The Group's trading performance was strong, with a significant improvement in operating margin and an increase in confectionery revenues of 15% to £5.4bn. Excluding the benefit of foreign exchange, base business revenue growth was 7%, representing organic growth above the top end of our 4%–6% goal range.
Throughout the year, we took effective measures to protect and expand our profit margins. We increased our prices to offset the rise in input costs and streamlined our cost base, mainly through reductions in sales, general and administration costs and in central overheads. As a result, combined with the good revenue growth, we significantly increased our profits. Our underlying operating margin increased from 10.1% in 2007 to 11.9% in 2008. Excluding the gain from foreign exchange, the improvement in margin was 150 bps.
I believe this is a strong performance and shows good progress on our four year Vision into Action (VIA) strategic plan which includes achieving mid-teens margins by 2011.
Despite our own change programmes and the unprecedented turmoil in financial markets, our teams around the world worked diligently to implement our business plan. I would like to thank all of them for their commitment, enthusiasm and focus on the job at hand and for making 2008 a successful year for Cadbury.
Strategy
Your Chief Executive, Todd Stitzer, explains our strategy at length in the next section, but I would like to briefly discuss the transformation of Cadbury into a focused confectionery company.
Cadbury plc started trading in May 2008 when we completed the successful demerger of the Americas Beverages business. The final steps towards becoming a pure-play confectionery business were announced in December 2008 with an agreement to sell Schweppes Australia, our last remaining beverages business, subject to certain conditions. Your Board is convinced that the focus gained by the separation, combined with the power of our brands in both developed and emerging markets, is already enhancing the prospects of the business. It is encouraging how quickly we adapted to being a focused confectionery company, and the enthusiasm with which this change has been embraced.
Board changes
The focus on confectionery necessitated changes to our Board to align the skills and experiences of our Non-Executive Directors with the new business model. This impetus, coupled with the retirement of a number of members, has led to a number of new faces at Board level.
Sir John Sunderland retired after forty years of service at Cadbury, culminating in his position as Chairman for the last five years. I would like to take this opportunity to once again thank John for his outstanding contribution and leadership.
David Thompson, a Non-Executive Director of the Company since 1998, retired from the Board and as Chair of the Audit Committee in March 2008. Sanjiv Ahuja and Ellen Marram, independent Non-Executive Directors since 2006 and 2007, respectively, also retired from the Board in September. The Board thanks David, Sanjiv and Ellen for their valuable contribution and assistance in overseeing the completion of the demerger prior to stepping down.
In October, Baroness Hogg joined the Board as a Non-Executive Director and brings a wealth of corporate experience and expertise to Cadbury. In November, we appointed Colin Day as a Non-Executive Director. Colin, an experienced FTSE 100 and consumer goods Chief Financial Officer with Reckitt Benckiser, joined the Board in December and will assume the role of Chairman of the Audit Committee with effect from April 2009. I know that both Sarah and Colin will make substantial contributions to Cadbury’s development in the forthcoming years and I look forward to working with them
After five years with Cadbury, Ken Hanna has decided to retire and will step down from the Board in April 2009. Ken played a central role as we made major changes to the structure of the business, both from an operations and a portfolio perspective. The Board would like to thank Ken for his dedication to Cadbury, and wishes him success in his future endeavours.
In December, we announced the appointment of Andrew Bonfield as Ken’s successor. Andrew, who has been a public company CFO for ten years, both in the UK and the US, joined Cadbury in February 2009 and will assume his role as Chief Financial Officer and Executive Director in April.
Bob Stack retired from the Board at the end of 2008 after 18 years with Cadbury. The Board thanks Bob for his significant contribution, particularly his help building a management team that will provide strong leadership in the future
Corporate Responsibility and Sustainability
Corporate responsibility has been integral to our business for nearly 200 years. In recent years our approach has developed from an attitude of responsibility to one of sustainable business practices.
This is demonstrated in the fact that our sustainability commitments are now integrated in our Vision into Action business plan and are executed with greater vigour and discipline. Our corporate mantra of ‘fewer, faster, bigger, better’ is applied to our CSR practices, helping concentrate our efforts on leading-edge programmes such as ‘Purple Goes Green’, the ‘Cadbury Cocoa Partnership’ and our ‘Be Treatwise’ responsible consumption initiative.
Your Board knows that developing sustainable business practices is critical to the long-term strength of our business. This has resulted in clearer goals and roadmaps, the details of which you can see in the CSR section of this report. In addition, this year we have expanded our CSR report and taken it online to enable a richer discussion with a wider audience.
Dividends
The Board is proposing a final dividend of 11.1p, bringing the total dividend for the year to 16.4p, an increase of 6% on 2007. While the increase is in line with our progressive dividend policy, the pay-out ratio is somewhat ahead of our medium-term target of
40–50%.
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Looking forward
Today, all companies are facing the most uncertain global economic outlook we have seen for many years. Consumer spending is under pressure, unemployment is increasing and the rate of growth is slowing in emerging markets. For Cadbury there are the additional issues of high cocoa prices and the challenges of increased competitor concentration.
On the other hand, the business model we have created has an enviable global footprint, powerful and respected brands, talented and passionate management and a history of resilience in economic downturns. We also have a strong balance sheet and secure financing.
In the months ahead, management will continue to build on these strengths, aggressively manage costs, sustain marketing spend and sharpen our competitive edge.
Despite the difficult and uncertain economic circumstances, we remain committed to making further progress towards our Vision into Action targets for revenue growth and margin improvement. Todd will talk more about this in our Strategic Review.
I believe our people are energised by the challenges ahead and comforted by the fact that our strategy is clearly defined and widely understood. As a result, while trading conditions will not be easy, we are confident that 2009 will be another year of progress for Cadbury plc.
A full outlook statement is included in the Strategic Review
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