TOP CONTRIBUTORS

Jonathan J. Smith

CBY AT A GLANCE

P/E ► 23.8   EV/EBITDA ► 14.7   ROA ► 3.4%   ROE ► 7.9%   Debt to Equity ► 1.53   Current Ratio ► 0.778   Interest Coverage Ratio ► 8.97

 

 

 

 

 

 

Cadbury plc (NYSE:CBY) is confectionery company that makes 7.3% of the world's chocolate (by dollar volume), 27% of the world's gum, and 7.4% of its candy.^[1]

The company's brands include Trident, Halls, and Sour Patch Kids.

CBY is less reliant on the holiday season (which includes Halloween and Christmas) than its competitors Hershey's, Mars, and Nestle. The company's sales were nearly evenly split between the first and second half of the year in 2007. Cadbury's Creme Eggs strongest sales are around easter, and Halls cough drops sell year-round.

Like its confectioner competitors, CBY suffers from rising commodities prices for ingredients such as corn, sugar, and milk. From 2006 to 2007, CBY raw material costs increased 10.9%, causing CBY operating margins to decrease from 14.4% to 13.2%.^[2] In response, management says it will reduce 15% of its manufacturing and distribution centers by 2011 and has divested its Americas Beverages segment.^[3] Management says the divestment will save CBY an estimated $66 million in 2008.^[4]

Business Financials

CBY operates in four main segments:

Britain, Ireland, Middle East and Africa (BIMA) (20% of revenue, 10% of operating profit)

The BIMA region is the largest confectionery region in terms of revenue. It mainly comprises chocolate businesses in the UK, Ireland, South Africa and Nigeria, but also includes market leading gum businesses in South Africa and Egypt.^[5]

• Britain and Ireland: Cadbury's operations in Britain and Ireland are the largest in this segment, representing around 80% of revenue. CBY has a leading 28.1% share in the UK, the world’s second largest confectionery market.^[5]

• Africa: CBY leads the African confectionery market. In South Africa, CBY has the leading confectionery market share at 31% an gum market at 57%. In Egypt, CBY has a 41% share of the confectionery market.^[5] BIMA also operates in Morocco, Lebanon, Ghana and Kenya. BIMA segment sells products under the brands Cadbury, Halls, Chiclets, Bim Bim, and Stimorol.^[6]

Europe (11% of sales, 7% of operating profit)

The Europe segment includes businesses in Western and Eastern Europe (including Russia and Turkey), excluding the UK and Ireland. It sells candy and gum, with the only significant chocolate businesses in Poland, Russia and France.^[6]

• France: CBY leads the French confectionery market– the world’s eighth largest. CBY also has a 47% share of the French gum market.^[5] In France, CBY sells gum under the Hollywood brand, candy under the La Pie Qui Chante and Carambar brands, and chocolate under the Poulain brand.^[6] In 2007, Cadbury-owned Halls was launched in France, and the brand has a 5% share of the candy market.^[5]

• Russia: CBY has a 27% share of the gum market in Russia.^[5] Gum is sold through the Dirol brand, cough drops are sold under the Halls brand, and chocolate is sold under the Cadbury brand.^[6]

• Turkey: CBY has the leading share of the candy market at 54%.^[5] Candy is sold under the brands Kent, Missbon, Olips and Jelibon. The acquisition of Intergum, the leading Turkish gum business, which completed in August 2007, has resulted in a 63% share of the Turkish gum market.^[5] Gum is sold under the Trident, First and Falim brands.^[6]

Gum is sold under the Trident brand in Spain, Portugal and Greece, and under the Stimorol and V6 brands in Switzerland, Denmark, Belgium and Sweden.^[6] Candy is sold under the Halls brand in Spain and Greece. Chocolate is sold under the Wedel brand in Poland, where CBY has a 15% market share.^[5]

Americas Confectionery (17% of revenue, 20% of operating profit)

CBY has businesses in the US, Canada, Mexico, Brazil, Argentina, Venezuela and Colombia.^[6] Approximately 54% of sales are in the US and Canada, with the remainder in Mexico and Latin America.^[5] Outside Canada, the region sells principally gum and candy. Four brands (Trident, Dentyne, Halls and the Bubbas) account for around 65% of revenue.^[5]

• United States: In the US, the world’s largest confectionery market, CBY has the second largest market share in gum (to Wrigley ) at 34% and the leading share at 56% in cough drops, through Halls.^[5] Gum is sold through brands Trident and Dentyne.^[6]

• Canada: CBY has the largest confectionery business in Canada, the world’s 11th largest confectionery market, with an overall 20% market share.^[5] CBY has leading market positions in gum, candy and cough drops and a top three position in chocolate. Chocolate is sold under the Cadbury brand, gum is sold under the Trident and Dentyne brands, and cough drops are sold under the Halls brand.^[6]

• Latin and South America: In Latin America, the Group has the leading overall confectionery market share at 18%.^[5] It has a 65% share of the Latin American gum market, and leading market shares in gum in Mexico, Brazil, Venezuela, Argentina and Colombia. It also has the second largest share of the candy confectionery market at 9%.^[6] In Mexico, CBY has a 78% share of the gum market and an 85% share of the candy market.^[5] Other brands sold in the Americas region include Chiclets, Clorets, Swedish Fish, Sour Patch Kids, Beldent, Bazooka and Mantecol.

Asia Pacific (16% of revenue, 15% of operating profit)

Asia Pacific comprises confectionery operations in Australia, New Zealand, India, Japan, Malaysia, Indonesia, Thailand and China.^[6]

• Australia and New Zealand: Australia and New Zealand are CBY's largest markets in the region.^[6] CBY leads the Australian confectionery market with a number one share in chocolate at 53%.^[5] Cadbury's main chocolate brand in Australia is Cadbury Dairy Milk and in New Zealand, brands include Cadbury Dairy Milk and Moro. CBY has a number one position in New Zealand’s confectionery market with a 47% share.^[5]

• India: Cadbury's Indian business has a leading presence in chocolate with a 71% market share, and also sells candy under the Eclairs and Halls brands, and Bournvita.^[5]

• Japan: In Japan, CBY sells mainly gum under the Recaldent and Clorets brands, and has the number two position in gum with a 20% market share.^[5]

• Thailand: CBY has leading market shares in Thailand in gum and candy at 63% and 31% respectively.^[5]

• Malaysia: In Malaysia, CBY has a number one market share in chocolate at 29%, and in gum, a number two position through the Dentyne brand with a 19% market share.^[5]

• Note: Divested Americas Beverages segment consisted of 36% of revenue and 48% of operating profit in fiscal 2007.^[7]

CBY leads the confectioners industry in total revenue and is second in market cap to Wrigley.^[8] From 2006 to 2007, CBY revenue increased 18.5%, total costs increased 33.3%, and net profit decreased 61.4%.^[9] According to the National Confectioners Association, the total U.S. candy market had $29.1 billion in retail sales in 2007 with $16.3 billion in sales for chocolate.^[10] In the past four years, CBY revenue growth (6%) has been higher than the confectioners industry revenue growth (5%).^[11]

Trends and Forces

CBY divests Americas Beverages segment to cut costs.

On October 10, 2007, Cadbury-Schweppes (CSG) divested into confectionery company Cadbury PLC (CBY) and beverage company Dr. Pepper Snapple Group, Inc. (DPS).^[12] Americas Beverages made and sold products under brand names Dr. Pepper, 7 UP, Sunkist, Snapple, Mott’s, Hawaiian Punch, Monster energy drinks, and Fiji mineral water. In 2007, Americas Beverages made up 36.1% of sales, 33.3% of total cost, and 61.7% of operating profit.^[13] From 2006 to 2007, cost to Americas Beverages increased 19.4% due to commodity costs, while sales only increased 12.2%.^[5] In that time period, confectionery costs increased 6.1%. Cadbury divested Americas Beverages due to increasing costs. Analysts estimate that the move will save CBY $66 million in 2008.^[14] From Q2 2007 to Q2 2008, Dr. Pepper-Snapple's net income decreased from $136 million to $108 million because of the divestment.^[15]

CBY makes solid gum product line, market-leading cough drops, and niche Easter products to rely less on the competitive holiday season.

Candy is in highest demand for holidays -- especially Halloween and Christmas. Consumers buy candy as gifts for holidays. Thus, confectionery companies rely on the competitive three month holiday season for most of their annual sales. While Hershey's, Mars, Nestle, and Tootsie Roll compete for places in children's Halloween bags and Christmas stockings, Cadbury makes products relevant to all four fiscal quarters. In 2007, CBY had 45.7% of sales in H1 (1/1/07 - 6/30/07) and 54.3% of sales in H2 (7/1/07 - 12/30/07).^[16] CBY produces the two most popular Easter candies -- Cadbury Creme Eggs and Milk Chocolate Eggs.^[6] In the UK, Cadbury Creme Egg is the most popular (unit sales) chocolate single between January & Easter.^[17] Also, CBY owns a leading gum brand (Trident) and leading cough drop brand (Halls). From 2006 to 2007, CBY gum sales increased 26%, boosting CBY total revenue 7%.^[18]

CBY responded to increasing corn, sugar, and milk prices by closing facilities.

Sugar and corn for corn syrup are CBY's highest volume commodities, as corn syrup and sugar are key ingredients in its products. Milk is also an ingredient in CBY products, particularly Cadbury milk chocolate. Unfortunately for all confectionery companies, corn, sugar, and milk prices have increased in the last decade. From 2006 to 2007, corn prices increased approximately 52%,^[19] milk prices increased over 50%,^[20] and sugar prices increased 20.7%.^[21] CBY raw material costs increased 10.9% from 2006 to 2007. In that time period, CBY operating margins decreased from 14.4% to 13.2%.^[22] In response, CBY management says it will close 15% of its manufacturing and distribution centers by 2011.^[23]

Competition

Confectioners

• Cadbury plc (CBY)--CBY leads the confectioners industry in total revenue.^[11]
• Tootsie Roll Industries (TR)-- TR produces the number one and number two movie theater confectioner products.^[24]
• Rocky Mountain Chocolate Factory (RMCF)-- RMCF leads the confectioners industry in operating margin (24.3%) and is second in net profit margin (15.56%) to Cosan Limited (CZZ).^[11]
• Hershey Foods (HSY)-- HSY sells chocolate products to over 90 countries.^[25]
• Wm. Wrigley Jr. Company (WWY)-- Purchased by Mars in April, WWY is first in market cap and second in total revenue in the confectioners industry.^[11]
• Imperial Sugar Company (IPSU) IPSU white, brown, and powdered sugar and molasses.^[26]
• Cosan Limited (CZZ)-- CZZ leads the confectioners industry in net profit margin.^[11]

Market Share^[1]

References

1. ↑ ^{1.0 1.1} CBY 2007 20-f, Item 4: Information on the Company, page 11
2. ↑ CBY 2007 20-f, Item 3: Key Information, page 4
3. ↑ CBY 2007 20-f, Item 5: Operating and Financial Review and Prospects, page 24
4. ↑ Cadbury Website, Press Releases, "Cadbury Schweppes Confirms Intention to Demerge Americas Beverages and Reports Strong Third Quarter in Confectionery," 10/10/07
5. ↑ ^{5.00 5.01 5.02 5.03 5.04 5.05 5.06 5.07 5.08 5.09 5.10 5.11 5.12 5.13 5.14 5.15 5.16 5.17 5.18 5.19 5.20 5.21} CBY 2007 20-f, Item 5: Operating and Financial Review and Prospects, page 23
6. ↑ ^{6.00 6.01 6.02 6.03 6.04 6.05 6.06 6.07 6.08 6.09 6.10 6.11 6.12} Cadbury 2007 Annual Report
7. ↑ CBY 2007 20-f, Item 4: Information on the Company, page 10
8. ↑ Yahoo! Finance, Confectioners, Leaders & Laggards
9. ↑ CBY 2007 20-f, Item 3: Key Information, page 2
10. ↑ TR 2007 10-k, Item 6: Selected Financial Data, page 8]
11. ↑ ^{11.0 11.1 11.2 11.3 11.4} Yahoo! Finance Confectioners Industry, Leaders & Laggards
12. ↑ Seeking Alpha, "Cadbury to Spin Off, Not Sell, U.S. Drinks Unit, 10/10/07
13. ↑ AOL Money & Finance: CBY
14. ↑ Cadbury Website, Press Releases, "Cadbury Schweppes Confirms Intention to Demerge Americas Beverages and Reports Strong Third Quarter in Confectionery," 10/10/07
15. ↑ Forbes, "Dr Pepper Snapple Posts Lower Quarterly Profit"
16. ↑ Google Finance: CBY
17. ↑ Cadbury Website, "Creme Egg"
18. ↑ CBY 2007 Annual Report
19. ↑ USDA, "Corn & Feed Grains
20. ↑ USDA, "Dairy"
21. ↑ USDA, "Sugar and Sweeteners"
22. ↑ MarketWatch: CBY, "Financials"
23. ↑ CBY 2007 20-f, Item 5: Operating and Financial Review and Prospects, page 24
24. ↑ TR 2007 Annual Report
25. ↑ "Hershey website, "Products"
26. ↑ Imperial Sugar Company website, "Products"
27. ↑ CBY 2007 20-f, Item 3: Key Information, page 2
28. ↑ TR 2007 10-k, Item 6: Selected Financial Data, page 8
29. ↑ RMCF 2007 10-k, Item 6: Selected Financial Data, page 18
30. ↑ HSY 2007 10-k, Item 6: Selected Financial Data, page 6
31. ↑ WWY 2007 10-k, Item 6: Selected Financial Data, page 12
32. ↑ IPSU 2007 10-k, Item 6: Selected Financial Data, page 20
33. ↑ CZZ 2007 Prospectus, Presentation of Financial and Other Information, page 33