(Adds comment from management and an analyst.)

By Michael Carolan

Of DOW JONES NEWSWIRES

LONDON -(Dow Jones)- British American Tobacco PLC (BTI) Wednesday unveiled better-than-expected first-quarter results, citing better pricing and favorable exchange rates.

The London-based maker of Lucky Strike, Kent, Dunhill and Pall Mall cigarettes, said that net profit rose to GBP599 million in the three months to March 31, from GBP495 million a year earlier.

Sales were up 14% at GBP2.54 billion, while operating profit - the key figure U.K. analysts and investors track - rose 18% to GBP807 million in the first quarter.

Analysts had predicted a 13% first-quarter rise in average operating profit to GBP782 million from GBP692 million a year earlier.

The company said it had benefitted from improved pricing, a better product mix and favorable exchange rates. Stripping out the effect of currency movements, operating profit was 10% higher.

BAT's corporate and regulatory affairs director Michael Prideaux admitted in an interview with Dow Jones Newswires that the company was a "bit flattered by currency movements" but said the 10% rise in profit at constant currency was the figure to focus on.

Chairman Jan du Plessis said the year had clearly got off to a great start, with profit growth in all the company's regions. "The group's unrivaled spread of business between developed and developing markets should continue to serve shareholders well," he said.

Earnings-per-share before exceptional items rose 17%, the company said. BAT has a long-standing target for high single-digit EPS growth - a target it regularly beats.

UBS said the favorable currency translation would add between 6% and 7% to the company's EPS in the full year.

BAT is the world's second-largest international tobacco group, after Altria Group Inc. (MO) of the U.S., with a market capitalization of around GBP37 billion.

The shares closed Tuesday at 1,938 pence, having risen by about a quarter in the last year as investors turn to the relative safety of tobacco stocks amid uncertainty elsewhere.

"It's a good all round performance, every region did well," said BAT's Prideaux.

Prideaux put this strength down to the company's pricing power, with price increases achieved in many territories and an improved pricing mix as customers migrated to higher priced brands.

"I think there may be a consumer slowdown but we haven't seen it yet," he said.

While consumer slowdowns don't necessarily stop smokers from buying cigarettes, they do lead consumers to buy lower-priced brands thereby denting margins, he said.

Another issue with economic slowdowns is that governments may raise tobacco tax rates in order to ease public finances, he said.

BAT in February made two major acquisitions in a matter of days, buying out Skandinavisk Tobakskompagni's cigarette business for GBP2.075 billion and winning the auction for Turkish tobacco producer Tekel with a bid of $1.72 billion.

Prideaux said the integration of Tekel would begin some time in the summer, while E.U. approval is still needed for the ST integration to go ahead.

The buys completed a year of consolidation for the industry, with U.K. rival Imperial Tobacco Group PLC (ITY) buying Franco-Spanish rival Altadis SA (ALT.MC) earlier this year for GBP12 billion and Japan Tobacco's (2914.TO) buying Gallaher in 2007.

Prideaux said the major consolidation in the industry was now complete. He said there may be some more privatization on the horizon in Egypt or Algeria for example but these are unlikely to happen in 2008.

BAT set out its plans for a new five-year cost savings program earlier this year, with a target of cutting annualized costs by GBP800 million by 2012. The program will focus on supply chain efficiencies, back-office integration and management structures. It recently completed a five-year cost-cutting program which stripped about GBP729 million from its cost base.

Company Web site: http://www.bat.com

-By Michael Carolan, Dow Jones Newswires; 44-20-7842-9278; michael.carolan@ dowjones.com

  (END) Dow Jones Newswires
  05-07-08 0345ET
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