`
`COWEN
`
`AND COM ® ARN ¥
`
`
`
`July 22, 2016
`
`= Tobacco
`Vivien Azer
`646.562.1351
`vivien.azer@cowen.com
`
`Aaron Grey, CFA
`646.562.1421
`
`aaron.grey@cowen.com
`
`Innovation Invigorates Inhalables
`TheCowentnsight=
`
`innovation is driving renewed growth in the e-cig category. PAX’s JUUL and MO's
`MarkTen XL look to be driving much of the category improvement, while RAI’s Vuse
`is posting steady growth and NJOY's trends are recovering. While not driving a
`noticeable shift away fromcigarettes, it is encouraging to see that better technologyis
`again driving trial.
`
`Trial Remains High, Maybe This Round of Innovation Drives Better Retention?
`
`For 10 consecutive months (through April 2016), we had been seeing notable declines
`in tracked-channele-cig sales. However, the category has returned to growth in the
`last 2 months(in Nielsen). While that surely reflects the benefits of easier comparisons
`(whichwill persist), innovation also looks to be playing a role. While category retention
`remains low (~11.3%, according to RAI), new innovation could surely go a long wayin
`terms of driving consumersto the vapor category. Indeed, in 2015, we saw a 100 bps
`improvementin retention rates, which waslikely a function of national launches from
`RAI and MO. As companies race against the FDA clock (deadline for new product
`introductions is August 8), it is encouraging to see that new innovation is again driving
`trial in the category.
`Nicotine Salts: Packs a Punch
`
`While much of the e-cig category is comprised oftraditional liquid nicotine offerings,
`PAX Labs' JUUL utilizes nicotine salts technology. We recently met with management,
`and were impressed to learn that their research indicates that the nicotine uptake
`on JUUL is substantially better than for e-liquids that rely on free-base nicotine.
`While JUUL is super-premium priced,relative to traditional offerings ($50 starter
`kit, $4/cartomizer), after 1 year on the market, the productis now in 12,000 points
`of sale (with a ~7% ACV), with revenues up over 90%since the beginning of the
`year (sequentially). This good growth reflects notable trial and retention (which PAX
`believes is running 2x any competing brand), which webelieve reflects the superior
`nicotine uptake delivered bythis differentiated offering.
`
`Opportunity to Win with Traditional E-Liquid
`
`Many of the smaller players in the e-cigarette category continue to face significant
`revenue pressure, with many posting consistent double-digit declines. RAl and MO
`(both with a $10 starter kit) are bucking this trend, as both companiesare seeing solid
`growthin e-cigs. For market share leader RAI, Vuse commands a 36%revenue share,
`posting dollar sales growth of 9% on a TTW basis. Retention looks to be quite good
`for RAI as more than 85%of sales are coming from cartridges. For MO, the company's
`updated MarkTen XLlooksto be driving renewed growth for the brand family, as
`Nielsen data would indicate that sales have fully transitioned to this larger format
`offering. For NJOY, the companyis targeting the value-end of the category with their
`Daily disposable e-cig ($5.99). While revenuesarestill in decline, Daily has helped
`drive a material improvement.
`
`Mindful of Sustainability
`
`Weremain interested, but we think appropriately cautious, on e-cigs given the low
`levels of consumer retention that we see in the category. To be sure, current growth
`
`.
`-
`Pl
`8 to 13 of thi
`rt fori
`i
`F
`
`
`
`WWhA.cowen.com to13oflease see pages8 this report for MPPPELIGISPage 1 of 13
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`
`

`

`Cowen and Company
`Equity Research
`
`July 22, 2016
`
`
`
`is encouraging, but also reflects the benefits of expandeddistribution. Indeed, we
`still remember well the market share growth that LO saw with their blu offering in
`2012/2013 (which was followed by declines in market share once the brand reached
`full distribution). For our public companies, these businesses thankfully still remain
`small, and have notat all disrupted the health of the traditional tobacco category in
`the U.S., where we remain constructive, given: (1) higher minimum wages, (2) lower
`levels of unemployment, and (3) still accomodative gas prices.
`
`2
`
`WHA.COWER.COM
`
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`

`

`Cowen and Company
`Equity Research
`
`July 22, 2016
`
`Innovation Invigorates Inhalables
`
`
`
`
`
`
`
`
`
`
`
`
`In the highly-fragmented e-cig category, trends have been mixed and quite volatile.
`After 10 consecutive monthsof dollar sales declines, the category hasfinally returned
`to growth. While in part that likely reflects the benefits of easier comparisons (which
`will persist), we believe that new innovation is also contributing to these improved
`trends for the category,in traditional tobacco outlets. While category retention
`remains low, these better trends could result in better consumer conversion. Indeed,
`in 2015, we saw a 100 bpsincrease in category retention, which we attribute to the
`national launchesof e-cig offerings from RAI (Vuse) and MO (MarkTen).
`
`Figure 1 E-Cig Category Finally Recovering...
`
`Figure 2 ...PerhapsIt will Drive Better Category Retention
`
`MarkTen
`Lap MarkTen&
`&RAI
`RAI Benefit
`
`
`
`JUUL
`
`Launche
`bgundh
`
`0%
`
`F
`S 40%
`S
`=
`65
`20%
`rs
`2
`“
`-
`S -20%
`8
`oO
`= -40%
`oO
`$@
`2
`
` c
`
`10.2%
`
`10.3%
`
`11.3%
`
`8.1%
`
`12.0%,
`:
`.
`g
`210.006
`=
`10.0%
`ne
`S 8.0%
`@
`com
`E 6.0%
`S
`3 4.0%
`o
`-
`
`2.0%
`0.0%
`
`oO oO
`Tr TT TO mom mM mom mH Oo
`§§S5SSSSSSSSS885
`RASELLSRSFERssa
`noo Nh OD Nt ownon- - OW
`.
`.
`Total E-Cigs (Ex. JUUL and MarkTen XL
`
`Total E-Cigs
`
`Source: The Nielsen Company and Cowen and Company
`
`*019
`
`9013
`
`014
`
`9015
`
`Note: Retention measured as reported exclusive vaporuserelative to trial
`Source: Campany Reports and Cowen and Company
`
`To be sure, the absence of robust growth in Nielsen channels only tells part of the
`story, given that over 50% of category sales occur outside of measured channels.
`Indeed, on a total category basis, growth has looked notably better, although it has
`decelerated, reinforcing the need for better innovation.
`
`Figure 3 With Growth Slowing Overall...
`
`Figure 4 ...Better C&G Trends Would Clearly Help
`
`Source: Company Reports and Cowen and Company
`
`i Sept-14 @ April-15 @Sept-15 # April-16
`Source: Cowen and Company Next Gen Tobacco Survey, April 2016
`
`JLI Ex. 2035, Page 3 of 13
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`
`WWW.COWEnR.COM
`
`~+25%
`
`~+50%
`
`
`
`U.S.NextGenRetailSales(S$in bns)
`
`3.0
`
`2.5
`
`2.0
`
`1.0
`
`0.5
`
`~+150%
`
`~+100%
`
`
`
`
`
`
`
`
`
`PrimaryPlaceofPurchase(Total
`
`45%4
`
`
`
`60%
`Respondents) 3&
` 18%19%
`
`Convenience and_—Specialty Stores Online
`
`|
`
`0.0
`Gas Stores
`2012
`2013
`2014
`2015
`
`JLI Ex. 2035, Page 3 of 13
`
`

`

`Cowen and Company
`Equity Research
`
`July 22, 2016
`
`
`
`In particular, PAX’s JUUL
`Innovation looks to be a key driver of the improved trends.
`has gained particular traction, as has MO’s MarkTen XL, while RAI’s Vuse continues to
`grow at a respectable clip (alsolikely a function of innovation). And, while still in
`decline, NJOY has also seen some improvementin trend, following the launch oftheir
`Daily product.
`
`PAX Labs (JUUL)
`
`e
`
`Last week we met with PAX Labs CEO Tyler Goldman, as well as CFO Tim
`Danaher. The company’s e-cig, JUUL, was a key focus as managementbelieves
`the product's innovative technology can help smokers convert to less harmful e-
`cigs. Unlike most e-cigs, JUUL uses nicotine salts, as opposed to free-base
`nicotine, which provides the consumer with a moresatisfying nicotine experience,
`moresimilar to that of a traditional cigarette. This agrees with our own Cowen
`Vaping Survey, where JUUL boasted the highest conversion rates among listed
`brands.
`JUUL first launched in June of 2015 and is now in 12,000 outlets,
`including Chevron, Circle K, Speedway, and Sheetz (with a ~7% ACV). JUUL’s
`results thus far have been impressive,particularly given its super-premium
`positioning as starter kits retail for $50 and a four-pack refill pack sells for $16.
`
`Figure 5 JUUL's Nicotine Salts Provide Greater ConsumerSatisfaction...
`
`
`Figure 6 ...Fueling Conversion
`
`
`
`_—
`
`73% 73%oy, ( 73%
`
`80%
`
`=2
`
`ey
`os
`
`a combustion cigarette
`Laren Cis
`PAS Laba pintionn: ~ as tested
`We VOR Wen GAMtee ~ Connervorgior?
`Waely Sakuhded ups POOR mio
`
`70% -163985% g3rg206
`B
`= 60%
`&
`a
`9
`Ss 50%
`40%
`$= 30%
`3°
`O 20%
`10% »
`
`:
`\
`pW use wor yeie® 8 ono?
`youl
`se
`.
`@ Sept 15
`®@April 16
`
`
`
`.
`
`%
`eae
`
`eee
`
`wO
`
`tine afoot beet pull Go
`
`:
`
`Source: Pax and Cowen and Company
`
`ice
`iii
`
`sp
`
`0
`
`
`
`0%
`
`Note: Defined as current use divided bytrial use
`Source: Cowen and Company Next Gen Tobacco Survey, April 2016
`
`Indeed, the company announcedthat dollar sales grew 94%in June 2016,
`compared to December 2015. While Nielsen data does not break-out JUUL, the
`SKUsare included within the cartridges segment. Using all “other” cartridges as a
`proxy for JUUL in our Nielsen data, these growth rates are readily apparent.
`
`Figure 7 JUUL's Growth Has Been Impressive
`
`
`94.0%
`100%
`80%
`
`59% 47.0%
`
`
`32.0%
`31.0%
`21.2%
`
`
`
`7.8%
` 9.1%
`
`
`
`1016 Vs. 4015
`2Q16 Vs. 1016
`Growth Since Start of Yr.
`
`m PAX Reported JUUL Growth=Other E-Cigs; Cartridges * Total E-Cigs; Cartridges
`Note: PAX Reported JUUL growth is according to IRI data; Other E-Cigs within the cartridges segment is used to represent JUULtrends as
`the brandis not broken out within Nielsen; Nielsen growth rates are not based off exact quarterly dates
`Source: Company Reports, The Nielsen Company and Cowen and Company
`
`
`
`YoYDollarSales
`
`Growth >Ss&
`
`13%
`
`4
`
`WANCOWGN.COn
`
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`
`

`

`Cowen and Company
`Equity Research
`
`July 22, 2016
`
`Since its launch in June 2015, trends have continued to improve, with growth
`accelerating each period this year. This has provided a nicelift for the e-cig
`category as a whole, including a ~200 bps benefit to category dollar sales growth
`in the most recent period. What is more, given JUUL’s premium positioning,
`positive mix has also fueled better sales growth.
`
`
`
`
`
`
`
`
`
`
`
`
`Figure 8 JUUL Growth Has Accelerated Every Quarter in 2016
`
`Figure 8 JUUL’s Premium Pricing Provides a Nice Benefit to Categary Mix
`
`
`
`0,
`
`0%
`-50%
`-10%
`-15%
`,
`-20%
`
`
`
` TotalE-CigsPrice/Mix
`
`-25%
`
`JUUL
`Launch
`
`
`
`
`
`JUUL*DollarSalesGrowth
`
`350%
`300%
`250%
`200%
`150%
`100%
`50%
`0%
`-50%
`-100%
`
`JUUL
`Launch
`
`
`
`3/28/15
`
`4/25/15
`
`5/23/15
`
`6/20/15
`
`7/18/15
`
`8/15/15
`
`9/12/15
`
`10/10/15
`
`11/7/15
`
`12/5/15
`
`1/2/16
`
`1/30/16
`
`2/27/16
`
`3/26/16
`
`4/23/16
`
`40% §
`30% §
`20% &
`10%
`0% 5
`-10% 8
`-20% &
`-30m%
`— e
`NS
`Bs
`
`-40% =
`
`
`
`UUL*(all other cartridges as proxy) =" Total E-Cigs
`Source: The Nielsen Company and Cowen and Company
`
`NJOY
`
`9
`
`80%
`2S G00
`=
`© 40%
`ao
`- 20%
`= vw
`= 0%
`
`-20%
`
`we a we
`SO WO
`PPP * OY B®
`Qe
`Ww
`dh
`ow a
`UUL*(all other sonidges as proxy)
`Total E-Cigs
`
`Me
`
`Source: The Nielsen Company and Cowen and Company
`
`ay
`
`For NJOY, the company’s new product, NJOY Daily, launched in September 2015
`has seen successinits early days. While many competitors have shifted to
`rechargeables, NJOY Daily is a disposable cigaretteretailing for $5.99, with its
`value positioning likely appealing to consumers. As NJOY doubled down withits
`investmentin the disposable segment (as NJOY Kingsarestill being produced),
`disposables now make up nearly 60% of NJOY sales. While NJOY dollar sales and
`volume had been in decline for some time, the launch of Daily has contributed to
`a notable easing in dollar sales declines, while volumes have returned to growth.
`
`Figure 10 NJOY Has Increased Its Exposure to the Disposable Segment
`
`Figure 11 Daily's Helped NJOY Return to Volume Growth
`
`
`Launch
`NJOY4WeekYoY%Growth
`
`
`80%
`60%
`40% ~
`
`20% ~
`0% -
`-20%
`-40%
`-60%
`
`NJOY Daily
`
`
`
`5
`
`
`wg whSSoeosoe
`@07/18/ oalar Sales—# Volume
`
`100%
`
`80% -
`
`60%
`
`40%
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`DollarSalesContribution
`
`20%
`So=
`~)
`’
`ee
`
`
`
`
`
`m™ Cartridges ¥ Kits
`
`Disposables
`
`-Liquds
`
`Source: The Nielsen Company and Cowen and Company
`
`Source: The Nielsen Company and Cowen and Company
`
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`
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`
`

`

`Cowen and Company
`Equity Research
`
`July 22, 2016
`
`Altria (MarkTen)
`
`
`
`e=For Altria, MarkTen XL has been a nice growth driver for the company, asit looks
`to have replacedtheir original offering, and driven incremental consumersinto the
`brand. Since launching the product in test markets in April 2015, MarkTen XL
`now accounts for 98% of MO dollar sales, according to Nielsen. During that same
`time frame, MO hasseenits dollar share of the category grow from ~7%to ~16%.
`MO managementhas said consumers have been moresatisfied with MarkTen XL
`compared to earlier generation MarkTen products, given XL’ bigger tank and
`longerbattery life. Asit is still early days for MarkTen XL, it is encouraging to see
`that kit sales remain a healthy contributor to MO’s overall vapor sales.
`
`Figure 12 MarkTen XL has Seemingly Replaced Earlier Gen Products...
`
`Figure 13 ...Cartridge Sales Suggest Consumer Retention has Improved
`
`
`
`Ra}
`2
`2
`Oo
`”
`S
`°°
`oO
`oO
`=
`
`well NHOkmHemHehHhlolUcrcrmlLUCCOhULO
`OO
`rarer Tre Tr
`~~ ™ ~ mm ~ > => = > ~* Dm DM
`era rrr le
`Saree S<aRRFFSgcage
`SFSessttaesernar ase
`-
`
`8
`8
`_
`©
`—_
`=
`a 8
`Or
`Oc
`i=
`wo
`Wop
`Q
`=
`
`weer er er er er er er
`PrP ere ere Se eS
`OoOmoOnmWoMmMWmMomMmMumwommMmmommomovowoewe wo ©
`SHESSSHASRBEASRSESAOS
`NANGECKCCSAHLereggge
`oOorTrMOoonnwone- = mN MO STL OO
`
`«@MarkTen &MarkTen XL_
`Source: The Nielsen Company and Cowen and Company
`
`i@ Green Smoke
`
`m™ Cartridges ™ Kits
`Source: The Nielsen Company and Cowen and Company
`
`Reynolds (Vuse)
`
`e
`
`For Vuse,the brand hasheld its share and remained the market leader, despite
`competition and innovation from competitors. More impressively, Vuse consumers
`seem to be continually using the product as cartridge contribution to retails sales
`is now 85%. To be sure, we've also seen innovation from Vuse. RAI expanded
`further within the e-cig category with the introduction of Vuse Connect, which
`features wifi capabilities that connect to an app which offers child locking
`capabilities, as well as usage and battery tracking. RAI also launched Vuse FOB,a
`palm sized e-cig with digital display. However these products are only sold online,
`and would therefore not be captured in Nielsen-tracked channels.
`In addition,
`RAI has two other products in the pipeline, including Vuse Port (a closed-system
`tank product) and VusePro(arefillable cartridge system featuring a bigger
`battery).
`
`Figure 14 Vuse is Still the Market Leader and Growing
`
`Figure 15 Consumers Continue to Adopt and Consistently Use Vuse
`
`x
`&
`'
`
`100%
`~
`60% _
`50%
`
`80%
`=
`40% &
`_
`40%
`”
`S
`.
`°
`& 8 60%
`20% &
`gg
`TON
`o
`30%
`faa]
`]
`j
`pa
`
`© 3 40%
`Tit ee
`= wn 20%
`SA 70%
`WU LLELE
`-20% &
`_ © 10%
`of
`i
`a
`L
`& o
`A> 0%
`:
`-40% ©
`Ss
`0%
`+t tT tT TNO MO MONON Nn oOo wo ©
`<x
`Tar TH HMMM MmMm Oo
`Qa
`8
`oO ©
`SE STP PEP SPP PPP PTUs
`= a oc
`SLCC SSSKESESLVE
`a
`SSSSRGRCSCASSS
`F<SSSFFSSRSGE aFs
`RGe AFSGBSH KGS
`
`ica Dollar Share=2 Dollar Sales Growth @Cartridges ™ Kits
`Source: The Nielsen Company and Cowen and Company
`Source: The Nielsen Company and Cowen and Company
`
`6
`
`Www.cowen.com
`
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`
`

`

`Cowen and Company
`Equity Research
`
`July 22, 2016
`
`While these trends are all encouraging, we would caution that this growth could simply
`reflect moretrial, driven by distribution gains, as we have seen this phenomenon
`before. As a reminder, from 2012 to 2014, we saw blu’s distribution increase
`approximately 4x to ~ 150,000, accompanied by meaningful share gains. However, as
`distribution growth slowed, so did share gains, which ultimately began to fall after the
`brand reachedfull retail penetration. While the sharp share declines were partially due
`to the national launches of Vuse and MarkTen, and we've since seen blu’s brand share
`level off in the ~20% range, the company’s share is down ~50%from 2013.
`
`
`
`
`
`
`
`
`
`
`
`
`Figure 16 Distribution And Trial Is Likely Driving Some of the Recent
`Category Growth...
`
`Figure 17 ...As We Have Seenin the Past
`
`30%
`50%
`$
`®
`-
`2 25%
`©
`40%
`=
`40m5
`- 30% © 3S
`to
`=
`S 15%
`20% 5
`=
`3
`g 10M
`3
`fm
`»
`10% 9
`=
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`© 160,000
`oD
`=
`5 120,000
`3
`S 80,000 -
`3
`© 40,000
`2
`oS
`
`z
`
`Al.
`am
`0 +
`6
`6
`®
`6
`AY NV AD AP AD AD APE AM A AO 0
`\*
`»
`N
`\*
`oO
`oO
`oO
`pr?
`pre
`yn?
`aol”
`RN J ne
`& eA OS ea & < og oa © X< &
`
`o—em= Retail Outlets «=» Nielsen-Reported Share @2—2 Dollar Sales9=== Volume
`
`“0%
`
`SB
`
`5
`\
`
`6
`\*
`
`Source: Company Reports,, The Nielsen Company and Cowen and Company
`
`Source: The Nielsen Company and Cowen and Company
`
`With the cut-off date for new innovation rapidly approaching, it sets up these four
`players aslikely best positioned to consolidate market share. We look for companies
`across our coverage to launch any products ready for production ahead of the August
`8" deadline. Admittedly, there are a lot of unknownsasit relates to how the category
`will innovate under FDA regulation. Costly FDA user and application fees will present
`a barrier for most small player. That said, even big players will likely have trouble
`getting products on the marketin a timely fashion, as company’s would need to go
`through the PMTA approval process, which the FDA anticipate will take 180 days, but
`could take much longer given the plethora of applications the FDA will need to sort
`through for products already on the market that do not meet the grandfather date.
`
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`
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`
`

`

`Cowen and Company
`Equity Research
`
`July 22, 2016
`
`
`
`
`
`Price*
`Price Target
`Ticker
`Rating
`Price*
`Price Target
`Rating
`Ticker
`$68.73
`$67.00
`IMB.LN
`Outperform
`3,994.50p
`4,390.00p
`Market Perform
`MO
`¥4,219.00
`¥4,800.00
`RAI
`Outperform
`$51.83
`$57.00
`Market Perform
`2914.JP
`
`“As of 07/21/2016
`
`
`
`Valuation Methodology And Risks
`
`
`
`Valuation Methodology
`
`Tobacco:
`
`Our valuation methodologyis primarily based on Price-to-Earnings (P/E), followed
`by Relative Price-to-Earnings(vs. the respective relative index) as well as Enterprise
`Value to EBITDA (EV/EBITDA). In cases where GAAPnet income includeslarge, non-
`cash items (e.g., restructuring charges or the resolution of disputed MSA), we may
`use non-GAAPEPS.
`
`Investment Risks
`
`Tobacco:
`
`Global tobacco demand is subject to a numberof potential headwinds. Most notably,
`increased awarenessof the risks associated with traditional tobacco use, and
`resultant regulatory actions (e.g., indoor smoking bans, enlarged textual or graphic
`warnings, and / or plain packaging) can negatively impact smoking incidence and/or
`per capita consumption, and thus industry volumes. Whatis more, the industry is also
`subject to risk from disruptive tax increases, which result in higher prices, and can
`also depress consumption. Further, while diminished, litigation risk also exists.
`
`8
`
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`

`

`Cowen and Company
`Equity Research
`
`July 22, 2016
`
`Addendum
`
`
`
`Each authorof this research report hereby certifies that (i) the views expressed in the research report accurately reflect his or her personal views about any andall of the subject
`securities or issuers, and (ii) no part of his or her compensation was,is, or will be related, directly or indirectly, to the specific recommendations or views expressed in this report.
`
`
`
`
`
`
`
`
`
`
`
`
`
`important Disclosures
`Cowenand Company, LLC andorits affiliatesmake a market iin the stock of Altria Group, Imperial Brands , Japan Tobacco and Reynolds American securities.
`Cowen and Company, LLC compensates research analysts for activities and services intended to benefit the firm's investorclients. Individual compensation determinations for
`research analysts, including the author(s) of this report, are based on a variety of factors, including the overall profitability of the firm and the total revenue derived from all sources,
`including revenues from investment banking, sales and trading or principal trading revenues. Cowen and Company, LLC does not compensate research analysts based on specific
`investment banking transactions or specific sales and trading or principal trading revenues.
`The Nielsen material contained in this report represent Nielsen’s estimates and do not represents facts. Nielsen has neither reviewed nor approved this report and/or any of the
`statements madeherein.
`
`Disclaimer
`Our research reports are simultaneously available to all clients are on ourclient website. Research reports are for ourclients only. Not all research reports are disseminated,
`e-mailed or made available to third-party aggregators. Cowen and Company, LLC is not responsible for the redistribution of research by third party aggregators. Selected
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`cowenlibrary bluematrix.com/clienVlibraryjsp.
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`The information, opinions, estimates and forecasts are as of the date of this report and subject to change withoutprior notification. We seek to update our research as appropriate,
`but various regulations may prevent us from doing so. Research reports are published atirregular intervals as appropriate in the analyst's judgement.
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`Furtherinformation on subject securities may be obtained from ouroffices. This research report is published solely for information purposes, and is not to be construed as an offer
`to sell or the solicitation of an offer to buy any security in any state where such an offeror solicitation would beillegal. Other than disclosures relating to Cowen and Company,
`LLC, the information herein is based on sources we believe to be reliable but is not guaranteed by us and does not purport to be a complete statement or summary of the available
`data. Any opinions expressed herein are statements of our judgment on this date and are subject to change without notice. The opinions and recommendations herein do not take
`into accountindividual client circumstances, objectives or needs and are not intended as recommendations of investment strategy. The recipients of this report must maketheir
`own independentdecisions regarding any securities subject to this research report. In some cases, securities and other financial instruments may be difficult to value or sell and
`reliable information about the valueorrisks related to the security or financial instrument may be difficult to obtain. To the extent that this report discusses any legal proceedings
`or issues, it has not been prepared to express or intended to express any legal conclusion, opinion or advice. Our salespeople, traders and other professionals may provide oral
`or written market commentary ortrading strategiesto our clients that reflect opinions that are contrary to the opinions expressed in our research. Our principal trading area
`and investing businesses may make investment decisions that are inconsistent with recommendations or views expressed in our research. Cowen and Company, LLC maintains
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`For important disclosures regarding the companies that are the subject of this research report, please contact Compliance Department, Cowen and Company, LLC, 599 Lexington
`Avenue, 20th Floor, New York, NY 10022. In addition, the same important disclosures, with the exception of the valuation methodsandrisks, are available on the Firm's disclosure
`website at htips://cowen.bluematrix.com/sellside/Disclosures.action.
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`Equity Research Price Targets: Cowen and Company, LLC assigns price targets on all companies covered in equity research unless noted otherwise. The equity research price
`target for an issuer's stock represents the value that the analyst reasonably expects the stock to reach over a performanceperiod of twelve months. Anyprice targets in equity
`securities in this report should be considered in the contextof all prior published Cowen and Company, LLC equity research reports (including the disclosures in any such equity
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`research report publishing such targets.
`
`Cowen Credit Research and Trading: Due to the nature of the fixed income market, the issuers or debt securities of the issuers discussed in “Cowen Credit Research and
`Trading” research reports do not assign ratings and price targets and may not be continuously followed. Accordingly, investors must regard such branded report as providing
`stand-alone analysis and reflecting the analyst's opinion as of the date of the report and should not expect continuing analysis or additional reports relating to such issuers or debt
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`Notice to European UnionInvestors:Individuals producing recommendations are required to obtain certain licenses by the Financial Regulatory Authority (FINRA). You can
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`
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`

`

`Cowen and Company
`Equity Research
`
`July 22, 2016
`
`Additionally, the complete preceding 12-month recommendationshistory related to recommendationin this research report is available at https://cowen.bluematrix.com/sellside/
`
`Disclosures.action
`
`The recommendation contained in this report was produced at July 21, 2016, 21:51 ET. and disseminated at July 22, 2016, 06:00 ET.
`Copyright, User Agreementand other general information related to this report
`© 2016 Cowen and Company, LLC. Member NYSE, FINRA andSIPC.All rights reserved. This research report is prepared for the exclusive use of Cowen clients and may not be
`reproduced, displayed, modified, distributed, transmitted or disclosed, in whole or in part, or in any form or manner, to others outside your organization without the express prior
`written consent of Cowen. Cowenresearch reports are distributed simultaneously to all clients eligible to receive such research reports. Any unauthorized use or disclosure is
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`the contents, opinions, conclusion, or information contained in this report (including any investment recommendations, estimates or price targets). All Cowen trademarks displayed
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` oston(
`
`(866) 544-7009 Stamford (646) 616-3000 London(affiliate) 44-207-071-7500
`
`COWEN AND COMPANY EQUITY RESEARCH RATING DEFINITIONS
`
`Outperform (1): The stock is expected to achieve a total positive return of at least 15% over the next 12 months
`
`Market Perform (2): The stock is expected to haveatotal return that falls between the parameters of an Outperform and Underperform over the next 12 months
`
`Underperform (3): Stack is expected to achieve a total negative return of at least 10% over the next 12 months
`
`Assumption: The expected total return calculation includes anticipated dividend yield
`
`Cowen and Company Equity Research Rating Distribution
`Distribution of Ratings/Investment Banking Services (IB) as of 06/30/16
`
`Rating
`Count
`Ratings Distribution
`Count
`IB Services/Past 12 Months
`Buy (a)
`440
`59.22%
`69
`15.68%
`
`Hold (b)
`293
`39.43%
`13
`4.44%
`Sell (c) 0.00% 10 1.35% 0
`
`
`
`
`(a) Corresponds to "Outperform" rated stocks as defined in Cowen and Company, LLC's equity research rating definitions. (b) Corresponds to "Market Perform" as defined in Cowen
`and Company, LLC's equity research ratings definitions. (c) Corresponds to "Underperform"as defined in Cowen and Company, LLC's equity research ratings definitions. Cowen
`and Company Equity Research Rating Distribution Table does not include any company for which the equity research rating is currently suspended or any debt security followed by
`CowenCredit Research and Trading.
`
`Note: "Buy", "Hold" and "Sell" are not terms that Cowen and Company, LLC usesin its ratings system and should not be construed as investment options. Rather, these ratings
`terms are usedillustratively to comply with FINRA regulation.
`
`Altria Group Equity Research Rating History as of 07/20/2016
`powered by: BlueMatrix
`
`
`
`30
`
`y
`Oct 2013
`
`¥
`Jan2014
`
`y
`Apr2014
`
`¥
`Jul 2014
`
`3
`Oct 2014
`
`¥
`Jan2015
`
`¥
`Apr2015
`
`i
` Jul20¢5
`
`¥
`Oct 2015
`
`y
`Jan2016
`
`y
`Apr2016
`
`y
`Jul2016
`
` Closing Price —
`
`10
`
`WWW.cowen.com
`
`JLI Ex. 2035, Page 10 of 13
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`JLI Ex. 2035, Page 10 of 13
`
`

`

`Cowen and Company
`Equity Research
`
`July 22, 2016
`
`imperial Brands Equity Research Rating History as of 07/20/2016
`powered by: BlueMatrix
`
`“1(4):$3.370.
`(08/25/15
`
`4,600
`4,400
`4,200
`4,000
`3,800
`3,600
`3,400
`3,200
`
`Oct2013.
`
`Jan2014
`
` Apr2014
`
` Jul2014.
`
`Oct2014.
`
`Jan2045
`
`Apr2015
`
` Jul2015.
`
`Oct2015
`
`Jan2016
`
`Apr2016
`
`Jul 2016
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
` 1(2):$4,0501
`OB/25/15
`
`Japan Tobacco Equity Research Rating History as of 07/20/2016
`powered by: BlueMatrix
`
`3,500
`
`3,000
`
`
`
`
`
`
`
`
`Oct 2013 Jul20149Oct 2014 Apr20159Jul2015) -Oct2015=Jan 2016=Apr2016Jan2014 Apr2014 Jan 2015) Jul 2016
`
`
`
`
`
`
`
`
`
`
`
`
`
`Reynolds American Equity Research Rating History as of 07/20/2016
`
`
`1:(2):$82.00
`
`Lomo
`
`O2H 0/15 20
`
`y
`Oct2013
`
`¥
`Jan2014
`
`g
`Apr2014
`
`t
` Jul2014
`
`#
`Oct 2014
`
`g
`Jan2015
`
`a
`Apr2015
`
`g
`Jul2075
`
`a
`Oct 2015
`
`z
`Jan2016
`
`E
`Apr2016
`
`§
`Jul2016
`
`
`
`Legendfor Price Chart:
`
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`
`11
`
`JLI Ex. 2035, Page 11 of 13
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`

`

`Cowen and Company
`Equity Research
`
`July 22, 2016
`
`| = Initiation | 1 = Outperform | 2 = Market Perform | 3 = Underperform | UR = Price Target Under Review | T = Terminated Coverage | $xx = Price Target | NA = NotAvailable|
`
`S=Suspended
`
`12
`
`WHA.COWER.COM
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`

`

`Points Of Contact
`
`646.562.1421 aaron.grey@cowen.com
`646.562.1351
`
`Vivien Azer
`
`New York
`
`Aaron Grey, CFA
`New York
`
`Cowen and Company
`Equity Research
`
`July 22, 2016
`
`
`
`
`
`
`
`
`
`
`
`
`vivien.azer@cowen.com
`
`Vivien Azeris a senior analyst covering
`beverages and tobacco. She joined
`Cowenin 2014.
`
`Aaron Greyis an associate covering
`tobacco. He joined Cowen in 2014 and is
`a graduate of Villanova University.
`
`Reaching Cowen
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