Chairman's comments on the preliminary results to 31 December 2011

A word from Richard Burrows

2011 has been a very successful year for your Company. While economic uncertainty continues, our operating environment improved during 2011. Our results for the year are driven by revenue growth, an improved operating margin, and growth in market share due to our successful brands, enhanced by the roll-out of product and packaging innovations.

Market share growth

Overall, industry volumes continued to decline in 2011 but there are signs that the rate of decline has moderated. Our own volumes were down marginally by 0.4 per cent and we grew market share during the year. These positive results were spread across many markets around the world.

The expansion of illicit trade is a continuing and growing threat to the business. Sharp increases in excise duty, pressure on consumers’ disposable income, and ill-considered regulation of our industry, are all making life easier and more lucrative for traders of illicit products, both contraband and counterfeit.

Increasing returns to shareholders

Using constant currency exchange rates, revenue rose by 7 per cent on an organic basis. Adjusted profit from operations grew by 11 per cent to £5,519 million, or by 10 per cent at constant currency exchange rates.

This is reflected in the adjusted diluted earnings per share for 2011 improving by 11 per cent to 194.6p.

The Board has recommended a final dividend of 88.4p per share, which will be paid on 3 May 2012 to shareholders on the register at 9 March 2012. This takes the total dividend for the year to 126.5p, an increase of 11 per cent on last year, and maintains our target of paying out 65 per cent of earnings in dividends.

In addition, following the suspension of our share buy-back programme in 2009, the Board approved the resumption of the programme in 2011. Between the beginning of March and the end of December 2011, some 28 million shares were repurchased at a value of £750 million, excluding transaction costs.

A continuation of the share buy-back to a value of £1.25 billion has been agreed by the Board.

Board and Audit Committee changes

Ana Maria Llopis retired from the board after the AGM in April 2011. Ann Godbehere, a Canadian, joined the Board as a Non-Executive Director on 3 October 2011. Paul Adams, former Chief Executive, retired at the end of February 2011 and was succeeded by Nicandro Durante who was introduced to shareholders in his new role at the AGM.

Christine Morin-Postel has resigned as a member of the Audit Committee with effect from 21 February 2012 due to a personal conflict of interest, details of which are set out at the end of this Preliminary Announcement.

Sustainability

Over the years we have built a strong reputation for corporate social responsibility and sustainability and have been recognised as leaders in our industry. For example, we were the first tobacco company to be included in the Dow Jones Sustainability World Index and were included again in 2011. This focus on running our business responsibly helps us create value for our shareholders as well as being in the best interests of our other stakeholders.

Continued success

I express my thanks and appreciation to my fellow Directors on the Board; to management; to our Chief Executive, Nicandro Durante; and, in particular, to all our 56,000 colleagues around the world.

2011 has been a very successful year for your Company and we carry momentum in market share growth and margin improvement into 2012. The economic climate around the world is far from settled but we remain confident that our strategy should continue to generate growth for our shareholders in the years ahead.

Richard Burrows
22 February 2012

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