Sales slide at tobacco giant BAT

BRITISH American Tobacco warned today that sales volumes were shrinking faster than expected, but assured investors it would still meet full-year earnings targets. Volumes in the three months to March fell by 6%, a much greater decline than the 2%-3% that the cigarette group indicated that it expected for the full year.

The drop in sales was due to restricting the supply of duty-free exports, disappointing sales of low-margin cigarettes in Russia and associate companies in India.

But, reporting a 1% increase in pre-tax profits to £472m, chairman Martin Broughton said he expected to see some recovery in volumes this year. 'Although volumes are running a little below expectations, at current rates of exchange we see no reason to change our earnings projection,' he said. This is for high single-digit growth.

There was no news on acquisitions nor any promise of a share buyback, despite growing shareholder pressure for BAT to find a use for its gushing cash flow. Analysts believe more than £3bn could be handed back to shareholders. Spokesman Michael Prideaux denied reports BAT was under pressure, adding that the group's interest cover was still within an acceptable range.

The company, whose brands include Lucky Strike, Kent, Pall Mall and Dunhill, has not done a mega-deal since buying Rothmans in 1999. He said it was still on the lookout for acquisitions and investments in parts of Asia, and the expected privatisation of Italy's tobacco operations could present opportunities.

He added: 'There is not another Rothmans out there but there are opportunities.' If no deal presented itself, and interest cover spiralled, BAT would consider a return to shareholders, he said.

The headline profits growth figure understated the position because of a £33m disposal in the prior year. Operating profits grew by 4% and the increase would have been 7% at comparable exchange rates.

Broughton today renewed his call for better dialogue with governments, which could produce lower consumption and higher tax receipts while still delivering value to well run tobacco companies. 'We are not out to increase the number of smokers but to compete fairly for a valuable share of the existing market,' he said.