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Chief Executive's review of the preliminary results for the year ended 31 December 2012

A word from Nicandro Durante

Very good business performance

We exceeded all of our financial objectives in 2012. We delivered organic revenue growth on a constant currency basis of 4% and adjusted profit from operations of 8% at constant rates of exchange. Despite the adverse exchange rates, once again we delivered excellent returns to shareholders, with adjusted diluted earnings per share up by 7% on last year, with an increase of 12% at constant exchange rates.

We grew our underlying market share in 2012, with good share momentum in the second half of the year. Pricing remains strong and, while our cigarette volumes were down slightly, this was mainly due to industry declines in some of our major markets.

Outstanding operating margin improvements

We achieved a substantial improvement in operating margin of 160 basis points, exceeding our target of increasing operating margin by 50 to 100 basis points each year. In addition to a strong price mix of 6%, we have continued to focus on productivity improvements, addressing our cost base through factory rationalisation, systems standardisation and productivity savings.

Innovations driving growth

Our Global Drive Brands (GDBs) – Dunhill, Lucky Strike, Kent and Pall Mall – continued to perform well, driven by our innovations, recording both volume and share growth. We saw outstanding volume growth of 11% for Lucky Strike in 2012. Dunhill volumes grew by 2%, Kent by 1% (or 4% adjusting for the one-off comparator in Japan) and Pall Mall by 3%. Collectively, our four GDBs achieved volume growth of 3% (or 4% excluding the impact of Japan) and now account for over one third of our total volumes. GDBs grew market share by 30 basis points.

Fine Cut tobacco grew volume by 8% in Western Europe and increased market share. This was driven by Pall Mall, by far the largest brand in this category.

Next-generation products

Alongside the innovations in the cigarette market, we are developing a portfolio of next-generation products. Nicoventures, a company we set up in 2011, is aiming to launch nicotine-based products. In December 2012, we acquired CN Creative, a UK-based company specialising in the development of e-cigarette technologies.

Management Board changes

I am pleased to announce the creation of a new role on the Management Board, that of ‘Managing Director – Next Generation Products’, encompassing Nicoventures and CN Creative. Des Naughton, currently Group Operations Director, will be appointed to this position from 1 March 2013. Des joined the group in 1995 and has extensive experience in Marketing, General Management and Operations.

Furthermore, it is a pleasure to announce that Alan Davy, currently Group Head of Supply Chain, will be promoted to Group Operations Director and join the Management Board also with effect from 1 March 2013. Alan joined the group in 1988 and has held various roles in Manufacturing, Supply Chain and General Management.

Challenges and opportunities ahead

Our geographic diversity, powerful brands, investment in innovations and strong positions in emerging markets remain key strengths and we are confident in the future of the tobacco business. We also believe that building a portfolio of next-generation products alongside our main tobacco business will provide us with significant new opportunities in the years ahead.

We ended 2012 with share growth in the majority of our markets. Pricing remains good and our GDBs get stronger every year. While we cannot underestimate the challenges ahead in 2013, I am confident that we have robust plans in place and the resources to succeed. We have momentum, proven capabilities and passionate people to deliver another year of good growth and I look forward to 2013 with optimism.

Nicandro Durante 
27 February 2013

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