RAI reports solid full-year results

February 11, 2009
    WINSTON-SALEM, N.C., Feb. 11 /PRNewswire-FirstCall/ --

                                 At a Glance

    -- Full-year 2008 reported EPS up 3.2 percent at $4.57; adjusted EPS up
       5.0 percent at $4.80
    -- 2008 4Q reported EPS down 11.9 percent at $0.89; adjusted EPS up 10.4
       percent at $1.27
       -- 4Q reported EPS includes non-cash trademark impairment charges of
          $145 million and an investment impairment of $33 million
    -- 2008 highlights:
       -- R.J. Reynolds, Conwood increase adjusted operating margins
       -- Camel, Grizzly expand successful new styles
       -- R.J. Reynolds' growth brands continue share gains
       -- Conwood delivers double-digit volume growth
       -- RAI sharpens focus on innovation
       -- RAI credit raised to investment grade

All references in this release to “reported” numbers refer to GAAP
measurements; all “adjusted” numbers are non-GAAP, as defined in schedules 2
and 3 of this release, which reconcile reported to adjusted fourth-quarter and
full-year results.

Reynolds American Inc. (NYSE: RAI) today announced fourth-quarter reported
EPS of $0.89, down 11.9 percent from the prior-year period, driven by non-
cash, pre-tax trademark impairment charges of $145 million and a long-term
investment impairment of $33 million. Adjusted fourth-quarter earnings of
$1.27 per share rose 10.4 percent. Full-year 2008 earnings were up on both a
reported and adjusted basis. Reported EPS of $4.57 was 3.2 percent higher
than the prior year. RAI’s adjusted earnings of $4.80 per share in 2008 were
up 5.0 percent as lower cigarette volume and higher settlement expense were
more than offset by higher cigarette and moist-snuff pricing, increased
productivity at R.J. Reynolds and double-digit moist-snuff volume growth at

       Fourth Quarter and Full Year 2008 Financial Results - Highlights
   (all dollars in millions, except per share amounts; for reconciliations,
              including GAAP to non-GAAP, see schedules 2 and 3)

                              For the Three Months        For the Full Year
                                Ending Dec. 31             Ending Dec. 31
                                              %                         %
                            2008    2007    Change     2008    2007   Change

    Net sales              $2,177  $2,230    (2.4)%   $8,845  $9,023   (2.0)%

    Operating income
      Reported (GAAP)        $510    $517    (1.4)%   $2,052  $2,288  (10.3)%
      Adjusted (Non-GAAP)     654     582    12.4%     2,460   2,353    4.5%

    Net income
      Reported (GAAP)        $258    $297   (13.1)%   $1,338  $1,308    2.3%
      Adjusted (Non-GAAP)     370     338     9.5%     1,406   1,348    4.3%

    Net income per diluted
      Reported (GAAP)       $0.89   $1.01   (11.9)%    $4.57   $4.43    3.2%
      Adjusted (Non-GAAP)    1.27    1.15    10.4%      4.80    4.57    5.0%

                           MANAGEMENT'S PERSPECTIVE


“Reynolds American produced solid results in 2008,” said Susan M. Ivey,
RAI’s chairman, president and chief executive officer. “RAI successfully
navigated through rapidly changing conditions, both in the economy and
competitive environment, and the company’s performance testifies to the
strength of its business model and growth strategy.”

Ivey said that R.J. Reynolds’ business model drove adjusted earnings and
margin improvements despite larger than usual declines in cigarette volume.
“They’re also making great progress with innovations like Camel Crush, Camel
Snus and their new, dissolvable products,” she said.

“Conwood again produced record results and further enhanced its position
as the growth leader in the smokeless-tobacco category,” Ivey said.

“Our Santa Fe subsidiary continues to build strength on its Natural
American Spirit brand, which delivered double-digit volume growth both
domestically and internationally in 2008.”

Ivey said that RAI’s addition of a dedicated growth and innovations
organization this year will further sharpen the focus of all its operating
companies on new products that drive profitable growth. She noted that R.J.
Reynolds’ progress in developing modern smoke-free tobacco innovations will
enhance performance over time.

Also in 2008, RAI:

— Bought $207 million of RAI shares under its repurchase program;

— Received credit rating upgrades from Standard and Poor’s, and Moody’s,
bringing RAI up to “investment grade”; and

— Was awarded membership in the 2008-2009 Dow Jones Sustainability North
America Index.

“2009 will undoubtedly be another challenging year for our companies,”
Ivey said. “However, we have demonstrated that we are resilient and have the
strategies and resources to succeed. RAI’s initiatives to diversify our
revenue stream, innovate and improve the efficiency of our overall business
are bearing fruit and will serve us well for the long term.”

R.J. Reynolds

“R.J. Reynolds produced solid results for the year, despite an especially
tough first quarter,” said Daniel M. Delen, chairman, president and chief
executive officer of R.J. Reynolds. “Our results demonstrate the power of our
business model and its focus on strengthening our core cigarette business
while developing innovations that satisfy changing consumer preferences.”

Excluding restructuring and non-cash trademark impairment charges, R.J.
Reynolds’ full-year adjusted operating income rose 2.0 percent to $2.0
. Fourth-quarter adjusted operating income increased 7.8 percent to
$528 million compared with the prior-year period. Among the benefits in the
fourth quarter was a reduction of about $35 million in the company’s tobacco
settlement accruals. This reduction was driven by a sharp decline in the
Consumer Price Index (CPI), which is a factor in determining settlement costs.

Delen said that the company’s focus on continuous productivity improvement
again paid off – contributing to a 1.4 percentage point gain in the full-year
adjusted operating margin to 26.2 percent.

R.J. Reynolds’ full-year cigarette volume was down 8.4 percent from the
prior year compared with an industry decline of 3.3 percent. Delen said that
several factors contributed to the company’s unusually high decline. These
included intensified competitive activity in the first half and the company’s
discontinuation of some cigarette styles in 2008 as part of its efforts to
reduce complexity and improve efficiency.

“We selectively reduced the number of products we sell by discontinuing a
number of low-margin and non-core brands and brand styles,” Delen said. “It’s
in our long-term interest to reduce operational complexities and maximize the
presence of key brands at retail.”

Delen said that R.J. Reynolds’ solid financial performance was the result
of the company’s focus on delivering profitable growth. “To this end, in 2008
we further refined our brand portfolio strategy, restructured the organization
to increase emphasis on innovation and improved efficiency,” he said.

Refinements to the portfolio strategy included reclassifying Kool to a
“support brand” and shifting focus to Camel’s menthol styles as R.J. Reynolds’
key driver in the growing menthol category.

Compared with the prior year, R.J. Reynolds’ total share of market
declined 1.0 share points to 28.1 percent, as gains on growth brands partly
offset declines on support and non-support brands. All three brand
categories continued to perform in line with R.J. Reynolds’ strategy of
balancing volume and profits.

The company’s two growth brands, Camel and Pall Mall, had a combined full-
year share of 10.7 percent, up 0.8 percentage points from the prior year.
“Camel’s share was up three-tenths of a point at 8.0 percent and Pall Mall
gained half a share point, rising to a full-year share of 2.6 percent,” Delen

Driving Camel’s share growth were gains on the brand’s menthol and core
styles. “Camel’s menthol styles increased 0.3 percentage points in 2008,”
Delen said. “This was boosted by strong performance from Camel Crush, an
innovation that offers adult smokers the option of regular or menthol with
each cigarette.” Camel’s core styles were upgraded in the first quarter of
2008, with new packaging and smoother blends.

Camel streamlined its offerings during the year by discontinuing nine non-
core styles. There were significantly higher levels of competitive promotion
in the first half. And the first-half comparison was also negatively impacted
by higher volume in the prior-year period due to the launch of several new
styles. These factors contributed to a first-half volume decline of 6.7
percent. However, Camel saw significant improvement in the second half, with
volume declining less than 1 percent.

R.J. Reynolds expanded Camel Snus to major metropolitan markets across the
country in 2008 and is making it available nationally in the first quarter of
2009. A smoke-free, spitless tobacco product that comes in a small pouch,
Camel Snus is available in two styles – Frost and Mellow.

“The appeal of Camel Snus is especially strong among adult cigarette
smokers, who are using it when they can’t or choose not to smoke,” Delen said.
“We’ve learned that over time smokers use Camel Snus more frequently as they
smoke fewer cigarettes, so we believe that this product has great potential.”

During the fourth quarter, R.J. Reynolds announced that it will introduce
Camel Dissolvables, a new line of smoke-free products that fully dissolve in
the mouth. These products – Camel Sticks, Strips and Orbs – will be introduced
in lead markets beginning in the first quarter of 2009.

Pall Mall, R.J. Reynolds’ other growth brand, posted strong volume and
share gains in 2008. Refinements in the brand’s promotional strategy are
generating higher levels of trial and conversion. Pall Mall, a value brand
that offers more puffs per cigarette, gained half a share point and increased
volume by 20.8 percent for the full year. Its fourth-quarter share was 3.1
percent, up 0.9 share points from the prior-year quarter. Pall Mall has grown
share every year since it was repositioned as a value brand in 2001.

Delen said that R.J. Reynolds asked the vendor that provides retail
market-share data to R.J. Reynolds to revise its sampling model, beginning in
2009, to better reflect the current retail environment. “As a result,” he
said, “we expect to see some changes to the reported market share of our
brands, but we don’t expect any significant share-trend shifts.”

He noted that R.J. Reynolds’ 2008 restructuring will reduce costs
throughout the company and will create a leaner organization more intensely
centered on opportunities with the greatest potential for profitable growth.
He said that cost savings from the restructuring are already being realized.

“R.J. Reynolds continues to deliver solid performance,” Delen said. “In
2008, we further refined our strategies and streamlined our structure. Our
focus on strengthening our core business and our ability to adapt to changing
marketplace demands will serve us well as we move ahead.”


“Conwood had another excellent year, posting record profits in 2008,” said

William M. Rosson, who retired Feb. 1 as Conwood’s president and chief
executive officer. “We increased margins, delivered double-digit volume
growth and strengthened the powerful platform of Grizzly, our flagship brand.”

Excluding non-cash trademark impairment charges, Conwood’s adjusted
operating income in the fourth quarter was $99 million, up 17.5 percent from
the prior-year period. Adjusted full-year profits of $374 million rose 8.8
percent on higher volume and pricing. Even with investments to launch two new
Grizzly styles in the first quarter, the company’s full-year adjusted
operating margin was up 0.4 percentage points at 51.8 percent.

The moist-snuff category’s strong momentum produced volume growth of more
than 7 percent in 2008, and Grizzly captured half of all category growth.

Conwood’s full-year moist-snuff volume jumped 13.4 percent to 335 million
cans on the strong performance of Grizzly, which continued to deliver double-
digit volume gains despite further narrowing of the price gap between premium
and value brands.

In 2008, Conwood led price increases in the moist-snuff value segment for
the third straight year. Conwood’s price increases, coupled with higher
levels of competitive discounting and promotion, have closed the price gap by
about 50 cents a can at retail during the past two years.

“The gap has closed to about two dollars a can, and we believe that it
will close more, but we still expect to see strong growth across the entire
Grizzly family,” Rosson said. “That’s because Grizzly is a high-quality
product, and its growth is based on much more than price.”

Grizzly’s share of 23.3 percent for the full year was 2.2 percentage
points higher than its 2007 share. With a fourth-quarter share of 24.1
percent, Grizzly ended the year as the nation’s best-selling moist-snuff
brand. Gains across the Grizzly brand family pushed Conwood’s total share of
shipments to 27.7 percent in 2008, up 1.7 percentage points from the prior

Driving Grizzly’s 2008 growth was the very successful national
introduction of two new styles in the first quarter – Grizzly Snuff and
Grizzly Wintergreen Pouches.

“We developed both these Grizzly styles to create a strong presence in
segments where the brand did not compete, and the performance of both of them
has been outstanding,” Rosson said. Grizzly Snuff had a full-year share of
0.9 percent and Grizzly Wintergreen Pouches captured half a share point.

Building on its pouch success, Grizzly is launching mint and straight
styles in the first quarter of 2009. With these styles, Grizzly is
establishing a strong platform in the rapidly growing pouch market.

Turning to the company’s premium Kodiak brand, Rosson said that packaging
and promotion upgrades helped to moderate the brand’s volume decline in 2008
despite increased levels of competitive promotion.

“Conwood remains focused on strengthening its position in the premium
category, and it is exploring opportunities for additional profitable growth,”
Rosson said.

“Conwood had another strong year in 2008,” he said. “We expect to see
increased competition in 2009, but we are confident that Conwood’s many
strengths position the company well for continued success.”

Financial Update

“I’m pleased with our 2008 performance and the progress we made through
the year,” said Thomas R. Adams, RAI’s chief financial officer. “RAI’s results
demonstrate the strength of our business and our total-tobacco model.”

“A great example of this was R.J. Reynolds’ results for the year. Despite
an 8.4 percent decline in total cigarette volume, the company increased
adjusted operating income and significantly improved its adjusted operating
margin while it eliminated some low-margin and non-core products, and
continued to improve efficiency across the business,” Adams said.

“Conwood’s resilience was evident as well,” he said. “Even as the price
gap continued to narrow, the company increased earnings, margins and share on
the strength of double-digit moist-snuff volume growth.”

In the fourth quarter, RAI reported a pre-tax, long-term investment
impairment of $33 million. In addition, R.J. Reynolds and Conwood reported
non-cash, pre-tax trademark impairment charges. R.J. Reynolds took charges of
$3 million on two non-support brands, while Conwood’s charges of $142 million
included $74 million on the Kodiak brand, with the remainder primarily on
loose-leaf brands.

Adams said that RAI recorded $90 million in restructuring charges in 2008.
The restructuring will generate cost savings that will grow to $55 million
annually by 2011.

Adams noted that RAI’s strong cash flow and balance sheet, and its
conservative approach, provide financial flexibility. Given the company’s
cash flow, low leverage ratio and manageable debt maturities, RAI has no need
to access the credit markets to fund operations. At the end of the year, the
company had $2.6 billion in cash, primarily invested in short-term treasuries.

“We remain committed to returning value to our shareholders,” Adams said.
In 2008, RAI maintained its annualized dividend of $3.40 per share, and its
target payout ratio of 75 percent of net income.

During the year, RAI bought $207 million of its shares under the current
$350 million share-repurchase program, which ends in April. To preserve
liquidity, RAI did not make any stock purchases in the fourth quarter.

“We expect 2009 to pose additional challenges and opportunities,” Adams
said. “However, our companies have strong core brands, innovations and
productivity initiatives. Those factors, coupled with RAI’s financial strength
and the commitment of our employees and leadership teams, provide a good
foundation to sustain our success.”


Reynolds American will webcast a conference call to discuss fourth-quarter
and full-year 2008 results at 9:30 a.m. Eastern Time on Wednesday, Feb. 11,
. The call will be available live online on a listen-only basis. To
register for the call, please visit the “Investors” section of
www.ReynoldsAmerican.com. A replay of the call will be available on the site
for 30 days. Investors, analysts and members of the news media can also
listen to the live call by phone, by dialing 888-211-9963 (toll-free) or 913-
312-0377 (international). Remarks made during the conference call will be
current at the time of the call and will not be updated to reflect subsequent
material developments. Although news media representatives will not be
permitted to ask questions during the call, they are welcome to monitor the
remarks on a listen-only basis. Following the call, media representatives may
direct inquiries to Seth Moskowitz at (336) 741-7698.


Statements included in this news release that are not historical in nature
are forward-looking statements made pursuant to the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995. These statements
regarding RAI’s future performance and financial results inherently are
subject to a variety of risks and uncertainties, described in the forward-
looking statements.

These risks and uncertainties include:

— the substantial and increasing taxation and regulation of tobacco
products, including the recent federal excise tax increase, and the possible
regulation of tobacco products by the FDA;

— the possibility of further restrictions or bans on the use of certain
flavorings, including menthol, in tobacco products, or the use of certain
flavor descriptors in the marketing of tobacco products;

— various legal actions, proceedings and claims relating to the sale,
distribution, manufacture, development, advertising, marketing and claimed
health effects of tobacco products that are pending or may be instituted
against RAI or its subsidiaries;

— the potential difficulty of obtaining bonds as a result of litigation

— the substantial payment obligations and limitations on the advertising
and marketing of cigarettes under the MSA;

— the continuing decline in volume in the domestic cigarette industry and
RAI’s dependence on the U.S. cigarette industry;

— concentration of a material amount of sales with a single customer or

— competition from other manufacturers, including industry consolidations
or any new entrants in the marketplace;

— increased promotional activities by competitors, including deep-
discount cigarette brands;

— the success or failure of new product innovations and acquisitions;

— the responsiveness of both the trade and consumers to new products,
marketing strategies and promotional programs;

— the ability to achieve efficiencies in the businesses of RAI’s
operating companies, including outsourcing functions, without negatively
affecting sales;

— the reliance on a limited number of suppliers for certain raw

— the cost of tobacco leaf and other raw materials and other commodities
used in products;

— the effect of market conditions on foreign currency exchange rate risk,
interest rate risk and the return on corporate cash;

— declining liquidity in the financial markets, including bankruptcy of
lenders participating in RAI’s revolving credit facility and decreased
availability of money market funds;

— the impairment of goodwill and other intangible assets, including

— the effect of market conditions on the performance of pension assets or
any adverse effects of any new legislation or regulations changing pension
expense accounting or required pension funding levels;

— the substantial amount of RAI debt;

— the rating of RAI’s securities;

— any restrictive covenants imposed under RAI’s debt agreements;

— the possibility of fire, violent weather and other disasters that may
adversely affect manufacturing and other facilities;

— the significant ownership interest of B&W, RAI’s largest shareholder,
in RAI and the rights of B&W under the governance agreement between the

— the expiration of the standstill provisions of the governance
agreement; and

— the potential existence of significant deficiencies or material
weaknesses in internal control over financial reporting that may be identified
during the performance of testing required under Section 404 of the Sarbanes-
Oxley Act of 2002.

Due to these risks and uncertainties, you are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of the date
of this news release. 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.


Reynolds American Inc. (NYSE: RAI) is the parent company of R.J. Reynolds
Tobacco Company; Conwood Company, LLC; and Santa Fe Natural Tobacco Company,

— R.J. Reynolds Tobacco Company is the second-largest U.S. tobacco
company. The company’s brands include five of the 10 best-selling cigarettes
in the United States: Camel, Kool, Pall Mall, Winston and Doral.

— Conwood Company, LLC is the nation’s second-largest manufacturer of
smokeless tobacco products. Its leading brands are Kodiak, Grizzly and Levi
. Conwood also sells and distributes a variety of tobacco products
manufactured by Lane, Limited, including Winchester and Captain Black little
cigars, and Bugler roll-your-own tobacco.

— Santa Fe Natural Tobacco Company, Inc. manufactures Natural American
Spirit cigarettes and other additive-free tobacco products, and manages and
markets other super-premium brands.

Copies of RAI’s news releases, annual reports, SEC filings and other
financial materials are available at www.ReynoldsAmerican.com.

                     (financial and volume tables follow)

    Schedule 1

                              REYNOLDS AMERICAN INC.
                Condensed Consolidated Statements of Income - GAAP
                 (Dollars in Millions, Except Per Share Amounts)

                                        Three Months Ended Twelve Months Ended
                                            December 31,       December 31,
                                          2008      2007      2008     2007

    Net sales, external                  $2,047    $2,097    $8,377   $8,516
    Net sales, related party                130       133       468      507
    Net sales                             2,177     2,230     8,845    9,023

    Cost of products sold                 1,165     1,192     4,863    4,960
    Selling, general and administrative
     expenses                               352       450     1,500    1,687
    Amortization expense                      6         6        22       23
    Restructuring charges                    (1)        -        90        -
    Trademark impairment charges            145        65       318       65

    Operating income                        510       517     2,052    2,288

    Interest and debt expense                67        81       275      338
    Interest income                          (9)      (40)      (60)    (134)
    Gain on termination of joint venture      -         -      (328)       -
    Other expense, net                       34         3        37       11

    Income from continuing operations
     before income taxes
     and extraordinary item                 418       473     2,128    2,073

    Provision for income taxes              160       176       790      766

    Income from continuing operations
     before extraordinary item              258       297     1,338    1,307

    Extraordinary item - gain on
     acquisition (1)                          -         -         -        1

    Net income                             $258      $297    $1,338   $1,308

    Basic income per share:
      Income from continuing operations
       before extraordinary item          $0.89     $1.01     $4.58    $4.44
      Net income                          $0.89     $1.01     $4.58    $4.44

    Diluted income per share:
      Income from continuing operations
       before extraordinary item          $0.89     $1.01     $4.57    $4.43
      Net income                          $0.89     $1.01     $4.57    $4.43

    Basic weighted average shares,
     in thousands                       290,533   294,178   292,445  294,385
    Diluted weighted average shares,
     in thousands                       291,139   294,771   293,074  294,889

    Segment data:
      Net sales:
        RJR Tobacco (2) (3)              $1,880    $1,950    $7,678   $7,945
        Conwood                             187       175       723      670
        All Other (2) (3)                   110       105       444      408
                                         $2,177    $2,230    $8,845   $9,023
      Operating income:
        RJR Tobacco (2) (3)                $525      $457    $1,756   $1,940
        Conwood                             (43)       52       232      312
        All Other (2) (3)                    41        35       153      142
        Corporate                           (13)      (27)      (89)    (106)
                                           $510      $517    $2,052   $2,288

    Supplemental information:
      Excise tax expense                   $461      $482    $1,890   $2,026
      Master settlement agreement and
       other state settlement expense      $624      $676    $2,703   $2,821
      Federal tobacco buyout expense        $63       $52      $249     $255

    (1) Includes adjustments to the 2000 extraordinary gain on acquisition,
        resulting from favorable resolution of prior-years' tax matters.
    (2) All periods adjusted to reflect the transfer on January 1, 2008, of
        the contract manufacturing business into the RJR Tobacco segment from
        All Other.
    (3) All periods adjusted to reflect the transfer on January 1, 2008, of
        the super premium brands, including DUNHILL and STATE EXPRESS 555,
        into All Other from the RJR Tobacco segment.

    Schedule 2

                            REYNOLDS AMERICAN INC.

                  Reconciliation of GAAP to Adjusted Results
                            (Dollars in Millions)

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 December 31,
                                        2008                     2007
                             Operating  Net   Diluted Operating  Net   Diluted
                              Income   Income   EPS    Income   Income   EPS

    GAAP results                $510    $258   $0.89     $517    $297   $1.01
    The GAAP results include
     the following expense
      Restructuring charges       (1)      -       -        -       -       -
      Trademark impairment
       charges                   145      91    0.31       65      41    0.14
      Long-term investment
       impairment charge           -      21    0.07        -       -       -
        Total adjustments        144     112    0.38       65      41    0.14
    Adjusted results            $654    $370   $1.27     $582    $338   $1.15

                                       Twelve Months Ended December 31,
                                        2008                     2007
                             Operating  Net   Diluted Operating  Net   Diluted
                              Income   Income   EPS    Income   Income   EPS

    GAAP results              $2,052  $1,338   $4.57   $2,288  $1,308   $4.43
    The GAAP results include
     the following expense
      Restructuring charges       90      57    0.19        -       -       -
      Trademark impairment
       charges                   318     200    0.68       65      41    0.14
      Gain on termination
       of joint venture            -    (210)  (0.71)       -       -       -
      Long-term investment
       impairment charge           -      21    0.07        -       -       -
      Extraordinary gain on
       acquisition                 -       -       -        -      (1)      -
        Total adjustments        408      68    0.23       65      40    0.14
    Adjusted results          $2,460  $1,406   $4.80   $2,353  $1,348   $4.57

                      Condensed Consolidated Balance Sheets
                              (Dollars in Millions)

                                                   December 31,  December 31,
                                                      2008          2007
    Cash and cash equivalents                        $2,578        $2,215
    Short-term investments                               23           377
    Other current assets                              2,418         2,400
    Trademarks and other intangible assets, net       3,270         3,609
    Goodwill                                          8,174         8,174
    Other noncurrent assets                           1,691         1,854
                                                    $18,154       $18,629
    Liabilities and shareholders' equity
    Tobacco settlement accruals                      $2,321        $2,449
    Other current liabilities                         1,602         1,454
    Long-term debt (less current maturities)          4,486         4,515
    Deferred income taxes, net                          282         1,184
    Long-term retirement benefits
     (less current portion)                           2,836         1,167
    Other noncurrent liabilities                        390           394
    Shareholders' equity                              6,237         7,466
                                                    $18,154       $18,629

    Schedule 3

                            REYNOLDS AMERICAN INC.
   Reconciliation of GAAP to Proforma Adjusted Operating Income by Segment

R.J. Reynolds is the second largest cigarette manufacturer in the United
and manages a contract manufacturing business. R.J. Reynolds’ segment
results have been adjusted to reflect the January 1, 2008 transfer of the
contract manufacturing business from All Other, and the transfer of super
premium brands, including DUNHILL and STATE EXPRESS 555, to All Other.

Conwood is 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 December 31,
                                           2008                    2007
                                R.J. Reynolds Conwood   R.J. Reynolds Conwood

    GAAP operating income             $525      $(43)          $457      $52

    The GAAP results include the
     following expense:
      Trademark impairment charges       3       142             33       32
        Total adjustments                3       142             33       32
    Adjusted operating income         $528       $99           $490      $84

                                          Twelve Months Ended December 31,
                                           2008                    2007
                                R.J. Reynolds Conwood   R.J. Reynolds Conwood

    GAAP operating income           $1,756      $232         $1,940     $312

    The GAAP results include the
     following expense:
      Restructuring charges             81*        -              -        -
      Trademark impairment charges     176       142             33       32
        Total adjustments              257       142             33       32
    Adjusted operating results      $2,013      $374         $1,973     $344

    * RAI and its operating companies recorded aggregate restructuring charges
      of $90 million during 2008.

    Schedule 4


    UNIT VOLUME (in billions):

                    Three Months Ended          Twelve Months Ended
                      December 31,     Change      December 31,     Change
                      2008   2007   Units    %     2008   2007   Units    %
      Camel (filter
       styles)         5.6    5.8   (0.1)  -2.5%   23.3   24.2   (0.9)  -3.8%
      Pall Mall        2.3    1.8    0.5   30.3%    8.6    7.1    1.5   20.8%
    Total growth
     brands            7.9    7.5    0.4    5.3%   31.8   31.3    0.5    1.7%

    Total support
     brands           11.2   12.4   (1.2)  -9.7%   46.6   52.0   (5.4) -10.3%

    Total non-
     support brands    2.6    3.2   (0.6) -20.1%   11.0   14.3   (3.3) -23.3%

    Total R.J.
     domestic         21.6   23.1   (1.4)  -6.3%   89.5   97.6   (8.2)  -8.4%

      Total premium   13.4   14.4   (1.0)  -6.7%   55.9   60.9   (5.0)  -8.2%
      Total value      8.2    8.7   (0.5)  -5.6%   33.5   36.7   (3.2)  -8.7%
     mix              62.0%  62.3%  -0.3%          62.5%  62.4%   0.1%

    Industry          83.6   86.5   (2.9)  -3.3%  345.3  357.2  (11.9)  -3.3%
      Premium         60.9   61.8   (0.9)  -1.4%  251.1  259.9   (8.9)  -3.4%
      Value           22.7   24.7   (2.0)  -8.1%   94.2   97.3   (3.0)  -3.1%
     mix              72.8%  71.4%   1.4%          72.7%  72.8%  -0.1%


                       Three Months Ended           Twelve Months Ended
                          December 31,                 December 31,
                       2008   2007  Change          2008   2007  Change
      Camel (filter
       styles)         8.1%   7.9%   0.3            8.0%   7.8%   0.3
      Pall Mall        3.1%   2.2%   0.9            2.6%   2.1%   0.5
    Total growth
     brands           11.3%  10.1%   1.2           10.7%   9.9%   0.8

    Total support
     brands           13.3%  14.4%  (1.0)          13.8%  14.7%  (0.9)

    Total non-
    support brands     3.4%   4.1%  (0.7)           3.6%   4.4%  (0.8)

    Total R.J.
     domestic         28.0%  28.5%  (0.6)          28.1%  29.0%  (1.0)

Amounts are rounded on an individual basis and, accordingly, may not sum
in the aggregate.

R.J. Reynolds’ support brands include Kool, Winston, Salem, Doral, Capri
and Misty.

Industry volume data based on information from Management Science
Associates, Inc.

    Retail shares of market are as reported by Information Resources Inc.

    Schedule 5


    UNIT VOLUME (in millions of cans):

                    Three Months Ended          Twelve Months Ended
                      December 31,     Change      December 31,     Change
                      2008   2007   Units    %     2008   2007   Units    %

      Kodiak          11.5   13.4   (1.9) -13.9%   51.0   53.2   (2.2)  -4.2%
      Other premium    0.7    0.8   (0.1)  -6.5%    2.8    3.2   (0.4) -12.5%
    Total premium     12.2   14.2   (2.0) -13.6%   53.8   56.4   (2.6)  -4.5%

      Grizzly         73.9   62.1   11.8   19.1%  279.6  237.0   42.6   18.0%
      Other price-
       value           0.3    0.4   (0.1) -25.0%    1.7    2.2   (0.5) -22.7%
    Total price-
     value            74.2   62.5   11.7   18.7%  281.3  239.2   42.1   17.6%

    Total moist
     snuff cans       86.4   76.7    9.7   12.7%  335.2  295.6   39.5   13.4%


                     Three Months Ended           Twelve Months Ended
                       December 31,                 December 31,
                       2008   2007  Change          2008   2007  Change

      Kodiak           3.7%   4.4%  (0.7)           4.0%   4.4%  (0.4)
      Total premium    4.0%   4.6%  (0.6)           4.3%   4.7%  (0.4)

      Grizzly         24.1%  21.9%   2.2           23.3%  21.1%   2.2
    Total price-
     value            24.2%  22.1%   2.1           23.4%  21.3%   2.1

      Total Conwood   28.2%  26.7%   1.5           27.7%  26.0%   1.7

Amounts are rounded on an individual basis and, accordingly, may not sum
in the aggregate.

Share data for total moist snuff based on distributor reported data
processed by Management Science Associates, Inc.

SOURCE Reynolds American Inc.

Source: newswire

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