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ear RJR Nabisco 1993 Annual Report

' Tobacco usmesses • R.J. Reynolds 7bbacco Worldwide is the second- largest tobacco company in the United States and the fourth-largest outside the United States. Cigarettes are manufactured in more than 30 joreign countries by the company and its licensees and are sold in more than 160 markets around the world. Q From a price war in the United States to fast-changing developments in Eastern Europe, 1993's events challenged R.J. Reynolds employees around the world. On April 2,1993, our major U.S. competi- tor initiated actions that led to list-price reduc- tions on full- and mid-price brands throughout the domestic industry. As a consequence, U.S. tobacco earnings declined by 43 percent, a result we were not happy with and an earn- ings level we do not accept for the future. Since April, we have cut costs throughout the company, challenging every activity and expense and aligning costs with the new 0 pricing. Today, our U.S. cost base is down 25 percent. We are a leaner, faster organiza- tion - a stronger competitor - committed to earnings and cash flow growth. And growth opportunities abound. Outside the United States, cigarette consumption is growing about one percent annually. American-blend brands - the segment in which Reynolds competes - are growing about 5 percent annually and currently account for about 40 percent of volume outside the United States and China. Three of the top-10 brands interna- tionally belong to R.J. Reynolds. 18

.................................................................................................... .................................................................................................. .f • . • "Alihough sales and earnings declined overall as a result of U.S. pricing, we saw real indications by year's end of returning stability in the domestic market that should enable us to improve profits significantly from last year's performance." We employ a "go and get" approach as opposed to many other companies' "wait and see" attitude. We invested in Russia, Poland, Hungary, Turkey, and Ukraine. Sales and marketing teams are on the ground in the Czech Republic, Bulgaria and Romania, among other countries. We are already making money in Eastern Europe and the former Soviet Union. Given the wealth of international oppor- tunities, we united our domestic and inter- national businesses by establishing a worldwide tobacco group. Our U.S. strengths in manufacturing, distribution, merchandising, R&D, marketing, and pro- motions, combined with our international team's wealth of expertise and flexibility, make our worldwide team second to none. Tony Butterworth, a talented, experienced global marketer, joined Reynolds as presi- dent of the international tobacco company. We have renewed confidence that we can grow both volume and earnings worldwide in 1994 and beyond. Our worldwide commitment is simple: We work for smokers. By doing that, we serve our shareholders well. We provide quality cigarettes that meet the preferences of the world's estimated one billion smokers. We recognize that smoking is controversial, in terms of both risk factors associated with smoking and the rights of smokers and non-smokers. However, millions of adults, after evaluat- ing all of the information available about cigarettes, have chosen to continue to smoke. Smokers weigh benefits such as pleasure and relaxation along with informa- tion about associated risk factors. They decide whether to smoke, how much to smoke, and which brand to smoke. We intend to provide adult smokers with the best cigarettes we can make. We will actively address external issues that affect our business. That means our practices must demonstrate our beliefs: That children should not smoke. That accommodation of smokers and non-smok- ers is achievable and sensible. Not everyone will agree with us. While our critics' views deserve expression, so do ours. Out of debate can come reasoned actions. Worldwide, tobacco will help power RJR Nabisco's growth. Savvy investors see tobacco as a generator of more free cash flow than nearly any other type of consumer-products business. Worldwide, hundreds of millions of smokers prefer American-blend cigarettes. Meeting that demand provides our tobacco business with substantial income and volume growth potential. Frankly, I couldn't ask for a more interesting company to lead, or a more talented management team to work with, For R.J. Reynolds, 1993 has been a year of great change, and 1994 and beyond will benefit as a result. James W. Johnston Chairman and Chief Executive Officer R.J. Reynolds Tobacco Worldwide RJ. Reynolds Tobecco Workiwide TOTAL VOLUME (unin fn bqNont) 2793 290.1 141.7 138.0 91 146.2 143.9 '92 316.7 141.0 174.7 ' 93  Domestic  International 19