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Summary Financial Statement 2005
Financial Review
Financial reviewPresentational ChangesIn common with all UK corporates, in 2005 we adopted International Financial Reporting Standards (IFRS) as endorsed by the EU. The prior year comparative information has been restated on a consistent basis. Full details of the restatement and the reconciliations to our previously published UK GAAP financial information for the year ended 2 January 2005 were included in our announcement on 19 May 2005 which can be obtained from our website, www.cadburyschweppes.com. The announcement in September of our intention to dispose of Europe Beverages and the completion of this transaction post year-end has had implications for the presentation of our financial statements. Under IFRS, Europe Beverages has been classified as a discontinued operation and consequently we are required to exclude its contribution from the Revenue, Profit from Operations, Financing and Taxation lines and include the after tax result (including any disposal costs incurred in 2005) as a single line on the face of the Income Statement. We have also re-presented the prior period on a consistent basis. However, the Cash Flow Statement continues to reflect the cash flows of the total Group, including Europe Beverages in both years. In the Balance Sheet IFRS requires the total assets and total liabilities of the discontinued operations to each be shown separately and excluded from the individual lines items of the balance sheet. However, in the Balance Sheet no re-presentation of the prior period is required and the assets and liabilities are included in the individual line items. Income Statement - Continuing OperationsRevenue at £6.5 billion was 7% higher than last year at actual exchange rates. After excluding the additional week's trading in 2004, Revenue grew by 8% at reported exchange rates and 6% at constant exchange rates. Acquisitions net of disposals had a broadly neutral effect on revenue growth. The most significant disposals to affect the year-on-year comparison were the disposal of Piasten in 2005 and the disposal of Moirs in 2004. The most significant acquisitions that affected the year-on-year comparison were the acquisition of Green & Black's in 2005 and Adams China in 2004. Underlying Profit from Operations was up 8%. At constant currency and after excluding the impact of the 53rd week, the growth was also 8%. Marketing was up 2% or £16 million to £683 million at actual exchange rates. Underlying operating margins rose by 20 basis points from 15.7% to 15.9%. After adjusting for the additional week's trading in 2004 and movements in exchange rates, Underlying Operating margins grew by 30 basis points. Central costs increased from £149 million to £156 million, principally reflecting incremental investments in innovation and capabilities, notably the Building Commercial Capabilities programme. The charge in respect of business restructuring was £72 million compared with £140 million last year, reflecting spend on Fuel for Growth initiatives. In 2005, we announced our intention to build a new green-field gum factory in Poland. Following commissioning of the factory in 2008, it is anticipated that we will reduce our gum supply requirements from Gumlink, a gum supplier in Europe and incur penalties under the terms of the supply agreement. As a result we will recognise restructuring costs in 2006 and 2007, estimated to be £10 million and £20 million respectively. Amortisation of brand intangibles of £6 million was broadly flat compared with 2004. Non-trading items resulted in a credit of £25 million reflecting principally the net profit arising from a number of business and asset disposals, notably the Holland House brands in the US and our investment in Gumlink following our decision to build a new gum facility. Fair value accounting under IAS 39 contributed a credit of £23 million to our reported results due to the difference between spot commodity prices and exchange rates compared to the hedge rates used in the underlying results. Profit from Operations excluding associates was up by 22% and 21% after allowing for exchange and the additional week in 2004. The Group's Share of Results from in Associates (net of interest and tax) at £28 million was £6 million higher than in 2004, with the increase reflecting higher profits from our US bottling associate, Dr Pepper/Seven Up Bottling Group ("DPSUBG") and the 5% increase in the Group's stake in DPSUBG acquired in June 2005. The net financing charge at £188 million was £17 million lower than the prior year. Incremental interest charges of £5 million resulting from the additional borrowing required to redeem the Group's $400 million Quarterly Income Preferred Stock ("QUIPS") in April 2005, were more than offset by a reduction in average net borrowing, the impact of exchange rates and the absence of the additional week relative to 2004. There was no net impact of IAS 39 adjustments on the net financing charge. Underlying Profit before Tax rose by 13% to £873 million and by 12% at constant exchange rates after allowing for the additional week's trading in 2004. The underlying tax rate in 2005 (excluding Europe Beverages) was 28.3% as against 25.0% in 2004. Reported Profit before Tax rose by 31% to £843 million reflecting the improved underlying performance of the business, lower restructuring costs and the favourable impact of fair value accounting under IAS 39. In 2005, we have concluded that recognition of a net deferred tax asset in the UK is now appropriate. This has resulted in a credit of £104 million to the current year tax charge which, given its size and one-off nature, has been excluded from the Group's underlying tax charge but is included in the reported tax charge of £140 million. Income Statement - Discontinued OperationsEurope Beverages Revenue was £649 million, down 1% versus 2004 or 2% at constant exchange rates. Underlying Profit from Operations of £112 million represented a 3% decline, or 4% at constant currency. The performance of the Europe Beverages business was adversely impacted during the year by a combination of weak markets in France and Spain and some distraction caused by the sale process. The net profit from Europe Beverages of £73 million consists of underlying profit from operations of £112 million, restructuring costs of £14 million, a financing cost of £1 million, tax on operating profits of £15 million and disposal costs of £9 million. We anticipate incurring a further £100 million of disposal costs in 2006. The underlying tax charge for Europe Beverages is £31 million representing a rate of approximately 27.5%. In connection with the disposal, the Group has recorded a deferred tax credit of £11 million arising on the transfer of certain Intellectual Property assets out of the Europe Beverage companies into the Continuing Group prior to disposal. This has been excluded from the underlying tax rate of Europe Beverages. We anticipate reporting a profit on disposal in 2006 of around £480 million after total tax and expenses. EarningsUnderlying Earnings per Share for the total Group (continuing and discontinued businesses) grew by 9% to 33.9 pence at constant exchange rates and excluding the 53rd week in 2004. At actual rates, growth was 10%. Basic Earnings per Share rose by 44% to 37.3 pence primarily reflecting reduced restructuring costs and recognition of the UK deferred tax asset. Cash FlowsReconciliation of Free Cash Flow
The Group generated Free Cash Flow (after dividend payments) of £404 million, an increase of £175 million compared to 2004. The improvement in Free Cash Flow reflects the increase in profits and a net working capital inflow of £37 million. Free Cash Flow attributable to the Europe Beverages business was £77 million. Capital spend was £298 million, of which £17 million was incurred by Europe Beverages and £281 million by our continuing operations. Net DebtAt 1 January 2006, the Group's Net Debt stood at £3.9 billion, broadly consistent with the prior year. The impact of free cash inflows was largely offset by the additional borrowing required for the redemption of the QUIPS and exchange rate impacts on the Group's US dollar borrowings. PensionsAt the year end, the Group's post retirement obligations amounted to £369 million, a reduction of £116 million from 2004. In the year, the fair value of the Group's post retirement liabilities has increased, principally as a result of lower discount rates. However, this has been more than offset by growth in the funds' assets following strong equity returns and higher company pension contributions. Following the recent valuations of our Group pension funds, we will be making one-off payments totalling £125 million into our defined benefit schemes. Payments of £31 million were made in 2005 and the balance will be paid in 2006. Basis of PreparationIn the discussion of our business performance we describe the year-on-year change in our financial performance. In order to highlight the underlying like-for-like performance of the business we also show the movements after allowing for the effects of exchange rates, acquisitions and disposals and the impact of the additional week's trading in 2004 relative to 2005. Over 80% of the Group's Revenues and profits in 2005 were generated outside the United Kingdom. Constant currency growth was calculated by applying the 2004 exchange rates to the 2005 reported results for the base business (excluding acquisitions). The contribution from acquisitions during the period equates to the first twelve month's impact of businesses acquired in the current and prior year. Once an acquisition has lapped its acquisition date then it is included within the base business results. For disposals, the prior year base is adjusted to remove the contribution earned for the period that we did not own the business in the current year. In 2005, Cadbury Schweppes' financial year consisted of 52 weeks. In 2004, Cadbury Schweppes had an additional week's trading: the statutory results for 2004 were for the 53 weeks to 2 January 2005. The extra week in 2004 resulted in additional turnover and profit from operations compared to 2005. In 2004, it was not possible to quantify the exact profit impact of the 53rd week and in determining the impact on the prior year, management had to exercise judgment. The estimated impact of the additional week's trading in 2004 is set out below. Revenue
Underlying Profit from Operations
In 2005, the Group introduced an improved allocation methodology for certain shared costs. The 2004 segmental analysis has been restated on a consistent basis. |
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