Business review

Consumer packaging has long been regarded as a relatively defensive industry. In Rexam’s case, this defensiveness is further enhanced by our balanced product portfolio of Beverage Cans and Plastic Packaging as well as a broad geographic spread comprising a mix of well established and emerging markets. As a result we delivered a record underlying performance in 2008. It was essentially a tale of two halves with a strong first six months and a more difficult second half due to softer trading as global economic and financial conditions deteriorated, which was offset by the favourable effect of foreign currency exchange.

While we began to see the impact of the economic slow down in those segments of our businesses more exposed to discretionary consumer spending, we continued to grow the top line. Group sales advanced 28% to £4,618m driven largely by the OI Plastics and Rostar acquisitions. Foreign exchange, primarily the strengthening of the dollar and euro against sterling, accounted for 10% of the increase. Organic sales, adjusted for currency and acquisitions, grew 7% as a result of continued beverage can volume growth, higher resin pass through and price increases in both Beverage Cans and Plastic Packaging.

Underlying operating profit grew 32% to £466m of which organic growth was 3%. The OI Plastics and Rostar acquisitions contributed £57m while £47m was derived from the benefit of currency translation. Underlying profit before tax rose to a record £328m with underlying earnings per share increasing 26% to 35.3p (2007: 28.0p), which is lower than the growth in profit before tax due to shares issued in mid 2007 to part finance the OI Plastics acquisition.

Despite pressure from the volatility in raw materials, energy and freight costs, operating margins improved owing to the synergies from the OI Plastics acquisition and some margin recovery in Beverage Cans.

As a Group we continued to achieve significant efficiency savings delivering £35m in line with previous years. Further lightweighting and scrap reduction as well as other efficiencies in Beverage Cans delivered £14m. Plastic Packaging delivered £21m of the efficiencies. Some £8m came from synergies from the successful integration of OI Plastics, while the remainder derived from energy saving, improved equipment utilisation and reduced scrap – the result of a more systematic adoption of Lean Manufacturing and Six Sigma practices across the Plastic Packaging operations.

In recent years, Rexam has made significant investments in new plants and additional or modified production lines as we look to realise opportunities for organic growth especially in the European Beverage Can business. In 2008, we opened new plants in Russia and Denmark and added new lines in Spain, Egypt and Austria. As a result, net capital expenditure by continuing operations for the year at £383m remained higher than historic levels. The stronger US dollar and euro translation impact increased our earlier estimates by about £30m. Our investment programme is now past its peak and in 2009 capital expenditure is returning to more normal levels of between 1.1 and 1.2 times depreciation and amortisation. Further details can be found in the Cash flow section.

Our traditionally very strong working capital management was affected during the second half of the year by a number of one offs as well as changes in trading terms which resulted in a disappointing outflow. (See Cash flow section.) With our focus on cash, we remain confident that we will improve our working capital position in 2009 and we are committed to achieving positive free cash flow post dividends for the full year 2009.

Free cash flow generation in 2008 was negative £128m, compared with £24m in 2007, owing to the increase in capital expenditure, as well as the aforementioned increase in working capital. This, along with the Rostar acquisition and a sizeable negative currency translation impact, increased net debt to £2.6bn and reduced interest cover from 3.7 to 3.5 times. Further details and commentary can be found under Balance sheet and borrowings.

Statutory results

On a statutory basis, results include the effect of acquisitions, disposed businesses, currency translation and exceptional and other items. Sales for continuing operations were £4,618m (2007: £3,611m) and profit before tax was £240m (2007: £260m). Total profit for the financial period was £171m (2007: £240m, including £66m from discontinued operations) and total basic earnings per share was 26.8p (2007: 39.0p, including 10.7p from discontinued operations).

Being proactive and pragmatic

Consumer packaging is generally regarded as a defensive industry because even in times of recession, people continue to eat, drink and take care of their health – three areas where we are a supplier of choice. We have two well positioned and well invested global businesses in Beverage Cans and Plastic Packaging. We have long, well established relationships with our customers and our suppliers are mostly large global companies. Beverage cans as an industry has proven to be relatively recession resistant on a global scale, although specialty cans are as yet untested. In Plastic Packaging, our focus is on higher growth and higher margin segments, but the business is less economically resilient than Beverage Cans.

In these uncertain times our overriding aim is to protect the foundations of the business. Flexibility is a key word as we manage our business pragmatically and focus on cash generation and cost reduction. In 2008, we acted swiftly in both Beverage Cans and Plastic Packaging to ensure capacity and demand remained in balance, closing plants and adapting assets to market conditions. Ensuring the optimal levels of utilisation is paramount in our business. If market conditions are such that we have to mothball or take out further capacity, we will do so.

We are also managing our business proactively. We have largely removed the risk to us of volatile raw material input costs through the implementation of pass through contracts with most of our customers. During the year, we absorbed significant increases in energy and freight costs. We continue to focus on manufacturing costs and delivering operational efficiencies. These have always been a key priority for Rexam and are even more critical in an environment with an uncertain growth trajectory.

Another key priority for 2009 is cash, and in Beverage Cans and Plastic Packaging we have two highly cash generative businesses. We are managing our capital expenditure very tightly, spending only on previously committed projects and on health, safety and maintenance requirements. There are no new major growth investment projects planned in 2009.

While maintaining our relentless pursuit of efficiencies and manufacturing excellence, we continue to strengthen our marketing and product innovation as the organisation becomes even more commercially focused. 2008 was the second year in succession that we put through price increases in both Beverage Cans and Plastic Packaging.

While few can predict when the current financial and economic situation will turn around, we remain confident that Rexam will come through this downturn as a leaner, more effective organisation.