantaged brands and by focusing on innovation and market place execution under this new structure, Americas Beverages performed well. In 2006 and 2007, a further step was taken in securing the sustainability of this performance by the acquisition and integration of a number of bottling companies to strengthen the Group’s beverages route to market in the US.

Proposed demerger
In March 2007, the Group announced that each of the Confectionery and Americas Beverages businesses had the appropriate platforms to deliver enhanced shareowner returns from being focused, stand-alone businesses.

On 10 October 2007, the Group announced that it had decided to focus on a demerger of its Americas Beverages business through a listing on the New York Stock Exchange. The business will be renamed Dr Pepper Snapple Group Inc. The Confectionery Group will retain a beverages business in Australia, which in 2007 accounted for approximately 8% of Confectionery revenue.

Recent developments
On 9 June 2007, the Group unveiled a new confectionery strategy, Vision Into Action, which is explained in greater detail in the Confectionery section below.

Operations
Market share information, except where otherwise indicated, is sourced from the latest available information from Nielsen, Euromonitor, Beverage Digest or IRI.

In 2007 the Group generated revenues of approximately £8 billion. The revenues from confectionery accounted for 59% with 5% coming from Australia beverages and the remaining 36% coming from Americas Beverages.

The charts below show the relative size of the regions (excluding the central costs in 2007):

FY 2007 Revenue by Region
 
FY 2007 Underlying Profit from Operations1 by Region

   
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Confectionery

Global confectionery market
Confectionery operates in the global confectionery market. The market is large, growing and has attractive dynamics.

Global Confectionery Market Category Share by US Dollar Value
For an explanation of Underlying profit from operations and a reconciliation to profit from operations see pages 25 to 27.

The global confectionery market is the world’s fourth largest packaged food market. It represents 9% of that market, and has a value at retail of US$141 billion. Chocolate is the largest category, accounting for over half of the global confectionery market by value.

Globally, confectionery is growing at around 5% per annum, faster than many other packaged food markets.

Developed markets, which account for around 67% of the global market, grew 3% per annum between 2001 and 2006. Premium and wellness products, such as high cocoa solids chocolate and functional and sugar-free candy and gum, are driving growth in these markets. Growth in premium products increased chocolate market growth by around 1% per annum in the 2001–2006 period, while, in wellness, sugar-free gum grew at around 8% per annum.

Confectionery: Developed Market Annual Growth 2001–2006
Confectionery: Emerging Market Annual Growth 2001–2006

Emerging markets grew at around 10% per annum between 2001 and 2006, with strong growth across all categories. Per capita consumption of confectionery in emerging markets is significantly below that in developed markets. Growth is being driven by increasing per capita consumption, which is closely correlated with per capita wealth increases, and by population growth.

By participant, the market is relatively fragmented, with the five largest confectionery companies accounting for less than 40% of the market and the top 10 for less than 55%. There are a large number of companies which participate in the markets on only a local or regional basis.

Gum is the most concentrated category, with the two largest companies accounting for 62% in 2006. In chocolate, the five largest companies accounted for over half of the market, but in candy, the top five accounted for only a quarter.

The confectionery market is primarily branded: there is a low level of private label sales and products are sold through a wide range of outlets.

Cadbury Schweppes in the global confectionery market
Cadbury Schweppes’ leadership of the global confectionery market by value is underpinned by number one or number two confectionery market positions in 20 of the world’s 50 largest confectionery markets by retail sales value. Markets where the Group has number one or number two market positions accounted for around three quarters of Confectionery Group’s revenue in 2007.

Of the Confectionery revenue, chocolate and cocoa-based beverages accounted for 42%, gum 29%, and candy 21%. Australia beverages accounts for the remaining 8%.

The Group has a strong presence in faster growing categories and markets. Gum, 29% of Confectionery revenue, is a prime example. In 2007, wellness confectionery, including products like sugar-free and fat-free products, and medicated candy grew in the confectionery market as a whole by 8% per annum from 2002–2007, against 5% growth for other products. Our wellness sub-category, which includes dark chocolate, accounts for around 30% of Confectionery revenues.


   
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Market share in the global confectionery market (US dollar share)                  
    Global              
    Confectionery              
    Market   Chocolate   Gum   Candy  

Cadbury Schweppes   10.1 % 7.3 % 27.0 % 7.4 %

Mars   8.9 % 14.7 %   2.8 %

Nestle   7.7 % 12.5 % 0.1 % 2.9 %

Wrigley   5.5 %   34.5 % 2.2 %

Hershey   5.5 % 8.3 % 1.3 % 2.7 %

Kraft   4.3 %  7.8 % 0.1 % 0.3 %

Ferrero   4.2 % 6.8 %   1.5 %

Source: Euromonitor:
 

The Group also has the largest (by value) and most broadly spread emerging markets business of any confectionery group, which in 2007 accounted for approximately one-third of confectionery revenue. From 2004 to 2007, revenue of the Group’s emerging markets confectionery businesses grew on average by 12% per annum on a like-for-like basis.

The Group competes against multinational, regional and national companies. The Group’s brands include many global regional and local favourites. Like the other top five chocolate groups, our chocolate share is built on regional strengths, including strong positions in the UK, Ireland, Australia, New Zealand, South Africa and India. The largest brand in chocolate is Cadbury Dairy Milk; other key brands are Creme Egg, Flake and Green & Black’s.

The Group has a number two position in gum with Trident being the largest brand. This position is built on strong market share in the Americas, in parts of Europe (including France, Spain & Turkey) and in Japan, Thailand and South Africa. Other brands include Hollywood, Stimorol, Dentyne, Clorets and Bubbaloo.

In candy the largest brand is Halls accounting for around one third of candy revenues, and other significant regional and local brands include Bassetts, Maynards, the Natural Confectionery Company and Cadbury Eclairs.

The Group uses a wide variety of raw materials purchased from a broad range of suppliers. Principal inputs are packaging materials (such as paper and plastics), sugar and other sweeteners, cocoa, and dairy products. Confectionery will seek to minimise the impact of price fluctuations and ensure security of supply by entering into forward purchase agreements and long-term contracts where appropriate.

Confectionery strategy – The Vision into Action plan
Confectionery strategy for the years 2008–2011 is embodied in its Vision into Action business plan. The governing objective remains to deliver superior shareowner returns through achieving our vision of being the biggest and best confectionery group in the world.

Confectionery aims to achieve this vision through delivering its financial scorecard. The financial scorecard for the 2008–2011 period is as follows:
> annual organic revenue growth of 4–6%.;
> total confectionery share gain;
> mid-teens trading margin by 2011;
> strong dividend growth;
> efficient balance sheet; and
> growth in return on invested capital.
Confectionery will focus on the following priorities to deliver its financial scorecard and its vision:
> to drive growth through a concentration on “fewer, faster, bigger, better” participation and innovation (bringing to market more quickly a smaller number of larger projects with greater impact), supported by the global category structure introduced in 2006;
> to drive cost and efficiency gains to help achieve the margin goal;
> to continue to invest in capabilities to support growth and efficiency agendas; and
> at the same time, retaining commitments to growing sustainably and to Cadbury’s strong cultural heritage.

Revenue growth of 4–6% per annum
The goal is to grow revenue on a base business basis by between 4–6%. per annum, reflecting the growth prospects of the Confectionery business. This goal is underpinned by global confectionery market growth of around 5% per annum over the last five years and by Confectionery’s greater weighting toward higher growth categories such as gum and emerging markets. It also accommodates some brand portfolio rationalisation as described below.

Category focus for scale and simplicity
To help drive revenue growth, under its structure of managing each confectionery category on a global basis, Confectionery will focus its resources on advantaged markets in each category where innovative products will be developed and launched. In innovation, the number of smaller, non-advantaged innovation projects will be reduced and increased resources will be applied to larger innovations from which Confectionery can derive competitive advantage.

Drive advantaged, consumer-preferred brands and products
Confectionery will also increase its focus on its biggest, most advantaged brands, and on key markets. As part of this focus, some of the smaller brands and products in the portfolio, accounting for approximately 5% of confectionery revenue, are being rationalised over the plan period.

Confectionery will focus its resources on its top 13 brands, which accounted for around 50% of confectionery revenue in 2007. These brands have grown base business revenue at 10% in 2007, and have gross margins that are around 8% higher than the confectionery portfolio overall. The focus will be on five brands which have the strongest potential in existing and new markets (Cadbury, Trident, Halls, Green & Black’s and The Natural Confectionery Company) on a global basis. The remaining 8 brands in the top 13 are: Creme Egg and Flake in chocolate; Hollywood, Dentyne, Stimorol, Clorets and Bubbaloo in gum; and Eclairs in candy.


   
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Confectionery is also increasing its focus on a limited number of markets in each category, based on their size today or their potential for future scale and growth. Six countries are common across all categories: the US, the UK, Mexico, Russia, India and China. The remaining countries vary by category: in chocolate, they are South Africa and Australia; in gum, Brazil, France, Japan and Turkey; and in candy, Brazil, France, South Africa and Australia. Other similar, affinity markets are being clustered around these lead focus markets, and initiatives are being rolled out from lead markets into these affinity markets.

Accelerate new market entry via “Smart Variety”
Confectionery aims to accelerate its entry into markets where it does not currently have a presence via the “Smart Variety” model, which uses existing distribution strength to expand into new categories. Confectionery ultimately aims to have a strong position in all three confectionery categories in the markets in which it operates. Recent initiatives in pursuit of this goal include the launch of gum in the UK market under the Trident brand to complement an existing strong presence in chocolate and candy, and the launch of Halls in France.

Create advantaged customer partnerships via total confectionery solutions
Confectionery is focusing its efforts on seven leading customers and three trade channels. These seven leading customers accounted for over 10% of confectionery revenue in 2007, and these revenues grew by 12%. We believe Confectionery is uniquely placed to support these customers given that it will be the only major confectionery group with a substantial presence across all three confectionery categories, and, given that, for the top three global retailers, we have more total confectionery leadership positions than our competitors in their key markets.

Expand platforms through acquisition
As the leading global confectionery business, we will continue to investigate available confectionery opportunities to grow our platform. The focus will be on bolt-on acquisitions to enhance existing positions in growing categories and markets and we will only undertake acquisitions if these fit with our strategy and meet our stringent criteria for value creation.

Significant increase in operating margins to mid-teens by 2011
Confectionery’s goal is to increase operating margins to mid-teens by 2011.

A programme of cost reduction and efficiency is being undertaken, which will result in an exceptional restructuring charge of approximately £450 million, of which around £50 million is expected to be non-cash. In addition, the programme will require incremental capital expenditure of around £200 million over the next three years. Delivery of the programme is being supervised by a Global Performance Director.

Cost reduction initiatives are impacting all parts of Confectionery: in sales, general and administration (SG&A) costs and supply chain, in the regions and at the centre. SG&A cost reductions began to deliver benefits from 2007 while supply chain configuration benefits will reduce manufacturing costs from 2009 onwards. Initiatives include:
> combining the central London headquarters with the new Britain, Ireland, Middle East and Africa region and Britain & Ireland business in a new location west of London during
the second quarter of 2008;
> clustering a number of countries which have previously been run as individual operations;
> adopting a more centralised decision-making process to category and brand management; and
> additional outsourcing opportunities in the areas of back-office processing, IT and liquid chocolate production.

Consequently, over the 2007 to 2011 period, around 15% of Confectionery’s manufacturing sites around the world are expected to be closed and it is anticipated that headcount will also be reduced as a result.

In addition to the contribution from this cost reduction programme, it is expected that margins will benefit from:
> improved operating margin performance in key emerging markets, notably China and Nigeria, which are currently loss making;
> a focus of resource on categories and brands which are growing faster and which earn above average returns; and
> strengthened profit performance from the confectionery business in Britain & Ireland, where performance has been below expectations as a result of the IT system implementation in 2005 and the product recall in 2006.

Strong dividend growth
Confectionery intends to target a dividend payout ratio in the medium term of 40–50%. of earnings. In the shorter term, it intends to pursue a progressive dividend policy reflecting its confidence in the Vision into Action plan and the earnings potential of the business.

Maintaining an efficient balance sheet
Confectionery will manage its capital base efficiently and will target a capital structure consistent with maintaining an investment grade credit rating.

Growing return on invested capital
The combination of higher revenue growth and margin improvement is expected to drive growth in return on invested capital. Confectionery also expects to continue its disciplined approach to working capital management, and to continue to recycle capital from low-growth and non-core businesses into organic investment and bolt-on acquisitions with a greater potential for higher growth and returns as appropriate.

Continuing to invest in capabilities
Confectionery will continue to invest in capabilities to support its growth and efficiency agendas.

Confectionery will continue to embed the “Building Commercial Capabilities” programme, which aims to improve commercial decision-making and marketing and sales expertise by defining a common way of marketing and selling across the business. It is also the intention to invest further in developing its Science & Technology capabilities.

The clustering and delayering of the organisation, and an increasing level of outsourcing, will also assist Confectionery in its goal of streamlining processes so that it has world-class capabilities across the business, including in supply chain, finance and IT.


   
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Sustainability commitments
Confectionery will retain commitments to growing sustainably and to its strong cultural heritage.

Within the overriding goal of being performance driven, but values led, our aims are to:
> promote responsible consumption of our products;
> ensure ethical and sustainable sourcing of raw materials and other inputs;
> prioritise quality and safety;
> reduce carbon and water use, and packaging;
> nurture and reward colleagues; and
> invest in the communities in which we operate.

The Group’s approach to and performance in this area is discussed in detail in its Corporate and Social Responsibility Report, (published every two years) and in the society and environment section of our website. This is available on www.cadburyschweppes.com and will be available from demerger on www.cadbury.com. In 2006, the Group’s Corporate and Social Responsibility Report set out goals and sustainability commitments for the period 2006–2010 in five key areas: marketing, food and consumer issues; ethical sourcing; environment, health and safety; human rights and employment standards; and community involvement.

On 2 July 2007 the Group launched a new environmental strategy designed to reduce the Group’s environmental impact by minimising the use of energy, packaging and water which aims:
> to reduce net absolute carbon emissions by 50% by 2020, with a minimum of 30% from company actions;
> to reduce packaging used per tonne of product by 10%, and by 25% in more highly packaged seasonal and gifting items;
> to use more environmentally sustainable forms of packaging, aiming for 60% biodegradable packaging and 100% of secondary packaging being recyclable; and
> to ensure that all “water scarce” sites have water reduction programmes in place.

Regions in Confectionery
Confectionery was organised into four regions with effect from 1 July 2007. The four regions are: Britain, Ireland, Middle East and Africa (BIMA); Europe (including Russia and Turkey); Americas; and Asia Pacific. Further information on each of these regions is set out below.

In 2006, the commercial confectionery operations were reorganised under a category structure, with each of the three confectionery categories of chocolate, gum and candy managed on a global basis. This structure will be further embedded in the regions to ensure excellence of execution and increase efficiency.

This structure enables the regions to focus on delivering the 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.

Within regions, Confectionery will also be clustered to reduce the number of business units and increase focus, and global, regional and business unit head offices will be co-located to reduce building and back-office costs. Further savings will be achieved through allocating dual roles to functional leaders to reduce headcount and increase efficiency of decision-making.


   
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Britain, Ireland, Middle East and Africa (BIMA)         % of Group  
      FY 2007   Total 1







Revenue     £1,579 m 20 %







Underlying profit from operations2     £169 m 14 %







Underlying operating margin     10.7 %  







Profit from operations     £99 m 10 %







Number of manufacturing sites     21      







Main markets:   UK, Ireland, South Africa, Egypt, Nigeria  







Main Brands:   Cadbury, Green & Black’s, Trident, Stimorol, Chiclets, Bassett’s, Halls, Maynards, The Natural Confectionery Company, Tom Tom, Bournvita  







1 Excludes Central
2 For an explanation of underlying profit from operations and a reconciliation to profit from operations see pages 25 to 27.
   

The BIMA region is the largest Confectionery region in terms of revenue. It mainly comprises chocolate businesses in the UK, Ireland, South Africa and Nigeria, but also includes market leading gum businesses in South Africa and Egypt, and candy businesses throughout the region.

Britain and Ireland is the largest confectionery business in BIMA, representing around 80% of revenue. The Group currently has a leading 28.1% share in the UK, the world’s second largest confectionery market. In the UK and Ireland, we sell chocolate principally under the Cadbury and Green & Black’s brands, and candy products under brands including Bassett’s, Halls, Maynards, The Natural Confectionery Company and Trebor. Trident gum was launched in the UK in early 2007 and has secured a 10% market share during the year.

The Group is the leading confectionery group in Africa. In the

Middle East and Africa, the Group’s main confectionery operations are in South Africa, Nigeria and Egypt.

In South Africa, we have the leading confectionery market share at 31%. We sell chocolate and candy under the Cadbury and Halls brands, and, with the acquisition of the Dan Products business in 2006, we now have a leading share of the South African gum market, mainly under the Stimorol brand, at 57%.

In 2006, the Group increased its shareholding in Cadbury Nigeria to 50.02% . The Nigerian business sells candy, food beverages and bubble gum. Its lead brands include Tom Tom, our 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. The Group also operates in Morocco, Lebanon, Ghana and Kenya.


             
Europe         % of Group  
      FY 2007   Total 1







Revenue     £879 m 11 %







Underlying profit from operations2     £91 m 8 %







Underlying operating margin     10.4 %  







Profit from operations     £70 m 7 %







Number of manufacturing sites     18      







Main markets:   France, Poland, Spain, Russia, Turkey, Greece, Scandinavia, Romania  







Main Brands:   Hollywood, Halls, Wedel, Trident, Dirol, Stimorol, Kent, Poulain, First, Falim  







1 Excludes Central
2 For an explanation of underlying profit from operations and a reconciliation to profit from operations see pages 25 to 27.
   

The Europe region comprises businesses in Western and Eastern Europe (including Russia and Turkey), excluding the UK and Ireland. It principally sells candy and gum, with the only significant chocolate businesses in Poland, Russia and France.

France is the region’s largest operating unit and confectionery has the leading position in the French confectionery market – the world’s eighth largest. We have a 47% share of the French gum market, principally under the Hollywood brand, and also sell candy under the La Pie Qui Chante and Carambar brands, and chocolate, mainly under the Poulain brand. In 2007, Halls was launched in France, and the brand now has a 5% share of the candy market.

Gum is sold under the Trident brand in Spain, Portugal and Greece, and under the Stimorol and V6 brands in Switzerland, Denmark, Belgium and Sweden, while candy is sold under the Halls brand in Spain and Greece. Chocolate is sold under the Wedel brand in Poland, where we have a 15% market share.

Confectionery also operates in the Netherlands and Switzerland selling mainly gum.

Other important businesses in the Europe region are those in Russia and Turkey. We have a 27% share of the gum market in Russia through the Dirol brand, and also sell medicated candy under the Halls brand and chocolate under the Cadbury brand. In Turkey, we have the leading share of the candy market at 54%, with brands including Kent, Missbon, Olips and Jelibon. The acquisition of Intergum, the leading Turkish gum business, which completed in August 2007, has resulted in a 63% share of the Turkish gum market, primarily under the Trident, First and Falim brands.

In June 2007, the Group acquired 93.32%. of Kandia-Excelent, which has a 21%. share of the Romanian confectionery market, resulting in the Group having a 27%. share of candy and the second largest share of the chocolate market at 18%. Since its initial acquisition, we have now increased our shareholding in Kandia-Excelent to 95%.


   
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Americas Confectionery         % of Group  
      FY 2007   Total 1 







Revenue     £1,372  m 17 %







Underlying profit from operations2     £248 m 20 %







Underlying operating margin     18.1 %  







Profit from operations     £205 m 20 %







Number of manufacturing sites     8      







Main markets:   US, Canada, Mexico, Brazil, Argentina, Colombia, Venezuela  







Main Brands:   Trident, Halls, Dentyne, Stride, Bubbas, Clorets, Chiclets, Cadbury,  







1 Excludes Central
2 For an explanation of underlying profit from operations and a reconciliation to profit from operations see pages 25 to 27.
 

The Group has businesses in all the Americas region’s major countries, including the US, Canada, Mexico, Brazil, Argentina, Venezuela and Colombia. Approximately 54% of sales are in the US and Canada, with the remainder in Mexico and Latin America. Outside Canada, the region sells principally gum and candy. Four brands (Trident, Dentyne, Halls and the Bubbas) account for around 65% of revenue. In the US, the world’s largest confectionery market, we have the second largest market share in gum at 34%, mainly through the Trident and Dentyne brands, and the leading share at 56% in cough/cold confectionery through Halls. In 2006, a new US gum brand, Stride, was launched, which now has a 5% share of the US gum market.

The Group has the largest confectionery business in Canada, the world’s 11th largest confectionery market, with an overall

20% market share, and has leading market positions in gum, candy and cough/cold confectionery, and a top three position in chocolate. In Latin America, the Group has the leading overall confectionery market share at 18%, double that of its nearest competitor. It has a 65% share of the Latin American gum market, and leading market shares in gum in Mexico, Brazil, Venezuela, Argentina and Colombia. It also has the second largest share of the candy confectionery market at 9%.

The Group has a broad-reaching distribution infrastructure in Latin America which enables it to supply a diverse customer base of small shops and kiosks. In Mexico, the Group has a 78% share of the gum market and an 85% share of the candy market. Other brands sold in the Americas region include Chiclets, Clorets, Swedish Fish, Sour Patch Kids, Beldent, Bazooka and Mantecol.


             
Asia Pacific         % of Group  
      FY 2007   Total 1







Revenue     £1,254 m 16 %







Underlying profit from operations2     £159 m 13 %







Underlying operating margin     12.7 %  







Profit from operations     £146 m 15 %







Number of manufacturing sites     19 confectionery      







Main markets:   Australia, New Zealand, India, Japan, Thailand, China, Malaysia, Indonesia, Singapore, Philippines, Korea  







Main Confectionery Brands:   Cadbury, Halls, Recaldent, Clorets, Bournvita, The Natural Confectionery Co.  







Main Beverage Brands   Schweppes, Solo, Spring Valley, Sunkist  







1 Excludes Central
2 For an explanation of underlying profit from operations and a reconciliation to profit from operations see pages 25 to 27.
 

Asia Pacific comprises confectionery operations in Australia, New Zealand, India, Japan, Malaysia, Indonesia, Thailand and China, and an Australian beverages business, which accounts for approximately 32% of the region’s revenue.

In 2006, the Group entered the Vietnamese market through a third-party distribution agreement, and in 2007 strengthened its position in the Japanese candy market with the acquisition of 96% of Sansei Foods, a Japanese functional candy company.

Australia and New Zealand are our largest markets in the region. Confectionery has a leading position in the Australian confectionery market, with a number one position in chocolate (53% market share), and a strong presence in candy. The Group’s main chocolate brand in Australia is Cadbury Dairy Milk and in New Zealand, brands include Cadbury Dairy Milk and Moro. The Group has a number one position in New Zealand’s confectionery market with a 47% share.

The products of the Group’s Australian beverages business are sold under the Schweppes, Cottee’s, Solo, Spring Valley, and Sunkist brand names. Australian Beverages also has a licence to manufacture, sell and distribute Pepsi, Red Bull, 7 UP, Mountain Dew and Gatorade. The beverages business manufactures, distributes and markets its own products, and also manufactures concentrate and bottles product for other manufacturers.

Other significant markets in this region include India, Japan and Thailand. Our Indian business has a leading presence in chocolate with a 71% market share, and also sells candy under the Eclairs and Halls brands, and Bournvita. In Japan, we sell mainly gum under the Recaldent and Clorets brands, and have the number two position in gum with a 20% market share.

The Group also has leading market shares in Thailand in gum and candy at 63% and 31% respectively. In Malaysia, it has a number one market share in chocolate at 29%, and in gum, a number two position through the Dentyne brand with a 19% market share.


   
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Americas Beverages
On 10 October 2007, the Group announced that it had decided to focus on demerging its Americas Beverages business through a listing on the New York Stock Exchange. The Americas Beverages business will be renamed Dr Pepper Snapple Group, Inc. (DPS) following the demerger.

Background
Americas Beverages operates as a brand owner, a bottler and a distributor through its five segments as follows:
> its beverage concentrates segment is a brand ownership business;
> its finished goods segment is a brand ownership and a bottling business and, to a lesser extent, a distribution business;
> its bottling group segment is a bottling and distribution business;
> its Snapple distributors segment is a distribution business; and
> its Mexico and the Caribbean segment is a brand ownership and a bottling and distribution business.

As a brand owner, Americas Beverages builds its brands by promoting brand awareness through marketing, advertising and promotion, and by developing new and innovative products and product line extensions that address consumer preferences and needs. As the owner of the formulas and proprietary know-how required for the preparation of beverages, Americas Beverages manufactures, sells and distributes beverage concentrates and syrups used primarily to produce carbonated soft drinks (CSD) and manufactures, bottles, sells and distributes primarily non-CSD finished beverages.

Most of Americas Beverages’ sales of beverage concentrates are to bottlers who manufacture, bottle, sell and distribute its branded products into retail channels. Approximately one third of its U.S. beverage concentrates by volume are sold to its Bottling Group, with the balance being sold to third-party bottlers affiliated with Coca-Cola or PepsiCo, as well as independent bottlers. Americas Beverages also manufactures, sells and distributes syrups for use in beverage fountain dispensers to restaurants and retailers, as well as to fountain wholesalers, who resell it to restaurants and retailers. In addition, Americas Beverages distributes non-CSD finished beverages through its own operations and through third-party distributors.

Americas Beverages’ bottling and distribution businesses manufacture, bottle, sell and distribute CSD finished beverages from concentrates and non-CSD finished beverages and products mostly from ingredients other than concentrates. They sell and distribute finished beverages and other products primarily into retail channels either directly to retail shelves or to warehouses through their large fleet of delivery trucks or through third party logistics providers. Approximately three-quarters of Americas Beverages’s 2006 bottling group net sales of branded products come from its own brands, with the remaining from the distribution of third-party brands such as Monster energy drink, FIJI mineral water and Big Red soda. In addition, a small portion of its bottling group sales come from bottling beverages and other products for private label owners or others for a fee (referred to as co-packing).


       
Americas Beverages   % of Group  
    FY 2007   Total 1






Revenue   £2,878 36






Underlying profit from operations2   £553 45






Underlying operating margin   19.2  






Profit from operations   £486 48






Number of manufacturing sites   25    






Main markets:   US, Canada, Mexico    






Main Beverage Brands:   Dr Pepper, Snapple, Mott’s, Hawaiian Punch, Peñafiel, Clamato, 7 UP, Yoo-Hoo, A&W, Sunkist, Diet Rite, Canada Dry, Schweppes  






1 Excludes Central
2 For an explanation of underlying profit from operations and a reconciliation to profit from operations see pages 25 to 27.
   

Americas Beverages is a leading integrated brand owner, bottler and distributor of non-alcoholic beverages in the United States, Canada and Mexico with a diverse portfolio of flavored CSDs and non-carbonated soft drinks (non-CSDs), including ready-to-drink teas, juices, juice drinks and mixers. Its brand portfolio includes popular CSD brands such as Dr Pepper, 7 UP, Sunkist, A&W, Canada Dry, Schweppes, Squirt and Peñafiel, and non-CSD brands such as Snapple, Mott’s, Hawaiian Punch, Clamato, Mr & Mrs T, Margaritaville and Rose’s. Its largest brand, Dr Pepper, is the number 2 selling flavoured CSD in the United States according to ACNielsen.

Americas Beverages operates primarily in the United States, Mexico and Canada, the first, second and tenth largest beverage markets, respectively, by CSD volume, according to Beverage Digest. It also distributes its products in the Caribbean. In 2007, 89% of its net sales were generated in the United States, 4% in Canada and 7% in Mexico and the Caribbean.


   
18 Cadbury Schweppes Annual Report & Accounts 2007

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Strategy
The Group’s strategy for Americas Beverages is as follows:

Build and enhance leading brands
The business has a well-defined portfolio strategy and uses an on-going process of market and consumer analysis to identify key brands that the Group believes have the greatest potential for profitable sales growth. For example, in 2006, 7UP was relaunched with 100% natural flavours and no artificial preservatives, thereby differentiating the 7UP brand from other major lemon-lime CSDs. There will be a continuing investment in key brands to drive profitable and sustainable growth by strengthening consumer awareness, developing innovative products and brand extensions to take advantage of evolving consumer trends, improving distribution and increasing promotional effectiveness.

Focus on opportunities in high growth and high margin categories
The focus is on driving growth in selected profitable and emerging categories. These categories include ready-to-drink teas, energy drinks and other functional beverages, for example, the recently launched Snapple super premium teas and juices and Snapple enhanced waters. The intention is to capitalise on opportunities in these categories through brand extensions, new product launches and selective acquisitions of brands and distribution rights. Americas Beverages also aims to enter into new distribution agreements for e merging, high-growth third party brands in new categories that can use our bottling and distribution network. Americas Beverages can provide these brands with distribution capability and resources to grow, and they provide us with exposure to growing segments of the market with relatively low risk and capital investment.

Increase presence in high margin channels and packages
The business is focused on improving product presence in high margin channels, such as convenience stores, vending machines and small independent retail outlets, and through increased selling activity and investments in coolers and other cold drink equipment. Increased promotional activity and innovation will increase demand for high margin products like single-serve packages for many of the key brands for example the successful introduction of the A&W “vintage” 20 ounce bottle.

Leverage our integrated business model
Integrated brand ownership, bottling and the distribution business model provides opportunities for net sales and profit growth through the alignment of the economic interests of brand ownership and the bottling and distribution businesses. America’s Beverages will leverage the integrated business model to reduce costs by creating greater geographic manufacturing and distribution coverage and to be more flexible and responsive to the changing needs of the businesses’ large retail customers by coordinating sales, service, distribution, promotions and product launches. The intention is to concentrate more manufacturing in multi-product, regional manufacturing facilities, including by opening a new plant in Southern California and investing in expanded capabilities in several of our existing facilities within the next several years.

Strengthen our route to market through acquisitions
The acquisition and creation of the Bottling Group is part of the longer-term initiative to strengthen the route to market for the Americas Beverages products. The additional acquisitions of regional bottling companies broadens the geographic coverage in regions where the business is currently underrepresented, enhances coordination with the large retail customers, more quickly addresses changing customer demands, accelerates the introduction of new products, improves collaboration around new product innovations and expands the coverage of high margin channels.

Improve operating efficiency
The Americas Beverages business was recently restructured which serves to reduce the selling, general and administrative expenses and improves operating efficiency. In addition, the integration of recent acquisitions into the Bottling Group has created the opportunity to improve manufacturing, warehousing and distribution operations. For example, through the creation of multi-product manufacturing facilities (such as our Irving, Texas facility) which provides a region with a wide variety of products at reduced transportation and co-packing costs.


   
Cadbury Schweppes Annual Report & Accounts 2007 19

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Description of business continued

 

Group structure
The Group is managed by the Cadbury Schweppes plc Board of Directors, which delegates day-to-day management to the Chief Executive’s Committee (CEC).

Cadbury Schweppes plc Board of Directors and Chief Executive’s Committee (CEC)
The Board is responsible for the overall management and performance of the company, and the approval of the long-term objectives and commercial strategy.

The Chief Executive’s Committee, which comprises the Chief Executive Officer, the leader of each region and function, and the Group Strategy Director, reports to the Board and is accountable for the day-to-day management of the operations and the implementation of strategy. This team is responsible to the Board for driving high level performance of the growth, efficiency and capability programmes as well as for resource allocation.

The CEC develops global commercial strategy and will address 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 sources and uses of funds, cash position and capital structure, and reviews the structure and policy of the 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.

Functions
The Group is organised into six global functions as well as the four Confectionery and one Americas Beverages regions explained above. This structure enables the regions to focus on delivering the Group’s 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.

Supply Chain
Supply Chain ensures the reliable supply of products, whether manufactured by the Group or by a third party. Supply Chain’s role encompasses sourcing of ingredients and packaging materials, planning, manufacturing, distribution and customer services, as well as quality and safety of products, and employee safety. Supply Chain is responsible for managing the fixed assets of the Groups manufacturing facilities and warehouses.

Commercial
The role of Commercial is to facilitate higher revenue growth from the business units than they could otherwise achieve on a stand-alone basis. Commercial defines category and portfolio strategy; ensures the Group has best-in-class commercial capabilities; partners with other functions such as Science & Technology and Supply Chain in creating innovation; and co-ordinates brand management, consumer insights, and global customer strategy.

Science & Technology
Science & Technology leads the Group’s technical innovation programme. This function sets and communicates global technical priorities, establishes and co-ordinates the science agenda and facilitates global knowledge management and best-practice transfer. It prioritises and funds technology developments which underpin the innovation agenda, including longer-term globally-applicable development programmes. It also co-ordinates nutrition initiatives as a key element of the Group’s food policy and, together with Group Legal, creates a strategy for the Group’s intellectual property assets.

The Group uses its own Science and Technology facilities as well as those of suppliers and has a growing number of external collaborations with university, consultant and industrial partners. The major Science and Technology facilities are at Reading, UK, Hanover Park, New Jersey, and Trumball, Connecticut. The Reading facility provides science and technology support to the Group both globally and to the BIMA and Europe region and to third parties. Hanover Park serves A mericas Confectionery and Trumball Americas Beverages. The Group also has a number of smaller facilities which support business units.

Human Resources
The role of the Human Resources function is to improve performance by enhancing the effectiveness of day-to-day working practices, people capabilities and the quality of their output. Human Resources 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.

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 the Group’s annual contracts (or budgets), for developing longer-term strategy and for managing acquisitions and disposals. It is also responsible for managing financial communications and the Group’s relationship with the investment community.

Legal and Secretariat
Legal and Secretariat partners and supports the regions and other functions by taking responsibility for a broad range of legal and secretarial activities. These include corporate governance matters; compliance with US and UK securities regulation and legislation; effective management of the Group intellectual property portfolio; mergers and acquisitions; litigation management; general contract work and incident management.


   
20 Cadbury Schweppes Annual Report & Accounts 2007

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Risk factors
Introduction

The Group, like all businesses, is exposed to a number of risks which may have material and adverse effects on its reputation, performance and financial condition. It is not possible to identify or anticipate every risk that may affect the Group: some material risks may not be known, others, currently deemed as immaterial, could become material, and new risks may arise.

The Group’s risk management process is described below. It aims to identify the risk factors that may have a material impact on the Group, and to manage them appropriately.

The risk factors identified by the Group’s risk management process are set out below. Each of these could have a material and adverse effect on the Group, including on its reputation, performance and financial condition. They have been divided into four categories: external risks; internal risks; execution risks; and financial risks.

Any investment decision should be made following consideration of the risk factors set out below. The risk factors should also be read in conjunction with the forward-looking statements on page 24 of this document.

Risk management process
The Group’s process for identifying and managing risk is set by the Board. The Board has delegated the day-to-day management of risk within the Group to the Risk and Compliance Committee (RCC). The RCC is chaired by the Chief Executive Officer, and comprises the Chief Legal Officer and representatives drawn from the Group’s Regions and Functions.

The Board conducts an annual review of Group risks, during which it identifies the key risks for the year ahead. As part of this review, operational and strategic risks are proposed as key risks by the RCC, based on inputs from Regions, Function Heads and business leaders. The Risk Factors set out below reflect the key risks identified as part of this process.

Each of the key risks is assigned to a member of the Chief Executive’s Committee (CEC), who proposes a level of risk the Group is willing to take and develops an appropriate plan of action to mitigate the risk. All risk mitigation plans are reviewed, challenged and agreed by the RCC.

Once risk mitigation plans are agreed, Regions and Functions are asked to carry out a self assessment exercise which requires all operating units to confirm compliance with Group policies and also to confirm that key operational controls are in place and working effectively. The results of this exercise, together with a review of specific plans for strategic risks, enable the Board to confirm that the business has a sound, risk-based framework of internal control.

The Group Audit team provides independent re-assurance that the standard of risk management, compliance and control meets the needs of the business, and this includes an evaluation of the accuracy and completeness of the self assessment exercise. Group Audit status reports are discussed with the CEC, Audit Committee and Board on a regular basis.

The Board also recognises that the risks facing the business may sometimes change over short time periods. Every quarter each Region provides an update on new and emerging risks to the RCC and proposals to update the Group risks are provided to the Audit Committee and the Board.

While the Group’s risk management process attempts to identify and manage (where possible) the key risks it faces, no such process can totally eliminate risk or guarantee that every risk is identified, or that it is possible, economically viable, or prudent to manage such risks. Consequently, there can never be an absolute assurance against the Group failing to achieve its objectives or a material loss arising.

1. External risks
The Group is subject to a number of external risks. The Group defines external risks as those that stem from factors which are mainly outside of its control. These risks will often arise from the nature of the Group and the industry in which it operates.

Legal, regulatory, political and societal risks
The Group is at risk from significant and rapid change in the legal systems, regulatory controls, and custom and practices in the countries in which it operates. These affect a wide range of areas including the composition, production, packaging, labelling, distribution and sale of the Group’s products; the Group’s property rights; its ability to transfer funds and assets within the Group or externally; employment practices; data protection; environment, health and safety issues; and accounting, taxation and stock exchange regulation and involve actions such as product recalls, seizure of products and other sanctions. Accordingly, changes to, or violation of, these systems, controls or practices could increase costs and have material and adverse impacts on the reputation, performance and financial condition of the Group.

Political developments and changes in society, including increased scrutiny of the Group, its businesses or its industry, for example by non-governmental organisations or the media, may result in, or increase the rate of, material legal and regulatory change, and changes to custom and practices.

The Group may also be subject to regulation designed to address concerns about dietary trends. This could include the introduction of additional labelling requirements, and levying additional taxes on, or restricting the production or advertising of, certain product types, which could increase the Group’s costs or make it harder for the Group to market its products, adversely affecting its performance.

Geographic spread and emerging markets exposure
The Group is exposed to control and other risks inherent in a business which operates in many countries. A failure of control in one or more countries may materially adversely affect the performance or financial condition of the Group as a whole. Approximately one-third of the Group’s confectionery revenues are generated in emerging markets, which have less developed political, legal and regulatory systems which are at higher risk of failure than those of developed markets. Any failure may have a materially adverse impact on the Group’s performance or financial condition.


   
Cadbury Schweppes Annual Report & Accounts 2007 21

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Description of business continued

 

Business continuity and incident management
The Group is at risk from disruption of a number of key manufacturing and distribution assets and systems on which it increasingly depends. The functioning of the Group’s manufacturing and distribution assets and systems could be disrupted for reasons either within or beyond the Group’s control, including: extremes of weather or longer-term climatic changes; accidental damage; disruption to the supply of material or services; product quality and safety issues; systems failure; workforce actions; or environmental contamination. While the Group has an incident management system in place, there is a risk that these plans may prove inadequate and that any disruption may materially adversely affect the Group’s ability to make and sell products and therefore materially adversely affect its reputation, performance or financial condition.

Competition and customer consolidation
Increased competition in the markets in which it operates may materially adversely impact the Group’s performance and financial condition. The confectionery industry is highly competitive. The Group competes with other multinational corporations which also have significant financial resources. The Group may be unable to compete effectively if its competitors’ resources are applied to change areas of focus, enter new markets, reduce prices, or to increase investments in marketing or the development and launch of new products. The Group is also at risk from the trend towards greater concentration of its customer base due to consolidation of the retail trade which may result in increased pricing pressure from customers and adversely impact the Group’s sales and margins.

Consumer demand
Consumer demand for the Group’s products may be affected by factors including changes to consumer preferences, unseasonable or unusual weather, or longer-term climatic changes. The Group has made substantial investments in understanding consumer preferences and in its ability to respond to consumer needs through innovation, and also has products appealing to a wide range of consumers. However, it may be unable to respond successfully or at reasonable cost to rapid changes in demand or consumer preferences, which may adversely affect its performance.

Raw materials
The Group depends upon the availability, quality and cost of raw materials from around the world, which exposes it to price, quality and supply fluctuations, including those occurring because of the impact of disease or climate on harvests. Key raw materials include cocoa, milk, sweeteners, packaging materials and energy, some of which are available only from a limited number of suppliers. Although the Group will take measures to protect against the short-term impact of these fluctuations and of the concentration of supply, there is no guarantee that these will be effective. A failure to recover higher costs or shortfalls in availability or quality could materially adversely impact the Group’s performance.

Retirement and healthcare benefits
The Group is at risk from potential shortfalls in the funding of its various retirement and healthcare benefit schemes. The liabilities of these schemes reflect the Group’s latest estimate of life expectancy, inflation, discount rates and salary growth which may change. These schemes are generally funded externally under trust through investments in equities, bonds and other external assets, the values of which are dependent on, among other things, the performance of equity and debt markets, which can be volatile. Changes in the value of the assets or liabilities of these schemes and therefore their funding status may require additional funding from the employing entities and may adversely impact the Group’s financial condition.

2. Internal risks
Internal risks are those arising from factors primarily within the Group’s control, including from the Group’s structure and processes.

Information technology infrastructure
The Group depends on accurate, timely information and numerical data from key software applications to aid day-today business and decision-making. Any disruption caused by failings in these systems, of underlying equipment or of communication networks could delay or otherwise impact the Group’s day-to-day business and decision-making and have materially adverse effects on the Group’s performance.

Operational interdependence
The Group’s operations in individual countries are increasingly dependent for the proper functioning of their business on other parts of the Group in terms of raw material and product supply, new products and sales and marketing programme development, technology, funding and support services. Any underperformance or failure to control the Group’s operations in one country properly could therefore impact the Group’s businesses in a number of other countries and materially adversely impact the performance or financial condition of other business units or the Group as a whole.

Product quality and safety
Despite safety measures adopted by the Group, its products could become contaminated or not meet the required quality or safety standards. The Group uses many ingredients, and there is a risk of either accidental or malicious contamination. Any contamination or failure to meet quality and safety standards may be costly and impact the Group’s reputation and performance.

Employees
The Group depends on the continued contributions of its executive officers and employees, both individually and as a group. While the Group reviews its people policies on a regular basis and invests significant resources in training and development and recognising and encouraging individuals with high potential, there can be no guarantee that it will be able to attract, develop and retain these individuals at an appropriate cost and ensure that the capabilities of the Group’s employees meets its business needs. Any failure to do so may impact the Group’s performance.


   
22 Cadbury Schweppes Annual Report & Accounts 2007

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Licensing
The Group licences to third parties certain brand and product rights in specific geographies. While such licences are carefully controlled, inappropriate action or an incident at a licensee partner could occur and impact the reputation of the Group’s brands or the Group as a whole.

Outsourcing
The Group is increasing its use of outsourcing arrangements with third parties, notably in information technology, manufacturing, finance and human resources operations. While the Group has benefited from the expertise of these third parties, it is at risk from failures by these third parties to deliver on their contractual commitments, which may adversely impact its reputation and performance, and increase its costs.

Intellectual property
The Group has substantial intellectual property rights and interests which are important to the Group and may require significant resources to protect and defend. The Group may also infringe others’ intellectual property rights and interests and therefore be required to redesign or cease the development, manufacture, use and sale of its products so that they do not infringe others' intellectual property rights. This may require significant resources or not be possible. The Group may also be required to obtain licences to infringed intellectual property, which may not be available on acceptable terms, or even at all. Intellectual property litigation by or against the Group could significantly disrupt the Group’s business, divert management's attention, and consume financial resources, and therefore have a materially adverse impact on the reputation, performance and financial condition of the Group.

3. Execution risks
Execution risks arise from the implementation of the Group’s strategy and its change and restructuring programmes, which aim to enhance long term shareowner value.

Demerger of Americas Beverages
The demerger of Americas Beverages may not complete on the anticipated timetable. Completion of the demerger is subject to the satisfaction (or waiver) of a number of conditions including, amongst others, the approval of the demerger by Cadbury Schweppes shareowners at a shareowner meetings (i.e. general meeting and court meeting) and Court sanction. If the Cadbury Schweppes shareowners do not approve the Proposals at the shareowner meetings, Court sanction is not given or Americas Beverages is unable to raise sufficient finance to repay its debts to the continuing group, the demerger will not complete. If the demerger and the transactions connected with it (e.g. if it fails to repay debts post-demerger) does not occur in part or whole, then the Group may experience a delay in the execution of its strategic objectives, and may be unable to realise the benefits for shareowners that the Board believes will result from the demerger.

There can be no guarantee that the Group will realise any or all of the anticipated benefits of the demerger, either in a timely manner or at all. If that happens, and the Group incurs significant costs, it could have a material adverse impact on the results of the Group.

Vision into Action
There can be no guarantee that the Group’s Vision into Action plan will deliver improvements in business performance and the implementation of the plan may disrupt the Group’s business. On 19 June, 2007, the Group announced a new strategy for Confectionery called Vision into Action, which includes a plan to improve its margin performance to achieve a mid-teens operating margin by 2011. This plan includes gross reductions of approximately 15%. in the number of factories, material changes to the Group’s supply chain configuration, and to the structure and operation of other Group Functions. These changes increase the risk of significant disruption to the Group’s business, which may occur, for example, through defective execution of the Vision into Action plan, unforeseen events, or workforce actions.

The Group expects to incur a restructuring charge of £450 million (of which around £50 million is non-cash) and invest £200 million of capital expenditure behind the ‘Vision into Action’ plan. There can be no guarantee, however, that this investment, or the Group’s other or subsequent investments, will deliver the anticipated improvements in business performance.

Acquisitions and disposals
Risks inherent in the acquisition or disposal of businesses and brands may have an adverse impact on the Group’s business or financial results.

From time to time the Group may make acquisitions and disposals of businesses and brands. While these are carefully planned, the rationale for them may be based on incorrect assumptions or conclusions and they may not realise the anticipated benefits or there may be other unanticipated or unintended effects. Additionally, while the Group seeks protection, for example through warranties and indemnities in the case of acquisitions, significant liabilities may not be identified in due diligence or come to light after the expiry of warranty or indemnity periods. These factors may materially adversely impact the performance or financial condition of the Group.


   
Cadbury Schweppes Annual Report & Accounts 2007 23

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Description of business continued

 

4. Financial risks
The Group is exposed to market risks such as interest rate and exchange rate risks arising from its international business.

The main financial risks facing the Group are fluctuations in foreign currency, interest rate risk, availability of financing to meet the Group’s needs and default by counterparties. Any of these financial risks may materially adversely impact the performance or financial condition of the Group. A detailed discussion of the Group’s financial risks can be found in the Financial Review on pages 42 to 44.

Forward-looking statements
Statements contained in this Report, including in the Description of Business – Risk Factors, the Financial Review, the Directors’ Report and the Directors’ Remuneration Report, may constitute “forward-looking statements” within the meaning of Section 27A of the US Securities Act of 1933, as amended, and Section 21E of the US Securities Exchange Act of 1934, as amended. Forward-looking statements are generally identifiable by the use of the words “may”, “will”, “should”, “plan”, “expect”, “anticipate”, “estimate”, “believe”, “intend”, “project”, “goal” or “target” or the negative of these words or other variations on these words or comparable terminology. Forward-looking statements involve a number of known and unknown risks, uncertainties and other factors that could cause our or our industry’s actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. In addition to those factors described under “Risk Factors”, other important factors that could cause actual results to differ materially from our expectations include international economic and political conditions; changes in laws, regulations and accounting standards; distributor and licensee relationships and actions; effectiveness of spending and marketing programmes; and unusual weather patterns. Cadbury Schweppes does not undertake publicly to update or revise any forward-looking statement that may be made in this Report, whether as a result of new information, future events or otherwise.

Although the Group believes that the expectations reflected in the forward-looking statements are reasonable, it cannot guarantee future results, levels of activity, performance or achievements.


   
24 Cadbury Schweppes Annual Report & Accounts 2007

       
  Business & Financial review    
       

 

financial
review

         
Items covered in this section:      


   
Overview 25    


   
  Information used by management to make decisions 25    


   
  Explanation of management performance measures 25    


   
  Executive summary 29    


   
  Earnings per ordinary share 30    


   
  Sources of revenue and trading costs 30    


   
  Contract termination gain 30    


   
  UK product recall 30    


   
  Cadbury Nigeria 31    


   
  Future trends 31    


   
  2008 outlook 31    


   
Operating review      


   
  2007 compared to 2006 32    


   
  – Total Group 32    


   
  – Confectionery 35    


   
  – Americas Beverages 39    


   
Capital structure and resources 39    


   
  Capital structure 39    


   
  Borrowings 40    


   
  Contractual obligations 40    


   
  Cash Flows 41    


   
  Capital expenditure 42    


   
  Treasury risk management 42    


   
Review of accounting policies 44    


   
  Critical accounting estimates 44    


   
  Accounting policy changes 47    


   
         
         

Overview
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 (before and after Business Improvement Costs);
> Underlying operating margins;
> Working Capital;
> Free Cash Flow;
> Net cash from operating activities (a key component of Free Cash Flow); and
> Return on Invested Capital.

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
The table below reconciles underlying profit from operations, as we define it, to what we believe is the corresponding IFRS measure, which is profit from operations.

  2007   2006  
  £m   £m  





Profit from operations 788   909  





Add back:    





Restructuring 200   133  





Amortisation and impairment of acquisition intangibles 42   38  





Non-trading items 38   (40 )





Contract termination gain (31 )  





UK product recall   30  





IAS 39 adjustment 13   3  





Underlying profit from operations 1,050   1,073  




 

A segmental analysis of underlying profit from operations is presented alongside profit from operations on pages 82 and 83 of the audited financial statements.


   
Cadbury Schweppes Annual Report & Accounts 2007 25

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Financial review continued

 

In addition, we present underlying earnings per share, along with a reconciliation to reported 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;
> Amortisation and impairment of acquisition intangibles;
> Non-trading items;
> IAS 39 adjustment;
> Exceptional items; and
> The tax impacts of certain intra-group transfers and of the above.

The reconciling items between reported and underlying performance measures are discussed in further detail below.

The costs incurred in implementing significant business reorganisation projects, such as our Confectionery Vision into Action programme, the efficiency programme in pursuit of mid-teen margins, the Fuel for Growth programme to reduce direct and indirect costs following the acquisition of Adams in 2003 and integrating acquisitions are classified as restructuring. In addition, the onerous lease which has arisen from the strategic decision to decrease our gum supply from a third party manufacturer, Gumlink A/S, and move production to a new green-field site in Poland, is included as restructuring.

Also included as restructuring are the costs incurred in establishing a stand-alone confectionery company.

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.

In 2007, the Group has also incurred costs which are restructuring in nature relating to the maintenance of an efficient business. These costs are termed ‘Business Improvement Costs’ and are included within the underlying results of the business as they are expected to be incurred each year and hence will not distort the performance trends of the business. There were no Business Improvement Costs in 2006 as all restructuring was incurred as part of the Fuel for Growth programme.

Our performance is driven by the performance of our brands, other acquisition intangibles and goodwill, some of which are 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.

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. Costs incurred from the disposals of operations which will meet the criteria to be disclosed as a discontinued operation are also separately identified due to their significance and discrete nature. Consequently, the non-trading 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.

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, practical to do so and 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 reported 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 or 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 we consider to be exceptional. 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 results for the year. Therefore any gains and losses on such items are analysed outside the underlying results to enable the trends in the underlying performance of the business to be understood. Where exceptional items are excluded from the underlying results we provide additional information on these items to enable a full understanding of the events and their financial impact.


   
26 Cadbury Schweppes Annual Report & Accounts 2007

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The items treated as exceptional in the period covered by this report are:
> Gain on contract termination – in 2007, the Group received amounts in respect of the termination in November of a distribution agreement for Glacéau in the US. The gain which would otherwise have been received through distribution of the product in 2008 is considered to be one-off and excluded from the underlying results.
> 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.
> 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.
> 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.

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 undertake reorganisations in preparation for a disposal or make intra-group transfers of the legal ownership of brands and other intangible assets. These transfers may give rise to 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.

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 for cash flow and report this externally. 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 investment analysts that should be provided alongside the equivalent GAAP measures.

Free Cash Flow
References to Free Cash Flow refer to the amount of cash we generate after meeting all our obligations for interest and tax and after all capital investment. In 2007, the Group revised its definition of Free Cash Flow to exclude dividends payable to equity shareowners to align with market practice. Free cash flow for 2006 has been re-presented from £200 million under the previous definition after the payment of £272 million dividends to equity shareowners to £472 million on a comparable basis.

  2007   2006  
  £m   £m  





Net cash from operating activities 812   620  





Add back:    





Additional funding of past service    
pensions deficit 48   67  





Taxes paid on disposals 12   83  





Less:    





Net capital expenditure (352 ) (300 )





Net associate and minority dividends    
received 7   2  





Free Cash Flow 527   472  





Net capital expenditure includes purchases of property, plant and equipment of £409 million (2006: £384 million) less proceeds on disposal of property, plant and equipment of £57 million (2006: £84 million).

Free Cash Flow is not a defined term under IFRS 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 taxation and interest costs or those which are characteristic of a continuing business, for example capital expenditure. 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.


   
Cadbury Schweppes Annual Report & Accounts 2007 27

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Financial review continued

 

In 2007, payments of £48 million (2006: £67 million) made into our principal Group defined benefit pension arrangements in respect of past service deficits have been excluded from Free Cash Flow. These payments are part of a wider pension funding strategy for the period from 2005 to 2008. We believe that the funding of these pension deficits is a discretionary use of Free Cash Flow comparable to the repayment of external borrowings and has therefore been added back in calculating Free Cash Flow. We will continue this reporting practice in future years. We continue to report the cash cost of funding pension obligations arising in respect of current year service within Free Cash Flow.

Consistent with the cash flow from disposals of subsidiaries being excluded from Free Cash Flow, associated tax payments are also excluded from the Group’s definition of Free Cash Flow.

Taxes paid on disposals in 2007 relate to the disposal of the European Beverages business.

In 2006, tax payments arising on disposals of £83 million, principally a £74 million payment to the UK tax authorities in settlement of a tax dispute arising on the 1997 disposal of Coca-Cola & Schweppes Beverages, have been excluded from Free Cash Flow. This aligns the treatment of the tax with the treatment of the disposal proceeds which are excluded from Free Cash Flow.

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.

  2007   2006  
  £m   £m  





Short-term investments 2   126  





Cash and cash equivalents 493   269  





Short-term borrowings    
and overdrafts (2,562 ) (1,439 )




Obligations under finance leases (21 ) (22 )




Borrowings – non current (1,120 ) (1,810 )




Obligations under finance leases –    
non current (11 ) (33 )





Net debt (3,219 ) (2,909 )





Net debt is not a defined term under IFRS 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.

Explanation of performance analysis
On 10 October 2007, the Group announced that it intended to demerge Americas Beverages. In view of the demerger, Americas Beverages is not classified as an asset held for sale in accordance with IFRS 5 and the results from Americas Beverages are included as part of continuing operations for the years ended 31 December 2007 and 31 December 2006.

The review below starts with an overview of the total Group, both Confectionery and Americas Beverages, that analyses revenue and underlying profit from operations, including the impact of exchange rates, and acquisitions and disposals. The analysis also identifies the movement in 2007 which has arisen from the inclusion of business improvement costs within underlying profit from operations. As part of the review there is an analysis of marketing, restructuring costs, amortisation and impairment of acquisition intangibles, non-trading items, contract termination gain, UK product recall, IAS 39 adjustment, share of result in associates, financing, taxation, discontinued operations, minority interests, dividends and earnings per share.

Following the executive summary, there is a review of the Confectionery business and each of the business segments which comprise Confectionery which are BIMA, Europe, Americas Confectionery, Asia Pacific and Central, followed by the Americas Beverages segment. Each segment reviews revenue, underlying profit from operations and restructuring costs. Underlying profit from operations refers to each segment’s profit from operations before restructuring costs, non-trading items, amortisation and impairment of acquisition intangibles, exceptional items and IAS 39 adjustment. This is the measure of profit or loss for each reportable segment used by the CEC and segment management. The CEC also consider underlying profit from operations before business improvement costs at the reportable segment level.

The meanings of certain terms used in this financial review are as follows:

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 acquisitions and disposals refer to 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 business improvement costs refer to costs incurred within underlying profit from operations in 2007 that have arisen which are restructuring in nature but are part of an ongoing maintenance of an efficient business. There were no business improvement costs in 2006 as all restructuring was incurred as part of the Fuel for Growth programme.


   
28 Cadbury Schweppes Annual Report & Accounts 2007

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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, acquisitions and disposals and business improvement costs.

We believe that removing the effect of exchange rates, acquisitions and disposals and business improvement costs provides shareowners with a meaningful comparison of year on year performance of the base business. A reconciliation of the reported results is included on page 32.


 

Executive summary

            Reported   Constant  
            currency   currency2   
    2007   2006   growth   growth  
    £m   £m   %   %  









Revenue 7,971   7,427   +7   +11  










  Confectionery 5,093   4,861   +5   +7  










  Americas Beverages 2,878   2,566   +12   +20  










Underlying profit from operations1 1,050   1,073   -2   +4  










  Confectionery 497   489          










  Americas Beverages 553   584          










Underlying operating margin 13.2   14.4          










Profit from operations 788   909          










Underlying profit before tax1 915   931   -2   +5  










Profit before tax 670   738          










Discontinued operations   642          










Underlying EPS1&3 30.2 p 31.6 p -4   +2  










Reported EPS3 19.4 p 56.4 p        










Dividend per share 15.5 p 14.0 p +11      









1 A full reconciliation between underlying and reported measures is included in the segmental analysis on pages 80 and 83 and Note 13 on page 100.
2 Constant currency growth excludes the impact of exchange rate movements during the period.
3 In 2006, EPS is presented on a basic total group basis and therefore includes the earnings contribution from the discontinued beverage businesses in Europe and South Africa and the profit earned on disposal of these businesses. All other a mounts are presented on a continuing basis.
   

Revenue in 2007 was £7,971 million. This was £544 million, or 7%, higher than in 2006. The net effect of exchange movements during the year decreased reported revenue by £300 million (or 4%), mainly driven by the US dollar, Mexican Peso and the South African Rand.

In 2007, acquisitions, net of disposals, resulted in a £385 million increase in reported revenue relative to the prior year. This was primarily due to the inclusion of 12 months of revenue from the 2006 acquisition of CSBG (Cadbury Schweppes Bottling Group) in 2007 compared to 8 months in 2006. The acquisitions made in 2007 were Intergum, a gum business in Turkey which was acquired on 31 August 2007, Sansei Foods, a confectionery company in Japan which was acquired on 19 July 2007 and Kandia-Excelent, a confectionery company in Romania which was acquired on 13 June 2007 and SouthEast Atlantic Beverages (SeaBevs), a bottling group which was acquired on 12 July 2007.

Base business revenue grew £459 million or 6%, with growth in all five of our business segments, led by Americas Confectionery.

Underlying profit from operations (profit from operations before restructuring costs, non-trading items, exceptional items, amortisation and impairment of acquisition intangibles and the IAS 39 adjustment) was £1,050 million. This was £23 million or 2% lower than in 2006.

Consistent with the impact on revenue, currency movements had a £61 million (or 6%) adverse impact on underlying profit from operations. The full-year impact of acquisitions, net of disposals, was a decrease of £1 million with a further decrease of £24 million from the inclusion of business improvements costs in 2007.

After allowing for these items the base business grew by £63 million or 6%. Further explanations of these movements are set out in the business segment performance analysis starting on page 36.

Profit from operations at £788 million was down £121 million (13%) compared to 2006. This was principally driven by a £67 million increase in restructuring costs, a £78 million adverse movement in non-trading items, a £10 million increase in IAS 39 charge to recognise the spot prices on the day of transaction and the £23 million decrease in underlying profit from operations. This was partially offset by the £31 million contract termination gain and absence of the UK product recall charge in 2007 (£30 million in 2006).

Reported profit before tax decreased by 9% to £670 million. The decrease reflected the decrease in profit from operations partially offset by an increase in our share of our associates’ profits due to the exceptional adjustment relating to Nigeria in 2006 and a decrease in net finance costs.


   
Cadbury Schweppes Annual Report & Accounts 2007 29

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Financial review continued

 

Earnings per ordinary share    
  2007   2006  
  pence   pence  





Reported earnings per share 19.4   56.4  





Restructuring costs 9.6   6.4  





Amortisation and impairment of    
acquisition intangibles 2.0   1.8  





Non-trading items 1.8   (32.3 )





Contract termination gain (1.5 )  





UK product recall   1.4  





Nigeria adjustments   1.1  





IAS 39 adjustment – fair value    
accounting (0.2 ) 0.5  





Tax effect on the above (0.9 )1 (1.2 )2





Release of disposal tax provisions   (2.5 )





Underlying earnings per share 30.2   31.6  





1 Includes tax arising on certain reorganisations carried out in preparation for the separation of Americas Beverages.
2 Includes deferred tax credit arising on the intra-group transfer of brands.

Reported earnings per share decreased by 37.0 pence to 19.4 pence principally reflecting the profit on disposal of our Europe and South African beverage businesses that was recognised in 2006.

Underlying earnings per share (earnings before restructuring costs, non-trading items, amortisation and impairment of intangibles, exceptional items and the IAS 39 adjustment) decreased by 1.4 pence (4%) to 30.2 pence. The base business grew underlying earnings per share by 8% or 2.1 pence which was offset by movements in exchange rates reducing underlying earnings per share by 6% or 1.9 pence.

Further decreases to underlying earnings per share arose from the inclusion of business improvement costs within underlying performance (-2%), the impact of acquisitions and disposals (-2%) and increases in the number of shares and underlying tax rate (both -1%).

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.

Contract termination gain
Following its acquisition by Coca-Cola on 30 August 2007, Energy Brands, Inc. terminated the distribution agreements with Americas Beverages for Glacéau beverage products effective from 2 November 2007. On termination of these agreements a payment of approximately £45 million was received from Energy Brands, Inc.

The part of that termination which would otherwise have been earned through distribution of the product in 2008 has been recognised outside the underlying profit from operations of the Group in 2007, offset by the write off of the franchise agreements which had been recognised as acquisition intangibles. The total net amount recognised outside underlying profit from operations in 2007 was £31 million.

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, which were excluded from our underlying results, 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 estimated that the adverse impact of the recall on our underlying results in 2006 was £30-35 million on revenue and £5-10 million (net of insurance recovery) on underlying profit from operations.


   
30 Cadbury Schweppes Annual Report & Accounts 2007

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Cadbury Nigeria
We increased our stake in Cadbury Nigeria from 46% to just over 50% in February 2006. In November 2006 following the appointment of a Cadbury Schweppes nominated Finance Director, a significant over-statement of Cadbury Nigeria’s financial position which had existed over a number of years was discovered. The Board of Cadbury Nigeria undertook a detailed review to fully understand the scale of the overstatement 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 2006. For 2006, it contributed a loss of £13 million or 0.6 pence to the Group’s underlying earnings and a loss of £53 million or 2.6 pence to the Group’s reported earnings.

Reported earnings in 2006 included a £23 million exceptional charge in associates reflecting our share of the adjustments required following the discovery of the significant overstatement of Cadbury Nigeria’s financial position. As a consequence of this balance sheet over-statement, a full impairment review was undertaken and management believed that it was 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 was recorded as at 31 December 2006. Given the exceptional nature of these charges they were excluded from the Group’s underlying result.

The Vision into Action programme
In mid-2007, the Group announced that part of its confectionery strategy is to achieve mid-teen margins by 2011. In pursuit of this goal the Group implemented a major group-wide cost reduction programme to significantly reduce the central and regional SG&A and supply chain costs. This will result in a 15% reduction in the Group’s global headcount and manufacturing footprint by 2011.

The Fuel for Growth programme
The Group implemented a major cost reduction initiative through 2003-07 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 took the cumulative restructuring spend to around £500 m illion (at constant exchange rates) and completed the cost phase of the programme.

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.

External factors
A discussion of the external factors that affect our business is contained in the ‘Description of Business’, primarily the section titled ‘Risk factors’ p21.

Internal factors
A discussion of the Group’s strategy is contained in the Chief Executive’s review pages 5 to 9.

2008 outlook
A discussion of our expectation of the 2008 underlying trading performance is set out within the Chief Executive’s review on page 7.

In 2007, the Board decided that Confectionery and Americas Beverages would deliver more value to shareowners as independent focused businesses. The businesses will run independently in 2008 as we continue to work towards a demerger in the second quarter subject to the legal and shareowners approvals and debt refinancing.

2008 restructuring guidance
In 2008 we will continue to implement our Vision into Action initiative to achieve mid-teen margins by 2011. In total the initiative will incur £450 million of restructuring costs. In addition, we will significantly reduce our gum supply requirements from Gumlink A/S and hence incur minimum penalties under the terms of the agreement. The costs of integrating acquisitions will continue to be recognised outside underlying in 2008. In 2008, we expect total restructuring charges of around £130–150 million.

In 2008, the net debt structure of the Group is likely to undergo considerable change following the demerger, with the future capital structure of the Group influencing the average interest rate on net debt.

The 2008 tax rate will be dependent on a number of factors including mix of profits in different jurisdictions. However, we expect the tax rate on underlying profits to be lower than that for 2007, reflecting a reduced level of profits in the US after the demerger of Americas Beverages.


   
Cadbury Schweppes Annual Report & Accounts 2007 31

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Financial review continued

 

Operating review 2007 compared to 2006                        
Executive summary                        
          Base       Business          
          business   Acquisitions/   improvement   Exchange      
      2006   growth   Disposals   costs   effects   2007  
Analysis of results £m   £m   £m   £m   £m   £m  















Revenue 7,427             7,971  















  Confectionery 4,861   345   (18 )   (95 ) 5,093  















  Americas Beverages 2,566   114   403     (205 ) 2,878  















Underlying profit from operations 1,073             1,050  















    Confectionery before business improvement costs 489   58   (9 )   (17 ) 521  















    Confectionery business improvement costs       (24 )   (24 )















  Confectionery 489   58   (9 ) (24 ) (17 ) 497  















  Americas Beverages 584   5   8     (44 ) 553  















  Restructuring costs (133 )           (200 )















  Amortisation and impairment of intangibles (38 )           (42 )















  Non-trading items 40             (38 )















  Contract termination gain             31  















  UK product recall (30 )            















  IAS 39 adjustment (3 )           (13 )















Profit from operations 909             788  















Basic EPS – continuing and discontinued              















  Underlying 31.6             30.2  















  Reported 56.4             19.4  















                             

The key highlights of 2007 were as follows:

In Confectionery:

> Base business revenues grew by 7%, above the top end of our new confectionery goal range, bringing the four year annual growth rate to over 6%;
> Revenue growth was broadly based across most of our markets with gum and emerging markets continuing to show double-digit growth;
> Underlying margins (before the impact of business improvement costs and exchange) increased by 30bps despite a significant increase in growth investment and a further escalation in raw material costs. Margins in the second half increased by 80bps driven by operating leverage and tight cost control;
> We made good early progress on our new Vision into Action plan including initiating significant elements of our cost reduction programme by the end of the year;
> Acquisitions made during the year significantly strengthened existing positions (Intergum in Turkey and Sansei in Japan) and gave us a strong position in a new emerging market (Kandia-Excelent in Romania).
In Americas Beverages:
> Base business revenues grew by 4%, a good result in view of the challenging US CSD market;
> Our CSDs continued to benefit from the trend away from colas to flavoured CSDs and an excellent performance from Snapple reflected highly successful innovation in super- premium teas and juices;
> Underlying margins (before the impact of exchange) fell by 340bps reflecting consolidation of bottling acquisitions and the losses arising from the launch of Accelerade;
> A major reorganisation was planned and completed during the fourth quarter and is expected to deliver £35 million of benefit in 2008, a payback of around one year;
> The acquisition of SeaBevs, an independent bottler, strengthened our route to market in the south east of the US.

1 Review of 2007 Group income statement
(i) Revenue
Revenue at £7,971 million was £544 million or 7% higher than 2006 sales of £7,427 million. The net effect of exchange movements during the year was to decrease reported revenue by £300 million, mainly driven by a weakening in the US Dollar, the Mexican Peso and the South African Rand.

In 2007, acquisitions, net of disposals, resulted in a £385 million increase in reported revenue relative to the prior year. This was primarily due to the inclusion of 12 months of revenue from the 2006 acquisition of CSBG in 2007 compared to 8 months in 2006. The acquisitions made in 2007 were Intergum, Sansei, Kandia-Excelent and SeaBevs.

Base business revenue grew £459 million or 6% with growth in all five of our business segments.


   
32 Cadbury Schweppes Annual Report & Accounts 2007

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(ii) Profit from operations
Profit from operations decreased by £121 million (13%) to £788 million compared to 2006. This was driven by:
> an increase in restructuring costs of £67 million;
> an increase of £4 million in amortisation and impairment of acquisition intangible assets, due to the additional amortisation charge from definite life CSBG customer relationships and contracts;
> an increase of £10 million charge to the IAS 39 adjustment; and
> a £23 million decrease in underlying profit from operations.

This was partially offset by the £31 million contract termination gain and the absence of the UK product recall charge in 2007 (2006: £30 million).

Underlying profit from operations (profit from operations before restructuring costs, non-trading items, amortisation and impairment of acquisition intangibles, contract termination gain, the UK product recall and the IAS 39 adjustment) was £1,050 million. This was £23 million or 2% lower than in 2006.

Currency movements had a £61 million (6%) adverse impact on underlying profit from operations. The full-year impact of acquisitions, net of disposals, was £1 million.

Underlying operating margin fell by 120 basis points to 13.2% . Excluding the impact of exchange, underlying operating margin fell by 100 basis points. Excluding the impact of acquisitions and disposals (principally CSBG and Cadbury Nigeria) and exchange differences margins were flat.

Marketing
Marketing spend was £707 million in 2007, a 2% increase at actual exchange rates and a 6% increase at constant exchange rates. Confectionery marketing spend as a percentage of revenues was 10% compared with 9% in the prior year. Americas Beverages marketing spend at 7% of revenues was 3% higher at constant exchange rates.

Restructuring costs
Costs in respect of business restructuring were £200 million compared with £133 million last year. In 2007, the restructuring principally related to the Vision into Action programme for the Confectionery business. In addition amounts were recognised relating to a third party supply agreement which has become an onerous contract, costs incurred to separate and establish a stand alone confectionery business, a headcount reduction programme in Americas Beverages and the integration of CSBG. In 2006, the business restructuring related to the continued execution of the Fuel for Growth cost reduction initiative and the integration of CSBG.

    2007     2006  
    £m     £m  







Vision into Action   151      







Fuel for Growth projects            
in the base business       123  







Onerous contract – Gumlink   9      







Separation costs   5      







Americas Beverages headcount reduction   26      







CSBG integration   9     10  







Restructuring costs   200     133  







Of this total charge of £200 million, £107 million was redundancy related, £23 million related to external consulting costs, £24 million was associated with onerous contracts and £13 million related to employee profit sharing termination 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 36 to 39. The table below details the business segment analysis of restructuring costs.

    2007     2006  
Business segment analysis   £m     £m  







BIMA   60     51  







Europe   18     14  







Americas Confectionery   33     11  







Asia Pacific   8     15  







Central   46     21  







Americas Beverages   35     21  







Restructuring costs   200     133  







Amortisation and impairment of acquisition intangibles
Amortisation and impairment of acquisition intangibles at £42 million was £4 million higher than in 2006. The increase principally relates to the inclusion of a full year’s charge from the definite life brands and customer relationships acquired with CSBG. Also included is the impairment of the goodwill relating to China (£13 million) recognised in the year. In 2006, an impairment of the goodwill relating to Cadbury Nigeria (£15 million) was recognised.

Non-trading items
During 2007, the Group recorded a net loss from non-trading items of £38 million compared to a profit of £40 million in 2006. The main items within non-trading items were:
> £38 million accounting gain on the rebuild of a factory in our Monkhill UK confectionery business from insurance proceeds. This was offset by the writing down to recoverable value of the Monkhill business (£41 million) which is held for sale at 31 December 2007;
> £40 million of costs incurred to separate the Americas Beverages business;
> £12 million write down to value in use of property, plant and equipment in China; and
> £20 million profit on disposal of Cottees, a jams, jellies and toppings business in Australia.

IAS 39 adjustment
Fair value accounting under IAS 39 resulted in a charge of £13 million (2006: £3 million charge). This principally reflects the fact that in 2007 spot commodity prices and exchange rates were higher than the rates implicit in the Group’s hedging arrangements and as used in the underlying results.


   
Cadbury Schweppes Annual Report & Accounts 2007 33

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Financial review continued

 

(iii) Share of result in associates
In 2007, our share of the result of our associate businesses (net of interest and tax) was a profit of £8 million. This compares to a loss in 2006 of £16 million. Included in the 2006 loss was 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.

(iv) Financing
The net financing charge at £126 million was £29 million lower than the prior year. After allowing for the £17 million impact of the IAS 39 adjustment to present financial instruments at fair value, the net underlying financing charge was £143 million or £6 million lower than in 2006. The reduced interest cost is driven by an overall decrease in average net debt over the year and a £4 million increase in the IAS 19 pension credit arising due to increased asset returns in excess of an increased cost from unwinding the discount on liabilities.

Although profit from operations has reduced in 2007 it was offset by a reduced interest charge which has resulted in the Group’s interest cover increasing to 5.1 times in 2007 from 5.0 times in 2006. However, on an underlying basis the interest cover decreased from 6.2 times in 2006 to 6.1 times in 2007.

(v) Taxation
Underlying profit before tax from continuing operations decreased by 2% to £915 million, or an increase of 5% at constant exchange rates. The continuing operations underlying tax rate in 2007 was 31.0% as against 30.4% in 2006. The increase in the tax rate reflects continued increased exposure to higher rate tax jurisdictions, in particular the US.

Reported profit before tax fell by 9% to £670 million reflecting increased restructuring costs, the costs of separation and the decreased underlying trading result partially offset by the gain on the termination of Glacéau contract.

(vi) Discontinued operations: Europe and South Africa Beverages
There is no result from discontinued operations in 2007.

In 2006, discontinued operations of £642 million included an insignificant contribution arising on the trading in the predisposal period and a net profit on disposal of our beverage businesses in Europe and South Africa of £591 million. In addition, a £51 million write-back of total tax provisions was 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 2007, the Group companies in which we do not own 100% contributed an aggregate profit to the Group. The minority interests share of these profits was £2 million. The change from 2006, where the minority interests share was a loss of £4 million, is due to the losses incurred by Cadbury Nigeria in 2006.

(viii) Dividends
The Board has proposed a final dividend of 10.50 pence, up from 9.90 pence in 2006, an increase of 6%. Including the interim dividend of 5.00 pence, the total dividend for 2007 is 15.50 pence, an 11% increase on the 14.00 pence dividend in 2006. The underlying dividend cover decreased to 2.0 times from 2.3 times in 2006 reflecting the reduced underlying earnings and increased dividend. Further dividend information for shareowners is given in shareowner information on page 148.

(ix) Earnings per share
Basic reported earnings per share fell to 19.4 pence from 56.4 pence in 2006 principally reflecting the profit on disposal of the Europe Beverage business recognised in 2006.

Underlying earnings per share (earnings before restructuring costs, non-trading items, amortisation and impairment of acquisition intangibles, exceptional items, IAS 39 adjustment and any related tax effect) at 30.2 pence was 4% behind last year. At constant exchange rates underlying earnings per share were up 2%. The higher underlying tax rate of 31.0% depressed earnings per share by 1%. Excluding the dilutive impact of acquisitions and disposals our underlying earnings per share rose by 4% at constant exchange rates and fell by 2% at actual rates.

(x) Effect of exchange rates and inflation on 2007 reported results
Over 80% of the Group’s revenues and profits in 2007 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 2007 compared with 2006, the largest exchange rate impact on the Group’s results was the weakening in the US Dollar, the Mexican Peso and South African Rand.

In 2007, movements in exchange rates decreased the Group’s revenue by 4%, underlying pre-tax profit by 7% and underlying earnings per share by 6%.

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.


   
34 Cadbury Schweppes Annual Report & Accounts 2007

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  Business & Financial review    
       

 

Confectionery Review
              Business            
      Base   Acquisitions/   improvement            
Full year results (£m) 2006   business   Disposals   costs 1 Exchange     2007  














Revenue                          














Confectionery2  4,861   345   (18 )   (95 )   5,093  














   year-on-year change     +7.1 % -0.4 %     -1.9 %   +4.8 %














Operating profit                          














Confectionery 489   58   (9 ) (24 ) (17 )   497  














   year-on-year change     +11.9 % -1.9 % -4.9 % -3.5 %   +1.6 %














Underlying operating margin 10.1 % +40 bps -10 bps -50 bps -10 bps   9.8 %














1 Ongoing business improvement costs charged to underlying profit from operations in 2007 were £24 million. There were no ongoing business improvement costs in the comparable period in 2006 as all costs were incurred as part of the Fuel for Growth programme which was included as restructuring costs outside underlying.
2 Confectionery includes BIMA, Europe, Americas Confectionery, Asia Pacific and Central costs as these principally relate to Confectionery.
   

Underlying base business revenue (excluding acquisitions, disposals and exchange) grew by 7%, above the top end of our new confectionery goal range, bringing the four year average growth rate to over 6%. Growth was strong across the majority of our markets with revenues up 4% in developed markets and up 14% in emerging markets. Results from our underperforming emerging markets (Russia, Nigeria and China) improved significantly and in Britain performance was boosted by both a strong market recovery and stronger commercial execution in the second half. Our focus brands, markets and customers grew by 10%, 7% and 12% respectively. Growth in our focus markets was impacted by a difficult year in Australia and by portfolio rationalisation in France.

Underlying operating margins rose by 30bps (excluding the impact of business improvement costs and exchange) despite a significant increase in growth investment and sharply escalating raw material costs. The launch of gum in Britain during the year reduced margins by 30bps and acquisitions and disposals reduced margins by a further 10bps. Margin delivery in the second half at +80bps, was significantly stronger than the first half due to the combination of operating leverage and the impact of cost and efficiency programmes.

Key commercial highlights include:
> Double-digit growth in gum and emerging markets for the fourth consecutive year including a 26% growth in Trident;
> Continued roll-out of key global gum technologies into new and existing markets with centre-filled now in 23 markets across Americas, Europe, Africa and Asia and longer-lasting gum in 5 markets;
> Further roll-out of focus brands into white space markets: Trident into Britain and Turkey; Bubbaloo into India; Green & Black’s into Australia, Ireland and South Africa; and The Natural Confectionery Company into Britain;
> A successful year for Cadbury Dairy Milk, our largest chocolate brand, with revenues up 5% as a result of good results in Britain and strong growth in emerging markets.
During 2007, we made significant progress on our cost reduction programme. We started initiatives which will lead to a reduction of 2,500 roles and deliver a significant proportion of our expected central SG&A and supply chain savings. Initiatives include:
> The move of Group headquarters to a new shared office with our Britain and Ireland confectionery business in the second quarter of 2008 combined with around a 15% reduction in our central function headcount;
> A senior management reorganisation of our Britain and Ireland business which with a broader reorganisation is expected to result in a 15% reduction in G&A headcount;
> A reduction of 270 employees in Americas Confectionery by the end of 2007, representing 16% of G&A headcount in the region;
> The negotiation and consultation in connection with the closure of our Somerdale chocolate plant in the UK and transfer of production to Bournville and Poland by 2010;
> A reduction of 450 employees (30% of workforce) at our chocolate manufacturing site at Coolock in Ireland;
> A programme to reduce supply chain indirect headcount by over 300 in the Americas;
> The proposed reconfiguration of our candy manufacturing footprint in Australia and New Zealand.

Central and regional SG&A initiatives will deliver significant benefits in 2008 and 2009, while supply chain configuration benefits will reduce manufacturing costs from 2009 onwards.


   
Cadbury Schweppes Annual Report & Accounts 2007 35

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Financial review continued

 

Britain, Ireland, Middle East and Africa (BIMA)

              Business          
      Base   Acquisitions/   improvement   Exchange      
Full year results (£m) 2006   business   Disposals   costs1   effects   2007  


Revenue 1,500   95   11     (27 ) 1,579  



   year-on-year change     +6.3 % +0.8 %   -1.8%   +5.3 %


Underlying profit from operations 186   (9 ) (1 ) (3 ) (4 ) 169  


   year-on-year change     -4.8 % -0.5 % -1.6 % -2.2 % -9.1 %


Underlying operating margins 12.4 % -130 bps -10 bps -20 bps -10 bps 10.7 %



1 Ongoing business improvement costs charged to underlying profit from operations in 2007 were £3 million. There were no ongoing business improvement costs in the comparable period in 2006 as all costs were incurred as part of the Fuel for Growth programme which was included as restructuring costs outside underlying.
   

In Britain, Ireland, the Middle East and Africa (BIMA), underlying base business revenue growth of 6% reflects buoyant confectionery category growth in Britain and strong growth in our emerging market operations in Africa and the Middle East. Acquisitions made in 2006 (mainly Cadbury Nigeria and Dandy Products in South Africa) contributed an additional £11 million or 1% to revenues.

Our business in Britain grew revenues by 5%, broadly in line with the overall confectionery market which benefited from a good recovery in chocolate following our product recall, a hot summer in the UKin 2006 and a 16% growth in the gum market following our launch of Trident early in the year. Our overall market share performance strengthened in the second half despite the adverse impact of flooding at our Sheffield factory on candy revenues. In chocolate, revenues in the second half benefited from the successful relaunch of Wispa and our new advertising campaign for Cadbury Dairy Milk. Our gum business secured a 10% share of the UK gum market in its first year, and accounted for the majority of the growth in the gum market during the year.

Revenues in emerging market operations grew by 15%. In South Africa, we had a good year as a result of strong growth in gum and affordable chocolate count-lines. In Nigeria, the business made solid progress after a difficult 2006 and was stabilised with revenues ahead and operating losses reduced.

Base business margins (before the impact of business improvement costs) were lower year-on-year, mainly as the result of a significant increase in marketing investment in the UK behind media advertising for our core Cadbury Dairy Milk brand, the launch of gum which diluted margins by over 150 bps and higher milk costs.

Outside underlying profit from operations were restructuring costs of £60 million. These costs include the redundancy costs incurred as part of the SG&A headcount reduction, the recognition of a provision relating to the announced redundancies which will be incurred on the closure of our Somerdale factory in the UK and an onerous contract and asset write-offs which arise due to the relocation of the UK regional headquarters. Non-trading items included an accounting gain of £38 million arising from a factory insurance recovery following a fire in 2005 at our Monkhill confectionery business in the UK offset by the writing down to recoverable value of £41 million of the Monkhill assets which are held for sale at 31 December 2007.

Also recognised outside the underlying result of the region is a charge of £9 million relating to the IAS 39 adjustment to reflect the actual rate ruling on the date of certain commodity transactions. The underlying results of the region reflect the hedged cash flows that were paid.


                         
Europe                        
              Business          
      Base   Acquisitions/   improvement   Exchange      
Full year results (£m) 2006   business   Disposals   costs1   effects   2007  













Revenue 818   56       5   879  




 year-on-year change     +6.8 %     +0.7 % +7.5 %




Underlying profit from operations 90   10   (4 ) (5 )   91  




 year-on-year change     +11.1 % -4.4 % -5.6 %   +1.1 %




Underlying operating margins 11.0 % +40 bps -40 bps -60 bps   10.4 %













1 Ongoing business improvement costs charged to underlying profit from operations in 2007 were £5 million. There were no ongoing business improvement costs in the comparable period in 2006 as all costs were incurred as part of the Fuel for Growth programme which was included as restructuring costs outside underlying.
   
36 Cadbury Schweppes Annual Report & Accounts 2007

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  Business & Financial review    
       

 

Our Europe region had an excellent year with base business revenues up nearly 7%. The impact of acquisitions (Intergum and Kandia) and disposals (Adams Italia) was neutral. The growth in revenues was driven by strong performances across the region particularly in gum where revenues were up by 11%. Developed market revenues grew by 5% and emerging markets by 11%.

Gum revenues benefited from the continued co-ordinated roll-out of key global product and packaging technologies and by strong market-place execution. Centre-filled gum was launched in Russia, Turkey, Spain and Portugal under the Dirol and Trident brands; longer-lasting gum was launched in France and Greece under the Hollywood and Trident brands respectively.

In France, revenues grew modestly reflecting planned rationalisation of our candy portfolio which was more than offset by continued strong growth in gum and the launch of Halls. Our businesses in northern Europe had a very good year with share gains in many markets. In southern Europe, we had an excellent year in Spain, with a further increase in our gum share to 46% following the launch of Trident Splash.

In our emerging market operations, revenues in Russia were ahead by over 20% due to strong market growth and share gains in gum. In Turkey, our business benefited from good market growth and the expansion into chocolate gifting products for the important Bayram religious festivals and the launch of Trident Splash.

The recent acquisitions of Intergum in Turkey and Kandia in Romania are being integrated into the region and performance was satisfactory. Intergum made a modest loss in the year reflecting planned de-stocking of the trade while Kandia made a small profit. Overall acquisitions diluted the region margin by 40bps. Before the impact of acquisitions and business improvement costs, margins in the region were ahead.

Outside underlying profit from operations the region incurred £18 million of restructuring costs relating to the penalties incurred and recognition of an onerous contract with a third party gum supplier and consulting costs incurred as part of setting up a new regional headquarters in Switzerland.


             
Americas Confectionery            
              Business          
      Base   Acquisitions/   improvement   Exchange      
Full year results (£m) 2006   business   Disposals   costs1   effects   2007  




Revenue 1,330   150   (26 )   (82 ) 1,372  




    year-on-year change   +11.3 % -2.0 %   -6.1 % +3.2 %




Underlying profit from operations 207   65   (3 ) (4 ) (17 ) 248  




    year-on-year change   +31.4 % -1.4 % -1.9 % -8.3 % +19.8 %




Underlying operating margins 15.6 % +280 bps +10 bps -30 bps -10 bps 18.1 %





1 Ongoing business improvement costs charged to underlying profit from operations in 2007 were £4 million. There were no ongoing business improvement costs in the comparable period in 2006 as all costs were incurred as part of the Fuel for Growth programme which was included as restructuring costs outside underlying.
   

Our Americas Confectionery region had an outstanding year with strong growth in revenues and margins. Base business revenue growth was 11% with double-digit growth in nearly every market. Revenues grew by 9% in our developed markets in North America and by 15% in our emerging markets in Latin America. This continued strong momentum was driven by gum category growth, share gains and new product launches, notably the roll-out of centre-filled gum into Latin America. The disposal of Allan Candy in Canada, reduced revenues by £26 million or 2%.

In the US, the gum market grew by 9%, benefiting from the combination of price rises and innovation. Our gum share rose by 310 bps in the year despite an increase in competitive activity. This share gain was due to strong growth in our Trident and Stride brands with Stride’s share of the gum market rising from 3.0% to 6.3% during the course of the year. Although the cough category grew 4%, Halls lost 70 bps of share and revenues in the US were modestly lower year-on-year as a result.

In Canada, base business revenues were 3% ahead, with growth in our core brands partly offset by the rationalisation of non-core brands and SKUs. Margins continued to benefit from the focus on our advantaged core brands. The Stride gum brand was launched in Canada at the end of the year.

Performance was strong across all our businesses in Latin America including in Mexico where revenues were ahead by 12% as a result of continued investments in extending our route to market and the launch of Trident Splash centre-filled gum. In a market which grew by 13%, our share of the Mexican gum market rose by 100bps, reaching 80% at the end of the year. Elsewhere in Latin America, revenues grew strongly in Argentina, Brazil and Venezuela due to the combination of pricing, route to market investments, growth in core brands (Trident, Halls and Beldent) and innovation. Trident centre-filled gum was also launched in Brazil, Colombia and Ecuador.

Margins in the region increased significantly during the year, to 18.2% before the impact of exchange. The 280bps increase in base business margins was driven by higher pricing, supply chain savings, positive mix and operational leverage. In the fourth quarter of the year, a major reorganisation of the region was implemented with significant SG&A savings expected to benefit margins in 2008.

Outside underlying profit from operations were restructuring costs of £33 million. These costs reflect a headcount reduction programme to reduce SG&A costs and the one-off costs incurred to terminate an employee profit sharing agreement. Non-trading items contributed a loss of £1 million. This charge represented the finalisation of the loss on disposal of Allan Candy. In addition, amortisation of £2 million relating to a definite life brand was excluded from the underlying result.


   
Cadbury Schweppes Annual Report & Accounts 2007 37

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Financial review continued

 

Asia Pacific            
              Business          
      Base   Acquisitions/   Improvement   Exchange      
Full year results (£m) 2006   business   Disposals   costs1   effects   2007  




Revenue 1,205   43   (3 )   9   1,254  




   year-on-year change   +3.6 % -0.2 %   +0.7 % +4.1 %




Underlying profit from operations 165   4   (1 ) (12 ) 3   159  




   year-on-year change   +2.4 % -0.6 % -7.2 % +1.8 % -3.6 %




Underlying operating margins 13.7 % -20 bps   -100 bps +20 bps 12.7 %





1 Ongoing business improvement costs charged to underlying profit from operations in 2007 were £12 million. There were no ongoing business improvement costs in the comparable period in 2006 as all costs were incurred as part of the Fuel for Growth programme which was included as restructuring costs outside underlying.
   

Base business revenues in Asia Pacific grew by nearly 4%, with continued double-digit (14%) growth in emerging markets, partly offset by a slower year in developed markets where revenues were 1% ahead. The slower growth in developed markets reflected the combination of our exit from non-core beverage and confectionery contracts and a challenging retail market in Australia. The net impact of acquisitions (Sansei in Japan) and disposals (Cottees Foods in Australia) reduced revenue growth by £3 million.

In developed markets, revenue growth in Australia slowed to 1%. Against a background of a competitive and challenging retail environment, confectionery revenues were modestly lower and beverages revenues were ahead 4%. While the Australian confectionery market grew strongly in the year, the reduction in our confectionery revenues was due to the combination of retailer de-stocking and a reduction in our promotional activity. Elsewhere, New Zealand had a good year with a 170bps increase in share driven by both chocolate and candy. In beverages, our market share rose by 100bps with strong growth in our flavoured carbonate brands and energy drinks benefiting from good consumer demand and our focus on core brands. Excluding the exit from a low-margin co-packing contract, beverage revenues were ahead by 10%. In Japan, we continued to gain share in gum, with our share up 120bps to nearly 20% at the end of the year. Sansei, a functional candy business, is being integrated into our existing business and is performing in line with expectations.

In emerging markets, performance in India was excellent, with revenues growing by over 20%. All our core brands including Cadbury Dairy Milk and Cadbury Eclairs contributed to the growth with results also benefiting from the successful launch of Bubbas branded bubblegum. Performance in South East Asia strengthened into the second half with continued good results from Malaysia where revenues rose by 18%. In China, we completed the refocus on a smaller number of key cities and while revenues were over 20% lower as a result, losses were reduced, in line with expectations.

Underlying margins (before business improvement costs) were modestly lower year-on-year, primarily due to the adverse mix in Australia and higher growth in emerging markets.

Outside underlying profit from operations were restructuring costs of £8 million. These costs were all incurred as part of our Vision into Action programme.

An impairment charge of £13 million relating to goodwill in China, following a change in the Group’s strategy in China, and amortisation of a definite life brand of £2 million were also excluded from the underlying results of the region. Non-trading items include the write down to value in use of property, plant and equipment of £12 million in China offset by the profit of £20 million from the disposal of Cottees, a jams, toppings and jellies business in Australia, is also excluded from the underlying results of the region.


Central
Central is included within Confectionery as the activities principally relate to the Confectionery business.

      Base   Acquisitions/   Exchange      
Full year results (£m) 2006   business   Disposals   effects   2007  











Revenue 8   1     9  





   year-on-year change        





Underlying profit from operations (159 ) (12 ) 1   (170 )





   year-on-year change   -7.5 % + 0.6 % -6.9 %





Underlying operating margins n/a         n/a  











                     

Central revenue arises on the rendering of research and development services to third parties.

Central costs increased by £11 million, a 7% rise principally as a result of investment in IT and an increase in the share based payment expense.

Outside underlying profit from operations were restructuring costs of £46 million. These costs were all incurred as part of our Vision into Action initiative and primarily relate to the relocation of our Head Office and headcount reduction programme in Group Functions.


   
38 Cadbury Schweppes Annual Report & Accounts 2007

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  Business & Financial review    
       

 

Americas Beverages
2007 Operating Review

    Base   Acquisitions/      
(£m) 2006   business   Disposals   Exchange   2007  











Revenue 2,566   114   403   (205 ) 2,878  











 year-on-year change   +4.4 % +15.7 % -7.9 % +12.2 %











Underlying profit from operations 584   5   8   (44 ) 553  











 year-on-year change   +0.9 % +1.3 % -7.5 % -5.3 %











Underlying operating margin 22.8 % -80 bps -260 bps -20 bps 19.2 %











                     

In Americas Beverages, base business revenues grew by 4%, a good result given the challenging market conditions in our key US CSD market. Acquisitions and disposals contributed a net £403 million or 16% to revenues. The contribution from acquisitions relate to bottling businesses bought during 2006 and 2007, including CSBG and SeaBevs.

Our carbonates revenues in the US grew by 1% and our share of the US CSD market rose by 40 bps, our fourth consecutive year of share gains. These share gains were made despite the fact that the business was cycling a year of significant innovation activity, notably in Dr Pepper and 7 UP, where bottler volumes fell by 2.5% and 3% respectively. Excluding innovations, base Dr Pepper bottler volumes were modestly ahead. Other key flavour brands (Sunkist, A&W and Canada Dry) had a good year with bottler volumes up 3% reflecting the trend away from colas to flavoured CSDs and the greater focus provided by our more integrated route to market.

In non-CSDs in the US, revenues grew by 3%, with performance boosted by the successful launches of Snapple super premium teas and enhanced waters. The Snapple brand grew revenues by 5%. As previously indicated, the national launch of our new sports drink brand Accelerade was disappointing with around a £30 million loss in the year arising from the launch. The decision has been taken to focus on a narrower range of profitable outlets going forward and further losses are not expected to be incurred. Our Mexican business had a more challenging year with results adversely impacted by poor weather and increased competitive activity, however revenues were 4% ahead.

Americas Beverages underlying margins were 340bps lower year-on-year, before the impact of exchange reflecting the strategic acquisitions of bottling businesses and the losses arising from the launch of Accelerade. Commodity costs continued to rise during the year, but these were more than offset through price increases and tight cost control. At the end of the year, a significant cost reduction programme was successfully implemented which is expected to generate full year cost savings of around £35 million in 2008. In November, our contract to manufacture and distribute Glacéau was terminated following Coca-Cola’s acquisition of Energy Brands. In 2007, this contract contributed around £110 million to revenues and around £20 million to underlying profit from operations.

Outside underlying profit from operations
Americas Beverages incurred £35 million of restructuring costs relating to a headcount reduction programme (£26 million) and further integration of CSBG (£9 million). The region also amortised £24 million of definite life intangible assets which arose from the acquisition of CSBG and other bottling operations purchased in 2006 and 2007 which are excluded from the underlying results of the region.

Further items treated outside underlying were the costs incurred to separate the Americas Beverages region from the Cadbury Confectionery business which totalled £40 million and a gain of £31 million which arose from the termination of the contract to distribute Gla´ceau offset by the write-off of the associated franchise intangible. The amount excluded from the underlying results is the amount which would otherwise have been earned through distribution of the product in 2008.

Capital structure and resources
Capital structure
During 2007, our market capitalisation increased to approximately £13.1 billion. This was driven by a 75 pence increase in the share price during the year to 621 pence at 31 December 2007 (546 pence at 31 December 2006) and the issuance of 14.5 million shares to satisfy employee share awards. Net debt increased during the year from £2,909 million at the end of 2006 to £3,219 million at the end of 2007, reflecting exchange and the acquisitions of Intergum, Kandia-Excelent and Sansei.

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, shareowners 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. 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 £70 million shares during 2007 (£50 million in 2006) and held 17 million (2006: 19 million) shares at the end of 2007, representing approximately 0.8% (2006: 0.9%) of the Company’s issued share capital.


   
Cadbury Schweppes Annual Report & Accounts 2007 39

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Financial review continued

 

Borrowings
At the end of 2007, the total of gross short-term and long-term borrowings was £3,714 million compared with £3,304 million at the end of 2006. Cash and cash equivalents increased to £493 million at the end of 2007 compared to £269 million at the end of 2006. Net borrowings increased to £3,219 million at the end of 2007, from £2,909 million at the end of 2006. The increase has been driven primarily by exchange and the acquisitions of Intergum, Kandia-Excelent and Sansei. At the end of 2007 £1,120 million of our gross debt was due after one year, however, 22% of the £2,518 million of debt due within one year was supported by undrawn committed facilities of £547 million maturing after more than one year.

Gearing is calculated as follows:        
  2007   2006  
  £m   £m  





Net debt (see page 28) 3,219   2,909  





Ordinary shareowners’ funds 4,162   3,688  





Equity minority interests 11   8  





  4,173   3,696  





Gearing ratio % 77   79  





At the end of 2007, 54% 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. Reduced profit from operations together with a reduced interest charge

resulted in the Group’s interest cover increasing to 5.1 times from 5.0 times in 2006. However, on an underlying basis interest cover decreased from 6.2 times in 2006 to 6.1 times in 2007.

At 31 December 2007 we had undrawn committed borrowing facilities of £1,347 million. This relates to a revolving credit facility of £1 billion which was partially drawn, maturing in 2010 and an additional revolving credit facility of £800 million maturing in 2008 which was undrawn. Interest rates payable on these facilities are LIBOR plus 0.225% to 0.375% and LIBOR plus 0.175% respectively per annum. Both facilities are subject to customary covenants and events of default. 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 2007 at BBB.

The Group’s debt is largely denominated in foreign currencies (see Note 27). Therefore, the Group’s debt will depend on future movements in foreign exchange rates, principally the US Dollar and the Euro.

Details of the currency and interest rate profile of our borrowings are disclosed in Note 27 to the financial statements.


                         
Contractual obligations – Net settled
As at 31 December 2007:
                       
  Total   Payable   <1 year   1–3 years   3–5 years   5 years +  
  £m   on demand   £m   £m   £m   £m  













Bank loans and overdrafts 814   44   677   17   75   1  













Estimated interest payments – borrowings 243     87   78   52   26  













Estimated net interest payments –
interest rate swaps
8     4   4      













Finance leases 36     22   5   5   4  













Other borrowings 2,868     1,841   526     501  













Operating leases 399     79   118   81   121  













Purchase obligations 431     365   52   14    













Other non-current liabilities 114       114      













Total 4,913   44   3,075   914   227   653  













                         
Contractual obligations – Gross settled
As at 31 December 2007:
                       
                         
  Total   Payable   <1 year   1–3 years   3–5 years   5 years +  
  £m   on demand   £m   £m   £m   £m  













Payments                        













Estimated foreign exchange payments –                        
forward contracts 233     214   19      













  233     214   19      













Receipts                        













Estimated foreign exchange receipts –                        
forward contracts 222     204   18      













  222     204   18      













Net payments 11     10   1      













Where the fair value of derivatives are financial assets, future contract obligations are not shown.                
   
40 Cadbury Schweppes Annual Report & Accounts 2007

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Contractual obligations – Net settled
As at 31 December 2006:
                       
  Total   Payable   <1 year   1–3 years   3–5 years   5 years +  
  £m   on demand   £m   £m   £m   £m  













Bank loans and overdrafts 297   84   83   60   69   1  













Estimated Interest payments – borrowings 303     93   69   95   46  













Estimated Net Interest payments –
interest rate swaps
27     17   8   2    













Finance leases 65     25   30   2   8  













Other borrowings 2,952     1,272   1,095   77   508  













Operating leases 380     66   107   83   124  













Purchase obligations 300     273   27      













Other non-current liabilities 53       53      













Total 4,377   84   1,829   1,449   328   687  













                         
Contractual obligations – Gross settled
As at 31 December 2006:
                       
  Total   Payable   <1 year   1–3 years   3–5 years   5 years +  
  £m   on demand   £m   £m   £m   £m  













Payments                        













Estimated Interest payments – cross currency
interest rate swaps
15     1   14      













Estimated Foreign Exchange payments –
forward contracts
713     709   4      













  728     710   18      













Receipts                        













Estimated Interest receipts – cross currency
interest rate swaps
13       13      













Estimated Foreign Exchange receipts –
forward contracts
703     699   4      













  716     699   17      













Net payments 12     11   1      













Where the fair value of derivatives are financial assets, future contractual obligations are not shown.              
               

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.

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 2007 being £3,470 million (2006: £3,520 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 2007 was £2,017million (2006: £2,658 million). Subsidiary undertakings have guarantees and indemnities outstanding amounting to £7 million (2006: £14 million).

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 after all capital investment (see page 27).

In 2007, we generated Free Cash Flow of £527 million, an increase of £55 million compared to 2006 when Free Cash Flow was £472 million.

The Free Cash Flow has benefited from the termination settlement from Glacéau, improved working capital and decreases in net payments of interest and tax which more than offset increased capital expenditure. 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 81 was £812 million (2006: £620 million).


   
Cadbury Schweppes Annual Report & Accounts 2007 41

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Financial review continued

 

Cash flows on acquisitions and disposals
The net cash outflow in 2007 on acquisitions and disposals was £320 million. This principally comprised the acquisitions of Intergum, Sansei, Kandia-Excelent and South East Atlantic Beverages offset by disposal proceeds.

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.

Net cash flow before financing in 2007 was £245 million (2006: £1,142 million).

Financing cash flows
The net cash inflow from financing during 2007 was £14 million. This included payment of dividends of £311 million to shareowners and the receipt of £56 million from issue of ordinary shares due to the exercising of options. In the year net drawdown of borrowings was £304 million.

The net cash outflow from financing during 2006 was £1,212 million. This included payment of dividends of £272 million to shareowners. In 2006 net repayments of borrowings were £949 million.

Net cash
Cash and cash equivalents (net of overdrafts) increased during 2007 by £263 million to £449 million from £186 million at 31 December 2006 due to timing of cash receipts. We invest our cash predominantly in instruments with investment grade credit ratings and the maximum exposure to any single counterparty is strictly limited.

Capital expenditure
Capital expenditure in 2007 was £409 million (2006: £384 million), an increase of 7% over the level of expenditure in 2006. Key areas of capital expenditure increase related to investment in the production capacity and facilities of the Group, in particular chocolate production in UK and gum capacity in Europe. All these projects were funded from internal resources.

For 2008 we expect capital spend to be 5.5% of revenue on ongoing basis and an additional 2% of revenue incurred as part of our Vision into Action programme. At 31 December 2007 we had capital commitments of £16 million. We expect to continue to fund this from internal resources.

Treasury risk management policies
Other than expressly stated, the policies set out below also apply to prior years, and the information provided is representative of the Group’s exposure to risk during the period.

(a) Credit Risk
The Group is exposed to credit related losses in the event of non-performance by counterparties to financial instruments, but it does not expect any counterparties to fail to meet their obligations given the Group's policy of selecting only counterparties with high credit ratings. The exposure to credit loss of liquid assets is equivalent to the carrying value on the balance sheet. The maximum credit exposure of interest rate and foreign exchange derivative contracts is represented by the fair value of contracts with a positive fair value at the reporting date.

Counterparties to financial instruments are limited to financial institutions with high credit ratings assigned by international credit rating agencies. The Group has ISDA Master Agreements with most of its counterparties to financial derivatives, which permits net settlement of assets and liabilities in certain circumstances, thereby reducing the Group's credit exposure to individual counterparties. The Group has policies that limit the amount of credit exposure to any single financial institution. Over year end this policy was breached in respect of one financial institution for a period of six days. The Group is now in compliance with policy and was compliant for the whole of 2007 except for this period.

At the year-end, the Group had currency swaps with a notional value of $32 million with a financial institution with a credit quality lower than that permitted under Group Policy. $1.4 million cash collateral has been obtained from the counterparty as security to mitigate against the higher credit risk. The book value of the cash collateral is equal to its fair value.

Concentrations of credit risk with respect to trade receivables are limited due to the Group's customer base being large and unrelated. There were no significant concentrations of credit exposure at the year-end relating to other aspects of credit. Management therefore believe there is no further credit risk provision required in excess of normal provision for doubtful receivables.

The Group is exposed to £3,470 million in credit exposure on financial guarantees issued in respect of Group corporate borrowings and certain subsidiary undertakings which represents the Group’s maximum credit exposure arising from guarantees. Refer to Note 34 on Commitments and Contingencies for further details.

The financial assets of the Group which are exposed to credit risk are:

Class    

Commodities 2  

Trade receivables 952  

Interest rate swaps 9  

Currency exchange contracts 38  

Cash 493  

Short-term investments 2  


   
42 Cadbury Schweppes Annual Report & Accounts 2007

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(b) Liquidity Risk
The Group is exposed to liquidity risk due to the possibility that un-forecast situations could give rise to uncertainty amongst lenders resulting in unavailability of uncommitted sources of funds.

The Group seeks to achieve a balance between certainty of funding, even at difficult times for the markets or the Group, and a flexible, cost-effective borrowings structure. Consequently the policy seeks to ensure that at 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 the Group's 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. At year end the Group was in breach of this policy as only 66% of net debt including undrawn facilities had a maturity of one year or more and only 16% three years or more. The Group's reliance on short term debt has deliberately increased as part of the planning for the Americas Beverages demerger, as agreed with the Board.

The Company uses maturity analysis (see table on page 120 –debt and page 122 – derivatives) and facilities analysis (see table on page 119) to measure liquidity risk. The Company manages the liquidity risk inherent in this analysis by having very diverse funding sources and committed borrowing facilities that can be accessed to meet liquidity needs.

(c) Market Risk
(i) Currency Risk
The Group operates internationally giving rise to exposure from changes in foreign exchange rates, particularly the US dollar. The Group does not hedge translation exposure and earnings because any benefit obtained from such hedging can only be temporary.

The Group seeks to relate the structure of borrowings to the trading cash flows that service them. The Group's policy is to maintain broadly similar fixed charge cover ratios for each currency bloc and to ensure that the ratio for a ny 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.

The Group also has transactional currency exposures arising from its international trade. The Group's 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. The Group makes use of the forward foreign exchange markets to hedge its exposures.

While there are exchange control restrictions which affect the ability of certain of the Group's subsidiaries to transfer funds to the Group, the operations affected by such restrictions are not material to the Group as a whole and the Group does not believe such restrictions have had or will have any material adverse impact on the Group as a whole or the ability of the Group to meet its cash flow requirements.

The tables on page 44 show data about exposure to risk at the reporting date.

(ii) Interest Rate Risk
The Group has an exposure to interest rate fluctuations on its borrowings and manages these by the use of interest rate swaps, cross currency interest rate swaps, forward rate agreements and interest rate caps. 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 treasury risk management 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 net debt. 54% of net debt was at fixed rates of interest at year end (2006: 75%). The Group was in breach of policy in respect of fixed rate debt maturing within two and three years. This was agreed with the Board as part of the planning for the Americas Beverages disposal. It is anticipated that the Group will become compliant once its borrowings profile is restructured after the planned demerger of the Americas Beverages business.

The currency profile of borrowings note on page 121 discusses interest rate risk further, and the table gives quantitative data in relation to interest rate risk.

(iii) Fair value analysis
The table below presents a sensitivity analysis of the changes in fair value (which all impact the profit and loss) of the Group’s financial instruments from 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 (further fair value sensitivity analysis of derivatives is set out in Note 28 to the financial statements).

The analysis on page 44 shows forward-looking projections of market risk assuming certain adverse market conditions occur. The sensitivity figures are calculated based on a downward parallel shift of 1% in yield curves and 10% weakening of sterling against other exchange rates. An upward parallel shift of 1% in yield curves and 10% strengthening of sterling against other exchange rates would result in an equal and opposite effect on fair values to the table below.

The sensitivity analysis on page 44 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.


   
Cadbury Schweppes Annual Report & Accounts 2007 43

Financial review continued

 

As at 31 December 2007:

   
  Impact on Income Statement arising from  
 
      10% weakening  
          in £ against  
      1% decrease in   other  
  Fair Value   interest rates   currencies 1 
  £m   £m   £m  







Cash and cash equivalents 493   (5 ) 36  







Short-term investments 2      







Borrowings (3,696 ) 8   (351 )







Cross currency interest rate swaps 5      







Interest rate swaps (2 )    







Currency exchange contracts (including embedded derivatives) 22     2  







             
As at 31 December 2006:            
  Impact on Income Statement arising from  
 
          10% weakening  
          in £ against  
      1% decrease in   other  
  Fair Value   interest rates   currencies 1 
  £m   £m   £m  







Cash and cash equivalents 269   (3 ) 14  







Short-term investments 126   (1 ) 11  







Borrowings (3,277 ) 8   (304 )







Cross currency interest rate swaps 10   (1 ) 1  







Interest rate swaps (4 ) 2    







Currency exchange contracts (including embedded derivatives) 10     1  







1 The Group hedges against currency risk using currency derivative contracts and by structuring the currency of its borrowings to relate to the trading cash flows that service them. Where IAS 39 hedge accounting is not applied the offsetting effect of such hedges is not included in the tables above.
   

(iv) 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 2007:

  2007   2006  
  Fair   Fair  
  value   value  
  £m   £m  





Commodities (asset) 2   3  




 
Commodities (liabilities) (3 ) (5 )





Total (1 ) (2 )





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 rise or fall in commodity prices to the Group’s net commodity positions held at the year end would result in a movement of £6.2 m illion (2006: £7.0 million) which would be recognised in the finance charge for the period. 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.

Review of accounting policies
Critical accounting estimates
The preparation of our financial statements in conformity with IFRS, 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 policies 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 policies are discussed below.


   
44 Cadbury Schweppes Annual Report & Accounts 2007

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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 95% 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.

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 China during 2007 and was the case for Cadbury Nigeria during 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.


   
Cadbury Schweppes Annual Report & Accounts 2007 45

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Financial review continued

 

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.

(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. 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 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 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 decrease 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.


   
46 Cadbury Schweppes Annual Report & Accounts 2007

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Where defined benefit pension plans have an asset value in excess of the valuation of liabilities we consider whether this surplus will be realisable by the Group in the future either through a reduction in contributions or guaranteed refunds on cessation of the plan.

An indication of the variability of the main assumptions applied by management for the UK plan over the past two years is set out below:

  2007   2006  





Discount rate 5.8 % 5.2 %





Rate of asset returns 6.6 % 6.8 %





Rate of salary increases 4.3 % 4.4 %





A 50 basis point decrease in the estimate of the discount rate would have resulted in an approximate 9% increase in the pension liabilities. A 50 basis point decrease in the estimate of the long-term rate of return on assets would have resulted in an approximate £14 million increase in the pension costs.

(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 two years the impact that revising the initial estimates has had on the recorded charge for current and deferred taxes and the corresponding increase in profits is set out below:

  2007   2006  
  £m   £m  





(Reduction)/increase in current    
tax charge (24 ) 4  





Increase/(reduction) in deferred    
tax charge 2   (46 )





We recognised deferred tax liabilities of £1,145 million (2006: £1,050 million) at 31 December 2007, and have recognised deferred tax assets of £124 million (2006: £170 million). There are further unrecognised deferred tax assets for losses of £179 million (2006: £187 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. £82 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 accounting policies during 2007.


   
Cadbury Schweppes Annual Report & Accounts 2007 47

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Board of Directors and Group Secretary

 

 
1 Sir John Sunderland ‡ *

Chairman

   
Term of office: Appointed as Chairman in May 2003. SirJohn was last re-elected in 2007 and is not retiring by rotation or standing for re-election in 2008. Sir John has announced he will retire as Chairman in mid 2008. SirJohn is Chairman of the Nomination Committee.
Skills and experience: Sir John has 39 years of experience working within the Cadbury Schweppes Group in the UK and overseas on both the confectionery and beverage side of the business. He 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 organisations, is invaluable to the business and makes him ideally placed to chair the Board as it seeks to create enhanced shareowner value. He was knighted in the 2006 Queen’s Birthday Honours list.
Other directorships and offices:
> Deputy 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
   
2 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 or standing for re-election in 2008. From mid 2008 Roger will replace Sir John Sunderland as Chairman.
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 (resigning in mid-2008)
> Non-executive Director of The Bank of England
> 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)
   
3 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 or standing for re-election in 2008.
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 organisation 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
   
4 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 or standing for re-election in 2008.
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 
   
5 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 retiring by rotation and standing for re-election in 2008.
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
   
6 Sanjiv Ahuja *
Independent Non-Executive Director
   
Term of office: Appointed to the Board on 19 May 2006. Sanjiv was last re-elected in 2007 and is not retiring or standing for re-election in 2008. 
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:
> Chairman and Chief Executive Officer of Augere
> Chairman of Orange UK
> Member of France Telecom’s Group Management Committee

   
48 Cadbury Schweppes Annual Report & Accounts 2007

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  Directors' report    
       

 

 

7 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 retiring by rotation and standing for re-election in 2008. He is Chairman of the Remuneration Committee.
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
> President Global Fabric & Home Care sector of The Procter & Gamble Co (1998–2001)
   
8 Lord Patten ‡ *
Independent Non-Executive Director
   
Term of office: Appointed to the Board in July 2005. Lord Patten was last re-elected in 2006 and is retiring by rotation and standing for re-election in 2008. He is Chairman of the Corporate and Social Responsibility Committee.
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)
   
9 David Thompson # † *
Independent Non-Executive Director
   
Term of office: Appointed to the Board in March 1998. David was last re-elected in 2007 and will 
resign from the Board on 8 March 2008. He is Chairman of the Audit Committee.  
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) 
   
10 Raymond Viault # † ‡
Independent Non-Executive Director
   
Term of office: Appointed to the Board on 1 September 2006. Raymond was last re-elected in 2007 and is not retiring by rotation or standing for re-election in 2008. 
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)

   

11 Ellen Marram

Independent Non-Executive Director

   
Term of office: Appointed to the board on 1 June 2007. Ellen is standing for re-election in 2008 at the first Annual General Meeting since her appointment.
Skills and experience: Ellen has extensive experience in the food and beverages industry and the broader consumer sector which enables her to contribute significantly to the Board. 
Other directorships and offices: 
> President of The Barnegat Group
> Director of The Ford Motor Company
> Director of The New York Times Company
> Director of Eli Lilly
> Managing Director of North Castle Partners (2000–2005)
> Group President (1993–1998) and Chief Executive (1997–1998) of the Tropicana Beverage Group
> President and Chief Executive Officer of the Nabisco Biscuit Company (1988–1993)
   
12 Guy Elliott #

Independent Non-Executive Director

   
Term of office: Appointed to the board on 27 July 2007. Guy is standing for re-election in 2008 at the first Annual General Meeting since his appointment.
Skills and experience: Guy has extensive financial and commercial experience, particularly in mergers and acquisitions which enables him to contribute significantly to the Board. 
Other directorships and offices: 
> Finance Director of Rio Tinto plc and Rio Tinto Limited.  
   

13 Henry Udow

Chief Legal Officer and Group Secretary
   
Term of office: Appointed Group Secretary on 28 September 2007. 
Skills and experience: Henry joined Cadbury Schweppes North America in 1987 as Division Counsel & Assistant Secretary after working in private practice with the law firm of Shearman & Sterling in the US and UK. In 1991 he became Vice President, General Counsel & Secretary of Cadbury Schweppes North America. In 1994 he moved to the UK to take up his role of Senior Vice President, Legal Director and General Counsel of Cadbury Schweppes’ Global Beverages business. In 2000 he moved from the Legal Department to become Mergers & Acquisitions Director, heading up all merger and acquisition activity for Cadbury Schweppes, both Beverages and Confectionery. He was appointed Chief Legal Officer in 2005, heading up the Global Legal Function for Cadbury Schweppes.  
   
Board Committee membership key
# Audit Committee
Remuneration Committee
Nomination Committee
*

Corporate and Social Responsibility Committee


   
Cadbury Schweppes Annual Report & Accounts 2007 49

directors'
report

         
  Items covered in this section:      
 
   
  Business review 50    
 
   
  Dividends 51    
 
   
  Directors 51    
 
   
  Substantial shareholdings 52    
 
   
  Going concern 52    
 
   
       
       

General
The Directors present their Report together with the audited financial statements for the year ended 31 December 2007.

Principal activities
Our principal activities are detailed in the Description of Business on page 10 and incorporated by reference into this report and deemed part of this report. The operating companies principally affecting our profit or net assets in the year are listed in Note 36 to the financial statements.

Business review
Cadbury Schweppes plc is required by the Companies Act 1985 to set out in this report a fair review of the business of the Group during the financial year ended 31 December 2007 and of the position of the Group at the end of the year.

A review of the business and a commentary on its strategy, performance and development is set out in the Chairman’s statement on pages 2 to 4, the Chief Executives Review on pages 5 to 9 and Financial Review on pages 25 to 47. In addition, the principal risks facing the business are detailed in the Description of Business on pages 21 to 24. The strategy of the Confectionery Group is discussed on page 13 and the Americas Beverages strategy is discussed on page 19. Treasury Risk on Management Policies are discussed in the Financial Review on pages 42 to 44. Environmental policies, their performance and impact on the Group are discussed on page 51, research and development in the business of the Group is discussed on pages 6 and 20 and the Company’s capital structure is discussed on pages 51 and 52. All the information detailed in those sections which is required for the business review or otherwise for this report is incorporated by reference in (and shall be deemed to form part of) this report. Key financial performance measures are discussed in the Financial Review on pages 25 to 27.

In addition, the Group’s performance can be assessed by comparative data from Euromonitor (for confectionery) and AC Nielsen (for beverages), examples of which are given in the Description of Business, and by our comparative TSR performance against the FTSE-100 (on page 61). Performance indicators relating to corporate and social responsibility can also be found in our biennial Corporate and Social Responsibility report and on our website.

Revenue and profit
Revenue during the period amounted to £7,971 million (2006: £7,427 million). Profit before taxation amounted to £670 million (2006: £738 million).

Legal proceedings
Cadbury Schweppes plc and its subsidiaries are defendants in a number of legal proceedings incidental to their operations. The outcome of such proceedings, either individually or in aggregate, is not expected to have a material effect upon the results of our operations or financial position.

Post balance sheet events
On 15 March 2007 the Group announced the separation of the Americas Beverages businesses and on 10 October 2007 it further announced that it would effect the separation via a demerger in 2008. A Circular will be sent to shareowners describing the demerger process and the actions shareowners need to take at the appropriate time.

On 25 February 2008 the Group completed the disposal of its Monkhill business, which principally manufactures sugar confectionery and popcorn for the UK market, for £58 million.

Financial instruments
Information on our use of financial instruments, our financial risk management objectives and policies, and our exposure to credit and liquidity risks, are described in the Financial Review. Our exposure to cash flow and price risks are described in Note 28 to the financial statements.

Corporate and Social Responsibility
We publish a separate Corporate and Social Responsibility report every other year with the next report being available in the autumn. Copies are available from our website, www.cadburyschweppes.com, or from the Group Secretary.

Our CSR performance is rated by various external organisations’ indices and this helps us assess how we are progressing. Indices include: Dow Jones Sustainability World Index, FTSE4Good, the Carbon Disclosure Project, Climate Leadership Index and the UK’s Business in the Community Corporate Responsibility Index.

Employees
Applications for employment by disabled persons are always fully considered. We employ people with disabilities, though not all are formally registered as disabled in UK terms. If an employee becomes disabled, we aim wherever possible to offer an alternative job, with retraining if necessary. Training, career development and promotion opportunities for people with disabilities are consistent with our Group-wide policy on equal employment opportunities, diversity and inclusiveness.


   
50 Cadbury Schweppes Annual Report & Accounts 2007

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  Directors' report    
       

 

Employee communication and involvement
Employee communication and engagement continued to grow in 2007, with all areas of the business introducing enhanced communication structures and programmes. We keep employees regularly informed through colleague communications via email and via the intranet. Our financial results are always presented to employees through various media channels. Through our subsidiaries, we have successfully entered into numerous collective bargaining agreements. Our management has no reason to believe that it would not be able to renegotiate any such agreements on favourable terms.

Employee share ownership
Share ownership amongst our employees is actively encouraged. Employees in Australia, Canada, France, Germany, Ireland, Mexico, Netherlands, New Zealand, Portugal, Spain, UK and USA have access to all-employee share plan arrangements. Overall around 40% of all eligible employees choose to participate and invitations to do so are issued on an annual basis.

Charitable and political contributions
In 2007, the value of Cadbury Schweppes’ contribution to non profit causes totalled £10 million, paid in respect of the following charitable purposes: education & enterprise, environment and health and welfare.

In 2007, neither the Company, nor any of its subsidiaries, made any donation to any registered party or other EU political organisation, incurred any EU political expenditure or made any contribution to a non-EU political party, each as defined in the Political Parties, Elections and Referendums Act 2000.

Environment & Heath 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 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. Therefore in June 2007 we launched a new environmental strategy, aimed at minimising the use of energy, packaging and water through adopting absolute rather than relative targets, these targets are described in more detail on page 15 of the Business Description.

We have in place an integrated EHS policy and standards based on both ISO14001 and OHSAS 18001. Our EHS policy and standards deal with environmental issues related to the manufacturing of our products, water, energy packaging and protection of 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 our manufacturing sites are audited on a rolling programme by Group EHS Assurance Department and areas of improvement are identified. Some sites are externally audited and certified to IS014001 or OHSAS18001.

Our EHS policies, goals and performance are described in detail in our Corporate and Social Responsibility Report 2006. The report has been reviewed by Deloitte & Touche LLP who have provided an assurance statement.

Protecting the health and safety of employees is fundamental to our Business Principles. We have 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 our agenda in this area. The remit of the committee includes quality and food safety. We are implementing additional programmes to strengthen performance.

Auditors
In accordance with the provisions of Section 234ZA of the Companies Act 1985, each of the Directors at the date of approval of this report confirms that:
> So far as the Director is aware, there is no relevant audit information of which the Group’s auditors are unaware; and
> The Director has taken all the steps that he or she ought to have taken as a Director in order to make himself or herself aware of any relevant audit information and to establish that the Group’s auditors are aware of that information

The Group’s auditors are Deloitte & Touche LLP, who are willing to continue in office and resolutions for their re-appointment and to authorise the Directors to determine their remuneration will be proposed at the AGM.

Note 6 in the financial statements states the auditors’ fees, both for audit and non-audit work.

Dividends
The Directors recommend a final dividend of 10.5 pence per ordinary share (2006: 9.9p) to be paid on 16 May 2008 to ordinary shareowners on the register as at 1 May 2008.

An interim dividend of 5.0 pence was paid on 19 October 2007, which makes a total of 15.5 pence per ordinary share for the period (2006: 14.0p) .

     
  Directors
The names of our Directors, together with biographical details, are set out on pages 48 and 49 and incorporated by reference into this report and deemed part of this report.
 
     
  At the 2008 Annual General Meeting, Wolfgang Berndt, Lord Patten and Bob Stack will retire by rotation in accordance with Article 90 of the Articles of Association, and, being eligible, will each offer themselves for re-appointment. David Thompson will retire as a Director with effect from 8 March 2008. After over 40 years of service, Sir John Sunderland will retire in mid 2008.  
     
  Guy Elliott and Ellen Marram will also retire and offer themselves for re-appointment in accordance with Article 89 of the Articles of Association, having been appointed as independent Non-executive Directors since the last Annual General Meeting.  
     
  The explanatory notes to the Notice of Meeting set out why the Board believes that these Directors should be re-elected.  
     

Capital Structure
Details of the authorised and issued share capital, together with details of movements in the issued share capital of Cadbury Schweppes plc during the year are shown in Note 29 which is incorporated by reference and deemed to be part of this report. The Company has one class of ordinary shares


   
Cadbury Schweppes Annual Report & Accounts 2007 51

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Directors’ report continued

 

which carry no right to fixed income. Each share carries the right to one vote at general meetings of the Company.

The percentage of the issued nominal value of the ordinary shares is 100% of the total issued nominal value of all share capital.

There are no specific restrictions on the size of a holding nor on the transfer of shares, which are both governed by the general provisions of the Articles of Association and prevailing legislation. The Directors are not aware of any agreements between holders of the Company’s shares that may result in restrictions on the transfer of securities or on voting rights.

Details of employee share schemes are set out in Note 26. Shares held by the Cadbury Schweppes Employee Benefit Trust. The trust waives its right to vote on the shareholding, and to a dividend.

No person has any special rights of control over the Company’s share capital and all issued shares are fully paid.

With regards to the appointment and replacement of directors, the Company is governed by its Articles of Association, the Combined Code, the Companies Acts and related legislation. The Articles themselves may be amended by special resolution of the shareowners. The powers of Directors are described in the Main Board’s Terms of Reference, copies of which are available on request, and the Corporate Governance Report on page 53.

At the 2007 AGM the Directors were authorised to issue relevant securities up to an aggregate nominal amount of £86,636,438 (approximately 33% of the issued ordinary share capital as at 20 March 2007); renewal was also sought from the following authorities: (a) for the Directors to allot relevant securities and to allot equity securities for cash (up to a maximum aggregate nominal amount of £13,126,733) 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 (maximum total nominal value of £26,253,466) and if appropriate, shareowners having approved a similar resolution annually since 1998. The Directors did not utilise this authority during 2007 and 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 was not used in 2007 and has not been used since 1999. The Directors will seek to renew similar authorities in 2008.

Directors’ responsibilities
The Statement of Directors’ responsibilities in relation to the financial statements is set out on page 76. The statement by the auditors on corporate governance matters is contained in their report on pages 76 and 77.

Directors’ share interests
The interests in the share capital of the Company of Directors holding office during the period at the beginning of the period, 1 January 2007 (or date of appointment if later), and the end of the period, 31 December 2007, are detailed in the Directors’ remuneration report on page 71.

Directors’ indemnities
Since February 2005, we have granted indemnities to each of the Directors, one member of our senior management and the Group Secretary to the extent permitted by law. These indemnities are uncapped in amount, in relation to certain losses and liabilities which they may incur to third parties in the course of acting as directors (or Company Secretary as the case may be) or employees of the Company or of one or more of its subsidiaries or associates.

Substantial shareholdings
At the date of this Report we have been notified, in accordance with the Disclosure and Transparency Rules, of the following interests in the ordinary share capital of the Company:

  Number of shares   Interest in  
  in which there   issued share  
  is an interest   capital (%)  

Morgan Stanley Investment        
Management Limited 150,787,720   7.18 %

Legal & General Investment        
Management 106,419,523   5.04 %

Franklin Resources 83,732,422   4.01 %

Trian 72,965,267   3.47 %

In December 2007 Trian indicated to the Company that their economic interest in the ordinary share capital of the Company is approximately 4.5% .

Policy on payment to suppliers
We adhere to the Better Payment Practice Guide. Our policy is, when agreeing the conditions of each transaction, to ensure that suppliers are made aware of the terms of payment and to abide by, and settle in accordance with, these terms. As Cadbury Schweppes plc is a parent company, it has no trade creditors.

Change of control
Pursuant to section 992 of the Companies Act 2006, the Directors disclose that in the event of a change of control in the Company: (i) the Company may be obliged to offer to sell its shares in Camelot to the other shareowners at fair market value; (ii) the Company’s £1 billion Revolving Credit Facility (dated 17 March 2005) and its four £200 million Revolving Credit Facilities (all dated 31 May 2007) could become repayable; and (iii) an Exclusive Bottling Agreement, which the Company has entered into in Australia, could become terminable.

Going concern
On the basis of current financial projections and facilities available, we have a reasonable expectation that the Company has adequate resources to continue in operational existence for the foreseeable future and, accordingly, consider that it is appropriate to adopt the going concern basis in preparing the financial statements.

By order of the Board

Henry Udow
Chief Legal Officer and Group Secretary

4 March 2008


   
52 Cadbury Schweppes Annual Report & Accounts 2007

       
  Directors' report    
       

 

  corporate
governance
report
             
    Items covered in this section:        




     
  Introduction 53      




     
  The Board 53      




     
  Key Committees 55      




     
    Audit Committee 55      




     
    Nomination Committee 56      




     
    Remuneration Committee 56      




     
    Corporate and Social Responsibility Committee 56      




     
    Chief Executive’s Committee 57      




     
  Relations with shareowners 57      




     
    Annual General Meeting 57      
   

     
    Institutional investors 57      




     
  Internal control 57      




     
  US Corporate governance 58      




     
             
             

This report has been prepared in accordance with the Code of Best Practice set out in section 1 of the June 2006 FRC Combined Code on Corporate Governance. Cadbury Schweppes plc has complied with the provisions of the Code throughout the year.

Cadbury Schweppes plc (the Group) has applied the principles set out in section 1 of the Code, including both the main principles, and supporting principles by complying with the code, as reported above. Further explanation of how the principles and supporting principles have been applied is set out below and in the Directors’ Remuneration Report and Audit Committee Report.

The Board remains committed to the principles of good corporate governance and 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 which explains the principles that 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 (the executive managers who report to CEC members), and managers are required to confirm their compliance with Our Business Principles on an annual basis. We have established a confidential, all employee Speaking Up helpline available in most languages, enabling employees to report concerns of breaches of Our Business Principles or usual standards of good behaviour. The Statement of Corporate Governance Principles, Financial Code of Ethics and Our Business Principles are available on the Group’s website, www.cadburyschweppes.com.

The Board
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. Changes to the Board since 1 January 2007 are as follows:






Rick Braddock Non-executive   resigned 24 May  
  Director   2007  

Ellen Marram Non-executive   appointed 1 June  
  Director   2007  

Guy Elliott Non-executive   appointed 27 July  
  Director   2007  

Rosemary Thorne Non-executive   resigned 5 September  
  Director   2007  

David Thompson Non-executive   will resign 8 March  
  Director   2008  

Sir John Sunderland Chairman   will resign  
      mid-2008  

Sir John Sunderland will be succeeded as Chairman by Roger Carr. Biographies of each of the Directors as at the date of this report, can be found on pages 48 and 49.


   
Cadbury Schweppes Annual Report & Accounts 2007 53

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Corporate governance report continued

 

Board meetings and attendance: The attendance of the individual Directors at Board and Committee meetings during 2007 was as follows:

        Corporate      
    Strategy   and Social      
  Board (1 meeting Audit Responsibility Nomination Remuneration  
  10 meetings over 2 days) 5 meetings 2 meetings 3 meetings 9 meetings  

Sir John Sunderland 10 1 n/a 2 3 n/a  

Roger Carr 10 1 3 n/a 3 8  

Todd Stitzer 10 1 n/a 2 n/a n/a  

Ken Hanna 10 1 n/a n/a n/a n/a  

Bob Stack 10 1 n/a 2 n/a n/a  

Sanjiv Ahuja 8 1 n/a 1 1 n/a  

Wolfgang Berndt 10 1 5 n/a 1 9  

Rick Braddock1 5 1 n/a n/a n/a 2  

Lord Patten 8 1 n/a 2 2 n/a  

David Thompson 10 1 5 2 1 8  

Rosemary Thorne2 7 1 4 1 2 5  

Raymond Viault 10 1 4 n/a 3 6  

Guy Elliott3 4 1 1 n/a n/a n/a  

Ellen Marram4 4 1 n/a 1 n/a 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 Rick Braddock resigned from the Board on 24 May 2007.
2 Rosemary Thorne resigned on 5 September 2007.
3 Guy Elliott was appointed a Non-executive Director on 27 July 2007 and has not missed a meeting since his appointment.
4 Ellen Marram was appointed a Non-executive Director on 1 June 2007 and has not missed a Board meeting since her appointment.
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 of the meeting.
 

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 by which the Board oversees control of the Group’s affairs. The Chief Executive Officer is supported by his Executive Committee. 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 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 55 and 58.

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 Group’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
The roles of the Chairman and Chief Executive Officer are separate and their responsibilities are clearly defined in writing and approved by the Board. The role of the Chairman is to lead and manage the Board. The Chief Executive is responsible for the leadership and day to management of the Group and execution of the strategy approved by the Board.

Induction: On joining the Board, Directors are given background information describing the Group and its activities. They receive an induction pack of information on our business. The pack includes guidance notes on the Group, the Group structure, its operations, information on corporate governance and brokers’ reports. Meetings are arranged with the members of the Chief Executive’s Committee and other senior executives below Board level from each Group function, as well as some of our advisers. Appropriate visits are arranged to our sites. Meetings are also arranged with the Group departments who provide support to the relevant Board Committees the Directors will serve on.

Continuing professional development: Training seminars are held for Board members at least annually. These formal


   
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sessions are in addition to written briefings to the Board on areas of regulatory and legislative change. The seminar held in December 2007 covered the Takeover Code and the new Companies Act.

In 2007 Egon Zehnder undertook a formal and independent evaluation of the Board. The review combined qualitative dialogue and a quantative questionaire to track Board and Committee effectiveness and covered Board dynamics, individual Director contributions and in particular the process relating to the demerger and its attendant implications. Overall, the review concluded that the Board and its committees function effectively and when issues are raised for consultation there is a thorough debate and effective decision making. Governance and Board processes in general are robust. The process of communication to the Board and individual directors has been stated but not, at the time of reporting concluded.

External directorships for Executive Directors
Subject to certain conditions, and unless otherwise determined by the Board, each executive Director is 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 65.

Non-executive Directors
The Board reviews the independence of all Non-executive Directors annually and has 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. David Thompson was considered to remain independent despite having served on the Board for more than nine years, following a thorough review of his continued independence and suitability. He will retire from the Board on 8 March 2008.

We made no payments to third parties for any of the Non-executive Directors’ services.

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. A new Senior Independent Non-executive Director will be appointed when Roger Carr becomes Chairman in mid 2008.

Terms of appointment: Other than Sir John Sunderland, who was appointed for an initial term of one year, extended to mid 2008, 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 65 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 2007, they held two such meetings chaired by Roger Carr and attended by all the Non-executive Directors.

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 2008. Committees are authorised to obtain outside legal or other independent professional advice if they consider it necessary to do so. The terms of reference are available on the website at www.cadburyschweppes.com.

Audit Committee
Members: David Thompson (Chairman), Roger Carr, Wolfgang Berndt, Raymond Viault, Guy Elliott (from 6 December 2007). The Committee consists solely of independent Non-executive Directors, all of whom have extensive financial experience in large organisations. All Committee members, except Guy Elliott 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. Other than the Chairman of the Committee, as described in the Directors’ Remuneration Report. Members do not receive additional fees for serving on the Committee.

At the invitation of the Committee, the Chairman of the Board, Chief Executive Officer, Chief Financial Officer, Chief Legal Officer, and Group Secretary, Corporate Finance Director, 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 five times in 2007, 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 Group’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 Group’s internal controls and their effectiveness;
> To review the Group’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

   
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  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 in confidence complaints 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 addition to carrying out the above duties, in 2007 the Committee’s agenda included considering the effect of accounting for changes to UK corporate legislation, the separation of American Beverages and work to redefine the role and operation of Internal Audit.

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 list of such services may only be varied by the Audit Committee.

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.

With effect from February 2008, the pre-approval process has been amended to enable the Committee to pre-approve the audit and non audit service categories that can be provided by Deloitte & Touche LLP and agreed monetary amounts for each service category that can be provided by them, subject to a maximum individual engagement value. The service will continue to require specific pre-approval from the Audit Committee or the Audit Committee Chairman. Where requests for pre approvals either do not fall within pre-approved category limits, or where a service value exceeds the maximum individual engagement value. There will continue to be no de minimis amount allowed.

Auditor independence: The Committee ensures that the external auditor remains independent of the Group. 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 reappointment 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 2007 can be found at Note 6 in the financial statements.

Nomination Committee
Members: Sir John Sunderland (Chairman), Sanjiv Ahuja, Roger Carr, Lord Patten, Raymond Viault.

Wolfgang Berndt, David Thompson, the Chief Executive Officer and Chief Human Resources Officer attend meetings at the invitation of the Chairman of the Committee. The Chief Legal Officer and Group Secretary also attends and is secretary to the Committee. This Committee is empowered to bring to the Board recommendations regarding 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 also 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 two new non-executives, and four 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.

During 2007, the Committee met three times to review succession planning, the appointment of Ellen Marram and Guy Elliott as new Non-executive Directors, the appointment of a new Chairman and the appointment of non-executives to the board of DPSG, Inc, the beverages business to be de-merged, subject to shareowner approval in 2008. External search consultants were engaged to produce a list of candidates for these appointments. These lists were then reduced to a short list of candidates which were discussed between the Chairman and the other members of the Nomination Committee. The Directors then met the preferred candidates and their nominations were presented to the Board for approval at the next Board meeting.

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 on page 59.

Corporate and Social Responsibility committee
Members: Lord Patten (Chairman), Sanjiv Ahuja, David Thompson, Bob Stack, Todd Stitzer, Sir John Sunderland. The following directors attend at the invitation of the Chairman; Raymond Viault, Wolfgang Berndt, Roger Carr, Henry Udow.

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. Further details of the


   
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Group’s approach to corporate and social responsibility matters can be found in the Description of Business section on page 15 and in the Company’s biennial Corporate and Social Responsibility report.

Chief Executive’s Committee
Todd Stitzer (Chairman), Henry Udow, Jim Chambers, Steve Driver, Ken Hanna, David Macnair, Tamara Minick-Scokalo (from 2 January 2007), Matt Shattock, Bob Stack, Rajiv Wahi, Mark Reckitt (from 2 January 2007) and Chris Van Steenbergen (from 1 July 2007). The Director of Group Secretariat also attends and is secretary to the Committee.

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 poll, the results of which will be announced to the London and New York Stock Exchanges.

Institutional investors
The Group 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. 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 June 2007, they hosted a seminar for institutional investors, analysts and brokers in London and New York.

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.

Internal control
The Directors have responsibility for the system of internal control that covers all aspects of the business and is part of an ongoing risk management process. 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, financial and EHS risk 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’s “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, social responsibility, 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 21 to 24;
> 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

   
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  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 factor in the creation and protection of 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 42 to 44).

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.

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 shareowner 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. Internal controls have been evaluated and enhanced. where necessary to comply with section 404 of that Act. Testing of these controls will be completed prior to the filing of the Company’s Form 20-F with the US SEC in early April, and a report on compliance with this legislation will be made in that document.

The Board’s annual 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 2007 and the period up to 4 March 2008 has been reviewed in line with the criteria set out in the Turnbull guidance currently applicable.

US Corporate governance
Because we are a UK company with our shares listed on the New York Stock Exchange (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. As our nomination committee is not entirely independent, because it is chaired by Sir John Sunderland, who was formerly an Executive Director, the Audit Committee considers corporate governance matters on behalf of the Board. This committee is composed entirely of independent Directors. The NYSE rules allow a committee other than the Nomination Committee to fulfil this role as long as all of its members are independent directors.

Sir John Sunderland
Chairman

4 March 2008


   
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directors'
remuneration
report

  Items covered in this section:    
 

 
  Introduction 59  
 

 
  Changes to reward arrangements 59  
 

 
  Remuneration Committee members and advisers 59  
 

 
  Remuneration policy principles 60  
 

 
  Executive Directors outside appointments 65  
 

 
  Chairman and Non-executive Directors 65  
 

 
  Directors’ remuneration tables 66  
 

 
  Changes in the Directors’ share interests since the year end 71  
 

 
 

Unaudited Information
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 2007. Except as detailed below or as explained in the AGM notice posted to shareowners with this document, 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 2006 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 (see page 66). 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
There were no changes to reward arrangements in 2007, but in line with previous commitments and in the light of the separation of the Americas Beverages business, the Committee undertook a fundamental review of remuneration policy and all incentive plans for submission to shareowners for approval in 2008. Following the detailed review of our existing plans a number of changes have been made to:
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