British American Tobacco - Chief Executive's review of our Half-year Report for the six months ended 30 June 2016

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Chief Executive's review of our Half-year Report for the six months ended 30 June 2016

Nicandro Durante comments on a strong performance in the first half of the year

Continuing strong organic growth

The Group’s performance in the first six months of the year has been very good, underpinned by strong organic growth.

Group revenue grew 7.8% at constant rates of exchange driven by good pricing, with price/mix of approximately 4%. Constant organic revenue grew 6.0%. Reported revenue grew 4.2%, reflecting the adverse translational exchange rate movements of around 4%.

Group cigarette volume increased 3.4% to 332 billion. It is estimated that the industry will decline by around 2.5% for the full year.

Market share in our Key Markets grew 30 bps, driven by an outstanding performance from our Global Drive Brands (GDB), which all grew market share, up a combined 80 bps, with volume higher by 10.8%.

Adjusted operating profit at constant rates of exchange was up 1.8%. Operating margin fell 240 bps on a reported basis. Excluding the significant adverse transactional impact of foreign exchange, adjusted operating profit growth would have been approximately 8%, with the underlying operating margin increasing around 50 bps.

If exchange rates stayed where they are today we would expect a translational full year tailwind of 4% on operating profit due to the current weakness of sterling. However we would expect the transactional foreign exchange impact to be an operating profit headwind of approximately 6% for the full year.

Progress in Next Generation Products (NGP)

In the first half of 2016, we have made excellent progress in our NGP business.

The global vapour products category continues to grow at a significant rate and, following the geographic expansion of Vype, we are now present in the biggest vapour markets outside of the US. Vype is performing extremely well - having reached 9% category retail share of market in the UK, as measured by AC Nielsen, and an estimated category retail share4 of 8% in Germany and 5% in France. It is now available in several innovative product formats, with new product launches and upgrades planned for this year. Further expansion to new markets are planned later in the year and into 2017.

The integration of the Chic Group, the market leading Vapour Product business in Poland is also on track and our recent acquisition of Ten Motives in the UK has increased our strength in the traditional grocery and convenience channels in the UK vapour market.

iFuse, our first Tobacco Heating Product, was launched in Bucharest, generating encouraging consumer interest, with a country-wide roll out planned in the next 12 months.

Our continued significant investment in NGP R&D means we have an exciting pipeline of new products and launches planned.

On track for another good year

I am confident that we remain on track for another year of good earnings growth at constant rates of exchange despite the continuing difficult trading environment in a number of our key markets.

An interim dividend of 51.3p, an increase of 4%, will be paid on 28 September 2016, being one third of the prior year dividend and in line with the Group’s intention to increase the dividend year on year.

Nicandro Durante
27 July 2016

[4] Category retail share based upon internal estimates for Vype in Germany and France