Reynolds American. Investor Day, November 14, 2011

Transcription

1 Reynolds American Transforming Tobacco Investor Day, November 14, 2011

2 Agenda Introduction Morris Moore - Investor Relations, RAI Overview Daan Delen - President and CEO, RAI Financial update Tom Adams - Chief Financial Officer, RAI FDA update Jeff Gentry - EVP, Operations and Chief Scientific Officer, R.J. Reynolds Litigation update Mark Holton General Counsel, RAI Business and brand equity-building update Andrew Gilchrist Pres. and Chief Commercial Officer, R.J. Reynolds Brice O Brien - EVP, Consumer Marketing, R.J. Reynolds Q&A / Closing remarks

3 Forward Looking Information This presentation contains forward-looking information. Future results or events can be impacted by a number of factors that could cause actual results to be materially different from our projections. These factors are listed in RAI s third-quarter 2011 earnings release and in the company s SEC filings. Except as provided by federal securities laws, RAI is not required to publicly update or revise any forwardlooking statement, whether as a result of new information, future events or otherwise. Web Disclosure RAI s website, is the primary source of publicly disclosed news about RAI and its operating companies. Those wishing to stay on top of company news can sign up for alerts by going to Shareholder Tools in the website s Investors Section.

4 Adjusted vs. GAAP RAI management uses adjusted (non-gaap) measurements to set performance goals and to measure the performance of the overall company, and believes that investors understanding of the underlying performance of the company s continuing operations is enhanced through the disclosure of these metrics. Adjusted (non- GAAP) results are not, and should not be viewed as, substitutes for reported (GAAP) results. A reconciliation of GAAP to Adjusted results is at the end of this presentation.

5 Overview Daniel M. Delen President and CEO Reynolds American

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7 $2.5 Billion Share Repurchase Program

8 Transformation RAI and its operating companies have transformed their businesses Restructured, streamlined organization Strengthened core cigarette business Entered moist-snuff category Pioneered U.S. snus category Introduced dissolvable tobacco products Exploring nicotine replacement therapy opportunities Leading innovation in tobacco

9 RAI Vision for Long-Term Growth

10 Driving Innovation Getting ahead of the curve amid shifting consumer preferences ensures sustainability Product differentiation offers a competitive advantage

11 Leading Innovation Who we are What the consumer sees, tries and buys

12 Migration Strategy Encourage adult smokers to switch to smoke-free tobacco products Aligns with consumer preferences and society s expectations Desire for new alternatives Fewer places to smoke Harm reduction Opportunity for profit / share growth Higher-margin products

13 The Key Elements Are In Place

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15 RAI Growth Model Focus on distinct brands, equity building Broad range of products and price points Effective cost management Redeployment of resources to growth areas Superior consumer and customer engagement Leveraging innovation across categories

16 Cigarettes Clearly defined brand portfolio Great brands Highly differentiated entries at each price point Focused on equity building and innovation Premium Super premium Value

17 Moist Snuff Growth leader in growing, high-margin category Defined brand portfolio Strong, differentiated entries at each price point Focused on equity building Value Premium

18 Snus Leader in growing U.S. snus category Offers convenience and new opportunities to enjoy tobacco Appeals to smokers and moist-snuff users

19 Dissolvables Modern smoke-free concept attracting strong consumer interest Developing new platforms that meet changing consumer preferences Broader demographic appeal

20 Nicotine Replacement Therapy Exploring new markets for Niconovum s innovative NRTs

21 Growth Highlights Industry s two fastest growing premium cigarette brands YTD Camel and Natural American Spirit No. 1 value brand Pall Mall No. 1, and fastest growing, moist-snuff brand Grizzly No. 1 in growing snus category Camel SNUS

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23 Productivity Aligning cost structure with business needs Embedded in organization s DNA Results reflected in margin improvement Simple, Bold, Focused

24 Productivity Three broad categories Significant facilities or staffing changes Outsourcing / eliminating non-core activities Pricing and promotional simplification and efficiencies

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26 High Performing Culture Talented people are key to our success Focused on talent development and succession planning Depth of management

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28 Doing the Right Thing Heightened focus on corporate social responsibility initiatives CSR integrated across RAI s operating companies Current CSR initiatives available online CSR makes good business sense Mitigates risk Aligns with stakeholder expectations

29 Doing the Right Thing Member of Dow Jones Sustainability North America Index for 4 th consecutive year Independent verification of RAI s approach to delivering economic, environmental and social performance

30 Strategy Payoff Meets changing consumer preferences and societal expectations Supports long-term sustainability through product and price diversity Drives higher margins and earnings Increases shareholder value

31 External Landscape Economy Protracted weakness High unemployment High energy prices Pressure on tobacco consumers disposable income

32 External Landscape Taxes Low likelihood of a federal tobacco tax increase in near term State excise tax increases lower than expected in 2011 Only two states have raised cig. taxes One state actually decreased cig. tax Estimated 2011 SET increase of 1 or 2 cents Expect moderate increases in 2012

33 External Landscape NPM Arbitration is under way for 2003 dispute Discovery process is completed Diligently working through the process Regulation Meeting FDA requirements while successfully competing in marketplace Litigation Effectively managing litigation risk

34 Recent Developments $2.5 billion share repurchase program Dividend increase Pension accounting change Revised 2011 adjusted EPS* $2.77 to $2.82 * Adjusted EPS excludes implementation and integration costs, tax items, and the Scott and Engle litigation charges.

35 Financial Highlights Solid increase in adj. EPS over past 5 years Growth in adj. operating margin Significant cash flow Strong balance sheet

36 Total Shareholder Return 94.6% 68.5% 26.3% 38.3% 8.1% 1.3% 1-Year 3-Year 5-Year S&P 500 RAI Through October 31, 2011 Source: Bloomberg

37 A Compelling Investment Tobacco category extremely resilient despite multiple challenges Economic downturn Litigation Regulation Taxation

38 A Compelling Investment RAI offers Track record of successfully managing through challenges Well-positioned brand portfolio Diversification across tobacco Significant cash flow, with strong dividend Financial flexibility

39 RAI Summary Continues to deliver strong performance while navigating challenging landscape A solid foundation for profitable growth over the long term Transforming Tobacco makes commercial sense and it s the right thing to do Consistent strategy for returning excellent shareholder value

40 Financial Update Thomas R. Adams EVP and CFO Reynolds American

41 Financial Philosophy Disciplined, consistent approach to increasing shareholder value Focused on cost management / strong balance sheet - Supports Investment grade credit ratings - Provides financial flexibility Committed to - 80 percent dividend payout - Identifying additional opportunities for returning value to shareholders

42 RAI 2011 YTD Performance Nine-month adjusted results Change Adj. Operating Income $ 1,978 $ 1, % Adj. Net Income $ 1,149 $ 1, % Adj. EPS $ 1.96 $ % Adjusted results exclude 2011 impact of charge for Scott lawsuit, accruals for the four Engle progeny lawsuits, implementation and integration costs, and tax items, as well as 2010 charges for plant closings, implementation and integration costs, changes in federal health-care laws and Canadian governments settlements. Reconciliation of GAAP to Adjusted results is in Appendix 1.

43 RAI Adjusted Operating Margin 35% 30% 30.6% 25% 20% Q11 YTD Reconciliation of GAAP to Adjusted results, including specific adjustments for each year, is in Appendix 1.

44 R.J. Reynolds YTD Results Nine-month adjusted results Change Adj. Operating Income $ 1,620 $ 1, % Adj. Operating Margin 29.3% 28.8% 0.5 pts. Adjusted results exclude 2011 impact of charge for Scott lawsuit, accruals for Engle lawsuits, implementation and integration costs, and tax items, as well as 2010 charges for implementation and integration costs, changes in federal health-care laws and Canadian governments settlements. Reconciliation of GAAP to Adjusted results is in Appendix 2.

45 American Snuff YTD Results Nine-month adjusted results Change Adj. Operating Income $ 258 $ 271 (5.1)% Adj. Operating Margin 53.2% 51.3% 1.9 pts. Adjusted results exclude 2011 impact of Lane, Limited sale, and implementation and integration costs, as well as 2010 charges for implementation and integration costs. Reconciliation of GAAP to Adjusted results is in Appendix 3.

46 Additional Financial Highlights Pension Share repurchase Dividend Debt

47 Pension Strategy Ensure plans are well funded Shifting asset allocation to reduce volatility Reducing long-term return assumption

48 Pension Accounting Change Rationale Aligns with fair value accounting concepts More transparent Better reflection of operating results Reflects current market returns, interest rates and health-care cost experience No impact on cash flow or funding requirements

49 Pension Accounting Change Change will Recognize market-based gains and losses in the year incurred Utilize a corridor Update prior years financials to be consistent with new policy

50 Pension Accounting Change (dollars in millions, except EPS) Full Year Full Year Q3 YTD 2011 Previous Adjusted Operating Income $ 2,398 $ 2,549 $ 1,978 RJRT American Snuff Other/Corporate Revised Adjusted Operating Income $ 2,435 $ 2,672 $ 2,108 Previous Adjusted EPS $ 2.32 $ 2.49 $ 1.96 Accounting Change Revised Adjusted EPS $ 2.36 $ 2.63 $ 2.09

51 New Share Repurchase Program Announced Nov. 14, 2011 $2.5 billion over two-and-a-half years Over 10 percent of current market cap BAT will participate

52 Dividend Policy is 80 percent of net income payout Increased dividend 14.3 percent in 2011 Primary vehicle to return value to shareholders

53 Attractive Dividend $2.50 Dividends Paid $2.12 *$2.24 $1.50 $1.38 $1.60 $1.70 $1.73 $1.84 $0.95 $1.05 $ Q12 *1Q12 Annualized

54 Favorable Debt Structure Investment grade credit ratings Total debt level of $3.5 billion Low leverage at 1.3x debt to EBITDA Target 1.5x to 2.5x Repaid $900 million over past three years Average interest rate 5.9 percent Average maturity 6.6 years Target less than 20 percent maturing in any year

55 Debt Maturity Profile $900 Millions $685 $775 $700 $600 $450 $450 $300 $200 $250 $

56 RAI Revised Adjusted EPS Guidance Full-year outlook - $2.77 to $2.82 Growth of 5.3% to 7.2% Excludes: Implementation and integration costs Tax items Scott charge and Engle accruals Asset impairment charges Pension mark-to-market adjustments Mid to high single-digit percentage growth over the mid term

57 Summary RAI remains a compelling investment Maintains strong balance sheet and cash flow Increasing earnings and margin Committed to returning shareholder value

58 FDA Update Jeffery S. Gentry EVP, Operations and Chief Scientific Officer R.J. Reynolds Tobacco Co.

59 Key Principles RAI and operating companies committed to FDA compliance Science-based regulatory decisions Comprehensive harm-reduction strategy Uniform regulatory enforcement Industry engagement and timely guidance

60 Key Milestones Achieved Manufacturer user fees (Sept. 2009) Facility and product registration (Feb. 2010) Submission of additives by brand (June 2010) Marketing / advertising restrictions, including smokeless packaging warnings (June 2010) Substantial equivalence (SE) reports (Mar. 2011) TPSAC report on menthol (Mar. 2011) Health-related and dissolvable tobacco document submissions (on-going)

61 Key Upcoming Requirements FDA announced inspections of registered facilities (started Oct at least once every 2 yrs.) TPSAC report on dissolvable tobacco (Mar. 2012) Harmful / potentially harmful constituents list (April assumed) Requirements to assess and review modified risk tobacco products (April 2012) Good manufacturing practices (GMP) (no earlier than June 2012) Graphic health warnings on cigarettes (Sept. 2012)

62 Menthol Review TPSAC concluded review March 2011 FDA s assessment submitted to external review panel in July (expect results to be made public by end of 2011) FDA preliminary assessment and external panel review to be subsequently posted in Federal Register FDA will announce next steps

63 Dissolvable Tobacco Review TPSAC review began July 21, 2011 Report expected March 2012 R.J. Reynolds participating in FDA process Anticipate a process similar to menthol Encouraged that harm reduction is major part of discussion

64 TPSAC Changes Two voting positions currently open Two temporary voting positions for evaluation of dissolvables until nominations are approved Nominations also being sought for other positions

65 Product Approval Process Pre-February 2007 Products in market and unchanged are grandfathered Can remain in market February 2007 March 2011 New or changed products require SE filing prior to March 22 Can remain in market unless and until FDA declares not SE Post-March 2011 New or changed products require pre-market clearance from FDA Pathways to market are SE, SE Exemption Request, Pre-market Tobacco Product Application (PMTA), or Modified Risk Tobacco Product (MRTP)

66 FDA / NIH Study Large-scale, national study of tobacco users to monitor and assess behavioral and health impacts of new government tobacco regulations Termed the Tobacco Control Act National Longitudinal Study of Tobacco Users Investigators will follow more than 40,000 users of tobacco products and those at risk for tobacco use ages 12 and older Wide-ranging focus

67 Citizens Petition R.J. Reynolds and ASC petitioned FDA on smokeless warning in July, 2011 From not a safe alternative to cigarettes To presents substantially lower risk to health than cigarettes Significant science-based document Process provides for comments and 180-day response from FDA

68 Cigarette Graphic Warning Labels Nine graphic warnings announced Top 50 percent front and back of pack 20 percent coverage of advertising pieces FDA data show minimal-to-no impact on smoking intent Lawsuit filed August 16, 2011

69 Summary Industry still in a period of uncertainty FDA will take time to build knowledge base The focus remains on: Compliance with on-going statutory obligations Work streams to address future regulatory initiatives Agency-stakeholder engagement

70 Litigation Update Martin L. Holton EVP and General Counsel Reynolds American

71 I know where I should be and I m gonna make it there - Blues artist Joe Bonamassa

72 10 Years of Progress Category YTD Individual S&H Health Care Reimbursement 62 3 Antitrust 39 1 Class Actions West Virginia IPIC 1, * Excludes Engle and Broin Progeny

73 Favorable Docket Trend YTD Dismissals Filings *Excludes Engle and Broin Progeny

74 Broin and Engle Progeny Overview Broin Progeny Plaintiff count at its highest 3,168 (2,585 remaining) : 10 trials 7 defense, 2 mistrials, 1 plaintiff Engle Progeny Plaintiff count at its highest - 12,482 (7,893 remaining) 2009 to date: 55 trials 15 defense, 13 mistrials, 26 plaintiff, 1 dismissed during trial

75 Engle Progeny Pre Trial success rate 41% 55% Total average damage award $15.3M $1.7M Average compensatory damage award $2.8M $0.9M Average punitive damage award $12.5M $0.8M Entitlement to punitive damages 69% 36% Allocation of fault to R.J. Reynolds 48% 31% Allocation of fault to plaintiff 38% 56%

76 Engle Progeny: Appellate Action Dispute over how Engle findings should be applied in individual suits Conflict: 1st DCA Martin: Affirmed trial court Petition of writ of certiorari to U.S. Supreme Court due December 16 4th DCA J.L. Brown: Rejected certain conclusions of the 1st DCA Motion to certify to FL Supreme Court denied October 21 11th Circuit - Bernice Brown: Favorable decision on state law Did not address due process arguments Waggoner Federal Court Hearing on due process September 7; awaiting decision Trial scheduled for February 6, 2012

77 Other Litigation West Virginia IPIC Trial began October 19 Mistrial granted on November 8 DOJ NO financial penalties Removal of brand descriptors Done Publish corrective communications TBD Lights Class Actions 8 Lights class actions pending (PM has 18) R.J. Reynolds cases have limited activity Star Defense verdict for R.J. Reynolds Court of Appeals affirmed no infringement and reversed invalidity findings R.J. Reynolds motion for rehearing pending

78 FDA Litigation First Amendment Challenging constitutionality of certain provisions of FDA law Conflicts Several members of FDA s Tobacco Products Scientific Advisory Committee (TPSAC) have/had a prohibited conflict of interest Graphic warnings Challenging constitutionality of mandated graphic warnings on ads and packs

79 FDA Litigation First Amendment Restricting rights to engage in commercial speech, and commandeering packaging and advertising for anti-smoking messages Court granted summary judgment in R.J. Reynolds favor on color/graphic ban, statements regarding regulation, prohibition by and compliance with FDA Court granted summary judgment in favor of FDA on all other counts, including the ability to make modified risk statements and imposition of new and larger heath warnings Oral argument before Sixth Circuit in July; decision pending

80 FDA Litigation Conflicts/Fair Balance Committee members have/had multiple conflicts of interest including testifying as paid plaintiff experts against R.J. Reynolds and being paid by pharmaceutical companies R.J. Reynolds and the other plaintiffs filed second amended complaint to address FDA s refusal to produce all documents generated by the TPSAC in preparation of the menthol report Government s motion to dismiss amended complaint filed on September 8 R.J. Reynolds opposition filed October 20 No hearing date scheduled

81 FDA Litigation Graphic Warnings New graphic warnings violate manufacturers rights under the First Amendment Compels speech that reflects government s antismoking message which is per se unconstitutional Burdens the right to engage in protected commercial speech without advancing any legitimate government interest Motion for preliminary injunction granted on November 7 Summary judgment briefing schedule: Gov t brief filed October 21 Plaintiffs opposition due November 18 Gov t reply due December 9

82 NPM Adjustment Arbitration MSA payments approximately $2B/year NPM Adjustment R.J. Reynolds experienced market-share loss due to NPMs MSA was a significant factor contributing to loss Total at issue = $6.64B Industry ($3.9B R.J. Reynolds) 2003 NPM Adjustment R.J. Reynolds share - $615 million Common issues hearing scheduled for April 2012 State-specific hearings likely to begin mid-2012

83 2012 Outlook Docket will be Engle-centric, including further evolution of appeals State-specific NPM arbitrations begin mid-year

84 I know where I should be and I m gonna make it there - Blues artist Joe Bonamassa

85 BREAK Investor Day, November 14, 2011

86 Business Update Andrew D. Gilchrist President and Chief Commercial Officer R.J. Reynolds Tobacco Co.

87 Cigarettes

88 Cigarette Industry Dynamics Weak economy driving volume declines and down trading Overall volume decline of about 3.5 to 4 percent in 2011 Environment remains highly competitive but still rational

89 Cigarette Industry - Premium vs. Value 80% 70% 60% 50% 40% 30% Traditional Brand Segmentation Premium Price Value 70.7% 29.3% 20% YTD'11 Source: MSAi Shipments to Wholesale

90 Cigarette Industry - Premium vs. Value 80% 70% 60% 50% 40% 30% Premium* Price Value Retail Price Segmentation 60.8% 39.2% 20% YTD'11 *Includes products that sell at a 90+ index to premium-priced brands Source: MSAi Shipments to Wholesale

91 Premium Category Market Share Change 0.03 (YOY 3Q11) Newport Menthol Camel Natural American Spirit Marlboro Ex-Sp. Blend

92 Value Category Market Share Change (YOY 3Q11) Maverick Pyramid L&M Newport Non- Menthol Pall Mall Marlboro Sp. Blend

93 Pipe / Roll-Your-Own Trend 40 Millions of pounds Est. RYO Pipe Source: TTB Removals (2011 est. - 8/11 YTD actuals, annualized)

94 Cigar Trends 12 Billions Est. Small Large Source: TTB Removals (2011 est. - 8/11 YTD actuals, annualized)

95 Cigarette Equivalent Impact Roll-Your-Own (Pipe-Your-Own) and Cigars (Little & Big) experienced significant growth 2009 to 2011 which is impacting cigarette industry volume Share of Market Equivalent 2011 Est. Change vs. Prior Year Pipe / Cigarette RYO Little / Big Cigars Total Share of Market

96 R.J. Reynolds

97 Market Share Ex-Private Label 33% R.J. Reynolds Cigarette Market Share Total 28% 27.5% Ex-Private Label 27.4% 23% Q11 YTD Source: Information Resources Inc./Capstone

98 Volume Shift to Growth Brands Q11 Growth Brands 25% Other Brands Other Brands Growth Brands 60%

99 Camel

100 Camel Cigarettes Steady market share in tough market for premium-priced products 9% 8% 7.9% 7% 6% Q11 Source: Information Resources Inc./Capstone

101 Camel 14% 13% 12% 11% 10% 9% Camel Share of Premium 12.7% 8% Q11 YTD Source: Information Resources Inc./Capstone

102 Camel Menthol Menthol share doubled since % 2.5% 2.4% 2.0% 1.5% 1.0% 0.5% Q11 Source: Information Resources Inc./Capstone

103 Camel Menthol Performance Percent of Camel in Menthol Non-menthol Non-menthol Menthol 6% Menthol 30% Q11

104 Camel Share of Market

105 Camel Highlights Growth through innovation Strong menthol opportunity Strong demographics, strong fundamentals

106 Pall Mall

107 Pall Mall Nation s No. 1 traditional value brand by factor of 4 Market share moderating amid intensified competition at Pall Mall s price point 9% 8.6% 7% 5% 3% 1% Q11 Source: Information Resources Inc./Capstone

108 Pall Mall Share of Market

109 Pall Mall Highlights Retention rate still about 50 percent Smokers tend to stick with Pall Mall because of high quality Long-term ability to further enhance brand s profitability Sustainable share, weak economy favors value-priced brands Evaluating additional growth opportunities

110 Snus

111 Snus Industry Volume 700 MM Pouches Est. Source: MSAi Shipments to Retail

112 Snus 100% Share by Brand 80% 60% 40% 20% 0% 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 Camel Marlboro Skoal Source: MSAi Shipments to Retail

113 Camel SNUS Highlights Very pleased with performance Large number of consumers interacting with Camel SNUS, but low share of requirement New larger-pouch styles appeal to current Snus users who want more flavor and moist-snuff users who want a spit-free convenience Continue to evaluate opportunities to enhance product, profitability

114 Productivity SKUs reduced by more than 80 percent, including elimination of private-label business Cigarette manufacturing consolidated from 3 facilities to 1 Leveraging RAI Services Company for support

115 Productivity Leveraging consumer and trade marketing expertise across R.J. Reynolds and American Snuff Outsourcing non-core activities Eliminating non-essential activities

116 Margin Trend 35% 30% R.J. Reynolds Adjusted Operating Margin 31.2% 25% 20% Q11

117 Santa Fe Natural Tobacco Company

118 NAS Share Trends Steady share growth 1.2 % 1.1% 0.7 % 0.2 % 2Q09 3Q11 Source: Information Resources Inc./Capstone

119 Strong Geographic Development

120 Santa Fe Natural Highlights Leading super-premium cigarette segment Natural American Spirit (NAS) unique offerings driving strong volume, share and earnings growth

121 Moist Snuff

122 Moist-Snuff Industry Dynamics Volume growing about 5 percent in 2011 Intensely competitive environment Premium-priced brands with value-price line extensions Aggressive discounting of low-priced brands

123 Industry Moist-Snuff Volume 1,400 Millions of cans Shipments to Retail 1,200 1, Est. Source: MSAi Shipments to Retail

124 Industry Moist Snuff - Premium vs. Value 65% 55% Traditional Brand Segmentation Premium 52.5% 45% 35% Value 47.5% YTD'11 Source: MSAi Shipments to Retail

125 Industry Moist Snuff - Premium vs. Value 65% 55% Premium Retail Price Segmentation 52.5% 45% 35% Value 47.5% YTD'11 Source: MSAi Shipments to Retail

126 Share Trends by Company Share of Shipments 60% 50% 40% 30% USST ASC 55.2% 30.8% 20% 10% SMNA/Swisher 12.9% YTD 11 Source: MSAi Shipments to Retail

127 Top 3 Moist-Snuff Brands 30% Retail Share of Market 25% Grizzly Skoal 27.5% 26.5% 22.8% 20% Copenhagen YTD 11 Source: A.C. Nielsen

128 American Snuff

129 Total Market Share 35% American Snuff Moist-Snuff Market Share 31.4% 30% 25% 20% Q11 YTD Source: A.C. Nielsen

130 Grizzly

131 Grizzly Growing share in highly competitive market Market Share 30% 27.5% 20% 10% 0% Q11 YTD Source: A.C. Nielsen

132 Grizzly 45% 39% Share of Flavor Segment 35% 25% 31% 28% 15% 13% 5% 3Q11 Wintergreen Straight Mint Natural

133 Trade Marketing Benefits Expanded R.J. Reynolds field trade-marketing organization serving ASC offers Increased retail call frequency Store-level business performance information Expanded database / direct-mail capabilities Increased selling time / less administrative time Reduced product out-of-stocks

134 Moist-Snuff Retail Contract Program launched February 2011 Better distribution and retail presence Discounting used as incentive Currently contracted in outlets representing more than 70 percent moist industry volume ASC up 2.2 share points in contracted outlets EDLP in effect in 18 states covering 27 percent of moist industry volume

135 Moist-Snuff Pricing Price Gap Comparisons $5.00 $4.50 $4.62 Premium $4.16 $4.00 $3.50 $3.00 Grizzly $2.96 $2.50 $2.00 $1.50 $2.31 $1.58 1Q08 Low Price $1.98 3Q11

136 Grizzly s Share Change Grizzly has gained 2+ share points in 17 states

137 Grizzly Highlights A distinctive brand Market leader Only 12 styles Loyal franchise Strong consumer demographics Benefiting from new retail contracts and trade marketing organization

138 Kodiak 9.0% Share of Premium (Retail Price Segmentation) 8.8% 8.5% 8.0% 7.5% 1Q10 Q4 '10 3Q11 Source: A.C. Nielsen

139 Kodiak Highlights Only 4 SKUs True premium-priced product, no value-priced styles Steady volume performance

140 New Facilities Modern, more efficient manufacturing to meet growing demand and anticipated FDA GMP requirements

141 Summary Operating companies well positioned for long-term growth Camel, Pall Mall delivering solid performance in challenging environment Grizzly growth outpacing category NAS increasing volume and share Relevant innovation transforming tobacco category

142 Brands Performance J. Brice O Brien EVP, Consumer Marketing R.J. Reynolds Tobacco Co.

143 Growth Brands Strategy Building strong consumer equity Delivering consumer and share growth Leading innovation into new categories

144 Agenda Camel Pall Mall Grizzly Natural American Spirit Summary

145 Camel A Total Tobacco Brand

146 Camel video playing Webcast will resume shortly

147 Camel Cigarette Growth Momentum driven by growth of menthol Menthol is 30 percent Camel market share 9% 7.9% 6% 5.1% 0.1% 2.4% 3% 5.0% 5.5% 0% Q11 Source: Information Resources Inc./Capstone

148 Camel Equity Century of innovation The expert in flavorful tobacco experiences Bold, irreverent wit Adventurous image

149 Camel Consumers 2011 YTD ASU30 share 17% ASU30 switching +7% ASU30 consumers 41%

150 Camel Consumers... Different Innovators, first to try new things Creative and clever Progressive Stand out in a crowd

151

152 Camel Menthol Growth Share of Market 2.5% 2.4% 2.0% 1.5% 1.0% 0.5% 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11 Source: Information Resources Inc./Capstone

153 Crush Bold Expansion Q3 Broadened interest among adult smokers Latest share.4 Incremental to Crush and Camel Menthol

154 Capsules: Strong ASU30 Momentum Sustaining growth in competitive environment ASU30 growth engine 7% 6.3% 6% 5.5% 5% 4% 3% 2% 1.5% 2.2% 1% 0%

155 Leading Modern Smoke-Free Innovation Growth with focus on Innovation to increase choice and acceptance Consumer education and awareness Reinforce consumer enjoyment Marketing programs aimed at full conversion

156 Camel SNUS Expanded nationally in 1Q09 New packaging, two new styles introduced in 3Q10

157 Camel SNUS Steady growth since launch Broad consumer and category appeal Higher ATU30 profile than cigarettes or moist snuff Opportunities for growth Expanded range and innovation Accelerating migration of adult smokers

158 Camel SNUS Growth 2.3 percent share of moist snuff Camel has 70 percent share of snus market Camel SNUS Shipment to Wholesale Volume (mm pouches) % YOY Growth 1Q-3Q Q-3Q 2011

159 Camel SNUS Interest High interest in the snus proposition Incidence % Adults 18+ Adults Cigarettes Snus Moist snuff

160 Camel SNUS Growth Potential Adult Snus Consumers Full-Time Snusers Part-Time Snusers Percent of all snusers 21% 79% Days/week using snus Pouches/day Weekly consumption 4.5 cans 0.4 cans

161 Consumer Communication Switch Messaging

162 Expand Choice and Variety

163 Pleasure Switch Challenge

164 Pleasure Switch Challenge

165 Pleasure Switch Challenge

166 Switching to Smokeless is Occurring Results Percent who said YES to switching 7% Percent who said they will switch, but will take some time 17%

167 Camel SNUS Summary No. 1 snus brand >70 percent share of snus market 2.3 share of moist snuff 16 percent share of smokeless pouch segment Smoker switching is having an impact Sustainable growth and upside potential

168 Camel s Dynamic Consumer Marketing Superior consumer engagement Integrated promotions creating consumer excitement and involvement Communicating the attitude of the brand

169 Focus On Equity Building Camel Hump Day Growth of consumer interaction Keeping Camel top of mind Hump Day = Wednesday Hump Day = Camel Strengthening Camel s image and personality

170 Promotional Packaging

171 Direct Mail Support

172 Direct Mail Support

173 Age Restricted Website Integrated Campaign

174 Focus On Equity Building Camel Capsule Institute Building awareness of innovative technology Engaging consumers in a fun way Platform for menthol communication

175 Age Restricted Website Integrated Campaign

176 Promotional Packaging

177 Camel Consumer Engagement More than 3 million consumer engagements Face-to-face conversations Age-verified adult tobacco consumers

178 Positive Consumer Results Average Weekly Web Visits Hump Day Web Relaunch Break Free Adventure J-10 J-10 J-11 J-11

179 Camel Brand Summary Menthol momentum Leading innovation Building equity Gaining momentum on ATU30

180 Pall Mall

181 Pall Mall No. 1 traditional value brand by a factor of 4 Moderating market share amid intensified competition at Pall Mall s price point 9% 8.6% 7% 5% 3% 1% Q11 Source: Information Resources Inc./Capstone

182 Pall Mall Genuinely More Much more than a great price Highly differentiated from other value brands Superior quality More tobacco Longer lasting Premium heritage Contemporary packaging

183 Pall Mall Consumer Dynamics Switching into Pall Mall is 3 times that of switching out 16 Percent Switched To Switched From

184 Pall Mall Strengths Pall Mall continues to convert ~50 percent of trial to OU/UB Purchase Dynamics % Trial 20% 21% % Repertoire 9% 10%

185 Longer-Lasting Proposition Meaningful brand attribute Growing awareness leads to trial Longer Lasting 2011 YTD Extremely Important 54% Describes Pall Mall Very Well 28%

186 Growing Awareness and Trial

187 Pall Mall Summary Steady gains in market share and consumer growth Highly differentiated from other value offerings Focus on building awareness for trial and conversion Well positioned to compete and grow

188

189 NAS video playing Webcast will resume shortly

190 Natural American Spirit The Additive-Free Alternative

191 Natural American Spirit Cigarettes Share of Market 120% 100% 1.0% 80%.7% 60% 40% 20%.2%.4% 0%

192 The NAS Brand Essence The highest quality, additive-free natural tobacco products responsibly created & shared by the people of SFNTC.

193 Real Product Differentiation Additive-free natural tobacco 25% more tobacco Only cigarette with styles made with organic tobacco Sustainable growing programs Product range

194 Awareness and Trial PROMO CODE TryAmericanSpirit.com or call Offer for two 1 for $1 Gift Certificates good toward any Natural American Spirit pack or pouch purchase (excludes 150g tins). Not to be used in conjunction with any other offer. Offer restricted to U.S. smokers 21 years of age and older. Limit one offer per person per 12 month period. Offer void in MA and where prohibited. Other restrictions may apply. Offer expires 03/31/12. Natural American Spirit is a registered trademark of Santa Fe Natural T obacco Co. SFNTC

195 Perique and Menthol Range We use premium whole leaf, natural tobacco, and a lter containing granules infused with natural menthol to create a taste that s anything but ordinary. EXPERIENCE NATURAL AMERICAN SPIRIT with two packs for$ 2 PROMO CODE Offer for two 1 for $1 Gift Certificates good toward any Natural Ameri - can Spirit pack or pouch pur chase (excludes 150g tins). Not to be used in conjunction with any other offer. Offer restricted to U.S. smokers 21 years of age and older. Limit one offer per person per 12 month period. Offer void in MA and where prohibited. Other restrictions may apply. Offer expires 12/31/11. TryAmericanSpirit.com or call Natural American Spirit is a registered trademark of Santa Fe Natural Tobacco Company. SFNTC

196 US Grown Styles

197 The NAS Consumer Socially aware Informed brand aware and read labels Looking for responsible companies and authentic brands Involved evangelists thank you for your earth friendly attitudes to our mother earth, I wish every company had the same ideals as you do. Keep up the work and don't be discouraged, every leader in a trend will and have taken a lot of hard hits... -Wanitta G. NAS Consumer

198 Natural American Spirit Summary Double-digit growth Transforming tobacco naturally Building the brand through total proposition

199

200 Grizzly video playing Webcast will resume shortly

201 Grizzly Strengths Appeal goes beyond price Unique and different product Benchmarks at or better than premium Strong demographic profile Loyal consumer franchise

202 Grizzly Consumer Age Profile Grizzly Industry Index LA

203 Grizzly Consumer Age Profile Grizzly Industry Index LA

204 Grizzly Consumer Age Profile Grizzly Industry Index LA

205 Investment Increasing ATU30 Equity 6.0 Premium Leader 3Q Consistent quality can-to-can Has a taste I really like A long lasting product A good value for the money A premium quality brand

206 Investment Increasing ATU30 Equity 6.0 Premium Leader 3Q11 Grizzly 3Q Consistent quality can-to-can Has a taste I really like A long lasting product A good value for the money A premium quality brand

207 Investment Increasing ATU30 Equity 6.0 Premium Leader 3Q11 Grizzly 3Q10 Grizzly 3Q Consistent quality can-to-can Has a taste I really like A long lasting product A good value for the money A premium quality brand

208 Focus on Equity Building Tellin It Like It Is campaign underscores brand attitude

209 Grizzly Premium Natural

210 Focus on Key Natural Styles

211 Grizzly Summary Solid performance in challenging environment Strong and loyal consumer base Continues to build brand equity Focusing on growth within the Natural segment

212 Brands Summary Strong, well positioned and growing brands Grizzly strength and momentum in a challenging environment Opportunities for modern smoke-free products

213 BREAK Investor Day, November 14, 2011

214 Summary Daniel M. Delen President and CEO Reynolds American

215 Summary RAI and its operating companies have transformed their businesses Strong key brands Building brand equity Focusing on innovation External Environment Improving litigation trend Managing through FDA regulation Favorable excise tax environment

216 Summary Solid financial performance Increased earnings and margins Strong balance sheet and cash flow Ample financial flexibility Returning value to shareholders Excellent dividend growth Significant share repurchase program Outstanding total shareholder return

217 Q&A

218 Appendix 1 Reynolds American Inc. YTD 2004* Q 2011 GAAP Operating Income: $882 $1,459 $1,930 $2,288 $2,052 $1,775 $2,419 $1,753 The GAAP results include the following expense (income): B&W/Lane GAAP results 328 Proforma adjustments (128) Premerger B&W integration costs 35 Trademark impairment charges Restructuring charges Merger integration costs RAI settlements 50 Phase II growers'trust offset (69) (27) RAI returned goods reserve adjustment 38 Federal tobacco buyout assessment 81 (9) Loss on sale of assets 24 Implementation costs included in cost of products sold and selling, general and administrative expenses Scott lawsuit 139 Engle Progeny lawsuits 63 Asset impairment and exit charges 38 Goodwill impairment charge 26 Total adjustments Adjusted operating income $1,470 $1,846 $2,057 $2,353 $2,460 $2,398 $2,549 $1,978 Net Sales $8,323 $8,256 $8,510 $9,023 $8,845 $8,419 $8,551 $6,458 Operating margins: GAAP 10.6% 17.7% 22.7% 25.4% 23.2% 21.1% 28.3% 27.1% Adjusted 17.7% 22.4% 24.2% 26.1% 27.8% 28.5% 29.8% 30.6% includes proforma GAAP adjustments as if the merger of B&W/Lane had been completed on January 1, Data as previously reported, and not adjusted for the pension accounting change.

219 Appendix 2 R. J. Reynolds Tobacco YTD Q 2011 GAAP Operating Income: $854 $1,399 $1,682 $1,988 $1,805 $1,487 $2,074 $1,402 The GAAP results include the following expense (income): B&W/Lane GAAP results 311 Proforma adjustments (128) Premerger B&W integration costs 35 Trademark impairment charges Restructuring charges Merger integration costs RAI settlements 0 Phase II growers'trust offset (69) (27) RAI returned goods reserve adjustment 38 Federal tobacco buyout assessment 79 (9) Implementation costs included in cost of products sold and selling, general and administrative expenses Scott lawsuit 139 Engle Progeny lawsuits 63 Asset impairment charges 24 Total adjustments Adjusted operating income $1,375 $1,758 $1,797 $2,021 $2,062 $2,034 $2,124 $1,620 Net Sales $7,841 $7,723 $7,707 $8,022 $7,755 $7,334 $7,350 $5,533 Operating margins: GAAP 10.9% 18.1% 21.8% 24.8% 23.3% 20.3% 28.2% 25.3% Adjusted 17.5% 22.8% 23.3% 25.2% 26.6% 27.7% 28.9% 29.3% Includes proforma GAAP adjustments as if the merger of B&W/Lane had been completed on January 1, Segment data presented utilizes most recent data published for any historic year in 10-k. Historical data past 3 years does not include subsequent segment reporting adjustments. Data as previously reported, and not adjusted for the pension accounting change.

220 Appendix 3 American Snuff Co. YTD 2006* Q 2011 GAAP Operating Income: $181 $312 $232 $276 $322 $255 The GAAP results include the following expense (income): Proforma adjustments 110 Trademark impairment charges Restructuring charges Integration costs 12 Loss on sale of assets Implementation costs included in cost of products sold and selling, general and administrative expenses 20 3 Goodwill impairment charge 26 Total adjustments Adjusted operating income $303 $344 $374 $352 $374 $258 Net Sales $487 $670 $723 $673 $719 $483 Operating margins: GAAP 37.2% 46.6% 32.1% 41.0% 44.8% 52.7% Adjusted 62.1% 51.4% 51.8% 52.3% 52.0% 53.2% includes proforma GAAP adjustments as if the Conwood acquisition had been completed on January 1, Data as previously reported, and not adjusted for the pension accounting change.

221 Appendix 4 Reconciliation of GAAP to Adjusted Results (Dollars in Millions) (Unaudited) RAI management uses "adjusted" (non-gaap) measurements to set performance goals and to measure the performance of the overall company, and believes that investors' understanding of the underlying performance of the company's continuing operations is enhanced through the disclosure of these metrics. "Adjusted" (non-gaap) results are not, and should not be viewed as, substitutes for "reported" (GAAP) results. Three Months Ended Sept. 30, Operating Net Diluted Operating Net Diluted Income Income EPS Income Income EPS GAAP results $ 635 $ 367 $ 0.63 $ 662 $ 381 $ 0.65 The GAAP results include the following: Implementation costs included in cost of products sold and selling, general and administrative expenses Engle Progeny lawsuits Total adjustments Adjusted results $ 706 $ 411 $ 0.70 $ 686 $ 396 $ 0.68 Nine Months Ended Sept. 30, Operating Net Diluted Operating Net Diluted Income Income EPS Income Income EPS GAAP results $ 1,753 $ 1,024 $ 1.75 $ 1,852 $ 804 $ 1.38 The GAAP results include the following: Implementation costs included in cost of products sold and selling, general and administrative expenses Scott lawsuit Engle Progeny lawsuits Tax items - (16) (0.02) Asset impairment and exit charges Health-care subsidy tax charge Loss on discontinued operations Total adjustments Adjusted results $ 1,978 $ 1,149 $ 1.96 $ 1,931 $1,106 $ 1.89 Data as previously reported, and not adjusted for the pension accounting change.