NET FINANCE COSTS

Net finance costs at £208 million were £33 million lower than last year, principally reflecting lower interest paid as a result of lower borrowing costs, increased interest income on cash balances and additional net fair value and foreign exchange gains in the Group.

Net finance costs comprise:

RESULTS OF ASSOCIATES

The Group's share of the post-tax results of associates decreased by £61 million, or 14%, to £364 million.  The Group's share of the adjusted post-tax results of associates decreased by 5% to £349 million, with a rise of 7% to £393 million at constant rates of exchange.

The adjusted contribution from Reynolds American decreased by 7% to £203 million. At constant rates of exchange the increase was 1%. The Group's adjusted contribution from its main associate in India, ITC, was £137 million, down 5%. At constant rates of exchange, the contribution would have been 13% higher than last year.

See page 25 for the adjusting items.

TAXATION

The tax rate in the income statement of 27.9% for the six months to 30 June 2014 (30 June 2013: 26.8%, 31 December 2013 27.6%) is affected by the inclusion of the share of associates' post-tax profit in the Group's pre-tax results and by adjusting items.  The underlying tax rate for subsidiaries reflected in the adjusted earnings per share on page 30 was 30.7% in 2014 and 30.5% for the six months to 30 June 2013.  For the year to 31 December 2013 it was 30.7%. The increase for the six months to 30 June 2014 is mainly due to a change in the mix of profits. The charge relates to taxes payable overseas.

Refer to page 34 for the Franked Investment Income Group Litigation Order update.

FREE CASH FLOW AND NET DEBT

Operating cash flow decreased by £158 million or 9% to £1,682 million, primarily reflecting the lower adjusted profit from operations due to exchange rate movements, and higher net capital expenditure, partially offset by working capital movements.  The higher cash outflows in respect of net interest paid and restructuring costs, together with lower dividends and other appropriations from associates (due to the Reynolds American share buy-back being £17 million lower at £93 million) were partially offset by lower dividends paid to non-controlling interests and lower tax paid. These led to the Group's free cash flow decreasing by £245 million or 30% to £567 million.

The ratio of free cash flow per share to adjusted diluted earnings per share was 30% (2013: 39%).

Closing net debt was £10,961 million at 30 June 2014 (30 June 2013: £10,548 million and 31 December 2013: £9,515 million).

The Group's alternative cash flow statement is shown on page 26 and explained on page 21 under non-GAAP measures.

RISKS AND UNCERTAINTIES

The principal risks and uncertainties affecting the business activities of the Group were identified under the heading 'Key Group risk factors', set out on pages 24 to 29 of the Annual Report for the year ended 31 December 2013, a copy of which is available on the Group's website www.bat.com. The Key Group risks and applicable sub-categories are summarised under the headings of:

Marketplace: Competition from illicit tobacco trade; Failure to lead developing non-tobacco nicotine market

Excise and tax: Excise shocks from tax rate increases or structure changes; Onerous disputed taxes, interest and penalties

Finance: Translational foreign exchange rate exposures; Access to end market cash resources

Operations: Geopolitical tensions; Risk of injury, illness or death in the workplace

Regulation: Tobacco regulation inhibits growth strategy

In the view of the Board, the key risks and uncertainties for the remaining six months of the financial year continue to be those set out in the above section of the 2013 Annual Report.  These should be read in the context of the cautionary statement regarding forward looking statements on page 36 of this Half-Yearly Report.

GOING CONCERN

A full description of the Group's business activities, its financial position, cash flows, liquidity position, facilities and borrowings position together with the factors likely to affect its future development, performance and position, are set out in the Strategic Report and in the notes to the accounts, all of which are included in the 2013 Annual Report that is available on the Group's website, www.bat.com. This Half-Yearly Report provides updated information regarding the business activities for the six months to 30 June 2014 and of the financial position, cash flow and liquidity position at 30 June 2014.

The Group has, at the date of this report, sufficient financing available for its estimated existing requirements for at least the next twelve months.  This, together with the proven ability to generate cash from trading activities, the performance of the Group's Global Drive Brands, its leading market positions in a number of countries and its broad geographical spread, as well as numerous contracts with established customers and suppliers across different geographical areas and industries, provides the Directors with the confidence that the Group is well placed to manage its business risks successfully in the context of the current financial conditions and the general outlook in the global economy.

After reviewing the Group's annual budgets, plans, current forecasts and financing arrangements, as well as the current trading activities of the Group, the Directors consider that the Group has adequate resources to continue operating for the foreseeable future and that it is therefore appropriate to continue to adopt the going concern basis in preparing this Half-Yearly Report.

POST BALANCE SHEET EVENTS

On 15 July 2014, the Group announced that it has agreed to invest US$4.7 billion as part of Reynolds American's proposed acquisition of Lorillard enabling British American Tobacco to maintain its 42% equity position in the enlarged business.  The investment is contingent upon the completion of Reynolds American's acquisition of Lorillard.  The proposed acquisition is subject to a number of regulatory approvals in the USA and the other parties' shareholder approvals and is anticipated to be completed in the first half of 2015. The Group will be subscribing for new shares in Reynolds American with funding from existing resources and debt.

British American Tobacco will suspend its £1.5 billion share buy-back programme with effect from 30 July 2014.

In addition, the Group and Reynolds American have agreed in principle to expand their existing cooperation to encompass the research, development, innovation, intellectual property and commercialisation of each other's next-generation vapour and tobacco heating products.

DIRECTORS' RESPONSIBILITY STATEMENT

The Directors confirm, that to the best of their knowledge, that this condensed financial information  has been prepared in accordance with IAS 34 'Interim Financial Reporting' as adopted by the European Union, and that this Half-Yearly Report includes a fair review of the information required by the Disclosure and Transparency Rules of the Financial Conduct Authority, paragraphs DTR 4.2.7 and DTR 4.2.8.

The Directors of British American Tobacco p.l.c. are as listed on pages 46 and 47 in the British American Tobacco Annual Report for the year ended 31 December 2013 with the exception of John Daly who retired as a Director on 6 April 2014 and Anthony Ruys who retired as a Director at the conclusion of the Annual General Meeting on 30 April 2014.

Details of all the current Directors of British American Tobacco p.l.c. are maintained on www.bat.com.

For and on behalf of the Board of Directors:

Richard Burrows                                                         Ben Stevens

Chairman                                                                      Finance Director and Chief Information Officer

29 July 2014

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INDEPENDENT REVIEW REPORT TO BRITISH AMERICAN TOBACCO p.l.c.

Report on the condensed consolidated financial information

Our conclusion

We have reviewed the condensed consolidated financial information, defined below, in the Half-Yearly Report of British American Tobacco Plc for the six months ended 30 June 2014. Based on our review, nothing has come to our attention that causes us to believe that the condensed consolidated financial information is not prepared, in all material respects, in accordance with International Accounting Standard 34 as adopted by the European Union and the Disclosure and Transparency Rules of the United Kingdom's Financial Conduct Authority.

This conclusion is to be read in the context of what we say in the remainder of this report.

What we have reviewed

The condensed consolidated financial information, which is prepared by British American Tobacco Plc, comprises:

·     the Group balance sheet as at 30 June 2014;

·     the Group income statement and Group statement of comprehensive income for the period then ended;

·     the Group cash flow statement for the period then ended;

·     the Group statement of changes in equity for the period then ended; and

·     the explanatory notes to the condensed consolidated financial information.

As disclosed in page 20, the financial reporting framework that has been applied in the preparation of the full annual financial statements of the group is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union.

The condensed consolidated financial information included in the Half-Yearly Report has been prepared in accordance with International Accounting Standard 34, 'Interim Financial Reporting', as adopted by the European Union and the Disclosure and Transparency Rules of the United Kingdom's Financial Conduct Authority.

What a review of condensed consolidated financial information involves

We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410, 'Review of Interim Financial Information Performed by the Independent Auditor of the Entity' issued by the Auditing Practices Board for use in the United Kingdom. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures.

A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK and Ireland) and, consequently, does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

We have read the other information contained in the Half-Yearly Report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed consolidated financial information.

Independent review report to British American Tobacco p.l.c. cont…

Responsibilities for the condensed consolidated financial information and the review

Our responsibilities and those of the directors

The Half-Yearly Report, including the condensed consolidated financial information, is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the Half-Yearly Report in accordance with the Disclosure and Transparency Rules of the United Kingdom's Financial Conduct Authority.

Our responsibility is to express to the company a conclusion on the condensed consolidated financial information in the Half-Yearly Report based on our review. This report, including the conclusion, has been prepared for and only for the company for the purpose of complying with the Disclosure and Transparency Rules of the Financial Conduct Authority and for no other purpose. We do not, in giving this conclusion, 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.

PricewaterhouseCoopers LLP

Chartered Accountants

1 Embankment Place

London

29 July 2014