3 Profit from operations
(a) Employee benefit costs
|Wages and salaries||2,099||1,880|
|Social security costs||245||225|
|Other pension and retirement benefit costs (note 12)||119||137|
|Share-based payments (note 27)||87||75|
(b) Depreciation, amortisation and impairment costs
|Intangibles||– amortisation of trademarks (note 3(f))||62||58|
|– amortisation of other intangibles||66||67|
|Property, plant and equipment||– depreciation||376||379|
Impairment of goodwill and trademarks is as explained in note 3(g). Impairment in respect of other intangibles and property, plant and equipment are shown as part of restructuring costs (see note 3(e)).
(c) Other operating income
This represents income arising from the Group’s activities which falls outside the definition of revenue and includes gains on disposal of trademarks as well as property disposals, service fees and other shared costs charged to third parties, manufacturing fees and trademark income.
(d) Other operating expenses include:
|Research and development expenses (excluding employee benefit costs and depreciation)||55||51|
|Rent of plant and equipment (operating leases)|
|– minimum lease payments||39||37|
|– contingent rents||2|
|– sublease payments||1||3|
|Rent of property (operating leases)|
|– minimum lease payments||84||83|
|– contingent rents||1||1|
|– sublease payments||2||3|
|Fees payable for audit services pursuant to legislation:|
|– fees payable to PricewaterhouseCoopers LLP for Parent Company and Group audit||1.8||1.7|
|– fees payable to other PricewaterhouseCoopers firms and associates for local statutory and Group reporting audits||7.9||8.6|
|Audit fees payable to PricewaterhouseCoopers firms and associates||9.7||10.3|
|Audit fees payable to other firms||0.4||0.5|
|Total audit fees payable||10.1||10.8|
|Fees payable to PricewaterhouseCoopers firms and associates for other services:|
|– other services pursuant to statutory legislation||0.2||0.2|
|– tax advisory services||5.6||4.3|
|– tax compliance||1.0||1.2|
|– services relating to information technology||2.1||1.2|
|– other non-audit services||0.5||0.9|
The total fees payable to PricewaterhouseCoopers firms and associates included above are £19.1 million (2009: £18.1 million).
Total research and development costs including employee benefit costs and depreciation were £117 million (2009: £112 million).
As a result of restrictions on accessing foreign exchange at the official exchange rate in Uzbekistan, the Group has revalued monetary items, mostly comprising foreign currency payables, in its subsidiary in Uzbekistan at a more conservative rate. This rate represents the rate at which management expects to settle these items and has resulted in the recognition of net exchange losses of £38 million. These are included in exchange differences of £62 million within other operating expenses in 2010.
(e) Restructuring and integration costs
Restructuring costs reflect the costs incurred as a result of initiatives to improve the effectiveness and the efficiency of the Group as a globally integrated enterprise. These initiatives include a review of the Group’s manufacturing operations, overheads and indirect costs, organisational structure and systems and software used. The costs of these initiatives together with the costs of integrating acquired businesses into existing operations, are included in profit from operations under the following headings:
|Employee benefit costs||163||143|
|Depreciation, amortisation and impairment costs||100||107|
|Other operating expenses||68||61|
|Other operating income||(20)||(7)|
Restructuring and integration costs in 2010 principally relate to: the continuation of factory closure and downsizing activities in Denmark and Australia respectively; the closure of the Jawornik factory in Poland, the Tire factory in Turkey and the Lecce factory in Italy. The costs also cover a voluntary separation scheme and closure of the printing unit in Argentina and the continued integration of Bentoel into existing operations; as well as other restructuring initiatives directly related to improving the efficiency and effectiveness of the Group as a globally integrated enterprise. These include the combining of the Group’s businesses in Belgium, Luxembourg and the Netherlands and charges for bringing employee benefit costs in the Group’s subsidiary in Canada in line with the Group’s global practices. In addition, the Group has recognised impairment charges as a result of the continued review of its software assets in light of the development of global software solutions.
Restructuring and integration costs in 2010 also include a payment of US$21 million to Reynolds American relating to the early termination and settlement of all disputes at issue in respect of the Contract Manufacturing Agreement dated 30 July 2004, as explained in note 29.
Restructuring and integration costs in 2009 principally relate to: costs in respect of the planned closure of the Soeborg factory in Denmark; the planned downsizing of the manufacturing plant in Australia; the continued integration of ST, Tekel and Bentoel with existing operations; as well as other restructuring initiatives directly related to improving the efficiency and effectiveness of the Group as a globally integrated enterprise. The costs for these other initiatives include redundancies, principally in respect of restructuring activities in the Group’s subsidiary in Canada, and impairment charges for certain software assets where the development of global software solutions has resulted in these assets having minimal or limited future economic benefits.
Other operating income in 2010 includes gains from sale of surplus land and buildings in Turkey and Croatia as well as the release of deferred income from a disposal in 2007. In 2009, other operating income also includes gains on property disposals and the release of deferred income from a disposal in 2007.
(f) Amortisation of trademarks
The acquisitions of Bentoel, Tekel and ST resulted in the capitalisation of trademarks which are amortised over their expected useful lives, which do not exceed 20 years. The amortisation charge of £62 million (2009: £58 million) is included in depreciation, amortisation and impairment costs in profit from operations.
(g) Impairment of goodwill and trademarks
Goodwill and trademarks recognised as a result of the Tekel acquisition in 2008 have been impaired by £249 million and £44 million respectively. Although cost saving initiatives in the acquisition plan have been delivered successfully, the impairment charge arises from intense pricing competition in 2010 following unforeseen and significant excise increases in Turkey in 2009 and further increases effective from January 2010 which resulted in the growth of illicit trade and a loss of volumes and market share. The basis for determining the deterioration in the recoverable amounts of the trademarks and goodwill is explained in note 9.
(h) Gains on disposal of businesses and trademarks
The acquisition of the cigarette and snus businesses of Skandinavisk Tobakskompagni (ST) in 2008 was subject to regulatory approval which was received on the condition that the Group divest a small number of local trademarks, primarily in Norway. The disposal of the trademarks was dealt with in two packages, with the first package sold and completed in February 2009. In March 2009, contracts were exchanged in respect of the second package with completion in May 2009. The total proceeds from the two packages resulted in a gain of £2 million which is included in other operating income in profit from operations for the year ended 31 December 2009.