Ceepackaging

Corporate

Rexam performing

Rolf Borjesson, Rexam's Chairman, commented: "During the first half of 2006 Rexam delivered strong top line growth, good cash flow, significant market share gains and a solid profit performance. Our ongoing pricing, innovation and cost efficiency initiatives are proceeding according to plan. Despite the challenging cost climate our industry is facing, trading remains in line with our expectations and we expect to make progress in the second half. Looking forward, we will focus on managing our margins through pricing and cost efficiencies and strengthening our businesses through our strategy for organic and acquisitional growth."

Rexam had an encouraging first six months of 2006 reporting strong top line growth, significant gains in beverage can market share and the rapid integration of acquisitions, all against the background of an unprecedented rise in input costs, especially aluminium.
The Group delivered strong sales growth of 20% from ongoing operations. Organic sales growth was 9%, acquisitions contributed 8% and 3% of the growth came from currency translation. Underlying operating profit from ongoing operations was up 1% at 194m pounds, reflecting volume growth and acquisitions offset by the impact of higher input costs and the reduced prices of the major new Beverage Can contract won in North America. Underlying profit before tax was 137m pounds and underlying earnings per share rose 3% to 18.4p as the Group benefited from a lower tax charge.
Following 2005’s notable performance, free cash flow generation was again good even allowing for higher capital expenditure to fund growth projects and interest cost. Interest cover remains robust at just under 5 times. Rexam is on track to deliver the expected amount of annual cost efficiencies, having achieved 18m pounds in the first half of the year compared with 15m pounds in the same period last year.
The net effect of currency movements was positive, increasing sales and underlying operating profit by 46m pounds and 5m pounds respectively, owing mainly to the movement in the US dollar against sterling.
On a statutory basis, including the effect of acquisitions, disposed businesses and currency, sales were 1,845m pounds, up 18%. On this basis, profit before tax (including exceptional items) was up 43% at 170m pounds. The principal exceptional gain arose from a change in US retiree medical benefits. The resulting basic earnings per share was 22.5p compared with 13.3p for the equivalent period last year.
On a global basis, our beverage can volumes grew 11%, benefiting from significant market share gains as well as strong overall market growth. Capacity utilisation is extremely high in all our beverage can plants, and efficiency savings remain similar to last year as we continue to identify further opportunities to ensure best practice manufacturing across our 42 can and end making plants around the world.
In Europe, our beverage can volume gains were equally positive, increasing by 7% on the same period last year. We benefited from further growth in the energy drinks sector and the generally favourable market development, buoyed by the fine early summer weather in Europe and the FIFA World Cup. The can started its comeback in Germany on 1 May 2006 and the early signs are encouraging.
To meet increased demand in the global energy drinks market, we have announced the building of a new can making plant close to Red Bull’s contract filling partner in Austria. Representing an investment of 45m pounds over 2006 and 2007, the new plant will have a capacity of some 1bn cans and is expected to come on line by the end of 2007.
In Russia, which continues to show good growth, we have decided to invest in a second can plant. Located in the Urals, it is expected to come on stream in mid 2008. We are also installing a new line at our Naro Fominsk facility to produce innovative one litre cans to meet the market demand for larger container sizes for beer.
Aluminium is by far the largest raw material cost for the Group with a total annual spend of more than 1bn pounds. Prices for this commodity, which are based in US dollars, rose steeply in the six months to 30 June 2006. In the Americas, Rexam is largely unaffected by the changes in the cost of aluminium as major customers agree the cost in advance with their suppliers, effectively resulting in a cost pass through. In Europe, both the metal and the associated US dollar/euro currency requirements are hedged through a three year rolling programme, such that aluminium is fixed in euros, the principal transaction currency. This year is now largely covered at prices well below recent peaks, while 2007 remains partially hedged.
As part of our ongoing management of aluminium input costs, we renegotiated a US contract for the future supply of aluminium which gave rise to a profit of 14m pounds in the first half of 2006. This, together with price surcharges, has helped to mitigate the effect of the higher aluminium cost on the European beverage can operation. We intend to continue to manage actively the effect of aluminium costs through contract renegotiation, hedging and surcharges as appropriate.
Looking forward to 2007, we will be renegotiating contracts with our European customers later on this year and it is our intention to reflect the aluminium price prevailing at that time in our pricing structures.
As we indicated in the 2005 results, the overall margin of our beverage can business reduced due to the impact of the major new contract in the US, along with the effect of the pass through to customers for increased aluminium costs in the Americas and higher energy and freight costs. We expect the margin to increase over the medium term.
Plastic Packaging in Rexam is focused on the more value added and faster growing sectors of the rigid plastic packaging sector. It includes beauty packaging operations, pharmaceutical packaging, closures and food and beverage plastics, as well as recently acquired businesses serving the home and personal care markets. These businesses are united by their common technologies, their focus on innovation and shared customers.
Plastic Packaging results were substantially up on the equivalent period last year benefiting from organic profit growth and acquisitions. Profit margins improved in the ongoing Plastic Packaging businesses compared with the second half of 2005. The majority of our operation performed strongly, notably pharmaceutical packaging and our high barrier food business. While our beauty packaging operations continued to be affected by delays in the launch of new products, as previously indicated, we see a promising number of planned new products from our customers which we expect to be launched in the second half of this year. Organic sales and profit growth were 2% and 5% respectively.
The acquisitions are being integrated rapidly and successfully into our existing operations. We believe there is scope to improve margins in these businesses over time.
We successfully managed to recover the majority of resin and energy price increases through price and cost efficiencies. The anticipated new product launches, along with the benefits from synergies arising from acquisitions and increased operational efficiency, should enable us to make further progress during the remainder of the year.
We will continue to pursue our strategy to capture growth in Plastic Packaging, consolidating attractive niches with high barriers to entry, focusing on innovation and adding complementary products and technologies. This will enhance our capability to serve our customers as one of the major players in the global rigid plastic packaging industry. This is evidenced by the acquisition of a pharmaceutical packaging operation in India, the opening of a plant in Poland to serve the home and personal care packaging market, the introduction of high barrier food container production in Europe and the construction of a purpose built dispensing systems manufacturing facility in Tournus, France, to replace the existing plants there.
Sales from our glass operations in the first six months rose by 7% through a combination of successful price increases, higher volumes and improvements to the mix. The demand for glass remains good and the industry in Europe is now in better balance than for a number of years. These increased sales were, however, insufficient to offset the significant 11m pounds increase in energy costs and, as a result, operating profit was lower than the equivalent period in 2005.
Most of our sales growth came from increased volumes for wine and spirits bottles and better pricing in other beverage containers. Sales to food markets are weighted towards the second half of the year in line with European harvests.
We continue to focus keenly on cost efficiencies and further price increases to help mitigate the exceptional rise in energy costs.