directors report and accounts 2006 - Notes 2-5

 
 

 Notes 2-5

2 Segmental analyses

Segmental analyses of revenue, profit, assets and liabilities for the year ended 31 December.

 a) Segment review

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

 2006
£m
2005
£m
Europe3,5453,497
Asia-Pacific1,8391,758
Latin America1,7911,555
Africa and Middle East1,4891,405
America-Pacific1,0981,110
Segment revenue (Segmental analyses)9,7629,325

  b) Segment assets
 2006
£m
2005
restated
£m
Total assets (Group balance sheet)17,77619,051
Less  
- investments in associates and joint ventures2,1082,193
- available-for-sale investments (note 15)152123
- deferred tax assets273290
- interest receivable (note 14)11
- income tax receivable5981
- dividends receivable from associates (note 14)4845
- derivatives in respect of net debt (note 16)125133
- loans8598
- cash equivalents (note 19)9721,272
- corporate assets578480
Segment assets (Segmental analyses)13,37514,335

  c) Segment liabilities
 2006
£m
2005
restated
£m
Total current and non-current liabilities (Group balance sheet)11,08812,174
Less  
- borrowings (note 21)6,6267,260
- deferred tax liabilities296277
- derivatives in respect of net debt (note 16)79116
- dividends payable48
- income tax payable292374
- interest payable (note 23)1217
- corporate liabilities385395
Segment liabilities (Segmental analyses)3,3943,727

  d) Segment analysis of the Group's share of the revenue and post-tax results of associates and joint ventures
External revenue
 2006
£m
2005
£m
Europe771642
Asia-Pacific456371
Latin America11
Africa and Middle East2015
America-Pacific1,9421,927
 3,1902,956

Post-tax results
 Segment resultAdjusted segment result*
 2006
£m
2005
£m
2006
£m
2005
£m
Europe46394639
Asia-Pacific921079281
Africa and Middle East4242
America-Pacific289244285267
 431392427389

* Excluding restructuring costs, US Federal tobacco buy-out, brand impairments and exceptional tax credits and other impairments (note 5)

 Note 3 Profit from operations

  a) Employee benefit costs

 2006
£m
2005
£m
Wages and salaries1,2331,228
Social security costs159152
Other pension and retirement benefit costs (Note 12)112123
Share-based payments (Note 27)5054
 1,5541,557

  b) Depreciation and amortisation costs
  2006
£m
2005
£m
Intangibles other than goodwill- amortisation3435
Property, plant and equipment- depreciation278290
 - impairment and accelerated depreciation8958
  401383

Impairment and accelerated depreciation in respect of property, plant and equipment arose in relation to the restructuring costs (see note e below) and in respect of the impairment of a business (see note f below).

  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 disposals of subsidiaries, joint venture and brands, property disposals, service fees and other shared costs charged to third parties, manufacturing fees and trademark income.

  d) Other operating expenses include:
 2006
£m
2005
£m
Research and development expenses (excluding employee benefit costs and depreciation)3629
Exchange differences7(23)
Loss on net monetary position 1
Rent of plant and equipment (operating leases)  
- minimum lease payments2526
- contingent rents11
Rent of property (operating leases)  
- minimum lease payments6161
- sublease payments22
Audit fees payable to PricewaterhouseCoopers LLP1.31.3
Fees for other services payable to PricewaterhouseCoopers firms and associates  
- other services pursuant to statutory legislation6.35.6
- tax advisory services4.32.4
- tax compliance0.40.5
- services relating to Information Technology0.10.1
- other non audit services0.30.8

Fees for other services pursuant to statutory legislation payable to PricewaterhouseCoopers firms and associates include £6.1 million (2005: £5.3 million) for local statutory and Group reporting audits. In addition, the Group paid £0.6 million (2005: £0.5 million) in audit fees to other audit firms, which are excluded from the table above.

Total research and development costs including employee benefit costs and depreciation were £76 million (2005: £66 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:

 2006
£m
2005
£m
Employee benefit costs100165
Depreciation and amortisation costs7458
Other operating expenses6248
Other operating income(20) 
 216271

The restructuring costs in 2006 principally relate to manufacturing rationalisation in the Netherlands, with further costs for the earlier restructurings in the UK and Ireland and in Canada. The initial recognition of these earlier restructurings comprised the main costs in 2005. Other operating income relates to gains on property disposals arising from the restructuring exercises.

 f) (Losses)/gains on disposal of a business, brands and joint venture

In April 2005, the Group sold its Benson & Hedges and Silk Cut trademarks in Malta and Cyprus to Gallaher Group plc (Gallaher), together with the Silk Cut trademark in Lithuania, resulting in a gain on disposal of £68 million included in other operating income in the profit from operations. The transactions were in accordance with contracts of 1993 and 1994 in which Gallaher agreed to acquire these trademarks in European Union states and the accession of Malta, Cyprus and Lithuania necessitated the sale.

As described in note 26, on 4 October 2005, the Group announced that it had agreed the sale of its 55% shareholding in BARH Ltd to Honda and the sale was completed on 20 December 2005. As a result of these transactions a gain of £5 million was included in other operating income in the profit from operations for 2005.

On 10 March 2006, the Group's Italian subsidiary signed an agreement to sell its cigar business, Toscano, to Maccaferri for euro 95 million. The sale was subject to regulatory and governmental approval and was completed on 19 July 2006. 

This resulted in the recognition of a loss of £19 million including an impairment charge of £15 million which is included in depreciation and amortisation costs in the profit from operations.

On 29 September 2006, the Group signed a trademark transfer agreement with Philip Morris International. Under this arrangement the Group agreed to sell 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, which resulted in a net payment to the Group of US $115 million. The agreement was subject to regulatory approval which was received and the transactions completed on 29 November 2006, resulting in a gain of £ 60 million included in other operating income in the profit from operations.

  4 Net finance costs

 £m2006
£m
£m2005
restated
£m
Finance costs    
- interest payable 410  373
- fair value changes (212) 218
- exchange differences 197  (246)
- loss on net monetary position 4  1
  399  346
Finance income    
- interest and dividend income (122) (106)
- exchange differences 12  (12)
  (110) (118)
Net finance costs 289  228
Net finance costs comprise    
Interest payable    
- bank borrowings94  59  
- finance leases3  4  
- other313  310  
  410  373
Interest receivable(120) (105) 
Dividend income(2) (1) 
  (122) (106)
Fair value changes on derivatives    
- cash flow hedges transferred from equity4  29  
- fair value changes on hedged items(111) 14  
- fair value hedges39  28  
- ineffective portion of cash flow hedges  (1) 
- instruments not designated as hedges(144) 148  
 (212) 218  
Exchange differences209  (258) 
Loss on net monetary position4  1  
  1  (39)
  289  228

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

In December 2005, the International Accounting Standards Board issued an amendment to IAS21 on foreign exchange rates. The amendment to IAS21 allowed intercompany balances that form part of a reporting entity's net investment in a foreign operation to be denominated in a currency other than the functional currency of either the ultimate parent or the foreign operation itself. This means that certain exchange differences previously taken to the income statement are instead reflected directly in changes in total equity. However this amendment was only adopted by the EU in 2006. Therefore the previously published results for 2005 have been restated accordingly, which has resulted in an increase in net finance costs above of £4 million and a corresponding reduction in differences on exchange in equity movements (note 20).

The £40 million movement to a charge of £1 million for net fair value changes and exchange differences is principally due to :

  1. £19 million of gains in 2005 which distort net finance costs as described in note 7; and
  2. The impact of interest rate movements on the fair value of derivatives to be recognised in the accounts.

  5 Associates and joint ventures

 Total
2006
£m
Group's
share
2006
£m
Total
2005
£m
Group's
share
2005
£m
Gross turnover including duty, excise and other taxes 11,831 4,384 11,441 4,077
Duty, excise and other taxes(3,349)(1,194)(3,351)(1,121)
Revenue8,482 3,190 8,090 2,956
Profit from operations1,765 677 1,546 566
Net finance costs (61)(26)(17)(8)
Profit on ordinary activities before taxation1,704 651 1,529 558
Taxation on ordinary activities(564)(216)(452)(163)
Profit on ordinary activities after taxation1,140 435 1,077 395
     
after (charging) / crediting    
- restructuring costs  (32)(13)
- US Federal tobacco buy-out  (28)(12)
- brand impairments(30)(13)(68)(29)
- exceptional tax credits and other impairments40 17 154 57
Attributable to:
British American Tobacco's shareholders 
(Group income statement)
 431 392
Minority interests 4  3
Dividends    
- listed investments (222) (175)
- unlisted investments (45) (27)
  (267) (202)

The share of post-tax results of associates and joint ventures is after restructuring costs, the US Federal Tobacco buy-out, brand impairments, exceptional tax credits and other impairments.

In 2006, Reynolds American benefited from the favourable resolution of tax matters of which the Group's share was £17 million (2005: £31 million). Reynolds American also modified the previously anticipated level of support between certain brands and the projected net sales of certain brands, resulting in a brand impairment charge of which the Group's share amounted to £13 million (net of tax) (2005: £29 million).

In 2005, Reynolds American also incurred restructuring costs and a one-off charge related to the stabilisation inventory pool losses associated with the US tobacco quota buy-out programme. The Group's share (net of tax) of these amounted to £13 million and £12 million respectively.

In 2005, the contribution from ITC Limited in India included a benefit of £26 million (net of tax), principally related to the write back of provisions for taxes offset by the impairment of a non-current investment.