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See overleaf for an overview of our business today For more information visit For more www.imperial-tobacco.com e continue to build on our e continue to Cross reference within report reference Cross information for more long track record of creating long track record shareholder value. sustainable Imperial Tobacco is a leading is Tobacco Imperial company tobacco international markets, manufactures, which a and sells distributes range of comprehensive tobaccos,cigarettes, cigars, rolling papers and tubes. W p35 About Us About Information key to the operations, performance and financial condition of the Company and the with respect statements The Annual Report contains certain forward-looking materially from to differ can cause actual results events and circumstances these statements involve uncertainties since future as a whole. By their nature, Group of this Annual Report and the Company knowledge and information available at the date of preparation statements reflect those anticipated. The forward-looking forecast. Nothing in this Annual Report should be construed as a profit statements. undertakes no obligation to update these forward-looking Imperial Tobacco Group PLC Group Tobacco Imperial 2008 Accounts and Report Annual growth, Driving value delivering

Imperial Tobacco Group PLC Annual Report and Accounts 2008 Registered Office Registered PLC Group Imperial Tobacco PO Box 244 Upton Road Bristol BS99 7UJ UK www.imperial-tobacco.com Printed by Park Communications on FSC certified paper. Park is a CarbonNeutral® Printed by Park Communications on FSC certified paper. Management System is certified to ISO14001:2004. company and its Environmental 100% of the inks sources, renewable 100% of the electricity used is generated from for further use recycled chemicals are vegetable oil based, 95% of press used are will be recycled. and on average 99% of any waste associated with this production paper This document is printed on Splendorgel Extra White, an FSC approved sustainable forests. well-managed from that all virgin pulp is sourced which ensures totally recyclable. and is (ECF) process Splendorgel uses an Elemental Chlorine Free by Black Sun Plc Designed and produced See overleaf for an overview of our business today For more information visit For more www.imperial-tobacco.com e continue to build on our e continue to Cross reference within report reference Cross information for more long track record of creating long track record shareholder value. sustainable Imperial Tobacco is a leading is Tobacco Imperial company tobacco international markets, manufactures, which a and sells distributes range of comprehensive tobaccos,cigarettes, cigars, rolling papers and tubes. W p35 About Us About Information key to the operations, performance and financial condition of the Company and the with respect statements The Annual Report contains certain forward-looking materially from to differ can cause actual results events and circumstances these statements involve uncertainties since future as a whole. By their nature, Group of this Annual Report and the Company knowledge and information available at the date of preparation statements reflect those anticipated. The forward-looking forecast. Nothing in this Annual Report should be construed as a profit statements. undertakes no obligation to update these forward-looking Imperial Tobacco Group PLC Group Tobacco Imperial 2008 Accounts and Report Annual growth, Driving value delivering

Adjusted proﬁt Net revenue from operations

Our brands United > Our leading cigarette market share Kingdom is at 45.9 per cent £869m £584m > We have the UK’s two best-selling cigarette brands in Lambert & Butler and Richmond Get more online at: > We are the clear market leader in fine p26 cut tobacco and rolling papers

Tobacco www.imperial-tobacco.com Germany > Our cigarette market share grew to 27.4 per cent £664m £309m > JPS is now Germany’s second best-selling cigarette brand with 7.8 per cent share > Our market share in Other Tobacco p27 Products increased to 20 per cent 1. View the 2008 Annual Report online Spain > We are the number one across all tobacco categories in Spain £411m £150m 2. Access the latest shareholder information > Our cigarette market share is 37.1 per cent with brands including 3. View archive information Fortuna, Ducados Rubio and Nobel > Our fine cut tobacco and cigar shares 4. Access shareholder services p28 are 49.1 and 36.8 per cent respectively 5. Tell us what you think

Our manufacturing sites Rest of EU > We increased our cigarette market Performance highlights share in many countries in the region £1,250m £494m > JPS grew cigarette market share in a number of markets and Gauloises 33 Blondes also performed strongly Cigarette factories > We have a leading fine cut tobacco position across the region p29 14 Americas > Our share of the overall cigarette market Other tobacco in the USA increased to 4.3 per cent £542m £166m product factories > Our USA market share in fine cut tobacco grew to 8 per cent in September > We expanded our portfolio with the launch of Davidoff and Fortuna cigarettes Premier 8 p30 and fine cut tobacco Tobacco processing factories Rest of the > We have grown our cigarette volumes World and delivered market share gains £1,502m £404m across the region 3 > We had excellent growth in Africa, Rolling papers • the Middle East and Eastern Europe Cigarette factories and tubes factories • Other tobacco product factories > With our versatile portfolio we see • Tobacco processing factories p31 significant opportunities for future growth • Rolling papers and tubes factories

Adjusted proﬁt Net revenue from operations

Overview Case Study: 2 Financial Highlights Africa and the 3 Chairman’s Statement Middle East p20 Directors’ Report: Business Review Strategic and Financial Review 6 Chief Executive’s Review 8 Financial Review 12 Where We Operate 14 Focus on the Future 15 World Tobacco Market Our new 16 Our Strategy 17 Key Performance Indicators logistics 18 Case Study: United States of America operations 20 Case Study: Africa and the Middle East p33 22 Principal Risks and Operating Environment

Operating Review 26 United Kingdom 27 Germany 28 Spain 29 Rest of EU 30 Americas 31 Rest of the World 32 Manufacturing 33 Logistics 35 Corporate Responsibility Financial Statements 72 Independent Auditors’ Report to the Members of Imperial Tobacco Group PLC Directors’ Report: Governance 74 Consolidated Income Statement 38 Board of Directors 75 Consolidated Balance Sheet 40 Chief Executive’s Committee 76 Consolidated Statement of Recognised 41 Report of the Directors Income and Expense 44 Corporate Governance Report 76 Consolidated Cash Flow Statement 55 Directors’ Remuneration Report 77 Accounting Policies 83 Critical Accounting Estimates and Judgements 85 Notes to the Financial Statements 127 Independent Auditors’ Report to the Members Case Study: of Imperial Tobacco Group PLC 128 Imperial Tobacco Group PLC Balance Sheet USA p18 129 Notes to the Imperial Tobacco Group PLC Balance Sheet

Supplementary Information 131 Principal Subsidiaries 133 Shareholder Information 135 Index 136 Glossary

www.imperial-tobacco.com 1 OVERVIEW Financial Highlights

Volumes 2008 Change 2007 Cigarettes (billion) 291.8 +46% 200.3 Cigars (million) 2,452 >100% 316 Fine cut tobacco (tonnes) 25,150 +3% 24,450

In £s million 2008 Change 2007 Revenue 20,528 +66% 12,344 Profit from operations 1,157 -18% 1,418 Adjusted profit from operations 2,230 +51% 1,475 Profit before tax 621 -50% 1,237 Adjusted profit before tax 1,607 +30% 1,238 Attributable earnings 428 -53% 905 Adjusted attributable earnings 1,159 +26% 921 Distribution to shareholders 588 +26% 467

In pence 2008 Change 2007 Basic earnings per share 50.6 -57% 116.7 Adjusted earnings per share 136.9 +15% 118.8 Diluted earnings per share 50.4 -57% 116.2 Dividend per share 63.1 +4% 60.4

Results include the contribution from Altadis since completion of the acquisition on 25 January 2008 and the 2007 per share ﬁgures have been restated to reﬂect the bonus element of the related rights issue.

Profit from operations, profit before tax, attributable earnings, basic and diluted earnings per share are impacted, where applicable, by amortisation of acquired intangibles, restructuring costs, certain fair value gains and losses on derivative financial instruments, an exceptional gain on brand divestments, charges for one-off acquisition accounting adjustments, retirement benefit net financing income and related taxation effects. Further detail of these items is included in the Financial Review.

Earnings per share amounts are calculated using the weighted average shares in issue of 846.5 million (2007: 775.5 million). Dividend per share has been determined using the current shares eligible for the ﬁnal dividend of 1,011.3 million (2007: 672.8 million), applying our policy of distributing around 50 per cent of adjusted attributable earnings.

Management believes that reporting adjusted measures provides a useful comparison of business performance and reflects the way in which the business is controlled. Accordingly, as outlined in our accounting policy note, adjusted measures of profit from operations, net finance costs, profit before tax, attributable earnings, taxation and earnings per share exclude, where applicable, amortisation of acquired intangibles, restructuring costs, retirement benefits net financing income, fair value gains and losses on derivative financial instruments in respect of commercially effective hedges, one-off acquisition accounting adjustments, brand divestment gains and related taxation effects. Reconciliations between adjusted and reported profit from operations are included within note 1 to the financial statements, adjusted and reported finance costs in note 5, adjusted and reported taxation in note 6, and adjusted and reported earnings per share in note 8. The adjusted measures in this report are not defined terms under International Financial Reporting Standards and may not be comparable with similarly titled measures reported by other companies.

2 Imperial Tobacco Group PLC 2008 OVERVIEW Chairman’s Statement

The past year has again demonstrated the success of our strategy with positive progress across the enlarged Group. Iain Napier, Chairman Delivering value across the Group

In what was a year of significant “With our The enlarged Group has around 40,000 achievement for Imperial Tobacco employees, 58 manufacturing sites, an we delivered another good operational enhanced extended geographic reach and a more and financial performance. geographic versatile brand and product portfolio, Earnings and Dividends and brand including international strength in cigarette Our adjusted earnings per share have profile we and world leadership in fine cut tobacco, risen by 15 per cent to 136.9 pence. cigars and rolling papers. We now also Basic earnings per share were look to the have a leading logistics platform in Europe. 50.6 pence (2007: 116.7 pence, adjusted future with As part of the integration process we for the bonus element of the rights issue confidence.” announced a number of European in June 2008), primarily impacted by restructuring projects in June which will restructuring costs, fair value movements enable us to strengthen our competitive on derivatives, amortisation of acquired position and deliver the previously intangibles and one-off acquisition announced annual operating efficiencies accounting adjustments, partially offset of approximately €300 million by the end by brand divestment gains. of the financial year ending 30 September Adjusted attributable earnings grew 2010, rising to approximately €400 million by 26 per cent to a little under by the end of the financial year ending £1.2 billion. In line with our policy, the 30 September 2012. The estimated Board is proposing to pay out half of one-off cash cost of achieving these this as ordinary dividends. The Board efficiencies is approximately €600 million. recommends a final dividend of 42.2 pence per share, bringing the Regrettably, these projects are impacting total for the year to 63.1 pence our workforce and we are committed (2007: 60.4 pence, adjusted for the to providing a comprehensive range bonus element of the rights issue in of support measures to assist June 2008).1 affected employees. Altadis Driving Operational Performance On 25 January 2008 we completed Altadis and integration have been the acquisition of Altadis, significantly key priorities during the year but enhancing our business profile. We we have also remained focused on have a strong track record in acquisitions driving the operational performance and a reputation for integrating new of the enlarged business, which included businesses efficiently. an eight month contribution from

1If approved by shareholders the dividend will be paid on 20 February 2009 to those shareholders on the register at the close of business on 23 January 2009. www.imperial-tobacco.com 3 OVERVIEW Chairman’s Statement continued

Altadis and the first full year contribution Corporate Governance and their knowledge of the tobacco from Commonwealth Brands. As a major international company we industry will be invaluable in ensuring that seek to act in a fair and responsible we maximise the significant opportunities Whilst building on our strong profit base manner towards all stakeholders. the enlarged Group offers. in mature markets we pursue growth in emerging markets and this year we made It is the Board’s duty to review and In conclusion, I would like to thank our excellent progress in Eastern Europe, approve our Company’s policies in this employees for their contribution to another Africa and the Middle East. regard. We have in place processes which successful year. Imperial Tobacco and The USA is another important growth enable us to meet the high standards Altadis employees have developed strong market and one where our cigarette of conduct expected of our Company. working relationships and their combined skills and expertise will enable us to create and fine cut tobacco shares further In September, we delisted from the further sustainable value for our increased in the year. New York Stock Exchange as part shareholders. These positive operational developments of our ongoing programme of business are underpinned by our ongoing focus simplification. This will not compromise The turbulent economic conditions are on reducing costs and effectively the integrity of our Corporate Governance unlikely to change in the short term but managing our cash. and internal control procedures and we we are resilient and highly cash generative. will continue to communicate regularly With our enhanced geographic and brand The Rights Issue with our investors based in the USA. profile, and strong business fundamentals, From the outset, we said that the we can look to the future with confidence. acquisition of Altadis would be Board Changes part funded by a rights issue. David Cresswell, Manufacturing Director and Anthony Alexander, Vice Chairman, At our half-yearly results in May we retired during the year and I would like announced a 1 for 2 rights issue at a to express my sincere thanks to them share price of 1475 pence per share to for their contribution to the Company. raise £4.9 billion. The rights issue was Iain Napier There have been several new additions sized at the minimum level required to Chairman maintain our investment grade credit to the Imperial Tobacco Board during rating, to which we remain committed. the year. Given the uncertainties affecting the capital We were delighted to welcome Jean- markets this year, it was gratifying to see Dominique Comolli, former Chairman that the take-up rate was 97.2 per cent of Altadis, to the role of Non-Executive and the remainder of the shares were Deputy Chairman. We also welcomed successfully sold in the market. Bruno Bich and Berge Setrakian, both former board members of Altadis, to Following the success of the rights our Board as Non-Executive Directors. issue and two bond issues in September, we are comfortable with our current All have a tremendous wealth of financing position. international business experience

Total Shareholder Return

Over the past ﬁve years our total shareholder return was 151 per cent and we have outperformed the FTSE All-Share Index by 106 per cent. 350

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4 Imperial Tobacco Group PLC 2008 In this section: Chief Executive’s Review 6 Financial Review 8 Where We Operate 12 Focus on the Future 14 World Tobacco Market 15 Our Strategy 16 Key Performance Indicators 17 Case Study: United States of America 18 Case Study: Africa and the Middle East 20 Principal Risks and Operating Environment 22 Strategic and Financial Review DIRECTORS’ REPORT: BUSINESS REVIEW: STRATEGIC AND FINANCIAL REVIEW Chief Executive’s Review

We have improved our position in mature and emerging markets and, in Altadis, completed an acquisition that has substantially strengthened our business. Gareth Davis, Chief Executive Significant potential for further growth

Performance Overview Whilst we have an excellent portfolio of We have completed the mergers of The acquisition of Altadis has been the premium brands, we also have particular the Imperial Tobacco and Altadis sales highlight of an eventful year for Imperial strength in the value segment enabling teams in Russia, Ukraine, Poland, Austria, Tobacco. Our overall cigarette volumes us to capitalise on consumer downtrading Belgium and Italy, and closed our cigar were up 46 per cent to 292 billion in mature markets, a trend that is likely to and fine cut tobacco factory in Slovakia. cigarettes, including contributions from continue in the current economic climate. The consultation process in France and Altadis and Commonwealth Brands. Our continued success in the contrasting the UK has been completed, enabling Our cigarette portfolio is complemented markets of the USA, Eastern Europe, us to begin implementing our projects by our world leadership in fine cut tobacco Africa and the Middle East was particularly in these markets in early 2009, while in and cigars. Overall, fine cut tobacco pleasing and demonstrates our ability Spain and Germany the consultations volumes were up to 25,150 tonnes, to successfully develop our business are ongoing. We continue to offer while cigar volumes were 2.5 billion. in both mature and emerging markets. comprehensive support to all employees affected by our integration projects. The enlarged Group has an enhanced Integration Regulation geographic profile and multi-product The integration of Imperial Tobacco portfolio and during the year we increased We continue to effectively manage the and Altadis has been a key focus our cigarette and fine cut tobacco shares increasing levels of regulation affecting during the year. and volumes across many territories. our industry. We support sound and Whilst pursuing the growth opportunities proportionate regulation that respects Our international cigarette brands, Davidoff presented by our combined portfolio adult freedom of choice and recognises and Gauloises Blondes, performed very and enhanced geographic footprint, that tobacco products are enjoyed by well, complemented by further growth millions of people worldwide. We have from a number of regional brands we have been managing the consultation a long history of co-operation with including Gitanes and JPS. process related to our European integration projects. authorities in the markets in which Our strategy is to drive sales growth we operate and remain committed by developing our brands and products These projects affect sales and marketing, to continuing to work constructively through investment and innovation, manufacturing and central support with individual governments and supported by excellent trade marketing functions in a number of markets and will other regulatory bodies. improve our competitiveness by reducing skills and strong sales forces. Corporate Responsibility over-capacity and improving efficiencies. Our versatile portfolio is characterised Our ongoing commitment to manage by great brands and products across We concluded the European consultation our business responsibly is fundamental all price segments, which provides process in September and have made to our long-term success. As a global considerable growth opportunities given very good progress on the national tobacco company we recognise the the large and diverse number of markets consultations and implementation importance of manufacturing, marketing in which we operate. of our projects in many markets. and selling our products responsibly.

6 Imperial Tobacco Group PLC 2008 Over the years we have taken an Altadis related events in 2008 increasingly strategic approach to promoting responsible behaviour through defined governance structures, On 25 January 2008 we completed the acquisition of Altadis, strengthening group principles and policies. our position as one of the world’s leading international tobacco companies. The transaction was the catalyst for a series of further related events, which We have also established robust risk are highlighted in the table below. management procedures, progressed our non-financial performance reporting 26 Feb 2008 Offer for Logista processes and further developed our Altadis held a 59.6 per cent share in Logista, the largest distributor Five-for-Five corporate responsibility of tobacco and other products in Southern Europe. Under Spanish initiative which was launched last year. takeover law we were required to make a tender offer for the Further information on our progress is outstanding shares or reduce the shareholding to below 30 per cent. outlined on page 35 of this report and We launched an unconditional offer for the outstanding shares held by our detailed Corporate Responsibility minority shareholders at a price of €52.50 per share. This offer closed Review will be published in December. on 6 May 2008 with acceptances taking our overall holding to 96.9 per cent, and enabling a squeeze-out of the remaining 3.1 per cent, which Our People was completed in June 2008. The additional cost of this transaction The development of our employees is was €925 million and Logista’s shares were subsequently delisted. critical if we are to continue delivering sustainable shareholder value and I am proud of the success of the leadership 14 Apr 2008 Aldeasa disposal programmes we have in place. We seek We completed the disposal of the 49.95 per cent shareholding in to support and develop people in all Aldeasa, a Spanish-based airport duty free retailer, that we acquired functions and at all levels, from senior with Altadis. The sale, for a consideration of €355 million, was to managers to employees who are at an Autogrill Espana, the other partner in the joint venture. early stage of their career. Our programmes are run on an 23 Apr 2008 Divestiture of tobacco brands international basis and participants are The divestment of a small number of brands in certain European often tasked with managing business markets was a condition of the European Commission’s approval of projects on behalf of the Chief Executive’s the Group’s acquisition of Altadis and we therefore agreed the sale of Committee. I have been extremely certain fine cut and pipe tobacco brands to Philip Morris International for impressed with the results, which have a total consideration of €254 million. The divestment was completed on highlighted the significant and growing 30 June 2008 and will not materially affect the operational and financial talent pool we have within the business. performance of Imperial Tobacco. The gain realised on the divestment Outlook was £174 million. The integration of Altadis will remain a priority going forward. We have an 20 May 2008 Launched rights issue excellent track record of integrating new We announced the launch of a fully underwritten rights issue to raise businesses into the Group and remain £4.9 billion to repay part of the debt facilities put in place to fund the cash on course to successfully deliver our consideration paid for the acquisition of Altadis. The basis of the rights targeted cost savings. issue was 1 new share for every 2 existing shares held on 15 May 2008 Leveraging our enhanced operating at a subscription price of 1475 pence per share. At the close of the rights platform and stronger, more diversified issue on 11 June 2008 valid acceptances had been received in respect brand and product portfolio will be key of 97.2 per cent of the total number of new shares offered. This was an to driving future growth and I am confident excellent response considering the financial climate and the remainder that we will realise the potential of the of the shares were successfully sold by the underwriters on 12 June 2008. many opportunities that lie ahead. Integration announcement Combined with our ongoing focus on cost 19 Jun 2008 and effectively managing our cash, we We announced a number of European restructuring projects that we remain well placed to continue to create propose to implement progressively over the next three years as part sustainable value for our shareholders. of the integration of Imperial Tobacco and Altadis. We believe that the Group will be able to generate annual operating efficiencies from these restructuring projects of around €300 million by the end of the financial year ending 30 September 2010, rising to around €400 million by the end of the financial year ended 30 September 2012. We estimate that the one-off cash cost of achieving these efficiencies will be around €600 million. Gareth Davis Chief Executive For more information visit www.imperial-tobacco.com

www.imperial-tobacco.com 7 DIRECTORS’ REPORT: BUSINESS REVIEW: STRATEGIC AND FINANCIAL REVIEW Financial Review

Our good ﬁnancial performance and working capital improvements enabled us to generate free cash ﬂow of £1 billion. Robert Dyrbus, Finance Director Strong cash generation

Segmental Reporting Enlarged Group Performance Prior to the acquisition of Altadis on Profit from Adjusted profit 25 January 2008, the Group undertook Revenue operations from operations a single principal activity which was the In £s million 2008 2007 2008 2007 2008 2007 manufacturing, marketing and sale of Tobacco 15,650 12,344 1,531 1,418 2,107 1,475 tobacco and tobacco-related products. Logistics 5,561 – 23 – 121 – Following the acquisition of Altadis the enlarged Group has two main business Eliminations (683) – (83) – 2 – activities, Tobacco and Logistics, which Fair value movements have been used as the basis of the on derivatives – – (314) – – – segmental reporting in this report. Group Total 20,528 12,344 1,157 1,418 2,230 1,475 The Tobacco segment comprises the manufacturing, marketing and Enlarged Group Performance sale of tobacco and tobacco-related Results have benefited from a full year’s contribution from Commonwealth Brands in the products including sales to, but not USA and the consolidation of Altadis from 25 January 2008. These financial results also by, the Logistics segment. The Logistics reflect good performances in a number of regions across the enlarged Imperial Tobacco segment comprises the distribution Group and foreign exchange gains which were partially offset by the impact of specific of tobacco products for major tobacco events in Europe and Asia. manufacturers, including Imperial Tobacco, as well as a wide range of other products New Geographic Analysis of Tobacco 2008 Adjusted and services. profit from New Geographic Analysis In £s million Net revenue operations Following the acquisition we will be UK 869 584 reporting Tobacco results for the enlarged Germany 664 309 Group using a new geographic analysis reflecting the way we manage our Spain 411 150 business. Further information can Rest of EU 1,250 494 be found in our Preliminary Results Americas 542 166 presentation on our corporate website at www.imperial-tobacco.com. Rest of the World 1,502 404 To aid understanding of our 2008 results, Total 5,238 2,107 we have also provided details of the contribution of the standalone Imperial Tobacco and Altadis businesses, as well as a geographic breakdown of the existing Imperial Tobacco business and a divisional breakdown for Altadis.

8 Imperial Tobacco Group PLC 2008 Tobacco

In £s million 2008 2007 Revenue 15,650 12,344 Net revenue 5,238 3,280 Proﬁt from operations 1,531 1,418 Adjusted proﬁt from operations 2,107 1,475 Adjusted operating margin % 40.2% 45.0%

Logistics

In £s million 2008 2007 Revenue 5,561 – Distribution fees 607 – Proﬁt from operations 23 – Adjusted proﬁt from operations 121 – Adjusted distribution margin % 19.9% –

Proﬁt from Operations

In £s million 2008 2007 Adjusted proﬁt from operations 2,230 1,475 Acquisition accounting adjustments (161) – Amortisation of acquired intangibles (309) (23) Brand divestment gains 174 – Fair value movements on derivatives (314) (34) Restructuring costs (463) – Proﬁt from operations 1,157 1,418

Profit from Operations Acquired Intangibles Amortisation The total restructuring charge in the year Reported profit from operations for was £463 million, with £442 million relating Acquisition Accounting Adjustments the year included acquired intangible to these integration projects. The expected There are a number of acquisition amortisation costs of £309 million related cash element of these restructuring costs accounting adjustments required under mainly to the Altadis and Commonwealth is £412 million and mainly relates to IFRS which have affected reported profit Brands acquisitions. redundancies and social plan costs. from operations. The most significant of Brand Divestment Gains There was also £30 million in respect of asset write downs. These figures reflect these are one-off adjustments related to Reported profit from operations includes where we were in the consultation process the fair value of stocks held by Altadis at a profit of £174 million on the sale of the date of the acquisition, which reduced at the end of September 2008, and we still a number of fine cut and pipe tobacco expect the total cash costs in respect of our reported profit from operations for the brands to Philip Morris International. year by £118 million. the European restructuring projects to The divestments will result in a full year be in the region of €600 million. Prior to the acquisition of Altadis, reduction of around £20 million in our In addition, we have announced some profit from operations. Imperial Tobacco sold products to Altadis, smaller restructuring projects, including principally to the logistics business for Derivative Financial Instruments the integration of Lignum 2, our recent distribution in France, Spain, Italy and Fair value losses of £314 million on USA acquisition, the closure of our cigar Portugal, and recognised profit at the derivative financial instruments used factory in Selma, Alabama, USA, and time of sale to Altadis. to hedge our net investment in overseas the streamlining of our Logistics operations Following the acquisition we now operations are included in profit from in France. These projects have resulted recognise these profits when the operations. These losses are offset by in additional restructuring charges of £21 million. products are sold out of the enlarged gains on the underlying foreign currency Group. There are similar, although smaller, assets which have been recognised in the Included within profit from operations effects where Imperial Tobacco distributed exchange translation reserve. is €43 million of synergies generated from the Altadis acquisition. These were goods on behalf of Altadis prior to Restructuring and Synergies acquisition. Together they have affected primarily reflected in the Altadis results. In June we announced a number Production and purchasing accounted for reported profit from operations recognised of restructuring projects in Europe around 40 per cent of the savings with the in the year to 30 September 2008 by as part of the integration of Imperial balance being split evenly between sales a further £43 million. Tobacco and Altadis. and marketing and corporate overheads.

www.imperial-tobacco.com 9 DIRECTORS’ REPORT: BUSINESS REVIEW: STRATEGIC AND FINANCIAL REVIEW Financial Review continued

Enlarged Group Adjusted Profit from Operations Therefore, excluding foreign exchange, Adjusted profit underlying growth was around 6 per cent. from operations In the USA our results were enhanced In £s million 2008 2007 by a full year’s contribution from Imperial 1,578 1,475 Commonwealth Brands. The results Altadis 641 – also reflect market share gains in both cigarette and fine cut tobacco and price 11 Eliminations – increases which more than offset cigarette Group Total 2,230 1,475 market volume declines and additional investment on advertising and promotion Imperial Tobacco Regional Results (excluding Altadis) to support our brand launches. In £s million Net Adjusted profit Cigarette Fine cut tobacco In the Rest of the World, we delivered revenue from operations volumes (bn) volumes (tonnes) (unless otherwise stated) strong performances in many markets 2008 2008 2008 2008 2007 2007 2007 2007 across the region, particularly in Eastern UK 869 876 570 564 21.4 22.9 2,350 2,200 Europe, Africa and the Middle East Germany 567 524 267 238 19.5 20.4 4,150 4,700 and we have made further significant Rest of W. Europe 665 635 332 326 18.0 19.6 12,800 14,900 investment in the region with a view to continuing this momentum. USA 239 117 115 52 14.2 7.1 550 100 This region also benefited from a foreign Rest of the World 1,314 1,128 294 295 134.0 130.3 3,300 2,550 exchange benefit of £26 million, which Total 3,654 3,280 1,578 1,475 207.1 200.3 23,150 24,450 helped offset the impact of the planned destocking in Taiwan and Russia. We In the UK, despite the initial impact of as a result of the strengthening euro also absorbed duty to maintain market public smoking bans on volumes, profits exchange rate. However, following the share and our competitive position in were up, benefiting from price increases Altadis acquisition, we have reassessed some Central European countries as the and reduced costs. and reduced the levels of stock of Imperial accession states move towards the end Tobacco brands in Spain. This impacted In Germany, results were up, benefiting of their derogation periods. We estimate Imperial Tobacco standalone operations from the strengthening euro exchange that the overall impact of these events but not the Group results as the offsetting rate. Share gains in both cigarette and was a reduction in profit from operations amount is reflected within eliminations. fine cut tobacco alongside selective of around £50 million and, excluding foreign Our performance was also impacted by price increases were offset by market exchange gains, that our underlying profit the divestment of Interval in Europe and volume declines, in part impacted by the growth was around 8 per cent. by travel retail declines in Western Europe. introduction of public smoking restrictions, Taking these operational factors into After increasing our marketing investment as well as ongoing downtrading. account, we estimate that profit from by around 10 per cent, particularly In the Rest of Western Europe we operations in this region was reduced focusing on the USA, Turkey and Ukraine, delivered cigarette share growth in many by around £50 million in the year ended we delivered underlying growth in total markets and benefited by £37 million 30 September 2008. profit from operations of 4 per cent.

Altadis Divisional Results from 25 January 2008 Fine cut Adjusted Adjusted In £s million Cigarette and tobacco Net distribution proﬁt from (unless otherwise stated) cigar volumes volumes revenue fees operations Cigarette 84.7bn 2,000t 1,092 429 Cigar 2,162m 464 120 Logistics 641 139 Other (37) Eliminations (10) Total 641

Altadis Divisional Results Overall, the division was impacted In cigarette, we delivered a strong by increasing smoking restrictions performance reflecting market share and the economic slowdown. gains and improved proﬁtability particularly in Spain, France and North Africa. In Logistics, results were in line with our expectations with a good performance Within cigar, we performed well in the in Tobacco offsetting ongoing weakness natural wrapper segments in the USA, in publications and transport. with Habanos in the emerging markets of Eastern Europe, Latin America and Other costs relate to Altadis central Asia Paciﬁc, and in Spain with mini cigars. overheads and support function costs.

10 Imperial Tobacco Group PLC 2008 Cash and Debt increase in the adjusted effective tax rate 25 January 2008), taking into account is due to the higher rates of tax applying Altadis’ net debt and the interests of to Altadis. The reported tax charge was minority shareholders at that date. Our Our business is highly cash generative £180 million (2007: £325 million). tender for the 40.38 per cent Logista and we aim to convert around Earnings per Share and Dividends minority which we did not acquire through 100 per cent of our profit from Adjusted earnings per share increased the Altadis acquisition ended on 6 May operating activities after net capital 2008, with 37.3 per cent accepting our expenditure into cash. We have by 15 per cent to 136.9 pence. Basic earnings per share were 50.6 pence offer. We subsequently used the squeeze- performed a review of all aspects out mechanism to compulsorily acquire all of capital employed to enable (2007: 116.7 pence), primarily impacted by restructuring costs, fair value of the remaining Logista shares for a us to deliver further sustainable total cash consideration of €925 million. improvements in our working capital. movements on derivatives, amortisation of acquired intangibles and one-off On 14 April 2008 we completed the disposal At the end of September 2008 we acquisition accounting adjustments, of Altadis’ 49.95 per cent shareholding in had committed financing facilities in partially offset by brand divestment gains. Aldeasa S.A. to Autogrill S.A. for a total cash place of around £14 billion. Around consideration of €275 million and a number 66 per cent was bank facilities with The total amount of dividends payable in respect of 2008 is £588 million, an of fine cut and pipe tobacco brands were the balance raised through capital sold to Philip Morris International for market bond issues. increase of 26 per cent on last year, which reflects growth in our adjusted attributable €254 million on 30 June 2008. Our closing adjusted net debt was earnings to a little under £1.2 billion and Continuing the programme of non-core £11.5 billion which was denominated maintains our payout ratio at around asset disposals of €650 million originally in the following currencies: 62 per cent 50 per cent, in line with previous years. announced by Altadis in April 2007, euros, 25 per cent US dollars and the We have proposed a final dividend of €380 million had been realised as at remaining 13 per cent mainly sterling. 42.2 pence per share such that the total 30 September 2008. This includes the sale Our all-in cost of debt was stable at dividend for the year is 63.1 pence. of Logista’s stake in Iberia for €220 million 5.5 per cent. We had a successful Following approval by shareholders this prior to our acquisition of Altadis. Since dual-tranche bond issuance in dividend will be paid on 20 February 2009 completion of the Altadis acquisition September 2008 where the £1.2 billion to those shareholders on the register at €34 million has been realised. raised has fulfilled our short-term close of business on 23 January 2009. Rights Issue financing needs. In the short term, we will Net Debt and Cash utilise the high level of cash we generate In June we completed a 1 for 2 rights At 30 September 2008, our reported net to reduce debt and to continue to create issue at a subscription price of debt had increased to £11.7 billion additional value for our shareholders. 1475 pence which raised £4.9 billion (2007: £4.9 billion). Eliminating accrued and we used the proceeds to repay interest, the fair value of interest rate Other Financial Information the equity bridge facility put in place derivatives and finance lease liabilities, to part fund the Altadis acquisition. our adjusted net debt was £11.5 billion Net Finance Costs (2007: £4.8 billion). Additional borrowings Adjusted net finance costs were to finance the Altadis acquisition have £623 million (2007: £237 million). On been partially offset by the proceeds of an adjusted basis, our interest cover was £4.9 billion from the rights issue. Our cash 3.6 times (2007: 6.2 times). Our interest conversion was 86 per cent (2007: 81 per Robert Dyrbus cover for banking covenant purposes cent). This level was achieved despite the Finance Director was higher as this excluded some lower than usual level of Altadis net debt at matters, including the interest paid the date of acquisition which normalised in on the equity bridge. February, resulting in a cash outflow of Reported net finance costs of £536 million approximately £400 million. Excluding this (2007: £181 million) include retirement impact, our cash conversion was 103 per benefit net finance income of £45 million cent, slightly ahead of our target. (2007: £54 million) and fair value gains Foreign Exchange on interest rate derivatives of £42 million Net revenue was increased by (2007: £2 million). Reported and adjusted £257 million mainly as a result of the net finance costs include £289 million stronger euro exchange rate. Adjusted related to the acquisition of Altadis. profit from operations was increased by Profit Before Tax £93 million and this was partially offset by Adjusted profit before tax was £1,607 an adverse impact on adjusted net finance million (2007: £1,238 million). Reported costs of £19 million. profit before tax was £621 million Acquisitions and Non-Core-Asset (2007: £1,237 million). Disposals Taxation On 25 January 2008, we completed The adjusted tax charge for the year the acquisition of Altadis for a total was £426 million (2007: £310 million) cash consideration of €50 per share representing an adjusted effective tax rate representing an enterprise value for Altadis of 26.5 per cent (2007: 25.0 per cent). The of €15.2 billion (£11.3 billion as of

www.imperial-tobacco.com 11 DIRECTORS’ REPORT: BUSINESS REVIEW: STRATEGIC AND FINANCIAL REVIEW Where We Operate

The acquisition of Altadis has increased our geographic reach and portfolio of brands in both cigarette and other tobacco products. A stronger international portfolio

We have pursued a consistent strategy Imperial Tobacco Cigarette significant growth in the Central European Volumes of expanding our international footprint % markets of Hungary and the Czech and developing our multi-product portfolio Republic this year. Developed Emerging to create sustainable value for our markets markets Cigar shareholders. With the acquisition of Altadis we became This has resulted in a diversified tobacco the global leader in cigar, with sales in 40 company, with a strong presence within more than 120 countries worldwide. We the developed markets of the European hold around a quarter share of the global 60 Union and an increasing share of the market and have leadership in the high emerging markets of the world. value premium cigar sector. Some 60 per cent of our cigarette We are the market leader in France and volumes now come from the growing Spain and are the number one in the large emerging markets. cigar segment in the USA in value terms. Other Tobacco Products Our joint venture, Corporación Habanos, Cigarette Golden Virginia Through brands including is an exclusive exporter and marketer We combine a strong and growing and Drum, we are the global leader in of Cuban cigars, and offers further cigarette presence in the mature markets fine cut tobacco with the largest market opportunities for the Group to develop of Europe, the USA and Australasia with shares in several countries within the its interests in this segment. expanding market shares across the European Union. emerging markets in Eastern Europe, The largest cigar markets are Africa, the Middle East and Asia. Our acquisition of Lignum 2 during the predominantly in North America and year added the Rave brand to our portfolio Western Europe. However, we are seeing Our focus is on creating comprehensive and doubled our fine cut tobacco market impressive growth rates in the emerging coverage of key price segments within share in the USA. markets of Asia, Eastern Europe and the individual markets through our portfolio Middle East. of local, regional and international brands. Fine cut tobacco is growing in response to the demand from cigarette consumers Due to the addition of Altadis’ cigarette downtrading to value for money options. business, we now have a broader portfolio It is primarily a developed market product of brands with which we can enhance our but we see opportunities for introductions position in both new and existing markets. into new markets and have achieved

12 Imperial Tobacco Group PLC 2008 We are a diversiﬁed tobacco company with strong international positions across our key product categories.

CIGARETTE FINE CUT TOBACCO CIGAR

We have leading Our portfolio of We are the world cigarette positions brands has given leader in cigar with in markets across us global leadership particular strength Europe, Asia, in the growing in the high value Africa and the ﬁne cut tobacco premium sector. Middle East. segment.

www.imperial-tobacco.com 13 DIRECTORS’ REPORT: BUSINESS REVIEW: STRATEGIC AND FINANCIAL REVIEW Focus on the Future

Our Corporate Development team is focused on the strategic direction and sustainable growth of the business. Alison Cooper, Corporate Development Director

Corporate Development was established These have included the disposal of our they may have on consumers and the to focus on the long-term strategy and stake in the duty-free retailer, Aldeasa, demand for our products. Understanding sustainable growth of Imperial Tobacco. the divestment of certain fine cut and these issues and developing appropriate pipe tobacco brands as required by the responses are fundamental to the strategic It brings together various activities European Commission and the buy-out direction of Imperial Tobacco. within the Group, including Business of the minority shareholding in the logistics Development, Corporate Affairs, and Integration business, Logista. Strategy and Foresight, with the task Integration is managed by a dedicated of examining how the business and the Elsewhere, Business Development has led Integration Team in conjunction with industry are developing and identifying negotiations in the successful buy-out of functional senior managers, and reports future growth opportunities. Corporate the outstanding shares in the Scandinavian into the Chief Executive’s Committee via Development is also responsible for snus company, Skruf, and the USA cigar the Corporate Development Director. Corporate Communications and business, JR Cigars. The team is particularly focused on managing the integration of Imperial Corporate Affairs managing the specific European Tobacco and Altadis. We support sound and proportionate integration projects which will improve Business Development regulation and continually seek operational efficiencies and deliver We have a long and successful track opportunities for active engagement substantial cost savings. This involves record of acquisitions and although on a range of issues affecting our industry, managing a wide range of activities further significant consolidation within including public smoking restrictions, throughout the consultation and the industry may be more limited, there packaging regulation, ingredients implementation phases, ensuring remain numerous opportunities for further disclosure, excise duties, illicit trade that all employees affected by the market or product specific acquisitions. and the display of tobacco products projects are treated responsibly The Business Development team at the point of sale. and provided with a comprehensive continually evaluates these opportunities range of support measures. This requires expertise across all against Imperial Tobacco’s financial and Outlook strategic acquisition criteria. Corporate Affairs’ disciplines and we constantly review our structure to ensure Critical to the success of our business The team is also responsible for assessing that we have sufficient skills and resources has been our ability to anticipate and potential strategic alliances and joint in place to inform on strategy and respond to changing market dynamics ventures that will further develop our effectively manage these issues. and consumer preferences. We achieve business and create value for our this by encouraging all functions to work Strategy and Foresight shareholders. together to optimise our growth potential. In Strategy and Foresight we focus on This year there has been considerable longer-term planning issues, anticipating This cross-functional approach is vital focus on activities related to the changes to our operating environment and we are currently implementing a acquisition of Altadis. and how these might impact our business. number of structural changes that will strengthen cross-functional collaboration Strategy and Foresight’s core objective and ensure that it is fully embedded is to ensure that the enlarged Group is across the enlarged Group. Scope of role well placed to maximise the potential of its combined portfolio and enhanced Regional Forums and a Group Planning > Planning for the long-term operating platform. This requires a diligent Forum, with representatives from all development of the Group. approach to monitoring and responding functions and strong links to the Chief to external events. Executive’s Committee, are established > Assessing acquisitions and and have the remit to identify and developing strategic alliances The team continually reviews evolving maximise the many opportunities and joint ventures. market dynamics and the potential effect that lie ahead. > Engaging externally on issues affecting our company and the industry.

For more information visit www.imperial-tobacco.com 14 Imperial Tobacco Group PLC 2008 World Tobacco Market

The world tobacco market is stable with over five trillion cigarettes consumed each year.

Industry Overview Other tobacco products, particularly fine The past year has seen significant change Summary cut tobacco, have experienced growth among the largest tobacco companies, as a result of this trend, and this is with Imperial Tobacco’s acquisition of > The developed markets are expected to continue. Conversely, Altadis, formerly the fifth largest company experiencing a move towards in emerging markets, premium brands in the industry, and Altria retaining its lower priced tobacco products. have been growing as consumers are operations in the USA and spinning increasingly trading up. off its international tobacco operations > In the emerging markets volumes to form Philip Morris International. are growing and consumers are The global market for cigars has been uptrading to international brands. stable in recent years with growth being Excluding China, which accounts for a experienced in smaller, mass market third of total global cigarette consumption, > Diversification across tobacco oriented products. The market is the five largest tobacco companies are products is an increasingly concentrated in the developed markets Philip Morris International, British American common strategy. of Western Europe and the USA, although Tobacco, Japan Tobacco, Imperial growth is being seen in the emerging Tobacco and Altria. The respective markets of Asia, the Middle East and cigarette market shares are 24 per cent, Eastern Europe. 19 per cent, 17 per cent, 9 per cent and Global market shares % Industry Outlook 5 per cent. Together, they account for 74 per cent of the total cigarette market. While the tobacco markets of the EU, Altria North America and Australasia are Stability in the world tobacco market mature we believe there are still many is a function of offsetting trends in the Other 5 British American opportunities to grow profits. developed and emerging markets. 26 19 Tobacco We expect that our organic growth will In the developed markets, such as those continue to be derived from volume trends in Western Europe, smoking incidence Japan across the emerging markets and product is expected to continue to decline, with 17 Tobacco categories, enhanced by market share 24 the percentages of smokers within total Philip Morris Imperial gains from other manufacturers resulting 9 populations reducing. However, the International Tobacco from entry into new markets, new brand Group number of adults in the world is expected launches and the introduction of innovative to grow, especially in emerging market brand variations. regions, such as Africa and Asia, and as a result we expect that overall annual Cost management will also contribute global consumption will remain broadly to organic profit growth. unchanged in the medium term. Diversification into the full array of tobacco Tobacco regulation and legislation have products by broadening their portfolios increased in recent years, including beyond cigarette, is a common thread restrictions on smoking in public places, of the strategic objectives being pursued advertising and promotional restrictions by the major tobacco companies, and pictorial health warnings. as is the development of international cigarette brands. Excise duties have also increased, especially in the developed markets, Further consolidation within the tobacco leading consumers to downtrade to value industry may be limited, but still remains brands and products. The level of excise a strategic opportunity, with more focus also tends to facilitate a positive pricing on market or product specific acquisitions environment for the industry. and strategic alliances.

www.imperial-tobacco.com 15 DIRECTORS’ REPORT: BUSINESS REVIEW: STRATEGIC AND FINANCIAL REVIEW Our Strategy

We are delivering on our global strategy by actively pursuing three primary strategic objectives.

To create sustainable shareholder value by growing our operations organically and through acquisitions.

Sales development Cost focus Cash management

The enlarged Group has sales in over Managing costs and improving The Group’s business is highly cash 160 countries. In the developed markets the efficiency of our operations are generative and our focus is on managing we have strong positions in the European core objectives. capital expenditure and working capital, Union and a growing presence in the USA. tax and interest costs to ensure cash flows Our challenge each year is to find new In these markets volumes are in gradual are optimised. As a result of the increased ways of optimising our manufacturing decline but we have benefited from a debt arising from the acquisition of Altadis, capacity and performance. These combination of the pricing environment a reduction in our overall debt level is a improvements have to be achieved without and our ability to respond to trends, key objective for cash management going undermining our approach to best practice such as downtrading, by positioning forward. Our objective is to ensure that the or our focus on quality and innovation. our portfolio to meet consumer demand. cash we generate is used efficiently, and Standardisation across the manufacturing as well as paying down debt we will This is balanced with extensive exposure portfolio has become a central theme invest in the future growth of the business, to the emerging markets of the rest of of our success. including acquisitions, and return cash the world, including Eastern Europe, We are already addressing many issues to shareholders through dividends and, Africa, the Middle East and Asia. These relating to cost management and efficiency when appropriate, share buybacks. are markets where volumes have been resulting from the ongoing integration growing, and account for 60 per cent Since our listing on the London Stock of the enlarged Group. of our overall cigarette business. In Exchange in 1996, we have invested these regions, there are considerable We believe there are many opportunities over £17 billion in acquisitions. We are opportunities to develop our international, to deliver cost improvements through committed to continuing to expand our regional and local brands in new and better resource allocation, simplification business through both acquisitions and existing markets. of processes and infrastructure, and the organic investment opportunities. economies of scale available from our We have a versatile brand and product Over £3.7 billion has been returned combined purchasing power. portfolio that has been enhanced to shareholders through a combination significantly with the acquisition of Altadis. of dividends and our share buyback programme. Our dividend policy is to We have strong local, regional and increase dividends broadly in line with international brands across all tobacco underlying earnings growth, with a payout categories and comprehensive coverage ratio of around 50 per cent, and this has of the key price segments within individual led to increases in the dividend each year markets. since our listing. Our strategy is to drive sales growth by developing our brands and products through investment and innovation, supported by excellent trade marketing skills and strong sales forces.

See our case studies on the USA and Africa and p18-21 the Middle East demonstrating our strategy in action

16 Imperial Tobacco Group PLC 2008 Key Performance Indicators

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

2008 performance 2007 performance1

Adjusted Earnings Per Share 136.9p 118.8p

Total Shareholder Return2 Imperial Tobacco -5% 30% FTSE All-Share Index -22% 12% Adjusted Operating Margin 40.2% 45.0% Tobacco Adjusted Distribution Margin 19.9% Logistics Cash Conversion Rate 86% 81% Cigarette Market Share3 45.9% 46.4% UK 27.4% 21.3% Germany 37.1% 5.9% Spain Volumes 291.8bn 200.3bn Cigarettes 25,150t 24,450t Fine Cut Tobacco 2,452m 316m Cigars Productivity4 +5% +7%

1 Imperial Tobacco standalone ﬁgures. 2 In 2008 Imperial Tobacco achieved a total shareholder return 17 per cent greater than that of the FTSE All-Share Index (2007: 18 per cent greater). 3 Imperial Tobacco estimates. 4 Excluding Altadis. www.imperial-tobacco.com 17 DIRECTORS’ REPORT: BUSINESS REVIEW: STRATEGIC AND FINANCIAL REVIEW Case Study: United States of America

Our expansion into the USA demonstrates our ability to continue to create value in mature markets. Graham Blashill, Group Sales & Marketing Director Implementing our strategy in the USA

Our recent rapid expansion into the USA Commonwealth Brands was one of the is a good example of our ability to create first tobacco companies to voluntarily sign value through targeted investment. the Master Settlement Agreement (MSA) and, like Imperial Tobacco, has never lost We have sold rolling papers and tubes in or settled any product liability claim. the USA since our acquisition of the Rizla business in 1997 but made a strategic The MSA is an agreement between decision not to enter the tobacco market tobacco manufacturers and the National due to the uncertain litigation environment. Association of Attorneys General. Over the years, however, this has eased In return for annual payments based considerably reflecting the fact that the on market share and compliance with vast majority of individual and class action restrictions on advertising and marketing, claims in the USA have been decided in each MSA member is protected from favour of the tobacco industry. State healthcare cost actions. These improvements prompted us to re-evaluate our strategy. We originally intended to enter the USA tobacco market organically but in 2007 had the opportunity to acquire Commonwealth Brands, the fourth largest tobacco company in the USA. The company, based in Bowling Green, Kentucky, had a 3.7 per cent cigarette market share from a portfolio of discount brands, a sizeable sales force, and a modern factory in Reidsville, North Carolina. The company was also the exclusive distributor of the Bali Shag and McClintock fine cut tobacco brands.

18 Imperial Tobacco Group PLC 2008 USA: Cigarette market share % Although our cigar sales have been Sales excellence is key to our success generally affected by smoking restrictions Other and we are currently in the process Imperial Tobacco and the economic downturn, particularly of expanding our sales force. This Group in the premium category, this is being 10 will improve our national distribution 4 offset by the good performance of our capabilities and ensure that we continue Lorillard brands in the natural wrapper segment 10 to maximise the opportunities that our 50 and growth in cigarillos. versatile multi-product portfolio offers. Altria Altadis had a 51 per cent stake in 26 Reynolds JR Cigars, a nationwide retailer of cigars American and related products, and in October 2008 we purchased the remaining shares to further strengthen our position in the market. Outlook Membership of the MSA is important in In a relatively short period of time we have managing litigation risk in the USA and developed a strong and growing presence was always a pre-requisite for our entry in the USA tobacco market and remain into the tobacco market. very well positioned to continue to improve The acquisition of Commonwealth our market shares and profitability. Brands provided a strong platform for Through our strong portfolio we have a growth which we have optimised through presence in cigarette, fine cut tobacco, a number of initiatives. cigar and rolling papers and tubes. This Imperial Tobacco secured MSA broad representation provides significant membership in November 2007 in order potential for future growth. to be able to sell our own tobacco brands in the USA. We have subsequently launched Davidoff in key cities across the USA and Fortuna in both Florida and Texas. We also focused on driving the growth of Commonwealth Brands’ portfolio of discount brands, which include USA Gold and Sonoma, and our cigarette share has now increased to 4.3 per cent. Fine cut tobacco is a growth area in the USA and as world leader in this sector we were quick to capitalise on this opportunity, acquiring the Bali Shag and McClintock brands in the USA, and launching our own brand, Premier.

We further enhanced our ﬁne cut tobacco In a relatively short portfolio with the Rave brand following period of time we have the acquisition of the company, Lignum developed a diverse 2, in May 2008. These initiatives have portfolio of brands significantly developed our fine cut across cigarette, ﬁne tobacco share which had grown to around cut tobacco and cigars. 8 per cent in September 2008 compared to 1 per cent in the previous year. Completing our multi-product portfolio is our market-leading position in cigars, in terms of net sales, which we inherited through the Altadis acquisition. We offer the broadest range of cigar products in the USA, from premium to mass market.

www.imperial-tobacco.com 19 DIRECTORS’ REPORT: BUSINESS REVIEW: STRATEGIC AND FINANCIAL REVIEW Case Study: Africa and the Middle East

The acquisition of Altadis has signiﬁcantly enhanced our presence and future growth potential in Africa and the Middle East. Developing opportunities in emerging markets

Our presence in Africa and the Middle East an expanding business in Vietnam. The has grown steadily over the past decade. acquisition transformed our presence in Africa and provided a springboard We estimate that the region accounts for for growth in South East Asia. almost 500 billion cigarettes annually. We have very strong positions in established In 2008, with the acquisition of Altadis we markets and see numerous opportunities have again strengthened our position, more for expansion through the introduction of than doubling our volumes in the region with our brands across existing markets, and the addition of an Altadis footprint that was by entry into new markets. complementary to our own, and bringing us into new markets. We have 13 manufacturing plants in the region with a capacity of around 50 billion We are the market leader in the majority cigarettes, including facilities in Morocco, of our markets in Africa and have West Africa and Turkey. consistently achieved market share gains in many areas including the Ivory Coast, Increases in tobacco regulation and Burkina Faso and Senegal. taxation are a feature of the African and Middle Eastern markets. As in all our Our footprint in Africa is by no means markets we remain focused on effectively complete, and there is substantial scope managing the implications of regulation for us to expand further into new markets. on our business. Through Altadis we gained entry into The evolving political dynamics can at Morocco and are now the number one times lead to instability in some countries player with our leading cigarette brand but our committed and experienced Marquise. We have also launched employees have continually demonstrated our premium brand Davidoff with their ability to overcome these challenges. encouraging early results. Africa Our other key brands in Africa include In 2001, we signiﬁcantly enhanced our Fine, Gauloises Blondes, Excellence, position in Sub-Saharan Africa with the Mustang and Good Look. Mustang, acquisition of a majority stake in Tobaccor, a mid-priced brand in Burkina Faso, has a major cigarette manufacturer and grown market share to almost 46 per cent, distributor with strong market shares while Fine, a mid-priced brand sold in key in a number of African countries and markets such as the Ivory Coast, Chad

20 Imperial Tobacco Group PLC 2008 and Congo, has seen consistent volume West and Davidoff, and are strengthening growth. Excellence, a value brand also our position with increased marketing sold in the Ivory Coast, Senegal and investment. Burkina Faso, has performed similarly well, Outlook as have Gauloises Blondes in Algeria and Good Look Africa and the Middle East have been key in Madagascar. growth regions for both Imperial Tobacco Whilst focusing on developing our and Altadis, and we see further signiﬁcant business we remain committed to opportunities given our combined portfolio supporting the tobacco growing industry and geographic reach. in Africa. We believe that we have Our international cigarette brands are a responsibility to help address key performing well in the Middle East and issues affecting tobacco farmers. through our portfolio of local brands in We strive to prevent the exploitation Africa we are focused on enhancing our of children through our membership strong market shares. We also have of the Eliminating Child Labour in Tobacco ambitions to further grow our international Foundation and help tobacco growers brand presence in the African region. develop sustainable agricultural practices as part of the Social Responsibility in Tobacco Production programme. Our ongoing community investment initiatives have also provided wide ranging support to local communities, including improved education and healthcare facilities. Middle East Whereas in Africa a major acquisition provided us with strong established market shares, which we have continued to develop, our progress in the Middle East has been based on an import strategy that seeks to build share through the development of our international brands. The acquisition of Altadis has enhanced our geographic proﬁle in the region and has also considerably strengthened our cigarette portfolio. Gauloises Blondes is now our leading cigarette brand in the Middle East, complemented by Gitanes and Davidoff. These prestigious brands are supported With the acquisition by a number of regional and local brands, of Altadis we doubled including Superkings and Golden Gate. our volumes in a region Davidoff has been a real success story estimated to account in the region, recording compound annual for almost 500 billion growth of 44 per cent over the last five cigarettes annually. years. Davidoff’s best selling market is Saudi Arabia, where its share now stands at over 9 per cent. Our expanding operations in Turkey are also included in this region. We entered the Turkish market in 2003 with the construction of a new cigarette factory which became fully operational a year later. We have since captured a 3.2 per cent market share with our brands Klasik,

www.imperial-tobacco.com 21 DIRECTORS’ REPORT: BUSINESS REVIEW: STRATEGIC AND FINANCIAL REVIEW Principal Risks and Operating Environment

A detailed assessment of strategic risks within our operating environment is undertaken by management and is embedded into our corporate planning process.

Each area of the business is required to formally However, it is our belief that the WHO should Our View review its principal areas of risk and uncertainty not attempt to regulate areas that fall outside its We support sensible regulation but believe so that major risks are reviewed at all levels across mandate or competence, as many FCTC provisions that bans on smoking in public places are the Group. This is an ongoing process, ensuring seek to go beyond reasonable objectives and disproportionate and unnecessary. Our experience there are clear and consistent procedures for impose a supranational regulatory regime covering in markets where smoking restrictions or total bans monitoring, updating and implementing appropriate a wide range of areas better addressed by national are in place supports our view on the impact of controls to manage the identified risks. The Board regulators, who are familiar with local conditions. this legislation; while there may be an initial dip has responsibility for the Group’s systems of Moreover, it gives the WHO authority to establish in cigarette consumption, this tends to diminish internal control. We are subject to the same rules in areas outside its core competence – areas over time. However, we are concerned that these general risks and uncertainties as any other that fall under the jurisdiction of other bodies such business; for example, the political stability in unnecessary restrictions have an adverse effect the countries in which we operate and source our as the World Trade Organization or the International on smokers and on the venues which may wish raw materials, the impact of natural disasters and Organization for Standardization. to allow smoking. changes in general economic conditions including 2008 Update We believe that concerns about smoking in public currency and interest rate fluctuations, changes in New work has been agreed by the parties places can be resolved through common sense taxation legislation and the impact of competition. to the FCTC, including the development of and courtesy and by introducing practical solutions Outlined below is a description of the principal risks guidelines on advertising and sponsorship, such as well-ventilated smoking and no-smoking and uncertainties that are specific to and may packaging and labelling, smoking cessation, impact our business. Not all these factors are areas into work places, restaurants and other and education. The development work for within the Group’s control. There may be other risks public places. a further protocol that would focus solely on cross- and uncertainties which are unknown to the Group 2008 Update or which may not be material now but could be border advertising has been suspended following the decision to develop a comprehensive guideline A proposal for a directive banning smoking material in the future. A more detailed description in all enclosed work places, including catering of risks relating to the Group is set out in on advertising, sponsorship and promotion. establishments, within the EU is expected to be Part II of our rights issue prospectus dated Little progress has been made regarding the announced by the EU Commission through the 20 May 2008, available on our website: development of the protocol on illicit trade which www.imperial-tobacco.com. addresses issues such as licensing, tracking and Director General Employment and Social Affairs tracing, duty free, supply chain, anti-money by the end of 2008. This requires consultation with Regulation laundering provisions and internet sales. As a the social partners: trade unions and employers consequence, adoption of the protocol is likely (or their representative organisations). The previous consultation in 2004 led to the conclusion that The tobacco industry is subject to substantial to be moved back from 2010 to 2012. social partners were not in favour of an EU-wide and increasingly restrictive regulatory practices. workplace smoking ban. If such a directive was In many of the markets in which we operate, 2) UK Consultation on the Future of Tobacco approved by the Council and Parliament, it would there are regulatory restrictions affecting the Control override national legislation that allows for development, manufacture, sale, distribution, In May 2008 the UK Department of Health issued exemptions in hospitality venues. marketing and advertising of tobacco products. a consultation document on the future of tobacco Any future increases in regulation of the tobacco control which covered many areas including Comprehensive smoking bans in hospitality industry could have an adverse effect on the proposals to ban product display, vending sales venues are in place in a number of markets demand for our products or increase the and 10 packs. We submitted a detailed response including Ireland, the UK, Norway and New costs related to compliance. Key regulatory rigorously opposing these proposals, and this Zealand, as well as in several Canadian provinces developments in 2008 are outlined below. document is available via our corporate website: and USA states. In France, a smoking ban in www.imperial-tobacco.com. hospitality venues took effect in January 2008. 1) WHO Framework Convention Our View In Germany, there is a national ban on smoking in on Tobacco Control We agree with reasonable regulation and public places; however, the regulation of smoking The World Health Organization’s (WHO) Framework remain committed to working constructively in hospitality venues is determined individually by Convention on Tobacco Control (FCTC), ratified with governments and other regulatory bodies 16 Federal states, resulting in varying degrees of by 160 countries, provides all ratifying countries around the world. However, legislation must restrictions, ranging from full bans to exemptions with a framework within which national authorities meet the principles of good regulation by being for small venues. may decide on the most appropriate tobacco proportionate, supported by compelling evidence control regulation for their national circumstances. and fit for purpose. 4) Pictorial Health Warnings The FCTC contains wide-ranging provisions, There is a general trend towards introducing In our view the proposals outlined in the including those on advertising, ingredients, pictorial health warnings. Countries such as Department of Health’s consultation document product testing, taxation and illicit trade. Canada, Brazil, Australia, Thailand and Singapore do not meet these criteria. The Department of have had pictorial health warnings on cigarettes Our View Health is expected to publish a summary of all and other tobacco products for several years, We respect the WHO’s overall objective of the the responses received, before 8 December 2008. while others have passed legislation which will ‘attainment by all peoples of the highest possible become effective in the near future. level of health’ and agree with some principles 3) Smoking in Public Places of the Convention, most notably the need to Authorities have introduced tighter regulations Our View prevent youth smoking and combat illicit trade on smoking in public places in many of We do not believe that pictorial health warnings in tobacco products. the markets in which we operate. are necessary, as such warnings are designed

22 Imperial Tobacco Group PLC 2008 solely to shock and stigmatise smokers, and we promotion of products. The term ‘fire-safe’, which years. A technical consultation document was disagree with their use. We believe that pictorial was adopted widely by USA media, is in our view published in March 2007 seeking overall excise health warnings make no overall contribution to unhelpful and dangerously misleading. We prefer duty simplification and a narrowing of differentials the public awareness of the risks associated with the term ‘lower ignition propensity’. between fine cut tobacco and cigarette excise duty. smoking, which are already well known. We believe that the most effective way to reduce A formal report, published in July 2008, contained We support the principle of adult choice and fires is through a range of measures including firm proposals to amend the structure and minimum believe that we are entitled to use our packaging public education, fire protection and prevention levels of excise duty relating to tobacco products to enable our consumers to distinguish our programmes. as well as product definitions. Discussions in the Member States, European Parliament and products from those of our competitors. 2008 Update European Council are now in progress. The new 2008 Update A standard for LIPPs is being developed in the EU Tobacco Excise Tax Directive is expected A number of markets in which we operate already EU, and could be implemented in 2010. A final to be adopted in 2009, with implementation have, or will implement, pictorial health warnings safety assessment was approved by the European from 2010. Considerable negotiation over the in the near future. New Zealand introduced pictorial Commission in November 2007 and a mandate proposals in consultation with the 27 Member health warnings earlier this year while the UK has now been passed to the European Committee States is expected. Further increased levels Government required them from October 2008 for Standardization to establish a standard. are proposed from 2014. on all tobacco product packs. The Australian Government has published We continue to work with customs authorities a national LIPPs standard and is discussing 5) Product Display Bans at Point of Sale around the world to counter the illicit trade in the safety assessment process that is required tobacco products. We have now signed formal Product display bans have been in place in parts before its implementation. Memoranda of Understanding (MoU) in 13 countries of Canada for a number of years now. In Europe, including the UK, Ireland, Turkey and China, with Iceland is currently the only country with a product similar industry-wide co-operation agreements display ban in place. Excise Duty in Australia and the Ukraine. Our View Tobacco products are subject to excise duty Further information regarding certain investigations Imperial Tobacco encourages governments to which, in many of the markets in which we operate, initiated in January 2003 in relation to alleged foreign respect the principles of adult choice and freedom represents a substantial percentage of the retail trading and related violations by a number of people, of competition when regulating tobacco products. price and has been steadily increasing in recent including former Reemtsma employees, during a We are opposed to regulation that restricts years. Increasing levels of excise duty are likely period prior to our 2002 acquisition of Reemtsma, or prohibits retailers from displaying tobacco to encourage consumers in affected markets to is included in the Corporate Governance Report. products at the point of sale. switch from premium-priced cigarettes to lower- We are concerned that smokers are unreasonably priced cigarettes and fine cut tobacco, or to turn Key Market Dependency and unjustifiably denied the opportunity to view to the black market. Substantial increases in excise the range of tobacco products available from duty and any significantly unfavourable change The continued organic growth of the business their chosen retailer. The display of products is in the tax treatment of fine cut tobacco, if widely is underpinned by our key markets. Any material an important aspect of the consumer purchasing adopted, may have an adverse effect on the size decline in the performance of these markets may process; it provides consumers with the information of individual duty paid markets for our products. impact our future profit development. to make a genuine selection from the wide range Excise duty increases encourage both legal and of tobacco products, brands and prices that are 2008 Update illegal cross-border trade from countries with available in retail outlets, whilst contributing to fair Our business profile and brand and product lower levels of duty and the production of and undistorted competition between tobacco portfolio have been considerably strengthened counterfeit tobacco products. Within such an manufacturers and retailers. We are also concerned following the Altadis acquisition. Our extended that prohibiting or restricting the display of tobacco environment there is a risk that we and/or our international footprint provides a more balanced products is likely to further fuel the illicit trade employees may be subject to investigation by exposure to mature and emerging markets, in tobacco products. customs or other authorities. Although we have while our enlarged portfolio includes international implemented procedures to detect and control strength in cigarette and world leadership in fine 2008 Update illegal trading of our products, such procedures can cut tobacco, cigars, rolling papers and tubes. The Republic of Ireland is set to introduce a provide only reasonable and not absolute assurance We now also have a leading logistics platform product display ban in July 2009. Norway is also of detecting non-compliance by managing rather in Europe. This provides us with enhanced growth expected to announce new regulations in 2009. than eliminating risk. In September, we submitted our response to the opportunities and has resulted in individual key UK Government’s consultation on future tobacco Our View markets contributing a lower percentage of the control measures in England, Wales and Northern We remain totally opposed to the illicit trade in Group’s adjusted profit from operations. Ireland, which among other issues, sought views both smuggled genuine and counterfeit tobacco on proposals to ban or restrict product display or products. We are committed to working Competition Law to retain the status quo. For further information our with government authorities and international submission is available via our corporate website: organisations around the world and we continue We have significant market positions in certain www.imperial-tobacco.com. Similar proposals are to invest considerable resources in working countries. As a result, we may be subject to currently under consideration in Scotland and in the to counter the illicit trade in tobacco products. enhanced regulatory scrutiny as to competition Australian state of New South Wales. 2008 Update law in these countries, which could result in In general, levels of excise duty have been steadily adverse regulatory action by relevant authorities, 6) Lower Ignition Propensity Products (LIPPs) increasing in recent years in a number of markets including the potential for monetary fines, Canada and a number of states in the USA have in which we operate and this trend continued in EU and negative publicity. introduced regulations that all cigarettes sold Member States in 2008. All the Member States that 2008 Update in the market must comply with lower ignition joined the EU in May 2004 and January 2007 have Along with a number of other companies we propensity standards. continued to implement excise duty increases as supplied information to the UK Office of Fair Trading Our View they move towards the EU excise tax minima. (OFT) in October 2003 and April 2005 in relation Both regulators and the industry must take In the EU, the Tobacco Excise Tax Directive to an enquiry into the operations of the UK tobacco care with the terms used in any regulations and contains a provision for its evaluation every four supply chain. On 25 April 2008 the OFT issued

www.imperial-tobacco.com 23 DIRECTORS’ REPORT: BUSINESS REVIEW: STRATEGIC AND FINANCIAL REVIEW Principal Risks and Operating Environment continued

a Statement of Objections (SO) to a number of has been served upon us. We are not facing any We can offer no assurance that we will be able retailers and two tobacco manufacturers, including claims in France. Following our acquisition of to realise the potential benefits of the acquisition Imperial Tobacco, alleging those parties had Logista in May 2008, we are currently facing to the extent envisaged and within the timeframe engaged in unlawful practices in relation to retail a claim in Italy which is at an initial stage. contemplated. If we are unable to successfully prices for tobacco products in the UK. On 11 July integrate Altadis, this could have a negative impact In Poland, we faced a claim filed by three 2008, the OFT announced that six companies on the revenue, profit and financial condition of prisoners in April 2008, in response to which had reached early resolution agreements and had the enlarged Imperial Tobacco Group. we filed a defence. The statement of claim was agreed to pay individual penalties with a combined subsequently withdrawn in September 2008, 2008 Update maximum value of £173.3 million. and the court has discontinued the proceedings. In June 2008 we announced a number of Imperial Tobacco was not one of those companies. We understand that a claim was filed against restructuring projects in Europe which we propose We take compliance with competition law very us (and other tobacco companies) in Bulgaria to implement progressively over the coming years seriously and reject any suggestion that we have in March 2008 but we have not yet been formally as part of the integration of Imperial Tobacco and acted in any way contrary to the interests of served with any court documents. Despite threats Altadis. The projects affect sales and marketing, consumers. Imperial Tobacco has co-operated to do so, no proceedings have been commenced manufacturing and central support functions fully with the OFT throughout and continues to against us in The Netherlands. in a number of markets, and will strengthen do so. We provided our submission to the OFT the enlarged Group’s competitive position Following our acquisition of Commonwealth Brands responding to the allegations in August 2008. by addressing over-capacity and improving in April 2007, we are currently facing three claims efficiencies. Consultations have been concluded In the event that the OFT decides that a company brought by individuals in the United States. Two in several markets, enabling the implementation has infringed UK competition law, it may impose of these claims are brought by prisoners and were of projects to begin. Elsewhere, consultations are a fine which could be material and have adverse served on Commonwealth Brands in January 2008. ongoing and are being conducted in a constructive effects on the company’s profitability. In the event In the first prisoner claim the court has dismissed and productive manner. that such a fine is imposed on the Company the case. That dismissal has been appealed, but we would be able to appeal the decision to Commonwealth Brands believes the appeal was the Competition Appeal Tribunal and, ultimately, not filed in time. In the second prisoner claim Financing on a point of law to the Court of Appeal. Further the court has also dismissed the case, but that information is available in the Corporate judgment could still be appealed. The other The Group has significant borrowings which Governance Report. case is inactive and has been for some time. may impair operational and financial flexibility and Commonwealth Brands has applied to dismiss performance. The Group’s indebtedness could Tobacco-Related Litigation the case. That application remains pending. Two potentially cause Imperial Tobacco to dedicate further claims against Commonwealth Brands have a substantial portion of cash flow from operations to payments to service debt, depending on the We may incur substantial costs in connection with been dismissed. These dismissals are consistent level of borrowings, prevailing interest rates and health-related litigation. Various tobacco litigation with the considerable improvements we have exchange rate fluctuations, which would reduce claims are pending against the Group. To date, seen in the USA litigation environment. the funds available to the Group for working no tobacco litigation claim brought against Imperial We also understand from media reports that capital, capital expenditure, acquisitions, dividends, Tobacco has been successful and/or resulted in the Saudi Ministry of Health has issued legal and other general corporate purposes. the recovery of damages. However, if any individual proceedings against a number of international claim were to be successful, it may result in tobacco companies and their ‘agents’ to recover It could also limit the Group’s ability to borrow a significant liability for damages, and may lead the costs of providing medical care to individuals. additional funds for these purposes and limit to further claims against us. Regardless of the It is reported that Imperial Tobacco is one of these flexibility in planning for, or reacting to, changes outcome of pending litigation, the costs of defendants, however, we have not been served in technology, customer demand, competitive defending such claims can be substantial with any court documents to date. To date, no pressures and the industry in which the Group and may not be fully recoverable. judgment has been entered against Imperial Tobacco operates. This could place the Group at a 2008 Overview and no action has been settled in favour of a claimant competitive disadvantage compared to its competitors that are less leveraged, and increase We are not facing any active tobacco-related in any tobacco-related litigation involving Imperial our vulnerability to both general and industry- litigation in the UK. In the Republic of Ireland, Tobacco or any of its subsidiaries. Imperial Tobacco specific adverse economic conditions. Our credit the number of tobacco-related claims has fallen has been advised by its lawyers that it has meritorious ratings may be adversely affected by various from 307 in 1997, to 11. Ten of these claims are defences to the legal proceedings in which damages factors if this happens and/or if conditions in subject to dismissal motions. The other claim is are sought for alleged tobacco-related health effects. credit markets are unfavourable at a time when inactive. The dismissal motion in respect of one We will continue to vigorously contest all such claimant was heard by the Dublin High Court in litigation against us. we are looking to refinance our current sources 2006. In April 2007, the court ruled that this claim of financing, we may not be able to obtain new should be dismissed. This decision has been The Acquisition of Altadis sources of financing or only at higher costs. appealed and the dismissal motions in respect 2008 Update of the nine other active claims have been stayed Altadis was acquired by way of a public tender Following the completion of a rights issue, our pending the appeal. No date has been set for offer and we did not have access to perform reported net debt was £11.7 billion, as at 30 the appeal hearing. significant due diligence prior to the completion September 2008. In September we had issued of the acquisition. In the event that liabilities Following our acquisition of Altadis in January new capital market debt equating to 8 per cent or other problems concerning Altadis arise, the 2008, we are currently facing two claims in of our committed financing at a rate above our Group has no warranty or indemnity protection. Spain. A claim on behalf of an individual has overall cost of debt, which remained stable been dismissed pending appeal to the Spanish While we believe that we have a proven track at 5.5 per cent. Supreme Court. record of integrating acquisitions, their success is dependent on our ability to integrate without A claim on behalf of the Regional Government significant disruption to either business. of Andalucia has also been dismissed and subsequently appealed to the Spanish Supreme The integration of Altadis may involve particular Court. The Regional Government is attempting challenges and require management attention that to restart this claim, although no statement of claim would otherwise be devoted to running our business.

24 Imperial Tobacco Group PLC 2008 In this section: United Kingdom 26 Germany 27 Spain 28 Rest of EU 29 Americas 30 Rest of the World 31 Manufacturing 32 Logistics 33 Corporate Responsibility 35

Operating Review DIRECTORS’ REPORT: BUSINESS REVIEW: OPERATING REVIEW UK: Tobacco United Kingdom Adjusted proﬁt from operations %

28 UK

Rest of Tobacco

Market Dynamics Performance Highlights We estimate that the duty paid cigarette Net Revenue Adjusted Profit from Operations market declined by 5 per cent to 45.5 billion cigarettes in the year (2007: 47.9 billion). £869m £584m We estimate that 2-3 per cent of the decline was attributable to the smoking bans introduced in England, Wales and Northern Ireland in 2007, with the balance Cigarette Volumes Fine Cut Tobacco Volumes due to normal long-term decline. In contrast, market volumes of duty paid 21.4bn No.1 2,350t No.1 fine cut tobacco rose by an estimated in the UK in the UK 7 per cent to 3,750 tonnes during the year (2007: 3,500 tonnes). From 1 October 2008, all tobacco products manufactured for sale in the UK must have a pictorial health warning on the reverse of the pack, although there is Market Size a sell-through period for products without 2008 2007 these warnings of 12 months for cigarettes Cigarette1 45.5bn 47.9bn and 24 months for fine cut tobacco. Fine cut tobacco1 3,750t 3,500t Our Performance In the UK, net revenue was £869 million, Market Share with adjusted profit from operations of 2008 2007 £584 million. Cigarette1 45.9% 46.4% We lead the UK market in cigarette, fine Fine cut tobacco1 61.6% 63.6% cut tobacco and rolling papers. We have 1 Imperial Tobacco estimates. a 45.9 per cent cigarette market share, led by Lambert & Butler at 16.2 per cent Rizla (2007: 16.6 per cent) and Richmond , the world’s leading rolling paper opportunity to reiterate our support for at 16.1 per cent (2007: 15.7 per cent), brand and number one in the UK, initiatives to reduce youth smoking and the two best-selling cigarette brands delivered another strong performance illicit trade. in the year. in the country. We robustly opposed a number of Outlook Our value offering, Windsor Blue, proposals which we consider to be had another successful year, increasing The UK is an important market and unnecessary and disproportionate, its market share to 3 per cent (2007: one where we remain focused on including proposals to ban product 2.6 per cent). strengthening our leadership position. display, vending sales and 10 packs. The Department of Health is expected We expect a more normal rate of decline Value brands and products are growing in to publish a summary of all the responses in duty paid cigarette volumes in the many mature markets, particularly those received by 8 December 2008. Further coming year and further growth in duty with high taxation as consumers continue information is available on our website: paid fine cut tobacco volumes. to downtrade in search of value, and the www.imperial-tobacco.com. UK is no exception. The portfolio initiatives we have taken Downtrading is likely to continue in the in recent years have continued to build current economic climate and to capitalise our position at the value end of both on this we launched the JPS Silver range cigarette and fine cut tobacco, leaving in the economy sector in November 2008. us well placed to capitalise on the downtrading trend. Our fine cut tobacco market share declined to 61.6 per cent (2007: Regulation continues to increase but 63.6 per cent), with our market leading we are very experienced at successfully premium brand, Golden Virginia, declining managing the impact on our business. due to downtrading. However, we continued to improve the share of our In our response to the Department of value brand, Gold Leaf, which is now Health consultation document on the up to 2.6 per cent. future of tobacco control, we took the

26 Imperial Tobacco Group PLC 2008 Germany: Tobacco Germany Adjusted proﬁt from operations %

15 Germany

Rest of Tobacco

Market Dynamics Performance Highlights In Germany, duty paid cigarette volumes Net Revenue Adjusted Profit from Operations have declined by an estimated 3 per cent to just under 88 billion cigarettes (2007: 91 billion). £664m £309m This was largely influenced by the introduction of public smoking restrictions in all states. These restrictions have Other Tobacco Products recently eased in some states following Cigarette Volumes (as cigarette equivalents) a court ruling that some aspects of the legislation were unconstitutional. Downtrading remains a key dynamic, 22.9bn No.2 6.9bn No.1 in Germany in Germany with the value price sector share now up to 24 per cent of factory made cigarettes (2007: 19 per cent). Private label’s cigarette share continues to fall, now down to 11.3 per cent (2007: 12.5 per cent). Market Size The level of both legal and illegal cross- 2008 2007 border flows reduced slightly to an Cigarette1 88bn 91bn estimated 20 per cent during the year 1 2 34bn but still remains a significant problem. Other tobacco products 36bn Other tobacco product volumes fell by an Market Share estimated 5 per cent to 34 billion cigarette 2008 2008 2008 2007 Enlarged Group Altadis Imperial Tobacco equivalents (2007: 36 billion). This was Imperial Tobacco largely due to a 24 per cent decline in Cigarette1 27.4% 5.8% 21.6% 21.3% eco-cigarillos as a result of legal changes to the product specifications coming into Other tobacco 1 20.0% effect from January 2008. products 0.6% 19.4% 19.1% Our Performance 1 Imperial Tobacco estimates. 2 As cigarette equivalents. In Germany, net revenue was £664 million, with adjusted profit from operations up Our market share of other tobacco well placed to benefit from downtrading, to £309 million. products was up to 20 per cent. Both both within cigarette and from cigarette Against a challenging market environment JPS and Route 66 made market share into other tobacco products, whilst we delivered a number of good gains to 8.4 and 2.5 per cent respectively continuing to support our key brands, performances in Germany, including and performed particularly well in the such as West and Gauloises Blondes. increasing our cigarette share to make your own sector. 27.4 per cent. The market environment is evolving and We continue to manufacture eco-cigarillos we will continue to monitor cross-border In recent years JPS has achieved and during the year we improved our share inflows and participate in the ongoing significant success and continued to of this segment to 15.1 per cent. debate regarding restrictions on smoking build on its impressive growth record in Outlook in public places. 2008. JPS now accounts for 7.8 per cent of the market (2007: 6.4 per cent) and has We remain focused on improving become the second best-selling cigarette our competitive position in Germany brand in Germany. and further developing our strong market shares. Our mid-priced brand West continues to be impacted by downtrading but We have a broad portfolio which we will our premium brand Gauloises Blondes continue to leverage in order to capitalise was resilient in maintaining its share on growth opportunities. Our strength in at 5.6 per cent. value brands and products means we are

www.imperial-tobacco.com 27 DIRECTORS’ REPORT: BUSINESS REVIEW: OPERATING REVIEW Spain: Tobacco Spain Adjusted proﬁt from operations %

7 Spain

Rest of Tobacco

Market Dynamics Performance Highlights Spain is a key market for the enlarged Net Revenue Adjusted Profit from Operations Group. Tobacco sales are through two distinct channels – tobacconists, who account £411m £150m for two thirds of volumes, and vending machines which account for the balance. During the year market volumes of duty paid cigarettes remained stable at an Cigarette Volumes Fine Cut Tobacco Volumes estimated 90 billion, while volumes of fine cut tobacco have seen significant growth to approximately 3,600 tonnes 22.9bn No.1 1,550t No.1 in Spain in Spain (2007: 2,800 tonnes). The cigar market was up 5 per cent to around 1.1 billion units. Volumes of large and medium-sized cigars have declined following the introduction of smoking restrictions, although this has Market Size been more than offset by the growth 2008 2007 in volumes of small cigars. Cigarette1 90bn 90bn Our Performance Fine cut tobacco1 3,600t 2,800t In Spain, net revenue was £411 million and adjusted profit from operations Market Share was £150 million. 2008 2008 2008 2007 Enlarged Group Altadis Imperial Tobacco Imperial Tobacco Our position in Spain has been significantly enhanced following the acquisition of Cigarette1 37.1% 31.9% 5.2% 5.9% Altadis, and we now have a market leading 1 49.1% position across all tobacco categories. Fine cut tobacco 2.2% 46.9% 53.2% 1 Imperial Tobacco estimates. Full Year 2007 figures adjusted for divestments. Our cigarette market share was 37.1 per cent (2007: 5.9 per cent) with Fortuna, Farias Fortuna a mid-price offering and the second best- With we are number one in both We launched a new pack design Vegafina selling cigarette brand in Spain, broadly large and miniature cigars, whilst in the year which was well received maintaining its share at 12.1 per cent. is the leading non-Habanos premium by consumers and we are focused brand and Dux is number two in the on developing further innovative Nobel, also in the mid-price sector, and medium-sized segment. packaging initiatives for our products. Ducados Rubio our value brand performed Outlook well in the year, growing their shares We will also seek to build on our leading to 6.1 and 4.9 per cent respectively. Our broad brand and product portfolio cigar position, particularly in the growing gives us the opportunity to enhance miniature cigars segment. Our fine cut tobacco market share has our market leading positions, which declined to 49.1 per cent as a result of we will support by improving our sales competition and downtrading, which we and trade focus. have taken steps to address with the price As part of the integration of Altadis and repositioning of Golden Virginia and Drum Imperial Tobacco, we plan to improve our during the year. sales effectiveness and customer service Our cigar market share, including Habanos by combining the three sales forces of brands, is at 36.8 per cent, mainly driven Imperial Tobacco and Altadis cigarettes by three brands: Farias, Vegafina and Dux. and Altadis cigars into one unified team. All three brand families are building on We will also optimise the visibility of a broad and loyal consumer base and our brands and point of sale activities are represented across all the different at tobacconists and increase our sub-segments. presence in the vending channel.

28 Imperial Tobacco Group PLC 2008 Rest of EU: Tobacco Rest of EU Adjusted proﬁt from operations %

23 Rest of EU

Rest of Tobacco

Market Dynamics Performance Highlights We have replaced our Rest of Western Net Revenue Adjusted Profit from Operations Europe region with the Rest of EU, which for our purposes includes some non-EU countries which we have incorporated on the grounds of geographic proximity. £1,250m £494m In the region as a whole, we estimate that cigarette market volumes declined by 3 per cent to 382 billion cigarettes. Cigarette Volumes Fine Cut Tobacco Volumes Regional fine cut tobacco volumes grew by 1 per cent to an estimated 34,000 tonnes. 56.8bn 14,300t Our Performance In the Rest of EU, net revenue was £1,250 million and adjusted profit from operations was £494 million. Market Size France is a key market for us in this region 2008 2007 and one where the Altadis acquisition has 1 significantly increased our cigarette share, Cigarette 382bn 391bn now up to 29.3 per cent with gains from Fine cut tobacco1 34,000t 33,650t JPS, Gauloises Blondes, News and Fortuna . We are the leader in the French Cigarette Market Shares1 cigar market with a 23.5 per cent share. 2008 2008 2008 2007 We delivered a good performance in Enlarged Group Altadis Imperial Tobacco Imperial Tobacco Poland, growing Route 66 and West, while Belgium 16.5% 6.1% 10.4% 10.6% JPS and Fortuna improved our position 12.2% in Belgium. JPS also helped to increase Czech Republic 0.3% 11.9% 12.0% our share in The Netherlands and we France 29.3% 24.8% 4.5% 4.0% achieved further strong growth from Davidoff in Greece, where our cigarette Greece 10.9% 0.6% 10.3% 9.7% share is now up to 10.9 per cent. Hungary 12.6% 0.3% 12.3% 13.2% The regional fine cut tobacco market Ireland 26.6% 0.0% 26.6% 26.4% remains extremely competitive. In The Netherlands, by far the largest regional Italy 2.7% 1.5% 1.2% 1.3% market, our share was at 50.7 per cent Netherlands 13.5% 2.1% 11.4% 10.6% with both our value brands, Zilver and Evergreen, making gains. Poland 25.1% 7.6% 17.5% 16.9% In Hungary, we have captured 40.6 per cent of the rapidly growing fine cut tobacco Fine Cut Tobacco Market Shares1 market and our share in the Czech 2008 2008 2008 2007 Republic increased significantly to 51.8 Enlarged Group Altadis Imperial Tobacco Imperial Tobacco per cent, driven by strong growth in our 11.9% Paramount brand. Belgium 3.1% 8.8% 8.8% Outlook Czech Republic 51.8% 0.0% 51.8% 27.7% We expect further modest declines in France 24.4% 13.2% 11.2% 11.4% regional cigarette market volumes and continued growth in fine cut tobacco Greece 41.9% 0.0% 41.9% 43.8% market volumes. Hungary 40.6% 0.0% 40.6% 28.7% Our versatile portfolio provides a number Ireland 64.0% 0.0% 64.0% 65.6% of growth opportunities. We remain focused on further improving our cigarette Italy 46.7% 3.2% 43.5% 47.7% position, delivering growth across the Netherlands 50.7% 0.2% 50.5% 50.6% pricing spectrum, and see considerable scope for building on our growing fine Poland 2.0% 0.0% 2.0% 2.1% cut tobacco market shares in a number 1 Imperial Tobacco estimates. Full Year 2007 figures adjusted for divestments. of accession countries.

www.imperial-tobacco.com 29 DIRECTORS’ REPORT: BUSINESS REVIEW: OPERATING REVIEW Americas: Tobacco Americas Adjusted proﬁt from operations %

8 Americas

Rest of Tobacco

Market Dynamics Performance Highlights The Americas is a major growth area Net Revenue Adjusted Profit from Operations for us as we continue to focus on building our geographic footprint in these profitable markets. £542m £166m Currently, the main focus of our operations is the USA where we estimate that the overall cigarette market declined by 4 per cent to 351 billion cigarettes during Cigarette Volumes Fine Cut Tobacco Volumes the year. The discount segment remained broadly stable and accounts for around 27 per cent of the total cigarette market. 15.2bn No.4 600t No.3 In fine cut tobacco, we estimate in the USA in the USA market volumes grew by 5 per cent to 9,100 tonnes as a result of further downtrading from cigarettes. Sales of cigars have been generally affected by the economic slowdown Market Size and public smoking restrictions, 2008 particularly in the premium segment, 2007 although this is being offset by positive Cigarette – USA1 351bn 367bn trends in the smaller sizes. Fine cut tobacco – USA1 2 9,100t 8,700t In the USA, further tobacco tax increases are expected in 2009 and we continue Market Share to monitor the ongoing debate around 2008 2007 the potential for the Food & Drug 1 3 4.3% Administration to assume responsibility Cigarette – USA 4.0% for tobacco regulation. Fine cut tobacco – USA1 5.8% 1.0% Our growing Americas profile also includes 1 Imperial Tobacco estimates. 2 USA fine cut tobacco volumes have been restated to exclude pipe tobacco. a small presence in Mexico and Canada, 3 Our USA cigarette market share estimate in 2007 has been restated to reflect a changed basis of calculation. where we launched Davidoff in 2007, and Argentina, where we gained our position acquisition of Lignum 2 added the Our multi-product portfolio means we through the Altadis acquisition. Rave brand to our growing portfolio are well placed to respond swiftly and Our Performance and doubled our market share, which efficiently to changing market dynamics. was around 8 per cent in September. Net revenue in the year was £542 million, We also remain focused on improving with adjusted profit from operations of In acquiring Altadis, we gained market our national distribution capabilities in the £166 million. leadership, in value terms, in the large USA and are currently in the process of Our USA cigarette volumes were cigar segment with a strong presence expanding our cigarette sales force. in all the cigar categories in the USA. 14.2 billion, with our cigarette share up Our ambition is to continue to enhance to 4.3 per cent of the total market and In challenging market conditions, our our cigarette presence and build on the 14.2 per cent of the discount segment. natural wrapper brands of Backwoods excellent progress we have made in fine Dutch Masters Both our key discount brands, USA and performed well cut tobacco, whilst consolidating our Gold at 2.6 per cent and Sonoma at following the introduction of new flavoured position in cigar. 1.6 per cent, grew share. variants and two price increases. Having established a secure footing in In October 2008, we took up the option the value end of the cigarette market, to acquire the remaining 49 per cent of we have taken steps to expand our JR Cigars not previously owned by Altadis portfolio, launching Davidoff, initially as another step towards consolidating in ten cities, and Fortuna in Florida and our market position. The company is Texas, with encouraging early results. a nationwide distributor of cigars and related products. Our fine cut tobacco volumes continue Outlook to grow and were up to 600 tonnes in the year. We have made considerable progress in the short time we have been present in the During the year we launched our own USA tobacco market and see attractive fine cut tobacco brand, Premier. The opportunities for expanding our profile.

30 Imperial Tobacco Group PLC 2008 RoW: Tobacco Rest of the World Adjusted proﬁt from operations %

RoW 19

Rest of Tobacco

Our Rest of the World region contains Performance Highlights a diverse array of markets which offer Net Revenue Adjusted Proﬁt from Operations considerable opportunities for growth. Our Performance In the Rest of the World, net revenue £1,502m £404m grew to £1,502 million, with adjusted proﬁt from operations up to £404 million. We had an excellent year in Africa, increasing our volumes and market Cigarette Volumes Fine Cut Tobacco Volumes share in many countries. The acquisition of Altadis has enhanced 152.6bn 2,050t our position in this important growth region, giving us a market leading position in Morocco, with our key brand Marquise. Our volumes have also grown strongly in Algeria with Gauloises Blondes. Our performance in the Middle East has been equally strong, with further volume Cigarette Market Shares1 and share growth. Gauloises Blondes 2008 2008 2008 2007 is now our largest cigarette brand in Enlarged Group Altadis Imperial Tobacco Imperial Tobacco the region, complemented by Gitanes Australia 17.2% 0.0% 17.2% 17.5% Davidoff and . Azerbaijan 39.4% 0.0% 39.4% 36.6% Eastern Europe generates 54 per cent of 25.6% our Rest of the World cigarette volumes, Cambodia 25.6% 0.0% 0.0% predominantly in Russia and the Ukraine. Ivory Coast 84.8% 0.1% 84.7% 84.7% In Russia, sales were affected by Lebanon 21.1% 17.4% 3.7% 3.3% destocking, both at the distributor and wholesale levels, following the merger Morocco 87.3% 87.3% 0.0% 0.0% of the two largest tobacco distributors. Russia 11.0% 5.5% 5.5% 5.5% In the Ukraine we increased volumes of Saudi Arabia 9.7% 0.5% 9.2% 7.0% our value brand Classic by 55 per cent, while in Azerbaijan we further built on Taiwan 9.7% 0.0% 9.7% 11.7% our track record of growth with gains 3.2% from West and Davidoff. Turkey 0.0% 3.2% 2.5% 21.8% In Asia, our Taiwan share declined as Ukraine 0.1% 21.7% 20.6% a result of increased competition and 1 Imperial Tobacco estimates. downtrading. However, our new cigarette factory will generate substantial cost Outlook Our cigarette volumes are growing in savings and improve our competitiveness Our primary objective is to build on Eastern Europe and we remain focused in this important market. In Vietnam, our enhanced footprint by leveraging on building on our success. we have strengthened our position with our brand and product portfolios. Our extended geographic reach presents a new production and sales joint venture, a platform to expand the distribution of and in Laos our A brand generated further There are many opportunities for us to develop our business in this region and Habanos cigar brands, such as Cohiba share growth. Montecristo we will particularly focus on maintaining and , into new markets and Our presence in Asia has been our growth momentum in Africa, the we see particular growth opportunities strengthened as a result of the Altadis Middle East, Eastern Europe and Asia. in Eastern Europe and Asia. acquisition and we now have a strong position in Cambodia. In Africa our strong portfolio of local brands will continue to drive our volume Australia remains extremely competitive, particularly in the low price cigarette and share growth, with growing support sector, resulting in a slight fall in our from our international brands. In the market share, although we continue Middle East we will continue to enhance to lead the fine cut tobacco market market share through the development with a 61.1 per cent share. of our international brands.

www.imperial-tobacco.com 31 DIRECTORS’ REPORT: BUSINESS REVIEW: OPERATING REVIEW Manufacturing

The acquisition of Altadis has substantially increased our international manufacturing footprint. Gary Aldridge, Manufacturing Director

Our manufacturing capabilities now extend ingredients we use have decreased by We are constantly looking at the processes across North America, Europe, Africa, a further 9 and 6 per cent respectively. for controlling and improving our the Middle East and Australasia, where environmental performance and ISO14001 Like Imperial Tobacco, Altadis has we produce a broad range of high quality is an international standard applied to continually reviewed its manufacturing cigarettes, tobaccos, cigars, rolling papers our manufacturing bases. This year, we operations in recent years and has and tubes. increased the number of Imperial Tobacco delivered a steady progression of efficiency factories with ISO14001 accreditation The Altadis acquisition increased our enhancements which we will seek to build to 74 per cent (2007: 68 per cent). This manufacturing sites from 31 factories to on. A key area of focus this year has been standard is also in place in 12 Altadis 58. In combining two such large footprints, integrating the Altadis supply chain factories and in all the main distribution there will inevitably be a degree of over- processes with our own in order to centres of our Logistics business. capacity, and as part of our integration benefit from ongoing synergies. strategy we proposed closing six sites Outlook and restructuring a number of others In October 2008 we obtained the Our long-term strategy of simplification, in order to address this and improve manufacturing licence for our new factory standardisation and supply chain operational efficiencies. We have so far in Taiwan and are currently in the final optimisation, whilst maintaining quality, completed the closure of our cigar and phase of test production. The factory remains central to the success of our fine cut tobacco factory in Slovakia and is a state-of-the-art facility with the most manufacturing operations. Our focus remain committed to supporting modern technologies available and on cost optimisation and efficiency employees affected by integration. we expect it to be fully operational in improvements is being extended across January 2009. The factory will enable Our Performance our enlarged manufacturing portfolio. us to respond more swiftly to changing The tobacco industry is evolving and We have maintained our focus on market dynamics and provides a strong flexibility is therefore key to our success. simplification and standardisation while platform for further expansion in the We will ensure that we respond quickly to managing integration, and have delivered Asia-Pacific region. further operational improvements within changing market dynamics and consumer the Imperial Tobacco portfolio. Productivity It is inevitable that rising costs will present preferences, and will continue to deliver improved by 5 per cent and we reduced a challenge to our business and in order to the quality of product necessary to build overall cigarette unit costs by 3 per cent. mitigate their impact we continue to focus upon our strong presence in the In addition, the number of blends and on deriving efficiencies from our cost base. international tobacco markets.

Our ongoing programme of simplification and standardisation is being applied to the Group’s enlarged manufacturing portfolio.

32 Imperial Tobacco Group PLC 2008 Logistics

We are one of the largest distributors of tobacco and other products in Europe.

Performance Highlights Distribution Fees £607m

Adjusted Proﬁt from Operations £121m

Adjusted Distribution Margin 19.9%

Overview The logistics operations acquired with Altadis comprised a wholly owned company in France and a majority stake in Logista, a publicly traded company focused on the Spanish, Portuguese and Italian markets. Both companies owe their roots to the traditional distribution activities of previously state-owned tobacco manufacturers that became a part of Altadis. Following the acquisition of Altadis, Spanish takeover law required that we Our tobacco logistics business is the publishing, transportation and either reduced our majority shareholding largest of its kind in Europe and has in telecommunications industries. in Logista to below 30 per cent or made excess of 90 per cent market share in an offer for those shares not already held These range from telephone cards, the distribution of tobacco within Spain, by the Group. We reviewed the overall stamps, magazines and books, to France and Italy. Tobacco logistics logistics business and decided to launch promotional items and industrial courier delivers products for international an offer for the remaining shares, which services. Today, our Logistics division manufacturers, including Imperial was completed at a cost of €925 million distributes to around 200,000 outlets Tobacco, to tobacconists and other in June 2008. across Europe. These span convenience sales outlets across Southern Europe. stores, tobacconists, bakeries, kiosks, The business has a strategy of The business is run on an operationally pharmacies, grocery stores, service expansion through both organic growth neutral basis, providing bespoke solutions stations and stationers. and acquisitions. In the last decade based on our technology, and ensuring logistics has diversiﬁed from tobacco Market Dynamics that all customers are treated equally. distribution within France and Spain into In tobacco logistics, the continued new markets and a range of new and Through our other products activities, gradual decline in the volumes of related product groups. As a result, we manage the full logistics value chain cigarettes consumed across Western our operations are split into two distinct of a diverse range of products for clients Europe requires distributors to focus areas: tobacco and other products. including those from the pharmaceutical, on offering additional services while

www.imperial-tobacco.com 33 DIRECTORS’ REPORT: BUSINESS REVIEW: OPERATING REVIEW Logistics continued

improving operating efficiencies. The other products logistics business a difficult environment. However, our Expansion into additional territories has proven successful in identifying overall business was affected by continued is a strategy our Logistics business areas where the growth dynamics are weakness in publications and the impact has pursued successfully in Portugal, favourable, such as pharmaceuticals, of the economic downturn on the Italy and, more recently, Poland. books and transportation. transport business. Through the scale and efficiency of our In transportation, we are one of the largest Outlook distribution activities we are providing business-to-business courier and industrial The current economic conditions present customers with a range of services they parcel delivery operators in Spain, offering challenges for our other products logistics would find difficult to replicate elsewhere. long distance services across Europe. This business but we anticipate a stable has seen attractive growth over the last tobacco performance going forward, with five years, with opportunities for further the benefit of cigarette price increases by growth through diversification into related tobacco manufacturers compensating for areas within and beyond Spain. slight cigarette volume declines. Our Performance The Logistics business has grown rapidly Distribution fees in the eight months and we see further opportunities both to September were £607 million, with within the regulated markets of Western adjusted profits from operations of Europe and the unregulated markets £121 million. Our overall performance of Central and Eastern Europe, where was in line with our expectations. industry consolidation is likely. The good performance of tobacco Logistics is a profitable and highly cash logistics reflected a cigarette price increase generative part of the Group, and our in Italy and stable tobacco volumes in long-term strategy is one of continuing Spain, which offset a decline in French to enhance service levels to existing volumes following the extension of the customers whilst looking for opportunities public smoking bans in January 2008. to extend our logistics footprint In other products logistics, our traditional into additional countries and wholesale business performed well in related other products.

Our logistics business is run on an operationally neutral basis, ensuring that all customers are treated equally.

34 Imperial Tobacco Group PLC 2008 Corporate Responsibility

We remain committed to building a sustainable and proﬁtable business while behaving responsibly. The principles of corporate responsibility are integrated within the Group’s management practices and processes. Responsibly managing our business

Highlights Conducting our business responsibly Consultation has commenced with key is fundamental to our future success stakeholders to consider the potential and the sustainability of our business, impact on our business and assist in Lost time accident rates reduction from managing social and environmental the definition of appropriate energy and 1 in 2007 and economic risks and opportunities, carbon dioxide emission reduction targets. to responding to external developments We are participating in the Carbon and stakeholder issues. 20% Disclosure Project’s Supply Chain Our Strategy Leadership Study, to assess climate The way we approach Corporate change risks and to assist our suppliers Energy consumption reduction Responsibility (CR) and how it supports in managing carbon. Our 2008 submission in 20072 our commercial strategy has developed to the project resulted in a score of 87 over the years. Following a strategic review per cent for our climate change strategy 18% of international trends in CR, we identified (sector average 67 per cent). five key areas of focus with the purpose Portfolio Balance: we are committed of enhancing our performance over a five to further improvements in how we CO emissions reduction in 20072 year horizon, supported by increasing local 2 manage our product portfolio to achieve participation in managing these issues. an appropriate balance between product 26% Our Performance stewardship, regulatory demand and the Progress has been made for each of our needs and preferences of our consumers. Five-for-Five priorities and across a range 1 Progress Report: we completed the first 2007 compared with 2006 (excluding Altadis). of financial and non-financial performance 2 Absolute values for financial year 2007 compared with phase of this work by identifying a cross- metrics. 2001 base year (excluding Altadis). functional decision-making mechanism to Five-For-Five Priorities optimise our product portfolio. As a result, Carbon Management: we are committed information system projects are underway to further improvements in carbon to enable us to better understand how management through energy conservation, ingredients link to products, their market the application of lower carbon destinations and regulatory requirements technologies and carbon offsetting. within the enlarged Group. Progress Report: we have identified the Supplier Standards: we will most significant risks and opportunities continue to work with our suppliers for improvement in our business to improve their economic, social operations relating to climate change. and environmental standards.

www.imperial-tobacco.com 35 DIRECTORS’ REPORT: BUSINESS REVIEW: OPERATING REVIEW Corporate Responsibility continued

Progress Report: the aim of our Benchmarks a high priority. The Board has reiterated its supplier engagement and assessment commitment to continuous improvement programmes is to safeguard future by leading an initiative to reinvigorate supplies by managing the social, Ranking in Business in the OHS to coincide with organisational environmental and economic aspects of Community CR Index 2007 changes within the enlarged Group. our supply chain. Preliminary analysis has Environmental Management: been undertaken to deepen understanding we remain of reputational risk and the appropriate Gold committed to minimising the adverse standards which need to be promoted impact of our activities on the natural in the supply chain. environment. Our environmental Class distinction in Sustainability performance shows a downward We continue to use the Social Asset Management ‘Sustainability movement in energy consumption and Responsibility in Tobacco Production Yearbook 2008’ carbon dioxide emissions. Since 2004, programme, in conjunction with our we have reduced waste from our factories suppliers. An improvement in overall and main offices by 9 per cent and we performance and a good level of risk Bronze send 62 per cent less waste to landfills. management is generally evident. Water use by our factories and main We continue to engage with our leaf SAM Research for Dow Jones offices has decreased by 8 per cent suppliers, and have underlined our Sustainability Index 2008 since 2001. commitment to finding solutions to (sector average 69%) Community Investment: we have invested child labour by increasing our funding £2.4 million in our community activities, to the Elimination of Child Labour through international and local partnership in Tobacco Foundation. 74% projects, charitable giving and matching We continue to include CR-related employee fundraising. We were delighted factors in the qualification of non-tobacco to receive the Charity Aid Foundation material suppliers engaged in business Product Stewardship: we have Community Investment Award 2007 with the Group. invested further in better understanding in recognition of our commitment our products, assessing materials Local Accountability: we will aim for to sustainable funding of charities. for suitability, evaluating scientific accountability through the provision of Integration developments in tobacco and health, training and expertise to ensure a more Imperial Tobacco and Altadis have taken effective local response to CR issues. and complying with all voluntary agreements, legal and regulatory similar approaches to CR. This close Progress Report: a suite of educational requirements. alignment has enabled us to swiftly and materials is being developed to raise effectively plan implementation of our Sales and Marketing: awareness of accountability for CR we remain systems across the enlarged Group, throughout the enlarged Group and committed to promoting and selling including various social and environmental at all levels. This year we have been able our tobacco and paper products due diligence activities, our non-financial to link CR and Group policies to different responsibly, applying our International reporting system, the Social Responsibility elements of job roles within the business Marketing Standards (IMS) as the in Tobacco Production programme, and to enhance this understanding. minimum and directing our products community investment activities. Policy Evidence: only to adult consumers. The IMS has we are aiming undergone extensive review to ensure Following the announcement of proposed to increase transparency that our it continues to be fit for purpose for integration projects in June 2008, we policies and standards are routinely the enlarged Group. have been actively consulting with our and universally observed. employees, trade unions, work councils Employment Practices: our Business Progress Report: we have created a single and other organisations. We remain Principles and employment policies set reference point on our corporate intranet focused on providing those affected to communicate the requirements of our out a framework of practices to ensure by integration with a comprehensive policies to employees. We have also taken our people are treated with fairness, range of support measures. steps to support the alignment of policies dignity and respect, in line with universally accepted standards for human rights. We Further detailed information on our with working practice, and completed performance can be found in our a project to help improve the clarity of continue to invest in our people through our international career management, Corporate Responsibility Review which purpose of our corporate documents is published in December and which and how they are interconnected. leadership and development programmes, as well as through ongoing local training includes an independent verifier’s Non-Financial Objectives and development initiatives within our statement provided by SGS United In the phased implementation of projects markets and factories. Kingdom Limited on the accuracy and related to our key strategic objectives reliability of our corporate responsibility we continue our work in the social Occupational Health and Safety (OHS): performance reporting. and environmental areas important the safety and well-being of our employees to our business. and those who work with us remain

36 Imperial Tobacco Group PLC 2008 In this section: Board of Directors 38 Chief Executive’s Committee 40 Report of the Directors 41 Corporate Governance Report 44 Directors’ Remuneration Report 55

Governance DIRECTORS’ REPORT: GOVERNANCE Board of Directors

1234567

Name 1. Iain Napier, FCMA 4. Graham Blashill, BSC Title & age Chairman, 59 Group Sales and Marketing Director, 61 Appointment Appointed Chairman in January 2007. Appointed to the Board in October 2005. Non-Executive Director from March 2000. Committee membership Chairman of Nominations Committee and Member Chief Executive’s Committee. of the Remuneration Committee.

Skills and experience Iain was formerly main Board Director of Bass PLC, Graham is responsible for global sales and marketing Chief Executive of Bass Leisure and then of Bass activities. With over 40 years’ experience with the Brewers and Bass International Brewers. He was Group he has held a number of senior sales and then Vice President UK and Ireland for Interbrew SA marketing positions, including Managing Director until August 2001. He was Chief Executive of Taylor UK and Regional Director for Western Europe. Woodrow International Housing and Development from 2001 to 2005, and was previously Director of Tomkins PLC until December 2007.

External appointments Non-Executive Chairman of McBride PLC and a Non- No external Director appointments. Executive Director of Collins Stewart PLC, and was appointed to the Boards of Molson Coors Brewing Company and John Menzies plc during the year.

Name 2. Gareth Davis, BA 5. Alison Cooper, BSC, ACA Title & age Chief Executive, 58 Corporate Development Director, 42 Appointment Appointed Chief Executive on demerger in 1996. Appointed to the Board in July 2007. Committee membership Chief Executive’s Committee. Chief Executive’s Committee.

Skills and experience Gareth led the successful demerger from Hanson Alison has responsibility for strategic planning and subsequent listings on the London and New York and business development, Corporate Affairs and, Stock Exchanges. With 36 years experience across currently, the process of integration of the Altadis all aspects of the Company, he has played a key role business into the enlarged Imperial Tobacco Group. in the development and execution of the Group’s Alison joined the Group in 1999 and has held a number strategy and its development into one of the world’s of senior roles including Director of Finance and leading multinational tobacco businesses. Planning and Regional Director, Western Europe. Previously she was with PricewaterhouseCoopers.

External appointments Non-Executive Director, Wolseley plc since 2003. No external Director appointments. Senior Independent Director, Wolseley plc since 2004.

Name 3. Robert Dyrbus, BSC, FCA 6. Jean-Dominique Comolli Title & age Finance Director, 56 Non-Executive Deputy Chairman, 60 Appointment Appointed Finance Director on demerger in 1996. Appointed Non-Executive Deputy Chairman in July 2008. Committee membership Chief Executive’s Committee. Nominations Committee.

Skills and experience Robert was Finance Director of Imperial Tobacco Jean-Dominique has held a number of senior positions Limited from November 1989 and one of the in the French Civil Service including Assistant Principal three-man Hanson team involved in the strategic Private Secretary to the Minister of the Economy reorganisation of the Group. Since then he has and Principal Private Secretary to the Budget Minister, played an integral part in shaping the strategic before his appointment as Director General of Customs direction of the Group. at the Budget Ministry in 1989. In 1993 he was appointed Chairman and Chief Executive of SEITA and in 1999 appointed as Co-Chairman of the Altadis Group, a position he held until 2005, when he was appointed Chairman of Altadis. External appointments No external Director appointments. Non-Executive Director of Pernod-Ricard, Non- Executive Director of Calyon and Non-Executive Director of Public Establishment of Opéra Comique.

38 Imperial Tobacco Group PLC 2008 8 9 10 11 12 13 14 15

7. Pierre Jungels, CBE (HON), C ENG, PHD 10. Michael Herlihy, MA, (Oxon), Solicitor 13. Berge Setrakian Senior Independent Non-Executive Director, 64 Non-Executive Director, 55 Non-Executive Director, 59 Appointed Non-Executive Director in August 2002. Appointed Non-Executive Director in July 2007. Appointed Non-Executive Director in June 2008.

Chairman of the Remuneration Committee and Nominations Committee, Audit Committee and Nominations Committee. Member of the Nominations Committee and the Remuneration Committee. Audit Committee. Pierre has held numerous senior international Michael was formerly General Counsel and Head Berge is a senior partner in the law firm Dewey positions within the oil industry with Shell International, of Mergers and Acquisitions for ICI PLC with overall & LeBoeuf LLP and has extensive expertise in Petrofina SA and British Gas PLC. He became CEO responsibility for corporate acquisitions and international transactions. He was a Non-Executive of Enterprise Oil in 1996, leading the business to divestments and has extensive experience of both Director of Altadis, S.A. having been appointed in May substantial geographic and financial growth until private and public market transactions. 2004 and was a Non-Executive Director of Investcom, retirement in November 2001. a telecommunications company which was acquired in 2006 by MTN, a Johannesburg-based company. Berge is currently the Executive Chairman and CEO of AGBU, the largest philanthropic Armenian organisation in the world. He also serves as a Non-Executive Director on various not-for-profit organisations. Chairman of Oxford Catalyst Group PLC, Director Serves on the Board of Compass Partners Non-Executive Director of Interaudi Bank of New York, of Baker Hughes Inc., Chairman of Rockhopper International LLP. Executive Chairman and CEO of AGBU, Non-Executive Exploration PLC and a Non-Executive Director Director of The Morganti Group, Inc. of Woodside Petroleum Ltd.

8. Bruno Bich 11. Charles Knott, FCMA 14. Mark Williamson, CA (SA) Non-Executive Director, 62 Non-Executive Director, 53 Non-Executive Director, 50 Appointed Non-Executive Director in April 2008. Appointed Non-Executive Director in April 2006. Appointed Non-Executive Director in July 2007. Nominations Committee. Nominations Committee, Audit Committee and Chairman of Audit Committee; Member of the Remuneration Committee. Nominations Committee and Remuneration Committee. Bruno is Non-Executive Chairman of the BIC Group, Charles was a Director of ICI plc from 2004 to 2007, Mark has considerable international financial and having been appointed as Chairman and Chief Chairman and Chief Executive of Quest International, general management experience. He joined Executive Officer in June 1993. Prior to his ICI’s flavours and fragrances business. Previously International Power in 2000 as Group Financial appointment as BIC Group Chairman, Bruno fulfilled a variety of international assignments as Controller and was appointed to the Board as Chief held a number of key corporate positions including a long-term executive at National Starch, a Unilever Financial Officer in 2003. Previously, he was Group Chairman and Chief Executive Officer of BIC company until 1997. Currently, Chief Executive Officer Financial Controller and Group Chief Accountant at Corporation, Vice President of Sales and Marketing of Flint Group. Simon Group, the engineering and bulk chemicals and National Sales Manager. Bruno was a Non- storage group. Executive Director of Altadis, S.A. having been appointed in November 1999. Non-Executive Chairman of Société Bic. No external Director appointments. Serves on the Board of International Power plc.

9. Ken Burnett, MA, MBA, PHD 12. Susan Murray 15. Matthew Phillips, LLB Non-Executive Director, 56 Non-Executive Director, 51 Company Secretary, 38 Appointed Non-Executive Director in April 2006. Appointed Non-Executive Director in December 2004. Appointed Company Secretary in October 2004. Nominations Committee. Nominations Committee, Audit Committee and Chairman of the Disclosure Committee, Secretary Remuneration Committee. to and Member of the Chief Executive’s Committee; Secretary to the Audit, Nominations and Remuneration Committees. Ken was President, Asia Pacific of Allied Domecq from Susan was a Board member at Littlewoods Limited Matthew joined Imperial Tobacco’s legal department 1996 until its acquisition by Pernod Ricard in 2005. from October 1998 until January 2004, latterly as in 2000 and was closely involved in the acquisitions Prior to joining Allied Domecq, he held senior Chief Executive of Littlewoods Stores Limited. Prior of Reemtsma and Altadis. Previously he worked for management positions in the Asia Pacific region to this she was worldwide President and Chief law firms Linklaters and Burges Salmon. with Seagram, Interbrew and International Distillers Executive of The Pierre Smirnoff Company, a part & Vintners Ltd (now part of Diageo plc). of Diageo plc. Susan is also a former Non-Executive Director of SSL International plc and of Aberdeen Asset Management PLC.

No external Director appointments. Non-Executive Director of Enterprise Inns Plc, Wm No external Director appointments. Morrison Supermarkets plc and Compass Group PLC. Also fellow of the Royal Society of Arts and council member of the Advertising Standards Authority.

www.imperial-tobacco.com 39 DIRECTORS’ REPORT: GOVERNANCE Chief Executive’s Committee

123

Name 1. Gary Aldridge, MBA 3. Kathryn Turner Title & age Manufacturing Director, 55 Group Human Resources Director, 53 Appointment Appointed Manufacturing Director in January 2008. Appointed Group Human Resources Director in 2002.

Committee membership Chief Executive’s Committee. Chief Executive’s Committee.

Skills and experience Gary was Regional Operations Director Far East, Kathryn is responsible for all aspects of human Eastern Europe, Africa and Middle East. Previously, resource management across the Group. She joined he was Director of Operations, Central and Eastern in 2002 from Somerfield PLC, where she was Europe. He held a number of senior manufacturing a member of the PLC Board. She has also held roles in RJ Reynolds International before joining a number of senior operational consulting roles Reemtsma in 2001. in change management in the FMCG sector.

External appointments No external Director appointments. No external Director appointments.

Name 2. Fernando Domínguez, IE Title & age Chief Operating Ofﬁcer Cigar Business Unit, 49 Appointment Appointed Chief Operating Ofﬁcer Cigar Business Unit in June 2008. Committee membership Chief Executive’s Committee.

Skills and experience Fernando is Chief Operating Ofﬁcer Cigar, responsible for the Cigar Business of the Imperial Tobacco Group. With an industrial engineering background he joined Tabacalera in 1985. Fernando has held numerous senior positions within both Tabacalera and the Altadis Group, mainly in the Cigar Division. He was Co-chairman at Corporación Habanos, S.A. before his appointment as Chief Operating Ofﬁcer Cigar Business Unit in May 2005. External appointments No external Director appointments.

40 Imperial Tobacco Group PLC 2008 DIRECTORS’ REPORT: GOVERNANCE Report of the Directors

The Directors submit their report together with the audited at the close of business on 23 January 2009. The associated consolidated financial statements of the Group and the accounts ex-dividend date is 21 January 2009. The interim dividend was of the Company for the year to 30 September 2008. paid on 8 August 2008 to shareholders on the register at the Business Review close of business on 6 June 2008. Following the acquisition of Altadis, the enlarged Group now Share Capital has two main business activities: Tobacco and Logistics. The Details of the Company’s share capital are shown in note 20 to tobacco segment comprises the manufacture, marketing and the financial statements. All shares are freely transferrable and sale of tobacco and tobacco-related products. The logistics rank pari passu for voting and dividend rights. At the Company’s segment comprises the distribution of tobacco products for Annual General Meeting (AGM) on 29 January 2008 shareholder major tobacco manufacturers, including Imperial Tobacco, as authority for the buyback of up to 72,900,000 ordinary shares of well as a wide range of non-tobacco products and services. 10 pence each was renewed. The Company holds 51,717,000 ordinary shares of 10 pence each in Imperial Tobacco Group A review of the Group’s activities and future developments PLC, representing 4.84 per cent of issued share capital with an is included in the Business Review section on pages 5 to 36. aggregate nominal value of £5,171,700. These shares have not This review fulfils the requirements of the Business Review been cancelled but are held in a treasury shares reserve within contained in section 417 of the Companies Act 2006, including the profit and loss account reserve and represent a deduction the financial performance during the year on pages 8 to 11, from equity shareholders’ funds. These treasury shares do not key performance indicators on page 17 and a description of carry any voting rights or rights to dividends. The share buyback the principal risks and uncertainties facing the Group on pages 22 to 24. The purpose of the Annual Report is to provide programme was suspended on 8 February 2007. information to the shareholders of Imperial Tobacco Group PLC. At an Extraordinary General Meeting (EGM) on 13 August 2007, The Company, its Directors, employees, agents and advisers do the Company’s authorised share capital was increased from not accept or assume responsibility to any other person to whom 1,000,000,000 to 56,040,000,000 by the creation of an this document is shown or into whose hands it may come and additional 55,040,000,000 ordinary shares of 10 pence each. any such responsibility or liability is expressly disclaimed. The As a result of the Rights Issue in June 2008 the Company Annual Report contains certain forward-looking statements with issued an additional 338,741,960 shares at a price of respect to the operations, performance and financial condition of the Company and the Imperial Tobacco group as a whole. By 1475 pence per share. their nature, these statements involve uncertainties since future At 26 November 2008 the Company had been notified that the events and circumstances can cause actual results to differ following persons had interests in 3 per cent or more of the materially from those anticipated and no reliance should be Company’s issued share capital. placed on them. The forward-looking statements reflect Number Percentage knowledge and information available at the date of preparation of ordinary of issued of this Annual Report and the Company undertakes no obligation shares millions share capital to update these forward-looking statements. Nothing in this Invesco Limited 61 6.03 Annual Report should be construed as a profit forecast. Legal & General Investment The principal operating subsidiaries within the Group are shown Management Limited 50 4.94 on pages 131 and 132. Barrow, Hanley, Mewhinney & Financial Results and Dividends Strauss Inc 45 4.43 The profit attributable to equity holders of the Company for the Franklin Resources Inc 41 4.04 financial year was £428 million as shown in the consolidated Morgan Stanley Investment income statement set out on page 74. Note 1 to the financial Management Limited 41 3.99 statements gives an analysis of revenue, duty and similar items, Barclays PLC 37 3.66 profit from operations and net assets. The Directors have declared dividends as follows: The Company has not received notification that any other person holds 3 per cent or more of the Company’s issued share capital. In £s million 2008 2007 Ordinary Shares The share interests of the Directors, their families and any connected persons are shown on page 61. Interim paid, 20.9p1 per share (2007: 18.2p1) 161 141 Statement on Corporate Governance Proposed final, 42.2p per share The required disclosures are contained within the Corporate (2007: 42.2p1) 427 326 Governance Report on pages 44 to 54. Total ordinary dividends, Following recommendation by the Nominations Committee, 63.1p per share (2007: 60.4p1) 588 467 Directors are appointed by the Board. They must, however, submit themselves for election by shareholders at the AGM 1 Comparatives reflect the bonus element of the Rights Issue in June 2008. The interim dividend per share for 2008 has been similarly adjusted. following their appointment. The powers of the Directors are contained in the Company’s Articles of Association, changes to The full year dividend distribution of £588 million represents which require approval of the shareholders at a general meeting. an increase of 26 per cent on 2007 and a payment ratio of 50.7 per cent of the Company’s adjusted attributable profit Contracts with Employees or Directors of £1,159 million for the year. Other than disclosed on page 69 there are no agreements between the Company and its Directors or employees The final dividend, if approved, will be paid on 20 February 2009 providing for compensation for loss of office or employment to shareholders whose names are on the Register of Members due to a takeover.

www.imperial-tobacco.com 41 DIRECTORS’ REPORT: GOVERNANCE Report of the Directors continued

Significant Agreements That Take Effect, Alter Board of Directors or Terminate on Change of Control Mr B F Bich joined the Board on 25 April 2008 as a Non-Executive The following agreements are those agreements which the Director. Mr B Setrakian joined the Board on 25 June 2008 Company considers to be significant to the Group as a whole as a Non-Executive Director and Mr J-D Comolli joined the and which contain provisions giving the other party a specific Board on 15 July 2008 as a Non-Executive Director and Deputy right to terminate them if the Company is subject to a change Chairman. Mr Comolli also provides certain consultancy services of control following a takeover bid. to the Group. Certain members of the Group entered into a credit facilities The Directors of the Company for the year to 30 September agreement on 18 July 2007 under which certain banks and 2008 are shown on pages 38 and 39. Messrs G L Blashill and financial institutions made available to Imperial Tobacco Finance P H Jungels retire at the Annual General Meeting and being PLC and Imperial Tobacco Enterprise Finance Limited committed eligible, offer themselves for re-election. As part of the Board and uncommitted credit facilities. The credit facilities agreement Evaluation Process the contributions to the Board of Messrs provides that, unless the lenders thereunder otherwise agree, G L Blashill and P H Jungels were assessed and the Board in the event of any person or group of associated persons confirms that they continue to be effective Directors. Messrs acquiring the right to exercise more than 50 per cent of the J-D Comolli, B F Bich and B Setrakian, having been appointed votes exercisable at a general meeting of the Company, Imperial during the year, retire at the Annual General Meeting and offer Tobacco Finance PLC and Imperial Tobacco Enterprise Finance themselves for election. Limited must repay each advance utilised by it under the credit Messrs D Cresswell and A G L Alexander retired from the Board facilities agreement and the total commitments under the credit on 31 December 2007 and 29 January 2008 respectively. facilities agreement will be immediately cancelled. The Company has entered into qualifying third party indemnity Certain members of the Group entered into a letter of credit arrangements for the benefit of all its Directors in a form and facility agreement dated 12 December 2007 under which scope which comply with the requirements of the Companies certain banks and financial institutions made available to Act 2006 and the transitional arrangements in respect of the Imperial Tobacco Limited a letter of credit facility. The letter Companies Act 1985. of credit facility agreement provides that, unless the lenders thereunder otherwise agree, in the event of any person or group Employees of associated persons acquiring the right to exercise more than The Group’s employment policies are designed to attract, retain, 50 per cent of the votes exercisable at a general meeting of the train and motivate the very best people, recognising that this Company, Imperial Tobacco Limited must repay each credit can be achieved only through offering equal opportunities and utilised by it under the letter of credit facility agreement and the fair consideration to applications for employment, career total commitments under the letter of credit facility agreement development and promotion regardless of gender, race, religion, will be immediately cancelled. age or disability. These policies also cover the continuation of employment and appropriate training for employees who become Imperial Tobacco Finance PLC issued on 15 September 2008 disabled during their period of employment. £600,000,000 8.125 per cent guaranteed notes due 2024 under the €10,000,000,000 Debt Issuance Programme. The Company To ensure employees can share in our success, the Group offers acted as guarantor. The applicable final terms of this series of competitive pay and benefit packages and, wherever possible, notes contains change of control provisions pursuant to which links rewards to individual and team performance. Employees are the holder of each note will, subject to any earlier exercise by encouraged to build a stake in the Company through ownership the issuer of a tax call, have the option to require the issuer to of Imperial Tobacco Group PLC shares. A further opportunity to redeem or, at the issuer’ s option, purchase (or procure the join the Sharesave Plan was offered during the year and 32 per purchase of) that note at its nominal value if: (a) any person (or, cent of eligible employees around the world now participate. subject to customary exceptions, any persons acting in concert The Group is committed to providing an environment that or any person or persons acting on behalf of any such person(s)) encourages the continuous development of all its employees becomes interested in: (i) more than 50 per cent of the issued through skills enhancement and training programmes. or allotted ordinary share capital of the Company; or (ii) such number of shares in the capital of the Company carrying more Using their own consultative and communication methods than 50 per cent of the voting rights normally exercisable at a each of the Group’s businesses is encouraged to keep general meeting of the Company; and (b) as a result (in whole or its employees informed on Group and individual business in part) of the change of control, there is either: (i) a reduction in developments and to make its employees aware of the financial or withdrawal of the investment grade credit rating of the notes and economic factors affecting the performance of their during the change of control period specified in the final terms; employing company. To progress this aim further, employee or (ii) to the extent that the notes are not rated at the time of the representatives are briefed on pan-European issues through change of control, the issuer fails to obtain an investment grade a European Employee Forum and through CEEGA, the Altadis credit rating of the notes within the change of control period as European Works Council. The Group’s financial results and a result (in whole or in part) of the change of control. important initiatives are communicated through a number of mechanisms including company magazines, electronic updates, Imperial Tobacco Finance PLC issued on 15 September 2008 presentations, face to face briefings and the Group’s Intranet. €750,000,000 7.25 per cent guaranteed notes due 2014 under the €10,000,000,000 Debt Issuance Programme. The Company Information concerning employees and their remuneration acted as guarantor. The change of control provisions in the is given in note 4 to the accounts and in the Directors’ applicable final terms of this series of notes are the same as Remuneration Report. those mentioned in the above paragraph in respect of the £600,000,000 8.125 per cent guaranteed notes due 2024.

42 Imperial Tobacco Group PLC 2008 Charitable and Political Donations A resolution to reappoint PricewaterhouseCoopers LLP During the year the Group made charitable donations of as Auditors to the Company will be proposed at the £3.0 million of which £0.2 million was in respect of the UK Annual General Meeting. (2007: £2.0 million, of which £0.2 million was in respect of the Annual General Meeting UK), much of which was distributed through the Charities Aid Full details of the Annual General Meeting to be held on Foundation in accordance with the Group’s charities policy. 3 February 2009, together with explanations of the resolutions As in the previous financial year, no political donations were to be proposed at the meeting, appear in the notice of meeting made by the Imperial Tobacco Group to EU political parties, accompanying this report. organisations or candidates. By order of the Board Since its acquisition by Imperial Tobacco in April 2007 and in line with its long-standing practice, Commonwealth Brands has made corporate donations totalling in aggregate US$ 97,000 to candidates and political parties in the USA States of Florida,

Texas and Mississippi. Commonwealth Brands has not made Matthew R Phillips any corporate donations at a federal level. Company Secretary Since 1 October 2008, Commonwealth Brands has adopted 26 November 2008 Imperial Tobacco Group’ s long-standing policy of not making contributions to any political party, organisation or candidates. Since its acquisition by Imperial Tobacco in January 2008, neither Altadis USA nor its subsidiaries have made, and will not make, any corporate donations to political candidates or parties at either a state or federal level. Creditor Payment Policy The Company’s current policy concerning the payment of the majority of its trade creditors is to follow the CBI’s Prompt Payers Code (copies are available from the CBI, Centre Point, 103 New Oxford Street, London WC1A 1DU). For other suppliers, the Company’s policy is to: > agree the terms of payment with those suppliers when agreeing the terms of each transaction; > ensure that those suppliers are made aware of the terms of payment by inclusion of the relevant terms in contracts; and > pay in accordance with its contractual and other legal obligations. The payment policy applies to all payments to creditors for revenue and capital supplies of goods and services without exception. Wherever possible UK subsidiaries follow the same policy and international subsidiaries are encouraged to adopt similar policies, by applying local best practices. The amount of trade creditors outstanding as at 30 September 2008 was equivalent to 46 days (2007: 30 days) of trade purchases. Research and Development The Group recognises the importance of investing in research and development, which brings innovative improvements to the Group, both in the products supplied to the consumer and in production and marketing techniques. Auditors and Disclosure of Information to Auditors Each of the Directors in office as of the date of approval of this report confirms that: > so far as they are aware, there is no relevant audit information (that is, information needed by the Company’s Auditors in connection with preparing their report) of which the Company’s Auditors are unaware; and > they have each taken all the steps that he/she ought to have taken as a Director in order to make himself/herself aware of any relevant audit information and to establish that the Company’s Auditors are aware of that information.

www.imperial-tobacco.com 43 DIRECTORS’ REPORT: GOVERNANCE Corporate Governance Report

The Board of Directors (the Board) remains committed International Premier Tier of OTCQX under the ticker to maintaining high standards of corporate governance, symbol ITYBY. which it sees as a cornerstone in managing the business While registered under the US Securities Exchange Act 1934, affairs of the Group and a fundamental part of discharging Imperial Tobacco was subject to the provisions of SOXA and its stewardship responsibilities. management was responsible for establishing and maintaining Applicable Corporate Governance Provisions an adequate system of internal control over financial reporting. and Compliance Management used the Committee of Sponsoring Organizations Throughout the year under review and up to the date of of the Treadway Commission (COSO) framework to evaluate the approval of the Annual Report, the Group has complied with effectiveness of that system. Following deregistration, Imperial the governance rules and best practice provisions applying Tobacco is no longer required to comply with SOXA, however, to UK listed companies as contained in section 1 of the management recognises the benefit of the system of financial Combined Code on Corporate Governance (the Code) which controls introduced to meet its requirements and has therefore was introduced in 1998 and further revised during 2006. The decided to maintain the key elements of the system. Code is publicly available on the Financial Reporting Council’s Update on Ongoing Enquiries website www.frc.org.uk. German Investigations During the financial year Imperial Tobacco Group PLC also Certain investigations were initiated by German authorities in had securities registered with the US Securities and Exchange January 2003 into alleged foreign trading and related violations Commission (the SEC) and complied with the appropriate by a number of people, including Reemtsma employees, during provisions of the Sarbanes-Oxley Act of 2002 (SOXA) until a period prior to its acquisition by Imperial Tobacco Group in delisting on 12 September 2008. May 2002. In the course of 2005, parts of the investigations into The Board recognises that it is accountable to shareholders certain of the individuals were terminated on terms agreed by for the Group’s standard of governance and this report, the individuals with the authorities and settlement was made of together with the Directors’ Remuneration Report, seeks to any duty payable as a result of certain of the activities being demonstrate how the principles of good governance, advocated investigated at no cost to the Imperial Tobacco Group. In 2006 by the Code, have been and continue to be applied in practice and 2007, investigations against some of the other individuals within the Group. were terminated for lack of evidence. During the course of the financial year the Board and its Audit In September 2006, charges relating to smuggling were Committee have continued to keep under review the Group’s brought in connection with one of the investigations against entire system of internal control, encompassing both financial 18 individuals, one of whom is a former Reemtsma employee. and operational controls, as well as compliance and risk In November 2006, in connection with a separate investigation, management. Based on these reviews the Board is satisfied charges relating to violations of the German foreign trade act that an appropriate internal control framework is in place were brought against four other former Reemtsma employees. In across the Group. October 2008, the German court agreed to open the trial in relation to the charges of smuggling, but no hearing date has been set. Throughout the Group, formal procedures, including well established and embedded internal controls, have been and In connection with the charges relating to violations of the continue to be maintained. Such procedures, together with German foreign trade act, the authorities have applied for continued regular formal reporting to the Audit Committee, have financial penalties to be imposed on Reemtsma. Such penalties ensured the maintenance of a strong procedural framework for could be imposed if the former employees who have been the ongoing identification, evaluation and management of the charged are ultimately found to have committed offences. In significant areas of risk to achievement of the Group’s strategic those circumstances, the Imperial Tobacco Group would seek objectives. Any weaknesses identified have a plan of remedial recovery of any losses under arrangements made on the action, progress against which is regularly reported to the Audit acquisition of the business. Committee. A Risk Co-ordination Committee was established A Board Committee established in 2003 remains in place to during the year in order to further enhance the Group’s top monitor the progress of the investigations and the Group’s down risk management activities. responses on behalf of the Board. The German authorities’ During the course of the year business reviews of the Group’s investigations are based on alleged activities prior to the operations have been performed as part of the Group Group’s acquisition of Reemtsma and the Committee remains Compliance function’s programme of activity. This has satisfied that, since the acquisition, the Group has not been highlighted a small number of controls requiring minor involved in any activities of a nature similar to those alleged remediation work which is currently being completed. by the German authorities. From reports to the Group Compliance function by the business Office of Fair Trading operations of any potential instances of fraud or accounting As previously reported, information was supplied by Imperial irregularity that may have occurred during the financial year, Tobacco Group and a number of other companies to the UK the Audit Committee concluded that neither individually nor Office of Fair Trading (OFT) in October 2003 in relation to an OFT collectively did they have a material impact on the results or investigation into the operation of the UK tobacco supply chain. performance of the Group for the financial year. Further information was supplied in April 2005. On 24 April 2008 the OFT issued a Statement of Objections (SO) alleging that Consequences of Delisting from the NYSE and certain tobacco manufacturers and retailers had engaged in De-registration from the SEC unlawful practices in relation to retail prices for tobacco products Subsequent to the delisting of the Group’s American Depositary in the UK. Shares (ADSs) from the NYSE on 12 September 2008 it had retained a level 1 American Depositary Receipt (ADR) program. The SO sets out the OFT’ s allegations against tobacco Imperial Tobacco Group’s ADSs are now listed on the manufacturers, Imperial Tobacco Group and Gallaher, and

44 Imperial Tobacco Group PLC 2008

11 retailers – Asda, the Co-operative Group, First Quench, Imperial Tobacco Group has been advised would also exclude Morrisons, Safeway, Sainsbury, Shell, Somerfield, T&S Stores, duty. In addition, if the OFT were to make an infringement finding, Tesco and TM Retail. The OFT alleges that these tobacco it could issue orders prohibiting that activity in the future, whilst manufacturers and retailers variously engaged in one or more the infringing company might face the prospect of damages unlawful practices in relation to retail prices for some or all of actions from third parties. If the OFT were to make an a number of tobacco products in breach of Chapter I of the infringement decision, Imperial Tobacco Group would be able Competition Act 1998 (which prohibits anti-competitive to appeal the OFT’s decision to the Competition Appeal Tribunal, agreements and concerted practices that have the object or and ultimately, on a point of law to the Court of Appeal. effect of preventing, restricting or distorting competition in the UK Board and Board Committee or a part of it and which may affect trade in the UK or a part of it). Board Structure The alleged practices comprised: The Board of Directors, which met nine times during the year a) arrangements between each manufacturer and each retailer (with two of the meetings having a duration of two days), that restricted the ability of each of these retailers to currently comprises a Non-Executive Chairman, eight determine its selling prices independently, by linking the independent Non-Executive Directors, one Non-Executive retail price of a manufacturer’ s brand to the retail price of Director not classified as independent for the purposes of the a competing brand of another manufacturer. The alleged Code when determining the composition of the Board or its infringements span different periods for different parties Committees, and four Executive Directors. between 2000 and 2003; and There is a clear separation of the roles of the Chairman, b) in the case of Imperial Tobacco Group, Gallaher, Asda, Mr I J G Napier, and the Chief Executive, Mr G Davis, to ensure Sainsbury, Shell, Somerfield and Tesco, the indirect exchange an appropriate balance of power and authority. The Chairman is of proposed future retail prices between competitors. The responsible for the leadership of the whole Board, with the Chief alleged infringements span different periods for different Executive, in conjunction with the Chief Executive’s Committee, parties between 2001 and 2003. responsible for managing the Group and implementing the Following the issue of the SO, the OFT invited recipients of the SO strategy and policies which have been set by the Board. to enter into without prejudice settlement discussions to reach ‘early resolution agreements’ with the OFT in which they were Mr J-D Comolli is Deputy Chairman and Dr P H Jungels is the invited to admit liability for the conduct set out in the SO in return recognised senior independent Non-Executive Director to whom for a reduction in the level of fine that the OFT indicated it would the Company would encourage shareholders to raise any otherwise impose. On 11 July 2008 the OFT announced that six of concerns they may have. the parties subject to the SO had reached early resolution Following the annual Board evaluation and consideration of all agreements with the OFT, in which they admitted liability in respect other relevant factors contained in the Code and the New York of all of the infringements alleged against them in the SO and Stock Exchange (NYSE) Corporate Governance rules, the agreed to pay individual penalties which amounted to a combined Board concluded at its meeting in September 2008 that all maximum of £173.3 million before discounts (£132.3 million if all Non-Executive Directors continue to contribute effectively and leniency and early resolution discounts are given). Those constructively to Board debate, to challenge and question companies are Asda, First Quench, Gallaher, One Stop Stores management objectively and robustly and at all times to have (formerly named T&S Stores), Somerfield and TM Retail. the best interests of the Group in mind and that, taking account The parties which have not settled, and are therefore contesting of these factors, together with the other relevant factors the OFT’ s allegations other than Imperial Tobacco Group, are the contained in the Code and the NYSE Corporate Governance Co-operative Group, Morrisons (including Safeway), Shell and rules, with the exception of Mr J-D Comolli, the other nine Non- Tesco. According to the OFT’s press release of 11 July 2008, Executive Directors (including the Chairman) remain independent Sainsbury has been granted leniency and will, therefore, receive for the purposes of the NYSE Corporate Governance rules and complete immunity from financial penalty if it continues to the other eight Non-Executive Directors (excluding the Chairman co-operate fully with the OFT. Imperial Tobacco Group’ s detailed as required by the Code) remain independent for the purposes written response to the SO was submitted to the OFT on of the Code. 15 August 2008. An oral hearing has been scheduled for 3 December 2008 for Imperial Tobacco’s representatives to The Board does not classify Mr J-D Comolli, for the purposes of make submissions to the OFT in defence of the allegations. the Combined Code and the NYSE Corporate Governance rules, as an independent director, due to his ongoing Chairmanships of No timetable for the remainder of the OFT’ s enquiry has been certain subsidiaries within the Group and his provision of published. In light of the responses it receives to the SO, the OFT may decide to close the investigation, present additional consultancy services to the Group. evidence by issuing a supplemental SO, or proceed to an The Board has satisfied itself that there is no compromise to the infringement decision. independence of those Directors who have appointments on If the OFT proceeds to an infringement decision, it may impose boards of, or relationships with, companies outside the Group. a fine. The amount of the fine is calculated by reference to the The Board requires Directors to declare all appointments and turnover of the infringing company. The rules regarding the other situations which could result in any possible conflict of maximum amount of such a penalty changed on 1 May 2004. interest and has adopted appropriate processes to manage and Before that date, the maximum amount of a fine was 10 per cent if appropriate approve any such conflicts. In this regard, and to of a company’s UK turnover for up to three years. In the three underpin his independence, the Company has entered into an years to 30 September 2003 Imperial Tobacco Group’s agreement with Mr B Setrakian, a former Non-Executive Director aggregate net UK turnover was £2,215 million. The applicable of and legal adviser to Altadis, to minimise the risk of any conflict turnover on which the amount of a fine is based expressly of interest between, inter alia, the law firm Dewey & LeBoeuf LLP, excludes VAT and other taxes directly related to turnover, which of which he is a partner, and the Company.

www.imperial-tobacco.com 45 DIRECTORS’ REPORT: GOVERNANCE Corporate Governance Report continued

The Directors’ biographies, appearing on pages 38 and 39, In addition the Altadis board was requested to submit two demonstrate a detailed knowledge of the tobacco industry and of its non-executive directors to be invited to join the Board the wider Fast Moving Consumer Goods sector, together with as non-executive directors. After due consideration of the a range of business and financial experience which is vital to appropriate candidates and the approval of the Nominations the management of an expanding international company. The Committee and the Board, Messrs B F Bich and B Setrakian biographies also include details of any other major directorships. joined the Board as Non-Executive Directors on 25 April 2008 and 25 June 2008 respectively. Board Changes During the year the Nominations Committee again reviewed the As previously announced, Messrs D Cresswell and composition and balance of the Board. This review took into A G L Alexander retired on 31 December 2007 and account not only the overall balance of skills, knowledge and 29 January 2008 respectively. experience of Board members but also of the wider provisions In addition to extensive Investor Relations roadshows, of the Code and the results of the annual evaluation of the Mr I J G Napier met with a number of key shareholders during performance of the Board, its Committees and individual Directors. the year. The opportunity also exists for major shareholders As announced last year, Mr J-D Comolli was invited to become to meet with new and existing Directors. In addition, Directors Non-Executive Deputy Chairman and to provide certain made themselves available to meet shareholders after the consultancy services to the Group. Following approval by formal business of the Annual General Meeting (AGM) had the Board Mr J-D Comolli was appointed on 15 July 2008. been completed.

Structure of the Board and Board Committees Audit Remuneration Nominations Board Committee Committee Committee Executive Directors G Davis Member – – – R Dyrbus Member – – – G L Blashill Member – – – A J Cooper Member – – – Non-Executive Directors I J G Napier Chairman – Member Chairman B F Bich Member – – Member K M Burnett Member – – Member J-D Comolli Deputy Chairman – – Member M H C Herlihy Member Member Member Member P H Jungels – Senior Independent Director Member Member Chairman Member C F Knott Member Member Member Member S E Murray Member Member Member Member B Setrakian Member – – Member M D Williamson Member Chairman Member Member

Performance Evaluation The Chairman held meetings exclusively with the Non-Executive During the year, in accordance with the Code and with the Directors to consider, amongst other things, succession issues assistance of an external consultant, the Board formally and the performance of the Executive Directors in the discharge reviewed and evaluated its own performance together with the of their duties. performance of its Committees and individual Directors. The Following these reviews the Board and its Committees are reviews were conducted by way of detailed questionnaires, satisfied that they are operating and performing effectively. completed by the Directors, followed by one to one interviews No fundamental issues or training needs were identified and between each Director and the external consultant. Feedback the Board is also satisfied that each of the current Directors on individual Directors was discussed with the Chairman and this has sufficient time, knowledge and commitment to contribute in turn was followed by private feedback meetings between the effectively to the Board and its Committees. Accordingly, the Chairman and each of the Directors. A report on the performance Board recommends that Mr G L Blashill and Dr P H Jungels of the Board as a whole and of the Board Committees was made should stand for re-election and that Messrs B F Bich, to the Board at its meetings in September and November 2008. J-D Comolli and B Setrakian should stand for election at the Following a private feedback meeting with the external 2009 AGM. consultant, Dr P H Jungels, the senior independent Non- The key positive theme which emerged from this year’s Executive Director, met with the Non-Executive Directors evaluation was that, notwithstanding the Altadis acquisition, as a group, without the Chairman present, to consider the the increased size of the Board and refreshment of Board performance of the Chairman. After also taking account of the membership, there remains a high degree of Board unity views of the Executive Directors and the results of the Chairman’s with all Board members working well together. formal performance evaluation, Dr P H Jungels held a private feedback meeting with the Chairman.

46 Imperial Tobacco Group PLC 2008

The key themes for development included the need to ensure supplied with information on the progress of the business in a a continued high degree of Board unity and effectiveness during timely manner and that at Board meetings the Directors were the ongoing Board succession and refreshment process. properly briefed on issues arising. All Board members receive Commencing with the Remuneration Committee’s September reports from the chairmen of all Board Committees and receive 2008 meeting, a standing item has been added to the copies of each Committee’s minutes. Committee’s agenda allowing the members of the Committee The Non-Executive Directors also play a leading role in to meet without the Company Chairman, any Executive Director corporate accountability and governance through their or other manager being present. membership of the Remuneration Committee, the Nominations The Board plans to continue to conduct evaluations on an annual Committee and the Audit Committee. The membership and remit basis and may employ alternative formats and approaches in of each Committee are considered below, together with a record future years. of each Director’s attendance at Board and Board Committee Board Operations meetings during the year. As part of the Group’s policy of annual The Board is the principal decision making forum of the Group review, the terms of reference for each of these Committees and manages overall control of the Group’s affairs by the were reviewed, and updated where necessary, during the year schedule of matters reserved for its decision contained in and are published on the Imperial Tobacco Group website, the Group’s Corporate Manual. These include, inter-alia, www.imperial-tobacco.com. They are also available from the responsibility for the Group’s commercial strategy, the approval Company Secretary. of financial statements and corporate plans, the overall corporate The Group has procedures in place to allow Directors to seek governance framework, acquisitions and disposals, treasury, both independent professional advice, at the Group’s expense, tax and risk management policies and appointment and removal and the advice and services of the Company Secretary in order of Directors and the Company Secretary. to fulfil their duties. The Group maintains appropriate insurance The Company Secretary is responsible for advising the Board, cover in respect of Directors’ and Officers’ liabilities. The through the Chairman, on all governance matters and for Company has entered into qualifying third party indemnity ensuring Board procedures are followed and applicable rules arrangements for the benefit of all its Directors in a form and and regulations complied with. scope which comply with the requirements of the Companies All Directors are equally accountable in law for the proper Act 2006 and the transitional arrangements in respect of the stewardship of the Group’s affairs, with the Non-Executive Companies Act 1985. Directors having a particular responsibility for ensuring that Chief Executive’s Committee strategies proposed for the development of the business, Over the financial year, the Chief Executive’s Committee, resources and standards of conduct are critically reviewed using comprising the Executive Directors, the Manufacturing Director, their independent judgement and experience. This ensures that the Chief Operating Officer Cigar, the Group Human Resources the Board acts in the best long-term interests of the Company’s Director and the Company Secretary, met 11 times to ensure members, takes account of the wider community of interests appropriate control and management of day-to-day business represented by employees, customers and suppliers, and that matters. Within the framework of the Chief Executive’s environmental, community, ethical and reputational issues are Committee, the Board delegates day-to-day and business fully integrated into the Group’s decision making and risk control matters to the Chief Executive and the Chief Executive’s assessment processes. Committee, who are responsible for implementing Group policy During the year matters considered by the Board included the and monitoring the detailed performance of all aspects of the acquisition of Altadis, together with the follow-on bid resulting business. They have full power to act, subject to the reserved in the subsequent acquisition of all Logista shares not already powers and sanctioning limits laid down by the Board and the owned by Altadis, review of Group funding arrangements, Group’s policy guidelines. including the one for two Rights Issue, the divestment of Aldeasa, Mr G Aldridge joined the Chief Executive’s Committee as the Board changes detailed above, review of the strategy and Manufacturing Director with effect from 1 January 2008. operating results of the business, approval of annual and medium- Mr F Domínguez joined the Chief Executive’s Committee as Chief term plans and brand divestments which were a condition of the Operating Officer Cigar Business Unit with effect from 11 June 2008. European Commission’s approval of the Group’s acquisition of Altadis and the integration of Altadis. Actual results of the Group Between formal Board and Board Committee meetings, the were reviewed at each Board meeting, with monthly reports, Chairman and chairmen of the Board Committees communicate including detailed commentary and analysis, being provided in regularly with the Chief Executive and other members of the the intervening periods. This ensured that Board members were Chief Executive’s Committee.

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Meetings of the Board, Board Committees and Shareholders Annual Audit Remuneration Nominations General Board Committee Committee Committee Meeting Total number of meetings in 2008 9 4 6 2 1 Number of meetings attended in 2008 Executive Directors Mr G Davis 9/9 – – – 1/1 Mr R Dyrbus 9/9 – – – 1/1 Mr G L Blashill 9/9 – – – 1/1 Mrs A J Cooper 9/9 – – – 1/1 Mr D Cresswell1 1/1 – – – – Non-Executive Directors Mr I J G Napier 9/9 – 6/6 2/2 1/1 Mr A G L Alexander2 4/4 – – – 1/1 Mr B F Bich3 3/4 – – 1/1 – Dr K M Burnett 9/9 – – 2/2 1/1 Mr J-D Comolli3 1/1 – – –– Mr M H C Herlihy 9/9 4/4 6/6 2/2 1/1 Dr P H Jungels 9/9 3/4 6/6 1/2 1/1 Mr C F Knott 9/9 3/4 6/6 2/2 1/1 Ms S E Murray 9/9 3/4 6/6 2/2 1/1 Mr B Setrakian3 2/2 – – –– Mr M D Williamson 9/9 4/4 5/6 2/2 1/1

1 Mr D Cresswell retired from the Board on 31 December 2007. 2 Mr A G L Alexander retired from the Board on 29 January 2008. 3 Messrs B F Bich, B Setrakian and J-D Comolli were appointed on 25 April 2008, 25 June 2008 and 15 July 2008 respectively. Prior to his appointment Mr Bich informed the Company that he would be unable to attend one Board meeting due to a prior engagement.

The maximum number of meetings for each individual Director is the number which they were eligible to attend.

Remuneration Committee The membership and responsibilities of the Remuneration Committee are contained in the Directors’ Remuneration Report which appears on page 55. The Committee’s terms of reference are published on the Imperial Tobacco Group website, www.imperial-tobacco.com. The Remuneration Report, which has been approved by the Remuneration Committee and the Board and signed by the Chairman of the Remuneration Committee, outlines remuneration strategy and policy, details the Committee’s activities over the financial year and contains full details of Directors’ emoluments. The performance of the Committee was evaluated as part of the Board performance evaluation process described above.

48 Imperial Tobacco Group PLC 2008

Induction and Training Nominations Committee Report Detailed training and briefing is provided to all Directors on appointment to the Board, taking into account their individual Members qualifications and experience. Mr I J G Napier (Chairman); Mr A G L Alexander (retired 29 January 2008); Messrs B F Bich and J-D Comolli’s induction programme Mr B F Bich (appointed 25 April 2008); included meetings with the Group’s advisers and key Group personnel representing major functions, and site visits. These Dr K M Burnett; meetings also included briefings on relevant corporate Mr J-D Comolli (appointed 15 July 2008); responsibility and corporate affairs issues, legal matters, Mr M H C Herlihy; product stewardship, environmental management, social Dr P H Jungels; impact, scientific and regulatory affairs and commercial risk Mr C F Knott; management. Mr B Setrakian completed a similar induction Ms S E Murray; process subsequent to the end of the financial year. Mr B Setrakian (appointed 25 June 2008); Ongoing training is made available to all Directors to meet their Mr M D Williamson; and individual needs. Regular briefings are also provided to Directors Mr M R Phillips, Company Secretary, acts as Secretary on relevant issues such as legislation and regulation changes to the Committee. and corporate governance developments. During the year the Group’s external lawyers briefed the Board on topical items of Responsibilities interest, including the implications of the Companies Act 2006. The responsibilities of the Committee include:- The Audit and Remuneration Committees also received briefings > the evaluation of the balance of skills, knowledge and from PricewaterhouseCoopers and Hewitts Limited respectively experience on the Board; to ensure they remain up to date with current regulations and > the development of role specifications; developments. > the formulation of succession plans; and > the making of recommendations to the Board with regard to the appointment of Directors.

Membership The Nominations Committee comprises all the Non-Executive Directors and meets on an as required basis. During the year the Committee met twice. Overview The Committee’s terms of reference are published on the Imperial Tobacco Group website, www.imperial-tobacco.com. In the financial year the Committee met its responsibilities by the identification of suitable candidates, who met the relevant skill profile, from the Non-Executive Board Members of Altadis, in fulfilment of a commitment given on acquisition. The Committee also made a number of recommendations to the Board resulting in the appointments as detailed in the Board Changes section above, consideration of succession plans and the annual review of the Committee’s terms of reference. Following recommendation by the Nominations Committee, Directors are appointed by the Board. They must, however, submit themselves for election by shareholders at the AGM following their appointment. Thereafter all Directors, in accordance with the Code, are subject to re-election at least every three years. Furthermore, it is the Company’s practice that any Non-Executive Director, including the Chairman, having been in post for nine years or more is subject to annual re-election. The performance of each Director is considered before recommending such election or re-election. In order to facilitate succession planning, during the year there were a number of opportunities for Board members to interact with senior management, for example during strategy days, Board meetings and Board dinners. Succession planning was also discussed at Non-Executive Director dinners held during the year. The performance of the Committee was evaluated as part of the Board performance evaluation process described above.

www.imperial-tobacco.com 49 DIRECTORS’ REPORT: GOVERNANCE Corporate Governance Report continued

> consideration of and recommendations to the Board regarding Audit Committee Report the reappointment of the Auditors; > review of audit fees and of non-audit fees paid to the Auditors Members and other accountancy firms; Mr M D Williamson (Chairman); > review of the Going Concern statement prior to consideration Mr M H C Herlihy; by the Board; Dr P H Jungels; > oversight and monitoring of the Group’s Public Interest Mr C F Knott; Disclosure (Whistleblowing) Policy; Ms S E Murray; and > the financial integration of acquired businesses; Mr M R Phillips, Company Secretary, acts as Secretary > review of Group Compliance’s performance; and to the Committee. > review of the Group’s control and corporate governance environments including risk management systems. Responsibilities The responsibilities of the Committee include:- The performance of the Committee was evaluated as part of > review of internal control and risk assessment; the Board performance evaluation process described above. > oversight of the Group Compliance function; During the year the Head of Group Compliance provided > monitoring of external audit; the Committee with detailed reports to facilitate the regular > review of financial statements; and monitoring and review of its activities and effectiveness > oversight of other matters including the requirements of including those in respect of the programmes of activity in the UK listing authority and the Group’s Public Interest place to enable the Group to meet the requirements of both Disclosure (Whistleblowing) Policy. the Code and section 404 of the Sarbanes-Oxley Act (up to 12 September 2008). Membership The Committee undertook its annual review of the scope The Audit Committee, which has determined that all its members and content of the risk assessment and compliance are independent Non-Executive Directors, met four times during programme implemented by the Group Compliance function the year and members’ attendance is set out in the table on and confirmed its approval. The Committee continually monitors page 48. and critically reviews the authority, effectiveness and level of resource allocated to the activity. During the year a Risk Messrs M D Williamson and C F Knott are qualified accountants Co-ordination Committee was established in order to further and, therefore, are appropriately qualified to discharge the enhance the Group’s top down risk management activity. responsibilities that Audit Committee membership entails and The Risk Co-ordination Committee will provide regular reports are regarded as financial experts for the purposes of both the to the Audit Committee. Code and section 407 of the Sarbanes-Oxley Act (with which the Company had to comply until deregistration from the The Finance Director, the Group Financial Controller, the Head Securities & Exchange Commission on 12 September 2008). of Group Compliance, the Deputy Company Secretary and other The remaining members of the Committee supply a supporting financial management were invited to attend each meeting of the mix of skills and backgrounds. Committee. A standing item on each agenda allowed for the Head of Group Compliance to meet formally with the Committee, Mr M R Phillips, Company Secretary, acts as Secretary to the without any Executive Director or other manager being present, Committee. in line with the Code’s requirements. Overview In addition, the Group’s Auditors attended each meeting of the The Committee’s terms of reference cover the matters Committee during the year and, as a standing item on each recommended by the Code and are published on the Imperial agenda, had the opportunity to meet with the Committee Tobacco Group website, www.imperial-tobacco.com. During the members without the presence of any Executive Director or other year and up to the date of approval of the Annual Report, the manager, providing a direct line of communication between the Committee worked with a structured agenda of matters focused Auditors and Non-Executive Directors. to coincide with key events of the annual financial reporting cycle, together with standing items that the Committee is required to Auditor Independence Policy consider at each meeting. During the year the Committee met its The Group regularly reviews its Auditor Independence Policy, responsibilities by:- which provides clear definitions of services that the external Auditors can and cannot provide such that their independence > monitoring internal control throughout the Group; and objectivity are not impaired. The policy also establishes > approving the Group’s accounting policies, including changes a formal authorisation process, including the tendering and to segmental reporting, impairment testing and provisions; pre-approval by the Audit Committee for allowable non-audit > consideration of the accounting treatment of the ongoing work that they may perform, establishes guidelines for the enquiries detailed above on pages 44 and 45; recruitment of employees or former employees of the external > reviewing the interim and annual financial statements, together Auditors and for the recruitment of the Group’s employees with the USA filing on Form 20-F in respect of the 2006/07 by the external Auditors. This policy is published on the Group’s Financial Year, prior to submission to the Board; website, www.imperial-tobacco.com. > reviewing the scope of the external audit plan and the internal Group Compliance work plan; > consideration of any related party matters; > review of Auditor performance and independence, including rotation of Senior Audit Partner;

50 Imperial Tobacco Group PLC 2008

The Audit Committee also carried out bi-annual reviews of > The Audit Committee has delegated responsibility for the remuneration received by the Auditors for audit services, considering Group-wide operational, financial and compliance audit-related services and non-audit work with the aim of risks on a regular basis. The Group Compliance Function seeking to balance objectivity, value for money and compliance formally reported at each Audit Committee meeting the with this policy. The outcome of these reviews was not only that outcome of its ongoing activities, including its programme of performance of the relevant non-audit work by the Auditors was compliance reviews and any, more general, business reviews. the most cost-effective way of conducting the Group’s business These reports have supported the Audit Committee and the but also that no conflict of interest existed between such audit Board in assessing the effectiveness of internal controls within and non-audit work. The fees for such non-audit work within the business operations. In this way, the Audit Committee the financial year were principally related to acting as reporting satisfied itself that the Group’s exposure to major business accountant in connection with our offer for Altadis and the risks is minimised such that the levels of retained risk are associated Rights Issue and tax advisory work. Such fees are acceptable to the Group; shown on page 87. > A Risk Co-ordination Committee has also been established Following a review during the year by the Audit Committee of to supplement the bottom-up risk profiling exercises described the scope, efficiency and effectiveness of the audits performed above with a top-down approach; and by the Auditors it was agreed that the Group continues to receive > A summary of the principal risks facing the business is an efficient, effective and independent audit service. included on pages 22 to 24. Internal Control Control Environment and Control Activities: The Board acknowledges responsibility for the Group’s system > The Group is organised on a functional basis with of internal control and for reviewing its effectiveness. The Audit manufacturing, cigar, logistics, sales and marketing and Committee, on behalf of the Board, reviewed the effectiveness of central support functions each having their own management the system in accordance with the guidance set out in the Code and control structures which satisfy the Group’s controls, from information and regular reports provided by management, accounting policies and regulatory responsibilities; the internally independent Group Compliance Function and > The Board continually reviews the Group’s organisational external Auditors. However, given the size and complexity of the structure to ensure that clearly defined lines of responsibility Group’s operations, such a system can provide only reasonable with appropriate delegation of authority and segregation of and not absolute assurance of meeting internal control objectives duties exist, with personnel of the necessary calibre in place by managing rather than eliminating risk and can only provide to fulfil their roles. Such delegated authority ensures that reasonable and not absolute assurance against material decisions, significant either because of their value or impact misstatement or loss. on other parts of the Group, are taken at an appropriate level; The Board, either directly or through the Audit Committee, > The Board has formally adopted, and annually reviews, the regularly reviewed the effectiveness of the key procedures which schedule of matters of a strategic, financial, operational or have been established to provide internal control. It confirms that compliance nature, which are required to be brought to it an ongoing process for identifying, evaluating and managing the for decision; Group’s significant risks operated throughout the year and up to > The Group has an established framework of policies and the date of the approval of the Annual Report. procedures laid down by the Board which personnel are expected to comply with. These cover key issues such The Group has established control processes and procedures as acceptable business practices, authorisation levels, to ensure compliance with the best practice UK governance segregation of duties, ethical compliance matters and provisions as advocated by the Turnbull Guidance. The Group legislation, physical and data security as well as regulatory, considers its approach, methodology and actions in support of governance and health, safety and environmental issues. maintaining high standards of corporate governance satisfy the This framework of policies and procedures, which has been requirements of the Turnbull Guidance. developed and issued, with consistent communication The following key features have operated to provide reassurance throughout the Group, is reviewed and updated on a of both the reliability of information and the safeguarding of assets: periodic basis to ensure it continues to provide the requisite control guidance and remains pertinent to the Group’s Risk Assessment: business activities; > The Group has clearly set out its strategic objectives as part > A cross-functional project team has reviewed the Group’s of its medium-term planning process. These objectives are framework of policies and procedures with respect to their incorporated as part of the annual planning cycle; usefulness to the business and their relationship to each other. > A detailed assessment of strategic risks was undertaken by A new corporate documents intranet site has been created the Executive Directors as part of the medium-term planning in order to provide improved clarity on the purpose of the and annual and monthly forecasting reporting cycles; documents, how they are connected, how they are maintained > All areas of the business undertook bottom-up, risk-profiling and how they are to be used by the business; exercises to formally review their principal areas of risk so that > A major focus during the year has been the rollout of our all major risks were reviewed at all levels across the Group. control environment into Altadis. This included a briefing This formal system is based on the annual submission of risk to senior management during the first week following assessment summaries from each of the business operations acquisition, the rollout of ‘interim control measures’, business identifying their major areas of business risk, together with the and budgetary reviews within the first month, establishment controls embedded in the business processes to mitigate such of Imperial Tobacco’s reporting processes, changes to the risks. This review is ongoing throughout all business operations boards of Altadis SA and its subsidiaries and post acquisition of the Group to ensure that there continues to be clear and due diligence. Imperial Tobacco’s corporate governance consistent procedures for monitoring, updating and processes, including risk assessments and control implementing appropriate controls to minimise the risk certifications, have also been rolled out across the exposure identified; Altadis business;

www.imperial-tobacco.com 51 DIRECTORS’ REPORT: GOVERNANCE Corporate Governance Report continued

> A formal policy and arrangements for dealing in confidence The Audit Committee confirms it has reviewed and reported to with issues of genuine and significant concern raised by the Board on the system of internal control for the financial year employees or others relating to perceived malpractice, ended 30 September 2008, and up to the date of approval of the improper business practices, management impropriety or Annual Report, in accordance with the requirements of the Code other similar matters, whether financial or non-financial and Turnbull Guidance. Through the procedural and reporting (commonly referred to as ‘Whistleblowing’ arrangements) framework for monitoring business risks and controls, as set out operates throughout the Group; above, and review of the Group’s financial statements, the Board > The Group has an established and consistent methodology is satisfied there is sufficient information to enable it to review the for ranking the level of risk from each of its business operations effectiveness of the Group’s system of internal control. and identifying significant risk issues associated therewith. Disclosure Committee: Appropriate strategies have been implemented to deal with each significant risk that has been identified, including not In line with recommendations issued by the US Securities only internal controls but also other external measures such and Exchange Commission and to meet corporate governance as insurance and dual sourcing of supplies; best practice in the UK, the Group has a Disclosure Committee comprising appropriate senior executives: > There are well-defined procedures for appraisal, approval, control and review of capital and strategic expenditure > Company Secretary (Chairman); including acquisitions; > Head of Group Compliance (Co-ordinator); > The Group’s treasury function operates within a well-defined > Head of Group Legal Affairs; and policy designed to control the Group’s financing arrangements > Group Financial Controller. and to minimise its exposure to interest rate and foreign exchange risks through treasury instruments; and The Deputy Company Secretary acts as Secretary to > The Board reviews annually the Group’s Treasury and the Committee. Tax policies and Occupational, Health, Safety and The External Auditors, together with other senior management, Environmental matters. are invited to attend or to submit matters for the attention of the Committee. Information and communication: > Each area of the business produced detailed financial plans, The Committee, in accordance with its terms of reference, prior to the start of the financial year, which were reviewed considered the significance of relevant information identified after for robustness and realism; and due enquiry by its members both prior to each meeting and on > A comprehensive system of controls, including regular an ongoing basis. periodic performance reviews for each area of the business, During the year the Disclosure Committee reviewed all the ensured that major variances against plan were promptly Group’s major financial disclosures including Trading Updates, and thoroughly investigated. These reviews were conducted Interim Management Statements, Half Year Report, Report & at a detailed level within each function and at a high level by Accounts, Form 20-F and documentation in respect of the the Chief Executive’s Committee. European Medium Term Note Programme. The achievement of business objectives, both financial and The Committee reported on its evaluation of such information non-financial, were assessed on a regular basis using a range to the Chief Executive, Finance Director and, as appropriate, the of key performance indicators. These indicators are periodically Audit Committee to assist them in their evaluation of material reviewed to ensure that they remain relevant and reliable. issues for the purposes of any disclosure that may be required. Monitoring: The terms of reference of the Disclosure Committee were > A range of procedures is used to review the risk profile and reviewed during the year. monitor the effective application of internal controls across the Group. These included independent reviews by the Group The Disclosure Committee will continue to operate following Compliance Function, together with self-assessment of risks the Group’s USA delisting and deregistration. and relevant controls. Furthermore both the senior operational Going Concern and financial managers of each business and function annually The Directors are satisfied that the Group and Company has certify that effective systems of internal control, in accordance adequate resources to meet its operational needs for the with the Group’s policies and covering all business activities foreseeable future and, accordingly, they continue to adopt (both financial and non-financial), have been maintained within the going concern basis in preparing the financial statements. their area of responsibility; > The Group Compliance Function’s responsibilities include Pension Fund reporting to the Audit Committee on the effectiveness of The Group’s main pension fund, the Imperial Tobacco Pension internal control systems, focusing on those areas of greatest Fund, is not controlled by the Board but by Trustees consisting perceived risk to the Group. This is now a standing item on of five nominees from the Company; one member of which is the Chief Executive’s Committee’s agenda; chosen by employees and two by current and deferred > Follow-up procedures ensure that there is an appropriate pensioners. The Trustees look after the assets of the pension response to recommendations for any enhancement to risk fund, which are held separately from those of the Group and are controls as identified by the independent reviews of the Group managed by independent fund managers. The pension fund Compliance Function; and assets can only be used in accordance with the fund’s Rules > A Risk Co-ordination Committee chaired by the Company and for no other purpose. Secretary and comprising senior representatives of the Group’s functions was established during the year. The remit of this Committee is to ensure relevant risks identified within the Group from a top-down perspective are efficiently co-ordinated and to track mitigation activities by operational management.

52 Imperial Tobacco Group PLC 2008 Political Donations All shareholders are offered the choice of receiving shareholder As in the previous year, no political donations were made to EU documentation, including the Annual Report, and submitting political parties, organisations or candidates. However, one proxy votes either electronically or in paper format, including acquired business made corporate donations to candidates and the ability to abstain if desired. political parties in three USA states, as detailed on page 43. These donations were stopped with effect from 30 September In addition, at the AGM in 2008 individual shareholders received 2008. presentations from the Chairman and Chief Executive on the Group’s performance and current business activities and were New York Stock Exchange Corporate Governance given the opportunity to question the Chairman and the chairmen Requirements of the Audit, Remuneration and Nominations Committees and On 12 September 2008 the Group’s voluntary delisting from the other Directors. In accordance with the Group’s practice, the New York Stock Exchange (NYSE) became effective. Until that Annual Report and Accounts and Notice of the AGM were sent date, as a listed non-USA issuer, the Group was required to to shareholders more than 20 working days prior to the date of comply with some of the NYSE’s listing standards relating to the meeting. the corporate governance practices of listed companies, but was exempt from others. Separate resolutions are proposed on each discrete subject, with all resolutions put to a poll. The Company indicates the level This included an obligation to disclose any significant ways in of proxy votes lodged in respect of each resolution proposed which the Group’s corporate governance practices differed during its AGMs, together with the number of votes for, against from those followed by USA companies under the NYSE listing and withheld for each such resolution. In 2008, voting levels standards. During the period of its NYSE listing, the Group at the AGM represented approximately 77 per cent of the believes that it was in compliance in all material respects with Company’s then issued share capital (excluding shares held in the relevant NYSE listing standards. Treasury). After the conclusion of the meeting the final results It is, however, the Board that develops, recommends and adopts are published through a Regulatory Information Service and on the corporate governance principles to be applied throughout the Company’s website. the Group. In addition, the role of an internal audit department is Statement of Directors’ Responsibilities incorporated within the general remit of the internally independent The Directors are responsible for preparing the Annual Report, Group Compliance Function. the Directors’ Remuneration Report and the Group and the The Group will continue to provide a high standard of corporate parent Company financial statements in accordance with governance, information and disclosure in line with the current applicable law and regulations. UK corporate governance code and regulatory requirements, and will use the progress it has made in achieving compliance Company law requires the Directors to prepare financial with regulations under section 404 of the Sarbanes-Oxley Act statements for each financial year. Under that law the Directors as part of its ongoing approach to governance, internal control have prepared the Group financial statements in accordance and reporting. with International Financial Reporting Standards (IFRSs) as adopted by the European Union, and the parent Company Communication with Shareholders financial statements and the Directors’ Remuneration Report in Communication with all shareholders is given a high priority and accordance with applicable law and United Kingdom Accounting a number of methods are used to promote greater understanding Standards (United Kingdom Generally Accepted Accounting and dialogue with investment audiences. The Chairman, Chief Practice). The Group and parent Company financial statements Executive and Finance Director, together with feedback from are required by law to give a true and fair view of the state of external advisers, ensured that the views expressed at meetings affairs of the Company and the Group and of the profit or loss with major shareholders were communicated effectively to the of the Group for that period. Board as a whole such that any issues or concerns were fully In preparing those financial statements, the Directors are required understood. to:- At the half year a Half Yearly Report was published, which > select suitable accounting policies and then apply them together with this Annual Report, is available online through the consistently; Imperial Tobacco Group’s website, www.imperial-tobacco.com, > make judgements and estimates that are reasonable together with all announcements, investor presentations and and prudent; share price information. > state that the Group financial statements comply with IFRSs During the year shareholders were kept informed of the progress as adopted by the European Union, and with regard to the of the Group via Interim Management Statements, trading parent Company financial statements that applicable UK statements and of significant developments through other Accounting Standards have been followed, subject to any announcements. These were also made available on other material departures disclosed and explained in the financial news services and on the Group’s website. There was regular statements; and dialogue with institutional shareholders and participation in sector > prepare the Group and parent Company financial statements conferences, which has been extended to ensure that major on the going concern basis unless it is inappropriate to shareholders are given the opportunity to meet Non-Executive presume that the Group will continue in business, in which Directors on appointment and the senior independent Non- case there should be supporting assumptions or qualifications Executive Director will, if so requested, attend meetings with as necessary. major investors. The Directors confirm that they have complied with the above The Group regularly liaises with its major shareholders and their requirements in preparing the financial statements. representative bodies on significant issues. The Group also met with Corporate Governance representatives of investors when requested.

www.imperial-tobacco.com 53 DIRECTORS’ REPORT: GOVERNANCE Corporate Governance Report continued

The Directors are responsible for keeping proper accounting records that disclose with reasonable accuracy at any time the financial position of the Company and the Group and to enable them to ensure that the Group financial statements comply with the Companies Act 1985 and Article 4 of the IAS Regulation and the parent Company financial statements and the Directors’ Remuneration Report comply with the Companies Act 1985. They are also responsible for safeguarding the assets of the Company and the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. The Directors are responsible for the maintenance and integrity of the Company’s website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. Disclosure and Transparency Rules The Directors confirm that to the best of their knowledge:- > the financial statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation taken as a whole; and > the management report includes a fair review of the development and performance of the business and the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face. Statement of Auditors’ Responsibilities Imperial Tobacco Group PLC’s registered Auditors, PricewaterhouseCoopers LLP, are responsible for forming an independent opinion on the financial statements of the Group and on the financial statements of the Company as presented by the Directors, on other elements of the Annual Report and Accounts as required by legislation or regulation, and for reporting their opinion to members. Their report is set out on page 72 .

54 Imperial Tobacco Group PLC 2008 DIRECTORS’ REPORT: GOVERNANCE Directors’ Remuneration Report

Mr G Davis (Chief Executive) and Mr R Dyrbus (Finance Director) Remuneration Committee Report are invited to attend to respond to questions raised by the Committee. Mr M R Phillips (Company Secretary) also attends Members meetings as secretary to the Committee. They are, however, all Dr P H Jungels (Chairman); specifically excluded from any matter concerning the details of Mr M H C Herlihy; their own remuneration. Mr C F Knott; Advisers to the Remuneration Committee Ms S E Murray; The Committee sets the remuneration package for each Mr I J G Napier; Executive Director and member of the Chief Executive’s Mr M D Williamson; and Committee after taking advice principally from external sources, Mr M R Phillips, Company Secretary, acts as Secretary including remuneration consultants Hewitts Limited and Towers to the Committee. Perrin, both of whom are engaged by the Committee as required. Hewitts Limited also reviews the Group’s remuneration principles Responsibilities and practices against corporate governance best practice. The responsibilities of the Committee include:- Neither provides any other services for the Group. > determination of the Remuneration Policy for Executive remuneration data provided by Towers Perrin and Executive Directors and members of the Chief Boardex have also been used to assist in benchmarking Executive’s Committee; processes ensuring the consistent application of the executive > recommendations to the Board in respect of remuneration policy. Chairman’s remuneration; Mrs K A Turner (Group Human Resources Director) and the > determination of targets for performance-related Group Compensation and Benefits Manager also provide internal pay elements; support and advice to the Committee. > policy for Directors’ pensions and contracts; Solicitors Allen & Overy LLP have been retained by the Company > oversight of the overall policy for senior management to provide legal advice in respect of the Group’s share plans and remuneration; to provide services to the Committee as and when required. The > oversight of disclosures in the R emuneration R eport; and firm also provides other legal services to the Group as a whole. > oversight of the Group’s share incentive plans. The Company has appointed Alithos Limited to undertake Total Shareholder Return (TSR) calculations and provide advice on all This Report has been prepared by the Remuneration Committee TSR related matters, including advice in respect of the bespoke in accordance with schedule 7A to the Companies Act 1985 and comparator group. Alithos Limited provides no other services for to meet the relevant requirements of the Listing Rules of the UK the Group. Listing Authority. In particular, it describes how the Board has PricewaterhouseCoopers LLP, the Group’s Auditors, perform applied the principles of good governance relating to Directors’ agreed upon procedures on Earnings Per Share (EPS) calculations remuneration set out in the Code. used in the Group’s share plans prior to awards vesting. The Companies Act 1985 requires the Auditors to report to the Overview Company’s shareholders on the audited information within this The Board is ultimately responsible for the framework and cost Report and to state whether, in their opinion; those parts of the of executive remuneration but has delegated to the Remuneration Report have been prepared in accordance with the Companies Committee, within its terms of reference, responsibility for Act 1985. The Auditors’ opinion is set out on page 72 and those certain activities. aspects of this Report which have been subject to audit have been clearly marked. In discharging its responsibilities the most significant issues addressed by the Committee during the year were: The Remuneration Committee, which met six times during the year and operates under clear written terms of reference > annual review of Executive Directors’ and Chief Executive’s (available on the Company’s website www.imperial-tobacco.com), Committee members’ remuneration; confirms formally that throughout the year it has been > review of the standard Chief Executive’s Committee in compliance with the governance rules and best practice service contract; provisions relating to remuneration as set out in section > review of the executive bonus arrangements including 1 of the Code. determination of bonus performance criteria, and review of performance against the selected criteria prior to bonus Following the Remuneration Committee’s recommendation, payment, while ensuring the criteria remain appropriate commencing with the Committee’s September 2008 meeting, following the Altadis acquisition; a standing item has been added to the Committee’s agenda > approving adjustment to outstanding share plan awards allowing the members of the Committee to meet without the to reflect the Rights Issue; Company Chairman, any Executive Director or other manager > approval of minor amendments to share plan rules; being present. > extension of share plans to acquired companies; Membership > annual review of the operation, performance conditions, The Remuneration Committee comprises five independent vesting schedules, comparator groups and grant levels of Non-Executive Directors together with the Company Chairman, awards under the Group’s share plans, to ensure that they Mr I J G Napier (who is excluded from any matter concerning his remain appropriate in light of the Group’s current performance own remuneration and/or conditions of service), who have no and prospects and aligned with the strategy and objectives of personal financial interest, other than as shareholders, in the the Group and the Group’s overall remuneration strategy; and matters to be decided. > annual review of the Committee Terms of Reference.

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The Committee’s approach is fully consistent with the Group’s The Remuneration Committee has the discretion to consider overall remuneration strategy and philosophy that all employees corporate performance of environmental, social and governance should be competitively rewarded to attract and retain their issues when setting remuneration for the Executive Directors. valued skills in the business, as well as supporting corporate

strategy, by directly aligning executive management reward with the Group’s strategic business goals. Remuneration Strategy Imperial Tobacco Group PLC operates in a highly competitive, international environment. For the Group to continue to compete successfully it is essential that the level of remuneration and benefits offered achieves the objectives of attracting, developing, retaining and motivating the necessary high quality pool of talented employees at all levels across the Group while ensuring that there is a clear link between reward and performance. The Group, therefore, sets out to provide competitive remuneration to all its employees, appropriate to the business environment in the countries in which it operates. The Remuneration Committee oversees the remuneration policy for all employees. The Group’s remuneration arrangements not only align with the Group’s fundamental values of fairness, competitiveness and equity but also support the Group’s corporate strategy. The Group continues to relocate employees internationally to facilitate their development, and thus enhance the Company’s pool of talent, and to achieve the optimum balance of experience within the Group. A cohesive reward structure across the Group is critical in ensuring that all employees can associate with, and strive for, the Group’s strategic goals. During the year this structure was consistently applied and communicated to ensure each element of the package is understood and the links to corporate performance recognised. To assist in this communication senior employees were issued with total reward statements. The Group strives to align the interests of shareholders and employees at all levels by giving employees the opportunity to build a shareholding in Imperial Tobacco Group PLC. The majority of employees of the Company and its subsidiaries have been offered participation in one or more equity-based plans, with in excess of 32 per cent of eligible employees participating in one or more of those plans. To ensure the interests of management are aligned with those of shareholders, Executive Directors and senior management are required to meet minimum shareholding guidelines. Executive Remuneration Policy The Remuneration Committee determines the remuneration package for Executive Directors and members of the Chief Executive’s Committee. The package is designed to attract and retain high quality executives, induce loyalty and motivate them to achieve a high level of corporate performance in line with the best interests of shareholders, while not being excessive. Notwithstanding the Company’s continued outperformance of the FTSE 100 as shown in the graph on page 64 the executive remuneration policy continues to be set to provide base salary at around the median level of the comparator group, as set out below, while providing the Executive Directors and Chief Executive’s Committee members with the capacity to earn upper quartile total compensation on achievement of superior business performance. The executive remuneration policy combines short-term and long- term rewards focusing on, and significantly weighted towards, performance-related elements that take into account individual, functional and corporate performance. The main components are base salary, annual cash bonus, share matching scheme (SMS), long term incentive plan (LTIP) and pension benefits.

56 Imperial Tobacco Group PLC 2008

Percentage of Total Remuneration for the financial year to 30 September 2008

Salary Mr G Davis Bonus Pension Salary Supplement Mr R Dyrbus Beneﬁts SMS Mr G L Blashill LTIP

Mrs A J Cooper

0102030405060708090100

From the financial year ended September 2004, following a comprehensive remuneration review carried out during that year, more stringent performance criteria have been and continue to be applied to the performance-related elements, as detailed in the annual cash bonus and LTIP sections below and on pages 58 and 61 to 64, both of which form part of this policy statement. In September 2008, the Remuneration Committee reviewed the executive remuneration policy including award policies, performance criteria, relevant comparator groups and vesting schedules. Following the review of the bonus scheme detailed below the Committee is satisfied that these remain appropriate and support the strategy and objectives of the Group, including the creation of shareholder value. It was, however, agreed that the constituents of the bespoke comparator group for the third element of the LTIP described below should be reviewed following the demerger of Altria and the acquisition of Scottish & Newcastle PLC by Heineken N.V. Executive Directors’ Remuneration Package Performance Element Objective Award level Performance criteria period Base salary Attract and retain high performing Median of FTSE 50 excluding N/A N/A individuals reflecting market value companies in the Financial and of role and executive’s skills Pharmaceutical sectors with and experience. reference to the FTSE 30 excluding companies in the Financial and Pharmaceutical sectors. Annual bonus Incentivise delivery of Maximum percentage of Financial Targets 1 year Group objectives. base salary: (100% base salary Chief Executive and Finance Chief Executive Director 125%, other Executive and Finance Directors 100%. Director, 75% other Executive Directors). Strategic Targets (25% base salary for all Executive Directors). Share matching Incentivise delivery of improved May elect to invest some or all Adjusted EPS growth. 3 years scheme Group adjusted EPS and align of gross cash element of the with interests of shareholders. annual bonus in shares. These can be matched on a 1:1 basis. Long term Incentivise long term delivery Percentage of base salary: 3 elements – 3 years incentive plan of TSR and EPS (adjusted for Chief Executive 200%, Finance 50% adjusted certain items) and align with Director 150%, other Executive EPS growth interests of shareholders. Directors 100%. 25% TSR vs. FTSE 100 25% TSR vs. comparator group.

www.imperial-tobacco.com 57 DIRECTORS’ REPORT: GOVERNANCE Directors’ Remuneration Report continued

Base Salary Base salary is reviewed annually and is determined by the

Remuneration Committee following detailed consideration of a number of factors including individual responsibilities, performance and external market data. It is set within a range around the market median of the comparator group to reflect the experience, responsibility, effectiveness and market value of the relevant executive. The comparator group of companies chosen remains the FTSE 50 excluding companies in the Financial and Pharmaceutical sectors with reference to the FTSE 30 excluding companies in the Financial and Pharmaceutical sectors. Base salary is the only element of the package used to determine pensionable earnings. Annual Bonus For the financial year ended 30 September 2008 the potential maximum bonus was 125 per cent of base salary for the Chief Executive and Finance Director and 100 per cent for other Executive Directors. The targets for the year were related to adjusted EPS growth and stringent, quantifiable strategic elements including volume growth and integration-related criteria, however, they are not disclosed as they are considered to be commercially confidential. During the year the Company achieved adjusted EPS of 136.9 pence. In addition the strategic targets were met in part resulting in bonuses, as detailed in the table on page 60, being awarded to the Executive Directors. These payments represented 112.8 per cent of base salary in respect of the Chief Executive and Finance Director and 90.1 per cent in respect of the other Executive Directors. Cash bonuses were also earned by other senior management for achieving relevant performance targets for the financial year to 30 September 2008. For the financial year ending 30 September 2009 the Remuneration Committee has determined that the potential maximum bonus will remain unchanged. The performance criteria continue to be based on financial targets in respect of 100 per cent of base salary for the Chief Executive and Finance Director and 75 per cent for other Executive Directors. The performance criteria for 25 per cent of base salary will be based on stringent, quantifiable strategic targets which are set each year and are subject to the achievement of the minimum threshold in respect of the financial targets. Any bonus earned up to 100 per cent of base salary for the Chief Executive and Finance Director and 75 per cent for other Executive Directors is paid in cash and is eligible for investment into the Share Matching Scheme as detailed on page 65. Any bonus payable in excess of this level is paid in shares which the Director is required to retain for a minimum of three years. These shares are not eligible for investment in the Share Matching Scheme. In support of the Group’s key performance indicators, as set out on page 17, the Remuneration Committee has determined that the financial performance criteria for the financial year ended 30 September 2009 will be based on a matrix comprising Adjusted EPS and Group debt and that the strategic targets will be based on measures including volume growth and delivery of synergies from the Altadis integration. No element of the bonus is guaranteed.

58 Imperial Tobacco Group PLC 2008

Directors’ Emoluments for the Year Ended 30 September 2008 (Audited) 2008 2007 £’000 £’000 Executive Directors Base Salary 2,460 2,515 Benefits 85 93 Pension Salary Supplement 230 239 Bonus 2,560 2,140 LTIP annual vesting1 2,576 2,866 SMS vesting2 1,877 2,092 9,788 9,945 Non-Executive Directors Fees 846 660 Benefits 1 3 Subsidiary Board Fees 32 – Consultancy fees 119 – 998 663 Former Executive Directors Salary of former Executive Director 283 96 Bonus of former Executive Director – 68 Pension Salary Supplement of former Executive Director 16 16 Consultancy fees to former Executive Director 100 103 Subsidiary Board Fees 58 22 LTIP vesting1 893 – SMS vesting2 676 6 Benefits 11 4 2,037 315 Fees of former Non-Executive Directors Subsidiary Board Fees 66 22 66 22 Total remuneration 12,889 10,945

Chief Executive’s Committee Salary 906 725 Benefits 29 25 Pension Salary Supplement 43 48 Bonus 572 487 LTIP annual vesting1 282 469 SMS annual vesting2 215 396 2,047 2,150

1 Value of LTIP shares vesting in the year based on the prevailing closing share price on the day of exercise. 2 Value of SMS shares vesting on maturity based on the prevailing closing share price on the day of vesting.

Key Management Compensation for the Year Ended 30 September 2008 (Audited) 2008 2007 £’000 £’000 Short term employee benefits 7,609 6,648 Post-employment benefits 364 312 Other long term benefits – – Termination benefits – – Share-based payment 3,265 2,669 11,238 9,629

www.imperial-tobacco.com 59 DIRECTORS’ REPORT: GOVERNANCE Directors’ Remuneration Report continued

Emoluments by Individual Director (Audited) Base Pension Salary/ Base Subsidiary Consultancy salary Benefits in Total Total Fees from salary Fees Board fees fees Bonus supplement1 kind2 Sub total LTIP3 SMS3 2008 2007 1/10/2008 £’000 £’000 £’000 £’000 £’000 £’000 £’000 £’000 £’000 £’000 £’000 £’000 £’000 Executive Directors Mr G Davis, Chief Executive 939 – – – 1,059 – 25 2,023 1,021 855 3,899 3,494 1,033 Mr R Dyrbus, Finance Director 575 – – – 649 201 25 1,450 648 544 2,642 2,414 623 Mr G L Blashill, Group Sales and Marketing Director 420 – – – 378 – 16 814 207 218 1,239 1,106 455 Mrs A J Cooper, Corporate Development Director 425 – – – 383 29 15 852 235 260 1,347 181 470 Mr D Cresswell4, Manufacturing Director 101 – – – 91 – 4 196 465 – 661 1,435 – Dr F A Rogerson5, Corporate Affairs Director – – – –– – – – – – – 1,315 – 2,460 – – – 2,560 230 85 5,335 2,576 1,877 9,788 9,945 2,581 Non-Executive Directors Mr I J G Napier, Chairman – 360 – – – – – 360 – – 360 245 420 Mr J-D Comolli6, Deputy Chairman – 21 – 119 – – – 140 – – 140 – 106 Mr A G L Alexander7, Vice Chairman – 28 – – – – 1 29 – – 29 78 – Mr D C Bonham8 – – – – – – – – – – – 76 – Mr B F Bich9 – 26 19 – – – – 45 – – 45 –65 Dr K M Burnett – 60 – – – – – 60 – – 60 50 65 Mr C R Day8 – – – – – – – – – – – 23 – Mr M H C Herlihy – 60 – – – – – 60 – – 60 13 65 Dr P H Jungels10 – 85 – – – – – 85 – – 85 65 100 Mr C F Knott – 60 – – – – – 60 – – 60 50 65 Ms S E Murray – 60 – – – – – 60 – – 60 50 65 Mr B Setrakian9 – 16 13 – – – – 29 – – 29 –65 Mr M D Williamson10 – 70 – – – – – 70 – – 70 13 85 – 846 32 119 – – 1 998 – – 998 663 1,101 Former Directors Mr S Huismans11 – – 66 – – – – 66 – – 66 22 – Mr S T Painter12 – – 58 100 – – – 158 – – 158 125 – Dr F A Rogerson5 283 – – – – 16 11 310 893 676 1,879 190 – 283 – 124 100 – 16 11 534 893 676 2,103 337 –

1 Further details are contained in the Executive Directors’ pension section on page 68. 2 Benefits in kind principally include the provision of a company car and health insurance. 3 LTIP and SMS represent the value of awards vesting and LTIP options exercised in the year. 4 Mr D Cresswell retired from the Board on 31 December 2007. 5 Dr F A Rogerson resigned from the Board on 27 June 2007. Dr F A Rogerson completed a handover period and his employment terminated on 27 June 2008. 6 Mr J-D Comolli was appointed on 15 July 2008 and in addition to his Director’s fees receives consultancy fees for services provided to the Group. 7 Mr A G L Alexander retired from the Board on 29 January 2008. 8 Messrs D C Bonham and C R Day retired from the Board on 2 January 2007 and resigned from the Board on 16 February 2007 respectively. 9 Messrs B F Bich and B Setrakian were appointed on 25 April 2008 and 25 June 2008 respectively. 10 Includes payment in respect of chairmanship of Board Committees at an annual rate of £10,000. 11 Mr S Huismans retired from the Board on 31 January 2006. However, Mr S Huismans received fees in connection with his Non-Executive Director appointments to Subsidiary Boards within the Reemtsma and Altadis Groups. 12 Mr S T Painter retired from the Board on 31 May 2000 but received fees on a consultancy basis and in connection with his Non-Executive Director appointments to Subsidiary Boards within the Reemtsma and Altadis Groups. 13 No sums were paid to any Director by way of taxable expenses allowances and no Directors waived their fees.

60 Imperial Tobacco Group PLC 2008

Directors’ Interests in Shares (Beneficial, Family and any Connected Persons Interests) (Audited) Contingent Rights to Ordinary Shares Ordinary Shares Sharesave Options (LTIP and SMS Shares) Total Interests 1/10/071 30/9/082 3 26/11/083 1/10/071 30/9/082 3 1/10/071 30/9/082 3 1/10/071 30/9/082 3 26/11/083 Executive Directors Mr G Davis 367,726 610,300 610,300 1,344 870 317,394 400,044 686,464 1,011,214 1,011,214 Mr R Dyrbus 237,190 393,807 393,807 621 714 171,890 204,345 409,701 598,866 598,866 Mr G L Blashill 91,584 149,854 149,854 807 1,465 80,854 105,192 173,245 256,511 256,511 Mrs A J Cooper 57,981 104,628 104,628 670 771 65,256 82,234 123,907 187,633 187,633 Mr D Cresswell4 102,120 102,120 102,120 548 548 99,173 79,822 201,841 182,490 182,490 Non-Executive Directors Mr I J G Napier 5,600 10,281 10,281 – – – – 5,600 10,281 10,281 Mr J-D Comolli5 – – – – – – – – – – Mr A G L Alexander6 132,710 132,710 132,710 – – – – 132,710 132,710 132,710 Mr B F Bich5 – 377 7957 – – – – – 377 7957 Dr K M Burnett 405 920 920 – – – – 405 920 920 Mr M H C Herlihy 343 2,173 2,173 – – – – 343 2,173 2,173 Dr P H Jungels 2,993 4,866 4,866 – – – – 2,993 4,866 4,866 Mr C F Knott 405 920 920 – – – – 405 920 920 Ms S E Murray 993 1,802 1,802 – – – – 993 1,802 1,802 Mr B Setrakian5 – 62 62 – – – – – 62 62 Mr M D Williamson 81 1,934 1,934 – – – – 81 1,934 1,934

1 Or date of appointment if later. 2 Or date of retirement if earlier. 3 All Directors took up their rights in respect of the Rights Issue and the Contingent Rights have been adjusted to reflect the bonus element of the Rights Issue. 4 Mr D Cresswell retired from the Board on 31 December 2007. 5 Messrs B F Bich, B Setrakian and J-D Comolli were appointed on 25 April 2008, 25 June 2008 and 15 July 2008 respectively. 6 Mr A G L Alexander retired from the Board on 29 January 2008. 7 Includes 377 ordinary shares and 209 American Depositary Shares (ADSs), each ADS representing two ordinary shares. There have been no changes in these holdings since 30 September 2008, other than the share purchases by Mr B Bich pursuant to an irrevocable mandate given by Mr Bich to his brokers under which they purchase American Depositary Shares each month equivalent in value to his net Director’s fees. Executive Share Retention To ensure the interests of management are aligned with those of shareholders, Executive Directors and senior management are required to meet minimum shareholding guidelines. Over a period of five years from appointment they are required to build a holding in the Group’s shares to a current minimum value broadly equivalent to three times base salary for the Chief Executive and Finance Director and twice base salary in respect of the other Executive Directors. Other senior management are expected to invest at a level equivalent to between once and twice base salary, dependent upon grade. Failure to meet the minimum shareholding is taken into account when determining eligibility for future LTIP awards. All Executive Directors currently exceed their required shareholding. Effects of the Rights Issue To take account of the effects of the Rights Issue completed in June 2008, adjustments were made to awards under the Group’s share plans. In respect of the Share Matching Scheme, the Trustee sold sufficient rights ‘nil paid’ to enable the balance of the rights to be taken up, using the proceeds of the sale. The newly acquired shares were allocated pro-rata to the relevant participants and will be released on the same basis as the awards to which they relate. In the case of the savings-related Sharesave Plan and the LTIP, the Remuneration Committee adjusted the number of shares under option, or subject to awards, and in the case of the savings-related Sharesave Plan, the price at which the shares may be acquired was also adjusted. These adjustments were made in accordance with the scheme or plan rules. The Group’s Auditors performed their agreed upon procedures on the adjustments as required by those rules. Where appropriate the adjustments were approved by the relevant tax authorities. Long Term Incentive Plan (LTIP) Annual awards are made under the LTIP to Executive Directors and other senior management. These awards vest three years after grant, subject to the satisfaction of performance criteria over the relevant three year performance period. All grants are at the discretion of the Remuneration Committee and no employee has a right to receive any such grant. Awards granted prior to November 2005 were equivalent to 75 per cent of base salary for all Executive Directors and at a lower level for other senior management. Following a comprehensive remuneration review in 2004, and subsequent shareholder approval at the 2005 AGM, awards made in November 2005, November 2006 and October 2007 were equivalent to 200 per cent of base salary for the Chief Executive, 150 per cent for the Finance Director and 100 per cent for the other Executive Directors with awards at a lower level for other senior management. www.imperial-tobacco.com 61 DIRECTORS’ REPORT: GOVERNANCE Directors’ Remuneration Report continued

Current Structure From November 2005 the performance criteria for all awards were split into three elements as follows: First Element Fifty per cent of the award with a performance criterion based on average growth in adjusted Earnings Per Share based on an agreed protocol (EPS), after adjusting for inflation over the period of the award. At the Remuneration Committee’s request the Auditors performed agreed upon procedures on the calculations. 12.5 per cent of this element (i.e. 6.25 per cent of the total award) vests if average annual EPS growth, after adjusting for UK inflation (Real Annual EPS Growth), equals 3 per cent and 100 per cent of this element (i.e. 50 per cent of the total award) vests if Real Annual EPS Growth equals or exceeds 10 per cent. Between these two points this element vests on a straight-line basis. Second Element Twenty five per cent of the award with a performance criterion based on Total Shareholder Return (TSR) relative to the FTSE 100 Index as described below. The performance criterion for this element is based on a sliding scale depending on TSR achieved over the relevant period. No vesting of this element occurs unless the Company’s TSR ranks it in the top 50 of the companies constituting the FTSE 100 Index. At this performance threshold 30 per cent of this element (i.e. 7.5 per cent of the total award) vests. If the return ranks the Company in the top 25 of the Index, this element (i.e. 25 per cent of the total award) vests in full. Between these thresholds this element vests on a straight-line basis. Third Element Twenty five per cent of the award with a performance criterion based on TSR relative to a bespoke comparator group as described below. The performance criterion for this element is also based on a sliding scale depending on TSR achieved over the relevant period. No vesting of this element occurs unless the Company’s TSR exceeds that of the bottom six companies constituting the comparator group comprising 12 tobacco and alcohol companies as detailed below. At this performance threshold, 30 per cent of this element (i.e. 7.5 per cent of the total award) vests. If the return ranks the Company in the top three of the comparator group, this element (i.e. 25 per cent of the total award) vests in full. Between these thresholds this element vests on a straight-line basis. The proposed comparator group for the November 2008 award is: Altria Group Inc. British American Tobacco PLC Carlsberg A/S Diageo PLC Heineken N.V. Imperial Tobacco Group PLC Interbrew S.A. Japan Tobacco Inc. Philip Morris International Inc Pernod Ricard S.A. Reynolds American Inc. SABMiller PLC If one of the comparator group companies is acquired prior to the granting of an award a suitable replacement will be made. For any corporate actions affecting a comparator group company during an award period the intention would be to mirror the actions of a passive investor, e.g. for an equity bid the new shares offered in exchange for the original company would be held for the remainder of the award period. The TSR calculations use share prices averaged over a period of three months to determine the initial and closing prices rather than those ruling on a single day. It is assumed that the cash flow of dividend payments is recognised on the date the shares are declared ex-dividend. This method is considered to give a fairer and less volatile result as improved performance has to be sustained for several weeks before it effectively impacts on the TSR calculations. All share prices and dividend flows are converted to sterling on the applicable date to ensure that the calculations reflect the return achievable by a UK based investor. The TSR calculations themselves are performed independently by Alithos Limited. Each element operates independently and is capable of vesting regardless of the Company’s performance in respect of the other elements. During the year the Remuneration Committee reviewed the performance criteria, award policy, comparator groups and vesting schedules for LTIP awards and decided that, notwithstanding the current conditions in financial markets, the three elements remain the most important measures that drive and measure sustainable improvement in shareholder value. The TSR criteria reflect comparative performance against the appropriate FTSE sector and the bespoke comparator group of companies. The EPS criterion reflects a key part of the Group’s strategy to create sustainable shareholder value. Awards Under the Historical Structure For awards granted between December 2000 and November 2004, EPS growth was the sole performance criterion. This was seen as focusing on the financial performance of the business, over which Directors and senior management could exercise influence. These awards vested on a sliding scale depending on average growth in basic EPS adjusted under the terms of the relevant protocol. The EPS calculations were confirmed by the Auditors. For awards granted between 2000 and 2002 no vesting occurred unless the Company’s Real Annual EPS Growth was positive. For awards granted in 2003 and 2004 no vesting occurred unless the Company’s Real Annual EPS Growth exceeded 3 per cent. Full vesting occurred if Real Annual EPS Growth was equal to or exceeded 10 per cent. Between these two points the award vested on a straight-line basis.

62 Imperial Tobacco Group PLC 2008 Vesting of Awards On vesting a participant is granted an option to acquire the relevant number of shares. The option may be exercised at any time up to the seventh anniversary of its date of grant. Within this framework, for senior managers based outside the UK, the vesting process may be amended to conform to local tax and securities legislation. There is no opportunity to re-test if any of the performance criteria are not achieved. The Remuneration Committee has absolute discretion to vary, but not increase, the extent to which any awards vest. This ensures that they only vest, and vest at an appropriate level, if there has been an improvement in the underlying financial performance of the Company, including the maintenance of long-term return on capital employed. Under the LTIP Rules, in the event that Imperial Tobacco Group PLC is acquired the relevant performance period would come to an end on the date of acquisition. Any outstanding awards would vest on a time pro-rata basis, subject to the achievement of the applicable performance criteria. Award Summary Award Years Award as Percentage of Base Salary Performance Criteria 1996 – 1999 75 for all Executive Directors 100 per cent on TSR 2000 – 2004 75 for all Executive Directors 100 per cent on EPS ● 200 for Chief Executive ● 50 per cent on EPS ● 150 for Finance Director ● 25 per cent on TSR against FTSE 100 2005 onwards ● 100 for other Executive Directors ● 25 per cent on TSR against comparator group

Executive Directors’ Conditional Share Awards under the Long Term Incentive Plan (Audited) Market Market Market price at price at price Amount Performance date of Vested Rights date of at date of Lapsed realised on period Balance at Granted grant during year issue vesting exercise during exercise Balance at November– 1/10/2007 during year Date of grant £ (9/11/2007) adjustment £ £ year £’000 30/9/20081 November Mr G Davis 42,513 – 09/11/04 12.79(39,014) – 24.05 26.17 (3,499) 1,021 – 2004-2007 96,594 – 02/11/05 16.15 – 14,576 – – – – 111,170 2005-2008 89,929 – 01/11/06 18.57 – 13,570 – – – – 103,499 2006-2009 – 76,730 31/10/07 24.47 – 11,578 – – – – 88,308 2007-2010 229,036 76,730 – –(39,014) 39,724 – – (3,499) – 302,977 – Mr R Dyrbus 26,974 – 09/11/04 12.79(24,754) – 24.05 26.17 (2,220) 648 – 2004-2007 45,975 – 02/11/05 16.15 – 6,937 – – – – 52,912 2005-2008 42,810 – 01/11/06 18.57 – 6,460 – – – – 49,270 2006-2009 – 35,247 31/10/07 24.47 – 5,318 – – – – 40,565 2007-2010 115,759 35,247 – – (24,754) 18,715 – – (2,220) – 142,747 – Mr G L Blashill 8,600 – 09/11/04 12.79(7,892) – 24.05 26.17 (708) 207 – 2004-2007 21,981 – 02/11/05 16.15 – 3,316 – – – – 25,297 2005-2008 21,001 – 01/11/06 18.57 – 3,169 – – – – 24,170 2006-2009 – 17,163 31/10/07 24.47 – 2,589 – – – – 19,752 2007-2010 51,582 17,163 – –(7,892) 9,074 – – (708) – 69,219 – Mrs A J Cooper 9,773 – 09/11/04 12.79 (8,968) – 24.05 26.17 (805) 235 – 2004-2007 13,003 – 02/11/05 16.15 – 1,962 – – – – 14,965 2005-2008 13,731 – 01/11/06 18.57 – 2,072 – – – – 15,803 2006-2009 – 17,368 31/10/07 24.47 – 2,620 – – – – 19,988 2007-2010 36,507 17,368 – –(8,968) 6,654 – – (805) – 50,756 – Mr D Cresswell2 19,351 – 09/11/04 12.79(17,758) – 24.05 26.17 (1,593) 465 – 2004-2007 21,981 – 02/11/05 16.15 – – – – – – 21,981 2005-2008 20,463 – 01/11/06 18.57 – – – – – – 20,463 2006-2009 61,795 – – – (17,758) – – – (1,593) – 42,444 –

1 Or date of retirement if earlier. 2 Mr D Cresswell retired from the Board on 31 December 2007. There have been no changes in any Directors’ awards since 30 September 2008, other than the vesting of the November 2005 – November 2008 award detailed below. www.imperial-tobacco.com 63 DIRECTORS’ REPORT: GOVERNANCE Directors’ Remuneration Report continued

During the year, the November 2004 – November 2007 award vested partially. Real Annual EPS Growth over the period averaged 9.42 per cent, resulting in partial vesting of the award. The remaining shares under award therefore lapsed. In respect of the November 2005 – November 2008 award, the first to be granted under the current structure described above, based on EPS and TSR performance to the end of the financial year, partial vesting of 93.9 per cent of the first element, 77.6 per cent of the second element and none of the third element vested on 25 November 2008. For illustrative purposes only, the share price on 24 November 2008, being the latest practicable date prior to publication, was £15.77 valuing the awards as follows: Award vesting Award vesting Award lapsing No. of shares over Illustrative value No. of shares which option granted £’000 Mr G Davis 37,436 73,734 1,163 Mr R Dyrbus 17,818 35,094 553 Mr G L Blashill 8,519 16,778 265 Mrs A J Cooper 5,039 9,926 157 The value of any options exercised could vary significantly from that shown due to share price movements. The Remuneration Committee regards the November 2006 – November 2009 and the November 2007 – November 2010 awards to be too distant from maturity to be included in the value projected above. However, in respect of the 2006 – 2009 award, based upon interim measurement calculations prepared as at 30 September 2008 full vesting of the first element, partial vesting of 72.0 per cent of the second element and none of the third element would occur if this performance were maintained over the relevant performance period. In respect of the 2007 – 2010 award based upon interim measurement calculations prepared as at 30 September 2008 partial vesting of 97.0 per cent of the first element, 63.6 per cent of the second element and 53.3 per cent of the third element would occur if this performance were maintained over the relevant performance period. The illustrative values based on the above share price and performance criteria are as follows;

Potential awards vesting November 2009 November 2010 Illustrative value Illustrative value No. of shares £’000 No. of shares £’000 Mr G Davis 70,380 1,110 68,631 1,082 Mr R Dyrbus 33,505 528 31,527 497 Mr G L Blashill 16,436 259 15,350 242 Mrs A J Cooper 10,748 169 15,534 245 Evidence of the Group’s sustained performance on a TSR basis when compared with the FTSE 100 Index is set out below. Total Return Indices – Imperial Tobacco and FTSE 100

350 Imperial Tobacco FTSE 100 300

250

200

150

100 Sep 03 Sep 04 Sep 05 Sep 06 Sep 07 Sep 08

The FTSE 100 Index is seen to provide the most appropriate and widely recognised index for benchmarking the corporate performance of the Company, which is a constituent of that index and reflects the benchmark index used as an LTIP performance criterion.

64 Imperial Tobacco Group PLC 2008

Share Matching Schemes (SMS) Under the SMS the Remuneration Committee at its absolute discretion invites Executive Directors and the majority of the Group’s management to invest any proportion of their gross bonus (capped at 100 per cent of base salary for the Chief Executive and Finance Director and 75 per cent for other Executive Directors) in Imperial Tobacco Group PLC ordinary shares to be held by a nominee managed by the Employee Benefit Trust. Provided that the shares lodged are left with the nominee for three years and the participant remains an employee in the Group, they will be matched on a one for one basis. Employees can vote shares held in the nominee by giving written instructions to the nominee. In respect of investments made by Executive Directors under the SMS a performance criterion is applied to the matched shares such that matching only occurs if the Group has achieved Real Average EPS Growth in excess of 3 per cent after adjusting for UK inflation over the three year retention period, being an indicator of sustained ongoing profit delivery. Achievement measurement is based on the same protocol as that applying to the LTIP. There is no opportunity to re-test if this performance criterion is not met. In setting the performance criterion for SMS awards, the Remuneration Committee decided that EPS reflects a key part of the Group’s strategy to create sustainable shareholder value. Under the SMS Rules, should Imperial Tobacco Group PLC be acquired, the performance period would come to an end on the date of acquisition. Any outstanding awards would vest on a time pro-rata basis, subject to the achievement of the applicable performance criteria. The Executive Directors’ contingent rights to shares arising under the SMS are set out below: Executive Directors’ Contingent Rights to Shares under the Share Matching Schemes (Audited) Market price Market price at date of at date of Amount grant vesting realised on Balance at Contingent 15/2/2008 Vested Rights issue 29/01/2008 vesting Balance at Actual/expected 1/10/2007 rights arising £ during year adjustment £ £’000 30/9/20081 vesting date Mr G Davis 36,059 – – (36,059) – 23.70 855 – January 2008 31,698 – – – 4,187 – – 35,885 February 2009 20,601 – – – 2,722 – – 23,323 February 2010 – 33,441 23.97 – 4,418 – – 37,859 February 2011 88,358 33,441 – (36,059) 11,327 – 855 97,067 Mr R Dyrbus 22,947 – – (22,947) – 23.70 544 – January 2008 20,111 – – – 2,657 – – 22,768 February 2009 13,073 – – – 1,727 – – 14,800 February 2010 – 21,226 23.97 – 2,804 – – 24,030 February 2011 56,131 21,226 – (22,947) 7,188 – 544 61,598 Mr G L Blashill 9,211 – – (9,211) – 23.70 218 – January 2008 10,701 – – – 1,413 – – 12,114 February 2009 9,360 – – – 1,237 – – 10,597 February 2010 – 11,714 23.97 – 1,548 – – 13,262 February 2011 29,272 11,714 – (9,211) 4,198 – 218 35,973 Mrs A J Cooper 10,984 – – (10,984) – 23.70 260 – January 2008 9,988 – – – 1,320 – – 11,308 February 2009 7,777 – – – 1,027 – – 8,804 February 2010 – 10,040 23.97 – 1,326 – – 11,366 February 2011 28,749 10,040 – (10,984) 3,673 – 260 31,478 Mr D Cresswell2 14,893 – – – – – – 14,893 January 2008 13,109 – ––––– 13,109 February 2009 9,376 – ––––– 9,376 February 2010 37,378 – – – – – – 37,378

1 Or date of retirement if earlier. 2 Mr D Cresswell retired from the Board on 31 December 2007. There have been no changes in any Directors’ contingent rights since 30 September 2008. During January 2008, annual bonuses earned in the financial year to 30 September 2004 and lodged under the SMS for a three year period matured, providing matched shares for participants on a one for one basis. In respect of annual bonuses earned in the financial year to 30 September 2007 and paid in December 2007, the Executive Directors elected, in February 2008, to invest their entire bonus in the form of Imperial Tobacco Group PLC ordinary shares under the SMS. These will be matched on a one for one basis provided they are left in the SMS for three years, the participant remains an employee in the Group and the Company has achieved in excess of 3 per cent Real Annual EPS Growth over the retention period. This performance criterion and the award policy and vesting schedules were reviewed by the Committee during the year and deemed to remain appropriate. These matching shares are shown within contingent rights arising above.

www.imperial-tobacco.com 65 DIRECTORS’ REPORT: GOVERNANCE Directors’ Remuneration Report continued

It is anticipated that, in February 2009, the Executive Directors will again invest their entire Financial Targets element of annual cash bonus earned in the financial year to 30 September 2008 in the form of Imperial Tobacco Group PLC ordinary shares under the SMS. Share Options The Company does not operate an executive share option scheme. However, Executive Directors are eligible (along with all employees of the Company and participating subsidiaries of the Group, where possible) to participate in Imperial Tobacco Group PLC’s savings-related Sharesave Plan. Under this Plan options are granted, at a discount of up to 20 per cent to the closing mid-market price of an Imperial Tobacco Group PLC ordinary share on the London Stock Exchange on the day prior to invitation, to participants who have contracted to save up to £250 per month over a period of three or five years. Executive Directors’ Share Options (Audited) Market Exercise Gains on exercise3 price at date price (rebased Granted Rights Exercised of exercise Balance where Range of exercisable During the Balance at during issue during the 19/08/2008 at appropriate) dates of options held at year 2007 1/10/2007 the year adjustment year £ 30/9/20081 £ 30/9/20082 £’000 £’000 01/08/08 Mr G Davis 774 – 116 (890) 18.63 – 7.14 – 31/01/09 10 – 01/08/12 570 – 86 –– 656 14.96 – 31/01/13 –– 01/08/11 – 214 – –– 214 17.50 – 31/01/12 –– 1,344 214 202 (890) – 870 – 10 16 01/08/09 Mr R Dyrbus 402 – 60 – – 462 12.12 – 31/01/10 –– 01/08/10 219 – 33 –– 252 14.96 – 31/01/11 –– 621 – 93 –– 714 – –4 01/08/08 Mr G L Blashill 807 – 121 – – 928 10.19 – 31/01/09 –– 01/08/11 – 537 –– 537 17.50 – 31/01/12 –– 807 537 121 –– 1,465 – –– 01/08/09 Mrs A J Cooper 670 – 101 – – 771 12.12 – 31/01/10 –– 670 – 101 –– 771 – –– 01/08/10 Mr D Cresswell4 548 – – – – 548 17.22 – 31/01/11 –– 548 – – –– 548 – ––

1 Or date of retirement, if earlier. 2 Any option not exercised by the end of the range of exercisable dates will expire. 3 Gains made on exercise, calculated as the difference between the exercise price and the market price on the date of exercise. Aggregate gains during the year were £10,226 (2007: £47,557). 4 Mr D Cresswell retired from the Board on 31 December 2007. There have been no changes in any Directors’ share options since 30 September 2008. The Company’s middle market share price at the close of business on 30 September 2008, being the last trading day of the financial year, was £17.97 and the range of the middle market price during the year was £16.27 to £23.95 (£27.52 unadjusted for the rights issue). Full details of the Directors’ share interests are available for inspection in the Register of Directors’ Interests at the Company’s registered office. Award Dates It is the Group’s policy to grant awards under all its employee share plans on predetermined dates based on an annual cycle.

66 Imperial Tobacco Group PLC 2008

Employee Benefit Trusts The Imperial Tobacco Group Employee and Executive Benefit Trust (the Executive Trust) and the Imperial Tobacco Group PLC 2001 Employee Benefit Trust (the 2001 Trust) have been established to acquire ordinary shares and American Depositary Shares in the Company, by subscription or purchase, from funds provided by the Group to satisfy rights to shares and American Depositary Shares arising on the exercise of share options and on the vesting of the SMS and LTIP awards. Details of the shareholdings by the Employee Benefit Trusts are as follows: Shares under Balance at Purchased Distributed Balance at Award at Surplus/ 1/10/2007 during year during year 30/9/2008 30/9/2008 (Shortfall) Executive Trust 994,613 407,854 301,080 1,101,387 938,945 162,442 2001 Trust 3,761,126 1,245,014 1,201,443 3,804,697 4,523,942 (719,245)

As at 30 September 2008, the Company also held 51,717,000 shares in Treasury which may be used to satisfy options and awards under its share plans. Options and awards may also be satisfied by the issue of new shares directly from the Company. Share Plan Flow Rates The Company’s policy has always been to satisfy all awards under its share plans from market purchased shares through the Trusts. The Trust Deeds and the Rules of all plans contain provisions limiting awards to 5 per cent in five years and 10 per cent in ten years for all employee share plans with an additional restriction to 5 per cent in ten years for executive plans. Currently an aggregate total of only 0.51 per cent of the Company’s issued share capital is subject to awards under all the Group’s executive and all employee share plans. In future the Trusts may also be provided with shares held by the Company in Treasury in order to satisfy vesting awards. Since demerger in 1996 the cumulative awards under all of the Company’s share plans total 2.4 per cent of its issued share capital. Following initial grants on demerger, subsequent annual grants have averaged 0.3 per cent of issued share capital. Summary of Awards Granted Cumulative Awards granted as a Awards granted during the year as a Limit on awards percentage of issued share capital percentage of issued share capital 10% in 10 years 1.9 0.2 5% in 5 years 0.9 0.2 5% in 10 years (executive schemes) 1.1 0.1

Executive Directors’ Pensions Post 6 April 2006 (‘A’ day) the Group’s UK pension policy, which applies to all current Executive Directors, provides the option to maintain membership of or join (new employees) the UK Imperial Tobacco Pension Fund or receive a salary supplement in lieu of membership of the Fund. The Executive Directors are all members of the Imperial Tobacco Pension Fund, the principal defined benefit scheme operated by the Group. For members who joined prior to 1 April 2002 the fund is largely non-contributory with a normal retirement age of 60. The fund allows members to achieve the maximum pension of two-thirds of their salary at normal retirement age usually after 32 years service. Pension commutation to enable participants to receive a lump sum on retirement is permitted. For death before retirement a capital sum equal to four times salary is payable together with a spouse’s pension of two-thirds of the member’s expected pension at retirement. For death in retirement, a spouse’s pension of two-thirds of the member’s pre-commutation pension is payable. Dependent children will also receive allowances. Pensions increase annually by the lesser of 10 per cent and the increase in the Retail Prices Index, together with an option under the rules to surrender part of a pension in order for the annual increase to be in line with the increase in the Retail Prices Index to 15 per cent. From 6 April 2006 a new tax regime was introduced by HM Revenue & Customs (HMRC) which abolished most of the detailed limits previously imposed on pension schemes and replaced them with a more simplified approach. Each member now has a Lifetime Allowance (LTA), £1.65 million for retirements in the tax year 2008/2009 and a tax, called the lifetime allowance charge, is levied at retirement if the value of their pension benefit from all sources exceeds this amount. For any member whose total benefit value on 6 April 2006 exceeded the LTA, transitional arrangements allowed them to register the higher value so that they would not be subject to a large retrospective lifetime allowance charge. To qualify for this enhanced protection the member was required to opt out of fund membership as regards future service accrual in order to retain a final salary linked pension entitlement in respect of past service. All Executive Directors earn benefits on the standard scale with a normal retirement age of 60. Other than Mrs A J Cooper, each of the current Executive Directors has opted out of fund membership as regards future service accrual as a result of registering for enhanced protection with HMRC. The detailed HMRC rules governing enhanced protection mean that it may not be permissible in some rare circumstances for the full final salary linked pension based on service up to 6 April 2006 to be paid from the fund. In this event an additional pension will be paid by the Company through an unfunded unapproved retirement benefit scheme (UURBS) so that the full accrued benefit may be provided.

www.imperial-tobacco.com 67 DIRECTORS’ REPORT: GOVERNANCE Directors’ Remuneration Report continued

Mr R Dyrbus is in receipt of a salary supplement of 35 per cent of salary, which is in lieu of future pensionable service accrual and arises because his accrued pension on 6 April 2006 was well below the maximum pension of two-thirds of salary. Mrs A J Cooper is also in receipt of a salary supplement. Prior to 6 April 2006 her pension benefits were limited by the effect of HMRC’ s earnings cap. Although this cap was removed as from 6 April 2006, the Imperial Tobacco Pension Fund did not disapply it in respect of past pensionable service but maintained its own earnings cap going forward. For service from 6 April 2006 onwards and for pensionable salary in excess of the Fund’ s earnings cap, the standard Fund benefit is a pension at the lower accrual rate of 1/60ths with a 50 per cent spouse’ s pension and member contributions of 5 per cent of this top slice of salary are payable. As an alternative to extra pension accrual on this top slice of salary through the UURBS, Mrs Cooper receives a salary supplement of 12 per cent of this amount. In each case these salary supplements have been calculated by the independent actuaries to reflect the value of the benefits of which they are in lieu and are discounted for early payment and for employers’ National Insurance contributions. The supplements are non-compensatory and non-pensionable. The following table provides the information required by both the Listing Rules and schedule 7A to the Companies Act 1985 and gives details for each Director of: > the annual accrued pension payable on retirement calculated as if he had left service at the year end (any potential UURBS entitlement is included); > the increase in accrued pension during the year, excluding any increases for inflation in respect of the disclosure required under the Listing Rules; and > the transfer value of the increase in accrued pension calculated in accordance with the actuarial guidance note GN11. None of the Directors has made additional voluntary contributions. Executive Directors’ Pension Disclosures (Audited) Disclosures required under Directors’ Remuneration Report Regulations 2002 Listing Rules Accrued pension £’000 Transfer value of accrued pension £’000 Increase in accrued Increase/ pension Transfer (decrease) (net of value of Pensionable during the inflation) increase Age at service at Increase year net of during the (net of 30/9/2008 30/9/2008 At during the At At Directors’ Director’s At year inflation) Years Years 1/10/2007 year 30/9/2008 1/10/2007 contributions contribution 30/9/2008 £’000 £’000 Mr G Davis 58 36 557 69 626 10,061 (467) – 9,594 47 715 Mr R Dyrbus 55 26 268 23 291 4,185 (213) – 3,972 12 164 Mrs A J Cooper 42 9 37 11 48 317 23 12 352 9 68 Mr G L Blashill1 61 40 260 20 280 5,206 (401) – 4,805 9 151 Former Director Mr D Cresswell1 63 45 253 4 257 4,799 (650) – 4,149 4 64

1 Mr Cresswell retired from the Board on 31 December 2007. Mr Cresswell and Mr Blashill drew pension during the course of the year, as is permitted under the fund rules. Mr Cresswell left employment on 31 December 2007, and Mr Blashill was still in employment as at 30 September 2008. The transfer value figures in the table above incorporate allowance for the benefits paid out in order to provide a relevant comparison with the start of the year figures and have been calculated consistently with those disclosed at 30 September 2007.

As at 30 September 2007, a slightly different methodology was used to calculate transfer values for pensioner members and this gave transfer values at 30 September 2007 of £5,161,000 for Mr Cresswell and £5,728,000 for Mr Blashill. The accrued pensions at 30 September 2008 represent the benefits accrued, assuming that they first started to draw pension from that date (31 December 2007 for Mr Cresswell). This is consistent with those figures disclosed at 30 September 2007.

The transfer values disclosed at 30 September 2008 have been calculated using the amended transfer value basis introduced in July 2008 following a review by the Scheme Actuary. The combined effect of changing market conditions over the course of the year and the revised basis has been to reduce transfer values, leading to some negative changes under the Directors' Remuneration Report Regulations 2002 despite the increase in accrued pensions. Other than including an allowance for the benefits drawn by Mr Cresswell and Mr Blashill during the year, the transfer values disclosed above do not represent the value of a potential liability of the pension scheme. Benefits The principal taxable benefits for Executive Directors are the provision of company cars and health insurance. Remuneration from other Non-Executive Directorships The Company recognises that external non-executive directorships are beneficial for both the Executive Director concerned and the Company. At the discretion of the Board, Executive Directors are permitted to retain fees received in respect of any such non-executive directorship. Each serving Executive Director is restricted to one external non-executive directorship and may not serve as chairman of a FTSE 100 company. Mr G Davis serves on the Board of Wolseley plc and received fees of £70,300.

68 Imperial Tobacco Group PLC 2008

Executive Directors’ Service Agreements The service agreements for Mr G Davis and Mr R Dyrbus were entered into at the time of the demerger of the Company from Hanson Group and the provisions dealing with compensation on termination following a change of control in their service agreements reflect that. The service agreements for the other Executive Directors reflect the Company’s established policy that Executive Directors have service agreements which are terminable on no more than one year’s notice and that there is no entitlement to the payment of a predetermined amount on termination of employment in any circumstances. There are no liquidated damages provisions for compensation on termination within Executive Directors’ service agreements, save as set out in the table below. The Executive Directors’ service agreements do contain payment in lieu of notice provisions but these are at the Company’s sole discretion. The Group is unequivocally against rewards for failure and, save in the limited respects referred to above, the circumstances of the termination and an individual’s duty and opportunity to mitigate loss are taken into account in every case. The Group’s policy is to stop or reduce compensatory payments to former Directors to the extent that they receive remuneration from other employment during the compensation period and that any such payments should be paid monthly in arrears. Under the Rules of the LTIP and SMS outstanding awards vest on termination for certain reasons, such as death, retirement, redundancy, the business or company in which the participant is employed ceasing to be part of the Group or on a change of control, on a time-related pro-rata basis and subject to satisfaction of the relevant performance criteria. If, however, the termination of employment is for a reason other than one of those specified in the Rules an individual’s full award lapses. Executive Directors’ Service Agreements Executive Directors Date of contract Expiry date Compensation on termination following a change of control Payment of a liquidated sum calculated by reference to benefits receivable Mr G Davis 21 August 1996 Terminable on 52 weeks’ notice during the notice period Payment of a liquidated sum calculated by reference to benefits receivable Mr R Dyrbus 21 August 1996 Terminable on 52 weeks’ notice during the notice period Mr G L Blashill 28 October 2005 Terminable on 52 weeks’ notice No provisions Mrs A J Cooper 1 July 2007 Terminable on 52 weeks’ notice No provisions

Remuneration Policy for Non-Executive Directors Fees for Non-Executive Directors are determined by the Board as a whole with regard to market practice and within the restrictions contained in the Company’s Articles of Association. The remuneration of the Chairman is determined by the Board following recommendation from the Remuneration Committee. The Non-Executive Directors and the Chairman do not take part in discussions relating to their own remuneration. They receive no other material pay or benefits (with the exception of reimbursement of expenses incurred in connection with their directorship of the Company and provision of administrative support including the use of Company offices by the Vice Chairman Mr A G L Alexander (until his retirement on 29 January 2008)), do not participate in the Company’s share plans, bonus schemes or incentive plans and are not eligible for pension scheme membership. To align further the interests of the Non-Executive Directors with those of shareholders, it was agreed that a proportion of their fees be applied, after statutory deductions, to purchase shares in Imperial Tobacco Group PLC. These shares are to be held by a nominee during the term of each Non-Executive Directorship. Exceptionally, in respect of Mr A G L Alexander (up to the date of his retirement), this requirement was waived due to his continued level of investment, as detailed above. Following his retirement from the Board in January 2006, Mr S Huismans remains a member of Supervisory Boards within the Reemtsma group. He was also appointed as a non-executive director of Altadis, S.A. upon its acquisition by the Group in January 2008 until 5 November 2008. Mr S Huismans receives additional remuneration for fulfilling such non-executive roles. Non-Executive Directors’ Letters of Appointment The Non-Executive Directors do not have service agreements with the Company. The terms of their appointments are reviewed annually. These terms were reviewed for all Non-Executive Directors and confirmed on 29 January 2008. The letters of appointment are available for viewing at the Company’s registered office during normal business hours, and prior to and at the AGM. Under the terms of the Articles of Association of the Company, Non-Executive Directors stand for election at the first AGM following appointment and are subject to triennial re-election by shareholders. There are no provisions regarding notice periods in their letters of appointment which state that the Non-Executive Director will only receive payment until the date their appointment ends and, therefore, no compensation is payable on termination. The letters of appointment detail the time commitment expected of each Non-Executive Director.

www.imperial-tobacco.com 69 DIRECTORS’ REPORT: GOVERNANCE Directors’ Remuneration Report continued

Although currently there is no maximum term of appointment for Non-Executive Directors, the Board is supportive of the best practice provisions contained in the Code. However, where the Board considers a Non-Executive Director is making a particularly valuable contribution, they may be invited to remain on the Board in excess of nine years. In such instances the length of tenure of the Non-Executive Director would be relevant to the Company’s deliberations as to the independence of the Non-Executive Director and he/she would also be subject to annual re-election at the AGM. Consultancy Agreement with Non-Executive Director Mr J-D Comolli In addition to his appointment as Non-Executive Deputy Chairman Mr Comolli has entered into an agreement with Imperial Tobacco Limited, the Group’s principal operating company. Under this agreement he provides consultancy services to the Group and receives fees up to a maximum of € 850,000 per annum. The agreement terminates on 31 January 2009 but may be renewed by mutual consent for further one year periods. In the event that Mr Comolli ceases to be Deputy Chairman, the agreement terminates with immediate effect but Mr Comolli would receive fees for the remainder of the relevant one year period. Remuneration Arrangements for Former Executive Directors Dr F A Rogerson Dr F A Rogerson resigned as a director on 27 June 2007 for personal and private reasons. Under his contract of employment, Dr Rogerson was required to give 12 months’ notice to terminate his employment. Dr Rogerson completed a handover period and was on compassionate leave until 27 June 2008, when his employment terminated. Dr Rogerson was excluded from the 2007/2008 bonus scheme and did not receive any bonus payment in respect of that bonus year. He was also excluded from any invitations to the LTIP and SMS from his Board resignation date. The Remuneration Committee agreed that the awards granted to Dr Rogerson under the LTIP and the shares awarded to him under the SMS would vest, to the extent that the applicable performance conditions were satisfied, pro rata for the period up to 31 December 2007. No compensation has been paid to Dr Rogerson in connection with the termination of his employment. Dr Rogerson opted out of pension fund membership as regards future service accrual as a result of registering for enhanced protection with HMRC from 6 April 2006. Dr Rogerson was in receipt of a salary supplement in lieu of future pension service accrual of 16.4 per cent of salary. This amount was a non-pensionable payment. It was agreed with Dr Rogerson that this salary supplement ceased to be paid on 30 December 2007 and that no salary supplement would be paid for the remainder of his notice period. Mr S T Painter Following his retirement in May 2000, Mr S T Painter entered into a consultancy agreement with Imperial Tobacco Limited, the Group’s principal operating company. The agreement, as amended in October 2001 and May 2004, ran until March 2007. Under the terms of the agreement he provided consultancy services as required and received fees at a day rate of £1,000 with a minimum fee based on 100 days service for each 12 month period ending on 30 June, and 67 days for the period 1 July 2006 to 6 March 2007. Mr S T Painter is still providing consultancy services as required and receives fees at a day rate of £1,000. However, there is now no minimum fee. He is entitled to reimbursement for the use of his car. Mr S T Painter is also a member of Supervisory Boards within the Reemtsma and, between January and October 2008, Altadis groups for which he receives additional remuneration for fulfilling such non-executive roles. Mr M A Häussler Mr M A Häussler is currently in receipt of a retirement pension that has been reduced because it has been taken before he reached his normal retirement age. His service agreement with the Group provided that he would receive similar overall pension benefits to those that he would have received had he remained in the Reemtsma Cigarettenfabriken GmbH pension arrangement. This was a pension for life equivalent to 42 per cent of his fixed annual salary at age 63. For death in retirement, a spouse’s pension for life of 60 per cent of that amount would be payable. The pension is made up of two parts: one part payable from the unfunded pension arrangement of Reemtsma Cigarettenfabriken GmbH, the other part payable from the separately funded Imperial Tobacco Pension Fund. The pension payable under the Reemtsma arrangement and from the Imperial Tobacco Pension Fund may be increased annually in accordance with the Rules of those arrangements, or as required by law. For the Board

P H Jungels Chairman of the Remuneration Committee 26 November 2008

70 Imperial Tobacco Group PLC 2008 In this section: Independent Auditors’ Report Independent Auditors’ Report to the Members of Imperial to the Members of Imperial Tobacco Group PLC 72 Tobacco Group PLC 127 Consolidated Income Statement 74 Imperial Tobacco Group PLC Consolidated Balance Sheet 75 Balance Sheet 128 Consolidated Statement of Notes to the Imperial Tobacco Recognised Income and Expense 76 Group PLC Balance Sheet 129 Consolidated Cash Flow Statement 76 Accounting Policies 77 Critical Accounting Estimates and Judgements 83 Notes to the Financial Statements 85 Financial Statements FINANCIAL STATEMENTS Independent Auditors’ Report to the Members of Imperial Tobacco Group PLC

We have audited the Group financial statements of Imperial Tobacco Group PLC for the year ended 30 September 2008 which comprise the Consolidated Income Statement, the Consolidated Balance Sheet, the Consolidated Statement of Recognised Income and Expense, the Consolidated Cash Flow Statement and the related notes. These Group financial statements have been prepared under the accounting policies set out therein. We have reported separately on the parent company financial statements of Imperial Tobacco Group PLC for the year ended 30 September 2008 and on the information in the Directors’ Remuneration Report that is described as having been audited. Respective Responsibilities of Directors and Auditors The Directors’ responsibilities for preparing the annual report and the Group financial statements in accordance with applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union are set out in the Statement of Directors’ Responsibilities. Our responsibility is to audit the Group financial statements in accordance with relevant legal and regulatory requirements and International Standards on Auditing (UK and Ireland). This report, including the opinion, has been prepared for and only for the Company’s members as a body in accordance with section 235 of the Companies Act 1985 and for no other purpose. We do not, in giving this opinion, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing. We report to you our opinion as to whether the Group financial statements give a true and fair view and whether the Group financial statements have been properly prepared in accordance with the Companies Act 1985 and article 4 of the IAS Regulation. We also report to you whether in our opinion the information given in the Report of the Directors is consistent with the Group financial statements. The information given in the Report of the Directors includes that specific information presented in the Strategic and Financial Review and Operating Review that is cross referenced from the Business Review section of the Report of the Directors. In addition we report to you if, in our opinion, we have not received all the information and explanations we require for our audit, or if information specified by law regarding Directors’ remuneration and other transactions is not disclosed. We review whether the Corporate Governance Report reflects the Company’s compliance with the nine provisions of the Combined Code (2006) specified for our Review by the Listing Rules of the Financial Services Authority, and we report if it does not. We are not required to consider whether the Board’s statements on internal control cover all risks and controls, or form an opinion on the effectiveness of the Group’s corporate governance procedures or its risk and control procedures. We read other information contained in the annual report and consider whether it is consistent with the audited Group financial statements. The other information comprises only the Financial Highlights, the Chairman’s Statement, the Strategic and Financial Review, the Operating Review, the Report of the Directors, the Corporate Governance Report and the unaudited parts of the Directors’ Remuneration Report. We consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the Group financial statements. Our responsibilities do not extend to any other information. Basis of Audit Opinion We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the Group financial statements. It also includes an assessment of the significant estimates and judgements made by the Directors in the preparation of the Group financial statements, and of whether the accounting policies are appropriate to the Group’s circumstances, consistently applied and adequately disclosed. We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the Group financial statements are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the Group financial statements.

72 Imperial Tobacco Group PLC 2008 Opinion In our opinion: > the Group financial statements give a true and fair view, in accordance with IFRSs as adopted by the European Union, of the state of the Group’s affairs as at 30 September 2008 and of its profit and cash flows for the year then ended; > the Group financial statements have been properly prepared in accordance with the Companies Act 1985 and article 4 of the IAS regulation; and > the information given in the Report of the Directors is consistent with the Group financial statements.

PricewaterhouseCoopers LLP Chartered Accountants and Registered Auditors Bristol 26 November 2008 Notes (a) The maintenance and integrity of the Imperial Tobacco Group PLC website is the responsibility of the Directors; the work carried out by the auditors does not involve consideration of these matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the ﬁnancial statements since they were initially presented on the website. (b) Legislation in the United Kingdom governing the preparation and dissemination of ﬁnancial statements may differ from legislation in other jurisdictions.

www.imperial-tobacco.com 73 FINANCIAL STATEMENTS Consolidated Income Statement for the year ended 30 September 2008

Year ended Year ended 30 September 30 September In £s million Notes 2008 2007 Revenue 1 20,528 12,344 Duty and similar items (10,412) (9,064) Other cost of sales (6,253) (990) Cost of sales (16,665) (10,054) Gross profit 3,863 2,290 Distribution, advertising and selling costs (1,462) (659) Administrative and other expenses (1,244) (213) Profit from operations 1 1,157 1,418 Investment income 5 402 318 Finance costs 5 (938) (499) Net finance costs 5 (536) (181) Profit before taxation 2 621 1,237 Taxation 6 (180) (325) Profit for the year 441 912 Attributable to: Equity holders of the Company 428 905 Minority interests 13 7 Earnings per ordinary share* – Basic 8 50.6p 116.7p – Diluted 8 50.4p 116.2p

All activities derive from continuing operations.

* Comparative per share figures have been restated to reflect the bonus element of the rights issue described in notes 8 and 20. Reconciliation from profit from operations to adjusted profit from operations Year ended Year ended 30 September 30 September In £s million Notes 2008 2007 Profit from operations 1,157 1,418 Acquisition accounting adjustments 161 – Amortisation of acquired intangibles 9 309 23 Brand divestment gain 2 (174) – Fair value gains and losses on derivative financial instruments 314 34 Restructuring costs 3 463 – Adjusted profit from operations 2,230 1,475

Reconciliation from net finance costs to adjusted net finance costs Year ended Year ended 30 September 30 September In £s million 2008 2007 Net finance costs (536) (181) Fair value gains and losses on derivative financial instruments (42) (2) Retirement benefits net financing income (45) (54) Adjusted net finance costs (623) (237)

74 Imperial Tobacco Group PLC 2008 Consolidated Balance Sheet at 30 September 2008

30 September 30 September In £s million Notes 2008 2007 Non-current assets Intangible assets 9 19,792 4,950 Property, plant and equipment 10 1,822 640 Investments in associates 11 16 4 Retirement benefit assets 18 441 602 Trade and other receivables 13 98 7 Derivative financial instruments 16 76 – Deferred tax assets 17 392 52 22,637 6,255 Current assets Inventories 12 2,858 998 Trade and other receivables 13 2,951 1,254 Current tax assets 6 31 50 Cash and cash equivalents 14 642 380 Derivative financial instruments 16 97 71 6,579 2,753 Total assets 29,216 9,008 Current liabilities Borrowings 16 (2,678) (1,067) Derivative financial instruments 16 (238) (219) Trade and other payables 15 (6,183) (1,593) Finance lease liabilities 28 (2) – Current tax liabilities 6 (370) (267) Provisions 19 (187) (26) (9,658) (3,172) Non-current liabilities Borrowings 16 (9,558) (4,053) Derivative financial instruments 16 (2) – Trade and other payables 15 (14) (5) Finance lease liabilities 28 (24) – Deferred tax liabilities 17 (2,294) (208) Retirement benefit liabilities 18 (546) (397) Provisions 19 (764) (32) (13,202) (4,695) Total liabilities (22,860) (7,867) Net assets 6,356 1,141

Equity Share capital 20 107 73 Share premium account 22 5,833 964 Retained earnings 22 (109) 58 Exchange translation reserve 22 476 23 Equity attributable to equity holders of the Company 6,307 1,118 Minority interests 23 49 23 Total equity 6,356 1,141

The ﬁnancial statements on pages 74 to 130 were approved by the Board of Directors on 26 November 2008 and signed on its behalf by:

Iain Napier Robert Dyrbus Chairman Director

www.imperial-tobacco.com 75 FINANCIAL STATEMENTS Consolidated Statement of Recognised Income and Expense for the year ended 30 September 2008

Year ended Year ended 30 September 30 September In £s million 2008 2007 Exchange movements 541 58 Net actuarial (losses)/gains on retirement benefits (156) 202 Deferred tax relating to net actuarial losses/(gains) on retirement benefits 57 (59) Deferred tax on share-based payments (6) – Current tax on share-based payments 1 5 Current tax on exchange movements (88) – Net income recognised directly in equity 349 206 Profit for the year 441 912 Total recognised income and expense for the year 790 1,118

Attributable to: Equity holders of the Company 777 1,111 Minority interests 13 7 Total recognised income and expense for the year 790 1,118

Consolidated Cash Flow Statement for the year ended 30 September 2008 Year ended Year ended 30 September 30 September In £s million Notes 2008 2007 Cash ﬂows from operating activities 27 1,700 999

Cash ﬂows from investing activities Interest received 101 15 Purchase of property, plant and equipment (214) (128) Proceeds from sale of property, plant and equipment 34 5 Purchase of intangible assets – software (12) (5) Purchase of intangible assets – trademarks (5) (5) Proceeds from brand divestment 191 – Purchase of businesses – net of cash acquired 24 (9,642) (966) Proceeds from sale of businesses – net of cash disposed 222 – Net cash used in investing activities (9,325) (1,084)

Cash flows from financing activities Interest paid (608) (227) Purchase of treasury shares – (105) Proceeds from sale of shares held by Employee Share Ownership Trusts 5 7 Purchase of shares held by Employee Share Ownership Trusts (26) (55) Proceeds from rights issue 4,903 – Settlement of exchange rate derivative financial instruments 13 – Increase in borrowings 13,815 2,324 Repayment of borrowings (9,646) (1,317) Increase in collateralisation deposits (188) – Repayment of obligations under finance leases (1) – Dividends paid to minority interests (9) (4) Dividends paid to equity holders of the Company (487) (434) Net cash generated by financing activities 7,771 189

Net increase in cash and cash equivalents 146 104 Cash and cash equivalents at start of year 380 263 Effect of foreign exchange rates 116 13 Cash and cash equivalents at end of year 642 380

76 Imperial Tobacco Group PLC 2008 Accounting Policies

Basis of Preparation The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards and IFRIC interpretations as endorsed by the European Union (collectively IFRS) and with those parts of the Companies Act 1985 applicable to companies reporting under IFRS. The financial statements have been prepared under the historical cost convention except as described in the accounting policies on financial instruments, retirement benefit schemes and share schemes below. The preparation of the consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of revenues and expenses during the period, assets and liabilities, and the disclosure of contingent liabilities at the date of the financial statements. The key estimates and assumptions are set out in the Critical Accounting Estimates and Judgements note on pages 83 and 84. Such estimates and assumptions are based on historical experience and various other factors that are believed to be reasonable in the circumstances and constitute management’s best judgement at the date of the financial statements. In the future, actual experience may deviate from these estimates and assumptions. This could affect future financial statements as the original estimates and assumptions are modified, as appropriate, in the year in which the circumstances change. A summary of the more important Group accounting policies is set out below. Basis of Consolidation The consolidated financial statements comprise the results of Imperial Tobacco Group PLC (the Company) and its subsidiary undertakings. Subsidiaries are those entities controlled by the Group. Control exists when the Group has the power to govern the financial and operating policies of an enterprise taking into account any potential voting rights. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases. The purchase method of accounting is used to account for the acquisition of subsidiaries. The cost of an acquisition is measured at the fair value of the consideration plus costs directly attributable to the acquisition. The excess of the cost of the acquisition over the Group’s share of the fair value of the net identifiable assets of the subsidiary acquired is recorded as goodwill. Transactions with minority interests are treated as transactions with parties external to the Group. Intragroup transactions, balances and unrealised gains on transactions between Group companies are eliminated; unrealised losses are also eliminated unless costs cannot be recovered. Where necessary, accounting policies of subsidiaries have been changed to ensure consistency with the policies adopted by the Group. A list of the principal subsidiaries is included on pages 131 and 132. Joint Ventures Joint ventures are those businesses which management and third parties jointly control. The financial statements of joint ventures are consolidated using the proportionate method, with the Group’s share of assets and liabilities recognised in the balance sheet classified according to their nature. In the same way, the Group’s share of income and expenses is presented in the consolidated income statement in accordance with their function. If necessary, adjustments are made to the financial statements of these companies to unify their accounting policies with those used by the Group. Foreign Currency Items included in the financial statements of each Group company are measured using the currency of the primary economic environment in which the company operates (the functional currency). The income and cash flow statements of Group companies using non-sterling functional currencies are translated to sterling (the Group’s presentation currency) at average rates of exchange in each period. Assets and liabilities of these companies are translated at rates of exchange ruling at the balance sheet date. The differences between retained profits and losses translated at average and closing rates are taken to reserves, as are differences arising on the retranslation of the net assets at the beginning of the year. Any translation differences that have arisen since 1 October 2004 are presented as a separate component of equity. As permitted by IFRS 1, any differences prior to this date are not included in this separate component of equity. Transactions in currencies other than a company’s functional currency are initially recorded at the exchange rate ruling at the date of the transaction. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at exchange rates ruling at the balance sheet date of monetary assets and liabilities denominated in foreign currencies are recognised in the income statement, except when treated as qualifying net investment hedges. The Group designates as net investment hedges certain external borrowings and derivatives up to the value of the net assets of Group companies that use non-sterling functional currencies after deducting permanent intragroup loans. Gains or losses on these hedges are transferred to equity to offset any gains or losses on translation of the net assets.

www.imperial-tobacco.com 77 FINANCIAL STATEMENTS Accounting Policies continued

Revenue Recognition For the Tobacco business, revenue comprises the invoiced value for the sale of goods and services net of sales taxes, rebates and discounts. Revenue from the sale of goods is recognised when a Group company has delivered products to the customer, the customer has accepted the products and collectibility of the related receivables is reasonably assured. Sales of services, which include fees for distributing third party products, are recognised in the accounting period in which the services are rendered. Licence fees are recognised on an accruals basis in accordance with the substance of the relevant agreements. For the Logistics business, revenue comprises the invoiced value for the sale of goods and services net of sales taxes, rebates and discounts. The Logistics business only recognises commission revenue on purchase and sale transactions in which it acts as a commission agent. Distribution and marketing commissions are included in revenue. Revenue is recognised on products on consignment when these are sold by the consignee. Duty and Similar Items Duty and similar items includes duty and levies having the characteristics of duty. In countries where duty is a production tax, duty is included in the income statement as an expense. Where duty is a sales tax, duty is excluded from revenue. Payments due in the United States under the Master Settlement Agreement and the Fair and Equitable Tobacco Reform Act are treated as a production tax. Taxes Income tax on the profit or loss for the year comprises current and deferred tax. Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the balance sheet date, and any adjustments to tax payable in respect of previous years. Deferred tax is provided in full on temporary differences between the carrying amount of assets and liabilities in the financial statements and the tax base. However, the deferred income tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction, other than a business combination, that at the time of the transaction affects neither accounting nor taxable profit or loss. Deferred tax assets are recognised only to the extent that it is probable that future taxable profits will be available against which the assets can be realised. Deferred tax assets and liabilities are not discounted. Deferred tax is determined using the tax rates that have been enacted or substantively enacted by the balance sheet date, and are expected to apply when the deferred tax liability is settled or the deferred tax asset is realised. Deferred tax is provided on temporary differences arising on investments in subsidiaries (including overseas subsidiaries), except where the timing of the reversal of the temporary difference is controlled by the Group and it is probable that the temporary difference will not reverse in the foreseeable future. Tax is recognised in the income statement, except where it relates to items recognised directly in equity, in which case it is recognised in equity. Dividends Final dividends are recognised as a liability in the period in which the dividends are approved by shareholders, while interim dividends are recognised in the period in which the dividends are paid. Intangible Assets – Goodwill Goodwill represents the excess of the cost of an acquisition over the Group’s share of the fair value of the net identifiable assets, liabilities and contingent liabilities acquired. Goodwill arising on acquisitions made on or after 27 September 1998 is capitalised. Previously all goodwill was written off through equity in the period of acquisition. As permitted under IFRS 1, goodwill arising on acquisitions prior to 1 October 2004 is stated in accordance with UK GAAP and has not been remeasured on transition to IFRS. Goodwill is tested at least annually for impairment and carried at cost less accumulated impairment losses. Any impairment is recognised immediately in the income statement and cannot be subsequently reversed. Goodwill is allocated to groups of cash-generating units for the purpose of impairment testing. The allocation is made to those cash-generating units or groups of cash-generating units that are expected to benefit from the business combination in which the goodwill arose. Gains or losses on the disposal of a Group company are determined by comparing the proceeds with the carrying value of the Group company’s assets and liabilities including the carrying amount of related goodwill. Goodwill previously written off directly to reserves under UK GAAP is not recycled to the income statement on the disposal of the subsidiary to which it relates. Intangible Assets – Other Other intangible assets are initially recognised in the balance sheet at historical cost unless they are acquired as part of a business combination, in which case they are initially recognised at fair value. They are shown in the balance sheet at historical cost or fair value (depending on how they are acquired) less accumulated amortisation and impairment. These assets consist mainly of acquired trademarks, concessions and rights, acquired customer relationships and computer software. The Davidoff cigarette trademark and some premium cigar trademarks are considered by the Directors to have indefinite lives based on the fact that they are established international brands with global potential. Trademarks with indefinite lives are not amortised but are reviewed annually for impairment. Other trademarks, supply agreements (including customer relationships) and computer software are amortised over their estimated useful lives as follows: Other trademarks up to 30 years straight line Supply agreements 3 – 15 years straight line Computer software up to 5 years straight line

78 Imperial Tobacco Group PLC 2008 Property, Plant and Equipment Property, plant and equipment are initially recognised in the balance sheet at historical cost unless they are acquired as part of a business combination, in which case they are initially recognised at fair value. They are shown in the balance sheet at historical cost or fair value (depending on how they are acquired), less accumulated depreciation and impairment. Historical cost includes expenditure that is directly attributable to the acquisition of the items. Subsequent costs are included in the assets’ carrying amounts or recognised as a separate asset as appropriate only when it is probable that future economic benefits associated with them will flow to the Group and the cost of the item can be measured reliably. All other repairs and maintenance costs are charged to the income statement as incurred. Land is not depreciated. Depreciation is provided on other property, plant and equipment so as to write off the initial cost of each asset to its residual value over its estimated useful life as follows: Buildings up to 50 years straight line Plant and equipment 2 – 20 years straight line / reducing balance Fixtures and motor vehicles 2 – 14 years straight line The assets’ residual values and useful lives are reviewed and, if appropriate, adjusted at each balance sheet date. Gains and losses on disposals are determined by comparing proceeds with carrying amounts. These are included in the income statement. Finance Leases Assets acquired under finance leases are included within property, plant and equipment. They are initially valued at the lower of fair value and the present value of the minimum lease payments. The assets are depreciated over the shorter of the lease term and the useful life of the asset. The associated lease liabilities are recognised in the balance sheet, and the interest element of the leasing payments is charged to the income statement. Impairment of Assets Assets that are not subject to amortisation or depreciation are tested at least annually for impairment. Assets that are subject to amortisation or depreciation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised in the income statement for the amount by which the carrying amount of the asset exceeds its recoverable amount. The recoverable amount is the higher of the fair value less costs to sell and the value in use. For the purpose of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units). Financial Instruments Financial assets and financial liabilities are recognised when the Group becomes a party to the contractual provisions of the relevant instrument. Financial assets are de-recognised when the rights to receive benefits have expired or been transferred, and the Group has transferred substantially all risks and rewards of ownership. Financial liabilities are de-recognised when the obligation is extinguished. Non-derivative financial assets are classified as loans and receivables (including cash and cash equivalents). Receivables are initially recognised at fair value and are subsequently stated at amortised cost using the effective interest method, subject to reduction for allowances for estimated irrecoverable amounts. A provision for impairment of receivables is established when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of those receivables. The amount of the provision is the difference between the asset’s carrying amount and the present value of estimated future cash flows, and is recognised in the income statement. For interest-bearing assets, the carrying value includes accrued interest receivable. Cash and cash equivalents include cash in hand and deposits held on call, together with other short-term highly liquid investments. Non-derivative financial liabilities are initially recognised at fair value and are subsequently stated at amortised cost using the effective interest method. For borrowings, the carrying value includes accrued interest payable, as well as unamortised transaction costs. The Group transacts derivative financial instruments to manage the underlying exposure to foreign exchange and interest rate risks. The Group does not transact derivative financial instruments for trading purposes. Derivative financial assets and liabilities are included in the balance sheet at fair value, which includes accrued interest receivable and payable where relevant. However, as the Group has decided (as permitted under IAS 39) not to cash flow or fair value hedge account for its derivative financial instruments, changes in fair values are recognised in the income statement in the period in which they arise unless the derivative qualifies as a net investment hedging instrument in which case the changes in fair values, attributable to foreign exchange, are recognised in equity. Inventories Inventories are stated at the lower of cost and net realisable value. Cost is determined using the first-in, first-out (FIFO) method. The cost of finished goods and work in progress comprises raw materials, direct labour, other direct costs and related production overheads (based on normal operating capacity) but excludes borrowing costs. Net realisable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and selling expenses. Leaf tobacco inventory which has an operating cycle that exceeds twelve months is classified as a current asset, consistent with recognised industry practice. Provisions A provision is recognised in the balance sheet when the Group has a legal or constructive obligation as a result of a past event, it is more likely than not that an outflow of resources will be required to settle that obligation, and a reliable estimate of the amount can be made.

www.imperial-tobacco.com 79 FINANCIAL STATEMENTS Accounting Policies continued

A provision for restructuring is recognised when the Group has approved a detailed formal restructuring plan, and the restructuring has either commenced or has been publicly announced, and it is more likely than not that the plan will be implemented, and the amount required to settle any obligations arising can be reliably estimated. Future operating losses are not provided for. Where there are a number of similar obligations, the likelihood that an outflow will be required in settlement is determined by considering the class of obligations as a whole. A provision is recognised even if the likelihood of an outflow with respect to any one item included in the same class of obligations may be small. Retirement Benefit Schemes The Group operates a number of retirement benefit schemes for its employees, including both defined benefit and defined contribution schemes. Under a defined benefit scheme, the amount of retirement benefit that will be received by an employee is defined. The amount recognised in the balance sheet is the difference between the present value of the defined benefit obligation at the balance sheet date and the fair value of the scheme assets. The defined benefit obligation is calculated annually by independent actuaries using the projected unit credit method. The present value of the defined benefit obligation is determined by discounting the estimated future cash outflows. The service cost of providing retirement benefits to employees during the year is charged to profit from operations. Past service costs are recognised immediately in income, unless the changes to the pension plan are conditional on the employees remaining in service for a specified period of time (the vesting period). In this case, the past service costs are amortised on a straight-line basis over the average vesting period. All actuarial gains and losses, including differences between actual and expected returns on assets and differences that arise as a result of changes in actuarial assumptions, are recognised immediately in full in the statement of recognised income and expense for the period in which they arise. A credit representing the expected return on plan assets of the retirement benefit schemes during the year is included within net finance costs. This is based on the market value of the assets of the schemes at the start of the financial year. A charge is also made within net finance costs for the expected increase in the liabilities of the retirement benefit schemes during the year. This arises from the schemes being one year closer to payment. For defined contribution schemes, the Group pays a defined contribution to the scheme; there are no further payment obligations once these contributions have been paid. Such contributions are recognised as an employee benefit expense when they are due. Any prepaid contributions are recognised as an asset to the extent that a cash refund or reduction in future payments is available. Share-Based Payments The Group applies the requirements of IFRS 2 “Share-based payment” to share-based employee compensation schemes in respect of awards granted after 7 November 2002 which remained unvested at 1 January 2005, the dates specified in IFRS 1. The Group operates equity-settled and cash-settled share-based compensation schemes. The cost of employees’ services received in exchange for the grant of rights under both types of scheme is expensed over the vesting period, and is determined by reference to the fair value of the instruments granted, excluding the impact of any non-market vesting conditions (e.g. earnings per share). Non-market vesting conditions are included in assumptions about the number of instruments that are expected to become exercisable. At each balance sheet date, the Group revises its estimates of the number of instruments that are expected to become exercisable under all schemes, and re-measures the fair value of the cash-settled schemes. The Group recognises the impact of the revision of original estimates, if any, in the income statement, with a corresponding adjustment to equity for equity-settled schemes and current liabilities for cash-settled schemes. The fair value is measured based on an appropriate valuation model, taking into account the terms and conditions of the award. In order to manage the related exposure, the Group funds the purchase of the number of shares necessary to satisfy rights to shares arising under share-based employee compensation schemes. Shares acquired to satisfy those rights are held in Employee Share Ownership Trusts. On consolidation, these shares are accounted for as a deduction from equity attributable to the equity holders of the Company. No additional shares are issued as a result of the Group’s share-based employee compensation schemes. When the rights are exercised, equity is increased by the amount of any proceeds received. Share Capital Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction, net of tax, from the proceeds. Where any Group company purchases the Company’s equity share capital (treasury shares), the consideration paid, including any directly attributable incremental costs (net of income taxes), is deducted on consolidation from equity attributable to the equity holders of the Company until the shares are cancelled, reissued or disposed of. Where such shares are subsequently sold or reissued, any consideration received, net of any directly attributable incremental transaction costs and the related income tax effects, is included in equity attributable to the equity holders of the Company.

80 Imperial Tobacco Group PLC 2008 Segmental Reporting A business segment is a distinguishable component of the Group that is engaged in providing products or services that are subject to risks and returns that are different to those of other business segments. The two distinct businesses of Tobacco and Logistics have been used as the primary reporting segments. Transactions between segments are undertaken on an arm’s length basis reflecting market prices for comparable products and services. Use of Adjusted Measures Management believes that reporting adjusted measures provides a useful comparison of business performance and reflects the way in which the business is controlled. Accordingly, adjusted measures of profit from operations, net finance costs, profit before tax, taxation, attributable earnings and earnings per share exclude, where applicable, amortisation of acquired intangibles, restructuring costs, retirement benefits net financing income, fair value gains and losses on derivative financial instruments in respect of commercially effective hedges, one-off acquisition accounting adjustments, brand divestment gains and related taxation effects. Reconciliations between adjusted and reported profit from operations are included within note 1 to the financial statements, adjusted and reported net finance costs in note 5, adjusted and reported taxation in note 6, and adjusted and reported earnings per share in note 8. The adjusted measures in this report are not defined terms under IFRS and may not be comparable with similarly titled measures reported by other companies. The principal adjustments made to reported profits are as follows: Acquisition Accounting Adjustments There are a number of acquisition accounting adjustments required under IFRS which affect reported profit from operations. The most significant of these are one-off adjustments related to the adjustment to fair value stocks held in the acquired company at the date of acquisition, and the elimination of intercompany sales. Prior to the acquisition of Altadis, Imperial Tobacco sold products to Altadis, principally to the logistics business for distribution in France, Spain, Italy and Portugal, and recognised profit at the time of sale to Altadis. Following the acquisition the enlarged Group recognises these profits when the products are sold out of the enlarged Group, so there is an initial post acquisition period during which no profit is recognised. These one-off effects have no impact on the performance of the business or on cash flow. Consequently we exclude these adjustments and their related taxation effects from our adjusted earnings measures. Amortisation of Acquired Intangibles Acquired intangibles are amortised over their estimated useful economic lives where these are considered to be finite. Acquired intangibles considered to have an indefinite life are not amortised. We exclude from our adjusted measures the amortisation of acquired intangibles, other than software, and the deferred tax associated with amortisation of acquired intangibles and tax deductible goodwill. The deferred tax liability is excluded on the basis that it will only crystallise upon disposal of the entities. The related current cash tax benefit is retained in the adjusted measure to reflect the ongoing tax benefit to the Group. Impairment of goodwill is also excluded from our adjusted measures. Brand Divestment The Group was required to divest a small number of fine cut and pipe tobacco brands as a condition of the European Commission’s approval of the acquisition of Altadis. Imperial Tobacco brands were internally generated so did not have a carrying value. This one-off gain and its related taxation effects have no impact on the operational performance of the business and have consequently been excluded from our adjusted earnings measures. Fair Value Gains and Losses on Derivative Financial Instruments IAS 39 requires that all derivative financial instruments are recognised on the balance sheet at fair value, and that changes in the fair value are recognised in the income statement unless the instrument qualifies for hedge accounting under IAS 39. The Group hedges underlying exposures in an efficient, commercial and structured manner. However, the strict hedging requirements of IAS 39 lead to some commercially effective hedge positions not qualifying for hedge accounting. As a result, and as permitted under IAS 39, the Group has decided not to apply cash flow or fair value hedge accounting. We exclude fair value gains and losses on derivative financial instruments used to commercially hedge interest rate risk from adjusted net financing costs. We also exclude fair value gains on derivative financial instruments used to commercially hedge investments in foreign operations from adjusted profit from operations. Restructuring Costs Significant one-off costs incurred in integrating acquired businesses and in major rationalisation initiatives together with their related tax effects are excluded from our adjusted earnings measures. Retirement Benefits Net Financing Income The expected return on plan assets and the interest on retirement benefit liabilities is included within net finance costs. Since these items do not impact cash flows and can be subject to significant volatility outside management’s control they have been eliminated from adjusted measures of net finance costs and earnings per share together with their related tax effects.

www.imperial-tobacco.com 81 FINANCIAL STATEMENTS Accounting Policies continued

Other Non-GAAP Measures Used by Management Net Revenue Net revenue comprises the Tobacco segment revenue less duty and similar items. Management considers this an important measure in assessing the profitability of Tobacco operations. Distribution Fees Distribution fees comprises the Logistics segment revenue excluding the cost of distributed products. Management considers this an important measure in assessing the profitability of Logistics operations. Adjusted Net Debt Management monitors the Group’s borrowing levels using adjusted net debt which excludes interest accruals, the fair value of interest rate derivative financial instruments and finance lease liabilities. New Accounting Standards The following accounting standards and interpretations became effective for the current reporting period: IFRS 7 Financial Instruments: Disclosures IFRIC 11 IFRS 2 – Group and Treasury Share Transactions Application of these standards and interpretations has not had a material impact on the net assets or results of the Group. The following standards and interpretations were issued but application was not mandatory for the period: IFRS 2 Amendment to IFRS 2 Share-Based Payment – vesting conditions and cancellations IFRS 3 (Revised) Business Combinations IFRS 8 Operating Segments IFRIC 12 Service Concession Arrangements IFRIC 13 Customer Loyalty Programmes IFRIC 14 IAS 19 – The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their interaction IFRIC 15 Agreements for the Construction of Real Estate IFRIC 16 Hedges of a Net Investment in a Foreign Operation The Directors anticipate that the adoption of these Standards and Interpretations in future periods will have no material impact on the net assets or results of the Group other than IFRS 3 (Revised) which may have a material impact on the reporting of future acquisitions.

82 Imperial Tobacco Group PLC 2008 Critical Accounting Estimates and Judgements

The Group makes estimates and assumptions regarding the future. Estimates and judgements are continually evaluated based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. In the future, actual experience may deviate from these estimates and assumptions. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below. Legal Proceedings In accordance with IFRS, the Group recognises liabilities where there is a present obligation from a past event, a transfer of economic benefits is probable and the amount of costs of the transfer can be reliably estimated. In such instances a provision is calculated and recorded in the financial statements. In instances where these criteria are not met, a contingent liability may be disclosed in the notes to the financial statements. A contingent liability is a possible obligation arising from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the Group; or a present obligation arising from past events that is not recognised in the financial statements because it is not probable that an outflow of resources embodying economic benefits will be required to settle the obligation, or because the amount of the obligation cannot be measured with sufficient reliability. Realisation of any contingent liabilities not currently recognised or disclosed in the financial statements could have a material effect on the Group’s financial condition. Application of these accounting principles to legal proceedings, including cases in which claimants are seeking damages for alleged smoking and health-related effects, is inherently difficult, given the complex nature of the facts and law involved. Deciding whether or not to provide for loss in connection with such claims requires the Group’s management to make determinations about various factual and legal matters beyond its control. The Group reviews outstanding legal cases following developments in the legal proceedings and at each balance sheet date, in order to assess the need for provisions in its financial statements. Among the factors considered in making decisions on provisions are the nature of the litigation, claim or assessment, the legal processes and potential level of damages in the jurisdiction in which the litigation, claim or assessment has been brought, the progress of the case (including progress after the date of the financial statements but before those statements are issued), the opinions or views of legal counsel and other advisers, experience of similar cases and any decision of the Group’s management as to how it will respond to the litigation, claim or assessment. To the extent that the Group’s determinations at any time do not reflect subsequent developments or the eventual outcome of any claim, its future financial statements may be materially affected, with an adverse impact upon the Group’s profit from operations, financial position and liquidity. The Group is currently involved in a number of legal cases in which claimants are seeking damages for alleged smoking and health- related effects. In the opinion of the Group’s lawyers, the Group has meritorious defences to these actions, all of which are being vigorously contested. Although it is not possible to predict the outcome of the pending litigation, the Directors believe that the pending actions will not have an adverse effect upon the revenue, profit or financial condition of the Group. Consequently, in respect of any such cases, the Group has not provided for any amounts in the consolidated financial statements. In August 2003 the Group received a notice from the Office of Fair Trading (“OFT”) requiring the provision of documents and information relating to an investigation under UK competition law. In April 2008 the OFT released a press statement indicating that it proposed to issue a statement of objections (“SO”) to a number of retailers and two tobacco manufacturers, including Imperial Tobacco. Imperial Tobacco’s detailed written response to the SO was submitted to the OFT in August 2008. An oral hearing has been scheduled for 3 December 2008 for Imperial Tobacco’s representatives to make submissions to the OFT in defence of its allegations. No timetable for the remainder of the OFT’s enquiry has been published. In light of the responses it receives to the SO, the OFT may decide to close the investigation, present additional evidence by issuing a supplemental SO, or proceed to an infringement decision. In the event that the OFT decides that Imperial Tobacco has infringed UK competition law, it may impose a fine, calculated by reference to ITG turnover. If the OFT were subsequently to make an infringement finding against ITG, the Group would be able to appeal the finding to the Competition Appeal Tribunal (“CAT”). The CAT has the right to conduct a full rehearing of the facts considered by the OFT and overturn or adjust any penalty that the OFT imposed. There is a further right to appeal from the CAT to the Court of Appeal, which is limited to appeal on a point of law. In respect of the OFT enquiry, the Group has not provided for any amounts in the consolidated financial statements in this or any preceding year.

www.imperial-tobacco.com 83 FINANCIAL STATEMENTS Critical Accounting Estimates and Judgements continued

Property, Plant and Equipment and Intangible Assets Intangible assets (other than goodwill, the Davidoff cigarette trademark and certain premium cigar trademarks) and property, plant and equipment are amortised or depreciated over their useful lives. Useful lives are based on management’s estimates of the period over which the assets will generate revenue, and are periodically reviewed for continued appropriateness. Due to the long lives of certain assets, changes to the estimates used can result in significant variations in the carrying value. The Group assesses the impairment of property, plant and equipment and intangible assets subject to amortisation or depreciation whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors considered important that could trigger an impairment review include the following: > significant underperformance relative to historical or projected future operating results; > significant changes in the manner of the use of the acquired assets or the strategy for the overall business; and > significant negative industry or economic trends. Additionally, goodwill arising on acquisitions and indefinite lived assets are subject to impairment review. The Group’s management undertakes an impairment review annually or more frequently if events or changes in circumstances indicate that the carrying value may not be recoverable. When it is determined that there is an indicator that the carrying value may not be recoverable, impairment is measured based on estimates of the recoverable amount of the underlying assets of the cash-generating unit. The complexity of the estimation process and issues related to the assumptions, risks and uncertainties inherent in the application of the Group’s accounting estimates in relation to property, plant and equipment and intangible assets affect the amounts reported in the financial statements, especially the estimates of the expected useful economic lives and the carrying values of those assets. If business conditions were different, or if different assumptions were used in the application of this and other accounting estimates, it is likely that materially different amounts could be reported in the Group’s financial statements. See notes 9 and 10 to these financial statements. Retirement Benefits The costs, assets and liabilities of the defined benefit retirement schemes operating within the Group are determined using methods relying on actuarial estimates and assumptions. Details of the key assumptions are set out in note 18. The Group takes advice from independent actuaries relating to the appropriateness of the assumptions. It is important to note, however, that comparatively small changes in the assumptions used may have a significant effect on the Group’s financial statements. We estimate that a 0.5% increase/(decrease) in the discount rate would increase/(decrease) the IAS19 pension expense by approximately £1 million. We estimate that a 0.5% decrease/(increase) in the expected return on plan assets would increase/(reduce) the IAS19 pension expense by approximately £16 million. Restructuring Provisions The consultation process regarding the European integration projects announced in June 2008 is still underway. As a consequence, the nature, timing and cost of the projects may change. In addition, estimates of cost are dependent on assumptions about those employees affected, values of redundant, obsolete or surplus assets, and actuarial assumptions around pension adjustments and social plan costs. Comparatively small changes in assumptions used may have a significant effect on the eventual cost of the projects. Income Taxes The Group is subject to income tax in numerous jurisdictions and significant judgement is required in determining the provision for tax. There are many transactions and calculations for which the ultimate tax determination is uncertain during the ordinary course of business. The Group recognises liabilities for anticipated tax issues based on estimates of the additional taxes that are likely to become due. Where the final tax outcome of these matters is different from the amounts that were initially recorded, such differences will impact the current income tax and deferred tax provisions in the period in which such determination is made. See note 6 to these financial statements.

84 Imperial Tobacco Group PLC 2008 Notes to the Financial Statements

1. Segmental Information Following the acquisition of Altadis, Imperial Tobacco comprises two distinct businesses – Tobacco and Logistics – which have been used as the basis for the primary segment reporting below. The Tobacco segment comprises the manufacture, marketing and sale of tobacco and tobacco-related products, including sales to (but not by) the Logistics segment. The Logistics segment comprises the distribution of tobacco products for tobacco product manufacturers, including Imperial Tobacco, as well as a wide range of non- tobacco products and services. Central costs of the Enlarged Group are allocated to the Tobacco and Logistics segments based on management’s assessment of the level of support provided to each business segment. The business segments presented reﬂect the management structure of the Group and the way in which the Group’s management reviews business performance. Transactions between segments are undertaken on an arm’s length basis reﬂecting market prices for comparable products and services. Prior to the Altadis acquisition, Imperial Tobacco Group undertook a single principal activity, being the manufacture, marketing and sale of tobacco and tobacco-related products. Comparative data for 2007 is consequently shown as Tobacco. Segmental revenue 2008 2007 In £s million Tobacco Logistics Eliminations Total Tobacco External revenue 14,967 5,561 – 20,528 12,344 Inter-segment revenue 683 – (683) – – Total segment revenues 15,650 5,561 (683) 20,528 12,344

Segmental profit from operations and reconciliation to adjusted profit from operations 2008 2007 In £s million Tobacco Logistics Eliminations Unallocated Total Tobacco Profit from operations 1,531 23 (83) (314) 1,157 1,418 Acquisition accounting adjustments 76 – 85 – 161 – Amortisation of acquired intangibles 225 84 – – 309 23 Brand divestment gain (174) – – – (174) – Fair value gains and losses on derivative financial instruments – – – 314 314 34 Restructuring costs 449 14 – – 463 – Adjusted profit from operations 2,107 121 2 – 2,230 1,475

Fair value gains and losses on derivative ﬁnancial instruments for 2008 are shown as unallocated as they cannot reasonably be allocated between the Tobacco and Logistics segments. Segmental assets and liabilities 2008 2007 In £s million Tobacco Logistics Eliminations Total Tobacco Operating assets 22,741 6,082 (845) 27,978 8,455 Unallocated assets: Cash and cash equivalents n/a n/a n/a 642 380 Taxation n/a n/a n/a 423 102 Derivative ﬁnancial instruments n/a n/a n/a 173 71 Total assets n/a n/a n/a 29,216 9,008

Operating liabilities (3,692) (4,092) 64 (7,720) (2,053) Unallocated liabilities: Borrowings n/a n/a n/a (12,236) (5,120) Taxation n/a n/a n/a (2,664) (475) Derivative ﬁnancial instruments n/a n/a n/a (240) (219) Total liabilities n/a n/a n/a (22,860) (7,867)

Other segmental information Additions to property, plant and equipment 184 30 – 214 128 Additions to intangible assets 12 5 – 17 10 Depreciation 108 15 – 123 88 Amortisation 207 89 – 296 27 Impairments 38 – – 38 –

www.imperial-tobacco.com 85 FINANCIAL STATEMENTS Notes to the Financial Statements continued

1. Segmental Information continued Geographical information 2008 Rest of In £s million European Union Americas the World Total External revenue 17,012 874 2,642 20,528 Operating assets by location 20,407 3,317 4,254 27,978 Additions to property, plant and equipment 151 2 61 214 Additions to intangible assets 17 – – 17

European Union comprises the EU member states plus Norway, Iceland, Liechtenstein and Switzerland. Americas comprises North, Central and South America. The Cuban joint ventures are included in the Rest of the World. 2007 Rest of In £s million European Union Americas the World Total External revenue 10,358 270 1,716 12,344 Operating assets by location 5,418 1,035 2,002 8,455 Additions to property, plant and equipment 85 2 41 128 Additions to intangible assets 4 5 1 10

Further segmental and geographical analysis of results To aid understanding of our 2008 results, we present below the contribution of the two businesses combined, comprising the standalone Imperial Tobacco and Altadis businesses; further details of the results of the Tobacco and Logistics segments, a geographic breakdown of the existing Imperial Tobacco business (excluding Altadis), a divisional analysis of the Altadis result using Altadis’ historical divisions, and ﬁnally a regional analysis of the Tobacco segment for the enlarged Group. Two businesses combined Adjusted proﬁt from operations In £s million 2008 2007 Imperial 1,578 1,475 Altadis 641 – Eliminations 11 – 2,230 1,475

Tobacco segment In £s million unless otherwise indicated 2008 2007 Revenue 15,650 12,344 Net revenue 5,238 3,280 Proﬁt from operations 1,531 1,418 Adjusted proﬁt from operations 2,107 1,475 Adjusted operating margin 40.2% 45.0%

Logistics segment In £s million unless otherwise indicated 2008 2007 Revenue 5,561 – Distribution fees 607 – Proﬁt from operations 23 – Adjusted proﬁt from operations 121 – Adjusted distribution margin 19.9% –

Imperial Tobacco regional results (excluding Altadis) Revenue Net revenue Adjusted proﬁt from operations In £s million 2008 2007 2008 2007 2008 2007 UK 4,711 4,842 869 876 570 564 Germany 2,848 2,645 567 524 267 238 Rest of Western Europe 1,916 1,746 665 635 332 326 USA 548 266 239 117 115 52 Rest of the World 3,571 2,845 1,314 1,128 294 295 13,594 12,344 3,654 3,280 1,578 1,475

86 Imperial Tobacco Group PLC 2008 Altadis divisional results Adjusted From 25 January 2008 Net Distribution proﬁt from In £s million Revenue revenue fees operations Cigarette 1,542 1,092 429 Cigar 487 464 120 Logistics 641 139 Other (37) Eliminations (10) 641

New geographic analysis of Tobacco 2008 Adjusted Net profit from In £s million Revenue revenue operations UK 4,711 869 584 Germany 2,945 664 309 Spain 411 411 150 Rest of European Union 4,067 1,250 494 Americas 874 542 166 Rest of the World 2,642 1,502 404 15,650 5,238 2,107 2. Profit Before Taxation Profit before taxation is stated after charging/(crediting): In £s million 2008 2007 Raw materials and consumables used 1,046 643 Employment costs (note 4) 971 471 Depreciation of property, plant and equipment 123 88 Amortisation of intangible assets 296 27 Impairment of intangible assets 21 – Impairment of property, plant and equipment 17 – Operating lease charges: – plant and equipment 10 2 – other assets 12 11 Net foreign exchange losses 326 22 Write-down of inventories 19 5 Profit on disposal of property, plant and equipment (1) (2) Repairs and maintenance costs 25 19 Impairment of trade receivables 12 1 Brand divestment gain (174) – Analysis of fees payable to PricewaterhouseCoopers LLP and its associates In £s million 2008 2007 Audit fees in respect of the audit of the accounts of the Company 0.9 0.9 Audit fees in respect of the audit of the accounts of associates of the Company 4.0 2.2 Fees for other services supplied pursuant to legislation 1.1 0.4 6.0 3.5 Other services relating to taxation 3.1 1.3 Services relating to corporate finance transactions 0.2 0.2 Other services 0.1 0.1 9.4 5.1

Of the above fees £1.8 million (2007: £0.6 million) has been capitalised in the balance sheet. It is the responsibility of the Board of Trustees of the Imperial Tobacco Pension Fund to appoint the auditors to the scheme. The Board of Trustees acts independently of Group management. The fees paid to PricewaterhouseCoopers in respect of the audit of the Imperial Tobacco Pension Fund were £25,170 (2007: £26,400). www.imperial-tobacco.com 87 FINANCIAL STATEMENTS Notes to the Financial Statements continued

3. Restructuring Costs

In £s million 2008 2007 Employment related (mainly termination) 420 – Asset impairments 17 – Other operating charges 26 – 463 –

Restructuring costs relate primarily to European Integration projects announced in June 2008 as part of the integration of Imperial Tobacco and Altadis. They affect sales and marketing, manufacturing and central support functions in a number of markets and will be implemented progressively over the next three years. In addition to the European integration projects, restructuring costs include expenses relating to the closure of our cigar factory in Selma, Alabama, USA, the integration of the recently acquired Lignum 2 operation with Commonwealth Brands, and costs in relation to streamlining Logistics operations in France. Provision has been made to the extent that the conditions for provision recognition under IAS 37 were met at the balance sheet date. Restructuring costs are included within administrative and other expenses in the consolidated income statement. There were no restructuring costs in the year ended 30 September 2007. 4. Directors and Employees

Employment costs In £s million 2008 2007 Wages and salaries 721 343 Social security costs 176 58 Pension costs (note 18) 56 54 Share-based payments (note 21) 18 16 971 471

Details of Directors’ emoluments and interests, and of key management compensation which represent related party transactions requiring disclosure under IAS 24, are provided within the Directors’ Remuneration Report on pages 55 to 70. These disclosures form part of the ﬁnancial statements. Number of persons employed by the Group by segment during the year At 30 September Average Average 2008 2008 2007 Tobacco 33,431 27,317 14,221 Logistics 6,854 4,999 – 40,285 32,316 14,221

Number of persons employed by the Group by location during the year At 30 September Average Average 2008 2008 2007 European Union 19,358 15,719 7,071 Americas 10,880 7,650 474 Rest of the World 10,047 8,947 6,676 40,285 32,316 14,221 5. Net Finance Costs

In £s million 2008 2007 Interest on bank deposits (74) (14) Expected return on retirement benefit assets (224) (203) Fair value gains on derivative financial instruments (104) (101) Investment income (402) (318) Interest on bank and other loans 697 251 Interest on retirement benefit liabilities 179 149 Fair value losses on derivative financial instruments 62 99 Finance costs 938 499 Net finance costs 536 181

88 Imperial Tobacco Group PLC 2008 Reconciliation from net finance costs to adjusted net finance costs In £s million 2008 2007 Reported net finance costs 536 181 Expected return on retirement benefit assets 224 203 Interest on retirement benefit liabilities (179) (149) Fair value gains on derivative financial instruments 104 101 Fair value losses on derivative financial instruments (62) (99) Adjusted net finance costs 623 237 6. Taxation

Analysis of charge in the year In £s million 2008 2007 Current tax UK corporation tax at 29% (2007: 30%) being the average enacted rate for the year 2 120 Overseas taxation 359 172 Total current tax 361 292 Deferred tax Origination and reversal of temporary differences (181) 33 Total tax charge 180 325

Reconciliation from reported taxation to adjusted taxation The table below shows the tax impact of the adjustments made to reported profit before tax in order to arrive at the adjusted measure of earnings disclosed in note 8. In £s million 2008 2007 Reported taxation 180 325 Tax on acquisition accounting adjustments 51 – Deferred tax on amortisation of acquired intangibles 40 (10) Tax on brand divestment gain (59) – Tax on fair value gains and losses on derivative financial instruments 79 10 Tax on restructuring costs 148 – Tax on retirement benefits net financing income (13) (15) Adjusted tax charge 426 310

Factors affecting the tax charge for the year The tax on the Group’s proﬁt before tax differs from the theoretical amount that would arise using the average enacted rate for the year of 29% (2007: 30%) as follows: In £s million 2008 2007 Proﬁt before tax 621 1,237 Tax at the average enacted UK corporation tax rate of 29% (2007: 30%) 180 371 Tax effects of: Differences in effective tax rates on overseas earnings (9) (51) Unrecognised deferred tax assets – 3 Items not deductible for tax purposes 15 9 Adjustments in respect of prior periods (6) (7) Total tax charge 180 325

Factors that may affect future tax charges No deferred tax is recognised on the unremitted earnings of overseas subsidiaries, as the Group is able to control the source and timing of future remittances. The Group currently has no plans to remit dividends which would result in a material tax cost.

www.imperial-tobacco.com 89 FINANCIAL STATEMENTS Notes to the Financial Statements continued

6. Taxation continued Movement on current tax account In £s million 2008 2007 At 1 October (217) (259) Exchange movements (11) (1) Acquisitions (75) – Charged to income statement (361) (292) (Charged)/credited to equity (87) 5 Cash paid 401 320 Other movements 11 10 At 30 September (339) (217)

Analysis of current tax account In £s million 2008 2007 Current tax assets 31 50 Current tax liabilities (370) (267) (339) (217) 7. Dividends

Amounts recognised as distributions to ordinary equity holders in the year In £s million 2008 2007 Final dividend for the year ended 30 September 2007 of 42.2p per share (2006: 37.8p) 326 293 Interim dividend for the year ended 30 September 2008 of 20.9p per share (2007: 18.2p) 161 141 487 434

A final dividend for the year ended 30 September 2008 of 42.2 pence per share has been proposed. This amounts to £427 million based on the number of shares ranking for dividend at 30 September 2008. At the year end, the shareholders had not yet approved the final dividend and therefore it is not included in the balance sheet as a liability. The dividend per share figures included in the table above reflect the bonus element of the rights issue as described in note 20. 8. Earnings Per Share Basic earnings per share is based on the profit for the year attributable to the equity holders of the Company and the weighted average number of ordinary shares in issue during the year excluding shares held to satisfy the Group’s employee share schemes and shares purchased by the Company and held as treasury shares. Diluted earnings per share have been calculated by taking into account the weighted average number of shares that would be issued if rights held under the employee share schemes were exercised. No instruments have been excluded from the calculation on the grounds that they are anti-dilutive. Pre rights Post rights issue basis issue basis In £s million 2008 2007 2007 Earnings: basic and diluted 428 905 905

In millions of shares Weighted average number of shares: Shares for basic earnings per share 846.5 775.5 673.8 Potentially dilutive share options 3.0 3.3 2.9 Shares for diluted earnings per share 849.5 778.8 676.7

In pence Basic earnings per share 50.6 116.7 134.3 Diluted earnings per share 50.4 116.2 133.7

Basic and diluted earnings per share for 2007 have been calculated on both a pre rights issue and post rights issue basis. The pre rights issue basis uses the historical weighted average number of shares. For the post rights issue basis the weighted average number of shares has been calculated to reﬂect the increased number of shares in issue after the rights issue and the bonus element for periods prior to the closing date of the rights issue. The bonus factor used was 1.1509.

90 Imperial Tobacco Group PLC 2008 Reconciliation from reported to adjusted earnings and earnings per share on a post rights issue basis 2008 2007 In £s million unless otherwise indicated EPS Earnings EPS Earnings Reported basic 50.6p 428 116.7p 905 Acquisition accounting adjustments 13.0p 110 –– Amortisation of acquired intangibles 31.8p 269 4.3p 33 Brand divestment gain (13.6)p (115) –– Fair value gains and losses on derivative financial instruments 22.8p 193 2.8p 22 Restructuring costs 37.2p 315 –– Retirement benefits net financing income (3.8)p (32) (5.0)p (39) Adjustments above attributable to minority interest (1.1)p (9) –– Adjusted 136.9p 1,159 118.8p 921 Adjusted diluted 136.4p 1,159 118.3p 921 9. Intangible Assets 2008 Supply In £s million Goodwill Trademarks agreements Software Total Cost At 1 October 2007 3,837 1,183 – 38 5,058 Acquisitions (note 24) 7,039 5,061 1,422 39 13,561 Additions – 5 – 12 17 Disposals – (19) – (2) (21) Exchange movements 995 514 97 8 1,614 At 30 September 2008 11,871 6,744 1,519 95 20,229

Amortisation At 1 October 2007 – 85 – 23 108 Amortisation charge for the year – 183 105 8 296 Impairment 21 – – – 21 Disposals – – – (1) (1) Exchange movements – 9 – 4 13 At 30 September 2008 21 277 105 34 437

Net book value At 30 September 2008 11,850 6,467 1,414 61 19,792

2007 Supply In £s million Goodwill Trademarks agreements Software Total Cost At 1 October 2006 3,446 508 – 34 3,988 Acquisitions (note 24) 305 670 – – 975 Additions – 5 – 5 10 Disposals – – – (1) (1) Exchange movements 86 – – – 86 At 30 September 2007 3,837 1,183 – 38 5,058

Amortisation At 1 October 2006 – 58 – 20 78 Amortisation charge for the year – 23 – 4 27 Disposals – – – (1) (1) Exchange movements – 4 – – 4 At 30 September 2007 – 85 – 23 108

Net book value At 30 September 2007 3,837 1,098 – 15 4,950

www.imperial-tobacco.com 91 FINANCIAL STATEMENTS Notes to the Financial Statements continued

9. Intangible Assets continued Intangible amortisation is included within administrative and other expenses in the consolidated income statement. Supply agreements includes Logistics customer relationships and exclusive supply arrangements in Cuba and Morocco, all acquired under the purchase of Altadis. Amortisation and impairment in respect of acquired intangible assets are treated as a reconciling item between reported profit from operations and adjusted profit from operations. The adjustment comprises the amortisation charge for trademarks and supply agreements and the impairment of goodwill. Goodwill and intangible asset impairment review Goodwill and intangible assets with indefinite lives are allocated to the Group’s cash-generating units (CGUs), which have been identified according to the country of operation for distribution units, with manufacturing identified as a single separate unit. A summary of the carrying value of goodwill and intangible assets with indefinite lives is shown as follows: 2008 2007 Intangible Intangible assets with assets with In £s million Goodwill indefinite lives Goodwill indefinite lives European Union 5,089 115 1,838 105 Americas 1,934 88 296 – Rest of the World 2,475 523 1,348 273 Manufacturing 712 – 355 – Tobacco 10,210 726 3,837 378 Logistics 1,640 – – – 11,850 726 3,837 378

Goodwill has arisen principally on the acquisitions of Reemtsma in 2002 (mainly EU and Rest of the World), Commonwealth Brands in 2007 (Americas) and Altadis in 2008 (all regions). The Group tests goodwill and intangible assets with indefinite lives for impairment annually, or more frequently if there are any indications that impairment may have arisen. The recoverable amount of a CGU is determined based on value-in-use calculations. These calculations use cash flow projections derived from three-year financial budgets which are based on management’s experience and expectations and are approved by the Board annually. The compound annual growth rates implicit in these plans, which are used for the initial three years in the value-in-use calculations, are shown below. Cash flows beyond the three year period are extrapolated using the estimated long-term growth rate of 3% per annum. An average pre-tax discount rate of 9.7% is used, in line with the Group’s weighted average cost of capital. Any reasonable movement in the assumptions of the impairment test would not result in an impairment. Since their acquisition in January 2008, the intangible assets of Altadis have been subject to a provisional fair value exercise. This included an assessment of recoverability. No indications of impairment were identified. A goodwill impairment of £21 million has been recognised in respect of Sinclair Collis Limited, reflecting the decline in UK vending sales as a result of the introduction of restrictions on smoking in licensed premises and anticipated access restrictions. No impairment charges were recognised in 2007. Initial growth Long term rate1 growth rate2 European Union 5% 3% Americas 15% 3% Rest of the World 12% 3% Logistics n/a n/a

1 Weighted average compound annual growth rate used for ﬁrst three years in value-in-use calculations. 2 Weighted average compound annual growth rate used to extrapolate cash ﬂows beyond the initial three years.

92 Imperial Tobacco Group PLC 2008 10. Property, Plant and Equipment 2008 Plant and Fixtures and In £s million Property equipment motor vehicles Total Cost At 1 October 2007 168 853 168 1,189 Acquisitions (note 24) 802 118 93 1,013 Additions 21 124 69 214 Disposals (30) (14) (6) (50) Reclassiﬁcations 12 27 (39) – Exchange movements 71 90 20 181 At 30 September 2008 1,044 1,198 305 2,547

Depreciation At 1 October 2007 17 438 94 549 Charge for the year 5 73 45 123 Impairment 2 15 – 17 Disposals (1) (10) (6) (17) Reclassiﬁcations (1) – 1 – Exchange movements 2 42 9 53 At 30 September 2008 24 558 143 725

Net book value At 30 September 2008 1,020 640 162 1,822

The net book value above includes land and buildings of £29 million (2007: £nil) held under a ﬁnance lease. 2007 Plant and Fixtures and In £s million Property equipment motor vehicles Total Cost At 1 October 2006 157 780 159 1,096 Acquisitions (note 24) 1 9 – 10 Additions 6 98 24 128 Disposals (2) (50) (19) (71) Exchange movements 6 16 4 26 At 30 September 2007 168 853 168 1,189

Depreciation At 1 October 2006 12 415 89 516 Charge for the year 6 61 21 88 Disposals (1) (48) (19) (68) Exchange movements – 10 3 13 At 30 September 2007 17 438 94 549

Net book value At 30 September 2007 151 415 74 640

Land and buildings at net book value In £s million 2008 2007 Freehold 980 140 Long leasehold 40 11 1,020 151

No assets (2007: net book value of £nil) are pledged as security for liabilities.

www.imperial-tobacco.com 93 FINANCIAL STATEMENTS Notes to the Financial Statements continued

11. Investments in Associates and Joint Ventures Investments in associates In £s million 2008 2007 At 1 October 4 5 Acquisitions 13 – Impairment – (1) Exchange movements (1) – At 30 September 16 4 Investments in joint ventures The principal joint ventures are Corporación Habanos, S.A., Cuba and Altabana S.L., Spain. Summarised ﬁnancial information for the Group’s share of joint ventures is shown below: 2008 2007 Corporación In £s million Habanos Altabana Others Total Total Revenue 11 45 3 59 – Proﬁt after taxation 8 6 1 15 –

Non-current assets 183 7 3 193 – Current assets 31 46 5 82 – Total assets 214 53 8 275 – Current liabilities (31) (18) (1) (50) – Non-current liabilities (25) (2) – (27) – Total liabilities (56) (20) (1) (77) – Net assets 158 33 7 198 – 12. Inventories

In £s million 2008 2007 Raw materials 749 290 Work in progress 64 13 Finished inventories 1,801 505 Other inventories 244 190 2,858 998

Other inventories comprise mainly duty-paid tax stamps. It is generally recognised industry practice to classify leaf tobacco inventory as a current asset although part of such inventory, because of the duration of the processing cycle, ordinarily would not be consumed within one year. Leaf tobacco held within raw materials inventories at the balance sheet date will ordinarily be utilised within two years. 13. Trade and Other Receivables

2008 2007 In £s million Current Non-current Current Non-current Trade receivables 2,667 – 1,156 – Less: provision for impairment of receivables (17) – (7) – Net trade receivables 2,650 – 1,149 – Other receivables 234 95 22 3 Prepayments and accrued income 67 3 83 4 2,951 98 1,254 7

94 Imperial Tobacco Group PLC 2008 Trade receivables may be analysed as follows: 2008 2007 In £s million Current Non-current Current Non-current Within credit terms 2,309 – 1,120 – Past due by less than 3 months 291 – 28 – Past due by more than 3 months 50 – 1 – Amounts that are impaired 17 – 7 – 2,667 – 1,156 – 14. Cash and Cash Equivalents

In £s million 2008 2007 Cash at bank and in hand 457 364 Short term deposits and other liquid assets 185 16 642 380

£157 million (2007: £nil) of total cash and cash equivalents are held in countries in which prior approval is required to transfer the funds abroad. Nevertheless, if the Group complies with these requirements, such liquid funds are at its disposition within a reasonable period of time. 15. Trade and Other Payables

2008 2007 In £s million Current Non-current Current Non-current Trade payables 1,096 – 140 – Other taxes, duties and social security contributions 4,775 – 1,274 – Deferred consideration 45 – 8 – Other payables 99 – 53 1 Accruals and deferred income 168 14 118 4 6,183 14 1,593 5 16. Borrowings and Derivative Financial Instruments

(i) Management of financial risk The Group operates a centralised treasury function, Group Treasury, that is responsible for the management of the financial risks of the Group, together with its financing and liquidity requirements. It does not operate as a profit centre, nor does it enter into speculative transactions. The Group Treasury Committee (“GTC”) oversees the operation of Group Treasury in accordance with terms of reference set out by the Board. The Board retains responsibility for all major treasury decisions. The GTC currently comprises the Finance Director, Corporate Development Director, Group Financial Controller, Cigar BU Finance Director, Group Treasurer and the two Deputy Group Treasurers. The GTC agrees a framework which sets out the current expectations and boundaries to assist in the effective oversight of Group Treasury activities, covering all key areas within Group Treasury. The Group Treasurer reports on a regular basis to the Board, including the provision of a monthly treasury report, which is also provided to the GTC .

Accounting for derivative financial instruments and hedging activities IAS 39 requires that all derivative financial instruments are recognised in the balance sheet at fair value, with changes in the fair value being recognised in the income statement unless the instrument satisfies the hedge accounting rules under IFRS. The Group hedges underlying exposures in an efficient, commercial and structured manner. However, the strict hedging requirements of IAS 39 may lead to some commercially effective hedge positions not qualifying for hedge accounting. As a result, the Group has decided not to apply cash flow or fair value hedge accounting for its derivative financial instruments as permitted under IAS 39. However, the Group does apply net investment hedging, designating certain borrowings and derivatives as hedges of the net investment in the Group’s foreign operations. See section (v) below for details. The information contained in sections (ii) and (iii) below shows the underlying borrowing position before the effect of interest rate swaps and cross currency swaps.

www.imperial-tobacco.com 95 FINANCIAL STATEMENTS Notes to the Financial Statements continued

16. Borrowings and Derivative Financial Instruments continued

Foreign exchange risk The Group is exposed to movements in foreign exchange rates due to its commercial trading transactions denominated in foreign currencies, and the foreign currency cash deposits, borrowings and derivatives. The Group’s policy is to manage its balance sheet translation risk by funding acquisitions and the underlying business assets with borrowings (post cross currency swaps) in the currency of the underlying net assets. This results in foreign currency profit from operations being reduced by foreign currency interest costs thereby minimising the translation exposure on foreign currency profits after tax. In 2008, 77% of revenue (2007: 61%) and 74% of adjusted profit from operations (2007: 62%) was in markets outside the UK. Certain sales in these markets are invoiced in currencies other than the functional currency of the selling company, in particular Taiwanese dollars. Where necessary the Group uses foreign currency derivative financial instruments, such as forward foreign exchange contracts, to reduce exposure to the risk that these sales will be adversely affected by changes in exchange rates. At 30 September 2008, there were £nil million (2007: £20 million) notional outstanding forward foreign exchange contracts, the fair value of which was £nil million (2007: £0.4 million). The material foreign currency denominated costs include the purchase of tobacco leaf, which is sourced from various countries but purchased principally in US dollars, and packaging materials which are sourced from various countries and purchased in a number of currencies. The Group currently does not consider the foreign exchange risk here to be material enough to hedge after taking into account other US dollar inflows across the Group. The Group issues debt in the market or markets that are most appropriate at the time of execution and uses derivative financial instruments, such as cross currency swaps, to change the debt into the desired currency. At 30 September 2008, approximately 13% (2007: 12%) of adjusted net debt was denominated in sterling, 62% in euro (2007: 70%) and 25% in US dollars (2007: 18%). This excludes the impact of transactional cross currency swaps, maturing between 2011 and 2015, that will convert forecast euro dividends from subsidiaries into sterling.

Cashflow and fair value interest rate risk The Group’s interest rate risk arises from borrowings net of cash and cash equivalents. Borrowings issued at variable rates expose the Group to cashflow interest rate risk. Borrowings issued at fixed rates expose the Group to fair value interest rate risk. Group Treasury monitors the Group’s borrowing levels using adjusted net debt which includes cash and cash equivalents, the fair value of the principal amounts due to be exchanged at maturity under cross currency swaps, excluding finance lease liabilities, the fair value of interest rate derivatives and interest accruals. The Group’s financial results are currently principally exposed to gains or losses arising from fluctuations in sterling, euro and US dollar interest rates. In order to manage its interest rate risk on the borrowings, the Group separates the borrowing activities from its interest rate risk management decisions by issuing debt in the market or markets that are most appropriate at the time of execution and uses derivative financial instruments, such as cross currency swaps and interest rate swaps, to change the debt into the desired currency and into floating interest rates (post cross currency swaps) shortly after issue. The Group then transacts interest rate swaps at other times for different notional amounts and different maturities to manage the Group’s exposure to interest rate risk. At 30 September 2008, 38% (2007: 39%) of adjusted net debt was at a floating rate of interest, 60% (2007: 57%) at a fixed rate of interest and 2% (2007: 4%) fixed within a set range. The Group manages its interest rate exposure on a regular basis and reports the position monthly to the Board and GTC. The Group calculates the impact on profit and loss of a defined interest rate shift for each of the major currencies of borrowings. The Group also reports monthly the forecast percentage of debt fixed over the next ten years to the Board and GTC. Sensitivity analysis IFRS 7 requires a sensitivity analysis that illustrates the estimated impact on the income statement and items recognised directly in equity of hypothetical changes in foreign exchange rates and interest rates in relation to all of the Group’s financial instruments. The Group considers that a 100 basis point +/- movement in interest rates and a 10% weakening or strengthening in sterling represents reasonably possible changes. The impact on income and equity of these changes is shown in the table below. The sensitivity analysis has been prepared on the basis that the amount of net debt, the ratio of fixed to floating interest rates of the debt and derivatives portfolio, and the proportion of financial instruments in foreign currencies are all constant and on the basis of the net investment hedge designations in place at 30 September 2008. The sensitivity analysis does not reflect any change to sales or costs that may result from changing interest or exchange rates. All financial assets and liabilities held in the functional currency of subsidiary companies are not included in the analysis. The analysis excludes instruments that expose the Group to interest rate and foreign exchange risk where such risk is fully hedged with another financial instrument.

96 Imperial Tobacco Group PLC 2008 30 September 2008 30 September 2007 Income Equity Income Equity gain/ gain/ gain/ gain/ In £s million (loss) (loss) (loss) (loss) 100 basis point increase / decrease in GBP interest rates (8)/8 – (3)/3 – 100 basis point increase / decrease in euro interest rates (68)/68 – (12)/12 – 100 basis point increase / decrease in US dollar interest rates (11)/11 – (4)/4 –

10% appreciation / depreciation of the euro (155)/155 (1,422)/1,422 (121)/121 (573)/573 10% appreciation / depreciation of the US dollar (202)/202 (50)/50 (4)/4 (44)/44

The impact in the income statement due to changes in interest rates reflects the effect on the Group’s floating rate debt at 30 September 2008. The impact in the income statement from foreign exchange rate movements primarily relates to derivative ﬁnancial instruments that commercially hedge net investments, but do not qualify for hedge accounting due to the strict requirements of IAS 39 (although they are commercially effective). This value is expected to be fully offset by the retranslation of the hedged foreign currency net assets leaving a net impact on shareholders’ funds of zero. This gain or loss is excluded from our adjusted performance measures. The equity impact shown for foreign exchange sensitivity relates to derivative and non-derivative ﬁnancial instruments hedging net investments. This value is expected to be fully offset by the retranslation of the hedged foreign currency net assets leaving a net impact on shareholders’ funds of zero.

Credit risk The Group is exposed to credit risk arising from its trade receivables due from customers, as well as from cash and cash deposits and the mark-to-market of derivative financial instruments transacted with banks and financial institutions. The Group has some significant concentrations of customer credit risk. However, the Group has implemented policies to ensure that sales of products are made to customers with an appropriate credit history and obtains guarantees or other means of credit support to reduce the risk where this is considered to be necessary. Experience of credit loss has historically been low. Analysis of trade and other receivables is provided in note 13. The Group has no significant concentrations of credit risk from financial institutions. The Group has placed cash deposits and entered into derivative financial instruments with a diversified group of financial institutions with suitable credit ratings in order to manage its credit risk to any one financial institution. The table below summarises the Group’s major financial institution counterparties by credit rating and balances at 30 September 2008: 30 September 2008 30 September 2007 Maximum Maximum S&P Credit exposure to S&P Credit exposure to Counterparty Rating credit risk £m Rating credit risk £m Bank A AA– 95 AA 43 Bank B AA– 89 AA 69 Bank C AA– 71 AA 18 Bank D AA– 70 – – Bank E AA+ 60 A16 Bank F AA 52 A23 Bank G A50 A16

Management does not expect any losses from non-performance by these counterparties.

www.imperial-tobacco.com 97 FINANCIAL STATEMENTS Notes to the Financial Statements continued

16. Borrowings and Derivative Financial Instruments continued On 15 September 2008 Lehmans Brothers Holdings announced it was filing for Chapter 11 bankruptcy protection. The Group had various financial instruments in place with Lehmans Brothers International (Europe) at that date. On 2 October 2008 the Group served a default notice to terminate these financial instruments and filed a claim for settlement of the outstanding mark to market plus interest for £11.1m. The mark to market of these financial instruments has been fully provided against at 30 September 2008. Liquidity risk The Group would be exposed to liquidity risk from having insufficient funds to meet the financing needs of the Group. It is the policy of the Group to actively maintain a mixture of short, medium and long-term committed facilities that are designed to ensure that the Group has sufficient available funds for the forecast requirements of the Group over the short to medium term. At 30 September 2008 the Group had £2,053 million (2007: £777 million) of undrawn committed facilities, maturing between 2009 and 2012. As well as forecasting and monitoring the Group’s core liquidity needs, the Group Treasury function is in regular dialogue with subsidiary companies to ensure their liquidity needs are met. Subsidiary companies are funded by a combination of share capital and retained earnings, loans from central finance companies on commercial terms, or through local borrowings by the subsidiaries in appropriate currencies. Funds over and above those required for short-term working capital purposes by subsidiary companies are remitted to Group Treasury where practical and possible and are used to pay down debt wherever possible. The table below analyses the Group’s financial liabilities and derivatives into relevant maturity groupings based on the remaining period at the balance sheet date to the contractual maturity date. The amounts disclosed in the table are the contractual undiscounted cash flows which have been calculated using spot rates at the relevant balance sheet date, including interest to be paid. The carrying value of derivative financial liabilities excludes collateral transferred in respect of certain derivatives with negative fair values for which there is no reasonable basis upon which to allocate future cash flows to maturity groupings. At 30 September 2008 Carrying Contractual Less than Between 1 Between 2 More than In £s million amount cash flows 1 year and 2 years and 5 years 5 years Non-derivative financial liabilities Bank loans 7,421 7,500 4,454 2,559 487 – Capital market issuance 4,815 6,742 1,070 227 1,007 4,438 Trade payables 1,096 1,096 1,096 – – – Finance lease liabilities 28 32 3 3 26 – Derivative financial liabilities Net settled derivatives 110 205 24 21 89 71 Gross settled derivatives 318 – receipts 3,667 2,203 60 611 793 – payments 3,946 2,319 75 614 938

At 30 September 2007 Carrying Contractual Less than Between 1 Between 2 More than In £s million amount cash ﬂows 1 year and 2 years and 5 years 5 years Non-derivative ﬁnancial liabilities Bank loans 2,912 2,920 2,920 – – – Capital market issuance 2,208 2,948 129 403 644 1,772 Trade payables 140 140 140 – – –

Derivative ﬁnancial liabilities Net settled derivatives 53 67 10 10 31 16 Gross settled derivatives 166 – receipts 1,810 81 375 524 830 – payments 1,964 89 459 562 854

Price risk The Group is not exposed to equity securities price risk or financial instrument price risk. The Group is exposed to commodity price risk in that there may be fluctuations in the price of tobacco leaf. As with other agricultural commodities, the price of tobacco leaf tends to be cyclical as supply and demand considerations influence tobacco plantings in those countries where tobacco is grown. Also, different regions may experience variations in weather patterns that may affect crop quality or supply and so lead to changes in price. The Group seeks to reduce this price risk by sourcing tobacco leaf from a number of different countries, sourcing from various counterparties and by varying the levels of tobacco leaf held.

98 Imperial Tobacco Group PLC 2008 Capital risk management The Group manages the capital structure in an efficient manner in order to minimise the cost of capital whilst ensuring that we have access to on-going sources of finance such as the debt capital markets. The Group therefore manages the capital structure to maintain an investment grade credit rating and has and will continue to take the appropriate measures to maintain this. For example, where new equity is needed, the Group will issue the minimum required in order to maintain this investment grade credit rating. This is determined in connection with detailed discussions with credit rating agencies. Fair value estimation The fair values of derivatives are determined using valuation techniques based on market data (such as yield curves and exchange rates) to calculate the present value of the estimated future cash flows at the balance sheet date. The fair values of financial assets and liabilities maturing within one year are approximate to their carrying value. For liabilities with a maturity of more than one year the fair value is based on quoted market prices at the balance sheet date.

(ii) Borrowings The Group’s borrowings at the balance sheet date are as follows: In £s million 2008 2007 Current borrowings Bank loans and overdrafts 1,849 1,067 Capital market issuance: €600m 4.25% notes due 2008 491 – US$600m 7.125% notes due 2009 338 – Total current borrowings 2,678 1,067

Non-current borrowings Bank loans 5,572 1,845 Capital market issuance: US$600m 7.125% notes due 2009 – 304 £350m 6.875% notes due 2012 357 357 €500m 5.125% notes due 2013 410 – €1,200m 4.375% notes due 2013 981 867 €750m 7.25% notes due 2014 592 – €500m 4.0% notes due 2015 366 – £450m 5.5% notes due 2016 470 470 £200m 6.25% notes due 2018 210 210 £600m 8.125% notes due 2024 600 – Total non-current borrowings 9,558 4,053 Total borrowings 12,236 5,120

Current borrowings and non-current borrowings at 30 September 2008 include interest payable of £27 million (2007: £4 million) and £131 million (2007: £84 million) respectively. Borrowings drawn under revolving credit facilities have been classiﬁed as non-current borrowings, in accordance with the maturity date of those facilities. The Group has not defaulted on any loans during the year (2007: no defaults).

www.imperial-tobacco.com 99 FINANCIAL STATEMENTS Notes to the Financial Statements continued

16. Borrowings and Derivative Financial Instruments continued (iii) Currency analysis and effective interest rates of financial assets and financial liabilities The currency denomination, the maturities and the effective interest rates of the Group’s financial assets and liabilities (excluding derivatives) at 30 September 2008 are as follows: Maturity Less than Between 1 Between 2 More than Weighted 1 year and 2 years and 5 years 5 years Total average £m % £m % £m % £m % £m % Assets/(liabilities) (before the impact of cross currency swaps and interest rate swaps) Cash and cash equivalents Sterling 6 4.2 6 4.2 Euro 307 2.2 307 2.2 US dollars 69 2.2 69 2.2 Other 260 4.2 260 4.2 Total cash and cash equivalents 642 642 Weighted average receivable interest rate 3.0 3.0 Trade receivables Sterling 547 – 547 – Euro 1,705 – 1,705 – US dollars 109 – 109 – Other 296 – 296 – Total trade receivables 2,657 – 2,657 – Trade payables Sterling (60) – (60) – Euro (863) – (863) – US dollars (53) – (53) – Other (120) – (120) – Total trade payables (1,096) – (1,096) – Borrowings – by currency Sterling (3) 5.5 (648) 6.1 (427) 6.8 (1,281) 6.9 (2,359) 6.7 Euro (2,246) 5.2 (2,291) 5.7 (1,373) 5.5 (2,348) 4.5 (8,258) 5.2 US dollars (338) 7.1 (1,074) 4.2 (28) 4.1 ––(1,440) 4.9 Other (91) 4.1 (44) 4.0 (44) 4.0 ––(179) 4.1 Total borrowings (2,678) (4,057) (1,872) (3,629) (12,236) Borrowings – by class of instrument Bank borrowings (1,849) 5.4 (4,057) 5.3 (1,515) 5.5 (7,421) 5.4 Capital market issuance (829) 5.4 (357) 6.8 (3,629) 5.5 (4,815) 5.6 Total borrowings (2,678) (4,057) (1,872) (3,629) (12,236) Weighted average payable interest rate 5.4 5.3 5.7 5.5 5.4

The effective interest rates shown in the table above have been calculated excluding the accrued interest balances. The bank borrowings are ﬂoating rate liabilities. The majority bear interest at rates set in advance by reference to LIBOR in the case of sterling and US dollars and to EURIBOR in the case of euro borrowings. The capital market issuances in place at 30 September 2008 bear interest (pre interest rate swaps) at a ﬁxed rate throughout their life. The impact of interest rate swaps and cross currency swaps to manage the resultant interest rate risk arising is shown in section (iv) below.

100 Imperial Tobacco Group PLC 2008 The currency denomination, the maturities and the effective interest rates of the Group’s ﬁnancial assets and liabilities (excluding derivatives) at 30 September 2007 were as follows: Maturity Less than Between 1 Between 2 More than Weighted 1 year and 2 years and 5 years 5 years Total average £m % £m % £m % £m % £m % Assets/(liabilities) (before the impact of cross currency swaps and interest rate swaps) Cash and cash equivalents Sterling 98 5.3 98 5.3 Euro 142 3.5 142 3.5 US dollars 40 4.3 40 4.3 Other 100 4.4 100 4.4 Total cash and cash equivalents 380 380 Weighted average receivable interest rate 4.3 4.3 Trade receivables Sterling 546 – 546 – Euro 375 – 375 – US dollars 54 – 54 – Other 181 – 181 – Total trade receivables 1,156 – 1,156 – Trade payables Sterling (45) – (45) – Euro (40) – (40) – US dollars (19) – (19) – Other (36) – (36) – Total trade payables (140) – (140) – Borrowings – by currency Sterling (25) 4.3 (656) 6.8 (680) 5.7 (1,361) 6.2 Euro (91) 4.6 (1,546) 4.8 (867) 4.3 (2,504) 4.6 US dollars (950) 5.6 (304) 7.0 (1,254) 5.9 Other (1) 5.5 (1) 5.5 Total borrowings (1,067) (304) (2,202) (1,547) (5,120) Borrowings – by class of instrument Bank borrowings (1,067) 5.5 (1,845) 5.1 (2,912) 5.3 Capital market issuance (304) 7.0 (357) 6.8 (1,547) 4.9 (2,208) 5.5 Total borrowings (1,067) (304) (2,202) (1,547) (5,120) Weighted average payable interest rate 5.5 7.0 5.4 4.9 5.4

The effective interest rates shown in the table above have been calculated excluding the accrued interest balances. The bank borrowings are ﬂoating rate liabilities. The majority bear interest at rates set in advance by reference to LIBOR in the case of sterling and US dollars and to EURIBOR in the case of euro borrowings. The capital market issuances in place at 30 September 2007 bear interest (pre interest rate swaps) at a ﬁxed rate throughout their life. The impact of interest rate swaps and cross currency swaps to manage the resultant interest rate risk arising is shown in section (iv) below.

www.imperial-tobacco.com 101 FINANCIAL STATEMENTS Notes to the Financial Statements continued

16. Borrowings and Derivative Financial Instruments continued (iv) Derivative financial instruments IAS 39 requires that all derivative financial instruments are recognised in the balance sheet at fair value, with changes in the fair value being recognised in the income statement unless the instrument satisfies the hedge accounting rules under IFRS. The Group hedges underlying exposures in an efficient, commercial and structured manner. However, the strict hedging requirements of IAS 39 may lead to some commercially effective hedge positions not qualifying for hedge accounting. As a result, the Group has decided not to apply cash flow or fair value hedge accounting for its derivative financial instruments as permitted under IAS 39. However, the Group does apply net investment hedging, designating certain borrowings and derivatives as hedges of the net investment in the Group’s foreign operations. See section (v) below for details. The Group separates the borrowing activities from its interest rate risk management decisions by issuing debt in the market or markets that are most appropriate at the time of execution and using derivative financial instruments, such as cross currency swaps and interest rate swaps, to change the debt into the desired currency and into floating interest rate immediately after issue. The following table sets out the derivative financial instruments held by the Group at 30 September 2008, and demonstrates the Group’s use of those derivative financial instruments to manage the Group’s foreign currency exchange rate and interest rate exposures. The table presents the nominal value of such instruments used to calculate the contractual payments under such contracts, analysed by maturity date, together with the related weighted average interest rate where relevant. Some of the interest rate swaps have embedded options and assumptions have been made based on market information and third party advice at 30 September 2008 to determine whether such options are likely to be exercised in order to determine the probable maturity date, however the actual maturity date could be earlier or later depending upon future market conditions. Debt is issued in the market or markets that are most appropriate at the time of execution. Matures in financial year ending in 2009 2010 2011 2012 2013 Thereafter Total GBP equivalent at 30 September 2008 £m Capital market issuance €600m 4.25% notes due 2008 474 474 US$600m 7.125% notes due 2009 336 336 £350m 6.875% notes due 2012 350 350 €500m 5.125% notes due 2013 395 395 €1,200m 4.375% notes due 2013 947 947 €750m 7.25% notes due 2014 592 592 €500m 4.0% notes due 2015 395 395 £450m 5.5% notes due 2016 450 450 £200m 6.25% notes due 2018 200 200 £600m 8.125% notes due 2024 600 600 Interest accruals, discounts and fair value adjustments 19 7 50 76 Total capital market issuance 829 357 3,629 4,815 Bank loans and overdrafts, borrowed at LIBOR (or equivalent) plus a margin at the time of borrowing 1,838 4,040 1,514 7,392 Interest accruals 11 17 1 29 Total bank borrowings 1,849 4,057 1,515 7,421 Total borrowings 2,678 4,057 1,872 3,629 12,236

102 Imperial Tobacco Group PLC 2008 Derivative ﬁnancial instruments are then transacted to change the debt issued into the desired currency and interest basis. Fair value at 30 September Financial year ending in 2008 2009 2010 2011 2012 2013 Thereafter Total Asset Liability Cross currency swaps Receive sterling, pay euro: Notional amount 3501 6501 1,000 213 Sterling interest rate to receive (%) 6.7 5.6 6.0 Interest margin over EURIBOR to pay (%) 1.3 0.8 1.0 Receive US dollar, pay sterling: Notional amount 3361 336 32 US dollar interest rate to receive (%) 7.1 7.1 Sterling interest margin over LIBOR to pay (%) 1.3 1.3 Receive euro, pay US dollar: Notional amount 1,737 1,737 70 US dollar interest margin over LIBOR to pay (%) – –

Euro interest rate derivatives Interest rate swaps – pay variable, receive ﬁxed: Notional amount 1,855 1,855 47 Weighted average interest rate to receive (%) 6.8 6.8 Weighted average margin over EURIBOR to pay (%) 1.3 1.3

Sterling interest rate derivatives Interest rate swaps – pay variable, receive ﬁxed: Notional amount 600 600 4 Weighted average interest rate to receive (%) 8.1 8.1 Weighted average margin over LIBOR to pay (%) 3.1 3.1

Derivative ﬁnancial instruments are then transacted to create the desired interest rate risk. Sterling interest rate derivatives Interest rate swaps – pay ﬁxed, receive variable: Notional amount 110 3652 475 25 Weighted average interest rate to pay (%) 6.1 4.9 5.1

www.imperial-tobacco.com 103 FINANCIAL STATEMENTS Notes to the Financial Statements continued

16. Borrowings and Derivative Financial Instruments continued Fair value at 30 September Financial year ending in 2008 2009 2010 2011 2012 2013 Thereafter Total Asset Liability Euro interest rate derivatives Interest rate swaps – pay ﬁxed, receive variable: Notional amount 3473 1,1764 2,0565 43 1,9186 5,540 84 15 Weighted average interest rate to pay (%) 4.4 3.9 4.0 4.0 4.2 4.0 Basis swaps – Receive variable monthly, pay variable quarterly Notional amount 1,697 1,697 10

US dollar interest rate derivatives Interest rate swaps – pay ﬁxed, receive variable: Notional amount 336 8977 7298 1,962 7 26 Weighted average interest rate to pay (%) 5.1 3.9 4.6 4.3 Collars purchased: Notional amount 1359 11210 247 2 Caps purchased: Notional amount 2811 5612 84 – Basis swaps – Receive variable monthly, pay variable quarterly Notional amount 561 561 2 Basis swaps – Receive euro variable monthly, pay US Dollar variable Notional amount 22 22 4

104 Imperial Tobacco Group PLC 2008 Additional derivatives are then transacted to manage net investment hedging risk. Fair value at 30 September Financial year ending in 2008 2009 2010 2011 2012 2013 Thereafter Total Asset Liability Cross currency swaps Receive sterling ﬁxed, pay euro ﬁxed: Notional amount 753 983 1,012 1,610 4,358 76 Weighted average interest rate to pay (%) 4.6 4.6 4.7 4.7 4.7 Weighted average interest rate to receive (%) 5.7 5.7 5.6 5.6 5.6

Non-deliverable forward Receive euro, pay Moroccan dirham (MAD): Notional amount 116 116 2

Total fair value of derivative ﬁnancial instruments at 30 September 2008 173 428 Collateral transferred under the terms and conditions of credit support annex documents under ISDA agreements in respect of certain derivatives with negative fair values – (188) Total carrying value of derivative ﬁnancial instruments at 30 September 2008 173 240

Therefore, the overall effect of the interest rate swaps transacted at 30 September 2008 that were live at this date is to convert £6,870 million of borrowings into a ﬁxed rate with £331 million of borrowings ﬁxed within a set range, see below.

1 Principal amounts under these cross currency swaps are exchanged at the start and maturity of these trades. 2 The following trades are included within this balance: £15 million interest rate swap maturing in 2031 where the counterparty has the option to cancel every three months throughout the life of the trade. This trade is expected to be cancelled in April 2015. £50 million interest rate swap maturing in 2041 where the counterparty has the option to cancel every five years throughout the life of the trade. This trade is expected to be cancelled in April 2016. 3 The following trade is included within this balance: €240 million interest rate swap maturing in 2013 where the counterparty has the option to cancel every three months throughout the life of the trade. This trade is expected to be cancelled in November 2008. 4 The following trades are included within this balance: €480 million interest rate swaps maturing in 2013 where the counterparty has the option to cancel every three months throughout the life of the trade and is expected to cancel in February 2010. €480 million interest rate swaps maturing in 2013 where the counterparty has the option to cancel every three months throughout the life of the trade and is expected to cancel in August 2010. 5 The following trades are included within this balance: €75 million forward start three-year interest rate swaps starting in April 2009. €375 million forward start three-year interest rate swaps starting in May 2009. 6 The following trades are included within this balance: €500 million forward start five-year interest rate swaps starting in April 2012. €900 million forward start five-year interest rate swaps starting in May 2012. 7 The following trades are included within this balance: $400 million forward start three-year interest rate swaps starting in April 2009. 8 The following trades are included within this balance: $500 million forward start five-year interest rate swaps starting in April 2012. 9 $240 million interest rate collar maturing in 2009 where the interest rate is fixed within the range 3.55% to 6.00%. 10 $200 million interest rate collar maturing in 2011 where the interest rate is fixed within the range 3.78% to 6.00%. 11 $50 million interest rate caps maturing in 2009 where the interest rate is capped at 6.00%. 12 $100 million interest rate caps maturing in 2010 where the interest rate is capped at 6.00%.

www.imperial-tobacco.com 105 FINANCIAL STATEMENTS Notes to the Financial Statements continued

16. Borrowings and Derivative Financial Instruments continued The following table sets out the derivative ﬁnancial instruments held by the Group at 30 September 2007. Debt is issued in the market or markets that are most appropriate at the time of execution. Matures in ﬁnancial year ending in 2008 2009 2010 2011 2012 Thereafter Total GBP equivalent at 30 September 2007 £m Capital market issuance US$600m 7.125% notes due 2009 294 294 £350m 6.875% notes due 2012 350 350 €1,200m 4.375% notes due 2013 837 837 £450m 5.5% notes due 2016 450 450 £200m 6.25% notes due 2018 200 200 Interest accruals and discounts 10 7 60 77 Total capital market issuance 304 357 1,547 2,208 Bank loans and overdrafts, borrowed at LIBOR (or equivalent) plus a margin at the time of borrowing 1,063 1,841 2,904 Interest accruals 4 4 8 Total bank borrowings 1,067 1,845 2,912

Total borrowings 1,067 304 1,845 357 1,547 5,120

Derivative ﬁnancial instruments are then transacted to change the debt issued into the desired currency and interest basis. Fair value at 30 September Financial year ending in 2007 2008 2009 2010 2011 2012 Thereafter Total Asset Liability Cross currency swaps Receive sterling, pay euro: Notional amount 3501 6501 1,000 92 Sterling interest rate to receive (%) 6.7 5.6 6.0 Interest margin over EURIBOR to pay (%) 1.3 0.8 1.0

Receive US dollar, pay sterling: Notional amount 2941 294 75 US dollar interest rate to receive (%) 7.1 7.1 Sterling interest margin over LIBOR to pay (%) 1.3 1.3

Euro interest rate derivatives Interest rate swaps – pay variable, receive ﬁxed: Notional amount 837 837 34 Weighted average interest rate to receive (%) 4.3 4.3 Weighted average margin over EURIBOR to pay (%) 0.6 0.6

106 Imperial Tobacco Group PLC 2008 Derivative ﬁnancial instruments are then transacted to create the desired interest rate risk. Fair value at 30 September Financial year ending in 2007 2008 2009 2010 2011 2012 Thereafter Total Asset Liability Sterling interest rate derivatives Interest rate swaps – pay ﬁxed, receive variable: Notional amount 120 152 110 503 29513 Weighted average interest rate to pay (%) 6.4 4.2 6.1 4.3 5.8

Euro interest rate derivatives Interest rate swaps – pay ﬁxed, receive variable: Notional amount 63 192 98 1,5454 1,5525 3,450 70 7 Weighted average interest rate to pay (%) 3.1 5.1 3.7 3.9 4.2 4.1

US dollar interest rate derivatives Interest rate swaps – pay ﬁxed, receive variable: Notional amount 275 1966 2457 716 7 Weighted average interest rate to pay (%) 5.1 5.3 5.6 5.4 Collars purchased: Notional amount 1188 989 216 1

Total fair value of derivative ﬁnancial instruments at 30 September 2007 71 219

Therefore, the overall effect of the interest rate swaps transacted at 30 September 2007 that were live at this date is to convert £2,728 million of borrowings into a ﬁxed rate with £216 million of borrowings ﬁxed within a set range, see below. At 30 September 2007 £96 million has been transferred as collateral under the terms and conditions of credit support annex documents under ISDA agreements in respect of certain derivatives with negative fair values.

1 Principal amounts under these cross currency swaps are exchanged at the start and maturity of these trades. 2 The following trade is included within this balance: £15 million interest rate swap maturing in 2031 where the counterparty has the option to cancel every three months throughout the life of the trade. This trade is expected to be cancelled in March 2010. 3 The following trade is included within this balance: £50 million interest rate swap maturing in 2041 where the counterparty has the option to cancel every five years throughout the life of the trade. This trade is expected to be cancelled in April 2016. 4 The following trades are included within this balance: €75 million forward start three-year interest rate swaps starting in April 2009. €375 million forward start three-year interest rate swaps starting in May 2009. 5 The following trades are included within this balance: €500 million forward start five-year interest rate swaps starting in April 2012. €900 million forward start five-year interest rate swaps starting in May 2012. 6 The following trades are included within this balance: $400 million forward start three-year interest rate swaps starting in April 2009. 7 The following trades are included within this balance: $500 million forward start five-year interest rate swaps starting in April 2012. 8 $240 million interest rate collar maturing in 2009 where the interest rate is fixed within the range 3.55% to 6.00%. 9 $200 million interest rate collar maturing in 2011 where the interest rate is fixed within the range 3.78% to 6.00%.

www.imperial-tobacco.com 107 FINANCIAL STATEMENTS Notes to the Financial Statements continued

16. Borrowings and Derivative Financial Instruments continued (v) Hedge of net investments in foreign operations At 30 September 2008 external loans with a fair value of €6,429 million, $800 million and MAD2,500 million (2007: €3,081 million, $800 million and MAD nil), cross currency swaps of €5,502 million (2007: €nil) and non-deliverable forwards of MAD1,675 million (2007: MAD nil) have been designated as hedges of the net investment in the Group’s foreign operations and are being used to hedge the Group’s exposure to foreign exchange risk on these investments. Gains or losses on the retranslation of these borrowings are transferred to equity to offset any gains or losses on translation of the net investments in the Group’s foreign operations. Permanent intragroup loans with a fair value of €4,284 million (2007: €4,284 million) have been treated as a reduction in investments in the Group’s foreign operations. In addition, cross currency swaps of €1,516 million (2007: €1,516 million) and $3,235 million (2007: $nil) are considered to provide commercial hedges against investments in the Group’s foreign operations. However, since the derivatives do not meet the strict hedging requirements of IAS 39 the fair value gains and losses on these derivatives are recognised in the income statement, but are excluded from our adjusted performance measures.

(vi) Fair values of financial assets and financial liabilities Set out below is a comparison by category of carrying amounts and fair values of all financial liabilities that are carried in the financial statements at amounts other than fair values. All financial assets and liabilities are carried at amortised cost, other than derivative financial instruments that are carried at fair value. The carrying amounts of cash and cash equivalents, trade receivables and trade payables are approximate to their fair value and so are excluded from the analysis below. Derivative financial instruments are excluded as they are carried at fair value. No assets are held for sale. 2008 2007 Carrying Carrying In £s million amount Fair value amount Fair value Current borrowings Sterling 3325 25 Euro 2,246 2,247 91 91 US dollars 338 342 950 950 Other 91 91 11 Total current borrowings 2,678 2,683 1,067 1,067

Non-current borrowings Sterling 2,145 2,065 1,336 1,291 Euro 6,223 6,020 2,413 2,363 US dollars 1,102 1,102 304 314 Other 88 88 – – Total non-current borrowings 9,558 9,275 4,053 3,968

Within the table above it is only the capital market issues that have a fair value different to the carrying value and this has been calculated by comparing the current trading levels of the capital market issues to par.

108 Imperial Tobacco Group PLC 2008 17. Deferred Tax Assets and Liabilities Deferred tax assets and liabilities are offset only when there is a legally enforceable right to set off current tax assets against current tax liabilities and when the deferred income taxes relate to the same ﬁscal authority. The following amounts, determined after appropriate offsetting, are shown in the consolidated balance sheet. In £s million 2008 2007 Deferred tax assets 392 52 Deferred tax liabilities (2,294) (208) (1,902) (156)

Deferred tax expected to be recovered within 12 months In £s million 2008 2007 Deferred tax assets 127 19 Deferred tax liabilities (8) (17) 119 2

Deferred tax assets

Fixed and Other intangible Retirement Fair value temporary In £s million assets beneﬁts losses differences Total At 1 October 2007 (23) 43 – 32 52 Credited/(charged) to income statement (4) (26) – 240 210 Credited to equity – 6 – – 6 Acquisitions (41) 46 – 98 103 Exchange movements (6) – – 24 18 Transfers 7 – – (4) 3 At 30 September 2008 (67) 69 – 390 392

Fixed and Other intangible Retirement Fair value temporary In £s million assets beneﬁts losses differences Total At 1 October 2006 (23) 57 – 37 71 Charged to income statement (8) – – (1) (9) Charged to equity – (10) – – (10) Transfers 8 (4) – (4) – At 30 September 2007 (23) 43 – 32 52

Deferred tax liabilities Fixed and Other intangible Retirement Fair value temporary In £s million assets beneﬁts gains differences Total At 1 October 2007 (51) (169) 7 5 (208) Credited/(charged) to income statement (36) (4) (1) 12 (29) Credited/(charged) to equity – 51 – (6) 45 Acquisitions (2,067) – – 112 (1,955) Exchange movements (150) – – 6 (144) Transfers 25 (1) – (27) (3) At 30 September 2008 (2,279) (123) 6 102 (2,294)

www.imperial-tobacco.com 109 FINANCIAL STATEMENTS Notes to the Financial Statements continued

17. Deferred Tax Assets and Liabilities continued Fixed and Other intangible Retirement Fair value temporary In £s million assets beneﬁts gains differences Total At 1 October 2006 (27) (113) 22 (17) (135) Credited/(charged) to income statement (16) (11) (15) 18 (24) Charged to equity – (49) – – (49) Transfers (8) 4 – 4 – At 30 September 2007 (51) (169) 7 5 (208)

Deferred tax assets of £12 million are recognised for tax losses carried forward to the extent that the realisation of the related tax benefit through future taxable profits is probable. Deferred tax assets of £14 million as at 30 September 2008 (2007: £9 million) have not been recognised due to the potential uncertainty of the utilisation of the underlying tax losses in certain jurisdictions. Of these losses £9 million (2007: £5 million) will expire within five years. 18. Retirement Benefit Schemes The Group operates a number of retirement benefit schemes for its employees, including both defined benefit and defined contribution schemes. The Group’s two principal schemes are final salary defined benefit schemes and are operated by Imperial Tobacco Limited in the UK and Reemtsma Cigarettenfabriken GmbH in Germany. The UK scheme’s assets are held in trustee administered funds while the German scheme is unfunded. The results of the most recent available actuarial valuations for the principal Group schemes (outside Germany) have been updated to 30 September 2008 by Watson Wyatt Limited, actuaries and consultants, in order to determine the amounts to be included in the balance sheet and income statement. Actuarial valuations of the pension liabilities of Reemtsma Cigarettenfabriken GmbH pension schemes were undertaken by Russ, Dr Zimmerman und Partner at 30 September 2008.

Amounts recognised in the income statement In £s million 2008 2007 Current service cost 39 38 Past service cost 1 2 Losses from special termination benefits 1 16 Curtailment gains – (6) Defined benefit costs in profit from operations 41 50 Interest on retirement benefit liabilities 179 149 Expected return on retirement benefit assets (224) (203) Retirement benefits net financing income in finance costs (note 5) (45) (54) Total defined benefit scheme income (4) (4) Defined contribution costs in profit from operations 15 4 Total retirement benefit scheme costs in the income statement 11 –

Pensions costs charged to profit from operations In £s million 2008 2007 Defined benefit costs in profit from operations 41 50 Defined contribution costs in profit from operations 15 4 Total pension costs in profit from operations 56 54

Which is split as follows in the income statement: Cost of sales 29 29 Distribution, advertising and selling costs 14 13 Administrative and other expenses 13 12 Total pension costs in proﬁt from operations 56 54

110 Imperial Tobacco Group PLC 2008 Deﬁned beneﬁt schemes – amounts recognised in the balance sheet In £s million 2008 2007 Present value of funded obligations (2,332) (2,648) Fair value of scheme assets 2,769 3,238 437 590 Present value of unfunded obligations (542) (385) (105) 205

Recognised in the balance sheet as: In £s million 2008 2007 Retirement beneﬁt assets 441 602 Retirement beneﬁt liabilities (546) (397) (105) 205

Defined benefit schemes obligations – changes in present value In £s million 2008 2007 Defined benefit obligation at 1 October 3,033 3,072 Current service cost 39 38 Past service cost 1 2 Interest cost 179 149 Actuarial gains (477) (81) Contributions by employees 2 2 Exchange movements 83 18 Benefits paid (185) (177) Special termination benefits 1 16 Curtailment gains – (6) Acquisitions 198 – At 30 September 2,874 3,033

Defined benefit schemes assets – changes in fair value In £s million 2008 2007 At 1 October 3,238 3,035 Expected return 224 203 Actuarial (losses)/gains (633) 121 Contributions by employees 2 2 Contributions by employer 42 46 Exchange movements 31 8 Benefits paid (185) (177) Acquisitions 50 – At 30 September 2,769 3,238

The actual return on deﬁned beneﬁt scheme assets was a loss of £409 million (2007: gain £324 million).

www.imperial-tobacco.com 111 FINANCIAL STATEMENTS Notes to the Financial Statements continued

18. Retirement Beneﬁt Schemes continued Amounts recognised in the statement of recognised income and expense In £s million 2008 2007 Net actuarial (loss)/gain recognised in statement of recognised income and expense (156) 202 Cumulative net actuarial gains recognised in statement of recognised income and expense since 1 October 2004 247 403

Defined benefit schemes – principal actuarial assumptions used in scheme valuations 2008 UK Germany Other* Discount rate 7.30% 6.40% 6.44% Expected return on scheme assets 6.84% n/a 6.38% Future salary increases 4.90% 3.25% 3.94% Future pension increases 3.40% 2.15% 2.44% Inflation 3.40% 2.15% 2.40%

2007 UK Germany Other* Discount rate 5.90% 5.30% 5.28% Expected return on scheme assets 7.08% n/a 6.06% Future salary increases 5.15% 3.00% 3.81% Future pension increases 3.40% 1.90% 2.23% Inﬂation 3.40% 1.90% 2.20%

* Values shown are the weighted averages of the rates used in the calculations for schemes outside the UK and Germany. Assumptions regarding future mortality experience are set based on advice that uses published statistics and experience in each territory, and are provided in the table below for the defined benefit schemes in the UK and Germany, which in aggregate represent 85% (2007: 92%) of the Group’s total defined benefit scheme obligations at the year end. The average life expectancy, in years, of a pensioner retiring at age 65 is as follows: UK Germany 2008 Male Female Male Female Life expectancy at age 65 (years): Member currently aged 65 19.6 21.4 18.0 22.0 Member currently aged 50 20.6 22.3 20.0 24.0

UK Germany 2007 Male Female Male Female Life expectancy at age 65 (years): Member currently aged 65 19.5 21.3 17.9 22.0 Member currently aged 50 20.6 22.2 19.9 24.0

112 Imperial Tobacco Group PLC 2008 Major categories of scheme assets and their expected rates of return UK Other* Expected Percentage Expected Percentage 2008 return per of total UK return per of total other In £s million unless otherwise indicated annum Fair value assets annum Fair value assets Equities 8.2% 1,211 49.0% 7.5% 131 44.0% Bonds 5.2% 988 40.0% 5.5% 132 44.3% Property 6.8% 272 11.0% 6.0% 18 6.0% Other 4.7% –– 4.4% 17 5.7% 2,471 100.0% 298 100.0%

UK Other* Expected Percentage Expected Percentage 2007 return per of total UK return per of total other In £s million unless otherwise indicated annum Fair value assets annum Fair value assets Equities 8.1% 1,794 60.0% 7.3% 111 44.8% Bonds 5.1% 837 28.0% 4.8% 111 44.8% Property 6.8% 329 11.0% 5.5% 18 7.2% Other 4.9% 30 1.0% 4.8% 8 3.2% 2,990 100.0% 248 100.0%

* Values shown are the weighted averages of the rates used in the calculations for schemes outside the UK. £4 million (2007: £4 million) of assets related to the German unfunded schemes are not shown separately. The derivation of the overall expected return on assets reflects the actual asset allocation at the measurement date combined with an expected return for each asset class. The bond return is based on current market yields. The corporate bond yield has been reduced to allow for an element of default risk. The return on equities and property is based on a number of factors including the income yield at the measurement date, the long-term growth prospects for the economy in general, the long-term relationship between each asset class and bond returns, and the movement in market indices since the previous measurement date. Excluding any self-investment through pooled fund holdings, the Imperial Tobacco Pension Fund has no investments (2007: £nil) in Imperial Tobacco Group PLC’s own financial instruments. History of the plans for current and prior years In £s million 2008 2007 2006 2005 At 30 September Present value of defined benefit obligations 2,874 3,033 3,072 3,007 Fair value of total plan assets 2,769 3,238 3,035 2,828 Net total (surplus)/deficit on plans 105 (205) 37 179 Experience adjustments on total plan liabilities 18 (19) – (9) Experience adjustments on total plan assets (633) 121 144 333

In accordance with the transitional provisions for the amendments to IAS 19 in December 2004, the disclosures above are determined prospectively from the 2005 reporting period. The main UK Group scheme is the Imperial Tobacco Pension Fund (the ITPF). An actuarial valuation of the ITPF (the triennial valuation, for funding purposes) was made at 31 March 2007 by Watson Wyatt Limited. The assumptions which had the most significant effect when valuing the ITPF’s liabilities were those relating to the rate of investment return on the ITPF’s existing assets, the rates of increase in pay and pensions and estimated mortality rates. On the basis that the ITPF is continuing it was assumed that the future investment returns relative to market values at the valuation date would be 5.20% per annum and that pay and pension increases would average 4.5% and 3.0% respectively. The assets were brought into account at their market value. At 31 March 2007 the market value of the invested assets of the ITPF was £2,951 million. The total assets were sufficient to cover 114% of the benefits that had accrued to members for past service, after allowing for expected future pay increases. The total assets were sufficient to cover 102% of the total benefits that had accrued to members for past service and future service benefits for current members. As there was no actuarial deficiency, it was agreed with the trustees that, with effect from 31 March 2007, no employer contributions are required. The financial position of the ITPF and the level of contributions to be paid will be reviewed at the next triennial valuation, which is expected to be completed by the end of 2010 and will consider the scheme as at 31 March 2010.

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19. Provisions

In £s million Restructuring Other Total At 1 October 2007 25 33 58 Acquisitions (note 24) 121 331 452 Additional provisions charged to the income statement 463 26 489 Amounts used (75) (55) (130) Unused amount reversed – (1) (1) Exchange movements 23 60 83 At 30 September 2008 557 394 951

Analysed as: In £s million 2008 2007 Current 187 26 Non-current 764 32 951 58

Restructuring provisions relate primarily to European Integration projects announced in June 2008 as part of the integration of Imperial Tobacco and Altadis. They affect sales and marketing, manufacturing and central support functions in a number of markets and will be implemented progressively over the next three years. In addition to the European Integration projects, restructuring costs include expenses relating to the closure of our cigar factory in Selma, Alabama, USA, the integration of the recently acquired Lignum 2 operation with Commonwealth Brands, smaller restructuring projects in the Tobacco segment and costs in relation to streamlining Logistics operations in France. These liabilities are expected to crystallise over a number of years. Provision has been made to the extent that the conditions for provision recognition under IAS 37 were met at the balance sheet date. Restructuring provisions acquired represent plans already in place prior to the acquisition. The restructuring provision at 1 October 2007 relates to factory closures announced in prior years. Other provisions principally relate to commercial legal claims and disputes. Amounts acquired represent the fair value at acquisition of current and potential Altadis commercial disputes, litigation and duty claims arising in the normal course of business. These liabilities are expected to crystallise within the next ﬁve years. 20. Share Capital

In £s million 2008 2007 Authorised 56,040,000,000 ordinary shares of 10p each (2007: 56,040,000,000) 5,604 5,604 Issued and fully paid 1,067,942,881 ordinary shares of 10p each (2007: 729,200,921) 107 73

On 20 May 2008 the Group announced a fully underwritten 1 for 2 rights issue to part ﬁnance the Altadis acquisition. The subscription price of 1,475 pence per share represented a 30.2% discount to the theoretical ex-rights price after adjusting for the interim dividend, for which new shares issued under the rights issue were not eligible. The rights issue closed on 11 June 2008, by which time valid acceptances were received in respect of 329,215,281 new shares representing 97.19% of the total number of new shares offered to shareholders. The remaining 9,526,679 new shares were placed by the underwriters on 12 June 2008. The total number of new shares issued was 338,741,960. Proceeds of the rights issue, after costs of £93 million, were £4,903 million.

114 Imperial Tobacco Group PLC 2008 21. Share Schemes The Group recognised total expenses of £18 million (2007: £16 million) related to share-based payment transactions during the year (note 4). The Group operates a number of share-based employee benefit schemes. International Sharesave Plan Under the Plan the Board may offer options to purchase ordinary shares or American Depositary Shares (ADSs) in the Company to non-UK employees who enter into a savings contract. The price at which options may be offered varies depending on local laws, but for ordinary shares will not be less than 80% of the mid-market price of an Imperial Tobacco Group PLC share on the London Stock Exchange on the day prior to invitation. In respect of ADSs the price will not be less than 80% of the closing price on the OTCQX market (ticker symbol ITYBY) on the same day. The options may normally be exercised during the six months after expiry of the savings contract, three years after entering the Plan. The majority of awards under the International Sharesave Plan are equity-settled. Under the UK Sharesave Plan, which is part of the International Sharesave Plan, the Board may offer options to purchase ordinary shares in the Company to UK employees who enter into an HM Revenue and Customs approved Save as You Earn (SAYE) savings contract. The options may normally be exercised during the six months after expiry of the SAYE contract, either three or five years after entering the Scheme. The UK Sharesave Plan is equity-settled. Long Term Incentive Plan (LTIP) Each year since demerger in 1996, annual awards specified as a percentage of base salary have been made to Executive Directors and senior executives. The awards, which vest three years after grant, are subject to the satisfaction of specified performance criteria, measured over a three year performance period. All grants are at the absolute discretion of the Remuneration Committee, with no employee having the right to receive such a grant. Further information relating to the performance criteria and the terms of the plan are set out in the Directors’ Remuneration Report. In respect of the November 2004 – November 2007 award, based on earnings per share, 91.8% of the award vested on 9 November 2007. In respect of the November 2005 – November 2008 award, 93.9% of the EPS related element, 77.6% of the TSR related element linked to the FTSE 100 ranking, and 0% of the TSR element linked to the tobacco and alcohol companies comparator group, vested on 25 November 2008. Overall 66.3% of the award vested on that date. Share Matching Scheme The Share Matching Scheme is designed to encourage employees to acquire and retain Imperial Tobacco Group PLC ordinary shares or ADSs. The majority of the awards under the Share Matching Scheme are equity-settled. Executive Directors and most of the Group’s management may elect to invest any proportion of their gross bonus (capped at 100% of base salary for the Chief Executive and the Finance Director and 75% for the other Executive Directors) in Imperial Tobacco Group PLC ordinary shares or ADSs to be held by the Employee Benefit Trusts. Provided that the shares are left in the Trusts for three years, and the individual remains in employment with the Group, the participant will receive the original shares plus additional shares. The matching ratio for bonuses is 1:1 to encourage Directors and managers to build a meaningful shareholding in the Group. The matching of the Executive Directors’ shares is subject to performance criteria as set out in the Directors’ Remuneration Report. Employee Share Ownership Trusts (ESOTs) The Imperial Tobacco Group PLC Employee and Executive Benefit Trust and the Imperial Tobacco Group PLC 2001 Employee Benefit Trust (the Trusts) have been established to acquire ordinary shares in Imperial Tobacco Group PLC, by subscription or purchase, from funds provided by the Group to satisfy rights to shares arising on the exercise of Sharesave options and LTIPs and on the vesting of the share matching awards. At 30 September 2008, the Trusts held 4.9 million (2007: 4.8 million) ordinary shares with a nominal value of £490,608, all acquired in the open market at a cost of £93.9 million (2007: £94.2 million). The acquisition of shares by the Trusts has been financed by a gift of £19.2 million and an interest free loan of £180.6 million. None of the ESOT shares has been allocated to employees or Directors as at 30 September 2008. All finance costs and administration expenses connected with the ESOTs are charged to the income statement as they accrue. The Trusts have waived their rights to dividends and the shares held by the Trusts are excluded from the calculation of basic earnings per share. Cash-settled plan liabilities As noted above certain awards are cash-settled. The total liability recognised in the balance sheet as at 30 September 2008 in respect of cash-settled awards was £0.6 million (2007: £0.4 million).

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21. Share Schemes continued

Year from 1 October 2007 to 30 September 2008 Outstanding Outstanding Exercisable Lapsed/ at 1 October at start at start Exercised Cancelled Outstanding Exercisable Granted 2006 of year of year in year in year at end at end Date of grant (adjusted) (adjusted) (adjusted) (adjusted) (adjusted) (adjusted) of year of year Sharesave options UK 31 May 2002 943,890 343,053 16,794 16,794 (16,794) – – – 4 June 2003 735,332 222,035 176,473 – (144,204) (2,136) 30,133 30,133 26 May 2004 487,824 421,286 140,142 14,909 (17,571) (3,499) 119,072 – 23 May 2005 454,966 428,196 353,638 – (196,465) (5,693) 151,480 22,880 22 May 2006 370,989 366,757 327,777 – (5,963) (11,676) 310,138 – 29 May 2007 337,134 – 335,658 – (838) (21,168) 313,652 – 13 June 2008 229,294––––(1,393) 227,901 – International 4 June – 17 June 2003 736,420 133,865 – – – – – – 26 May – 4 June 2004 187,104 159,236 14,270 14,270 (9,308) (4,962) – – 23 May – 1 June 2005 197,115 183,218 171,028 – (106,003) (31,820) 33,205 33,205 22 May – 1 June 2006 347,332 340,692 323,593 – (3,062) (18,396) 302,135 – 29 May – 8 June 2007 309,381 – 307,820 – (481) (14,725) 292,614 – 13 June – 24 June 2008 381,983––––(3,769) 378,214 – US** 4 June 2004 2,915 2,915 – – – – – – 1 June 2005 6,573 6,573 3,265 – – (207) 3,058 3,058 1 June 2006 4,872 4,872 4,872 – – (26) 4,846 – 8 June 2007 46,943 – 46,943 – – (267) 46,676 – 24 June 2008 66,310––––(1,870) 64,440 – 5,846,377 2,612,698 2,222,273 45,973 (500,689) (121,607) 2,277,564 89,276

Conditional awards Share Matching Scheme 29 January 2004 1,131,805 845,443 – – – – – – 29 January 2005 942,881 817,690 771,966 – (766,013) (5,953) – – 15 February 2006 901,896 880,952 834,037 – (36,562) (32,150) 765,325 – 15 February 2007 737,454 – 727,125 – (13,129) (39,803) 674,193 – 15 February 2008 952,865–––(447) (5,195) 947,223 – 4,666,901 2,544,085 2,333,128 – (816,151) (83,101) 2,386,741 –

Long Term Incentive Plan 18 November 2003 553,790 381,590 – – – – – – 9 November 2004 409,560 348,568 338,192 – (310,191) (28,001) – – 2 November 2005 449,403 438,762 435,484 – (26,724) (35,442) 373,318 – 1 November 2006 407,809 – 404,478 – (15,111) (37,496) 351,871 – 31 October 2007 316,649–––––316,649 – 2,137,211 1,168,920 1,178,154 – (352,026) (100,939) 1,041,838 – Total options/awards 12,650,489 6,325,703 5,733,555 45,973 (1,668,866) (305,647) 5,706,143 89,276

** Granted as American Depositary Shares, each representing two ordinary shares and denominated in US dollars.

116 Imperial Tobacco Group PLC 2008 Year from 1 October 2006 Year from 1 October 2007 to 30 September 2007* to 30 September 2008* Share price at Share price at Exercise price date of exercise date of exercise of options/ for shares Contractual life for shares Contractual life awards Share price exercised of options/ exercised of options/ outstanding at grant date during the year awards during the year awards at end of year (adjusted) (adjusted) outstanding (adjusted) outstanding (adjusted) (in £ unless (in £ unless at end of year (in £ unless at end of year (in £ unless Date of grant stated otherwise) stated otherwise) (Months) stated otherwise) (Months) stated otherwise) Sharesave options UK 31 May 2002 10.04 18.64 3 21.97 n/a n/a 4 June 2003 9.38 17.93 16 18.26 4 7.14 26 May 2004 10.68 18.71 25 21.84 16 8.76 23 May 2005 12.85 18.60 25 18.25 24 10.19 22 May 2006 14.23 19.28 36 20.57 24 12.12 29 May 2007 18.65 n/a 50 19.87 38 14.96 13 June 2008 20.05 n/a n/a n/a 48 17.50 International 4 June – 17 June 2003 9.04 – 9.38 16.59 n/a 21.15 n/a n/a 26 May – 4 June 2004 10.64 – 10.68 18.73 4 21.47 n/a n/a 23 May – 1 June 2005 12.85 – 13.04 19.17 16 17.79 4 10.20 22 May – 1 June 2006 14.23 – 14.32 19.34 28 19.69 16 12.11 29 May – 8 June 2007 18.65 – 18.73 n/a 40 20.23 28 14.96 13 June – 24 June 2008 19.11 – 20.05 n/a n/a n/a 40 17.50 US** 4 June 2004 $19.92 $40.83 n/a n/a n/a n/a 1 June 2005 $24.10 n/a 16 n/a 4 $19.90 1 June 2006 $27.23 n/a 28 n/a 16 $22.06 8 June 2007 $37.53 n/a 40 n/a 28 $30.39 24 June 2008 $43.87 n/a n/a n/a 40 $35.10

Conditional awards Share Matching Scheme 29 January 2004 19.16 n/a n/a n/a n/a 29 January 2005 17.96 4 20.70 n/a n/a 15 February 2006 17.93 17 22.21 5 n/a 15 February 2007 19.41 29 22.20 17 n/a 15 February 2008 n/a n/a 18.75 29 n/a

Long Term Incentive Plan 18 November 2003 17.84 n/a n/a n/a n/a 9 November 2004 18.62 1 20.62 n/a n/a 2 November 2005 16.76 13 21.75 1 n/a 1 November 2006 18.59 25 21.77 13 n/a 31 October 2007 n/a n/a n/a 25 n/a

* All measures in these columns are weighted averages. ** Granted as American Depositary Shares, each representing two ordinary shares and denominated in US dollars. The exercise price of options/awards is ﬁxed over the life of each option/award, except as described below. Following the rights issue described in note 20, adjustments were made to the share plans. In respect of the Share Matching Scheme, the Trustees sold sufﬁcient rights ‘nil paid’ to enable the balance of the rights to be taken up. In the case of the Sharesave plans and LTIPs the number of shares under option, or subject to awards, was adjusted by the relevant bonus factor. In the case of the Sharesave Scheme the option price was also adjusted by the relevant bonus factor.

www.imperial-tobacco.com 117 FINANCIAL STATEMENTS Notes to the Financial Statements continued

21. Share Schemes continued

The weighted average exercise prices were: 2008 2007 Outstanding at the start of the year £11.89 £9.55 Granted during the year £17.53 £15.00 Exercised during the year £9.18 £7.94 Lapsed / cancelled during the year £12.37 £9.70 Outstanding at the end of the year £14.14 £11.89 Exercisable at the end of the year £9.13 £8.17

The weighted average fair value of options granted during the year was £4.41 (2007: £4.42). Pricing For the purposes of valuing awards to calculate the share-based payment charge, the Black-Scholes option pricing model has been used for all the share option and share matching schemes and for the LTIPs except for the LTIPs granted since November 2005, where the Monte Carlo model has been used. A summary of the assumptions used in the Black-Scholes model for 2008 and 2007 is as follows: 2008 2007 Sharesave Share match Sharesave Share match Risk-free interest rate 4.1% – 5.5% 4.1% 4.6% – 5.6% 5.2% Volatility 24.0% – 26.0% 21.0% 15.0% – 20.0% 17.0% Expected lives of options granted 3 – 5 yrs + 6 mths 3 yrs 3 – 5 yrs + 6 mths 3 yrs Dividend yield 3.3% 3.3% 3.6% 3.6% Fair value £3.77 – £5.30 £19.18 £3.97 – £5.00 £17.40 Share price used to determine exercise price £21.87 – £22.24 £21.17 £18.69 – £19.00 £19.40 Exercise price £17.50 – £17.81 n/a £14.96 – £15.45 n/a

Market condition features were incorporated into the Monte Carlo model for the total shareholder return elements of the LTIP, in determining fair value at grant date. Assumptions used in this model were as follows: 2008 2007 Future Imperial Tobacco Group share price volatility 18.0% 15.0% Future Imperial Tobacco Group dividend yield 3.3% 3.6% Share price volatility of tobacco and alcohol comparator group 12.0% – 27.0% 13.0% – 21.0% Share price volatility of FTSE 100 comparator group 11.0% – 71.0% 11.0% – 46.0% Correlation between Imperial Tobacco and the companies in the alcohol and tobacco comparator group 23.0% 26.0% Correlation between Imperial Tobacco and the companies in the FTSE 100 comparator group 30.0% 20.0%

For both the Black-Scholes model and the Monte Carlo model, volatility is determined based on the three or ﬁve year share price history (the time period being determined by the length of the scheme).

118 Imperial Tobacco Group PLC 2008 22. Changes in Equity Equity attributable Exchange to equity Share Share Retained translation holders of In £s million capital premium earnings reserve the Company At 1 October 2006 73 964 (423) (35) 579 Profit for the year attributable to equity holders of the Company – – 905 – 905 Actuarial gains on retirement benefits – – 202 – 202 Deferred tax relating to net actuarial gains on retirement benefits – – (59) – (59) Current tax on share-based payments – – 5 – 5 Proceeds from sale of shares held by Employee Share Ownership Trusts – – 7 – 7 Purchase of shares held by Employee Share Ownership Trusts – – (55) – (55) Costs of employees’ services compensated by share schemes – – 15 – 15 Increase in own shares held as treasury shares – – (105) – (105) Dividends paid – – (434) – (434) Exchange movements – – – 58 58 At 30 September 2007 73 964 58 23 1,118 Profit for the year attributable to equity holders of the Company – – 428 – 428 Actuarial losses on retirement benefits – – (156) – (156) Deferred tax relating to net actuarial losses on retirement benefits – – 57 – 57 Deferred tax on share-based payments – – (6) – (6) Current tax on share-based payments – – 1 – 1 Current tax on exchange movements – – – (88) (88) Proceeds from sale of shares held by Employee Share Ownership Trusts – – 5 – 5 Purchase of shares held by Employee Share Ownership Trusts – – (26) – (26) Costs of employees’ services compensated by share schemes – – 18 – 18 Rights issue 34 4,962 – – 4,996 Rights issue costs – (93) – – (93) Dividends paid – – (487) – (487) Other movements – – (1) – (1) Exchange movements – – – 541 541 At 30 September 2008 107 5,833 (109) 476 6,307

Cumulative goodwill of £2,410 million relating to acquisitions prior to 1998 was written off directly to reserves in line with the requirements of the accounting standards that were in force at the time. Treasury shares 2008 2007 Millions of Millions of In £s million unless otherwise indicated shares Cost shares Cost At 1 October 51.7 862 46.0 757 Net investment in own shares in the year – – 5.7 105 At 30 September 51.7 862 51.7 862

Details of the Group’s share buyback programme may be found in note (vi) to the parent company accounts.

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22. Changes in Equity continued

Shares held by Employee Share Ownership Trusts

In millions of shares 2008 2007 At 1 October 4.8 4.2 Acquired under rights issue 0.7 – Distribution of shares held by Employee Share Ownership Trusts (1.5) (2.0) Purchase of shares held by Employee Share Ownership Trusts 0.9 2.6 At 30 September 4.9 4.8

23. Minority Interests

In £s million 2008 2007 At 1 October 23 19 Exchange movements 29 1 Acquisition of Altadis 413 – Purchase of Logista minority interest (420) – Share of net proﬁt 13 7 Dividends (9) (4) At 30 September 49 23

24. Acquisitions

2008 On 25 January 2008 the Spanish Securities Exchange Commission, the Comision Nacional del Mercado de Valores (“CNMV”), announced that acceptances representing 95.81% of Altadis, S.A.’s share capital had been received and Imperial Tobacco’s offer to purchase Altadis had become unconditional. The Group exercised the squeeze-out provision available under Spanish law on 25 January 2008 to compulsorily purchase the remaining shares at the offer price of €50 per share. The squeeze-out was completed on 21 February 2008. As a consequence the acquisition has been fully consolidated from 25 January 2008 when the Group obtained control of Altadis. Through the acquisition of Altadis, the Group acquired direct control of Logista, and pursuant to its obligations under Spanish regulations, the Group made an offer for those shares in Logista not already owned by Altadis. The offer, at a price of €52.50 per share, completed on 6 May 2008, resulting in a total shareholding in Logista of 96.92%. The remainder of the shares were subsequently acquired on 9 June 2008 by using the squeeze-out provision available under Spanish law. In the period from 25 January 2008 to 30 September 2008, the acquired business contributed revenue of £6,916 million and loss from operations of £153 million after charging £245 million for amortisation of acquired intangibles and after one-off charges of £118 million in relation to stock revalued to fair value at acquisition and sold during the period. If the acquisition had occurred on 1 October 2007, Group revenue would have been £23,602 million and Group profit from operations for the year would have amounted to £1,212 million, these amounts having been estimated by including Altadis’ results for the four months prior to acquisition adjusted to reflect the Group’s accounting policies and changes in depreciation and amortisation due to fair value adjustments. In May 2008, the Group acquired Lignum 2 Inc., a seller of quality discount cigarettes in the United States, for a total of £11 million cash. Its net assets had nil book and fair value, giving rise to goodwill of £11 million. During the year the Group also acquired interests in a number of small businesses. The aggregate consideration for these acquisitions amounted to £3 million. Full IFRS disclosures have not been provided for these small acquisitions as they are not considered to be significant to the Group as a whole. During 2005 the Group acquired a 43% interest in Skruf Snus AB. The acquisition agreement included a commitment to acquire the remaining shares and provided the Group with immediate control of its operating and financial policies. Accordingly the acquisition was accounted for as a 100% subsidiary to reflect the substance of the transaction. In June 2008 the Group acquired the remaining 57% for a consideration of £39 million. This amount exceeded the £10 million contingent consideration originally booked by £29 million, which has been recorded as goodwill. No further consideration is payable to the former shareholders.

120 Imperial Tobacco Group PLC 2008 Details of Altadis’ net assets and goodwill arising on the acquisition of Altadis and the subsequent purchase of the minority interest in Logista are as follows: Provisional Provisional fair value fair value In £s million Book value adjustments under IFRS Intangibles 484 6,038 6,522 Property, plant and equipment 638 375 1,013 Investments in associates 13 – 13 Inventories 1,378 81 1,459 Trade and other receivables 2,020 – 2,020 Derivative ﬁnancial instruments 28 (6) 22 Cash 593 – 593 Borrowings (1,715) 40 (1,675) Trade and other payables (4,493) (23) (4,516) Current and deferred tax 152 (2,079) (1,927) Retirement beneﬁt net liabilities (148) – (148) Provisions (210) (242) (452) Investment in Aldeasa 50 152 202 Net assets (1,210) 4,336 3,126 Minority interests (183) (230) (413) Goodwill 6,687 Consideration for the acquisition of Altadis 9,400

Minority interest in Logista at 6 May 2008 420 Additional goodwill 311 Consideration for the purchase of Logista minority 731 Total goodwill in relation to Altadis and Logista 6,998 Total consideration for Altadis and Logista 10,131

The provisional fair value adjustments represent management’s current best estimates of the adjustments required to restate Altadis’ assets from book value to fair value at acquisition. The principal provisional fair value adjustments are in respect of intangibles, which comprise cigarette and cigar trademarks and supply contracts and have been independently valued using the income method, and property, plant and equipment for which we have engaged independent valuers. With the exception of premium cigar trademarks that the Directors have determined have an indefinite life, cigarette and mass market cigar trademarks are being amortised on a straight line basis over their estimated useful lives ranging from 20 to 30 years. Supply contracts are being amortised over periods ranging from 3 to 15 years. The goodwill of £6,998 million arising on the acquisition of Altadis represents a strategic premium to acquire Altadis’ leading positions in the world cigar market and the Western European logistics market, the synergies expected to be realised following acquisition and the assembled sales, manufacturing and distribution workforces. The Group’s share of Aldeasa’s assets and liabilities had been classified as held for sale upon acquisition and fair valued at that date at €275 million (£202 million). The investment in Aldeasa was disposed of on 14 April 2008 for cash consideration of €275 million at no profit or loss. Consideration for Altadis satisfied by: In £s million Cash 9,358 Direct costs related to the acquisition 42 Total consideration 9,400

Consideration for Logista minority satisﬁed by: In £s million Cash 729 Direct costs related to the acquisition 2 Total consideration 731

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24. Acquisitions continued

The purchase price for Altadis on a debt free basis is as follows: In £s million Total consideration 9,400 Borrowings at acquisition 1,675 Cash (593) Total purchase price 10,482

Cash flows relating to acquisitions In £s million Altadis Total consideration 9,400 Exchange rate movements between completion and settlement of the acquisition 33 Fees paid by Altadis 18 Cash acquired (593) 8,858 Total consideration for Logista minority 731 Other businesses acquired 53 Acquisition cash flows reflected in investing activities in consolidated cash flow statement 9,642

2007 On 2 April 2007, the Group acquired from Houchens Industries Inc 100% of the share capital of CBHC Inc, which trades as Commonwealth Brands and manufactures and sells quality discount cigarettes across the United States. The acquired business contributed revenue of £252 million and profit from operations of £35 million after charging £17 million for amortisation of acquired intangibles in the period from 2 April 2007 to 30 September 2007. If the acquisition had occurred on 1 October 2006, Group revenue would have been £12,561 million and Group profit from operations for the year would have amounted to £1,446 million, these amounts having been estimated by including Commonwealth Brands’ results for the six months prior to acquisition adjusted to reflect the Group’s accounting policies and changes in depreciation and amortisation due to fair value adjustments. During the year the Group also acquired interests in a number of small businesses including in January 2007 a controlling interest in Tremaco, a tobacco and tobacco-related products distribution business based in Estonia. The aggregate consideration for these acquisitions amounted to £1 million. Full IFRS disclosures have not been provided for these small acquisitions as they are not considered to be significant to the Group as a whole. Details of Commonwealth Brands’ net assets acquired are as follows: Fair value Fair value In £s million Book value adjustments under IFRS Intangibles 163 507 670 Property, plant and equipment 14 (4) 10 Inventories 37 – 37 Trade and other receivables 6 – 6 Unrestricted cash 29 – 29 Restricted cash 123 – 123 Trade and other payables (177) (4) (181) Dividend payable to Houchens by Commonwealth Brands (194) – (194) Borrowings (279) – (279) Net assets (278) 499 221 Goodwill 305 Total consideration 526

The fair value adjustment in respect of intangibles relates to Commonwealth Brands’ cigarette brands, principally USA Gold and Sonoma, which have been independently valued using the income method. The intangibles are being amortised over their estimated useful lives of 20 years. Goodwill represents a strategic premium to immediately establish critical mass in the US market and acquire assembled sales, manufacturing and distribution workforces.

122 Imperial Tobacco Group PLC 2008 Consideration for Commonwealth Brands satisﬁed by: In £s million Cash 516 Direct costs related to the acquisition 10 Total consideration 526

The purchase price for Commonwealth Brands on a debt free basis was as follows: In £s million Total consideration 526 Dividend payable to Houchens by Commonwealth Brands 194 Borrowings at acquisition 279 Unrestricted cash (29) Total purchase price 970

Cash flows relating to acquisitions In £s million Commonwealth Brands Total consideration 526 Dividend paid to Houchens at acquisition 194 Borrowings repaid at acquisition 279 Unrestricted cash acquired (29) 970 Other businesses acquired 1 Total cash flows arising due to acquisitions 971 Direct costs related to Commonwealth Brands acquisition not paid at the balance sheet date (5) Acquisition cash flows reflected in investing activities in consolidated cash flow statement 966

25. Commitments Capital commitments In £s million 2008 2007 Contracted but not provided for: Property, plant and equipment 51 50

Operating lease commitments Total future minimum lease payments under non-cancellable operating leases consist of leases where payments fall due: In £s million 2008 2007 Property Within one year 13 5 Between one and five years 37 12 Beyond five years 14 10 64 27 Plant and equipment (including fixtures and motor vehicles) Within one year 5 2 Between one and five years 8 4 Beyond five years – – 13 6

www.imperial-tobacco.com 123 FINANCIAL STATEMENTS Notes to the Financial Statements continued

26. Legal Proceedings The Group is currently involved in a number of legal cases in which claimants are seeking damages for alleged smoking and health- related effects. In the opinion of the Group’s lawyers, the Group has meritorious defences to these actions, all of which are being vigorously contested. Although it is not possible to predict the outcome of the pending litigation, the Directors believe that the pending actions will not have a material adverse effect upon the results of the operations, cash flow or financial condition of the Group. In August 2003 the Group received a notice from the Office of Fair Trading (“OFT”) requiring the provision of documents and information relating to an investigation under UK competition law. In April 2008 the OFT released a press statement indicating that it proposed to issue a statement of objections (“SO”) to a number of retailers and two tobacco manufacturers, including Imperial Tobacco. Imperial Tobacco’s detailed written response to the SO was submitted to the OFT in August 2008. An oral hearing has been scheduled for 3 December 2008 for Imperial Tobacco’s representatives to make submissions to the OFT in defence of its allegations. No timetable for the remainder of the OFT’s enquiry has been published. In light of the responses it receives to the SO, the OFT may decide to close the investigation, present additional evidence by issuing a supplemental SO, or proceed to an infringement decision. In the event that the OFT decides that Imperial Tobacco has infringed UK competition law, it may impose a fine, calculated by reference to ITG turnover. If the OFT were subsequently to make an infringement finding against us, we would be able to appeal the finding to the Competition Appeal Tribunal (“CAT”). The CAT has the right to conduct a full rehearing of the facts considered by the OFT and overturn or adjust any penalty that the OFT imposed. There is a further right to appeal from the CAT to the Court of Appeal, which is limited to appeal on a point of law. In respect of the OFT enquiry, the Group has not provided for any amounts in the consolidated financial statements in this or any preceding year. We take compliance with competition law very seriously and reject any suggestion that we have acted in any way contrary to the interests of consumers. 27. Cash Flows from Operating Activities

In £s million 2008 2007 Profit for the year 441 912 Adjustments for: Taxation 180 325 Finance costs 938 499 Investment income (402) (318) Share of post-tax profits of associates (2) – Depreciation, amortisation and impairment 457 115 Profit on disposal of property, plant and equipment (1) (2) Profit on the divestment of brands (174) – Net retirement benefits 6 4 Costs of employees’ services compensated by share schemes 18 15 Fair value gains and losses on derivative financial instruments 314 – Movement in provisions 388 (37) Operating cash flows before movements in working capital 2,163 1,513

Increase in inventories (44) (141) Decrease/(increase) in trade and other receivables 21 (149) (Decrease)/increase in trade and other payables (39) 96 Movement in working capital (62) (194) Taxation paid (401) (320) Net cash ﬂows from operating activities 1,700 999

124 Imperial Tobacco Group PLC 2008 28. Analysis of Net Debt The movements in cash and cash equivalents, borrowings, derivative financial instruments and finance lease liabilities in the year were as follows: Cash and Derivative Finance cash Current Non-current financial lease In £s million equivalents borrowings borrowings instruments liabilities Total At 1 October 2007 380 (1,067) (4,053) (148) – (4,888) Cash flow 146 206 (4,375) 175 1 (3,847) Acquisitions – (739) (906) 22 (30) (1,653) Accretion of interest – (6) (47) ––(53) Change in fair values –––(117) – (117) Reclassifications – (359) 359 – 5 5 Exchange movements 116 (713) (536) 1 (2) (1,134) At 30 September 2008 642 (2,678) (9,558) (67) (26) (11,687)

Adjusted net debt Management monitors the Group’s borrowing levels using adjusted net debt which excludes interest accruals, the fair value of interest rate derivative ﬁnancial instruments and ﬁnance lease liabilities. In £s million 2008 2007 Reported net debt (11,687) (4,888) Accrued interest 158 88 Fair value of interest rate derivatives (40) 15 Finance lease liabilities 26 – Adjusted net debt (11,543) (4,785)

29. Reconciliation of Cash Flow to Movement in Net Debt

In £s million 2008 2007 Increase in cash and cash equivalents 146 104 Settlement of exchange rate derivative financial instruments (13) – Collateralisation deposits 188 – Increase in borrowings (13,815) (2,324) Repayment of borrowings 9,646 1,317 Repayment of finance leases 1 – Change in net debt resulting from cash flows (3,847) (903) Exchange movements (1,134) (1) Borrowings acquired with subsidiaries (1,645) – Derivative financial instruments acquired with subsidiaries 22 – Finance leases acquired with subsidiaries (25) – Other non-cash movements including revaluation of derivative financial instruments (170) (105) Movement in net debt during the year (6,799) (1,009) Opening net debt (4,888) (3,879) Closing net debt (11,687) (4,888)

www.imperial-tobacco.com 125 FINANCIAL STATEMENTS Notes to the Financial Statements continued

30. Balances and Transactions with Associates and Joint Ventures Assets Liabilities Goods and services 2008 Accounts Current Accounts In £s million receivable loans payable Purchases Sales Associates Compagnie Agricole et Industrielle des Tabacs Africains – – (3) – – Compañía Española de Tabaco en Rama (Cetarsa), S.A. – – (3) 9 2 MITSA 1 – – – 1 Manufacture des Tabacs de l’Ouest Africain – – – 3 – Tabacos Elaborados, S.A. 4 – (3) 6 9 5 – (9) 18 12 Joint ventures Corporación Habanos, S.A. 4 – (15) 16 – Promotora de Cigarros, S.L. – 2 – 2 1 4 2 (15) 18 1 9 2 (24) 36 13

The Group’s interests in the associates and joint ventures listed above were acquired through the acquisition of Altadis in January 2008 with the exception of Compagnie Agricole et Industrielle des Tabacs Africains and Manufacture des Tabacs de l’Ouest Africain. In 2007 there were no signiﬁcant transactions or balances with associates and joint ventures. 31. Post Balance Sheet Events On 7 October 2008 the Group acquired the outstanding 49% minority shareholdings in 800 JR Cigar and MCM Management for USD81 million.

126 Imperial Tobacco Group PLC 2008 Independent Auditors’ Report to the Members of Imperial Tobacco Group PLC

Independent Auditors’ Report to the Members of Imperial Tobacco Group PLC We have audited the parent company financial statements of Imperial Tobacco Group PLC for the year ended 30 September 2008 which comprise the Balance Sheet and the related notes. These parent company financial statements have been prepared under the accounting policies set out therein. We have also audited the information in the Directors’ Remuneration Report that is described as having been audited. We have reported separately on the Group financial statements of Imperial Tobacco Group PLC for the year ended 30 September 2008. Respective Responsibilities of Directors and Auditors The Directors’ responsibilities for preparing the annual report, the Directors’ Remuneration Report and the parent company financial statements in accordance with applicable law and UK Accounting Standards (UK Generally Accepted Accounting Practice) are set out in the Statement of Directors’ Responsibilities. Our responsibility is to audit the parent company financial statements and the part of the Directors’ Remuneration Report to be audited in accordance with relevant legal and regulatory requirements and International Standards on Auditing (UK and Ireland). This report, including the opinion, has been prepared for and only for the Company’s members as a body in accordance with section 235 of the Companies Act 1985 and for no other purpose. We do not, in giving this opinion, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing. We report to you our opinion as to whether the parent company financial statements give a true and fair view and whether the parent company financial statements and the part of the Directors’ Remuneration Report to be audited have been properly prepared in accordance with the Companies Act 1985. We report to you whether in our opinion the information given in the Report of the Directors is consistent with the parent company financial statements. In addition we report to you if, in our opinion, the Company has not kept proper accounting records, if we have not received all the information and explanations we require for our audit, or if information specified by law regarding Directors’ remuneration and other transactions is not disclosed. We read other information contained in the annual report and consider whether it is consistent with the audited parent company financial statements. The other information comprises only the Financial Highlights, the Chairman’s Statement, the Strategic and Financial Review, the Operating Review, the Report of the Directors, the Corporate Governance Report and the unaudited parts of the Directors’ Remuneration Report. We consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the parent company financial statements. Our responsibilities do not extend to any other information. Basis of Audit Opinion We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the parent company financial statements and the part of the Directors’ Remuneration Report to be audited. It also includes an assessment of the significant estimates and judgements made by the Directors in the preparation of the parent company financial statements, and of whether the accounting policies are appropriate to the Company’s circumstances, consistently applied and adequately disclosed. We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the parent company financial statements and the part of the Directors’ Remuneration Report to be audited are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the parent company financial statements and the part of the Directors’ Remuneration Report to be audited. Opinion In our opinion: > the parent company financial statements give a true and fair view, in accordance with UK Generally Accepted Accounting Practice, of the state of the Company’s affairs as at 30 September 2008; > the parent company financial statements and the part of the Directors’ Remuneration Report to be audited have been properly prepared in accordance with the Companies Act 1985; and > the information given in the Report of the Directors is consistent with the parent company financial statements.

www.imperial-tobacco.com 127 FINANCIAL STATEMENTS Imperial Tobacco Group PLC Balance Sheet

30 September 30 September In £s million Notes 2008 2007 Fixed assets Investments in subsidiaries (ii) 1,035 1,035

Current assets Debtors (iii) 5,637 1,060

Creditors: amounts falling due within one year (iv) (16) (456) Net current assets 5,621 604 Total assets less current liabilities 6,656 1,639 Net assets 6,656 1,639

Capital and reserves Called up share capital (v) 107 73 Share premium account (vi) 5,833 964 Proﬁt and loss account (vi) 716 602 Equity shareholders’ funds 6,656 1,639

The ﬁnancial statements on pages 128 to 130 were approved by the Board of Directors on 26 November 2008 and signed on its behalf by:

Iain Napier Robert Dyrbus Chairman Director

128 Imperial Tobacco Group PLC 2008 Notes to the Imperial Tobacco Group PLC Balance Sheet

Basis of Preparation The financial statements have been prepared on the going concern basis in accordance with the historical cost convention, the Companies Act 1985 and UK Generally Accepted Accounting Principles. The principal accounting policies are set out below. Investments Held as Fixed Assets Investments held as fixed assets comprise the Company’s investment in subsidiaries and are shown at cost less any provision for impairment. Dividends Final dividends are recognised as a liability in the Company’s financial statements in the period in which the dividends are approved by shareholders, while interim dividends are recognised in the period in which the dividends are paid. As permitted by section 230 of the Companies Act 1985, no separate profit and loss account has been presented for the Company. The Company has not presented a cash flow statement or provided details of related party transactions as permitted under FRS 1 (revised) “Cash flow statements” and FRS 8 “Related party disclosures” respectively. As permitted by paragraph 3C (b) of FRS 25, the Company has elected not to present FRS 25 disclosures in the notes to its individual financial statements as full equivalent disclosures are presented in the consolidated financial statements. (i) Dividends Amounts recognised as distributions to ordinary shareholders in the year: In £s million 2008 2007 Final dividend for the year ended 30 September 2007 of 42.2p per share (2006: 37.8p) 326 293 Interim dividend for the year ended 30 September 2008 of 20.9p per share (2007: 18.2p) 161 141 487 434

A list of the principal subsidiaries of the Company is shown on pages 131 and 132. (iii) Debtors: Amounts Falling Due Within One Year In £s million 2008 2007 Amounts owed by Group undertakings 5,633 1,051 Other debtors and prepayments 4 9 5,637 1,060

(iv) Creditors: Amounts Falling Due Within One Year In £s million 2008 2007 Bank overdrafts 16 1 Amounts owed to Group undertakings – 455 16 456

(v) Called Up Share Capital In £s million 2008 2007 Authorised 56,040,000,000 ordinary shares of 10p each (2007: 56,040,000,000) 5,604 5,604 Issued and fully paid 1,067,942,881 ordinary shares of 10p each (2007: 729,200,921) 107 73

www.imperial-tobacco.com 129 FINANCIAL STATEMENTS Notes to the Imperial Tobacco Group PLC Balance Sheet continued

(vi) Reserves Share Profit premium and loss In £s million account account At 1 October 2007 964 602 Retained profit for the year – 114 Rights issue 4,962 – Rights issue costs (93) – At 30 September 2008 5,833 716 Profit for the year As permitted by section 230(3) of the Companies Act 1985, the profit and loss account of the Company is not presented. The profit attributable to shareholders, dealt with in the financial statements of the Company, is £601 million (2007: £544 million). Purchase of treasury shares In 2008 the Company did not buy back any ordinary Imperial Tobacco shares following the suspension of the programme on 8 February 2007. In 2007 the Company purchased 5,713,000 ordinary shares in Imperial Tobacco Group PLC for a total cost of £105 million including expenses. The total number of shares held in treasury is 51,717,000 (2007: 51,717,000) representing 4.8% (2007: 7.1%) of the issued share capital. The total cost, including expenses, of shares held in treasury is £862 million (2007: £862 million). The shares purchased to date have not been cancelled but are held in a treasury shares reserve and represent a deduction from equity shareholders’ funds (see note 22 to the Consolidated Financial Statements). (vii) Reconciliation of Movements in Shareholders’ Funds In £s million 2008 2007 Profit on ordinary activities after taxation 601 544 Dividends (487) (434) Payments for purchase of own shares – (105) Rights issue 4,996 – Rights issue costs (93) – Movement in equity shareholders’ funds 5,017 5 Opening equity shareholders’ funds 1,639 1,634 Closing equity shareholders’ funds 6,656 1,639

(viii) Contingent Liabilities Imperial Tobacco Group PLC has guaranteed various borrowings and liabilities of certain UK and overseas subsidiary undertakings, including various Dutch and Irish subsidiaries. At 30 September 2008, the contingent liability totalled £11,161 million (2007: £5,496 million). The guarantees include the Dutch subsidiaries which, in accordance with Book 2, Article 403 of The Netherlands Civil Code, do not file separate financial statements with the Chamber of Commerce. Under the same article, Imperial Tobacco Group PLC has issued declarations to assume any and all liability for any and all debts of the Dutch subsidiaries. The guarantees also cover the Irish subsidiaries, all of which are included in the consolidated financial statements as at 30 September 2008. The Irish companies, namely John Player & Sons Limited, John Player Distributors Limited and Imperial Tobacco Mullingar have therefore availed themselves of the exemption provided by section 17 of the Irish Companies (Amendment) Act 1986 in respect of documents required to be attached to the annual returns for such companies. (ix) Other Information Number of employees The average number of employees during 2008 was nil (2007: nil). Directors’ emoluments Details of Directors’ emoluments and interests are provided within the Directors’ Remuneration Report on pages 55 to 70. These disclosures form part of the financial statements.

130 Imperial Tobacco Group PLC 2008 SUPPLEMENTARY INFORMATION Principal Subsidiaries

The principal wholly owned subsidiaries of the Group, all of which are unlisted, are shown below. Registered in England and Wales Name Principal activity Imperial Tobacco Limited* Manufacture, marketing and sale of tobacco products in the UK Imperial Tobacco Finance PLC* Finance company Imperial Tobacco Holdings (2007) Limited* Holding investments in subsidiary companies Imperial Tobacco International Limited* Export and marketing of tobacco products Imperial Tobacco Overseas Holdings (3) Limited* Holding investments in subsidiary companies

Incorporated overseas Name and country of incorporation Principal activity Altadis S.A., Spain Manufacture, marketing, sale and distribution of tobacco products in Spain Altadis Distribution France S.A.S., France Distribution of tobacco products in France Altadis Financial Services, S.N.C.1, France Finance company Altadis Finland Oy, Finland Marketing and sale of tobacco products in Finland Altadis Maroc, S.A., Morocco Manufacture, marketing, sale and distribution of tobacco products in Morocco Altadis Middle East Fzco., United Arab Emirates Marketing and sale of tobacco products in the Middle East Altadis USA Inc.1, United States of America Manufacture, marketing and sale of cigars in the United States of America Commonwealth Brands Inc.*, United States of America Manufacture, marketing and sale of tobacco products in the United States of America Compañía de Distribución Integral Logista, S.A., Spain Distribution of tobacco products and related services in Spain Dunkerquoise des Blends S.A.*, France Tobacco processing in France Ets. L. Lacroix Fils N.V.*, Belgium Manufacture, marketing and sale of tobacco products in Belgium Imperial Tobacco (Asia) Pte. Ltd.*, Singapore Marketing and sale of tobacco products in South East Asia Imperial Tobacco Australia Limited*, Australia Marketing and sale of tobacco products in Australia Imperial Tobacco CR s.r.o.*, Czech Republic Marketing and sale of tobacco products in the Czech Republic Imperial Tobacco Hellas S.A.*, Greece Marketing and sale of tobacco products in Greece Imperial Tobacco Italy Srl*, Italy Marketing of tobacco products in Italy Imperial Tobacco Magyarorszäg Dohänyforgalmazö Kft*, Marketing and sale of tobacco products in Hungary Hungary Imperial Tobacco Mullingar*, Republic of Ireland Manufacture of ﬁne cut tobacco in the Republic of Ireland Imperial Tobacco New Zealand Limited*, New Zealand Manufacture, marketing and sale of tobacco products in New Zealand Imperial Tobacco Norway A.S.*, Norway Marketing and sale of tobacco products in Norway Imperial Tobacco Overseas B.V.*, the Netherlands Finance company Imperial Tobacco Polska S.A.*, Poland Manufacture, marketing and sale of tobacco products in Poland Imperial Tobacco Sigara ve Tutunculuck Sanayi ve Marketing and sale of tobacco products in Turkey Ticaret A.S.*, Turkey Imperial Tobacco Slovakia A.S.*, Slovak Republic Manufacture, marketing and sale of tobacco products in the Slovak Republic Imperial Tobacco Tutun Urunleri Satis ve Manufacture of tobacco products in Turkey Pazarlama A.S.*, Turkey Imperial Tobacco Ukraine*, Ukraine Marketing and sale of tobacco products in Ukraine John Player & Sons Limited*, Republic of Ireland Marketing and sale of tobacco products in the Republic of Ireland John Player S.A.*, Spain Marketing and sale of tobacco products in Spain Logista Italia. S.p.A, Italy Distribution of tobacco products in Italy Reemtsma Cigarettenfabriken GmbH*, Germany Manufacture, marketing and sale of tobacco products in Germany and export of tobacco products Reemtsma International Asia Services Limited*, China Marketing of tobacco products in China

www.imperial-tobacco.com 131 SUPPLEMENTARY INFORMATION Principal Subsidiaries continued

Incorporated overseas continued

Name and country of incorporation Principal activity OOO Reemtsma Volga Tabakfabrik*, Russia Manufacture of tobacco products in Russia Imperial Tobacco Sales & Marketing LLC*, Russia Marketing and sale of tobacco products in Russia Skruf Snus AB*, Sweden Manufacture, marketing and sale of tobacco products in Sweden Société Allumetiére Française S.A.S, France Distribution of wholesale in France Société Nationalé d’Exploitation Industrielle des Manufacture, marketing and sale of tobacco products in France and Tabacs et des Allumettes S.A, France export of tobacco products Supergroup S.A.S, France Distribution of wholesale in France Tobaccor S.A.S.*, France Holding investments in subsidiary companies involved in the manufacture, marketing and sale of tobacco products in Africa Van Nelle Canada Limited*, Canada Manufacture of tubes and sale of tobacco products in Canada Van Nelle Tabak Nederland B.V.*, the Netherlands Manufacture, marketing and sale of tobacco products in the Netherlands

The subsidiaries marked * are wholly owned and were held throughout the year with the exception of Skruf Snus AB of which the remaining 57% was acquired in June 2008 and Imperial Tobacco Polska S.A. of which the remaining 0.1% was acquired in July 2008. The remaining wholly owned subsidiaries were acquired through the acquisition of Altadis on 25 January 2008 with the exception of Compañía de Distribución Integral Logista, S.A., of which 59.63% was acquired with Altadis, 37.29% acquired on 6 May 2008 and 3.08% acquired on 9 June 2008, and which wholly owns Logista Italia. S.p.A. The principal partly owned subsidiaries of the Group, with the exception of Altadis Polska, S.A., ZAO Balkanskaya Zvezda and 800 JR Cigar Inc. which were acquired with Altadis, were held throughout the year, are shown below. All are unlisted unless otherwise indicated. Incorporated overseas Percentage Name and country of incorporation Principal activity owned 1 Altadis Polska, S.A., Poland Manufacture of tobacco products in Poland 96.4 ZAO Balkanskaya Zvezda, Russia Manufacture of tobacco products in Russia 99.9 Imperial Tobacco Production Ukraine, Ukraine Manufacture of cigarettes in Ukraine 99.8 800 JR Cigar Inc., United States of America Holding investments in subsidiary companies 51.0 Reemtsma Kyrgyzstan OJSC, Kyrgyzstan Manufacture, marketing and sale of tobacco products in Kyrgyzstan 98.6 Société Ivoirienne des Tabacs S.A.2, Ivory Coast Manufacture, marketing and sale of tobacco products in the Ivory Coast 74.1 Tutunski Kombinat AD, Macedonia Manufacture, marketing and sale of tobacco products in Macedonia 99.1

The principal joint ventures of the Group, acquired on 25 January 2008 through the acquisition of Altadis, are shown below. They are unlisted. Incorporated overseas Percentage Name and country of incorporation Principal activity owned 1 Corporación Habanos, S.A., Cuba Export of cigars manufactured in Cuba 50.0 Altabana S.L., Spain Holding investments in subsidiary companies involved in the marketing and sale of Cuban cigars 50.0

In addition, the Group also wholly owns the following partnership: Name and country Principal activity Imperial Tobacco (EFKA) GmbH & Co. KG, Germany Manufacture of tubes in Germany Principal place of business: Industriestrasse 6, Postfach 1257, D-78636 Trossingen, Germany

The consolidated Group ﬁnancial statements include all the subsidiary undertakings and entities shown above. With the exception of Imperial Tobacco Holdings (2007) Limited, which is wholly owned by the Company, none of the shares in the subsidiaries is held by the Company. A full list of subsidiaries is attached to the Annual Return of the Company.

1 The percentage of issued share capital held by immediate parent and the effective voting rights of the Group are the same, with the exception of Altadis USA Inc., and Altadis Financial Services S.N.C. where the entire issued share capital, and therefore 100% of the voting rights, was held by a number of Group companies. From late September 2008 Altadis Financial Services S.N.C. is 100% owned by Altadis S.A. 2 Listed on the Stock Exchange of the Ivory Coast.

132 Imperial Tobacco Group PLC 2008 SUPPLEMENTARY INFORMATION Shareholder Information

Registered office PO Box 244 Upton Road Bristol BS99 7UJ +44 (0)117 963 6636 Registered in England and Wales No: 3236483 Registrars Equiniti Aspect House Spencer Road Lancing West Sussex BN99 6DA 0871 384 2037 +44 (0)121 415 7009 0871 384 2255 text phone for shareholders with hearing difficulties ADR Depositary Shareholder Services for ADR Holders Citibank Shareholder Services PO Box 43077 Providence, RI 02940-3077 USA Toll-free number in the USA:1-877-CITI-ADR (877-248-4237) email: [email protected] Stockbrokers RBS Hoare Govett Limited 250 Bishopsgate London EC2M 4AA +44 (0)20 7678 8000 Morgan Stanley & Co International Limited 20 Bank Street Canary Wharf London E14 4AD +44 (0)20 7425 8000 Auditors PricewaterhouseCoopers LLP Chartered Accountants and Registered Auditors 31 Great George Street Bristol BS1 5QD Lawyers Allen & Overy LLP One Bishop Square London E1 6AD Ashurst LLP Broadwalk House 5 Appold Street London EC2A 2HA Financial advisers Citi Citi Centre 33 Canada Square Canary Wharf London E14 5LB

www.imperial-tobacco.com 133 SUPPLEMENTARY INFORMATION Shareholder Information continued

Financial Calendar and Dividends Interim results are expected to be announced in May 2009 and the full year’s results in November 2009. The Annual General Meeting of the Company is to be held on Tuesday, 3 February 2009 at the Bristol Marriott Hotel City Centre. The Notice of Meeting and explanatory notes about the resolutions to be proposed are set out in the circular enclosed with this report. Dividends are generally paid in August and February. Payment of the 2008 final dividend, if approved, will be on 20 February 2009 to shareholders on the register at the close of business on 23 January 2009. The associated ex dividend date is 21 January 2009. Shareholders who do not currently mandate their dividends and who wish to do so should complete a mandate instruction form obtainable from Equiniti, at the address shown. Share Dealing Service A low cost, execution-only share-dealing service for the purchase and sale of Imperial Tobacco Group PLC shares is available from NatWest Stockbrokers. NatWest Stockbrokers is authorised and regulated by the Financial Services Authority and is a member of the London Stock Exchange and PLUS. For details, please contact: NatWest Stockbrokers, Waterhouse Square, 138-142 Holborn, London EC1N 2TH, telephone: 0870 600 3070). Individual Savings Account (ISA) Investors in Imperial Tobacco Group PLC ordinary shares may take advantage of a low cost Individual Savings Account (ISA) and Investment Account where they can hold their Imperial Tobacco Group shares electronically. The ISA and Investment Account are operated by Equiniti Financial Services Limited. Commission starts from £5.00 and £1.75 respectively for the sale and purchase of shares. For a brochure or to apply for an Investment Account or ISA go online to www.shareview.co.uk/dealing or call Equiniti on 0845 300 0430. Dividend Reinvestment Plan (DRIP) Imperial Tobacco Group PLC has set up a dividend reinvestment plan (DRIP) to enable shareholders to use their cash dividend to buy further shares in the market. Further information can be obtained from Equiniti, Aspect House, Spencer Road, Lancing, West Sussex BN99 6DA, tel: 0871 384 2268. American Depositary Receipt Facility Imperial Tobacco Group PLC ordinary shares are traded on the International Premier “OTCQX” platform in the form of American Depositary Shares (ADSs) using the symbol “ITYBY”. Each ADS represents two Imperial Tobacco Group PLC ordinary shares. The ADS facility is administered by Citibank, N.A. and enquiries should be directed to them at the address shown. Dividend Reinvestment Plan Imperial Tobacco Group PLC ADS have also been included in the Citibank Dividend Reinvestment Program which provides registered holders and interested investors a convenient way to purchase and sell Imperial Tobacco Group PLC ADSs. To obtain further information about the Dividend Reinvestment Program, please call Citibank, N.A., the administrator and sponsor toll free within the USA at 1-877-248-4237 (1-877-CITIADR). Website Information on Imperial Tobacco Group PLC is available on our website: www.imperial-tobacco.com. Equiniti also offer a range of shareholder information online. You can access information on your holdings, indicative share prices and dividend details and find practical help on transferring shares or updating your details at www.shareview.co.uk.

134 Imperial Tobacco Group PLC 2008 SUPPLEMENTARY INFORMATION Index

A Directors and Employees 88 Nominations Committee 49 Accounting Policies 77 Directors’ Report : Business Review 5 Notes to the Financial Statements 85 Acquisitions 11, 120 Directors’ Report : Governance 37 O Adjusted Measures 81 Disclosure Committee 52 Operating Review 25 Africa 20, 31 Dividend Reinvestment Plan (DRIP) 134 Altadis 3, 7, 120 Dividends 11, 90 P American Depositary Donations 43 Pensions 52, 67, 110 Receipts/Shares 133 Performance Highlights IFC E Americas 30 Pictorial Health Warnings 22 Earnings Per Share 11, 90 Annual General Meeting 43, 134 Poland 29 Employees 42, 88 Asia 31 Principal Subsidiaries 131 Environmental Management 36 Audit Committee 50 Productivity 32 Auditors Excise Duty 15, 23 Property, Plant and Equipment 93 Remuneration 87 F Provisions 114 Report 72, 127 Financial Calendar 134 R Australia 31 Financial Highlights 2 Regional Results 10 Azerbaijan 31 Financial Review 8 Registrars 133 B Financial Statements 71 Regulation 6, 22 Balance Sheet (Parent) 128 Focus on the Future 14 Remuneration Committee 48, 55 Balance Sheet (Consolidated) 75 Framework Convention on Remuneration Report 55 Tobacco Control 22 Belgium 29 Report of the Directors 41 France 29 Board Committees 45 Rest of EU 29 Board of Directors 38 G Rest of the World 31 Restructuring Costs 9, 88 Borrowings and Derivative Germany 27 Retirement Beneﬁt Schemes 52, 110 Financial Instruments 95 Glossary 136 Rights Issue 7, 11, 61, 119 Burkina Faso 20 Greece 29 Risk Assessment 22, 51 Business Overview IFC Group Performance IFC, 8 Russia 31 C H S Cambodia 31 Health and Safety 36 Sales Development 16 Case Study Hungary 29 Africa and the Middle East 20 Saudi Arabia 21, 31 United States of America 18 I Segmental Information 85 Cash and Cash Equivalents 95 Income Statement 74 Senegal 20 Cash Flows from Operating Activities 124 Industry Outlook 15 Share Buybacks 130 Cash Flow Statement 76 Intangible Assets 91 Share Capital 41, 114 Cash Management 16 Inventories 94 Share Schemes 115 Chad 20 Investments in Associates and Joint Ventures 94 Shareholder Information 133 Chairman’s Statement 3 Ireland 29 Smoking in Public Places 15, 22 Changes in Equity 119 Italy 29 Spain 28 Chief Executive’s Committee 40, 47 Ivory Coast 20, 31 Statement of Recognised Income and Expense 76 Chief Executive’s Review 6 K Strategic and Financial Review 5 Commitments 123 Key Performance Indicators 17 Strategy 16 Community Investment 36 Congo 21 L T Contents 1 Laos 31 Taiwan 31 Corporate Governance Report 44 Lebanon 31 Taxation 11, 89 Corporate Responsibility 6, 35 Legal Proceedings 83, 124 Total Shareholder Return Index 4 Cost Focus 16 Litigation 24 Trade and Other Payables 95 Creditor Payment Policy 43 Logistics 33 Trade and Other Receivables 94 Critical Accounting Estimates Travel Retail 10 M and Judgements 83 Turkey 20, 31 Czech Republic 29 Madagascar 21 Manufacturing 32 U D Master Settlement Agreement 18 Ukraine 31 Debt 11, 125 Middle East 20, 31 United Kingdom 26 Deferred Tax 109 Minority Interests 120 United States of America 18, 30 Directors Morocco 20, 31 V Biographies 38 Vietnam 20, 31 Interests in Shares 61 N Pensions 67 Net Debt 11, 125 W Remuneration 55 Net Finance Costs 11, 88 Where We Operate 12 Responsibilities 53 Netherlands 29 World Tobacco Market 15 www.imperial-tobacco.com 135 SUPPLEMENTARY INFORMATION Glossary

Adjusted distribution margin Distribution fees Market capitalisation The adjusted profit from operations Distribution fees comprises the Logistics The market price of a share multiplied for the Logistics segment divided by segment revenue excluding the cost by the number of shares in issue. distribution fees for the Logistics segment. of distributed products. Management Market share Attributable earnings considers this an important measure Market share represents our best estimate Profit after tax attributable to the in assessing the profitability of Logistics of the volumes of our brands sold as a equity holders of the company. operations. percentage of total market volumes during Adjusted measures Earnings per share – adjusted the reporting period, including the most Management believes that reporting Adjusted profit after tax attributable to the appropriate independent data available. adjusted measures provides a useful equity holders of the Company divided by We use latest monthly data only where the comparison of business performance the weighted average number of shares moving annual total would be misleading – and reflects the way in which the business in issue during the period excluding shares for example, if market entry or a significant is controlled. Accordingly, adjusted held to satisfy employee share plans and product launch has taken place part way measures of profit from operations, net shares purchased by the Company and through the reporting period. finance costs, profit before tax, taxation, held as Treasury shares. MYO attributable earnings and earnings Earnings per share – basic Make your own: tobacco which is made per share exclude, where applicable, Profit after tax attributable to equity holders into a cigarette using a tube machine amortisation of acquired intangibles, of the Company divided by the weighted and filter tubes. restructuring costs, retirement benefits net average number of shares in issue during Net revenue financing income, fair value gains and the period excluding shares held to satisfy Net revenue comprises the Tobacco losses on derivative financial instruments employee share plans and shares segment revenue less duty and similar in respect of commercially effective purchased by the Company and items. Management considers this an hedges, one-off acquisition accounting held as Treasury shares. important measure in assessing the adjustments, brand divestment gains Earnings per share – diluted profitability of Tobacco operations. and related taxation effects. The adjusted As for basic earnings per share except that OTP measures in this report are not defined the weighted average number of shares terms under International Financial Other tobacco products – fine cut tobacco, includes the weighted average number of Reporting Standards and may not be cigars, pipe tobacco, snuff and snus. shares that would be issued on conversion comparable with similarly titled measures of all the dilutive potential ordinary shares Private label reported by other companies. arising from rights under the employee An exclusive retailer or distributor brand Adjusted net debt share plans. usually in the low-price segment. Management monitors the Group’s Effective tax rate Productivity borrowing levels using adjusted net debt The tax charge in the income statement Productivity is measured as factory output which excludes interest accruals, the fair as a percentage of profit before taxation. divided by paid hours. value of interest rate derivative financial RYO instruments and finance lease liabilities. Enterprise value (EV) Roll your own: tobacco which is used with Adjusted operating margin Market capitalisation plus net debt. rolling papers to hand make cigarettes. The adjusted profit from operations for Ex dividend date Snus the Tobacco segment divided by net The date from which shares are traded revenue for the Tobacco segment. without the right to the most recently Snus is a moist oral tobacco product. It is manufactured and consumed primarily Adjusted profit from operations declared dividend payment. in Sweden and Norway. Profit from operations adjusted for Framework Convention Total Shareholder Return (TSR) amortisation of acquired intangibles, on Tobacco Control restructuring costs, fair value gains and The World Health Organization’s The total investment gain to shareholders, losses on derivative financial instruments Framework Convention on Tobacco resulting from the movement in the share used to commercially hedge investments Control (FCTC) is the first global price and assuming dividends are in foreign operations, one-off acquisition tobacco treaty that seeks to regulate immediately reinvested in shares. accounting adjustments and brand tobacco products. Travel retail divestment gains. Fine cut tobacco Products made available in a market Amortisation Loose tobacco which is used with rolling principally for travelling consumers. A systematic charge to the income papers or filter tubes (including make Volumes statement to write off the value of intangible your own and roll your own). Our volume Key Performance Indicator assets with finite lives over their useful lives. FMC (KPI) represents the number of units Adjusted attributable earnings Factory-made cigarettes. sold in the period. Adjusted profit after tax attributable ISO Weighted average cost of capital to the equity holders of the company. The International Organization for The weighted average of the costs of Cash conversion rate Standardization, widely known as ISO, various types of capital that finance a Cash conversion is calculated as cash is an international standard-setting body company or a project. Capital would flow from operations before tax payments comprised of representatives from various generally include a mix of debt and equity. less net capital expenditure relating national standards organisations. to property, plant and equipment and It promulgates worldwide industrial software as a percentage of adjusted and commercial standards. profit from operations.

136 Imperial Tobacco Group PLC 2008 For more information visit Our Business Today www.imperial-tobacco.com

Adjusted proﬁt Net revenue from operations

With established operations Logistics > A good performance in tobacco logistics Distribution fees Adjusted profit across the Southern European reflected a number of factors, including from operations countries of Spain, France, Italy stable volumes in Spain and Portugal, and recent entry > In other products, our traditional £607m £121m into Central Europe with the wholesale business performed well opening of our operations in in a difficult environment Poland, we are one of the largest p33 logistics companies in Europe. Logistics See overleaf for an overview of our business today For more information visit For more www.imperial-tobacco.com e continue to build on our e continue to Cross reference within report reference Cross information for more long track record of creating long track record shareholder value. sustainable Imperial Tobacco is a leading is Tobacco Imperial company tobacco international markets, manufactures, which a and sells distributes range of comprehensive tobaccos,cigarettes, cigars, rolling papers and tubes. W p35 About Us About Information key to the operations, performance and financial condition of the Company and the with respect statements The Annual Report contains certain forward-looking materially from to differ can cause actual results events and circumstances these statements involve uncertainties since future as a whole. By their nature, Group of this Annual Report and the Company knowledge and information available at the date of preparation statements reflect those anticipated. The forward-looking forecast. Nothing in this Annual Report should be construed as a profit statements. undertakes no obligation to update these forward-looking Imperial Tobacco Group PLC Group Tobacco Imperial 2008 Accounts and Report Annual growth, Driving value delivering