14 Oct 2008 - Cadbury is today releasing its Interim Management Statement covering trading for the third quarter ending 30 September 2008, organisation changes and an update on cost reduction programmes.
HIGHLIGHTS
Good third quarter revenue performance:
+6% despite cycling strong prior year Continued double digit growth in emerging markets:
+13% Streamlined organisation to accelerate decision making and improve execution New Vision into Action cost reduction initiatives announced Outlook for the year unchanged from guidance in JulyNote:
All comments on revenue growth are on a like-for-like basis at constant exchange rates.
Todd Stitzer, Chief Executive Officer, said: “The good third quarter performance was in line with our expectations. Our new streamlined organisation, together with additional cost reduction initiatives, will increase the focus on implementing our strategic plans and underpin delivery of our margin targets. Despite weaker economic conditions, we expect strong profit growth for the year and reconfirm the revenue and margin guidance we gave in July.”
ORGANISATION CHANGES
We are today announcing important changes to our organisation and management structure which will strengthen our focus on globally led categories and further streamline the organisation. Our four region operational structure will be eliminated, leaving seven business units (listed in Appendix A) which will report directly to Todd Stitzer, CEO. At the same time, we are strengthening our global chocolate, gum and candy category structure, further increasing our focus on category development.
Overall, these changes remove our current regional structure, de-layer the organisation and further reduce SG&A costs. They will enable faster decision making, improve in-market execution and ensure a stronger alignment of category strategies and commercial programmes.
As a result of these and related changes, approximately 250 people will leave the business including a number of senior managers. We expect these changes to underpin delivery of our Vision into Action margin goal. The cost of this programme will be funded from the total restructuring programme announced in June 2007.
VISION INTO ACTION COST REDUCTION INITIATIVES
In June 2007, we presented the Group’s VIA strategy which included a significant increase in our margins to mid-teens by 2011. Part of achieving this goal included investing around £650m, including £200m of capital expenditure, to drive a major reduction in SG&A and supply chain costs, the benefits of which would be progressively realised over the period to 2011.
As part of this continuing programme of management action, we are today announcing three further restructuring measures within our operations:
Reconfiguration of chocolate manufacturing in Australia and New Zealand
Following a review of the confectionery supply chains in Australia and New Zealand, we have started a major programme of plant optimisation and supply chain reconfiguration to simplify our manufacturing activities, creating centres focusing on key technologies. As part of the programme, we expect to reduce SKUs by around 30% and see an incremental improvement in customer service. Around 330 positions will be removed over the next two years.Further centralisation of European operations
We are proposing to establish a single, state-of-the-art science & technology centre of excellence in Europe focusing on gum and candy. Based in Switzerland, it would consolidate three separate facilities and builds on the centralisation of commercial and supply chain management for Europe in Switzerland which has been largely put in place during 2008.
Outsourcing of global facilities management
We have reached agreement with a global partner to progressively provide facilities management and related services to Cadbury. Subject to consultation, this will likely result in the transfer of a significant number of existing roles and third party contracts over the coming years.These initiatives are within the scope of the VIA programme already announced and are part of the performance improvement targets set out in 2007. Taken together, projects which will deliver around 60% of the total planned cost savings have been announced to date.
THIRD QUARTER TRADING UPDATE
In line with the new organisation set out above, a new reporting structure will be introduced in 2009. A re-presentation to the new reporting units will be provided at the time of the 2008 final results. All comments on revenue growth are on a like-for-like basis at constant exchange rates.
Overall, the Group delivered a good performance in the third quarter following a strong first half. Revenue growth in the quarter was 6%, bringing year-to-date growth in revenues to 7%. Performance benefited from an excellent quarter in our business in Britain and continued double-digit growth in emerging markets. All categories made good progress supported by sustained marketing and promotional investments.
In Britain, Ireland, the Middle East and Africa (BIMA), revenues grew by 10% despite lapping strong prior year comparatives. This reflected strong performances from both our developed market operations in Britain and emerging markets, particularly in South Africa where revenue growth was 22%. In Britain, growth of 11% benefited from a significant recovery in candy, which in the same quarter last year was adversely impacted by floods at our factory in Sheffield, a strong innovation programme supported by further increases in marketing and a focus on strengthening our core products. Key product launches included the new range of Cadbury Dairy Milk bars - Cranberry & Granola and Apricot Crumble - and the re-launch of Wispa.
In Europe, revenues were 4% ahead in the quarter. Overall, our gum portfolio performed well in difficult market conditions, driven by market share gains in France, Northern Europe and Russia. Integration of the recent Intergum acquisition in Turkey has progressed well with major changes in route to market activities now starting to benefit market share and revenue trends. The overall rate of growth in Europe was held back by the market slow-down in France, Spain and Northern Europe and the near term impact of route to market changes in Russia.
In the Americas, revenues were ahead 7% in the quarter, reflecting good growth in South America and the US, partly offset by a weaker performance in Canada. In the US, our candy business, driven by Swedish Fish and Sour Patch Kids, performed well. Compared to recent trends, the US gum market grew more slowly in the quarter. We sustained a strong market share and in late September we announced an 8% increase in US gum prices, which will be implemented through the fourth quarter. Growth in our emerging market businesses in Latin and South America remained strong, particularly in Brazil where the business delivered strong revenue growth in good market conditions.
In Asia Pacific, revenues were 2% ahead in the quarter, with continued growth in confectionery, up 5%, partly offset by a weaker quarter in our Australian beverage business where revenues were 5% lower. Confectionery growth was very good across our key Asian emerging market businesses which had a strong quarter, with revenues up 19%. In particular, India and South East Asia delivered strong double-digit increases in revenues on the back of continued market growth, new product launches, including new variants of Bubbaloo, and promotional activities. In Australia, confectionery revenue was impacted by year-on-year changes in promotional phasing and frequency and some trade de-stocking.
Update on Financial Position
Over 80% of our revenues and underlying profit from operations are generated outside the United Kingdom. In 2008, movements in exchange rates, and in particular the weakening of the pound versus the US dollar, Australian dollar and the euro, are expected to increase revenues by around 7% and underlying profit from operations by around 12%.
Our projected interest rate for the year as a whole is unchanged at around 6%. In July, we completed a successful 10 year sterling bond issue (£350m at 7.25%) and in early October, we redeemed a 5 year US dollar bond ($1bn at 3.875%) issued at the time of the Adams acquisition. At this time, around 65% of our borrowings are at fixed rates, reflecting recent issuances and redemptions.
Other than as disclosed in this release, there have been no other material changes to the financial position of the Group.
SUMMARY
During 2008, considerable progress has already been made implementing the VIA programme. The further restructuring activities and organisation changes announced today underpin Cadbury’s focus on organic growth and margin improvement.
Commodity prices remain in line with our expectations. Overall commodity cost inflation during 2008 is expected to remain between 5-6%. So far in 2008, price realisation has remained strong and is expected to recover overall input cost increases for the year despite higher inflation in the second half.
We continue to expect further cost pressures in 2009, particularly in respect of cocoa costs. At this early stage, our 2009 commodity and input costs are expected to be in the range of 6 to 8% higher than 2008. Consequently, we are in the process of implementing price increases in most of our major markets to cover the impact of these future cost rises.
We are in a period of unprecedented global financial turmoil and it is not possible to gauge with certainty what effect the most recent market turbulence may have on both trade customer and consumer behaviour. However, despite these increased headwinds we participate in a resilient category with a strong business model and continue to expect a successful outcome for the year with guidance on revenue and margin unchanged from the Interim Results in July.
APPENDIX A – REPORTING STRUCTURE 2009 ONWARDS
In line with the new structure set out in today’s statement, a new reporting structure will be introduced in 2009. A re-presentation to the new reporting units will be provided at the time of the 2008 final results.
From 2009 the Group will report its results across seven Business Units:
2008 Regions 2009 Business Units
BIMA B&I (Britain and Ireland)
MEA (Middle East and Africa)
AMERICAS NA (North America inc Mexico)
SA (South America)
EUROPE EUROPE (including Russia and Turkey)
ASIA PACIFIC ASIA (China, India, Pakistan and South East Asia)
PACIFIC (Australia, NZ and Japan)