Chief Executive's review of the preliminary results for the year ended 31 December 2013

A word from Nicandro Durante

We’re delivering today and investing in tomorrow

British American Tobacco had another very good year in 2013, again meeting or exceeding our financial metrics. Revenue and market share continued to grow. Together our Global Drive Brands (GDBs) – Dunhill, Kent, Lucky Strike and Pall Mall – increased share and volume.

It was a challenging year for our people globally, but they responded with the enterprise and commitment I have come to expect. We adapted to changes in our business environment, faced some tough trading conditions and embraced a range of new opportunities, in both new product categories and new markets. We invested further in our existing key high growth markets, too.

We’ve achieved another year of strong results

The Group’s strong performance in 2013 was achieved against a backdrop of adverse exchange rate movements, lower industry volume and instability in some parts of the world.

At constant rates of exchange, revenue was up by 4% and adjusted profit from operations was up by 7%. Adjusted diluted earnings per share were up by 6% at current rates or 10% at constant rates of exchange.

Our adjusted operating margin improved significantly by 100 basis points, at the top end of our guidance of an increase of 50 to 100 basis points each year. This was achieved thanks to efforts right across our global organisation to address our cost base, to standardise our systems and deliver productivity savings year on year. A strong price-mix of 7% has also contributed to this excellent result.

Our return on capital employed (ROCE) has also improved considerably over the past few years. We have seen a steady increase in ROCE from 23% in 2009 to 31% in 2013, demonstrating that our investments are delivering growth.

We’re growing market share

In 2013 we successfully grew our market share in our key markets by 20 basis points, driven by the success of our GDBs, which were up by 60 basis points. Our share of the premium segment also grew, up by 80 basis points. However, cigarette volume from subsidiaries was lower by 2.7%, mainly as a result of industry declines.

Our international brands grew volume by 2.1%, of which our GDBs grew by 1.9%. Dunhill volume was up by 9.7% and Pall Mall grew by 4.4%. Kent’s was 2.9% lower while Lucky Strike volume was down by 6.5%. Collectively, our GDBs now account for 35% of our total volume. From 2014, we have added Rothmans to our portfolio of GDBs, recognising the brand’s strategic value to the Group.

Other tobacco products also performed very well, particularly Fine Cut tobacco, which was up 1.3% in Western Europe, driven by the continued success of Pall Mall and Lucky Strike. We also launched Vype, our first electronic cigarette, in the UK in 2013, making us the first international tobacco business to enter this new market.

We look to the future with confidence

Challenges persist in 2014. Economic recovery is still fragile, particularly across southern Europe. However, we have shown a consistent ability to improve our operating margin and grow market share. The pricing environment also remains good.

We have a great brand portfolio, market-leading innovations and an outstanding range of high quality products. We maintain our firm commitment to invest in key growth markets and new product categories. Our scientific research into harm reduction, for instance, is helping us develop next-generation tobacco products, such as heat-not-burn, and nicotine-based products, like e-cigarettes.

In short, we have the expertise, the talented people and the global reach to succeed. Consumers have always been core to our success. We will continue to meet their needs by providing them with the superior and innovative products they want. We have a compelling strategy and proven capabilities in place to make this happen. I look forward to a gradually improving economic environment and BAT is well positioned to take advantage of this when it comes.

Nicandro Durante
26 February 2014

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