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BAT 1st-Quarter Net Declines 17% on Asia, Brazil Woes

London, April 29  -- British American Tobacco Plc, the world's second-largest cigarette
company, said first- quarter profit fell 17 percent as economic and currency problems in Asia, Brazil and other emerging markets crimped sales.

Profit for the maker of Lucky Strike fell to 143 million pounds ($278.5 million), or 9.2 pence per share, from 173 million pounds, or 11.1p. Pretax profit fell to 309 million pounds from 311 million pounds, above most forecasts. The shares rose 39 pence, or 7.7 percent, to 544p.

Recession and falling currencies meant many consumers in emerging markets couldn't afford BAT's brands. It also lost sales in the U.S. as companies raised cigarette prices to cover a $206 billion settlement with states last fall. BAT, which is in the process of buying Rothmans International from Cie Financiere Richemont AG, said business will improve in the second half. As a result, operating profit before items in 1999 will be flat.

``That implies a very good second half,'' said Nick Bunker, an analyst at HSBC Securities. ``I would be reluctant to change my numbers before seeing the color of the water. However, it looks as though the first quarter of 1999 has seen the worst.''

BAT said it's seen ``early signs'' of a recovery in both Asia and Brazil. In Asia, BAT returned to profit in the first quarter after losing 21 million pounds the previous quarter. First-quarter operating profit in Asia dropped 14 percent to 48 million pounds.

Latin America

Profit in Latin America declined 9.0 percent to 71 million pounds as Brazilian sales plunged with the devaluation of the real. BAT said Brazil's economic problems haven't spread to other regions.

Managing Director Ulrich Herter said business in Russia has improved, yet it's still experiencing difficulties in neighboring Ukraine. These were partly responsible for an 18 percent decline in first-quarter European profit to 42 million pounds.

``We are addressing the problem internally but there's little scope within an environment as bad as it is,'' he said. ``People don't have the money in their pockets to buy high-priced international brands.''

In America and Japan, profit declined 19 percent to 92 million pounds. Sales volumes fell 10 percent and results also were crimped by a one-off charge of 13 million pounds for settlement compliance costs and legal fees.

Last year's $206 billion settlement between U.S. tobacco companies, including BAT's Brown & Williamson, and states hasn't eliminated the prospect of multimillion-dollar damage awards to smokers, however. BAT's larger rival, Philip Morris Cos., has been hit by two record-breaking damages awards so far this year, most recently for $81 million.

BAT Chairman Martin Broughton said in a statement that recent litigation developments ``have represented something of a paradox'' but the industry is better placed to win suits than a year ago.

In addition to individual cases brought by smokers, U.S. companies face the prospect of a federal law suit. The Justice Department is currently considering the viability of action.

``Clinton is engaged in a very political game,'' said Stuart Chelfen, BAT's legal director. ``The Justice Department has had many years to decide whether to bring action against the tobacco industry.

``It has never done so,'' he added. ``There are limited opportunities for government to bring a case without a change in the law; the case is quite clear cut but not favorable to the position of the government.''

He also said he didn't expect the Supreme Court to reverse a lower court conclusion that the Food and Drug Administration doesn't have authority to regulate tobacco. Supreme Court justices agreed Monday to hear the FDA's appeal against that ruling during their 1999-2000 term.

Antitrust Obstacles

BAT's acquisition of Rothmans will boost business in Europe, a region where the litigation climate is more favorable to companies than in the U.S., as well as adding profitable, higher- priced brands such as Dunhill. The acquisition hit an antitrust obstacle in Australia, where regulators said last month it would breach competition laws.

``Australia is the only real hurdle,'' said Herter. ``We are confident we can close in the second quarter.''

He wouldn't comment on BAT's discussions with Australian regulators.

The sharper, 17 percent decline in first-quarter profit and earnings per share, compared with a 10 percent fall in operating profit to 341 million pounds, stemmed from ``accounting distortions'' in the 1999 tax rate, BAT said.

HSBC's Bunker said the results also were distorted in BAT's favor by influences including a higher-than-expected Brazilian tax recovery.

``The figures are a bit better than market expectations but not quite as good as they look,'' said Bunker, who has a ``trading buy'' recommendation on the stock.


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