Second Quarter 2009 -- At a Glance

-- Adjusted EPS: second quarter at $1.29, up 4.9 percent; first half at

$2.30, up 3.1 percent

-- Excludes 1Q09 non-cash trademark impairments of $0.98 and 1Q08 gain

from joint-venture termination of $0.71

-- Reported EPS: second quarter at $1.29, up 4.9 percent; first half at

$1.32, down 55.1 percent

-- RAI increases, narrows 2009 guidance: Adjusted EPS range of $4.40 to

$4.60

-- Key cigarette and smokeless brands continue strong performance

-- R.J. Reynolds Tobacco Company grows earnings, margin and share

-- Conwood posts record moist-snuff volume and share

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 results for the second quarter and first half.

Reynolds American Inc. (NYSE: RAI) today announced second- quarter 2009 earnings of $1.29 per share, up 4.9 percent from the year-ago quarter on both a reported and adjusted basis. For the first half of 2009, reported EPS was $1.32, down 55.1 percent from the prior-year period, driven by first-quarter non-cash trademark impairment charges and a prior-year joint-venture (JV) gain. Excluding trademark impairments and the JV gain, first-half adjusted EPS was up 3.1 percent at $2.30 as increases in pricing, productivity and moist-snuff volume more than offset cigarette volume declines and higher pension and legal expenses. RAI raised and narrowed its full-year guidance, saying it now expects 2009 adjusted EPS of $4.40 to $4.60, which excludes any trademark impairment charges, but includes a $0.40 per share year-over-year increase in pension expense.

2Q and First Half 2009 Financial Results - Highlights

(unaudited)

(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 Six Months

Ended June 30__ Ended June 30

-------------__ --------------

%__ %

2009__ 2008__ Change__ 2009__ 2008__ Change

----__ ----__ ------__ ----__ ----__ ------

Net sales__ $2,250__ $2,339__ (3.8)%__ $4,171__ $4,396__ (5.1)%

Operating income

Reported (GAAP)__ $649__ $637__ 1.9%__ $746__ $1,143 (34.7)%

Adjusted (Non-GAAP)__ 649__ 637__ 1.9%__ 1,199__ 1,143__ 4.9%

Net income

Reported (GAAP)__ $377__ $364__ 3.6%__ $385__ $869* (55.7)%

Adjusted (Non-GAAP)__ 377__ 364__ 3.6%__ 670__ 659__ 1.7 %

Net income per diluted

share

Reported (GAAP)__ $1.29__ $1.23__ 4.9%__ $1.32__ $2.94* (55.1)%

Adjusted (Non-GAAP) 1.29__ 1.23__ 4.9%__ 2.30__ 2.23__ 3.1%

*Includes a gain of $210 million, or $0.71 per share, from the

termination of the joint venture with Gallaher.

MANAGEMENT'S PERSPECTIVE

Overview

"I'm extremely pleased with our strong performance in the second quarter," said Susan M. Ivey, RAI's chairman, president and chief executive officer. "Our total-tobacco business model, growth strategies and focus on productivity are serving us well in this changing tobacco environment.

"During the second quarter, we were better able to evaluate how the April 1 federal excise tax increases on tobacco products would impact our operating companies," she said. "As trade inventories and shipping patterns returned to more normal levels, we gained additional clarity for this year."

Based on those factors and on RAI's first-half results, the company now expects full-year adjusted EPS, which excludes trademark impairments, in the range of $4.40 to $4.60, compared with its previous guidance of $4.15 to $4.45.

Ivey also noted that in the second quarter:

-- R.J. Reynolds posted higher operating income, margin and total cigarette

market share, with strong performance by its growth brands, Camel and

Pall Mall; and,

-- Conwood delivered record moist-snuff volume and market share, with its

powerful Grizzly brand capturing more than half of total category

growth.

She added that the company's Santa Fe subsidiary continues to gain volume and share on its Natural American Spirit brand.

On the external front, authority for the U.S. Food and Drug Administration to regulate the tobacco industry was signed into law. Implementation of new industry regulations will be rolled out over the next few years.

"RAI and its operating companies have been preparing for this regulation for some time," Ivey said, "and our companies are continuing to adjust their operations and refine their strategies to successfully compete in the new regulatory environment."

She said that RAI and its operating companies remain intensely focused on strengthening their businesses, while developing innovative products that meet changing consumer preferences.

R.J. Reynolds

"R.J. Reynolds had an outstanding second quarter, which contributed to our strong first-half results, with higher adjusted earnings and operating margin in both periods, and overall share growth for the quarter," said Daniel M. Delen, R.J. Reynolds' chairman, president and chief executive officer.

"We continue to reap the benefits of our strategic business model, with its focus on innovation and strict cost control, in the evolving tobacco environment," Delen said. "Given the significant fluctuations in trade inventory levels between the first and second quarters, we believe that our half-year results provide better perspective on our performance."

R.J. Reynolds' second-quarter operating income of $556 million was up 3.4 percent over the prior-year period. That includes the impact of higher quarter-over-quarter pension expense of $45 million. The company's operating margin of 28.2 percent was up 2 percentage points.

For the first half, adjusted operating income was $1.0 billion, which excludes trademark impairment charges of $377 million but includes higher pension expense of $90 million. Adjusted operating income was up 5.3 percent, while adjusted operating margin of 27.9 percent was 3 full percentage points higher than the first half of 2008.

For the second quarter and the first half, higher pricing, lower promotional expense and additional productivity gains, including those from last year's restructuring at R.J. Reynolds, more than offset the impact of lower cigarette volume, higher pension and legal expense, and MSA costs.

"R.J. Reynolds' cigarette shipment volume fell 6.0 percent in the second quarter compared with an industry decline of 4.1 percent. That performance was significantly better than the first quarter, largely due to strong Pall Mall volume, as well as trade inventories returning to more normal levels after the federal tax increase," Delen said.

Delen noted that the company's first-half cigarette volume decline of 8.1 percent was slightly higher than the industry decline of 7.1 percent. "That reflects an improvement over our volume trend in recent years, and I'm pleased with that performance," he said.

R.J. Reynolds' growth brands, Camel and Pall Mall, delivered a strong second-quarter cigarette market share gain of 2.6 percentage points, bringing their combined share to 12.7 percent. That drove the company's total cigarette market share to 28.7 percent, up 0.4 percentage points.

Camel, the company's flagship brand, continued to perform well, with a second-quarter cigarette market share of 7.5 percent, in line with the prior-year period. The company's smokeless Camel Snus products contributed an additional 0.3 percentage points on a cigarette-equivalent basis, which assumes that a tin of Camel Snus is equal to a pack of cigarettes.

"We look at Camel as a total-tobacco brand, so this brings Camel's total-tobacco market share to 7.8 percent, up three-tenths of a share point over the prior-year quarter," Delen said. "Camel's strong focus on innovation is reinforcing and broadening the brand's appeal among adults who enjoy tobacco."

He noted that Camel Crush posted market share of 0.6 percent in the second quarter even though it has received relatively low promotional support since its national introduction in the third quarter of 2008.

Camel Crush uses R.J. Reynolds' innovative capsule technology to offer smokers the choice of regular or menthol with each cigarette. In the third quarter, the company is expanding the use of this technology to enhance Camel's core menthol styles by offering adult smokers the choice of two different levels of menthol with each cigarette.

"This gives smokers the opportunity to add more menthol taste to the cigarette at any time," Delen said. "Incorporating this technology in Camel's core menthol styles is part of our strategy to strengthen Camel's presence in the growing menthol segment."

Camel Snus was expanded nationally in the first quarter and continues to gain awareness and trial. The company is also moving forward with its innovative line of dissolvable tobacco products. Camel Orbs went into three lead markets in the first quarter and will be joined by Camel Sticks and Camel Strips this summer.

"Although it's still very early, we're pleased with the response and learning that we're getting," Delen said. "Many adult smokers say they want tobacco products that are convenient, discreet and that don't bother others, and our dissolvable products meet these desires."

Pall Mall, R.J. Reynolds' other growth brand, performed extremely well in the second quarter, with continued high levels of trial and conversion. Its second-quarter market share rose 2.6 percentage points from the prior-year period, to 5.2 percent.

"Pall Mall is a high-quality, longer-lasting cigarette at an attractive price, so it's particularly appealing in today's economic environment," Delen said. "The brand's most recent promotional period, which coincided with the federal excise tax increase, was widely welcomed by adult smokers as they reevaluated brand choices in light of higher prices. The promotion ended in late May and many of the adult smokers who tried the brand are sticking with Pall Mall."

Delen said: "R.J. Reynolds' strong performance in the second quarter and its solid results for the first half demonstrate our company's many inherent strengths. We have powerful brands and solid strategies to compete effectively in the current environment, and we're well positioned to meet the challenges and opportunities that lie ahead."

Conwood

"Conwood had another excellent quarter, with strong gains in moist-snuff volume and share," said Bryan K. Stockdale, Conwood's president and chief executive officer.

"Despite significant premium price reductions and aggressive competitive value-brand promotions, Grizzly continued to capture more than half of total moist-snuff category volume growth."

He added that Conwood reduced the price of Kodiak, the company's premium moist-snuff brand, to help stabilize its performance and remain competitive with other premium brands.

Conwood's second-quarter operating income was $92 million, down 4.1 percent from the prior-year period, as price increases and volume gains on Grizzly were more than offset by the company temporarily absorbing the federal tax increase on moist snuff, and lowering margins on Kodiak. The tax increases also significantly reduced volume on roll-your-own tobacco and little cigars.

Even with these factors, Conwood's second-quarter operating margin was 54.1 percent, up 3.2 percentage points from the prior- year period.

For the first half, Conwood's adjusted operating income of $176 million, which excludes trademark impairments of $76 million, was down 0.8 percent, while its adjusted operating margin of 52.4 percent was up 2.5 percentage points.