Chief Executive's review of the Half-year Report to 30 June 2015

Good underlying performance continues

The business performed well, despite a strong volume comparator and the intensified low price competition in Australia. Adverse foreign exchange rate movements significantly impacted our results. Adjusted profit from operations at constant rates of exchange grew by 1.3%. Excluding the impact of transactional foreign exchange this growth would have been 5.4%.

Cigarette volume was down 2.9% although the consistent growth of GDB volume, higher by 6.0%, demonstrates that our strategy continues to deliver. Underlying volume, excluding one-offs, was down by approximately 2.5%. This is against an industry decline of around 3.5% following significant excise driven price increases in Russia, Australia and South Korea.

Our market share, an important indicator of the underlying strength of our business, grew strongly with corporate share up 40 basis points in the Key Markets and the Global Drive Brands continuing to perform excellently with share up 80 basis points. Pricing in general continued to be strong, with price/mix ahead of last year.

The ongoing focus on our cost base continues to deliver and has meant we were able to mitigate adverse transactional exchange rate effects. As a result, operating margin on a current basis was flat at 39.2% at the half year.

Continuing investment in sustainable growth

On 12 June 2015, the Group completed its investment of US$4.7 billion in cash to maintain its 42% equity position in the enlarged Reynolds American Inc. as part of its acquisition of Lorillard Inc. This followed the final approval by the relevant US authorities on 8 June 2015.

The Group has also signed an agreement to acquire TDR, the leading independent cigarette manufacturer in Central Europe, for €550 million. This will provide us with the opportunity to significantly grow our business in the region. Final approvals for this deal are expected by October 2015.

We continued to make good progress with the potential public tender offer for the shares in Souza Cruz that the Group does not own. The relevant approvals are expected in Q3 2015, after which the Group will be in a position to formally launch its public tender offer.  It is expected that subject to certain conditions, the financial settlement will occur in Q3 2015.

We remain committed to leading in Next Generation Products globally and continued to make good progress on the development and roll out of our portfolio. Our e-cigarette brand, Vype, continues to perform well in the UK market and has been strengthened by the recent launch of an enhanced range of flavours and nicotine strengths for our ePen and eStick devices. In July, we launched an open system, the Vype eTank and its accompanying range of liquids. We continue to make progress on Voke, our nicotine inhalation product licensed as medicine, and expect to launch in the UK around the year end. Additionally, significant progress has been made in developing a range of tobacco heating products, with plans for a test market of one of the platforms in 2015.

On course for another good year 

Despite the backdrop of challenging market conditions we continue to deliver for shareholders. An interim dividend of 49.4p, an increase of 4.0%, will be paid on 30 September 2015, being one third of the prior year dividend, and which is in line with the Group’s intention to increase the dividend year on year.

Given the strength of our broad portfolio and global reach, I remain confident that, as the impact of the strong comparison base unwinds and the incremental benefits of recent M&A investments start being realised, we are on course to deliver another year of good growth, on a constant currency basis.

Nicandro Durante
28 July 2015