Annual Report and Accounts 2006

Deliver annual contract

Our goal is to deliver superior returns to our shareowners by delivering superior business performance. We measure shareowner returns by looking at the total return on our shares, or TSR (share price growth plus the value of reinvested dividends).

Following strong performances in 2004 and 2005, our 2006 return was 4%, below the average of 11% for our peer group, primarily because of three factors: the slow start to the year, the impact of the product recall in the UK and the significant overstatement of Cadbury Nigeria's financial position uncovered in November. Nevertheless, over the 2004-2006 period, our return was 63%, above the peer group average of 50%.

Peer group average TSR performance (%) 2004-2006

Our first priority in 2006 was to deliver our annual contract. We measured this against the financial goal ranges which we set in 2003. These were (all on a constant currency basis):

• To grow revenues on a like-for-like basis by 3-5% every year (excluding acquisitions and disposals)
• To improve Underlying operating margins by 50 to 75 basis points each year
• To generate Free Cash Flow of £1.5 billion over the period 2004-2007

The table below shows our performance in 2004-2006 against these financial goal ranges:

2004-2006 Financial performance against our goal ranges

	Goal ranges	(52 weeks)
	2004-07	2004	2005	2006
Revenue growth	3-5% p.a.	5%*	6%*	4%*
Margin growth	50-75bps p.a.	+50bps	+30bps	0bps
Free Cash Flow generation#	£1.5bn over 4 years	£265m	£450m	£242m

* excluding Europe Beverages.
# at 2003 exchange rates.

In 2006, we grew like-for-like revenues by 4%. Three of our four regions, Americas Beverages, Americas Confectionery and Asia Pacific, continued to grow strongly. Our confectionery and beverages businesses both contributed equally to this growth, and we grew our emerging market businesses by 10%, the third successive year of double digit growth. Acquisitions net of disposals added a further £800 million, or 12%, to our revenues.

While we did not achieve our margin goal, we maintained our Underlying margins at 15.9% (excluding acquisitions, disposals and exchange), with cost savings offsetting our third consecutive year of significant input cost increases, and enabling us to once again grow our investment in growth and capabilities.

Acquisitions and disposals (primarily the bottling acquisitions in the US and the move to majority ownership in Nigeria) diluted our operating margins by 140 basis points. We estimate that the impact of the UK product recall on the Group's revenues and Underlying profit from operations in 2006 was £30-£35 million and £5-£10 million respectively.

Our Free Cash Flow for the year was £200m, down from £400m in 2005. Cash flow was significantly impacted by the one-off items in respect of the UK recall, financial overstatement in Nigeria and the acquisition of CSBG which amounted to around £100m. Excluding these items, our Underlying Free Cash Flow would have been around £300m. Other factors impacting our Free Cash Flow in 2006 were higher capital spend and an increase in cash tax payable reflecting accelerated tax payments in several countries.

We continued to strengthen our ability to deliver long-term sustainable growth through investments in growth initiatives, such as brand marketing and capabilities. We spent £35 million more on these areas in 2006 than in 2005, having increased our spend in 2005 by £56 million.

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Execute Fuel for Growth and focus on Free Cash Flow

Our Fuel for Growth programme once again delivered cost savings in line with expectations, with £90 million of savings made in 2006. This brings total cost savings from the programme since it began in the middle of 2003 to £270 million. We have reinvested a proportion of these in our businesses, as we committed to do when we launched the programme in 2003.

Delivering Fuel for Growth

	2003	2004	2005	2006
Factories closed/sold	6	3	6	16
Headcount reduced	1,000	1,100	1,900	1,600
Gross cost savings	£20m	£70m	£90m	£90m

In 2006, our acquisition and disposals activity was mainly in our beverages businesses, where we exited our less advantaged businesses and significantly strengthened our US business. We also made acquisitions in emerging markets confectionery businesses. These investments are discussed under our confectionery and beverages goals (Goals 2 and 3 respectively).

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