UK: Cadbury Schweppes Autumn 2000 Investor Briefing
Consistent Strategy and Objectives
Key points from John Sunderland's opening review of strategy, progress and objectives include:
Cadbury Schweppes' governing objective remains growth in value for its shareowners. Since the introduction of Managing for Value in 1996, average 10%+ earnings per share targets have been achieved, although restructuring charges slightly diluted 1999 results, and free cashflow has exceeded £150 million annually, significantly so in 1999.
Return on invested capital has accelerated over the past three years and now comfortably exceeds our cost of capital. Growth in Economic Profit has averaged 14% per annum during the period.
Cadbury Schweppes remains committed to Beverages and Confectionery. The Group aims to develop regional businesses where its positions are robust and sustainable. Growth will continue to be generated organically through momentum from existing major brands, from innovation and from acquisition where appropriate.
During the past four years, significant efforts have been made to strengthen management and improve business processes as part of a heightened focus on value delivery. The most recent development was a major reorganisation implemented in March 2000. Responsibility for performance delivery has been separated from strategy with John Brock appointed as Chief Operating Officer and Todd Stitzer as Chief Strategy Officer. The operational structure has been realigned to reflect the regional nature of the business and a new business unit management team put in place.
In Beverages, the Group has addressed its lack of critical mass in many countries outside the US by selling its brands in 160 markets where its average 2% share accounted for only around 4% of Group profits. The Group now has considerably more robust and sustainable businesses in North America, Continental Europe and Australia. In the US, greater route-to-market security for all the Group's beverages brands has been established through strengthened distribution arrangements in all three bottling systems. This has enabled the Group to grow Dr Pepper ahead of the market, turn round 7 UP and successfully promote the whole of its flavours range. In Australia, the acquisition of the Pepsi Lion Nathan bottling venture has strengthened that business and the acquisition of Hawaiian Punch and shortly the Snapple Beverages Group will further enhance the Group's position in the USA.
In Confectionery, around 90% of profits are generated from a series of markets around the world where the Group enjoys leadership positions. In these markets, the businesses are being developed further through innovation and extending availability. In emerging markets such as China, Poland, Egypt and Russia, the Group is seeking to replicate leadership positions through greenfield structures and organic growth, supplemented by acquisition. Elsewhere in the world, where tastes for confectionery are indigenous and already served by well-established brands, robust and sustainable businesses are being developed through acquisition.
Underlying earnings, excluding restructuring, have grown at an average of 11% over the last three years from a combination of volume, price, product mix, operational gearing, cash generation and acquisitions. In the medium term, this general model remains sustainable, particularly with a portion of anticipated efficiency benefits being reinvested behind growth and with positive earnings contributions expected from recent acquisitions. Accordingly, the Group remains committed to its 10%+ earnings per share growth target.
Growth and Efficiency to Support Value Creation
John Brock, COO, will review the opportunities for growth in both Beverages and Confectionery.
In both markets, advantaged brands, availability and innovation will drive above-category growth. Major efficiency initiatives will support value creation.
In Beverages, Cadbury Schweppes is focused on participation in flavoured refreshment beverages with strong brands and effective routes to market in North America, Continental Europe and Australia. In the US, the combination of Dr Pepper/Seven Up (DPSU), Mott's and Snapple will consolidate the Group's position and underpin participation in the fastest growing categories of the market. Our business in Europe is centered on France and Spain with Schweppes and strong regional brands like Oasis, Trina and Gini. In Australia the acquisition of the Pepsi franchise builds on Schweppes, Solo, Sunkist and Cottee's to create a full range offering.
In Confectionery, growth will come firstly from key markets such as Great Britain, Ireland, Australia, New Zealand, Canada, South Africa and India through implementation of a total chocolate and sugar confectionery strategy. In other markets, the Group will build position by leveraging local brand strengths and through acquisition. A major drive to increase availability in the impulse channel is underway and early results from Australia are encouraging.
Efficiency initiatives will focus primarily on Confectionery where costs will be taken out of the supply chain and synergies will be sought globally. Other major initiatives to achieve lower operating costs through best practice include procurement and IT. E-commerce opportunities are also being exploited.
DPSU Third Quarter US Volume Results
DPSU continued to outperform the US soft drinks market. Adjusting the raw industry data below for the varying number of selling days per quarter, the year-to-date increases of 2% for both Dr Pepper and 7 UP were relatively consistent over all three quarters.
The US carbonated soft drinks market remained sluggish in the third quarter, following the impact of higher retail sales prices. In addition, the poor weather in this quarter, particularly in July in the North East, impacted sales levels abnormally.
BRANDS Q1 Q2 Q3 YTD
Dr Pepper +4% +1% +1% +2%
7 UP +3% +3% 0% +2%
All Others +5% +2% -1% +2%
Total DPSU +4% +2% 0% +2%
Total Market (estimated) 0% 0% -1% 0%
Trading Outlook for 2000
We are seeing positive performances in a number of markets, although the slow trading conditions seen in UK confectionery in the first half have continued into the second.
We remain comfortable with the current market expectations for full year performance.
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