Business review

During the first six months of 2008 Rexam delivered a robust operational and financial performance despite the headwinds of challenging economic conditions across many of our markets and higher raw material and energy costs.

As a Group, we reported another period of good sales growth which has come through in bottom line growth as we successfully reduced our exposure to the risk of aluminium price rises. We achieved good efficiency savings and are realising the synergies from the recent acquisitions as anticipated. Operating margins improved despite increases in energy and freight costs.

Group sales grew 30% to £2,191m including the benefit of the OI Plastics and Rostar acquisitions. Foreign exchange, primarily the strengthening of the euro against sterling, contributed 5% growth while organic sales growth (including pass through) was 8%.

Underlying operating profit grew 47% to £217m. After taking into account the OI Plastics and Rostar acquisitions, disposals and the £12m benefit from currency translation, organic growth was 8%. Underlying earnings per share increased to 17.0p (2007: 11.7p) mirroring the good start to the year and the contribution from recent acquisitions.

Underlying interest cover improved to 4.0 times (2007: 3.4 times) as a result of relatively higher underlying operating profit.

In June, against the backdrop of a difficult credit environment, we refinanced successfully the £370m Medium Term Note (MTN), which matures next year, and at good interest rates.

In view of the change in principally the euro/sterling exchange rate, capital expenditure in 2008 is now expected to be somewhat higher than previously indicated for the full year, in the region of £360m, remaining above historical levels.

For continuing operations on a statutory basis, which includes the effect of acquisitions, disposed businesses, currency translation and exceptional items, profit before tax was £141m (June 2007: £97m). Total profit for the financial period was £97m (June 2007: £135m, including £67m from discontinued operations) and total basic earnings per share were 15.1p (June 2007: 22.9p, including 11.4p from discontinued operations).

Strategy execution

The execution of our strategy to focus Rexam on higher growth, higher margin segments and emerging markets continued apace. In the growing Russian beverage can market, we increased our presence with the acquisition of Rostar, the Russian beverage can maker, at the start of the year and in May we opened a new aluminium beverage can making plant in Argayash. Both are delivering to plan.

As indicated at the time of the OI Plastics acquisition, we have invested in the new Plastic Packaging businesses and are in the process of installing key infrastructure to allow the development and acceleration of new and existing programmes. In addition, a number of our pharmaceutical packaging plants are being extended to increase capacity for new products due to come into full production in the coming years. These include the plant in Bangalore, India, which is being upgraded to support the growing pharmaceutical market for products such as eye droppers, nasal sprays and child resistant closures. We are also nearing completion of a purpose built plant for Dispensing Systems in France to provide a platform for further expansion in the fast growing lotion pump market.

In the US, we announced in July that we are to reduce our 12oz beverage can making capacity to optimise utilisation of our assets and this is expected to contribute to margin enhancement in the second half and beyond.

With innovation a key element of our strategy, we continue to invest in new product development in both Beverage Cans and Plastic Packaging. Examples include the Fusion™ aluminium bottle, the new short height beverage closure and a new highly adaptable dispensing system solution to satisfy a range of customer needs.

Beverage Cans

During the first half of 2008, Beverage Cans overall sales grew 19% on last year benefiting from continued market growth and five months of sales from Rostar, which was acquired in January 2008. Organic sales were up 8% mainly as the market benefited from new capacity coming on stream.

Underlying operating profit grew 28%. Organic underlying operating profit improved 9%, reflecting increased pricing and efficiency savings, as well as the good management of our contracts for cost recovery, all of which enabled us to absorb higher costs.

Last year we largely reduced our exposure to aluminium volatility in Europe as we renegotiated a number of contracts to the pass through model along the lines of our North and South American beverage can businesses. In those contracts without pass through, we hedged the cost of aluminium. These actions not only minimised risk but have given us improved forward visibility.

Beverage Can Europe & Asia

The European beverage can market remained vibrant in the first half across regions and categories. As a whole, the market grew 9% driven by continued strong growth in Russia as well as good growth in Western Europe. Increased beer and carbonated soft drinks consumption were the principal drivers in Eastern Europe as cans took share from other forms of packaging and consumers increased their overall consumption of packaged beverages. In Western Europe growth came from increased at-home consumption particularly in the Nordic countries as well as in the UK, Turkey and Italy.

Against this background, our own beverage can volumes in Europe grew 17% including the additional volumes from Rostar. Excluding Rostar, volume growth was in line with the market at 9%. The new capacity that came on stream in Spain, Egypt and Austria helped us maintain our leadership position and grow in line with the overall market.

Our volumes of standard cans grew 10%, and, after a slow start in the first quarter, volumes of specialty cans were up 7% driven by continued growth of energy drinks and new sizes such as the successful one litre beer can, the switch to slim cans for soft drinks by certain customers as well as a number of new product launches.

Good price increases on our open contracts, along with good cost recovery and contractual cost inflation escalators, helped offset increases in oil related costs such as freight and energy.

The integration of Rostar is progressing according to plan and we are already covering our cost of capital. A new Russian management structure is in place which combines the best talent from Rostar’s and our own organisation. With the addition of the recently opened plant in Argayash, we have an excellent platform to capture the continued strong growth in this country.

Beverage Can North America

In North America, the non alcoholic beverage can market was down 3% overall in the first half. Our own volumes of standard cans were flat on the first half last year, a period in which we were affected by a four week strike. Adjusting for the impact of the strike, our volumes would have been broadly in line with the market.

While 12oz cans are a fundamental and important part of our business, we are focused on margin enhancement. In our quest to optimise our asset utilisation we have decided, as part of a wider restructuring programme, to close the Forest Park plant in Georgia, and shut down a 12oz line in Longview, Texas, which together represent some 1.9bn (9%) of our 12oz capacity. These measures will not impair our ability to meet customer requirements as we will continue to supply from other plants. The programme, announced in July, will incur an exceptional restructuring charge in the order of £20m which will principally be taken in the second half of 2008, of which some £5m will be cash costs net of asset disposal proceeds. As a result, we expect to generate approximately £5m in annual cash savings from 2009. We will continue to monitor the situation in the US to ensure optimal utilisation of our facilities.

The market for US specialty cans is down, an indication that certain new can sizes may be sensitive to economic changes. Rexam’s 24oz and 24oz CapCan™ products continued to grow and were up 5% and 100% respectively. We have decided to exit the 8oz and a large portion of the 16oz can market as a result of significant margin erosion in these categories. The cost to do this is reflected in the £20m restructuring charge outlined above. We will further increase focus on higher margin products such as the 24oz can, where we are market leader, and the CapCan™ and Sleek™ range of products.

Beverage Can South America

In South America, the market continued to grow well and Rexam’s own volumes were up 9%. Volumes of standard cans grew 6%, driven by further strong performances in Argentina and Chile. Specialty can volumes were up 50% as customers continued to favour these alternative sizes as an effective means of differentiation. Specialty cans now account for 10% of our South American volume compared with 7% this time last year.

In the final quarter of last year we successfully increased prices in South America on a number of contracts, the benefits of which, together with mix improvement, led to a profit improvement in this region.

Plastic Packaging

On a reported basis, Plastic Packaging sales for the period rose from £363m to £617m, chiefly owing to the acquisition of OI Plastics in 2007. Organic sales growth was 6% with pass through accounting for just under 5% and volume improvements and other net price increases contributing the remaining 1%. Underlying operating profit grew to £80m, with organic underlying operating profit up 7% mainly due to supply chain and efficiency savings as well as the net pricing effect. Operating margin improved from 11.3% to 13.0% reflecting good growth in the acquired businesses, and good progress on efficiency savings and acquisition synergies.

Plastic Packaging now accounts for almost 40% of Rexam’s underlying operating profit and the benefits of running it as a portfolio of businesses are coming through. Some businesses are doing better than others but, in aggregate, the whole sector is delivering as expected. Resin costs have risen considerably since this time last year, reflecting the higher cost of oil and gas. However, the increased cost of resin is passed through to our customers in around 80% of our contracts, which minimises our exposure. Overall, the business is progressing well in a tough environment.

The integration of the OI Plastics businesses is progressing according to plan. Synergies in the first half totalled £3m and we are on track to meet our target for the full year as well as the £25m annual synergy savings by 2010. Good supply chain savings were generated in the first half which helped mitigate some of the raw material cost increases. As anticipated, the largest savings are being generated on resin and colourants, due to increased leverage with suppliers, as well as cost reductions from plant closures. Other Rexam manufacturing facilities are absorbing the production from these closures thereby improving overall asset utilisation. We anticipate the full year Plastic Packaging restructuring charge to remain in line with that announced earlier this year.

In mid-July, a warehouse fire at one of our Shanghai plants resulted in the tragic loss of three firefighters’ lives. The fire destroyed the raw material inventory and some semi-finished goods and caused the plant to cease production for a number of days.

Closures

Sales in Closures (which comprises Rexam’s and OI Plastics’ closures businesses) grew 9% with resin pass through and price increases being somewhat offset by a drop in volume owing to our exit from the UK thin wall food business. Operating margin benefited from this mix improvement and efficiency savings, and remains in line with the Plastic Packaging portfolio margin.

In the closures part of the business, sales grew in a declining carbonated soft drinks market. Shortfalls in beverage and food closures were more than offset by increased demand in the juice and healthcare segments.

The High Barrier Food business continued to show good underlying profits growth in the US. Additional capacity is being added in our Union, Missouri, plant to meet growth in demand, while the business development programme in Europe and Asia continues.

Healthcare

Sales in Healthcare (which comprises Rexam’s Pharma and the Primary Packaging and Prescription businesses from OI Plastics) increased 7% mainly due to resin pass through but helped by volume growth and price increases. Operating margin improved further due to good pricing and mix benefits, as well as cost management and acquisition synergies, and remains substantially above the average for the portfolio.

Strong sales growth in Pharma was driven by the ramp up of new products and increased demand for pill jars. The Prescription business performed well delivering good sales growth over the equivalent period last year, principally driven by higher selling prices following the annual price increase agreed at the end of 2007 to mitigate expected resin price increases. Sales in Primary Packaging were up due to resin pass through and good pricing, and profit margins have improved.

Personal Care

Sales in Personal Care (comprising Make Up, Dispensing Systems and Home & Personal Care) were up 3% for the period. Margins held up well but are below the average margin of the Plastic Packaging portfolio.

Dispensing Systems experienced good volume growth driven by higher demand for lotion pumps in Europe and strong customer demand in Brazil. Demand for fragrance pumps was lower, primarily in the US, as key customers reduced the number of new fragrance launches, instead focusing resources on improving and refining their existing product lines.

Make Up sales improved on the equivalent period last year as a result of higher volume demand for lipsticks from key customers and some price rises. Growth in Europe was strong but we saw signs of a general consumer slow down in the US market as well as reduced demand from our largest customer in Brazil. Improvements to the Make Up cost base continued during the first six months with further business restructuring in China helping to optimise our operations there.

Sales in Home & Personal Care were softer, stemming from reduced demand from key customers as they adjusted to the economic conditions in the US. In some instances, we saw customers switch to new, cost effective packaging solutions as a way to revitalise their brands.