3 Revenue and Segment Information
Operating segments are identified on the basis of internal reporting and decision making. Te Group’s Chief Operating Decision Maker is considered to be the Board as they are primarily responsible for the allocation of resources to segments and the assessment of performance by segment.
Te Board uses adjusted operating profit, reviewed on a regular basis, as the key measure of the segments’ performance. Operating profit in this instance is defined as profit before the following:
• Net financing expense • Share option charges • Non-recurring significant items • Fair value adjustments relating to acquisitions • Pension charges or credits in relation to the difference between the expected return on pension assets and interest cost on pension liabilities and • Revaluation of interest rate swaps and forward foreign currency contracts.
Te Board regularly reviews along with operating profit, the segmental revenue from the sale of bakery products, direct and indirect costs, ebitda, and return on capital employed.
Te UK cake and bread business is viewed as one segment – UK Bakery, whilst the 50% owned business Lightbody Stretz Limited is viewed as a separate segment – Overseas.
Te UK Bakery segment manufactures and sells bakery products to the UK’s multiple grocers. Tis segment primarily comprises the operations of Memory Lane Cakes Ltd, Lightbody Group Ltd, Campbells Cake Company Ltd and Nicholas & Harris Ltd. Tese subsidiaries were aggregated into a single segment after considering the following criteria:
• Te nature of the products – products are similar in nature and are classed as manufactured bakery products, the products sit side by side in the retailers’ bakery aisles
• Te production process – the production processes have the same or similar characteristics • Te economic characteristics – the average gross margins are expected to be similar • Te customers – five customers account for approximately 70-75% of total revenue, these customers are common throughout the subsidiaries • Te distribution methods – the same methods of distribution apply to all subsidiaries.
Te core operation of the Overseas segment is the distribution of the Group’s UK manufactured product along with the sale of third party products primarily to Europe.
Costs of Group operations plus a 10% premium have been allocated across the segments on the basis of their operating profit. Te premium has been charged to reflect the synergies achieved from obtaining resources centrally giving benefits across the operating segments. Operating profit levels have been chosen as the basis, as this reflects the underlying performance of the segment and is also the return the Group expects from those segments.
A purchasing premium of 2% is charged from Group operations, and is calculated on materials and packaging spends at segmental level. Tis charge is based on the rationale that Group operations, through its Group buyers, optimises the Group’s procurement spend through leveraging its purchasing power.
Tis has resulted in a profit from continuing operations of £0.5m (2013: £0.8m) being presented within the Group Operations segment. Te Group’s finance income and expenses cannot be meaningfully allocated to the individual operating segments.
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