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Trading update - ahead of closed period commencing 1 January 2019

• ��The business continues to perform well and full year guidance remains unchanged
• ��Continued good market share growth in combustibles, driven by the Strategic Brands
• ��Strong growth across THP, Vapour and Oral (PRRP) categories
• ��The US is performing well with volume in line with expectations
• ��De-leveraging remains on track
• ��Remain well placed to manage US regulatory proposals

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1. The business continues to perform well and full year (FY) 2018 guidance remains unchanged

• ��Expecting FY industry volume decline around 3.5%
• ��Exceeding the 5.5% full year price mix achieved in 2017
• ��Delivering good adjusted revenue and adjusted operating profit growth, on a constant currency representative basis, with a second half weighting
• ��Growing market share +40bps YTD v FY17 driven by the Strategic Brands +180bps YTD
• ��Full year adjusted EPS growth is expected to be impacted by a currency translation headwind, around 6% for FY18, at current exchange rates*
• ��Exceeding our high single figure constant currency adjusted diluted EPS growth target

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2. Strong growth across THP, Vapour and Oral (PRRP) categories

• ��THP and Vapour on track to reach £900m of full year reported revenue
• ��Glo now in 16 markets globally; share in Japan continues to grow and is now 4.6%
• ��Epen3 performing well with new market launches including France and New Zealand
• ��Oral tobacco expected to deliver strong constant currency revenue growth on a representative basis.

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3. The US is performing well with volume in line with expectations

• ��US industry volume decline remains in line with historic ranges down 4.4% YTD and we continue to expect an industry decline of around 4.0-4.5% for the full year 2018
  [Note: An explanation of volume data sources in the US is attached in��Appendix��1]
• ��Continued value share growth +20bps YTD with NAS, Camel and Newport all growing share
• ��Vuse volume up over 30% YTD, despite the Vuse Vibe recall. Vuse Alto’s national roll-out has now reached ~55,000 stores after 13 weeks
• ��Delivering good revenue growth on a constant currency representative basis

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4. De-leveraging remains on track

• ��Net debt**/adjusted EBITDA*** reducing at around 0.4x per annum excluding the impact of FX
• ��At current exchange rates* net debt**/adjusted EBITDA*** is expected to be around 3.9X by end 2018
• ��The Group’s medium-term rating target remains BBB+/Baa1, with a current rating of BBB+/Baa2

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5. Remain well placed to manage US regulatory proposals

• ��We are constructively engaging regulators and supporting evidence-based regulation
• ��We have experience in managing regulatory change over many years
• ��Regulation of menthol in cigarettes should be developed through a comprehensive rule-making process, be based on a thorough review of the science and consider the unintended consequences, in order to withstand judicial review

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“We remain on track for a strong performance in 2018 – driven by both our combustible and PRRP businesses. In the US, we are performing well, with positive pricing and continued value share growth. Our de-leveraging remains on track and we remain committed to a dividend pay-out ratio of at least 65%. We expect to exceed our high single figure adjusted diluted EPS growth at constant rates of exchange.”

Nicandro Durante, CEO

Enquiries

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Press Office
+44 (0) 20 7845 2888 (24 hours)�� |��

Investor Relations

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Appendix 1: US industry cigarette volume data sources:

Given continued investor interest in monthly US industry cigarette volume data, investors should note that there are three main sources of volume data in the US:

1. Shipments to Wholesale (STW): represents manufacturer shipments (sales) to wholesale and drives the P&L.�� This system is based upon actual shipments from manufacturers representing 90% of cigarette volumes.�� An independent vendor then estimates the remaining volumes using government tax data.�� Shipments can fluctuate due to changes in inventory at wholesale.
2. Shipments to Retail (STR): represents sales from wholesale to retail, which is subject to minimal changes in inventory, as retailers will not significantly vary inventory levels due to the impact on working capital.�� STR measures actual sales reported by suppliers representing ~94% industry coverage for cigarettes. In our experience, this provides the most reliable indicator of consumer trends in the US.
3. Syndicated sample-based survey data: Publicly available sample-based data relies on representative outlet coverage (e.g. Nielsen, IRI). When interpreting data from such studies, investors should consider the following:

a. Surveys are designed to provide information across a wide range of consumer goods categories, with the result that sample construction is often a compromise in terms of representation across distribution channels and categories.

b. More than 40% of cigarette industry sales are through a large number of small chain and independent stores.

c. Survey samples can be skewed to larger organized outlets, due to the costs of constructing a representative sample of independent outlets, however, these independent outlets may be more relevant to cigarettes, than to other categories.

d. When modelling industry volume, retail outlets are weighted by All Commodity Value (ACV), which can further skew data towards stores within large chains and may not be representative of cigarette industry trends.

��As a result, syndicated sample-based data systems can be heavily skewed towards large chains, and independents are under-represented.

Based on Shipments to Retail, YTD October US industry volume is down 4.4%, in line with our expectations and reflecting a slightly improved H2, as previously communicated. We continue to expect US industry cigarette volume to be down 4.0% – 4.5% in 2018.

Note on Non-GAAP Measures

This announcement contains several non-GAAP measures used by management to monitor the Group’s performance. Certain of our measures are presented based on an adjusted basis, on a constant currency basis and on a representative basis. Please refer to the 2017 Annual Report on Form 20‐F for a full description of each measure, pages 218 to 222, as well as the Half-Year Report to 30 June 2018 on Form 6-K, pages 50 to 53.

For the non-GAAP information contained in this announcement, no comparable GAAP or IFRS information is available on a forward-looking basis, as the effect of adjusting items and rates of exchange, which could be significant, may be highly variable and cannot be estimated with reasonable certainty. Statements concerning information presented on a representative basis (i.e., information presented as though the Group had owned the acquisitions made in 2017 for the whole of that year), also apply to such information when it is not presented on a representative basis.

Adjusting items, as identified in accordance with the Group’s accounting policies, represent certain items of income and expense which the Group considers distinctive based on their size, nature or incidence. These include significant items in revenue, profit from operations, net finance costs, taxation and the Group’s share of the post‐tax results of associates and joint ventures which individually or, if of a similar type, in aggregate, are relevant to an understanding of the Group’s underlying financial performance. Although the Group does not believe that these measures are a substitute for IFRS measures, the Group does believe such results excluding the impact of adjusting items provide additional useful information to investors regarding the underlying performance of the business on a comparable basis.

The Group’s management reviews a number of our IFRS and non‐GAAP measures for the Group and its geographic segments at constant rates of exchange. This allows comparison of the Group’s results, had they been translated at the previous year’s average rates of exchange. The Group does not adjust for the normal transactional gains and losses in operations that are generated by exchange movements. Although the Group does not believe that these measures are a substitute for IFRS measures, the Group does believe that such results excluding the impact of currency fluctuations year‐on‐year provide additional useful information to investors regarding the operating performance on a local currency basis.

As previously announced, this announcement and other results communications in 2018 include a presentation of results against 2017 as though the Group had owned the acquisitions made in 2017 for the whole of that year. Comparison of results on this basis will be termed “on a representative basis” and will provide shareholders with a results comparison representative of the Group having owned the acquisitions throughout 2017 and 2018. Although the Group does not believe that results on this basis are a substitute for IFRS measures, the Group does believe such results including the impact of acquisitions as though the acquisitions had occurred at the beginning of 2017 provide additional useful information to investors regarding the underlying performance of the business on a comparable basis. Because of the impact of the acquisitions made in 2017, we believe statements concerning non-representative information would be distorted and do not provide meaningful information to investors regarding the underlying performance of the business.