RAI CEO: 'Returning Value in a Challenging Time'

All references in this release to "reported" numbers refer to GAAP measurements; all "adjusted" numbers are non-GAAP, as defined in schedule 2 of this release, which reconciles reported to adjusted results for the first quarter.

Reynolds American Inc. (NYSE: RAI) today announced a 54.1 percent increase in reported EPS for the first quarter of 2008, driven by a $328 million pre- tax gain related to the termination of the Gallaher Joint Venture. Excluding that gain, first-quarter adjusted EPS was down 9.9 percent, as higher cigarette pricing was more than offset by a number of factors that lowered R.J. Reynolds' volume. Conwood continued to deliver strong moist-snuff volume and share gains. Continuing its focus on returning shareholder value, RAI also announced a $350 million share repurchase program. In light of a weaker- than-expected first quarter, RAI revised its full-year forecast and now expects 2008 earnings, excluding the JV gain, to be consistent with the prior year.

Overview

"Reynolds American's operating companies continued to post gains on key cigarette and smokeless tobacco brands in the first quarter, with R.J. Reynolds' growth brands gaining half a share point and Conwood continuing to post double-digit volume growth," said Susan M. Ivey, RAI's chairman and chief executive officer.

"However," she said, "above-average cigarette declines on R.J. Reynolds' non-growth brands and an adjustment to settlement expense were among the factors that drove first-quarter adjusted earnings lower than the prior-year period."

While adjusted earnings were down about 10 percent, reported EPS was about 54 percent higher, due to a $328 million pre-tax gain from the successful termination of the Gallaher Joint Venture. The payments from that transaction will provide a cash stream over the next several years.

Ivey also noted that the RAI board of directors has approved a share repurchase program of $350 million during the next 12 months. "This share repurchase reflects our commitment to our shareholders, and it demonstrates our continuing confidence in the long-term strength of our businesses," she said.

"As we work through the challenges of the current environment," Ivey said, "Reynolds American remains committed to returning value to our shareholders, and our operating companies remain focused on growth strategies to deliver long-term success.

"Reynolds American's operating companies manufacture and market a broad range of tobacco products," she said. "That product diversification provides flexibility to take advantage of shifting consumer preferences - as well as other emerging opportunities."

R.J. Reynolds

R.J. Reynolds' first-quarter operating income of $415 million fell 15.0 percent from the prior-year quarter as an 11.8 percent decline in the company's shipment volume and an adjustment to MSA expense more than offset the impact of higher pricing.

Total cigarette industry shipment volume was down 3.3 percent from the prior-year quarter when excess wholesale inventory resulted in lower industry shipments. Based on shipments to retail through traditional channels, it appears that cigarette consumption declined by about 5 percent. R.J. Reynolds believes that some of that consumption decline reflected shifts to other cigarette channels and other tobacco products.

R.J. Reynolds' growth-brand shipment volume was down 5.6 percent. Based on retail shipments, growth-brand consumption was down about 4 percent, in line with total industry performance. The company's first-quarter volume decline was primarily driven by a 16.3 percent decline in the company's lower- margin, non-growth brands.

R.J. Reynolds' growth brands continued to deliver market-share gains, with a combined first-quarter increase of 0.5 share points. Due to declines on non-growth brands, the company's total market share of 28.0 percent was down 1.4 share points from the prior-year quarter.

Several factors contributed to the company's overall share and volume declines.

R.J. Reynolds' older, more price-sensitive consumers were disproportionately affected by ongoing economic pressures that included higher cigarette prices. That contributed to higher-than-normal cigarette volume declines in the first quarter.

"It's obvious that our first-quarter performance was weaker than expected and that our efforts to improve promotional efficiency and increase margins were not in sync with the economic and competitive environment," said Daniel M. Delen, R.J. Reynolds' president and chief executive officer.

"We are adjusting our programs to make sure that our brands are competitive in the marketplace," he said. "We will, however, continue to look for opportunities to increase promotional efficiencies going forward."

R.J. Reynolds' growth brands - Camel, Kool and Pall Mall - represented about 45 percent of the company's first-quarter volume. These brands posted a combined share gain of 0.5 percentage points from the prior-year period, with a first-quarter share of 13.2 percent. That performance was driven by continued growth of Camel and Pall Mall, and a slight decline on Kool.

During the first quarter, Camel launched updated packaging and smoother blends for its core styles. Camel's ongoing focus on providing adult smokers with relevant innovations like Camel No. 9 and Camel Signature continued to enhance the brand's marketplace performance. Camel gained 0.5 share points from the prior-year quarter.

Camel's latest innovation, Camel Crush, was introduced in test market in the first quarter. Camel Crush is a unique cigarette that uses R.J. Reynolds' technology to provide adult smokers with the option of changing each cigarette from regular to menthol by crushing a capsule in the filter. This technology has already been introduced in the Japanese market, where it has strong appeal.

Camel Snus, R.J. Reynolds' first effort to broaden Camel's appeal beyond cigarettes, is on track for a second-quarter expansion to nine additional major markets across the United States. Camel Snus, a smoke-free, spitless tobacco product that comes in a small pouch, is currently being tested in eight markets. With continued learning from this test, the company remains optimistic about the potential for this new product.

Kool, the company's second premium-priced growth brand, has remained relatively stable in the highly competitive menthol marketplace. Kool's first-quarter share of market was 3.1 percent.

Pall Mall, a value-priced brand, continued to benefit from its position as a great product that lasts longer. Pall Mall's first-quarter share was up 0.2 percentage points from the prior-year quarter. In the second quarter, Pall Mall plans to introduce more stylish, round-cornered packs.

During the first quarter, R.J. Reynolds' premium-to-value price mix was 63.2 percent, an improvement of 1.2 points from the prior-year period.

R.J. Reynolds' first-quarter operating margin of 23.2 percent was 2.4 percentage points lower than the year-ago quarter, when the timing of promotional expense resulted in an unusually high margin.

Delen said that R.J. Reynolds is intensely focused on getting its performance back on track. "It's clear that we had a difficult first quarter," he said, "and we're already taking steps to improve our marketplace results."

Conwood

Moist-snuff category growth continued in the first quarter with a total industry volume increase of 5.5 percent - or about 7 percent after adjusting for one less shipping day in the current-year quarter. Conwood grew at about twice the industry rate, with the company's Grizzly brand continuing to capture more than 40 percent of total category growth.

Gains on Grizzly, and Kodiak's improved performance, drove Conwood's total moist-snuff shipments up 1.2 share points to a first-quarter share of 26.9 percent. Grizzly's continued growth further strengthened the brand's position as the industry's third-largest and fastest-growing moist-snuff brand.

Introduced as a value brand in 2001, Grizzly posted a first-quarter share of 22.1 percent, up 1.6 share points from the prior-year period. That performance was aided by the recent launch of two new Grizzly styles - Snuff and Wintergreen Pouch - which are both being expanded nationally this year. Grizzly Snuff will be available nationwide in the second quarter, and Grizzly Wintergreen Pouch is scheduled to be national in the third quarter.

"We're exceptionally pleased with the performance of these new Grizzly styles," said William M. Rosson, Conwood's president and chief executive officer. "Their results to date confirm our belief that these products will further add to Grizzly's growth."

Rosson said he was also pleased with the performance of Kodiak, the company's leading premium brand.

"We've taken steps to make Kodiak more competitive in the marketplace, and that translated into volume growth of almost 2 percent compared with last year's first quarter," he said. "And upgrades to the packaging and blends of Kodiak's mint and straight styles that we rolled out last month should also enhance the brand's performance. We also began to distribute Kodiak Pouch, to extend the brand's appeal among competitive pouch consumers."

Even with one less shipping day than the prior-year period, Conwood's net sales were up 7.7 percent at $167 million. And after significant first- quarter investments to launch new styles and further drive Conwood's growth, the company's operating income of $81 million was up 1.9 percent from the year-ago quarter. Operating margins of 48.8 percent were down from the prior- year quarter, due to these investments.

"Our brands and our business continue to perform well," Rosson said. "With the continuing growth of Grizzly and the new styles we're launching nationally, we expect Conwood to post another year of strong growth."

FINANCIAL UPDATE

"Clearly, the first quarter was marked by a number of challenges that hurt our performance and have caused us to reassess our outlook for the year," said Thomas R. Adams, Reynolds American's chief financial officer. "Given our results to date, we're reducing our full-year forecast. Excluding the gain from the joint venture, we now expect to deliver earnings in line with our 2007 adjusted results."

Adams said that R.J. Reynolds is taking steps to address factors that contributed to its weak volume in the first quarter and expects to improve its performance through the balance of the year. "R.J. Reynolds is making adjustments to ensure that its brands are more competitive, while also remaining focused on improving profits through increased efficiency," he said.

"The investments that Conwood is making to further strengthen brand performance are already beginning to pay off and position the company well for another year of solid growth," Adams said. "Conwood is a strong company with strong brands, and these investments will reinforce the company's ability to consistently deliver volume and earnings gains moving forward."

Resulting from the termination of the Gallaher Joint Venture, in April, the company received 40 percent of the total payment of euro265 million. That payment was euro106 million - or about $166 million. The balance will be paid in annual installments over the next six years.

Adams said that RAI's confidence in the future is evidenced by the $350 million share repurchase that the board has approved. He said the company plans to use cash generated from operations to opportunistically repurchase shares during the next 12 months. "This approach allows us to maintain financial flexibility while returning value to shareholders," he said.

"In the current economic environment," Adams said, "our strong balance sheet and financial flexibility position us well to take advantage of opportunities to further increase shareholder value."

CONFERENCE CALL WEBCAST TODAY

Reynolds American will webcast a conference call to discuss first-quarter 2008 results at 9:30 a.m. Eastern Time on Wednesday, April 30, 2008. The call will be available live online on a listen-only basis. To register for the call, please visit the "Investors" section of http://www.ReynoldsAmerican.com. A replay of the call will be available on the site until May 30 at 5 p.m. Investors, analysts and members of the news media can also listen to the live call by phone, by dialing 888-715-1397. 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.

RISK FACTORS

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:

Due to these uncertainties and risks, 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.

ABOUT US

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

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

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.

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

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

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

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.

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