CORRECTED-British American Tobacco outlines cost of EU compliance

Tue Apr 29, 2014 2:38am EDT

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(Corrects currency to euros from pounds)

* Investment in new machines to be 100 mln to 200 mln euros

* Raises need to cut costs, no job losses expected

* New package sizes, graphic pictures

By Martinne Geller

BAYREUTH, Germany, April 29 (Reuters) - British American Tobacco expects compliance with new European regulation on cigarettes to cost it 100 million to 200 million euros ($138 million-$277 million) over the next two years as it upgrades its machines to meet new packaging rules.

The European Commission is implementing legislation known as the Tobacco Products Directive (TPD) aimed at cutting down on the estimated 700,000 EU citizens who die each year from tobacco-related causes.

The law includes an eventual ban on menthol cigarettes and a requirement that graphic health warnings cover 65 percent of the surface of a pack of cigarettes with pictures of illnesses such as cancer.

The new rules will require British American, maker of Lucky Strike, Pall Mall and Kent cigarettes, to upgrade much of the machinery in its factories.

It will spread the investment across its seven plants in Europe, but the change will be felt most acutely in Bayreuth, a town in the German countryside home to rapeseed fields and an opera house that only puts on work by German composer Richard Wagner.

The company says despite the cost impact, none of the 1,400 jobs here, its biggest factory, will be lost.

"What it really means is a significant, additional cost for us, which at the end of the day puts pressure on us to save money elsewhere," said Bernd Meyer, operations director of BAT Germany and head of manufacturing for Western Europe.

BAT and rivals including Philip Morris International and Imperial Tobacco are grappling with declining sales in a number of European markets as regulation and taxes grow, and increasingly health conscious consumers smoke less.

Earlier this month, Imperial said it would close factories in England and France, resulting in the loss of about 900 jobs.

"Every site in the European Union is under pressure in Western Europe, simply because we have currently decreasing volumes," Meyer said.

The majority of BAT's investment in new machinery will be made by the beginning of 2016, Meyer said, since member states have two years to implement the TPD following its formal adoption in March 2014. However, is the fact that various European countries are likely to implement the laws differently at different times.

Britain plans to go a step further by banning branded packs altogether as Australia has done, adopting a standard of "plain packaging" meant to remove any lure to non-smokers from brightly colored packages.

Under the TPD, cigarette packages have to feature pictures of tobacco-related diseases, which cost more in printing, Meyer said. Also, since the pictures must be of a certain size, smaller packs - like those of ultra-slim cigarettes - have to be increased.

Meyer said the move should not have a long-term effect on profitability, since standardisation can make production simpler and cheaper.

The factory in Bayreuth accounts for 35 percent of BAT's European production, making cigarettes for Germany and export to Italy, Spain, Denmark and Romania.

Excluding duty, excise and other taxes, British American had 2013 revenue of 15.3 billion pounds and adjusted profit of 5.8 billion pounds. It will give an interim management statement on April 30.

($1 = 0.7223 euros) (Editing by Jason Neely)

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