Business Update Debra Crew, President and COO R.J. Reynolds Tobacco - PowerPoint PPT Presentation

Business Update Debra Crew, President and COO R.J. Reynolds Tobacco Company Reynolds American Inc. Sept. 7, 2016 1

Our transformation journey  Key 2016 YTD accomplishments  Progress on operating companies’ businesses and brands  Financial update and growth outlook  Closing comments / Q&A 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 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

Reported vs. adjusted 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

vision Our is to achieve market leadership by transforming tobacco 5

Key YTD accomplishments  Successfully completed full Newport integration  Accelerated business performance  Increased target dividend payout ratio to 80%, with total dividend increase of 27.8% in 2016  Further reduced long-term debt by $4.1 billion  New $2.0 billion share repurchase program 6

Underlying competitive strengths  Range of strong brands across the risk continuum  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 7

accelerating We’re our sustainability efforts for long-term success 8

Current industry dynamics  Stable and positive macroeconomic environment  2016 industry volume outlook o Cigarette decline of about 2% o Moist-snuff growth of about 3-4%  Migration and poly-use more prevalent  Moderate up-trading to premium  Adult preference for menthol 9

Distinctive brands driving growth • Cigarettes • Moist • Snus • Vapor • NRT 10

Strength in cigarettes Drive Brand 93% Volume Premium 73% Volume Menthol 55% Volume 42% ASU30 Share Source: MSA, Inc. shipments to retail, six months ended June 30, 2016. ASU30 share - Tracker FY 2015 11

Strong across all key areas Premium Value Menthol Non-menthol 12

Newport – accelerated growth Share of market  Continuing ASU30 momentum (ppt. change from prior year) percent +0.6  Optimized retail impact +0.5 14 +0.6 +0.5  Increasing ATC interaction +0.3 +0.4 13 12 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 Source: MSA, Inc. shipments to retail 13

Solid Newport growth across U.S. OPPORTUNITY SOM: 4.4% Menthol: +.2 Non Menthol: +.2 TOTAL US Core SOM: 13.9% SOM: 21.6% Menthol: +.4 Menthol: +.4 Non Menthol: +.2 Non Menthol: +.2 EMERGING SOM: 9.1% Menthol: +.3 Non Menthol: +.2 14 Source: MSA, Inc. shipments to retail, YTD16 vs. YTD15, six months ended June 30.

Trade-marketing impact Pre-Deal 2Q16 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 15

Enhanced in-store presence 16

Delivering on Lorillard transaction objectives  Strengthened U.S. cigarette market position  Increased scale, transition of manufacturing  Enhanced growth and margin profile  Significant cost and revenue synergies  Strong financial returns 17

Camel – positioned to thrive Share of market 9  Increasing brand equity programming 8.2%  Revamping, upgrading product families 8  Squarely positioning in largest segments  ASU30 index of 175 7 2012 2013 2014 2015 YTD16 Source: MSA, Inc. shipments to retail – six months ended June 30, 2016, Tracker. 18

Pall Mall – focused on equity 90  Increasing proposition 85 awareness, trial 80 75  Reinforcing quality / value 70 proposition 65  Balancing profitability and 60 market share 55 50 2010 2011 2012 2013 2014 2015 YTD16 Net Sales per Unit Share of Market Source: MSA, Inc. shipments to retail, six months ended June 30, 2016 and company estimates. 19

Natural American Spirit – tipping point Share of market  Accelerating awareness 2.1% 2  Driving broader retail distribution  Elevating brand and values 1  ASU30 index of 205 0 2012 2013 2014 2015 YTD16 Source: MSA, Inc. shipments to retail – six months ended June 30, 2016, Tracker. 20

Room to grow NAS City SOM Boulder, CO 13.9% San Francisco, CA 10.2% Portland, OR 9.1% Asheville, NC 7.7% Austin, TX 7.2% New York, NY 5.0% Below nat’l avg. SOM > 3.0 share SOM 2.0 - 3.0 share Source: MSA, Inc. shipments to retail – six months ended June 30, 2016. 21

Grizzly – focused on growth Share of market 32  Expanding brand equity initiatives 30.7%  Broadening product innovation, 30 pouch leadership 28  Enhancing retail presence 26 2012 2013 2014 2015 YTD16 Source: MSA, Inc. shipments to retail – six months ended June 30, 2016. 22

Grizzly portfolio expanded  Grizzly Dark Mint rolled out nationally this month  Offers bold flavor, 100% American-grown, dark- fired tobacco  Builds on the success of Grizzly Dark Wintergreen  Expansion of innovative smokeless styles like Dark Mint part of our vision to transform tobacco 23

Innovation essential for vapor growth Adult Smokers 21+ 2012 2013 2014 2015 Trial - Vapor 37% 49% 58% 62% Loyal (Vapor Only) 3% 5% 6% 7% BASE: 21+ Adult tobacco or e-cigarette consumers Source: Tracker FY 2015 24

FDA deeming rule update  Product approval guidelines will inform our efforts to bring products with potential to reduce risk to market  Working with agency to gain greater clarity on this process  New VUSE product formats in place for newly regulated environment  Committed to working with agency on reasonable regulation that recognizes risk continuum and offers greatest potential to improve public health 25

Prepared for vapor leadership  RAI Innovations Company ‒ Created Jan. 2016 to drive speed-to-market for leading-edge products  R.J. Reynolds / BAT vapor tech-sharing and licensing ‒ World-class vapor expertise and capability ‒ Competitive advantage in tobacco transformation ‒ Agreement signed Dec. 1, 2015 26

VUSE – expanding market leadership VUSE blu Logic MarkTen NJOY 27 Source: MSA, Inc. shipments to retail – six months ended June 30, 2016.

VUSE evolution Current Platform 28

VUSE innovation – VUSE VIBE Leading-Edge Innovation 29

Best-in-class merchandising and marketing support  New products priced in-line with VUSE’s premium position - VUSE Vibe kit/tanks- $19.99/$9.99 MSRP  Consumer engagement and education  Marketing designed to drive trial 30

Leading-edge products - ZONNIC  National expansion going smoothly  2016 expanded product line ‒ 40-count gum package ‒ 10-count mini-lozenges  Leveraging consumer desire for alternative products  Aligns with tobacco harm reduction 31

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 32

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 in Wintergreen and Pouches No. 1 vapor brand; superior technology 33

RAI’s YTD performance Adjusted GAAP Adjusted YTD16 vs. YTD15 Operating Income + 56.8 % $7,557 $2,785 + 49.5 % Net Income $4,361 $1,549 EPS + 14.9 % $3.05 $1.08 + 5.8 ppt. Operating Margin 123.6% 45.6% Year-to-date period is the six months ended June 30. Reconciliation of GAAP to Adjusted results in Appendix 1 34