Reynolds American Inc.
July / August 2015 1 Agenda
• Introduction – Morris Moore – Vice President of Investor Relations, RAI • Overview – Susan Cameron – President and Chief Executive Officer, RAI • Brand portfolio strategies and opportunities – Debra Crew – President and Chief Commercial Officer, R.J. Reynolds Tobacco • Financial update – Andrew Gilchrist – Chief Financial Officer, RAI • Closing comments / Q&A – Susan Cameron – President and Chief Executive Officer, RAI
2 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 second- quarter 2015 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 forward-looking statement, whether as a result of new information, future events or otherwise.
Web Disclosure RAI’s website, www.reynoldsamerican.com, is the primary source of publicly disclosed news about RAI and its operating companies. Those wishing to stay on top of company news are encouraged to sign up for email alerts on our website.
All brand references are for RAI’s operating companies’ brands 3 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.
4 Overview
Susan Cameron
5 The next stage in our transformation journey
Confidential Draft for Discussion Only 6 Our vision and strategy in this New World
7 We will achieve market leadership by transforming the tobacco industry
8 Driving innovation
Leading Redefining tobacco enjoyment change Reducing harm of smoking
Reducing youth tobacco use
Resolving controversial issues
9 Strong brands in key categories
Commercial Leaders in developing innovations strengths Efficiency and productivity gains
Superior consumer and trade marketing
Highly engaged talent base
10 Unique portfolio of iconic brands
The right deal at the Complementary geographic strengths right time Stronger competitive position
Increased scale and significant synergies
Significantly strengthens growth profile
11 Unique portfolio of iconic brands
Strong category positions
Strength across price points
Enhanced growth profile
Confidential Draft for Discussion Only 12 Strongest portfolio dynamics in the industry
• No. 2 brand in the U.S. • No. 1 menthol brand in the U.S.
• No. 3 brand in the U.S. • Growing market share in premium category
• No. 4 brand in the U.S. • Largest traditional value brand
• Fastest growing brand in the U.S. • Super premium
• No. 1 brand in the moist-snuff industry • Growing share and volume
• No. 1 e-cigarette brand in convenience / gas • Superior technology, expanding e-cig category
13 Proven track record of execution
Integration Experience
2009 Niconovum
2006 American Snuff
2004 Brown & 2002 Williamson Santa Fe Natural Tobacco
14 Returning excellent value • RAI’s strong total shareholder return among global peers
RAI 29% JTI 103% LO* 279%
JTI 23% RAI 92% RAI 271%
IMT 23% LO* 86% JTI 262%
LO* 22% MO 64% MO 217%
MO 22% S&P 500 61% S&P 500 122%
S&P 500 7% IMT 45% PM 116%
BATS 2% BATS 19% IMT 106%
PM 0% PM 5% BATS 98%
1 3 5 Year
Through June 30, 2015. * LO data through June 11, 2015. Source: Bloomberg 15 Brand portfolio strategies and opportunities
Debra Crew
16 Competitive landscape
New ‘Big 3’ represent: 89% of combustibles
91% of moist snuff
85% of snus
36% of e-cigarettes
17 Adult consumers reshaping tobacco
• Tobacco consumers (50 million) navigating challenging environment
• 46% open to change, looking for products that better suit their desires
• New cigarette alternatives creating an opportunity for trial and repeat purchase
18 Trends driving consumer choice
Seeking Demographics: Alternatives to Aging Cigarettes Multicultural
Menthol Value Hunting
19 Broad strategic plan for combustibles
20 Relevantly positioned
Macro-Trend Our Aligned Brands
Demanding Focused brands Authenticity Each with unique, meaningful heritage
Going Green Unrivaled focus on sustainability
Multicultural Strong growth among all key demographics
Pragmatic Consumption Great value equation with branded offerings
21 Competing from all sides
Non-Menthol Menthol
Unique brand proposition, High menthol credibility on trend with growing Diverse, loyal buyer base consumer sentiment Unique product Deep cultural connection Premium
An American classic with rich Highly differentiated heritage and mass appeal Surging menthol credibility
A great value and A great value and Value experience for the money experience for the money
22 Natural American Spirit – Tipping point
Share of market
1.8% 1.8 Accelerate awareness
1.4 Drive broader retail distribution
1.0 Elevate brand and values 0.6 2010 2011 2012 2013 2014 2015*
* YTD through June 30, 2015 Source: MSA, Inc. shipments to retail 23 Newport – Energize and reinforce
Share of market
14.0 13.3% Continue ASU30 momentum
13.0 Broaden product portfolio
12.0 Optimize retail impact 11.0 Increase ATC interaction 10.0 2010 2011 2012 2013 2014 2015*
* YTD through June 30, 2015 Source: MSA, Inc. shipments to retail 24 Camel – Position to thrive
Share of market
8.2% Optimize portfolio offerings
8.0 Elevate equity programming
Revamp, upgrade product families
Squarely position in largest segments 7.0 2010 2011 2012 2013 2014 2015*
* YTD through June 30, 2015 Source: MSA, Inc. shipments to retail 25 Pall Mall – Equity focus
Share of market
9.0 Increase proposition awareness, trial
7.9% 8.0 Reinforce quality/value proposition
7.0
Balance profitability and market share 6.0 2010 2011 2012 2013 2014 2015*
* YTD through June 30, 2015 Source: MSA, Inc. shipments to retail 26 Moist snuff
27 Grizzly – Continue growth
Share of market
32 30.6% Expand brand equity initiatives
30
28 Broaden product, pouch innovation
26 Enhance retail presence 24 2010 2011 2012 2013 2014 2015*
* YTD through June 30, 2015 Source: MSA, Inc. shipments to retail 28 Innovation pipeline
29 VUSE – Expand market lead
Evolve brand-building efforts
Broaden innovation portfolio
Enhance marketing capabilities
30 ZONNIC & Revo – Next-generation products
Leveraging consumer desire for alternative products
Continue learnings from marketplace
Aligns with tobacco harm reduction
31 Lorillard transaction
32 Transaction summary – What we bought
• Newport – #1 menthol brand in U.S., 2014 volume of 32.9 billion units – 12% premium menthol SOM, 1% value non-menthol SOM • Kent, True, and Old Gold brands (~0.25% SOM) • Additional 50,000 merchandizing contracts with retailers • Database of 5 million adult tobacco consumers • Added ~75 Lorillard employees, 28 manufacturing lines
33 Transaction summary – What we sold
• Winston, KOOL, Salem, and Maverick cigarette brands – 2014 volume of 17.8 billion units – ~7% SOM • blu eCigs electronic cigarette brand • Database of 3 million adult tobacco consumers • 10 manufacturing lines • All Lorillard facilities and remaining employees transferred
34 Shipments and share of cigarette market
2014 Annual Volume (B) 2014 Share of Market + 32% + 7.7 Share Pts 85.3 33.6 64.6 25.9
RAI OpCos RAI OpCos RAI OpCos RAI OpCos Pre-Transaction Post-Transaction Pre-Transaction Post-Transaction
Source: MSA, Inc. shipments to retail, 2014. 35 Complementary geographic strengths EAST RAI OpCos: 34.7
Newport: 18.9 Camel: 5.7 WEST MIDWEST RAI OpCos: 31.5 RAI OpCos: 33.3
Newport: 5.6 Newport: 10.4 Camel: 13.3 Camel: 8.7
SOUTH RAI OpCos: 34.8
Newport: 16.4 Camel: 5.2
Source: MSA, Inc. shipments to retail, 2014. 36 Improved positioning in strongest cigarette categories
% Premium Brands Mix % Menthol Brands Mix % % 80
70% 60 55% 70
60% 40 38% 60
50 20
40 0 RAI OpCos RAI OpCos RAI OpCos RAI OpCos Pre-transaction Post-transaction Pre-transaction Post-transaction
Source: MSA, Inc. 2014 37 Enhanced growth profile RAI Operating Companies’ Portfolio Market Share
Stand-Alone Pro Forma 2004 2014 2014
9% 25% 30%
70% 75% 91%
All other brands All other brands Camel, Pall Mall & NAS Newport, Camel, Pall Mall & NAS
Focus On Growth Brands
Source: MSA, Inc. 38 Transaction significantly strengthens cigarette brand profile 5-Year Retail Market Share Change
% % 30 -2 pts 36 +3 pts 28% 28 34 34% 26% 26
32 24 31%
30 22
20 28 2009 2014 2009 2014 RAI OpCos Pre-Transaction RAI OpCos Post-Transaction
Source: MSA, Inc. shipments to retail 39 Route to market agreement (RTMA)
• Provides for 5-month standstill and retail space restrictions in following year • No restrictions 18 months post-merger
Months 1- 5 Months 6 - 17 • RJRT operates Lorillard contracts • New RJRT and ITG retail programs • Newport stays in place • RJRT gets minimum of 8 sq. ft. or • ITG obtains facings in Lorillard combustible share space • Newport: • ITG can display Winston, Salem, - Included in new RJRT retail program KOOL in former Lorillard space - Move into RJRT space • Winston, KOOL, Salem stay in place • ITG can negotiate with retailer for if in RJRT space pre-close other available space
40 Newport opportunities
• Expanding Newport presence in the West, leveraging Newport strength in the East with Camel and Pall Mall
• Increasing adult tobacco consumer interactions through expanded consumer engagement and retail contact
• Opportunity to broaden Newport product portfolio with new packaging and/or brand styles
41 Newport considerations
• Thoughtful and measured decisions to minimize potential risks • New sales reps in key geographies with established relationships limit disruption potential • Track record of patience and deliberate marketing enhancements with high- performing brands, e.g., NAS
42 OpCos’ key growth brands enjoy strong ASU30 indices
269
184
131 139
84
37
Marlboro RAI OpCos' Brands* NEWPORT CAMEL NAS PALL MALL
Source: Tracker * Includes: Newport, Camel, Pall Mall and NAS 43 The ASU30 market leader
57%
40%
36% 19%
RAI OpCos Key Growth Brands* Marlboro
1994 1999 2004 2009 2014
Source: Tracker * Includes: Newport, Camel, Pall Mall and NAS 44 A product portfolio fit for the future
Cigarettes
Positioned to Moist
win Snus
NRTs
Vapor
45 Summary • Strongest and most innovative brand portfolio • Industry shifts creating opportunity • Brands, strategies and resources to win • Accelerating journey to market leadership Transformative Powerful innovations key brands Next stage of growth
46 Financial update
Andrew Gilchrist
47 Focused on cost management
Disciplined financial Strong balance sheet, cash flow approach Leverage of about 3.6x
Maintain financial flexibility
Increase stakeholder value
48 Maintain investment grade profile
Policy and De-leverage is priority focus objectives Maintain conservative liquidity
Target dividend payout ratio of 75%
Evaluate share repurchase and dividend target after de-leveraging
49 Manageable debt profile
Long-term debt of $17.6 billion
Average interest rate of 4.5%
Average maturity of 12.4 years
As of June 30, 2015 50 Transition well under way
• Manufacturing – Consolidate to R.J. Reynolds’s facility in Tobaccoville, NC – Anticipate no product changes requiring FDA authorization – Access to sufficient equipment base • Supply chain – Maintain current Lorillard non-tobacco material vendor base (consolidate over time) – No expected leaf changes, with potential procurement synergies – Consolidate distribution supply chain into existing logistics • R&D and product support – Expertise and capabilities exist at R.J. Reynolds, with some capacity adjustments – Synergies expected
51 Revenue and cost synergy potential
• Cost savings from assumption of Lorillard operations by ITG Brands ($500 MM savings from Day 1) Cost Savings • Synergies from elimination of redundancies ($300 MM over 18 month transitional period – manufacturing, legal, etc.) • Approximately $800 million of cost savings on run-rate basis
• Complementary geographic strengths Revenue Opportunities • Leverage R.J. Reynolds’ sales force to expand Newport presence • Increased Northeast presence to benefit Camel & Pall Mall
• Manufacturing transition began in July 2015 Implementation • Integration expected to be completed over next 18 months
52 Proven track record of execution
RAI Adjusted Operating Margin 45% 39.8% 40% Intense focus on efficiency 35%
30% Continued productivity 25% improvements
20%
15% Results reflected in strong operating margin improvement 10% 2004 2007 2010 2013 2015 YTD
Source: RAI filings. 53 Attractive dividend
• Annualized split-adjusted $1.44 per share • Up 24 percent in last three years, 200 percent since 2004
$1.44* $1.34 $1.24 $1.17 $1.08 $0.92 $0.86 $0.80 $0.85 $0.69 $0.48 $0.53
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 3Q15
*3Q15 annualized 54 Strong 2015 YTD RAI performance
2014 vs.2015 YTD + % $1,473 ➡ $1,776(MM) Adj. Operating Income 20.6 + % $860 ➡ $1,036(MM) Adj. Net Income 20.5 + % $1.60 ➡ $1.88 Adj. EPS 17.5
Reconciliation of GAAP to Adjusted results is in Appendix. Adjusted results exclude charges for transaction-related and financing costs for the Lorillard, Inc. acquisition and related divestiture, a gain on divestiture, charges for implementation costs, Engle progeny lawsuits and tobacco-related and other litigation, benefits from the 2003 Non-Participating Manufacturer (NPM) adjustment claim, and a 2014 gain on discontinued operations. 55 Revised 2015 earnings guidance • Adjusted EPS of $1.90 to $2.00 split-adjusted 2015 RAI • Adjusted EPS growth of 11% to 17% Outlook (7/28/15) Deal accretion • Accretive in first 12 months • Strong double-digit accretion second year and beyond
Guidance excludes charges for transaction-related and financing costs for the Lorillard, Inc. acquisition and related divestiture, a gain on divestiture, charges for implementation costs, Engle progeny lawsuits and tobacco-related and other litigation, and a benefit from the 2003 Non-Participating Manufacturer adjustment claim. 56 Break
57 Closing comments
Susan Cameron
58 Vision: A powerful intersection
The right thing What others to do expect of us
Value to Commercial shareholders success
59 Our strategy is driving success Strong vision Aligned infrastructure Right Right businesses brand portfolios Shaping favorable environment Returning value to stakeholders
60 Poised for NEW growth
61 62 Appendix REYNOLDS AMERICAN INC. Reconciliation of GAAP to Adjusted Results (Dollars in Millions, Except Per Share Amounts) (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.
Six Months Ended June 30, 2015 2014 Operating Net Diluted Operating Net Diluted Income Income EPS Income Income EPS
GAAP results $ 5,057 $ 2,317 $ 4.20 $ 1,426 $ 855 $ 1.59 The GAAP results include the following: Gain on divestiture (3,499) (1,466) (2.66) - - - 2003 NPM Adjustment Claim (70) (43) (0.08) - - - One-time benefit from the NPM Partial Settlement - - - (34) (21) (0.04) Implementation costs 104 66 0.12 8 5 0.01 Transaction related costs 54 43 0.08 - - - Tobacco Related and Other Litigation 19 11 0.02 2 1 - Financing costs - 38 0.07 - - - Engle Progeny cases 111 70 0.13 71 45 0.08 Gain on discontinued operations - - - - (25) (0.04) Total adjustments (3,281) (1,281) (2.32) 47 5 0.01 Adjusted results $ 1,776 $ 1,036 $ 1.88 $ 1,473 $ 860 $ 1.60
63