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l,l~ e.ur~ pDr~T.EC_TFD RV X1I\'\'E.q/)~ T~__ TOBACCO LITIGATION PROTECTIVE -3- Moving to spirits, I know you are aware of the adjustment occurring in that"industry. Spurred in part by the lingering recession in 1982, the whole category recently has been in decline. Most of this decline,-however, came from the share drop in brown goods -- the bourbon and whisky segment of the market. But white goods -- the vodkas and tequilas -- did relatively well. And while Smirnoff's domestic case volume was flat for the year, market share improved and worldwide volume was up 3 percent. Our strategy in the U.S. spirits business is to increase our share of market in the segments characterized as either light or flavorful products -- where we are already the market leader. So, our advertising and marketing efforts will be concentrated behind Smirnoff, Jose Cuervo tequila and Black Velvet Canadian. In the spirits business, we are embarked on an aggressive new product development program and have 16 new products planned for Introduction-this year. While most will be line extensions such as the new 10-proof Club Cocktail Bloody Mary, at least two of the introductions will be entirely new beverage concepts aimed at appealing to changing consumer tastes. The new low-proof cocktail, and those to follow, have been made possible by a technological breakthrough which enhances shelf-life, even with lower proof numbers. In the wines business, a bumper crop of grapes has caused significant dislocation in the marketplace, and eroding margins. Our strategy is to concentrate our marketing and selling resources behind Inglenook and Beaulieu. Inglenook, a premium table wine generating a healthy profit, is in a growing category, we plan to increase market share by about I percent per year over the next five years. Over the last decade, this brand has grown from 68,000 cases to more than six million cases annuall9 -- so our target is realistic. Beaulieu is a highly profitable, super-premium brand which has no difficulty selling out its entire production. Looking ahead, our immediate objective is for Heublein wines to hold relatively steady in terms of total case sales. But we will change the mix from the lower-prlced wines with lower margins to the higher-priced, higher-margin products. With the Heublein merger, we obtained a highly profitable, fast growing, quick service restaurant system in Kentucky Fried Chicken. We intend to move quickly to capitalize on our advantage.

(B&W) PROTECTED BY .MINNESOTA TOBACCO LITIGATION PROTECTIVE ORDER --4-- Z We are employing a two-pronged growth strategy for KFC, First, we are going to continue to increase per-store sales by continuing to improve our in-store operations. KFC has worked hard to establish its'impressive record of five consecutive years of real sales growth. And, I'm happy to say, we see that continuing. Longer term, we will probably have to add some new products to take advantage of shifting consumer trends as we already have done with our made-from-scratch biscuits, and our spicy chicken menu especially designed for urban areas. But we have no intention of trying to be everything to everybody, and our major emphasis will be to continue to do what we have been doing -- only better -- and of course, staying with chicken. The second element of our KFC strategy will be to increase the number of stores that we open each year. Over the last five years, we opened an average of 20 new company stores per year in the United States. This year we'll open 80 new stores. And next year, we will increase the number of new store openings by an additional 50 percent, opening 120 stores. This will take us along the path to our objective of 200 new stores per year. It's worth noting here that the returns from new stores start on opening day. We think the U.S. market needs another 2,000 KFC stores, which is an increase of nearly 50 percent over the 4,300 stores that we have today. And this year, franchisees will open almost as many new outlets as the company, thanks in part to lower interest rates. Internationally, we have 1,300 Kentucky Fried Chicken stores -- about one-third of them company-owned. We plan to open more than 500 franchised and company-owned units over the next five ~ears. We can only guess how many KFC stores will ultimately be uilt overseas. But I can say with conviction that the number is staggering, and that KFC's future is bright indeed. As you have heard, there's a great deal going on in our Food and Beverage Group, and we believe it will grow and prosper in the years ahead. Now let me turn to transportation. You will recall that 1982 operating results were at a record high, even in the face of a world trade environment which was probably as bad as any of us can remember. This, of course, was because Sea-Land has worked hard to achieve fleet efficiency and lower fuel consumption, to build a worldwide structure of efficient land-based facilities and to pare costs generally. Of course, the earlier sale of the high-cost SL-7s was a key contributor to this improvement.

, Ilq&V~3 PROTECTED BY ~II.N.~ESOTA TOBACCO L_ITIGATION PROTECTIVE ORDER -5- While we expgct a minimal increase .in containerizable world trade in 1983, it is difficult to predict how this w~.ll affect operating results. Two of outmajor trade routes appear poised for substantial changes. In the Atlantic trade, indications are that in 1983 we will see significant advances in European exports to the United States. In the Pacific, historically our strongest and most profitable trade lane, we expect continued strengthening and modest growth through the remainder of this year. Unfortunately, despite some volume increase and continued progress in reducing costs, we are experiencing major rate erosion. As a result, our average revenue per load -- the key performance measurement in this business -- presently lags last year. If this continues, it will offset the volume gains, and negatively impact earnings. The current softness in rates is due primarily to excess capacity, and new carriers entering the major trades. Our strategy for dealing with the near-term situation is to maintain tight cost controls and maximize cargo volumes while working through conference groups to restore rate stability. A regulatory bill, =The Shipping Act of 1983," has been passed by the Senate, and it's been through one committee in the House and is now in the hands of another. This bill would reduce Justice Department second-guessing of operating decisions approved by the Federal ~aritime Commission, whose function it is to regulate shipping. It would also permit rationalization among carriers, and greater flexibility in intermodal rates. We believe this regulatory reform legislation will pass, and be signed into law sometime this year. The factor affecting our energy business which has received the most publicity, is the current world crude oil surplus and the resulting price declines. We believe the market is stabilizing at current price levels barring any serious dislocation within the major producing countries. And we anticipate a gradual increase in the volume of~ energy consumed as economic activity picks up. The key to earnings performance during the remainder of 1983 is the continued upturn in world trade -- principally the Asia/U.S. and Atlantic trades -- and progress in securing higher rate levels early in the second half of the year. With our fixed costs lowered, any significant upturn will have a positive influence on rates, and of course will leverage earnings quickly.

PROTECTED BY .MINNESOTA TOBACCO LITIGATION PROTECTI\E ORDER Z In Amlnoil's case, we have no concern over the marketability of our U.S. crude oil production, since substantial quantities of imported oil will still be required to meet domestic demand. Domestic crude prices will, however, be determined by the international situation. So far this year, our average domestic oil price has been about l0 percent below last year. However, because the Windfall Profits excise tax takes up to 70 percent of the difference between actual sales price and the regulated base price, these crude oil price cuts have had more effect on the government's tax revenue than on Aminoil's EFO. I wish we had more businesses like that. Of greater concern to us is the supply/demand situation for natural gas. Reduced economic activity, warm weather, rising prices and significant curtailments have resulted in a marked decline in U.S. natural gas production. Although total United States gas production capacity is difficult to determine, there appears to be about a 2.5 trillion cubic feet per year surplus capacity against a 1982 total demand of 18 trillion cubic feet. However, given today's increasing level of economic activity and reduced exploration efforts in the gas provinces, we believe this so-called "gas bubble" will disappear in two to three years. Importantly, this implies competitive pricing with residual fuel oil. Aminoil's strategy to deal with this uncertain picture has been implemented in a logical, consistent and flexible manner. Once the over-supply and price softness began to develop~ we immediately perceived the need to review and initiate reductlons in our capital spending and our operating costs, based upon reduced cash flows and the less favoraDle economic outlook. These cuts are already effective. We have also significantly improved our selectivity in exploration and development projects. On the plus side, lease bonus levels are down in almost all areas. Pipe and rig costs are down 30 to 50 percent and drilling efficiency has improved markedly. Well completion charges are down anywhere from 25 to 40 percent, and equipment costs are down almost 20 percent. This should result in a decline in industry finding costs from a peak of around $13 per barrel in 1981 to an industry average perhaps in the $i0 range this year. Another way of looking at this is to observe that the law of supply~demand is alive and well in the oil patch.

~r~.B:zPROTECTF_D BY .M|,NNE$OTA TOBACCO LITIGATION PROTECTIVE ORDER Z From Aminoil's perspective, the reduction in industry activity levels has several desirable aspects. We have been able to reduce oosts'~hrough less expensive drilling and service contracts, and we can choose from the more competent operators. We have reduced our tubular goods and other materials inventories, as our suppliers have become more anxious to please. And we've been able to employ high-quality professionals at reduced recruiting costs. X should add that the strengthening of Aminoil's management team with the highest quality people available, had been a high priority for us for some time, and that objective has been achieved. Another beneficial effect of the shake-out in the industry is the increased availability of opportunities to purchase properties or companies. Although competition will be keen, these opportunities will likely become better during the latter part of 1983 and into 1984. As I've said on previous occasions, we will not hesitate to do some of our prospecting on Wall Street if the economics are there. TO sum all this up, we continue to see our energy business as an area of prime opportunity for us, and with a bright future. We believe the energy price/supply equation will improve with a continuation of present economic trends, and our operations are now benefitting from a substantially improved cost picture. During the present transition, our strategy will be to manage our investment and control our costs carefully, while still building for the long-term. This continuing commitment is well illustrated by the success Amihoil enjoyed at the May 25th offshore Louisiana lease sale, where we bid on behalf of ourselves and in partnership with ARCO and Elf Acquitaine. Nearly $4.6 billion was bid by the industry on 656 tracts offered for lease by the federal government. Aminoil and its partners bid on 38 blocks and emerged as the apparent winner on 27. These blocks present us with long-term opportunities to replace or increase reserves near areas where we currently are producing crude oil and natural gas. In the Development Corporation, we are moving quickly to take advantage of emerging trends affecting our many businesses.

"(B&W) PROTECTED BY MINNESOTA TOBACCO LITIGATION PROTECTI%E ORDER -8- Consumer and industrial needs have created demands for new types of packaging -- particularly lightweight, flexible materials that have'special protective qualities and are less expensive than ca~s or boxes to transport and store. RJR Archer is strengthening its position asa supplier of high value-added flexible packaging materials. We acquired a flexible tube manufacturer earlier this year, and have now entered into a joint venture agreement to produce aseptic packaging under the Combibloc name in this country. We will continue to look for ways by which our Development Corporation can complement our major lines of business. I think you might want to ask Ty Wilson about progress in the foodservice area during the question and answer session. That wraps up my discussion of the operational factors affecting our non-tobacco businesses currently, and our strategies for dealing with these. Now let me turn to some key financial factors. The first is foreign currency management. As you know, we adopted FASB-52 for the 1982 second quarter. We did so after a great deal of study, and concurrent with the opening of our new Finance Company in Europe which functions as an "in-house" bank for our overseas operating units. The Finance Company acts to redeploy the liquid assets of our overseas units by borrowing their excess funds, converting them into other currencies as appropriate and on-lending to units needing funds. Through these newly created financial links, we are currently recycling more than $i00 million among our companies around the world. That same entity also serves to concentrate exposures arising from the crossborder trading activities of our foreign operations, by hedging net exposures in the foreign exchange market from one central point. In this manner, we have removed future currency risk from our operating companies and cut attendant transaction costs by more than 30 percent. Next is capital spending. While consolidated capital expenditures for 1983 were initially projected to be $1.4 billion, an all-time high for the company, it's now likely that they will be somewhat less -- perhaps $i.1 billion -- based on cancellations and deferrals. Combined spending by Domestic Tobacco and Aminoil accounts for more than 65 percent of the total. And, the most significant portion will be spent on the domestic tobacco company's plant modernization and expansion program which you will hear more about tomorrow. Cash generated by operations will be up significantly this year and it is unlikely that we will have to use external sources to fund our requirements despite a record-level capital program.

_ Jn,~.w) PRr3TFC'TF_D RY MINNESOT_~Q_L_ITIGATION PROTECTIVE ORDER -9- Z Our financial ratios are still well within the rating agencies' statistics for a high quality, "Double-A" credit. At year-end 1982, our ratio of total debt to total capital was 33 percent and our fixed charge coverage was 6.1 times. Both of these will improve this year. Well, we've covered a lot of ground here in a short period of time. So let me sum up. While the vagaries of the marketplace this year were not unexpected, it has been a tumultuous five-plus months. But we believe the balance we have struck in the management of our businesses will again produce a year of record operating results for R.J. Reynolds Industries. In the tobacco business, we see the improvements in shipments to the trade and retail take-away, which began early in the second quarter, continuing through the year. The introduction of Century, aime~ at capturing a new market segment for the long term, should contribute to the brightening picture in the domestic business. Internationally, we continue to grow market share in most of our markets, and the base of our business continues to strengthen. You'll hear more about this tomorrow from Ed Horrigan. In foods and beverages, we will see a dramatic upturn in earnings performance this year. And that upturn is a result of both the inclusion of Heublein for the full year and the long-awaited impact of the improvements we have made at Del Monte. We also are moving quickly to seize the opportunities provided by Kentucky Fried Chicken both here at home and overseas. Aminoil will hold its own this year as the petroleum industry returns to normal from the go-go decade just past. Traditional market forces and sound management decisions have replaced the boom psychology approach to doing business. For Aminoil, which traditionally avoided the excesses common to other companies during the past several years, growth will continue to come frcm its ability to replace reserves by expJoration or acquisition, and to grow production with lower costs. Sea-Land is poised for incremental gains in earnings as rates stabilize and then return to more normal levels, we believe we should see this change in rates begin to occur later this year. With cost discipline already a way of life at Sea-Land, we are in a position to leverage our earnings significantly with better rates. I think you can sense from my remarks that we believe our businesses to be strategically well-positioned for an upturn. But while we expect operating results to improve, 1983 quarterly bottom line comparisons will vary from previous experience.

PROTECTED BY .MINNESOTA TOBACCO LITIGATION PROTECTIVE ORDER -10- The doubling of the federal excise tax on cigarettes, the voluntary separation program in Winston-Salem which reduced first quarter EFO by more than $30 million, and the Heublein dilution have.made the early part of the year challenging for us, to say the least. The 7.$ million additional common shares issued at the time of the merger with Heublein, the dividend on the incremental preferred, plus the cost of financing the cash portion of the acquisition price, will mean that EP$ improvement will not track operating improvement on a one-for-one basis in 1983. 1984, of course, will not be subject to these problems of comparison and therefore should show results more in line with our historic patterns. In 1983, we are concentrating on making our businesses more efficient, more productive, more innovative and more profitable. we expect our earnings trends to improve during the second half -- most noticeably in the fourth quarter. And, as I said earlier, we do expect to produce another record year in operating earnings per share in 1983 -- excluding only the extraordinary Kuwait gain earned in 1982. Now we're ready for your questions. Thanks very much.

PROTECTED BY MINNESOTA TOBACCO LITIGATION PROTECTIVE ORDER Remarks by E.A. Horrigan, Jr. Chairman and Chief Executive Officer R.J. Reynolds Tobacco Company to the Tobacco Seminar Winston-Salem, North Carolina June 8, 1983 ~ >

,R.R.~V) pl~CqTFf'TPD RV XII~.'NFRf3TA TOR~_CCO.LITIGATION PROFECTIVE ()RDER It's not often that anyone in a responsible position in business will truthfully say that they are happy to have the opportunity to appear before~a.group whose function is to place every part of a business under a microscope, and then to make judgments which may have a significant impact on the price of our stock in the marketplace. But that, ladies and g~ntlemen, is exactly what I am saying to you. All of us associated with R.J. Reynolds Tobacco Business do truly feel that our time with you today is an opportunity. It is an opportunity to answer questions, and address concerns, we know you have about our business, to demonstrate that we are driving our business ahead in a carefully planned way, and to clearly show that we are doing so in a financially responsible manner. It is certainly no secret to anyone that the tobacco industry as a whole has faced difficult times during the past year and a half. Every tobacco company has felt an impact from the doubling of the federal excise tax on cigarettes. But in the face of these problems, R.J. Reynolds has taken steps to ensure that our tobacco business remains as vibrant and progressive as it has been since we began building renewed momentum in 1980. I can assure you that we are particularly mindful of your concerns, which we believe are quite legitimate, about the manner in which we at R.J. Reynolds Tobacco have addressed its future in terms of market share, unit volume and, most importantly, its continuing profitability. With this in mind, this morning's presentations have been designed to provide enough general information about our goals, strategies and accomplishments not only to provide a well-rounded picture, but to do so within the framework of the issues you and your peers have raised and placed before the invesLment community. While Jerry Long, the president of R.J. Reynolds Tobacco Company, and Lester Pullen, the president of R.J. Reynolds Tobacco International, will cover most of our major points f=r their respective operations, there are a few key observations : have reserved for myself. I have done so because I think they provide a framework for what will follow, and because they are very important in your consideration of our companies. For some time, We have been aware of and understood the concern of many of you that our determination to remain .numZer one in the domestic tobacco industry is so all-encompassing we will make any sacrifice to hold the top spot.