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Strategic and Financial Review

Strategic Review

Maximising our growth potential

“Our track record of creating sustainable shareholder value has been impressive over many years and has been driven by the consistent application of our strategy.”

Alison Cooper Chief Operating Officer

Our strategy is underpinned by three core objectives – sales growth, cost optimisation and effective cash utilisation. These are the building blocks of our business and we are committed to delivering a strong performance in each of these areas. Our enhanced focus on sales is a key driver in creating value for our shareholders and strengthening the long-term sustainability of our business.

As a global tobacco company we recognise the importance of manufacturing, marketing and selling our products responsibly. This underpins our growth strategy and is an integral part of how we do business.

Our overall strategic Key Performance Indicators (KPIs) are total shareholder return and adjusted earnings per share.

Our strategy is to create sustainable shareholder value by growing our operations organically and through acquisitions

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We are a sales led business, with strong positions in both mature and emerging markets and sales in over 160 countries. Our balanced operating platform provides stability and creates future growth opportunities.

We have invested strategically to create a comprehensive and balanced brand and product portfolio, in turn facilitating a total tobacco focus, which considerably enhances our growth potential.

Our international strength in cigarette is complemented by world leadership in cigar, fine cut tobacco, papers and tubes and a small but growing snus business.

We have strong local, regional and international brands with representation across the key price segments within individual markets.

These portfolio strengths, combined with our focus on trade marketing and on our consumers, are key to sales development.

We ensure that individual markets have the flexibility to align local portfolios to specific local market and consumer dynamics, within a Group strategic framework.

We seek to be agile in responding to changing market dynamics ensuring our brands and products remain relevant to evolving consumer preferences enabling our highly skilled sales forces to drive growth across our portfolio.

Our sales growth KPIs are cigarette volumes and tobacco net revenue.

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Cost optimisation is a hallmark of our business. We seek maximum returns from our investments and seek efficiency improvements without compromising our focus on quality and innovation. We have a long history of value creating acquisitions and are renowned for our ability to integrate new businesses swiftly and efficiently.

This year we have delivered our integration synergy targets whilst driving business initiatives and improvement across the Group.

Our cost optimisation KPI is tobacco adjusted operating margin.

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We are highly cash generative. We focus on managing capital expenditure, working capital, tax and interest costs to optimise our cash flows and ensure that the cash we generate is used effectively.

Our short-term focus is on debt reduction following the acquisition of Altadis. We also continue to make disciplined investments across the business to enable us to continue to deliver sustainable growth.

While debt reduction will remain a priority, given our very strong cash flows, we believe we will have scope for further value creating acquisitions and strategic alliances within a reasonable timeframe.

Cash conversion is an essential prerequisite to cash utilisation, therefore the cash conversion rate is our KPI.

Measuring our Strategy:

Key performance indicators are the principal measures used by the Board to assess performance against our strategy.

Risk Management:

A detailed assessment of strategic risks within our operating environment is undertaken by management and is embedded across the Group.

Leveraging our Assets:

Corporate Responsibility:

We manage our business to ensure we maintain the high standards of conduct and performance expected of an international company.

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