Rexam rides out rocketing raw material costs
to avoid the impact of higher raw material costs through canny
business decisions such as relying on the buying power of its
largest customers, writes Anthony Fletcher.
As a result, the UK-based packaging group was capable of recording unveiled a 14 per cent rise in first half of the year, with pre-tax profits increasing from £70 million to £80 million. But sales still fell 1.5 per cent to £1.53 billion, hit by the impact of the weak dollar and the disposal of several businesses.
Nonetheless, the results are impressive, if you consider that aluminium prices have increased by 20 per cent since the start of the year and the German beverage packaging market is yet to be restored. But Rexam, which spends about £900 million a year on aluminium used in the manufacture of beverage cans, said that dramatic aluminium price increases in the US had been avoided because major customers such as Coca-Cola usually buy the metal themselves, paying Rexam to convert the material into cans.
In Europe, Rexam told the UK's Financial Times that it had safeguarded its aluminium supply for three years, meaning it was hedged for this year, next year and part of 2006.
In addition, Rexam claimed that rising energy costs were offset by average price increases of just under one per cent across Rexam's beverage packaging business. The group's glass packaging operation is the heaviest energy user, accounting for about 50 per cent of its annual energy bill of £100 million.
As a consequence of these measures, Rexam has been able to almost totally avoid the effect of aluminium and energy cost increases this year.
Aluminium is not the only raw material to have shot up in price - other materials such as resin for plastic packaging have also increased sharply. But Rexam claims to have clauses with many of its customers that allow it to pass through resin [price] increases in plastic packaging.
"We manage our input costs mainly through hedging and pass through contracts<" said the company in a statement. "Aluminium is our largest raw material cost. The other two main input costs, resin and energy, are being managed through regular compensatory price increases."
Rexam has also benefited this year from a combination of volume, price and efficiency gains, as well as the contribution from acquisitions, including Latasa, the Brazilian can maker acquired last November. The group raised its forecast of annual cost savings from Latasa by the end of 2006 from $20 million to $30 million.
The gains offset disruption to the German market, where new recycling legislation cost Rexam £20 million in turnover.
"We have had a good first six months carrying on from where we left off in 2003. We are benefiting from a combination of acquisitions, price increases, volume and mix improvements, as well as ongoing cost efficiencies and synergies," said Rolf Börjesson, Rexam's new non-executive chairman.
"These have helped mitigate the effects of cost inflation, currency and the continuing impact of the deposit legislation in Germany. We have also seen improvements in free cash flow and margins. In all, we remain confident that 2004 will be another successful year for the group."
In Germany, there is still no nationwide infrastructure for the collection and clearance of one-way beverage containers following the introduction of the deposit legislation at the start of 2003. In the absence of a national system, a number of retailers are establishing their own return systems for one-way beverage packaging.
Rexam is operating one of these so called 'island solutions,' which involves it providing distinctive packaging for a particular retailer.
"We are now seeing beverage cans returning to the store shelves in Germany<""While we expect no immediate political solution to this issue, we remain confident that a rational outcome will eventually be found to the benefit of all stakeholders. We have taken steps to deal with the consequences of lower domestic demand, including the reduction of under-utilised capacity."
Despite ongoing difficulties in Germany, Rexam's overall results for the first half of 2004 remain solid. Underlying profit before tax and retirement benefits net finance cost was up 19 per cent to £150 million (after retirement benefits net finance cost up 23 per cent to £137m), up from £126 million in the first half of last year.
In Europe, excluding Germany, sales volumes were 5 per cent ahead of the same period last year, helped by Rexam's strong presence in Russia. Growth in non-traditional market segments, such as energy drinks, was also particularly strong. To meet the growing global demand for slim cans for the energy drinks market, Rexam has started converting two lines in Germany at the previously mothballed Gelsenkirchen plant.
The group's European glass sales were up 5 per cent, and acquisitions are being integrated on schedule. However, Rexam recently announced the shutting down of its furnace and related production lines in Germany to bring production capacity more into line with demand, a move that will cost the business £5 million.
Rexam's plastic packaging division also recorded strong sales, increasing by 11 per cent to £271 million. Strong organic growth and efficiencies across the business, combined with the boost from acquisitions, lifted underlying operating profit by 35 per cent to £35 million with margins moving to almost 13 per cent.
"It is clear to me that Rexam has a solid strategy in place and that there are many opportunities for growth and value creation. I am committed to following the path set out, while also addressing the challenge inherent in defining Rexam's next phase of development," said Rexam's new chief executive Stefan Angwald.
Rexam is one of the world's top five consumer packaging groups and the world's leading beverage can maker, with an annual turnover of £3.1 billion. Its operations focus on beverage packaging in metal, glass and plastic, as well as plastic packaging solutions for the food industry.
