Transformation: Our growth paths2.q4cdn.com/129460998/files/doc_presentations/RAI... · This...
Transcript of Transformation: Our growth paths2.q4cdn.com/129460998/files/doc_presentations/RAI... · This...
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Reynolds American Inc.
Investor Day November 2015
Transformation:Our growth path
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Agenda• Introduction
– Morris Moore – Vice President of Investor Relations, RAI
• Overview– Susan Cameron – President and Chief Executive Officer, RAI
• Financial update– Andrew Gilchrist – Chief Financial Officer, RAI
• FDA update– Danny Herko – Executive Vice President of Regulatory Oversight, RAI Services Company
• Operating companies’ business and brand highlights – Debra Crew – President and Chief Operating Officer, R.J. Reynolds Tobacco– Brice O’Brien – Executive Vice President of Consumer Marketing, R.J. Reynolds Tobacco
• Closing comments / Q&A– Susan Cameron
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Forward-looking informationThis 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 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 DisclosureRAI’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
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Adjusted vs. GAAPRAI 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.
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Overview Susan Cameron
President and CEO, RAI
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to-do list
Fully integrate Newport
Continue to deliver robust business growth
Maintain strong dividend
Pay down debt
Achieve targeted $800 million in synergies
Our
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Successfully integrating Newport
Delivered strong 2015 YTD performance
Increased dividend 7.5%, split stock
Reduced debt by $450 million
On track in capturing synergies
to dateProgress
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Other key developments• R.J. Reynolds / BAT vapor technology -
sharing term sheet agreement• Sale of Natural American Spirit business
outside U.S. to JT Group• Consolidation of VUSE manufacturing• R.J. Reynolds, Santa Fe / N.Y. settlement
on NPM disputed claims
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current environment performance drivers
Our vision and strategy,
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So how does transformation actually help us?
Shapes a different future, not just for our company, but also for the industryAligns our commercial strategy with societal expectations Resolves controversies by engagingstakeholders in new ways on shared goalsDoing the right thing drives sustainable, long-term success
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Key dynamics• Improved macroeconomic factors• Adult tobacco consumers continue to use multiple
categories • Higher cigarette and moist-snuff pricing• Newport benefiting R.J. Reynolds• Successful management of challenging litigation
environment
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An all-star lineup
Brands positioned to win in key categories• Cigarettes• Moist• Snus• NRTs• Vapor
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Sustainabilityremains
a core focus…
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…and we’re committedto operating
responsibly
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Strong brands in key categories
Leaders in developing innovations
Efficiency and productivity gains
Superior consumer and trade marketing
Highly engaged talent base
commercial strengths
Key
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Delivering excellent total shareholder return
Since 2004 …
902%
Through October 30, 2015Source: Bloomberg
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Financial updateAndrew GilchristEVP & CFO, RAI
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Agenda• Financial approach• Current financial position• Business performance• Growth outlook• Summary
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Focused on cost management
Strong balance sheet, cash flow
Commitment to investment-grade rating
Leveraging value-enhancing opportunities
Returning value to shareholders
approachFinancial
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De-leveraging is priority focus
Target leverage of 1.5 to 2.5 times
Target dividend payout ratio of 75%
Evaluate share repurchase and dividend target after de-leveraging
Consistent operating income, EPS and dividend growth
objectivesPolicy and
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Financial priorities for use of excess
cash
1. Balance sheet metrics
2. Dividend payout
3. Share repurchases
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Current financial position
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Interest coverage of ~8 times
Long-term debt of $17.0 billion
Average maturity of 12.1 years
Average interest rate of 4.5%
Credit facility of $2.0 billion
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Manageabledebt structure
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$500
$500
$750
$750
$500
$250 $250
$700
$250
$1,1
00
$550
$450
$1,0
00
$550
$1,2
50
$1,2
50 $1
,000
$2,5
00
$750
$2,2
50
$0
$500
$1,000
$1,500
$2,000
$2,50020
15
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025 ****
2035
2036
2037
2038
2039
2040
2041
2042
2043
2044
2045
Assumed LO RAI Outstanding Newly Issued
Favorable debt maturitiesmillions
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More than 80% funded on a PBO basis
Contributed $1.5 billion since 2008
Five-year annualized return of more than 7%
Asset allocation mitigates funded-status volatility
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Pension plans well positioned
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Future impacts from international sale of Natural American
Spirit
$5B sale of NAS business outside U.S.
Approximately $3.2B proceeds, net of tax
Minimal impact to ongoing operating income
Focus on cash-use priorities
Efficient targeting of balance sheet metrics
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Business performance
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$0.00
$0.50
$1.00
$1.50
$2.00
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Est.
GAAP Adjusted
EPS has doubled since 2004
Reconciliation of GAAP to Adjusted results is in Appendix 1. Adjusted results primarily exclude charges for Engle progeny lawsuits, trademark impairments, restructuring, merger integration and mark-to-market adjustments, and gain on divestiture and one-time benefit from the NPM partial settlement, and includes B&W/Lane 2004 pre-merger results.
$0.83
$1.94 to $2.00(10/27/15)
$0.69
$1.37
$1.71
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BuybacksDividends
Returning value• $12 billion in dividends paid since 2004• $2.7 billion in share repurchases since 2004
~$15 Billion
2004 – 2015 YTD
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Attractive dividend• Annualized split-adjusted $1.44 per share• Up 24 percent in last three years, 200 percent since 2004
$0.48 $0.53$0.69
$0.80 $0.85 $0.86 $0.92$1.08
$1.17 $1.24$1.34
$1.44*
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 3Q15
*3Q15 annualized 32
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Shareholder value creationEnterprise value* has grown by more than $70 billion since 2004
$11 Billion
$83 Billion
July 30, 2004 October 31, 2015
* Enterprise value = market capitalization plus long-term debt, minus cash33
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Growth outlook
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Operating income
Net income
EPS
Strong 2015 YTD RAI performance
+36.8%
+33.1%
+18.1%
Reconciliation of GAAP to Adjusted results is in Appendix 2. Adjusted results exclude charges for transaction-related and financing costs for the Lorillard, Inc. acquisition and related divestiture, implementation costs, asset impairment and exit costs, Engle progeny lawsuits and tobacco-related and other litigation, a gain on divestiture and benefits from the 2003 Non-Participating Manufacturer (NPM) adjustment claim, and a 2014 gain on discontinued operations.
Adjusted 2015 vs. 2014 YTD
$2.45
$2,974
$6,263
Operating margin +5.0 ppt.82.2%
$1.50
$1,817
$3,181
41.7%
Adjusted GAAP
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2015 RAIoutlook
(10/27/15)
Tightened 2015 earnings guidance
• Adjusted EPS of $1.94 to $2.00
• Adjusted EPS growth of 13% to 17%
Guidance excludes charges for transaction-related and financing costs for the Lorillard, Inc. acquisition and related divestiture, implementation costs, asset impairment and exit costs, Engle progeny lawsuits and tobacco-related and other litigation, a gain on divestiture and a benefit from the 2003 Non-Participating Manufacturer adjustment claim. 36
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$27B purchase price, closed on 6/12/2015
$7.1B divestiture package to Imperial Tobacco
$800M of identified synergies, $500M on Day 1
18-month period to achieve synergy run-rate
Revenue synergies likely, but not quantified
Synergy update
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Integration progressing smoothly
Manufacturing
Supply chain
R&D and product support
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Cost synergies on track
$500
$800
June 2015 2016 January 2017
Million
Million
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10%
20%
30%
40%
2005 2007 2009 2011 2013 3Q15YTD
Proven track record of capturing cost savings
Intense focus on efficiency
Continued productivity improvements
Results reflected in strong adjusted operating margin improvement
Source: Appendix 1
RAI Adj. Operating Margin
41.7%
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Key NPM developments
• 2013 and 2014 settlement with 24 jurisdictions
– Estimated $1.3 billion in credits (2012-2016)
• October 2015 settlement with N.Y. state
– Estimated $290 million in credits (2015-2018)
• Litigation related to 2003 arbitration ongoing
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Summary
Solid balance sheet, cash flow
Strong and growing margins
Consistent earnings growth
Strategic transactions driving transformation
Compelling shareholder value creation
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Excellent total shareholder return
6%57% 95% 114%
61%
167%
283%
713%
1-Year 3-Year 5-Year 10-Year
S&P 500 RAI
Outpacing S&P 500 over the long term
Through October 30, 2015.Source: Bloomberg
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FDA update
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Danny HerkoEVP, Regulatory Oversight
RAI Services
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• Key principles• Santa Fe warning letter• Substantial equivalence• SE guidance• Other key topics• Going forward
Agenda
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Key principles for effective regulatory framework
• Youth tobacco prevention • Science-based regulatory decisions• Comprehensive harm-reduction policy• Truthful product communication• Uniform regulatory enforcement • Transparent communication and timely
guidance
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Santa Fe warning letter
• Received warning letter – Aug. 27, 2015• FDA alleged “natural” and “additive free” violate the
modified risk tobacco product provision• Responded on Sept. 18, highlighting disagreements with
FDA’s analysis and conclusions • Engaging FDA in constructive dialogue
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Not substantially equivalent
• On Sept. 15, 2015, Center for Tobacco Products notified R.J. Reynolds of four NSE orders
• R.J. Reynolds ceased manufacturing, distribution, sale, marketing and promotion of the affected styles
• We disagree with FDA’s analysis and conclusions • Working to ensure clearance of future and provisional
submissions
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Substantially equivalent
• 378 SE clearance orders, 126 NSE orders, 898 withdrawn• RAI operating companies have hundreds of submissions outstanding
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~2000Regular SE
~5500 SEs~3500
Provisional SEAllowed to
remain in marketunless and until
FDA deems not SE
GFRequires
pre-marketclearance
March 2011Feb 2007
Allowed to stay in market
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SE guidance – label and quantity change
• Issued September 2015, requires pre-approval of changes to label and quantities of products in a package
• Three of RAI’s operating companies and other tobacco manufacturers filed legal challenge
• Guidance violates first amendment rights and exceeds the agency’s authority under the Tobacco Control Act – Attempts to redefine scope of “new tobacco product”– Circumvents rule-making process required for label authority
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Other key topics
• Menthol‒ Not on FDA’s unified agenda‒ FDA funding menthol / flavor research
• Deeming regulations‒ Draft regulation published April 2014‒ More than 80,000 comments submitted ‒ Final rule submitted to OMB on Oct.19, 2015
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Going forward
• Science-based decisions will prevail• Commitment to constructive relationship• Participating in the regulatory process• Broad range of products provides ability to compete• Innovative culture driving agility and adaptability• RAI’s operating companies well positioned for future
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Business highlightsDebra Crew
President and COOR.J. Reynolds
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Agenda• Business transformation• Industry dynamics• RAI operating companies update• Summary
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We will achieve
market leadershipthe tobacco industry
by transforming
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Brands positioned for growth
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Sustainable share and profit growth
Leader in growing smoke-free categories
Support growth platforms
Progress toward industry transformation
successHow we define
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Cigarette industry dynamics
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Competitive landscape
89% of combustibles
91% of moist snuff
85% of snus
36% of e-cigarettes
New ‘Big 3’ represent:
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Cigarette industry dynamics
• Macroeconomic factors are positive for industry– Stronger volume trend: less than 1% decline
• ATC preference for menthol
• Migration and poly-use more prevalent
• Down-trading moderating
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Menthol share poised for long-term growth
28
34
39
51
34
40
2007 2008 2009 2010 2011 2012 2013 2014
Menthol Share of Market
Menthol Claimed Usual Brand – Total Market
Menthol Claimed Usual Brand – ASU30
Source: MSA, Inc. shipments to retail, Tracker FY 2014
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Cigarette portfolio
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Portfolio strategies
• Organic premium growth
• Menthol focus
• Enhanced national EDLP footprint
• Sustain ASU30 momentum
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Cigarette portfolio strength
40%
55%
67%
92%
ASU30 Share
Menthol Volume
Premium Volume
Drive Brand Volume
Source: MSA, Inc. shipments to retail, Tracker FY 2014
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WEST
32.8%+0.4 ppt.
MIDWEST34.4%
+0.3 ppt.
EAST34.4%
+0.1 ppt.
SOUTH
34.2%-0.2 ppt.
Complementary geographic strengths and momentum
Source: MSA, Inc. shipments to retail, 3Q15 YTD
RAI Operating Companies’ Cigarette Share of Market
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Commercial strength across all key areasNon-Menthol Menthol
Unique brand proposition, on trend with growing consumer sentiment
High menthol credibilityDiverse, loyal buyer baseUnique productDeep cultural connection
An American classic with rich heritage and mass appeal
Highly differentiated Increasing menthol credibility
A great value and experience for the money
A great value and experience for the moneyValue
Premium
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RAI OpCos cigarette performance
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RAI operating companies cigarette performance
2015 2014 Change
Volume (billions) 64.5 64.4 +0.2%Drive brands 59.6 58.8 +1.3%All other 5.0 5.6 -10.6%
Retail share of shipments 33.8% 33.7% +0.1 ppt.Drive brands 31.2% 30.8% +0.4 ppt.All other 2.6% 2.9% -0.3 ppt.
• Solid drive-brand share gains• Positive impact from addition of Newport
Nine-month pro forma results
Share Source: MSA, Inc. shipments to retail, 3Q15 YTD
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Synergies
Manufacturing transition
Retail contracts
Newport share performance
Acquisition update
+0.5 ppt.
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A stronger universe
R.J. Reynolds -
No Lorillard
50K
Lorillard -No R.J.
Reynolds 50K
100K Both R.J. Reynolds
and Lorillard
Contracted Retail Outlets
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WEST
3.7%+0.6 ppt.
MIDWEST1.4%
+0.3 ppt.
EAST1.5%
+0.3 ppt.
SOUTH
1.2%+0.2 ppt.
Solid growth across all geographies
Source: MSA, Inc. shipments to retail, 3Q15 YTD
Natural American Spirit Share of Market
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NAS Volume Change vs. Previous Year
New distribution
Same stores
Same stores driving volume growth
66% 70% 65% 67%
Source: MSA, Inc. shipments to retail
1Q154Q14 2Q15 3Q15
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Moist-snuff industry
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Moist-snuff industry dynamics
• Industry volume growing 2-3% annually
• Pouches and Wintergreen in the mainstream price tier providing all category growth
• Competitive environment
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Industry moist-snuff volumeShipments to Retail
(Billions of cans)
Source: MSAi STR
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015Est.
0.9
1.5
Source: MSA, Inc. shipments to retail
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Grizzly leads moist snuff
24
26
28
30
32
2010 2011 2012 2013 2014 2015*
30.7%
Share of Market
Source: MSA, Inc. shipments to retail* 3Q15 YTD
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Grizzly’s competitive advantage
Preferred Wintergreen - No. 1 SKU in fastest growth area
Superior Pouch - Better mouth feel and convenience
Broader range - More Pouch and Wintergreen offerings
Consumer advantages - Positive switching, driven by ATU30
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Net price realization• ASC significantly outpacing competition
2.6%
0.6%
2.2%
-0.2%
4.5%
1.9% 2013
2014
3Q15YTD
Key CompetitorTotal ASC
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American Snuff performance
Nine-Month Results
• Growth in growing category• Volume outpacing category• Strong margin and earnings
2015 2014 ChangeVolume (millions) 371 358 +3.7%Retail share of market 33.5% 32.9% +0.6 ppt.Operating income $369 $329 +12.1%Operating margin 58.6% 56.4% +2.2 ppt.
Source: MSA, Inc. shipments to retail, 3Q15 YTD80
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R.J. Reynolds Vapor
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2013 2015
The vapor category is at an inflection point….
Early Adoption
New Intros
New Product Proliferation
Brand Failures
Channel Fragmentation
Source: MSA, Inc. shipments to retail and R.J. Reynolds estimates 82
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2013 2015
But innovation can re-ignite growth…
Sustainable Growth
• Meaningful innovation
• Superior products
• Strong brands
FutureSource: MSA, Inc. shipments to retail and R.J. Reynolds estimates 83
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And VUSE is gaining momentumVUSE Share of Market
(Traditional Retail)
Source: MSA, Inc. shipments to retail
27%
1Q13 3Q13 1Q14 3Q14 1Q15 3Q15
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Vapor strategy
• Solidify VUSE as the Vapor Authority
• Maximize potential for traditional e-cig / cartridge
• Leverage superior technology to compete in mods / tanks / liquids
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VUSE evolution and innovation
Cig-A-Like Platform Next Generation Innovation
Superior products Superior performance Trusted brand
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R.J. Reynolds / BAT vapor tech-sharing
• Marriage of world-class vapor expertise and capability
• Competitive advantage in tobacco transformation
• Term sheet signed Sept. 22, 2015– Framework for collaboration / IP licensing– Critical step in reaching long-term agreement through 2022
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Niconovum
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ZONNIC highlights
National distribution in more than 30,000 outlets
Building the NRT category in convenience / gas
1 in 5 purchases of NRT-coated gum is ZONNIC
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• No. 1 vapor brand• Superior technology
Strongest portfolio dynamics in the industry
• No. 1 value brand in the U.S.
• No. 1 menthol brand in the U.S.
• No. 1 super-premium brand• Fastest growing brand in the U.S.
• No. 1 brand in the moist-snuff industry
• Leading total tobacco brand• No. 3 brand in the U.S.
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Summary• Powerful brands in key categories
• Positioned for sustainable growth
• Expert marketing and sales force
• Track record of success!
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Consumer and brand portfolioBrice O’Brien
EVP, Consumer MarketingR.J. Reynolds
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Consumers’ behavior shifting
The Era of Indulgence
Prior to the recession The immediate aftermath of the recession
Today
The Era of Responsibility
The Era of Consequences
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Consumer macro trends
The Era of Indulgence
The Era of Consequences
POLYCULTURALISM
Source: Consumers Leaning Forward: A Trend Analysis, March 2015
TURNINGBLUE RECEPTIVITYPENT-UP
ASPIRATIONS
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The Era of Indulgence
The Era of Responsibility
Source: Consumers Leaning Forward: A Trend Analysis, March 2015
MULTICULTURALISM to POLYCULTURALISM
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Polyculturalism drivers
U.S. diversity in 2014 is 8%
Millennial diversity
is 44%
Majority minority U.S. projected in
2044
CA, TX, NM, HI are today
Interracial or interethnic
married couples
7% (2000) to 10% (2010)
Source: U.S. Census Bureau 96
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Industry Newport Camel NAS
Caucasian 70% 36% 70% 68%
Hispanic 13% 18% 19% 19%
African American 11% 41% 4% 6%
Asian 2% 2% 3% 2%
Strongest brand portfolio
Source: Tracker97
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Turning blue
The Era of Indulgence
The Era of Consequences
Source: Consumers Leaning Forward: A Trend Analysis, March 2015
TURNINGBLUE
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Green is turning blue
ME:Personal convenience
THE WORLD:Environmental and global impact
MY WORLD:Local community impact
“I am motivated to lead an environmentally-conscious
life because it enables me to save money”
“I do not want to compromise on the convenience of the
products I already use to lead a more environmentally
conscious lifestyle”
“Companies that make sincere efforts to be a part of the community deserve
their loyalty”
ATC 21+(2014)
69%58% 78%
Source: The Futures Company 2014 Global MONITOR – U.S. sample, total 21+
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RAI OpCos aligned with turning blue
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Migration to digital solution
• Greener, more relevant, cost effective
• 2012 test did not meet expectations‒ Too complex‒ Inconvenient‒ Could be copied and passed along
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• R.J. Reynolds developed proprietary technology platform
• Spot You More™– A simple, intuitive consumer experience– Fraud prevention with ‘One & Done’ coupons– Real-time redemption data– Open-technology platform
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Migration to digital solution
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Spot You More™ test markets• 64 stores in Columbus, OH and Des Moines, IA
• Over 14,000 redemptions in first 3 months
• Positive ATC response– 99% are “satisfied” with the experience– 94% claim digital “easier or same as” paper
coupon– 90% “definitely will” redeem future digital
promotions
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Spot You More™ next steps
• Digital promotion platform for C-gas channel– Potential across all consumer products
• ‘Internet of Things’ for C-gas channel– Proximity marketing
• Working with third parties to develop broader applications
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Pent-up aspirations
The Era of Indulgence
Source: Consumers Leaning Forward: A Trend Analysis, March 2015
PENT-UPASPIRATIONS
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Shifting pent-up aspirationsFrom
Progress
Boundlessness
Inspiration
Stagnation
Constraint
Frustration
Source: 2014 Yankelovish MONITOR Study. Insights Applicable to Adult (ages 21+) Tobacco Consumers Only
To
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Consumers willing to spend more
CONFIDENTIAL - FOR DISCUSSION PURPOSES ONLY | Insights Applicable to Adult (ages 21+) Tobacco Consumers Only
40%48%
ATC 21+
2013 2014
Source: The Futures Company 2014 Global MONITOR; Insights Applicable to Adult (ages 21+) Tobacco Consumers Only
“I am more open to spending money now than I have been in the
past few years”
107
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15
19
23
2
7 8
Pent-up aspirations driving premium growth
Era of Indulgence(Prior to recession)
Era of Responsibility(2015 YTD)
Era of Consequences(Recession)
Source: MSA, Inc. shipments to retail
RAI OpCosPremium Drive Brand Share Pall Mall Share
108
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Receptivity
The Era of Indulgence
The Era of Consequences
Source: Consumers Leaning Forward: A Trend Analysis, March 2015
RECEPTIVITY
109
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Guilt-Free Consumption
Novelty
Innovation
Experimentation
Era of Responsibility
New Experiences
Increasing receptivity
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Consumers more open to change
69% 59%
ATC 21+ (2014)
“I would welcome more novelty and change in my life”
Source: The Futures Company 2014 Global MONITOR; Insights Applicable to Adult (ages 21+) Tobacco Consumers Only
“I am more likely to choose a brand if it exposes me to
new sensations or experiences”
111
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85%
62%
15%
38%
2011 2012 2013 2014 1H15
Greater acceptance of alternativesAdult Smoker Product Usage
Source: Tracker
Tobacco products only Tobacco products + vapor
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Brand portfolio positioned for growth
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“THE MENTHOL AUTHORITY”
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Strong history and bright future
1970 - #24 selling brand
1980 - #18
1990 - #51993 - #1
menthol brand
1996 - #2 selling brand
2015 Newport joins R.J. Reynolds
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Newport growth momentum
0.8%
13.4%
1972 1977 1982 1987 1992 1997 2002 2007 2012 2013 2014 3Q15 YTD
Source: MSA, Inc. shipments to wholesale
Share of Shipments
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Future demographics aligned
Source: Tracker YTD Aug. 2015 – Past 7 Day AS 21+
33%
46%
21%
Newport Menthol ATCsCaucasians African American Hispanic
0
40
80
120
160
200
Newport Largest Competitor
ASU30 Indices
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Proud, loyal buyer base
Source: Tracker
62 63 64 65 66 67 68 69
Largest Competitor
Newport
Net Promoter Score
118
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Key strategic initiatives
Strengthenportfolio appeal
Optimize retail
leadership
Strengthen brand
relevance
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Menthol portfolio opportunityKey CompetitorNewport
Source: Tracker and 2008-14 shipments to retail style analysis
Full Flavor Menthol
92%
Full Flavor Menthol
53%
Other Menthol 47%
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Newport menthol portfolio opportunity Awareness
Adult Smokers 21+
87% 33% 35%121
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Newport non-menthol styles
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Newport non-menthol growth
0.8% 0.8%
1.0%
1.1%
1.3%
2011 2012 2013 2014 3Q15 YTD
• Steady organic share growth
• Low awareness (under 40%)
• Strong demographic profile
• National distribution opportunity
Source: MSA, Inc. shipments to retail
Share of Market
123
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Significant retail impact for Newport
94K 48K
• More than 190,000 contracted outlets
• Greater merchandising and impact• New contracts and presence• Supported by more than 2,000 trade
marketing representatives
Contracted Outlets
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Trade marketing impactCurrent Future
125
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Enhanced equity programming
• National consumer engagement• Enhanced database reach• Strong, relevant programming
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Leading and complementary menthol portfolio
Camel Menthol SOM > Newport MentholNewport Menthol SOM > Camel Menthol
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Camel share of market growth
7.1% 7.2% 7.5% 7.6% 7.6% 7.9% 8.1% 8.1%
2008 2009 2010 2011 2012 2013 2014 3Q15 YTD
Source: MSA, Inc. shipments to retail
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Camel’s consumer equities
Embraces challenge to learn and grow
Pursues a life of challenge and novelty
Stands out in a crowd
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Camel sparking originality
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Unique and engaging brand programs
Integrated promotion
Mobile photography
In Focus project
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Passionate, artistic consumers
133
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134
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Consistent and accelerating growth
Source: MSA, Inc. shipments to retail
1.2%
1.4%
1.6%1.8%
2012 2013 2014 3Q15 YTD
NAS Share of Market
135
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ASU30 growth outpacing share
Source: Tracker and MSA, Inc. shipments to retail
2000 2002 2004 2006 2008 2010 2012 2014
4.3%
1.6%
0.5%
0.2%
ASU30 Share Share of Market
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Los Angeles - 8%
Portland – 11%
Denver – 6%
Minneapolis – 5%
Austin – 9%
Chicago – 6%
Seattle – 11%
NYC – 8%
San Francisco – 11%
Asheville – 9%
> 2.0%> 1.5 – 2.0%< 1.5%
3Q15 NAS share
NAS share strengths
Source: MSA, Inc. shipments to retail137
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Growth highest in underdeveloped states
Source: MSA, Inc. shipments to retail
3Q15 YTD volume growth> 23%< 23%
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Differentiated marketing programs
Values-driven
Enhanced retail impact
Increased marketing investment
139
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140
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Pall Mall performance
• Stable market share• Growing financial contribution • Unique and appealing brand
equity
2007 2008 2009 2010 2011 2012 2013 2014 3Q15 YTD
Source: MSA, Inc. shipments to retail
Share of Market Financial Contribution
141
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142142
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Grizzly No. 1 brand where it matters
31% 45%
No. 1 in Wintergreen No. 1 in PouchesCategory Leader
45%
Source: MSA, Inc. shipments to retail
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Industry-leading consumer dynamics
43%
ATO35ATU35
50%
82
106
ATU30 index to share
Buyer profile
Source: Tracker
Key competitor
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Innovative products driving growth
• Dark family‒ Extends Wintergreen leadership ‒ 3.0 share of market
Source: Tracker
145
• Big Can promotion‒ ATC excitement drove 4 million page views at
MyGrizzly.com
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Engaging equity programs
• Aspirational promotions• Seasonal packaging• Relevant cause
marketing
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VUSE expanding market leadership
27%
0%
10%
20%
30%
VUSE blu Mark Ten Logic NJOY
3Q15 YTD SOM
Source: MSA, Inc. shipments to retail, traditional retail outlets.148
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Added styles increasing consumer appeal
149
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Innovation essential for category growth
28%daily
7 days/wk 59%part-time
1-6 days/wk
13%0 days/wk
Usage of Vapor Products
Source: TrackerBASE: 18+ E-cigarette consumers
Adult Smokers 21+ 2012 2013 2014
Trial - Vapor 37% 49% 58%
Loyal (Vapor Only) 3% 5% 6%
150
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Vapors are looking for
performance of a tank withsimplicity of a cig-a-like
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VUSE Port – refillable v-liquid system
152
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VUSE innovations
VUSE ProVUSE Connect
VUSE Fob
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154
VUSE summary
Market leadership
Flavors expansion
Continuous innovation
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Portfolio summary
155
#1Menthol Brand
The LeadingInnovative Total Tobacco Brand
#1Super Premium
#1SNUS Brand
#1Value Brand
#1Moist Snuff Brand
#1Vapor Brand
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Closing comments Susan Cameron
156
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157
Now a bigger business, stronger competitor
Bold, innovative, driving change in our industry
Leader in key growth categories
2015Bringing
the vision to life
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Confidential Draft for Discussion Only
And so our transformationjourney continues
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Appendix 1Reynolds 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.
3Q YTD20041,2 20052 20062 2007 2008 2009 2010 2011 2012 2013 2014 2015
GAAP Operating Income: $882 $1,459 $1,930 $2,418 $567 $1,763 $2,432 $2,399 $2,214 $3,132 $2,531 $6,263The 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 32Restructuring charge 5 2 1 90 56 149Merger 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 197Scott lawsuit 139Engle progeny lawsuits 64 37 18 100 125Other tobacco-related litigation charges 5 34 2 19Asset impairment and exit charges 38 99Gain on divestiture (3,506)One-time benefit from NPM Partial Settlement (219) (34) (70)Transaction-related costs 38 54MTM pension/postretirement adjustment - - - (43) 1,527 49 110 145 329 -_ -_ _ -_
Total adjustments 588 387 127 22 1,935 672 240 419 649 (111) 574 (3,082)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 $3,181
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 $2.45Non-GAAP adjusted $0.83 $0.98 $1.02 $1.19 $1.20 $1.32 $1.32 $1.41 $1.49 $1.59 $1.71 $1.50
Net Sales $8,323 $8,256 $8,510 $9,023 $8,845 $8,419 $8,551 $8,541 $8,304 $8,236 $8,471 $7,621
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% 82.2%Adjusted 17.7% 22.4% 24.2% 27.0% 28.3% 28.9% 31.2% 33.0% 34.5% 36.6% 36.7% 41.7%
(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.
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Appendix 2REYNOLDS 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.
Nine Months Ended September 30,2015 2014
Operating Net Diluted Operating Net Diluted Income Income EPS Income Income EPS
GAAP results $ 6,263 $ 2,974 $ 2.45 $ 2,238 $ 1,322 $ 1.23 The GAAP results include the following:
Gain on divestiture (3,506) (1,473) (1.21) - - -2003 NPM adjustment claim (70) (43) (0.03) - - -One-time benefit from the NPM Partial Settlement - - - (34) (21) (0.02)Implementation costs 197 125 0.10 12 8 0.01 Gain on discontinued operations - - - - (25) (0.02) Engle Progeny cases 125 79 0.06 84 53 0.05 Tobacco-related and other litigation 2 1 - 9 6 0.01 Transaction-related costs 54 43 0.04 23 18 0.01 Asset impairment and exit charges 99 63 0.05 - - -Financing costs - 38 0.03 - 9 0.01
Total adjustments(3,082) (1,157) (0.95) 87 43 0.04
Adjusted results $ 3,181 $ 1,817 $ 1.50 $ 2,325 $ 1,365 $ 1.27
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