Chief Executive's review of the half-yearly report to 30 June 2014

We remain on track for another good performance

We are on course to achieve another good set of results in 2014. We are consistently growing our market share and we continue to improve our volume performance, driven by our Global Drive Brands (GDBs). Around the world, there were good performances across all our regions.

Pricing remains on track, with the timing of price increases, compared with 2013, more weighted towards the second half of the year. Strong growth in emerging markets impacted the Group’s price-mix. The underlying business performance, measured at constant rates of exchange, was good, with revenue up by 3% and adjusted profit by 4%, despite the impact of transactional gains and losses in operations, generated by exchange rate movements. Adjusted diluted earnings per share were up by 8%.

We continue to grow market share

The Group’s cigarette market share increased by 20 basis points in our key markets, led by our GDBs, which grew share by 60 basis points. Rothmans, Pall Mall and Dunhill all increased share, while Kent and Lucky Strike were stable. We also increased our share of the premium segment by 40 basis points.

Our volume decline moderates

Cigarette volume in the first half of the year was down by just 0.4%, continuing an improving trend. This was driven by the strong performance of our GDBs, which grew volume by 5.7%. Our international brands, including GDBs, make up 58% of our total cigarette volume. Total tobacco volume was down by 0.5%.

We continued to drive down cost

Our operating margin grew by 30 basis points, despite absorbing transactional exchange losses.

We are investing in sustainable growth

The Group continues to build stronger, sustainable businesses in key markets. Growth across Asia Pacific was particularly strong, with excellent performances in Bangladesh, Pakistan and Indonesia. Our businesses in Brazil and Russia both achieved good market share growth. The economic environment across Western Europe is still fragile but there are signs of improvement and we are well-placed to gain advantage of this upturn when it comes.

We are also investing in new product categories and we are committed to leading the industry with a strong pipeline of next-generation tobacco and nicotine products, including electronic cigarettes and tobacco heating devices. One year after launching Vype, our first electronic cigarette in the UK, we continue to increase retail distribution and to strengthen the product offer for consumers in this growing category.

We plan to maintain our shareholding in the enlarged Reynolds American

Our planned US$4.7 billion investment to maintain our 42% shareholding in an enlarged Reynolds American, as part of its proposed acquisition of Lorillard in the US, will enhance our position in one of the world’s most profitable tobacco markets.

We are committed to delivering shareholder value

Despite the adverse impact of exchange rate movements, we continue to deliver for shareholders. At constant rates, adjusted diluted earnings per share increased by 8% and our interim dividend of 47.5p is 6% up on last year and will be paid on 30 September 2014.

I remain confident that with our strong regional performances, proven strategy and powerful brands, we are set to deliver another year of good growth.

Nicandro Durante
29 July 2014