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Reynolds American Reports Quarterly Sales of $1.9 Billion

WINSTON-SALEM, N.C. -- Reynolds American Inc. (RAI) reported third-quarter financial results and increased its guidance primarily as a result of additional tax favorabilities associated with resolution of certain prior-years' tax matters. This is the first RAI earnings release that includes results from the U.S. operations formerly owned by Brown & Williamson Tobacco Corp. (B&W) and from Lane Ltd. (Lane).

Reynolds American was established as a publicly traded holding company on July 30, following a combination of the nation's No. 2 and No. 3 cigarette manufacturers, R.J. Reynolds Tobacco Co. and B&W's U.S. operations. At that time, Lane, a tobacco products manufacturer and distributor, was also acquired by RAI.

The third-quarter results reported include the pre-merger results of R.J. Reynolds Tobacco Holdings Inc. through July and the consolidated RAI earnings for August and September.

"Our third-quarter results and outlook for the year demonstrate the progress we continue to make in streamlining our cost structure and realizing the initial benefits of the business combination and Lane acquisition," said RAI CEO and president Susan M. Ivey. "We are ahead of schedule in delivering the $1 billion in cost-structure improvements announced last fall. We have met all key integration milestones to date and are capturing significant cost synergies related to the merger."

Ivey added that R.J. Reynolds is making progress in developing a new brand-portfolio strategy. "The company is conducting a comprehensive analysis of the strengths and long-term potential of each brand to determine its strategic role and future support," she said. "R.J. Reynolds will finalize these plans by the end of the year and will communicate its decisions and implement the new strategy in early 2005."

RAI's third-quarter net sales were $1.9 billion, a 34.8 percent increase primarily due to incremental revenues resulting from the business combination.

Operating income was $346 million, benefiting from approximately $30 million in merger-related synergies and a $7 million adjustment to previously recorded restructuring charges. These were more than offset by approximately $60 million in one-time merger-related costs. During the prior-year quarter, the company recorded an operating loss of $3.6 billion, due to restructuring charges and related trademark and goodwill impairment charges totaling $3.9 billion.

Third-quarter net income was $339 million, compared to a loss of $3.5 billion in the year-ago quarter, due to the factors mentioned above. Third-quarter net income comparisons also include a $141 million third-quarter 2004 benefit associated with resolution of prior-years' tax matters, as well as a third-quarter 2003 tax favorability of $55 million.
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