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Chief Executive's review of our Half-Year Report to 30 June 2017

Nicandro Durante comments on a good performance with strong strategic momentum

Performance in line with expectations

The performance of the Group in the first six months of the year is in line with expectations and demonstrates the good organic progress we are making. The relative weakness of sterling led to a significant tailwind on our reported results, with revenue 15.7% higher and profit from operations up 16.3% at current rates of exchange. Excluding the translational tailwind and the adjusting items, adjusted revenue and adjusted profit from operations were both up, 2.5% and 3.2% respectively at constant rates of exchange.

The growth in adjusted revenue was due to a strong price mix and to the increased contribution from both our NGP business and the acquisitions in the period. The growth in adjusted profit from operations led to an increase in adjusted operating margin of 30 bps.

As anticipated, the performance of the Group to date reflects a strong prior year volume comparator due to the timing of shipments in a number of key markets, principally Pakistan. Cigarette market share in our Key Markets continues to grow, up 30 bps, driven by the GDBs (up 50 bps). Group cigarette volume was 5.6% down and GDB volume was lower by 1.3%. Excluding, in Pakistan, the effect of inventory movements and market contraction, cigarette volume fell 2.6% with GDB volume up 2.6%.

Next Generation Products

Good progress in our NGP business has been made in the first half of the year and we are now present in 15 markets worldwide with our vapour products and THP.

In the Japanese city of Sendai, glo continues to perform exceptionally well, reaching an estimated 8% share and with one in three smokers in Sendai having purchased glo. We have recently expanded our coverage to Tokyo, Miyagi and Osaka and national rollout in Japan is planned for October 2017. While it remains early days, the initial results in Tokyo are excellent, with performance ahead of Sendai over the same period. We are also now present in Canada (Vancouver) and nationally in Switzerland, with very encouraging early signs.

To support our on-going glo expansion plans, and to meet the increasing demand, investment in Neostik production capacity is taking place in South Korea and Russia.

We are the largest vapour company in the world, with market leadership in the US, through Vuse, and in Poland and the UK, with the latter driven by the two fastest growing vapour brands in the market, Vype and Ten Motives. Vype is now present in 10 markets and, whilst still immaterial in the context of the Group, our European vapour business grew with turnover up strongly against the same period last year.

Completed acquisition of Reynolds

I am delighted that we completed the deal to acquire the remaining balance of Reynolds shares on 25 July 2017. The integration of the two companies is now underway and work has already begun to realise the projected cost synergies. As we have previously said, the acquisition creates a stronger, global tobacco and NGP company committed to delivering sustained long-term profit growth and returns. As a result of the deal, the enlarged group has a balanced presence in high growth emerging markets and high profitability developed markets, combined with direct access to the attractive US market.

On course to deliver another good year

We continue to expect profit growth to be weighted to the second half of the year, which will be moderated by the continued roll out of NGP and is against a strong prior year comparator in Ukraine. Although the challenging environment in a number of markets continues, including in Russia, I am confident that we remain on course to deliver another year of good earnings growth at constant rates of exchange.

Nicandro Durante
26 July 2017

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