UPDATE 2-Rothmans profit gets lift from higher prices

(Recasts, adds details; changes dateline from Toronto)

By Susan Taylor

OTTAWA, May 16 (Reuters) - Fourth-quarter profit at Rothmans Inc ROC.TO grew 17 percent, Canada's No 2 cigarette maker said on Friday, as price increases more than offset pressure from a growing trade in contraband tobacco.

Increased competition to sell low-priced cigarettes and declining volumes posed further difficulties, but Rothmans said it is well positioned financially to withstand market pressures thanks to C$234.9 million in cash reserves.

Known for its Craven A, Rothmans and Benson & Hedges brands, the company said it earned C$21 million ($21 million), or 31 Canadian cents per share, in the period ended March 31.

That is up from C$18 million, or 26 Canadian cents per share, in the same period last year and betters analyst expectation for a profit of 30 Canadian cents a share.

Revenue increased 4.8 percent to C$145.7 million.

Toronto-based Rothmans, Canada's only publicly traded cigarette maker, said rising sales of lower-priced cigarettes lifted results, despite weakness in premium market sales.

Rothmans Benson & Hedges Inc., which is a 60 percent co-owned unit, shipped 2.3 billion cigarettes into the domestic market in the period, down 2.6 percent from last year.

Growing contraband trade remains a threat to the sector, management said on a conference call, adding that they are encouraged by recent government plans to combat the problem.

"We'll have to see really how effective these measures are going to be over time to, first, stop the growth in contraband and then contract it and move people back to the tax-paid market," Chief Executive John Barnett said on a conference call.

The Canadian government promised in May to tackle contraband tobacco trade with a bulked-up police effort and public awareness campaign.

The tobacco industry has long lobbied Ottawa for tougher enforcement and lower taxes to offset the draw of illegal cigarettes.

Shares in Rothmans added 15 Canadian cents to C$25.40 on the Toronto Stock Exchange on Friday. So far this year, the stock is virtually unchanged, versus a 5 percent decline for the TSX consumer staple sector .GSPTTCS.

Rothmans competes with industry leader Imperial Tobacco Canada, owned by British American Tobacco (BATS.L) and JTI-Macdonald Corp., owned by Japan Tobacco Inc. (2914.T) ($1=$1.00 Canadian) (Reporting by Jonathan Spicer and Susan Taylor; editing by Rob Wilson)