Performance Summary 2017 Chief Executive’s review

“Following our acquisition of RAI, and the progress we are making with NGPs, we can now accelerate our ambition to transform ”

Nicandro Durante Chief Executive

10 BAT Performance Summary 2017 Performance Summary 2017

Leading the industry From 2018, the Group will introduce a However, while trading conditions remain new metric called Revenue Growth of our challenging in a number of markets, including The Group delivered another set of strong Strategic Portfolio, replacing the Global ad hoc excise increases and increasing illicit financial results in 2017, despite a challenging Drive Brand (GDB) & Key Strategic Brand consumption, 2017 again saw the Group trading environment. Following the (KSB) volume growth metric. To provide deliver on its high single-digit earnings transformational deal in July 2017, these the comparator against which 2018 will be growth commitment on an adjusted basis, results benefit from the acquisition of Reynolds measured, Revenue of our Strategic Portfolio increasing adjusted diluted earnings per share American Inc. (RAI) while also demonstrating in 2017 would have been £16,711 million by 14.9% to 284.4p, or 9.9% at constant the strength of the organic business. assuming we had consolidated RAI for a rates of exchange. The Group has delivered outstanding returns to full 12 months and after recognising the shareholders for many years. We recognise that impact of implementing the new accounting Group structural changes the tobacco and industry has entered requirements of IFRS 15. Having the right organisational structure will a dynamic period of change. Increased public set us up for continued long-term success as health awareness, new societal attitudes and Strong results across our a truly global multi-category business, with rapid developments in new technologies have portfolio of products NGPs embedded at the core. all combined to create a unique opportunity Notwithstanding the good progress we are With the NGP business set for significant to accelerate the delivery of our long-held making with our potentially reduced-risk expansion and growth, we decided to ambition to provide our consumers with less products, combustible products integrate it into our existing geographic risky tobacco and nicotine choices. remain at the core of our business – delivering structure. This has enabled us to begin fully Since 2012, together with RAI, we have growth today and providing the funds leveraging the scale and expertise of the invested approximately US$2.5 billion in the required for investing in the future. I am whole Group to drive growth in an area that is growth of our Next Generation Product (NGP) therefore pleased that 2017 saw the Group fast becoming a key part of our core business. business – comprising vapour and tobacco yet again deliver another good performance. In order to address the key opportunities heating products (THPs). Following the The Group’s cigarette market share in its Key and challenges we face going forward, we acquisition of RAI, not only have we become Markets continued to grow strongly (up 40 recognised the need to ensure the combustible the world’s leading vapour company, we bps). This was powered by another excellent business operates even more efficiently than have also significantly increased the size performance by our GDBs, which grew 110 ever before. To achieve this, we created three of our existing oral tobacco and nicotine bps (ex US) and now account for more than new regions – Americas and Sub-Saharan Africa; business with the addition of leading snus 50% of Group cigarette and THP volume Europe and North Africa; and Asia-Pacific and and moist snuff brands in the US. Collectively, outside the US. Over the year, market share in Middle East – in place of the previous four. we refer to these products as our potentially the US also grew strongly and was up 20 bps, The creation of these three new regions has reduced-risk products. with the RAI Strategic Brands growing 40 bps. simplified the existing structure by rationalising Our investments are now coming to fruition Total Group cigarette and THP volume grew the complexity and scale of existing direct and, recognising that not all consumers are 3.2% to 686 billion, or on an organic basis fell reporting business units (DRBUs) and has the same, we now have an unrivalled range 2.6%, outperforming the industry, which was pushed decision making further down the of exciting and innovative products across the estimated to have declined by around 3.5%. organisation by creating fewer, larger DRBUs. potentially reduced-risk categories – including, These changes took effect from 1 January 2018 vapour, THPs, oral tobacco, tobacco-free In 2017, we also made excellent progress and the revised regional structure will therefore nicotine pouches and moist snuff. With the with our NGP business. Our flagship THP, form the basis of our reporting going forward. increased size and scale coming from RAI, we glo, first launched in Japan in December To facilitate these changes, we created the are clear leaders in the potentially reduced-risk 2016, reached 3.6% market share by the end new role of Chief Operating Officer for the product space and we are confident of leading of 2017 – having been rolled out nationally International business – reporting directly the NGP category. This year we generated NGP from October 2017. Since then, 50% of the to me and managing our global business revenue of £397 million. On a full year basis, overall category growth in Japan has been outside the US. The President and CEO of including the contribution from RAI, this would from glo – demonstrating its strong consumer RAI also reports directly to me and leads have been approximately £500 million and we appeal in a very short period. Good initial our business in the US – reflecting its scale expect this to double in 2018 to £1 billion, rising progress is also being made in our other and the importance of ensuring a smooth to more than £5 billion in 2022. launch markets of South Korea, Russia, Canada, Romania and Switzerland. integration that does not impact ongoing New Strategic Portfolio of brands business delivery. In the vapour category, Vype is now present In light of the evolution of the business, in nine markets and we remain the market Confidence in future growth with the addition of leading brands in the leader in the UK, with Vype and Ten Motives The Group’s results in 2017 are testament to US, as well as the growing importance and combined delivering around 40% share of our commitment to delivering strong results for progress of our potentially reduced-risk measured retail in December 2017. We also shareholders whilst at the same time investing products, we have taken the opportunity lead the vapour category in Poland. In the US, substantially in the long-term future of the to establish a new portfolio of priority brands the range of products continues to have business. Following our acquisition of RAI, and – which we will in future refer to as our a significant presence in the market. We see the progress we are making with NGPs, we Strategic Portfolio. the rapidly developing vapour category, as can now accelerate our ambition to transform This Strategic Portfolio comprises our existing a whole, contributing significantly to our tobacco. With the right people, products and GDBs, combined with RAI’s Strategic Brands long-term growth ambitions in NGPs. strategy we are ideally positioned to deliver (Camel, Newport and Natural American The Group’s financial performance was greater choice for our consumers, potential Spirit). Also included is our portfolio of positively impacted by the accounting for benefits for society as a whole and long-term potentially reduced-risk products, including the acquisition of RAI and the subsequent sustainable value for shareholders. our key oral tobacco brands and NGP brands US tax reforms. These drove diluted earnings Nicandro Durante in vapour and THP. Further details can be per share up by over 600% to 1,830.0p. found on pages 14 and 15. Chief Executive

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