Gallaher Group Announcement of Interim Results for the Six Months Ended June 30, 1998.

LONDON--(BUSINESS WIRE)--Sept. 10, 1998--Gallaher Group Plc (NYSE:GLH) announces its interim results for the six months ended June 30, 1998.

HIGHLIGHTS

                      US$ (c)     pounds

(a) Turnover            3,250m      1,946m   -   (1997 :  2,064m pounds)

- Operating Profit (a)    279m        167m   -   (1997 :  170m pounds)

- Operating Margin (a)               37.8%   -   (1997 :  37.5%)

- UK Cigarette Market Share          39.1%    -   (1997 :  39.5%)

- Interim Dividend (b)                6.8p    -   (1997 :  9.625p)
                         45.4cents   27.2p  per ADS

     Comparisons with 1997 are distorted. Last year's operating
results were assisted by some additional trade buying in the UK ahead
of the July Budget announcement.

(a)  1997 figures before exceptional demerger costs and excluding
     one-off release of provision

(b)  1997 pro-rata interim dividend 6.4p per ordinary share, 25.6p per
     ADS


Commenting on the performance, Peter Wilson, Chairman & Chief
Executive, said:

     "I am pleased with Gallaher's performance. Underlying trading is
good, we have maintained our UK lead position, and considerably
enhanced our presence in our selected international markets. In
addition, our productivity and efficiency program is on course. We
have increased our interim dividend by 6.25% over the pro-rata figure
for 1997."

(c)  US dollar equivalents are provided for reader convenience at the
     June 30, 1998, exchange rate of 1 pound = US$1.67

1998 Interim Results

     Gallaher maintained its leadership of consumer sales in the UK
cigarette market and increased international volume sales by some 16%
in the six months to June 30, 1998. Sovereign and Mayfair, the Group's
low price brands, continued to be the fastest growing brands in the UK
market, and Gallaher maintained its leadership of the UK's premium
sector with Benson and Hedges and Silk Cut. Gallaher continued to
secure ongoing efficiency improvements and further increased its
operating margin. The underlying trading performance is good.

     The Board of Gallaher Group has declared an interim dividend of
6.8p per share (net). This dividend will be paid on November 2, 1998,
to all ordinary shareholders on the register at close of business on
September 25, 1998. For ADS holders, The Bank of New York will convert
the 27.2p (net) ADS dividend into US dollars, and distribute it to ADS
holders on November 13, 1998. As previously stated, the directors
expect that the 1998 interim dividend will be approximately one third
of the total annual dividend for 1998. If the total annual net
diayments,
the pro-rata 1997 interim net dividends to June
30, 1998, excluding exceptional costse of the July Budget announcement. 1997 also
bee continued
strength of sterling.

     UK tueflecting
change in mix of sales partly offset ed by the
strong pound, which adversely affected international turnover and
operating profit by approximately 30m pounds and 4m pounds
respectively.

     Operating margin (operating profit as a percentage of turnover
excluding duty) rose to 37.8%, from 37.5% in 1997 (before exceptional
demerger costs and the one-off release of provision). Excluding the
1997 provision release, the UK operating margin improved by over 1% to
41.5% (1997: 40.2%). The international operating margin was 27.3%
(1997: 29.1%), although at constant exchange rates it would have been
28.6%. The small reduction in the underlying international margin
largely refleelates to the borrowings
of 945m pounds assumed in connection with the demerger in May, 1997.
On a pro-formafective tax rate of 32.3% in 1998 is above that for the
first half of 1997 of 26.1%, because of the one-time h flow for the first half
of 1998 is not comparable with the prior period.

Operations

-     United Kingking in the UK appears now to
be broadly stable, after many years of gradual decline. As, however,
the trendre-positioning of a competitor brand and the seasonal post-duty
increase downtrading, the low price sector increased its share of the
market to 36.6% in the first six months of 1998. Sovereign, from
Benson and Hedges, and Mayfair remain t 44% of consumer sales. With its two
leading brands, Benson and Hedges and Silk Cut, Gallaher maintained
itsmaintaining its share of this growing sector and
increasing its share of the premium sector.

     Bootlegging remains the foremost feature of the handrolling
tobacco market. Gallaher estimates that overseas-sourced product now
accountaining the
leading brands.

-     International

     Gallaher recorded solid growth in selected domesticvolumes by
6.7%. This strong performance was drnd Benson &
Hedges American Blend continuing to increase their volumes. Gallaher's
market share also rose in Greece, up to 4.3%, led by the continuing
growth in volumes of Silk Cut.
     Handrolling tobacco shipments to Belgium and Luxembourg continued
to grow strongly; volumes rose by over 19%.
     Cigarette volumes to Kazakstan increased by 32.4%, with Sovereign
firmly established as the leading brand in Almaty. Gallaher's
commitment to Kazakstan is underlined with the 12m pounds investment
in the Almaty factory, a joint venture with Reemtsma, which is on
schedule to commission production during the fourth quarter of 1998.
     Cigarette volumes to Russia and Ukraine grew by 53.6%, with both
Sovereign and Sobranie contributing to this strong performance. Whilst
Gallaher's trade in Russia is denominated in US dollars, and its mid
price Sovereign brand is strongly positioned, recent and current
events there inevitably make trading conditions very uncertain.
     In Asia Pacific, Gallaher has started shipping Sobranie Classic
and Pinks and Mints to China, and, following the successful national
roll-out, increased volumes of Pinks and Mints to Japan.

-     Productivity

     Gallaher continued to secure ongoing efficiency improvements
including further productivity gains in the manufacture of each of
cigarette, cigar and tobaccos.

     The Group's rationalization of its UK cigarette manufacturing
remains on schedule; the extension of its Lisnafillan cigarette
factory was completed, as planned, in March, and the first Ultra High
Speed cigarette complex is fully operational.

Share Repurchase

     The Board has reviewed Gallaher's capital structure against the
background of the high level of cashflow generated by the Group's main
businesses, even after the significant investment Gallaher makes each
year in building the equity in its brands. The Board's primary
objective is to ensure that the best balance is struck between
reducing the Group's cost of capital and the need to preserve
flexibility to take advantage of opportunities that may be presented
by the continuing consolidation of the international tobacco industry.

     As an integral part of the long-term drive to build shareholder
value, it is the intention of the Board to make purchases of up to 5%
of the Group's ordinary share capital. These repurchases will be
conducted within the scope of the authority granted by shareholders at
Gallaher's recent Annual General Meeting.

Outlook

     Gallaher's strong underlying performance demonstrates the
effectiveness of the Group's domestic and international strategy.
Available evidence indicates that the decline in the incidence of
adult cigarette smoking in the UK has halted. However, the longer-term
implications of the growing trend of UK smokers acquiring cigarettes
from overseas smust face up to this
issue. Its current strategy on tobacco taxation is clearly not
working.
-0-

Gallaher Group Plc Group Profit and Loss Account SIX MONTHS ENDED46.2 2,064.4 4,414.8

Duty (2,512.5) (1,504.5) (1,611.1) (3,445.6)

Excep

investments 0.3 0.2 0.2 0.4

Interest (64.9) (38.9) (11.0) (45.0)

---------- ---------- ---------- ---------- Profit on ordinary activities before taxation 145.0 86.8 123..6 39.9 56.8 108.0

Dividend - per ordinary share -

interim 11.4cents 6.8p 9.625p - per ADS -

interim 45.4cents 27.2p 38.5p - per ordinary Six months Six months Year end.0

---------- ----------

Investments 93.4 55.9 (689.1) (412.6) (25.3)

---------- ----------ital and reserves

Called up share

Capital 115.2 69.0 69.0 69.0 589.9) (540.8)

---- Six months Six months Year ended

ended ended Decems m pounds

Net cash inflow from oper (33.4) (20.0) (14.6) (60.3) Capital expenditure (51.1) (30.6) (15.5) (38.8) Financial investment (3.8) (2.3) 32.0 32.0 Acquisition of subsidiary - - (6.1) (6.1) Equity cash dividends paid (110.9) (66.4) - (66.4)

---------- ---------- ---------- ---------- Net cash (outflow)/inflow before use of liquid resources and financing (19.0) (11.4) 454.1 238.1

Management of liquid resources 2.2 1.3 173.8 174.7 Financing

Increase in debt - - 595.0 770.0

Purchase of own shares - - (945.0) (945.0)

---------- ---------- ---------- ---------- Net cash outflow from financing - - (350.0) (175.0)

---------- ---------- ---------- ---------- (Decrease)/increase in net cash (16.8) (10.1) 277.9 237.8

---------- ---------- ---------- ----------

Reconciliation of Movements in Equity Shareholders' Funds

Six months Six months Year ended

Ended ended December 31,

June 30, 1998 June 30, 1997 1997

US$m(a) m pounds m pounds m pounds

Profit on ordinary activities after taxation 145.0 86.8 123.2 240.8 Dividends (78.4) (46.9) (66.4) (132.8) Exchange adjustments on foreign currency net investments (1.5) (0.9) 3.0 0.9 Purchase of own shares out of capital - - (945.0) (945.0)

---------- ---------- ---------- ---------- Net increase/(decrease) in equity shareholders' funds 65.1 39.0 (885.2) (836.1) Opening equity shareholders' funds (903.1) (540.8) 295.3 295.3

---------- ---------- ---------- ---------- Closing equity shareholders' funds (838.0) (501.8) (589.9) (540.8)

---------- ---------- ---------- ----------

(a) US dollar equivalents are provided for reader convenience at the June 30, 1998, exchange rate of 1 pound= US$1.67.

Gallaher Group Plc Reconciliation of Operating Profit to Net Cash Inflow from Operating Activities SIX MONTHS ENDED JUNE 30, 1998

Six months Six months Year ended

ended ended December 31,

2 10.9 11.3 21.6 Amortization of intangible fixed assets  3.0 1.8 1.7 3.4 Profit on sale of tangible fixed assets (0.5) (0.3) (0.1) (1.5) (Increase)/decrease in debtors (450.5) (269.8) (454.2) 8.1 Decrease/(increase) in stocks 936.5 560.8 490.9 (198.9) (Decrease)/increase in creditors and provisions (540.2) (323.5) 233.9 203 ---------- ---------- ---------- ----- December 31,

June 3 237.8 Cash inflow from decrease in liquid resources (2.2) (1.3) (173.8) ---------- ---------- ---------- Chang ---------- ---------- ---------- ---------------- ---------- Closing net debt ( June 30, 1998, exchange rate of 1 pound = US$1. ended ended December 31,

---------- ---------- ---------- ----------

Duty

UK 2,225.9 1,332.9 1,433.6 3,093.5

International 286.6 171.6 177.5 352.1

---------- ---------- ---------- ----------

2,512.5 1,504.5 1,611.1 3,445.6

---------- ---------- ---------- ----------

Operating profit

UK 225.8 135.2 146.7 322.2

International 52.9 31.7 31.5 60.3

Exceptional item -

demerger costs - - (0.7) (0.7)

---------- ---------- ---------- ----------

278.7 166.9 177.5 381.8

---------- ---------- ---------- ----------

(a) US dollar equivalents are provided for reader convenience at the

June 30, 1998, exchangeear ended

December 31, 1997. The accounts p's published financial statements for that

ATIC Group, Inc. ("ATIC"). The Company has takenhe merger of ATIC and the

Company as if itporation

tax rates of 31% for 1998 and 31.1% reflects the one-time benefit of deferred tax Gallaher Group Plc

We have reviewed this to report on the results of our review.

nalytical procedures to the underlying financial data, assessing whether accounting policies have been consistently applied, and making inquiries of management responsible for financial and accounting matters. The review excluded audit procedures such as tests of controls and verification of assets and liabilities, and was therefore substantially less in scope than an audit performed in accordance with Auditing Standards. Accordingly, we do not express an audit opinion on the interim financial information.

On the basis of our review:

- in our opinion the interim financial information has been

prepared using accounting policies consistent with those adopted

by Gallaher Group Plc in its financial statements for the year

ended December 31, 1997; and,

- we are not aware of any material modifications that should be

made to the interim financial information as presented.

PricewaterhouseCoopers Chartered Accountants, London September 9, 1998

Forward-Looking Statements

This announcement includes "forward-looking statements" within the meaning of section 27A of the US Securities Act of 1933 and section 21E of the US Securities Exchange Act of 1934. All statements other than statements of historical facts included in this announcement, including, without limitation, statements regarding Gallaher's future financial position, strategy, projected costs and plans and objectives of management for future operations, may be deemed to be forward-looking statements. Although Gallaher believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such explanations will prove to have been correct. Important factors that could cause actual results to differ materially from Gallaher's expectations ("cautionary statements") include but are not limited to changes in general economic conditions, foreign exchange rate fluctuations, competitive product and pricing pressures, the impact of excise tax increases, regulatory developments, the uncertainties of litigation, bootlegging and production or distribution disruptions, as well as other risks and uncertainties detailed in this announcement. All forward-looking statements attributable to Gallaher or persons acting on its behalf are expressly qualified in their entirety by the cautionary statements.

Gallaher Group Plc

Differences Between UK and US Generally Accepted Accounting Principles

The Group prepares its financial information in accordance with generally accepted accounting principles in the United Kingdom ("UK GAAP") which differ from those generally accepted in the United States ("US GAAP"). The following statements summarize the significant adjustments which reconcile profit on ordinary activities after taxation and equity shareholders' funds under UK GAAP to the amounts which would have been reported had US GAAP been applied in respect of the six months ended June 30, 1998.

Six months ended

June 30, 1998

Note US$m (a) m pounds Profit on ordinary activities after tEquity shareholders' Funds Noted assets for capitalized interest  (c) 7.3 4.4

Increase in non-cu 11.7

---------- ---------- Equity shareholders' funds under ion costs

Under UK GAAP, pension costs are determined in accordance with the UK Statement of Standard Accounting Practice ("SSAP") No. 24, with costs being expensed over employees' working lives. Under US GAAP, pension costs are determined in accordance with the requirements of the Statements of Financial Accounting Standards ("FAS") Nos. 87 and 88. US GAAP requires valuation of plan assets and obligations based on the fair value of plan assets and assumed discount rates in measurement of plan objectives. UK GAAP requires valuation based on actuarial long-term assumptions of both asset values and expected rate of return on liabilities. Gains and losses under US GAAP are amortized on a straight-line basis whereas under UK GAAP, these items are amortized as a level percentage of pensionable pay.

(b) Hyde closure provision

Under UK GAAP, the Hyde closure provision included an amount for additional depreciation as permitted by SSAP No. 12 (revised). Under US GAAP there is no impairment as described under FAS No. 121.

(c) Capitalization of interest

Under US GAAP, interest incurred as part of the cost of constructing fixed assets is capitalized and amortized over the life of the qualifying assets in accordance with FAS No. 34. In accordance with common UK practice, Gallaher does not capitalize such interest in its financial statements.

(d) Deferred taxation

Under UK GAAP, deferred taxation is only accounted for to the extent that it is probable that taxation liabilities or assets will crystallize in the foreseeable future. Under US GAAP deferred taxation is accounted for on all temporary differences and a valuation allowance is established in respect of those deferred taxation assets where it is more likely than not that some portion will not be realized.

(e) Ordinary dividends

Under UK GAAP, ordinary dividends and related ACT are provided in the financial statements in the period in which they are proposed by the Board. Under US GAAP, dividends and related ACT are not provided for until declared.

Gallaher Group Plc Year 2000

Many computer systems and electronic devices were designed only to recognize the final two digits of a year and, as a consequence, unless these systems or devices are modified or replaced, theyrom its suppliers and others as to their compliance and expects to have completed the entire process by the end of 1998, at a cost of some 1.5m pounds, most of which has already been incurred. These costs include internal charges and replacement expenditure, where specifically related to obtaining year 2000 compliance.

Based on this review, Gallaher does not expect that the year 2000 issue will have a material impact on its financial condition or results of operation, although, due to the interdependent nature of information systems, the Group could be adversely affected by the failure of other companies to address this issue adequately.

Euro

On January 1, 1999, the currencies of certain Member States of the European Union will cease to exist as such and will be replaced by the euro. The UK is not, however, a participating Member State and the pound sterling will not be replaced by the euro on January 1, 1999, although it may be replaced by the euro on a later date. Notwithstanding that the pound sterling will not cease to exist after January 1, 1999, Gallaher is likely to incur payment obligations and receive payments after that date denominated in euro as a consequence of transactions it enters into with suppliers and other parties located within participating Member States.

Gallaher has reviewed its information systems and believes that by October, 1998, its information systems will be able to manage euro denominated trathe euro in January, 1999, will not have a material adverse effect on its business.

Litigation and Regulation

As at September 4, 1998, Gallaher is involved as defendants in 17 cases in the UK, where 43 plaintiffs seek damits have been issued against Gallaher, but, to date, none has been served. Although it is not possible to pretion or claim has been settled in favor of a plaintiff in any such action or claim in the UK or the Republic of Ireland.

During the period, the European Parliament approved the European Directive banning tobacco advertising and spos tobacco strategy that it is planning to publish by the end of 1998.

CONTACT: e on the Internet

with Hyperlinks to your home page.

URL: http://www.businesswire.com