UPDATE 1-BAT hit by tough times in Brazil and Japan

Wed Oct 24, 2012 4:01am EDT

* Nine-month volumes down 1.2 percent

* Shares down 0.5 percent

LONDON Oct 24 (Reuters) - British American Tobacco , the world's second-biggest cigarette maker, saw nine-month volumes fall after weaker demand in markets including Brazil and Japan.

The British maker of Dunhill, Kent, Lucky Strike and Pall Mall cigarettes, said volumes were down 1.2 percent from subsidiaries to 517 billion, while organic volumes were 1.8 percent lower as a result of the overall industry decline.

BAT said on Wednesday it still expected another year of good earnings growth after nine-month revenue grew 4 percent at constant currency, helped by good pricing.

"Economic recovery remains fragile this year and difficult trading conditions persist in many parts of the world," chief executive Nicandro Durante said. "However, pricing remains strong, we are growing underlying market share and our Global Drive Brands continue to perform well."

BAT, which made 705 billion cigarettes last year, has the broadest global spread of the big tobacco groups with over 60 percent of profit coming from developing markets which have helped offset tough conditions elsewhere as smoking levels fall in Western Europe and North America.

However in the nine months, higher sales in markets including Bangladesh, Pakistan and Vietnam were more than offset by tougher trading in Egypt, Italy and Turkey.

BAT was also hit by a tough comparison from an earlier one-off increase in sales volumes in Japan and a significant excise increase in Brazil which, the group said, had led to a rise in illicit trade.

"BAT has provided a reminder of an industry which is increasingly under pressure but which for the moment remains a defensive play," Richard Hunter, Head of Equities at Hargreaves Lansdown Stockbrokers.

"Excise tax rises, particularly in developed markets, are driving an increase in illicit trade. Meanwhile, the threat of litigation is never far away, whilst the full impact of global packaging rules remains to be seen."

BAT shares were down 0.5 percent at 0800 GMT.

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