bat plc annual report 2007 - Notes on the accounts: Notes 2-4

 
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Annual Report and Accounts 2007

2 Segmental Analyses

Segmental analyses of revenue, profit, assets and liabilities for the year ended 31 December:
 EuropeAsia-PacificLatin AmericaAfrica and Middle EastAmerica-PacificEliminationConsolidated
 2007
 
 £m
2006
 
 £m
2007
 
 £m
2006
 
 £m
2007
 
 £m
2006
 restated
 £m
2007
 
 £m
2006
 
 £m
2007
 
 £m
2006
 restated
 £m
2007
 
 £m
2006
 
 £m
2007
 
 £m
2006
 
 £m
Revenue              
External sales3,621 3,495 1,874 1,755 1,979 1,780 1,224 1,063 473 760   9,171 8,853
Inter-segment sales225 526 22 27 585 332 15 24     847 909
Revenue3,846 4,021 1,896 1,782 2,564 2,112 1,239 1,087 473 760   10,018 9,762
Results              
Segment result before restructuring costs and net gains / (losses) on disposal of businesses and brands842 781 672 616 680 611 470 468 446 424   3,110 2,900
Restructuring costs (116) (132) (5) (7)   (42) (24) (10) (53)   (173) (216)
Net gains/(losses) on disposal of businesses and brands56 27     19   14   75 41
Segmental result782 676 667 609 680 611 447 444 436 385   3,012 2,725
Unallocated costs             (107) (103)
Profit from operations            2,905 2,622
Net finance costs             (269) (289)
Share of post-tax results of associates and joint ventures            442 431
Profit on ordinary activities before taxation            3,078 2,764
Taxation on ordinary activities             (791) (716)
Profit for the year            2,287 2,048
Attributable to:              
Shareholders’ equity            2,130 1,896
Minority interests            157 152
Unallocated costs represent net corporate costs not directly attributable to individual segments.              
Other segment items              
Capital expenditure245 232 70 59 110 102 72 69 32 51   529 513
Depreciation and amortisation138 126 45 48 63 64 37 39 31 35   314 312
Impairment, accelerated depreciation and amounts written off4 49 3    11 3 4 37   22 89
Assets              
Segment assets before goodwill2,586 2,653 1,047 1,056 1,305 1,191 897 1,004 459 560 (412) (439)5,882 6,025
Goodwill3,508 3,295 1,329 1,244 188 186 815 803 2,102 1,822   7,942 7,350
Segment assets including goodwill (note 2b)6,094 5,948 2,376 2,300 1,493 1,377 1,712 1,807 2,561 2,382 (412) (439)13,824 13,375
Investments in associates and joint ventures203 203 508 394 3 2 11 10 1,544 1,499   2,269 2,108
Assets classified as held for sale5  27  1  1  2    36  
Unallocated assets            2,599 2,293
Total assets (Group balance sheet)            18,728 17,776
Liabilities              
Segment liabilities (note 2c)1,846 1,797 526 532 678 564 584 546 568 580 (657) (625)3,545 3,394
Liabilities directly associated with assets classified as held for sale  2          2  
Unallocated liabilities            8,083 7,694
Total liabilities (Group balance sheet)            11,630 11,088

The restructuring costs and net gains/(losses) on disposal of businesses and brands are explained in note 3(e) and note 3(f).

The 2006 analysis of revenue above has been restated to reflect changes in manufacturing operations.

Segment assets and segment liabilities include inter-company balances with entities reported as corporate liabilities and corporate assets in note 2(b) and note 2(c).

a) Segment revenue

The segmental analysis of revenue is based on location of manufacture. Figures based on external sales by subsidiaries in each segment are as follows:

 2007
£m
2006
£m
Europe3,655 3,545
Asia-Pacific1,876 1,839
Latin America1,983 1,791
Africa and Middle East1,445 1,489
America-Pacific1,059 1,098
Segment revenue (Segmental analyses)10,018 9,762
b) Segment assets
 2007
£m
2006
£m
Total assets (Group balance sheet)18,728 17,776
Less  
– investments in associates and joint ventures2,269 2,108
– available-for-sale investments (Note 15)97 152
– deferred tax assets262 273
– interest receivable (Note 14)11 1
– income tax receivable85 59
– dividends receivable from associates (Note 14)53 48
– derivatives in respect of net debt (Note 16)188 125
– loans77 85
– interest bearing cash and cash equivalents1,063 972
– assets classified as held for sale36  
– corporate assets763 578
Segment assets (Segmental analyses)13,824 13,375
c) Segment liabilities
 2007
£m
2006
£m
Total current and non-current liabilities (Group balance sheet)11,630 11,088
Less  
– borrowings (Note 21)6,923 6,626
– deferred tax liabilities294 296
– derivatives in respect of net debt (Note 16)179 79
– dividends payable5 4
– income tax payable227 292
– interest payable (Note 23)4 12
– liabilities directly associated with assets classified as held for sale2  
– corporate liabilities451 385
Segment liabilities (Segmental analyses)3,545 3,394
d) Segmental analysis of the Group's share of the revenue and post-tax results of associates and joint ventures

External revenue

 2007
£m
2006
£m
Europe763 771
Asia-Pacific547 456
Latin America1 1
Africa and Middle East9 20
America-Pacific1,888 1,942
 3,208 3,190

Post-tax results

 Segment resultAdjusted
segment result*
 2007
£m
2006
£m
2007
£m
2006
£m
Europe48 46 48 46
Asia-Pacific110 92 110 92
Latin America1  1  
Africa and Middle East1 4 1 4
America-Pacific282 289 289 285
 442 431 449 427

*Excluding brand impairments and exceptional tax credits (Note 5)

3 Profit from operations

a) Employee benefit costs
 2007
£m
2006
£m
Wages and salaries1,301 1,233
Social security costs164 159
Other pension and retirement benefit costs (Note 12)60 112
Share-based payments (Note 27)61 50
 1,586 1,554
b) Depreciation and amortisation costs
 2007
£m
2006
£m
Intangibles including goodwill  
– amortisation 37 34
– amounts written off 6  
Property, plant and equipment  
– depreciation277 278
– impairment and accelerated depreciation 16 89
 336 401

Impairment and accelerated depreciation in respect of property, plant and equipment arose in relation to the restructuring costs (see note (e) below) and, for 2006, in respect of the impairment of a business (see note (f) below). Goodwill arising on the acquisition of minority interests in Africa and Middle East in 2007 has been expensed as part of restructuring costs of that region.

c) Other operating income

This represents income arising from the Group’s activities which falls outside the definition of revenue and includes gains on the disposal of businesses and brands, property disposals, service fees and other shared costs charged to third parties, manufacturing fees and trademark income.

d) Other operating expenses include:
 2007
£m
2006
£m
Research and development expenses (excluding employee benefit costs and depreciation)43 36
Exchange differences(18)7
Rent of plant and equipment (operating leases)  
– minimum lease payments25 25
– contingent rents2 1
Rent of property (operating leases)  
– minimum lease payments64 61
– sublease payments2 2
Fees payable for audit services pursuant to legislation:  
– fees payable to PricewaterhouseCoopers LLP for parent company and Group audit1.5 1.3
– fees payable to other PricewaterhouseCoopers firms and associates for local statutory  
and Group reporting audits6.7 6.1
Audit fees payable to PricewaterhouseCoopers firms and associates8.2 7.4
Audit fees payable to other firms0.5 0.6
Total audit fees payable8.7 8.0
Fees payable to PricewaterhouseCoopers firms and associates for other services:  
– other services pursuant to statutory legislation0.3 0.2
– tax advisory services3.7 4.3
– tax compliance0.5 0.4
– services relating to information technology0.3 0.1
– other non-audit services0.8 0.3
 5.6 5.3

The total fees payable to PricewaterhouseCoopers firms and associates included above are £13.8 million (2006: £12.7 million).

Total research and development costs including employee benefit costs and depreciation were £91 million (2006: £76 million).

e) Restructuring costs

These were the costs incurred as a result of a review of the Group’s manufacturing operations and organisational structure, including the initiative to reduce overheads and indirect costs, and are included in the profit from operations under the following headings:

 2007
£m
2006
£m
Employee benefit costs84 100
Depreciation and amortisation costs22 74
Other operating expenses73 62
Other operating income(6)(20)
 173 216

Restructuring costs in 2007 principally relate to costs associated with restructuring the operations in Italy and with the reorganisation of the business across the Europe and Africa and Middle East regions, as well as further costs related to restructurings announced in prior years. The restructuring costs in 2006 principally relate to manufacturing rationalisation in the Netherlands, with further costs for the earlier restructurings in the UK and in Canada.

Other operating income relates to gains on property disposals arising from the restructuring exercises.

f) Net gains/(losses) on disposal of businesses and brands

On 10 March 2006, the Group’s Italian subsidiary signed an agreement to sell its cigar business, Toscano, to Maccaferri for €95 million. The sale was subject to regulatory and governmental approval and was completed on 19 July 2006. The sale resulted in the recognition of a loss of £19 million, reflecting an impairment charge of £15 million included in depreciation and amortisation costs in the profit from operations and £4 million of other costs included in other operating expenses in the profit from operations.

On 29 November 2006, the Group completed a trademark transfer agreement with Philip Morris International. Under this arrangement the Group sold its Muratti Ambassador brand in certain markets, as well as the L&M and Chesterfield trademarks in Hong Kong and Macao, while acquiring the Benson & Hedges trademark in certain African countries. These transactions resulted in a gain of £60 million included in other operating income in the profit from operations.

On 20 February 2007, the Group announced that it had agreed to sell its pipe tobacco trademarks to the Danish company, Orlik Tobacco Company A/S, for €24 million. The sale was completed during the second quarter and resulted in a gain of £11 million included in other operating income in the profit from operations. However, the Group has retained the Dunhill and Captain Black pipe tobacco brands.

On 23 May 2007, the Group announced that it had agreed to sell its Belgian cigar factory and associated brands to the cigars division of Skandinavisk Tobakskompagni AS. The sale includes a factory in Leuven as well as trademarks including Corps Diplomatique, Schimmelpennick, Don Pablo and Mercator. The transaction was completed on 3 September 2007 and a gain on disposal of £45 million is included in other operating income in the profit from operations.

On 1 October 2007, the Group agreed the termination of its license agreement with Philip Morris for the rights to the Chesterfield trademark in a number of countries in Southern Africa. This transaction resulted in a gain of £19 million included in other operating income in the profit from operations.

4 Net finance costs

 20072006
 £m£m£m£m
Finance costs    
– interest payable 382  410
– fair value changes 143  (212)
– exchange differences (120) 197
– loss on net monetary position   4
  405  399
Finance income    
– interest and dividend income (111) (122)
– exchange differences (25) 12
  (136) (110)
Net finance costs 269  289
Net finance costs comprise:    
Interest payable    
– bank borrowings67  94  
– finance leases3  3  
– other312  313  
  382  410
Interest receivable(109) (120) 
Dividend income(2) (2) 
  (111) (122)
Fair value changes     
– cash flow hedges transferred from equity(26) 4  
– fair value changes on hedged items(6) (113) 
– fair value hedges(14) 39  
– ineffective portion of fair value hedges8  2  
– instruments not designated as hedges181  (144) 
 143  (212) 
Exchange differences(145) 209  
Loss on net monetary position  4  
  (2) 1
  269  289

Other interest payable includes interest on the bonds and notes detailed in note 21.

Included within the interest receivable above is £3 million (2006: £6 million) in respect of available-for-sale investments. Included within dividend income above is £1 million (2006: £2 million) in respect of available-for-sale investments.

Included within exchange differences above is a loss of £35 million (2006: £71 million loss) in respect of items subject to fair value hedges.

© British American Tobacco