Reynolds American Inc.
Business Update
May 16, 2016
1
Agenda
Overview– Susan Cameron – President and Chief Executive Officer, RAI
Operating companies’ business and brand highlights– Debra Crew – President and Chief Operating Officer, R.J. Reynolds Tobacco
Financial position and outlook– Andrew Gilchrist – Chief Financial Officer, RAI
Closing comments / Q&A– Susan Cameron
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 first-quarter 2016 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 and Social Media Disclosure
RAI’s website, www.reynoldsamerican.com, is the primary source of publicly disclosed
news, including our quarterly earnings, about RAI and its operating companies. RAI also
uses Twitter to publicly disseminate company news via @RAI_News. It is possible that
the information we post could be deemed to be material information. We encourage
investors and others to register at www.reynoldsamerican.com to receive alerts when
news about the company has been posted, and to follow RAI on Twitter at @RAI_News.
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
President and CEO, RAI
5
Remember
this
check list?
6
Delivering on our objectives
Newport integration set for early completion by end of June
Generating strong business performance and momentum
Increased dividend by 16.7% in 1Q16
Reduced debt by $4.1 billion over the past year
On track for targeted $800 million in synergies
7
Strong start to 2016
$5 billion sale of Natural American Spirit business outside the U.S.
Completion of $3.6 billion tender offer / redemption of debt
Creation of RAI Innovations Company
8
Deeming Rule considerations
FDA regulations/oversight provide structure to category that
needed it
Rule recognizes distinctions in vapor restrictions versus
combustible products
Premarket authorization process has the potential to slow
innovation
Additional regulations could be forthcoming
9
is to achievevisionOur
transforming tobacco
market leadership by
10
Competitive strengths
Industry’s broadest array of strong brands
Leaders in innovation and new product commercialization
Effective and efficient business strategies and operations
Masters of consumer and trade engagement
High-performing work culture drives performance
11
Distinctive brands driving growth
• Cigarettes
• Moist
• Snus
• NRT
• Vapor
12
Youth Tobacco
Prevention
Tobacco Harm
Reduction
Commercial
Integrity
13
accelerating
effortssustainability
ourWe’re
14
Delivering outstanding total shareholder return
Since 2004 …
942%
Through April 29, 2016
Source: Bloomberg
15
Business & brand highlights
Debra Crew
President and COO
R.J. Reynolds
16
Adult
tobacco
reshaping consumers are
17
Trends driving consumer choice
Seeking Alternatives to
CigarettesDemographics
Menthol Value Hunting
18
Current cigarette industry dynamics
Macroeconomic factors positive for industry
‒ Stronger volume trends in 2015 and 1Q16; less than 1% decline
Migration and poly-use more prevalent
Moderate up-trading
Adult smokers’ preference for menthol
19
Positive macroenvironment for ATCs
$3.49$3.34
$2.40
$1.86
$0.00
$1.00
$2.00
$3.00
$4.00
2013 2014 2015 1Q16
Retail Gasoline Prices Hourly Wage Rate (Core Tobacco Consumers* – Selected Occupations)
National average price of regular unleaded gasoline
Source: Bloomberg
* Average of manufacturing, hospitality and construction industries
Source: Bloomberg
$21.32
$21.80
$22.31
$22.66
$20
$21
$22
$23
2013 2014 2015 1Q16
20
Up-trading in total tobacco and cigarettes
Total Tobacco/Vapor Volume Premium Cigarette Mix
Source: MSA, Inc. shipments to wholesale; industry estimates
0
100
200
300
400
2013 2014 2015
Cigarettes Vapor RYO/Cigars
Moist Snuff Snus Chewing
-1.9% -0.9% -0.7%
Source: MSA Inc. shipments to retail
Billions 75.2%
70
75
2013 2014 2015 1Q16
%
%
21
Adult smokers shifting to premium
Source: MSA, Inc. shipments to retail, 1Q16.
Price
point
Low
High
$5.87 average U.S. pack price
22
Menthol share growing long term
Source: MSA, Inc. shipments to retail, Tracker FY 2015
2007 2008 2009 2010 2011 2012 2013 2014 2015
39%
34%
28%
49%
39%
34%
Menthol Claimed Usual Brand – ASU30
Menthol Claimed Usual Brand – Total Market
Menthol Share of Market
23
Smoking prevalence in U.S.
Source: NSDUH, September 2015. Past month cigarette use among people aged 12 or older, by age group.
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
25%
13%
21%
5%
Cigarette use - Age 26 or Older
Cigarette use - Age 12 to 17
Cigarette use - Age 18 to 2541%
28%
24
Cigarette portfolio
25
Strength in cigarettes
42%
55%
72%
93%
ASU30 Share
Menthol Volume
Premium Volume
Drive Brand Volume
Source: MSA, Inc. shipments to retail, 1Q16. Tracker FY 2015
26
93%
7%
1Q16
70%
30%
2014
Enhanced growth profile
RAI Operating Companies’ Portfolio Market Share
Source: MSA, Inc. shipments to retail
Camel, Pall Mall & NAS
All other brands
Newport, Camel, Pall Mall & NAS
All other brands
27
Strong across all key areas
Premium
Value
Menthol
Non-menthol
28
R.J. Reynolds
29
Volume
Net Pricing
Retail Market Share
R.J. Reynolds marketplace performance
+35.1%
+14.3%
+0.0 ppt.
1Q15
Source: Company filings; MSA, Inc. shipments to retail.
1Q16
30
Source: MSA, Inc. shipments to retail
Continuing ASU30 momentum
Optimize retail impact
Increasing ATC interaction
Newport – accelerated growth
+0.6
+0.5+0.4+0.3
+0.6
12
13
14
1Q15 2Q15 3Q15 4Q15 1Q16
Share of market(ppt. change from prior year)
31
Solid Newport growth across U.S.
OPPORTUNITY
SOM: 4.4
Menthol: +.2
Non Menthol: +.2
EMERGING
SOM: 9.2
Menthol: +.3
Non Menthol: +.2
Core
SOM: 21.7
Menthol: +.5
Non Menthol: +.2
TOTAL US
SOM: 14.0
Menthol: +.4
Non Menthol: +.2
Source: MSA, Inc. shipments to retail, 1Q16 vs. 1Q15.
32
Campaign encourages ATCs to use NewportPleasure.com
to engage with the brand and each other
‒ $500 instant wins every day; $100,000 grand prize
Significant increase in website visits
Newport’s Payday Everyday
33
Newport Smooth Select marketing support
Retail POS
Direct MailPrint Media
34
Source: MSA, Inc. shipments to retail, Tracker.
Share of market
Increase brand equity programming
Revamp, upgrade product families
Squarely position in largest segments
ASU30 index of 175
8.2%
7
8
9
2012 2013 2014 2015 1Q16
Camel – positioned to thrive
35
Camel’s The Hump promotion
New promotion spotlights the ‘off-center’ with
unique content reflecting Camel’s character
Camel.com redesigned
– Bold design optimized for mobile devices
– Entire brand family on a single site
36
Camel’s Since Now campaign
Captures iconic nature of Camel
Celebrates Camel as an up-to-
date brand with strong heritage
Utilized at retail and in 1:1
marketing channels
37
Source: MSA, Inc. shipments to retail
Increase proposition
awareness, trial
Reinforce quality / value
proposition
Balance profitability and
market share
Pall Mall – equity focus
38
50
55
60
65
70
75
80
85
90
2010 2011 2012 2013 2014 2015 1Q16
Net Sales per Unit Share of Market
Santa Fe
39
Volume
Net Pricing
Retail Market Share
Santa Fe marketplace performance
+22.1%
+4.4%
+0.3 ppt.+0.3 ppt.
Source: Company filings; MSA, Inc. shipments to retail.
FY2015 1Q16
40
Source: MSA, Inc. shipments to retail, Tracker.
Share of market
Accelerating awareness
Driving broader retail distribution
Elevating brand and values
ASU30 index of 205
Natural American Spirit – tipping point
2.0%
0
1
2
2012 2013 2014 2015 1Q16
41
Teaching The NAS Difference
Direct-mail campaign focused
on why Natural American Spirit
is, and tastes, different– Reaching 30% more ATCs of premium
competitive brands than in 1Q15
– Generating more trial, more education
about the difference of NAS
42
Earth Day celebration
1.2 million ashtrays distributed
to adult smokers on Earth Day
with purchase of any cigarette
brand
Pocket ashtrays made from
recycled materials including
cigarette waste
Supports SFNTC’s “Respect
the Earth” commitment
43
120+CLEAN UP PROJECTS
20,000+BUTTS
COLLECTED
100+ORGANIC PROJECTS
30,000+POUNDS
OF FOOD
Community outreach
Employees participated in
over 230 butt litter prevention
and organic growing projects
in 2015
Teams partner with local
organizations to identify needs
Tangible demonstration of
SFNTC’s corporate values
44
growRoom to
Source: MSA, Inc. shipments to retail, 1Q16
Below nat’l avg.SOM 2.0 - 3.0 share SOM > 3.0 share
City
NAS
SOM
Boulder, CO 14.0%
San Francisco, CA 10.4%
Portland, OR 8.9%
Asheville, NC 7.3%
Austin, TX 7.0%
New York, NY 4.8%
45
Moist snuff
46
Volume
Net Pricing
Retail Market Share
American Snuff marketplace performance
+3.3%
+4.8%
+0.2 ppt.
Source: Company filings; MSA, Inc. shipments to retail.
FY2015 1Q16
47
Source: MSA, Inc. shipments to retail
Share of market
Expand brand equity initiatives
Broaden product, pouch innovation
Enhance retail presence
Grizzly – continued growth
30.8%
26
28
30
32
2012 2013 2014 2015 1Q16
48
Grizzly’s popular Tellin’ It Like It Is campaign
49
Grizzly Packs A Better Pouch
Grizzly focused on strengthening
lead in growing pouch segment
Offering engaging online activities
– Pack a Better Pouch sweepstakes
doubled Grizzly.com visits
– Online Pouch Toss played millions of times
50
Powerful promotions driving digital interactions
+ 10 million annual website page views
~750,000 unique visitors per year
+ 40% mobile interactions
51
RAI Innovations Company
52
BASE: 21+ Adult tobacco or e-cigarette consumers
Source: Tracker FY 2015
Adult Smokers 21+ 2012 2013 2014 2015
Trial - Vapor 37% 49% 58% 62%
Loyal (Vapor Only) 3% 5% 6% 7%
Innovation essential for category growth
53
Deems “tobacco products” not previously regulated by FDA to be subject to FDA authority
Bans sales to persons under 18, vending machine sales, free samples, and requires health warnings on products and advertisements
No ban on flavors for vapor, recognizing the potential benefits and risks
Premarket authorization required through PMTA, SE, or SE exemption
Deeming Rule overview
54
Prepared for vapor leadership
R.J. Reynolds / BAT vapor tech-sharing and licensing
‒ Marriage of world-class vapor expertise and capability
‒ Competitive advantage in tobacco transformation
‒ Agreement signed Dec. 1, 2015
RAI Innovations Company
‒ Created Jan. 2016 to drive speed-to-market for leading-edge products
55
VUSE – expanding market leadership
VUSE blu Logic MarkTen NJOY
56
VUSE - top innovative new product
$26.5$43.3
$69.3$82.7
$221.1
RUFFLESDeep Ridged
REDD'SWicked Ales
MarkTen MonsterEnergy Ultra
Sunrise
VUSE
“In the convenience store market,
median year-one sales across the top
10 IRI New Product Pacesetters were
$18.6 million, demonstrating the
power behind consumers' ongoing
quests for uniquely indulgent
experiences,” IRI said.
Source: IRI Market Advantage™. New products that completed their first year in calendar year 2015.
2015 Retail Sales at C-Stores(in millions)
Convenience Store News
April 20, 2016
57
Jan. 15 Mar. 15 May 15 Jul. 15 Sep. 15 Nov. 15 Jan. 16 Mar. 16
VUSE Cartridges Share of Market (excluding VUSE Solo)
Flavors
Original and Menthol
58
VUSE flavors
58Source: MSA, Inc. shipments to retail. Traditional retail outlets only
Current Platform Leading-Edge Innovation
VUSE evolution and innovation
59
Leading-edge products - ZONNIC
National expansion going smoothly
Expanding product line
‒ 40-count gum package introduced in April
‒ 10-count mini-lozenges coming in July
Leveraging consumer desire for alternative products
Aligns with tobacco harm reduction
60
Leading-edge products - CORE
Utilizes R.J. Reynolds’ heat-not-burn expertise
Test marketed in Japan, evaluating path forward with
additional activities
Leveraging consumer desire for alternative products
Continue learnings from marketplace
Aligns with tobacco harm reduction
61
Integration progress
62
Trade-marketing impact
Pre-Deal 1Q16
Retail contracts 150,000 200,000
- Contracts (% of industry volume) 80% 90%
- EDLP contracts (% of industry volume) 60% 70%
Adult smoker engagements per year 2 million 4 million
- Newport consumer engagements per year 0 2 million
Newport database of adult smokers 5 million 10 million
63
West coast - strong Newport retail presence
64
East coast - strong Camel retail presence
65
Modernized brand imagery
1970s
2016
66
Enhanced in-store presence
67
Lorillard transaction objectives
Strengthened U.S. cigarette market position
Enhanced growth and margin profile
Increased scale, transition of manufacturing
Significant cost and revenue synergy opportunities
Strong financial returns
68
Source: MSA, Inc. shipments to retail.
Strengthened position in marketplace
24%
33%
2014 1Q16
Top Competitor R.J. Reynolds
Share of Market
69
Source: Company filings, shipments to retail
Enhanced growth and margin profile
-3.3%
-0.1%
-5.2%
-0.2%
Cigarette Volumes
2014 1Q16
R.J. ReynoldsIndustry
58%
71%
2014 1Q16
Premium Cigarette Mix
70
Source: Company estimates, shipments to wholesale
Increased scale, manufacturing efficiency
65%
2%
25%
3Q15 4Q15 1Q16
% of Newport
manufactured by R.J. Reynolds
13.9
18.8
1Q15 1Q16
Cigarette Volume(In billions)
71
Strongest portfolio dynamics in U.S. industry
No. 1 menthol cigarette brand; no. 2 cigarette brand
No. 3 cigarette brand; leading total-tobacco brand
No. 1 value cigarette brand
No. 1 super-premium cigarette brand; fastest growing brand
No. 1 moist-snuff brand
No. 1 vapor brand; superior technology
72
Financial update
Andrew Gilchrist
EVP & CFO, RAI
73
Financial approach
74
Focused cost management
Strong balance sheet, cash flow
Committed to investment-grade rating
Leverage value-enhancing opportunities
Return value to shareholders
Near-term priorities
Growing the business
Capturing the transaction synergies
Deleveraging
75
NPM credit expiration in 2017
Credits resulted from settlements of MSA adjustment
claims with certain states
Reduced State Settlement expenses from 2013-2016
Meaningful opportunities to address the impact in 2017
RAI is confident it can maintain its strong record of growth
76
RAI performance
77
Operating Income
Net Income
EPS
Strong 2015 performance
+42.9%
+37.0%
+15.8%
Adj.
2015 vs. 2014
$2.57
$3,253
$6,953
Operating Margin +4.9ppt.65.1%
$1.98
$2,509
$4,438
41.6%
Adjusted GAAP
Reconciliation of GAAP to Adjusted results in Appendix 1
78
Operating Income
Net Income
EPS
Momentum continuing in 1Q16
+72.4%
+57.8%
+16.3%
Adj.
1Q16 vs. 1Q15
$2.49
$3,565
$6,142
Operating Margin +8.0ppt.210.6%
$0.50
$721
$1,319
45.2%
Adjusted GAAP
Reconciliation of GAAP to Adjusted results in Appendix 1
79
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
GAAP Adjusted
EPS more than doubled since 2004
Reconciliation of GAAP to Adjusted results in Appendix 1
$0.83$0.69
$1.98
$2.57
80
Buybacks
Dividends
Returning value since 2004
More than $16 billion returned to shareholders
– $13.4 billion dividends paid
– $2.7 billion share repurchases
2004 – YTD 2016
81
Attractive dividend
2004 2006 2008 2010 2012 2014 2Q16
Annualized rate of $1.68 per share
Up 35 percent in last three years
– Up 250 percent since 2004
$1.68*
$0.48
*2Q16 annualized
82
Lorillard integration
83
Initial financial objectives
$500 million in cost synergies realized Day 1
– $300 million additional synergies to be achieved in 18 months
Opportunity for revenue synergies
Accretive Year 1
– Strong double-digit accretion Year 2 and beyond
84
Cost synergies ahead of schedule
Initial integration expectations – 18 months
Current integration expectations – 12 months
2Q15 4Q15 2Q16 4Q16
85
10%
20%
30%
40%
50%
2004 2006 2008 2010 2012 2014 1Q16
Proven record capturing cost savings
RAI Adj. Operating Margin
45.2%
Reconciliation of GAAP to Adjusted results in Appendix 1
Results reflected in strong adjusted
operating margin improvement
Intense focus on efficiency
Continuous productivity
improvements
86
Revenue synergies being realized
31.6%
32.1%
1Q15 1Q16
23.5%
24.3%
1Q15 1Q16
Cigarettes Premium Cigarettes
Drive brand: Cigarette includes Newport, Camel, Natural American Spirt and Pall Mall; Premium includes Newport, Camel and NAS
Source: MSA, Inc. shipments to retail
Drive Brand Share of Market
87
Source: Company filings. Reconciliation of GAAP to Adjusted results in Appendix 1
Enhanced margin profile
36.7%
45.2%
2014 1Q16
Adj. Operating Margin
88
* Based on mid-point of company-provided 2016 adjusted EPS guidance range
Reconciliation of GAAP to Adjusted results in Appendix 1
Growth reflects transaction accretion
7.2%
15.8% 16.2%
2014 2015 2016*
Annual Adj. EPS Growth
89
RAI 2016 outlook(April 26, 2016)
90
Full-year earnings guidance
Adjusted EPS of $2.25 to $2.35
Adjusted EPS growth of 13.6% to 18.7%
Reconciliation of GAAP to Adjusted results in Appendix 1
91
Our priorities for use of excess cash are
RAI balance sheet metricsassessment of the
dividend payout ratio
and consideration of share repurchases
92
Summary
Solid balance sheet, cash flow
Strong and growing margins
Consistent earnings growth
Strategic transaction driving
transformation
Compelling shareholder return
and value creation
93
Excellent total shareholder return
1-Year 3-Year 5-Year 10-Year
Through April 29, 2016
Source: Bloomberg
Outpacing S&P 500 over the long term
S&P 500 RAI
40%
138%
239%
527%
94
Break
95
Closing comments
Susan Cameron
96
2016
strong growthon track for …
97
Our transformation journey gathers speed
A much stronger No. 2 U.S. tobacco company
Bringing bold vision and strategy to life
Delivering sustainable growth in key categories
Driving innovation and industry change
Richly rewarding our shareholders for their support and
commitment
98
99
Appendix 1
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.
YTD
20041,2 20052 20062 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
GAAP Operating Income: $882 $1,459 $1,930 $2,418 $567 $1,763 $2,432 $2,399 $2,214 $3,132 $2,531 $6,953 $6,142
The GAAP results include the following
expense (income):
B&W/Lane GAAP results 328
Proforma adjustments (128)
Premerger B&W integration costs 35
Goodwill and trademark impairment charges 199 200 90 65 318 567 32 48 129 32
Restructuring charge 5 2 1 90 56 149
Merger integration costs 130 107 45
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 60 23 24 16 223 25
Scott lawsuit 139
Engle progeny lawsuits 64 37 18 100 127 13
Other tobacco-related litigation charges 5 34 2 25
Asset impairment and exit charges 38 99
Gain on divestiture (3,181) (4,861)
Benefits from NPM Settlement and 2003 claim (219) (34) (108)
Transaction-related costs 38 54
MTM pension/postretirement adjustment - - - (43) 1,527 49 110 145 329 -_ -_ _246 _ -
Total adjustments 588 387 127 22 1,935 672 240 419 649 (111) 574 (2,515) (4,823)
Adjusted operating income $1,470 $1,846 $2,057 $2,440 $2,502 $2,435 $2,672 $2,818 $2,863 $3,021 $3,105 $4,438 $1,319
Net income per diluted share:
Reported GAAP $0.69 $0.89 $1.03 $1.18 $0.38 $0.82 $0.96 $1.20 $1.12 $1.57 $1.37 $2.57 $2.49
Non-GAAP adjusted $0.83 $0.98 $1.02 $1.19 $1.20 $1.32 $1.32 $1.41 $1.49 $1.59 $1.71 $1.98 $0.50
Net Sales $8,323 $8,256 $8,510 $9,023 $8,845 $8,419 $8,551 $8,541 $8,304 $8,236 $8,471 $10,675 $2,917
Operating margins:
GAAP 10.6% 17.7% 22.7% 26.8% 6.4% 20.9% 28.4% 28.1% 26.7% 38.0% 29.9% 65.1% 210.6%
Adjusted 17.7% 22.4% 24.2% 27.0% 28.3% 28.9% 31.2% 33.0% 34.5% 36.6% 36.7% 41.6% 45.2%
(1) Includes proforma GAAP adjustments as if the merger of B&W/Lane had been completed on January 1, 2004.
(2) Not adjusted to reflect change in accounting for pension and postretirement.
100
Appendix 2
REYNOLDS AMERICAN INC.
Reconciliation of GAAP to Adjusted Operating Income by Segment
(Dollars in Millions)
(Unaudited)
The RJR Tobacco segment consists of the primary operations of R.J. Reynolds Tobacco Company, the second-largest tobacco company in the United States and which also manages a contract manufacturing business.
The Santa Fe segment consists of the primary operations of Santa Fe Natural Tobacco Company, Inc., which manufactures Natural American Spirit cigarettes and other additive-free tobacco products.
The American Snuff segment consists of the primary operations of American Snuff Company, LLC, the second-largest smokeless tobacco products manufacturer in the United States.
Management uses "adjusted" (non-GAAP) measurements to set performance goals and to measure the performance of the company, and believes that investors' understanding of the underlying performance of the company's continuing operations is enhanced through the disclosure of these metrics.
Three Months Ended March 31,
2016 2015RJR Tobacco Santa Fe American Snuff RJR Tobacco Santa Fe American Snuff
GAAP operating income $ 1,107 $ 123 $ 133 $ 588 $ 92 $ 118
The GAAP results include the following:
Implementation costs (1)
1 - - - - -2003 NPM Adjustment Claim - - - (70) - -Engle Progeny cases
13 - - 108 - -Tobacco Related and Other Litigation - - - 19 - -
Total adjustments (2)
14 - - 57 - -Adjusted operating income $ 1,121 $ 123 $ 133 $ 645 $ 92 $ 118
(1)For the three months ended Mar. 31, 2016, RAI and its operating companies recorded aggregate implementation cost adjustments of $25 million including $24 million in the corporate and all other segment.
(2)For the three months ended Mar. 31, 2015, RAI and its operating companies recorded aggregate transaction related cost adjustments of $15 million which are included in corporate costs.
101