BAT defends US division

British American Tobacco yesterday insisted its Brown & Williamson business in the US was "not a sinking ship" despite the division more than halving its quarterly profits and preparing for the potentially crippling costs of a lawsuit over its branding of "light" cigarettes.

Managing director Tony Adams said: "It [B&W] may have taken in a little water but a sinking ship it is not."

The company said there had been little change in demand in the US, though its fortunes had been hit by the outbreak of a price war.

B&W - number three in the US market - revealed operating profits for the first three months of this year had fallen 56% to £39m. The number of cigarettes sold was down 10%, dipping below 10bn.

BAT's results come just four days after RJ Reynolds, number two in the US, revealed its quarterly net income from brands including Camel and Winston had also more than halved, to $71m (£44.5m).

Margins at B&W and RJ Reynolds have slid under pressure from market leader Philip Morris, which is leading the industry through a savage price war in an effort to see off competition from cut-price brands that have been making gains against the top three premium brand operators.

As well as the price war, B&W is also facing the prospect of a costly courtroom battle next March over its Carlton Light brand. BAT, which last year generated 13% of profits in the US, was among a number of tobacco firms put on credit watch recently by some agencies after Philip Morris, which makes Marlboro Lights, was found by a US court to have deceived smokers into thinking low tar "light" cigarettes were safer.

The decision overshadowed the US tobacco industry last month when Altria, Philip Morris' parent company, was ordered to establish a £6.4bn bond to cover its liability while the appeal progressed.

Yesterday BAT, which makes Dunhill, Kent, Lucky Strike, and Pall Mall cigarettes, said it was keeping a close eye on its own bond facility but declined to put a figure on how much it could afford to set aside.

The company stresses that despite decades of lawsuits brought by dying smokers in the US, it has only ever been forced to pay out to one individual. BAT operating profit slipped 1% to £612m. Pre-tax profit rose from £463m to £464m, broadly in line with City expectations.