25th Mar 2015 17:01
25 March 2015
Annual Report 2014 and Notice of Annual General Meeting
Rexam PLC, a leading global beverage can maker, announces that it has published its Annual Report 2014. The following documents (as applicable) are being mailed to shareholders or otherwise made available today:
· Annual Report 2014
· Notice of Annual General Meeting 2015
The documents are also available to view and download on the Rexam website at www.rexam.com/ar14
In accordance with Listing Rule 9.6.1 copies of the documents have been submitted to the UK Listing Authority and will shortly be available for inspection from the National Storage Mechanism at www.morningstar.co.uk/uk/NSM
The Annual General Meeting 2015 of Rexam PLC will be held at 2.30pm on Tuesday 28 April 2015 at Church House, Dean's Yard, London SW1P 3NZ.
The information included in the Appendix to this announcement has been extracted from the Annual Report 2014 and is reproduced here solely for the purpose of complying with Disclosure and Transparency Rule 6.3.5 (DTR 6.3.5) and the requirements it imposes on how to make annual financial reports constituting regulated information available to the public.
The content of this announcement, including the Appendix, should be read in conjunction with Rexam PLC's unaudited annual financial results announcement issued on 19 February 2015 (www.rexam.com/index.asp?pageid=98) (the Results Announcement). Together these announcements constitute the material required by DTR 6.3.5 to be communicated to the media in unedited full text through a Regulatory Information Service. This material is not a substitute for reading the full Annual Report 2014. All page references in the Appendix are to the Annual Report 2014.
The information extracted from the Annual Report 2014 and contained in the Appendix to this announcement does not constitute Rexam's statutory accounts for the years ended 31 December 2014 or 2013 as defined in section 434 of the Companies Act 2006, but is derived from those accounts. The reports of the auditors on the statutory accounts for the years ended 31 December 2014 and 2013 were (i) unqualified, (ii) did not include a reference to any matters to which the auditor drew attention by way of emphasis without qualifying their report and (iii) did not contain any statement under section 498(2) or (3) of the Companies Act 2006. The statutory accounts for the year ended 31 December 2013 were approved on behalf of the Board of Directors on 20 February 2014 and have been delivered to the Registrar of Companies. The statutory accounts for the year ended 31 December 2014 were approved on behalf of the Board of Directors on 12 March 2015 and will be delivered to the Registrar of Companies in due course following the Rexam PLC Annual General Meeting 2015.
Enquiries
Marion Le Bot, Head of Investor Relations 020 7227 4100
David Gibson, Company Secretary 020 7227 4100
Editors' notes:
Rexam is a leading global beverage can maker. We are business partners to some of the world's most famous and successful consumer brands. Our vision is to be the best beverage can maker in the world. We have 55 can making plants in more than20 countries and employ around 8,000 people. In 2014 our sales were £3.8 billion. Rexam's ordinary shares are listed with theUK Listing Authority and trade on the London Stock Exchange under the symbol REX. Visit www.rexam.com for further information.
Appendix
Part A - Important Events from the financial year ended 31 December 2014
The Annual Report 2014 contains the following statements regarding important events that have occurred during the financial year ended 31 December 2014 on pages 8 to 15:
"CHIEF EXECUTIVE'S REVIEW
I am pleased to report that in a difficult year, we delivered a good performance. It has been a great team effort in the face of unprecedented rises in metal premiums, the impact of foreign currency translation and some pricing pressure. The annual dividend is up by 2% to 17.7p and we returned £450m to shareholders during 2014 following the sale of our Healthcare business.
Before providing an overview of 2014 I believe, along with fellow board members, that the proposed combination with Ball represents a strong opportunity for industry consolidation to create a truly global platform to deliver 'best in class' service to customers based on shared cultures of manufacturing excellence and continued innovation.
THE YEAR 2014
In 2014, our beverage can volumes grew 4%. Reported sales from continuing operations, however, were down 3% at £3,832m, mainly as a result of the depreciation against sterling of all three of our major trading currencies - US dollar, euro and Russian rouble. Organic sales, which adjust for the impact of foreign currency translation, were up 4%, broadly in line with our volume growth.
The increase in volumes stemmed from good organic growth in all regions (except North America) at rates in line with or ahead of the respective markets. In Brazil we saw exceptional volume growth boosted by the 2014 FIFA World Cup. As expected we also increased market share in Brazil following the conversion of some of our plants to meet the growing demand for specialty cans.
This good volume growth along with a non recurring indirect tax benefit in Brazil of £18m were offset by £39m of foreign exchange translation headwinds and £34m of higher aluminium premium costs. As a result, reported underlying operating profit from continuing operations was down at £418m (2013: £449m) while organic operating profit increased, as anticipated, by 2%.
While the year was challenging in terms of both sales and profit growth, we generated good free cash flow (one of the characteristics of our business) through tight management of working capital and disciplined capital spend. Free cash flow from continuing operations was strong at £225m (2013: £180m).
A full review of the underlying and statutory results can be found on pages 40 to 46.
FOCUSED INVESTMENT
Our ultimate aim as a Company is to balance growth and returns to shareholders through focused and disciplined organic investment and bolt on acquisitions. During 2014, we continued to invest in new growth markets and in our capabilities to manufacture new, differentiated products.
We installed a new line at our existing plant in Chile to meet the growth in specialty cans and also completed line conversions for specialtycans in Brazil, Turkey, Egypt and India to meet changing customer preferences and market needs. We also announced the conversion of our two plants in Spain (Europe's second largest can market) from steel to aluminium. The conversion demonstrates our commitment to invest for our customers and our confidence in the growth dynamics of the can market in Spain. Other significant projects included the investment in expanding the capacity of our Fusion® aluminium bottle production in the Czech Republic to meet the demand for this innovative product.
The construction of the new can plant in Widnau, Switzerland, is on schedule and on budget, and is due to come on stream in the final quarter of 2015. The plant will give us more flexibility within our European network to meet the growing demand for specialty sizes.
We also announced that we will invest in a second can plant in the south of India to meet continued growth in that market. In the short term, expanding our existing plant close to Mumbai could have given us some cost advantage but having plants in different locations in India will ensure a favourable footprint and bring longer term advantages. As part of this expansion project we also secured land in the north of India where we plan to locate a third can plant in due course.
In all, net capital expenditure from continuing operations was £195m (2013: £186m), 1.4 times depreciation and within our stated limits.
EXPANDING GLOBAL PLATFORM
During the year, we continued to strengthen our global platform. We have spoken for some time about the opportunities in emerging markets but have also indicated that competition is strong for new growth opportunities. It was, therefore, pleasing to see our strategy bear fruit as we acquired a controlling stake in United Arab Can (UAC) in Saudi Arabia in January 2015.
Also in the same month, we completed a substantial investment in Envases del Istmo SA (Endelis), a beverage can business in Colón, Panama, in association with Envases Universales de Mexico (EUM), a long standing partner in Central America.
UAC is a modern business with respected partners, well established customer relationships, in a market with attractive growth prospects for the beverage can and we look forward to working together with our partners in UAC to lead further expansion in the region. (See also page 22.)
The joint acquisition of the Endelis business in Panama complements our existing Central American footprint and positions us well to serve our customers in this exciting growth region as well as the broader Latin America market.
The reaction to the acquisitions from customers and employees has been very positive and the integration of the two businesses is now proceeding apace. We expect to extract further synergies given our own global scale and breadth of technical expertise.
STRENGTHENING CUSTOMER RELATIONSHIPS
Our major customers are growing: they have ambitious growth targets and are, naturally, keen to deliver on these. There is significant pressure in some of our customers' core markets from consumer, regulatory and other trends and the need for growth is driving higher demands on innovation and differentiation: in the case of cans this centres mainly on different can sizes and value add features. Customers are also focused on supply chain savings to help support their profitability. As a consequence, we are experiencing a more co-ordinated, global approach to procurement among our customers. We also see players in both soft drinks and beer exploring consolidation opportunities.
To respond to the shifting and challenging back drop, we made further important changes during the year in the way we are organised. The aim was to bring us closer to our customers and build strong, sustainable relationships as the preferred can supplier. Internally we are more aligned across our four regions to help us better understand, anticipate and respond to customer needs. Key account directors now manage our main customers on a global rather than regional basis. This helps to co-ordinate our approach and is helping to extend our points of interaction with customers beyond procurement and into marketing and sustainability - two areas where we can add value to our relationships. Monthly tracking and quarterly reviews of mutually agreed key performance indicators help ensure further that we execute as planned and deliver the best product offering at the best cost.
OPERATIONAL EXCELLENCE AT THE CORE
At Rexam, our drive for operational excellence extends beyond just the financial results. A major focus this year has been driving further improvement in the Group's health and safety performance. It was pleasing to see that the Group's Lost Time Accident Rate improved substantially after the absence of any improvement in 2013. A fatal injury at the UAC plant (although prior to the completion of the acquisition) shows that there is still more to do. In 2015, we are rolling out a new world class safety plan to all locations in the Group, to establish a single standard of expectation for behaviour as we renew our efforts to remove accidents from our sites, and sustain that level. (More details on page 25.)
Our manufacturing capabilities are where we create the vast majority of our value and where we aim to generate sustainable competitive advantage.
Our lean manufacturing approach was very much in evidence, and we saw good results from the many value stream activities implemented in 2014, not least the delivery of a further £20m of efficiency savings to maintain our solid record in this area. (See page 30.)
The world class standard of our operations was again recognised by The Shingo Institute - a global reviewer of operational excellence. It was not just our manufacturing that gained Shingo accreditation: at the start of the year our headquarters in Rio de Janeiro became the first corporate office in the world to be recognised by the Institute. At year end, our plant in Jacareí in South America received its accreditation. Only a handful of sites (from all walks of industry) meet the Institute's strict criteria each year: the fact that we now have eight accredited plants (unmatched by any other company in the world) demonstrates the extent of our achievements. With two plants in North America well advanced in the accreditation process, we are confident of adding more to this roster as we continue our pursuit of excellence.
SHAPING OUR FUTURE THROUGH INNOVATION
Our ability to innovate is crucial: it adds value and is an important driver of growth and improved returns. Our innovation programme focuses on the pack of the future, core process improvement and the plant of the future.
Consumers continue to demand more and more from the products they buy and are doing this in an increasing variety of outlets. Differentiation is key, and we consistently pursue innovation for customers as can be seen in various examples in this report. Our product development programme encompasses both incremental and transformational technologies, helping our customers to position and sell their products as efficiently, sustainably and profitably as possible well into the future.
Within core process improvement we build on our embedded lean manufacturing and six sigma practices with new technologies to deliver step change improvements in our manufacturing process and costs to address our customers' need for increased productivity.
During 2014, our intention to pursue transformational innovation was exemplified by us taking an equity stake in an advanced engineering company, Magnaparva Packaging, to investigate disruptive technologies in metal forming to drive can lightweighting and reduce energy consumption. Together these are expected to provide cost advantage and improve the quality and efficiency of our can making process.
A third focus for innovation is developing the plant of the future with highly sustainable and flexible plant designs to help our customers access new markets. During the year, we added a number of strategic technology projects to support this work.
Our ongoing collaboration with our customers helps identify opportunities and understand priorities. We deliver by examining and using new technologies from other industries, via our supplier collaboration programme, and by leveraging public funding for earlier stage research. I am encouraged by the progress we have made and confident that we have a robust technology pipeline for the future.
AND THROUGH SUSTAINABILITY
Many of our customers have advanced programmes that commit them to ambitious targets with regard to the sustainability of their packaging. As one of their core suppliers, we support them in their journeys to drive sustainable transformation within their supply chains and to maintain the 'case for the can'. Our work with Carlsberg, the Danish global brewer, on their Circular Economy programme is just one example of the work that we are doing to support our customers. (See page 26.)
Our own sustainability agenda is an important means of not simply supporting our customers but also of reducing our cost base and earning a licence to operate as a trusted member of the community. After a decade or more of embedding sustainability throughout our organisation, we now think and operate in a more integrated manner and now include a number of non financial measures in our key performance indicators. (See page 31.) In 2015, we plan to provide a more detailed update on our progress.
As a global manufacturing business producing billions of beverage cans a year, we have a corporate responsibility to ensure sustainability sits at the heart of our business. We have a carefully considered and robust framework to ensure we address the broader issues of sustainability across all of our business. This framework is focused on three key areas: products, operations and people.
In 2014, we carried out a materiality study to understand better the key areas that are of importance to our stakeholders. The study highlighted economic, social and environmental issues that most concern our stakeholders and plotted the risks and opportunities (See below.)
Following the study, we reviewed our sustainability framework to align our commitments closer to those of our stakeholders. We have set ourselves stretching goals for 2020 to ensure the business continuously improves and plays its part in addressing the issues facing business and society today. Twelve specific commitments (with 15 measures) enable us to monitor and report on progress across our three areas of focus. We introduced a new product commitment to reduce the overall carbon footprint of a beverage can by 25% by 2020 (from a 2010 baseline). We also now have a specific commitment relating to water consumption, which is a major concern for our customers especially in regions of high water stress.
In the quest for continuous improvement, we benchmark our performance against the best in the world through regular third party reviews. We are continually challenging ourselves to be the most sustainable business we can be, and our inclusion once more in the prestigious Dow Jones Sustainability Indices (DJSI Europe), where we are one of only five packaging companies listed, and in the MSCI Global Sustainability Indices confirm the progress that we have made.
BUILDING A WINNING ORGANISATION
Building a winning organisation is a key element of our strategy to help secure a sustainable future for our business and our people, our customers and shareholders. (See also page 29.) We have values and leadership practices which define how we should behave, how we perform and how we can act as one company. The values and practices are part of leaders' personal performance objectives and help us to differentiate ourselves and make us the employer of choice. We reward and recognise our people in return, and support them in their choice of career.
Prepared for the future
In 2014, we continued to focus on performance management, talent management and providing learning and development opportunities for our people. Our aim is to develop employees' skills to help them progress their careers, and help us grow our business. Development objectives are agreed during annual performance evaluations and employees across all locations have the opportunity to learn proactively through our online resources, on the job learning and mentoring as well as through formal programmes with leading business schools, specialist consultancies and vocational training organisations to build skills and performance levels.
Our internal appointment rate for our most senior leadership levels of more than 75% is a clear demonstration that we offer careers rather than simply jobs.
During 2014, we continued to look at the organisation's effectiveness to ensure that we focus on the work that is important to us and where this is best carried out. Our ultimate aim is to provide the right structure to support the work we do and an organisation that is geared to bring as much clarity as possible to what is an increasingly ambiguous world.
The internal restructuring of our business in Europe into four distinct but interdependent regions during the year brought our organisation closer to the customer and is a good example of our work to date. We can expect to see similar work in the future as we seek to ensure that we are well placed to address the needs of customers in an ever more complex market.
Engaged
The global roll out of our vision to be the best beverage can maker in the world as well as the introduction of safety as a core value during the year are expected to drive employee engagement further.
Communicating with all our employees is a key priority for all our leaders. Each sector has its own regular channels and vehicles such as face to face meetings, notice boards, publications, and, in South America a dedicated Facebook page for all employees. Senior executives on regular site visits organise townhall meetings with the employees. We encourage employees to participate and give their views on any aspect of the Group's business through regular team meetings, the local presentation of the annual and half year financial results and the economic factors affecting the Group's performance. We have nominated employee representatives who help ensure that employees' view are taken into consideration. We also have employee share schemes, in countries where this is feasible, to promote share ownership.
In our employee survey 2013, in terms of engagement, we were three percentage points from the upper quartile in our benchmark group which includes a number of non manufacturing organisations. Our 2015 survey will, we hope, show that we continue to make progress with this key indicator as we have done in the latest surveys. (See page 31.)
MARKETS AND DIVISIONAL PERFORMANCE
The market background and the world in which we operate are explained more fully on page 4 but, in 2014, volume growth in our markets was mixed with strong growth in South America (helped by the FIFA World Cup), good growth in the AMEA region, albeit from a low base, and North America and Europe performing in line with their respective markets.
This year, we have adopted a new segmental disclosure for financial performance comprising Europe & Rest of World and the Americas to help transparency and understanding of our business (see page 41 and Note 2 to the financial statements). The following section reviews the trading performance of the two segments which encompass our four main geographic regions.
Europe & Rest of the World: overview
In the Europe & Rest of World segment organic sales grew 5%, with growth in all regions with the exception of Russia, and organic operating profit growth was 5%. Return on sales was down slightly, and lower profits and recent investments made in growing the business (including the new plant in Switzerland) combined to reduce return on net assets for the segment.
Europe
After a quiet start to the year in both standard and specialty cans, trading in Europe (excluding Russia) improved significantly and volume growth for the year was 3%, driven by the UK, Benelux and Germany. Standard cans, as anticipated, were up 2% while specialty cans were up 4% as good growth continued within energy drinks.
Our business in Russia is self contained in terms of supply of aluminium and other raw materials, the can manufacturing process and customers. Trading, however, was subdued primarily due to the weak macroeconomic backdrop. Market performance in beer impacted the brewers while flavoured alcoholic drinks were delisted from the popular kiosks channel. As a consequence, our volumes declined 2%. The regulatory environment regarding alcohol appears now to be steadying and tax on beer has been frozen.
A positive development is that beverage cans' share of the pack mix in Russia grew by 0.9% to 21.7% compared with 2013.
Africa, Middle East & Asia
Our AMEA business saw continued growth with overall volumes growing 18% to just over 3bn driven by good growth in specialty cans. Our volumes in India, boosted by the introduction of domestically manufactured 250ml cans, grew robustly (72%). Egypt had a quiet start to the year but with our conversion to specialty cans now fully ramped up, we were able to benefit from a buoyant market and 16% growth as we supplied to both global and local drinks manufacturers. In Turkey, the market picked up throughout the year and volumes ended up ahead of last year.
Americas: Overview
Performance in the Americas was good. Organic sales were up 3% as strong volume growth in South America was partially offset by a volume decline in North America. Organic operating profit was flat as the benefit of strong sales in South America and a good product mix was offset by the commoditisation of some specialty can sizes in North America. Return on sales and return on net assets were lower than last year, reflecting the adverse impact of foreign exchange translation on profits and the investment in line conversions in South America. At c 40% North America still has the highest return on net assets in the Group.
North and Central America
In North America, can consumption remains the highest in the world at more than 315 cans per capita per year. Rexam has more than 20% of the North American market. During the year we have continued to focus on diversifying the portfolio and establishing strong positions with growth customers in growth categories. Our strategy is bearing fruit: we are the largest can supplier across both the tea and energy drink categories with both categories continuing to show year on year growth.
In 2014, our volumes tracked the industry. Our standard can volumes were down 3% in line with the CSD market. Specialty can volumes were up 1% as good volume growth in Sleek and 16oz sizes offset maturing, larger specialty can sizes. Encouragingly, growth in Sleek and 16oz was driven by customers in a variety of beverage categories including beer, CSD and energy drinks as well as flavoured alcoholic beverages, so called 'malternatives'. (See above.)
The process of commoditisation in the specialty can segment in North America is accelerating as contracts are renewed and, as previously stated, this will have an effect on volumes and margins during 2015.
Outside the US, there is significant potential for further growth in Mexico and Central America with the region's increasing population and improving GDP per capita. We are participating in this growth through our own plant in Querétaro, Mexico, where we saw specialty can growth continue particularly in Sleek and 16oz cans. We have a joint venture in Guatemala to help us broaden and strengthen our customer relationships, and at the start of 2015 we announced a new can making joint venture in Panama. (See page 22.)
South America
Trading was very strong in South America in the first half as a result of better than normal weather, the timing of the Carnival (which extended the normally busy summer season) and the build up to the FIFA World Cup. As expected, volumes softened in the latter part of the second half but overall volumes grew 12%, ahead of the market as we regained market share and shipped a record 14bn cans. Specialty cans continued to grow faster than the total market, ratifying the decision of converting four lines in Brazil to meet these needs. We also expanded the specialty capacity of our plant in Chile.
The macroeconomic environment continues to be weak in Brazil with GDP growth expected to be 0.1% in 2015. We expect the beverage can market growth to slow significantly compared with 2014 in the absence of any major stimulus such as the FIFA World Cup. A new tax on drinks is expected to come into force during 2015. Additionally, we expect fillers to revert to prioritising specialty cans to provide attractive price points with different can sizes.
ACTING RESOLUTELY TO MEET CHALLENGES AHEAD
2015 is expected to remain challenging. Aluminium premiums, despite new proposed load out rules, are expected to remain high and there is limited opportunity to pass on these costs in Europe and South America under current contracts. Customer pressure and competitor actions are reducing market prices, and competition is strong for new growth opportunities. On top of this, our customers still want and expect us to invest in new growth markets and new differentiated products. We are taking resolute steps to address these challenges in Europe, reducing our cost base and increasing our productivity to attain cost leadership. We will be carrying through these plans irrespective of the outcome of the Ball offer.
As a first step, we will be opening consultations with the German works council in March 2015 with a view to closing our plant in Berlin. Berlin has three low speed lines and one of the highest fixed cost bases in our European network and has become uncompetitive in serving its core German, Benelux and Polish markets. Whilst we conducted a thorough review of our options, including investing in higher speed lines, reductions in SG&A and incremental investment in capacity to reduce the cost per thousand cans, it was clear that the plant's location meant that even if those steps were taken, it could still not provide a competitive cost base to support those markets in the future.
Total P&L costs of the plan over the next three years are expected to be £140m of which £80m are cash costs. Most of the cash costs will occur in 2016 and 2017. Capital expenditure is expected to be an additional £70m in 2015 and 2016, which relates mainly to investment in the current footprint to support our customers during this restructuring.
Once the restructuring is complete, annual savings are expected to be £50m from 2017.
We plan to pursue further restructuring actions, included in the costs set out above, but we are not in a position to disclose anything further at this juncture. I am confident that the actions we are taking and those that we are planning will help us achieve the cost leadership that we need. Rexam has the pragmatic mindset required and has proven over the years that, when set a target, it will deliver.
In closing, while the fundamentals of our industry may be shifting, I am confident that they are sound. The global beverage can market is expected to continue to grow at around 3% for the foreseeable future. We can capture that growth: we have leading positions in our main markets and are increasing our exposure in emerging markets. We are building stronger partnerships with our customers. They are global businesses, and they want to deal with sophisticated, global suppliers.
We have also strengthened our technological capabilities to meet increasingly demanding customer needs.
The Group's balance sheet remains strong and we maintain our investment grade rating with all rating agencies.
We still see opportunities for further development in all our regions. We funded the two latest acquisitions out of debt and would envisage adopting a similar approach in the future for smaller bolt ons.
Significant steps have been taken to strengthen our strategic position to better serve our customers, and we are now a 100% focused beverage can maker. The acquisition of a majority stake in UAC and our investment in Panama position us well in higher growth geographies.
In summary, we expect 2015 to present a tough trading environment with headwinds from metal premium, foreign exchange volatility and pricing pressure. However, we are taking steps to address these through further improvements in productivity to make sure we are delivering cost leadership and continuing to invest in growth capacity to enhance our competitive market positions.
Graham Chipchase
Chief Executive
12 March 2015 "
Part B -Principal Risks and Uncertainties
The Annual Report 2014 contains the following statements regarding the principal risks and uncertainties facing the business on pages 34 to 39:
"SUMMARY OF PRINCIPAL RISKS AND UNCERTAINTIES
The table below sets out what we believe to be the principal risks and uncertainties facing the business. Each is linked to one or more of our strategic priorities:
1. Strengthen customer relationships
2. Invest to capture growth
3. Operational excellence
4. Shape our future
5. Build a winning organisation
The table does not cover all the risks that the Group may face. Additional risks and uncertainties not presently known to management or deemed to be less material at the date of this report may also have an adverse effect on the Group.
Risk and description | Potential impact and key mitigations | 2014 Assessment | 2014 Movement |
Competitive environment trends The risk of adverse commercial impact on Rexam from customer and competitor activities. This risk can be driven by dependency on key customers, competitor activities and behaviours, price and volume pressure or contract negotiations. Strategic priorities: 1, 2, 3, 4 | Potential impact Adverse business performance, price and volume pressure, adverse terms and margin erosion. Key mitigationsWe continue to focus on value adding service and innovation, as well as investing in our production capacity and our capabilities to strengthen relationships with our customers and optimise our competitive cost position. See also page 21. During the year, we carried out global bids and negotiations with some of our major customers, implemented a customer and competitor strategy review and analysis, worked to improve our pricing process and focused on cost reduction and efficiency. | HIGH | Increased |
Continued economic slowdown The risk of economic slowdown and sluggish recovery in Rexam's key markets and its impact upon demand for consumer packaging. This remains one of the key risks for the Group. Strategic priorities: 1, 2, 3 | Potential impact Adverse business performance, price and volume pressure, and eroded customer and consumer confidence. Key mitigationsRexam continues to manage capital investment closely and is focused on maximising utilisation of assets to ensure we align our capacity with volume demand. We use scenario planning and modelling based on potential upside and downside risk analysis within our strategic planning and annual budgeting and forecasting processes to identify mitigating actions which would be implemented should this risk increase further. Continued cost improvement measures were implemented during 2014 with ongoing focus on lean initiatives, efficiency savings, supply chain management and innovation (see pages 9 and 10). | HIGH | Stable |
Financial impact fromcountry based instability The risk of political, socioeconomic and legal uncertainties within a country or region that Rexam operates in and its impact on our performance. Our expansion in emerging markets means that this is a risk area to which we will continue to be exposed. Strategic priorities: 2, 4 | Potential impact Social unrest, liquidity issues, currency fluctuations and lack of availability, trade sanctions affecting our business, political instability, war and terrorism, security threat to our people and assets. Key mitigationsEmerging market risks are assessed in detail by management when considering investment opportunities through due diligence reviews prior to investment and risk assessment during capital evaluation process. We leverage on the ground market and country intelligence from local management with support from external advisors. Additionally, business continuity plans are in place at plant, sector and Group level, and these plans were reviewed, benchmarked and tested in 2014. Preparedness plans have been built for operations in countries facing rapidly changing environments. Actions to further improve business continuity management were identified during the year and will be implemented going forward. For update on our operations in Russia, see page 12. | HIGH | Increased |
Cyber attack and data security Risks of a data security incident which could be driven by, for example, cyber attack, virus, or technology failure. Strategic priorities: 4 | Potential impact Business interruption, financial losses, loss of confidential data, negative reputational impact and breach of regulations. Key mitigationsRexam's IT security procedures and processes (including mobile devices and Cloud services) are in place, covering areas around antivirus software, backups, access and password control. Disaster recovery plans are also in place and these are tested twice a year along with system penetration and vulnerability tests. In the case of a disaster or technology failure, there are clear responsibilities between IT and business units to ensure operations can continue during any downtime. In 2014, an information asset review was completed. Additionally, we rolled out laptop encryption and standardised and improved access controls to desktops. The transformation of the global data centre is progressing as planned. Other ongoing projects are the installation of a vulnerability tool on our network to improve visibility of server operating systems and the implementation of role based restrictions on our key transactions to improve controls to sensitive access. | HIGH | Stable |
Aluminium and otherinput costs increases Aluminium represents our most significant raw material cost, followed by metal premiums, other raw materials, energy and fuel costs. These costs are driven by market volatility, regulatory changes and requirements, and non controllable costs. Strategic priorities: 1, 3 | Potential impact Margin erosion, loss of volumes, loss of competitive advantage against direct competitors or other beverage packaging products. Key mitigationsThe majority of our aluminium ingot costs are charged to our customers on a pass through or back to back hedged pass through basis. For the remaining aluminium, hedging strategy and mechanisms are in place to manage the aluminium cost and associated currency exposures. The conversion cost from ingot to aluminium coil is covered by long term supply contracts. During the year, there was a significant increase in aluminium premiums due to increasing warehouse queue and availability issues. The new LME rules on warehouse load out rates were implemented in February 2015, which could normalise premium levels in the longer term. (See also page 8.) In Brazil, we have entered into a medium term contract with an energy provider to manage the energy cost and supply exposure as a result of the continuing drought crisis in the country. | HIGH | Increased |
Business interruption Every business faces the potential risk of a major disruption to internal facilities or the external supply chain which could be caused by natural disaster, loss or scarcity of supply, industrial disputes, supplier failure, technology failure, unplanned outages and physical damage as a result of fire or other such event. Strategic priorities: 1, 3, 5 | Potential impact Operational disruption, a significant adverse impact on our ability to meet customer requirements, potential additional contractual liabilities and a consequential impact on financial performance. Key mitigationsThere are established business continuity management protocols and procedures across the Group, and clarity on responsibilities between Group functions and business units, in the event of disaster. Ongoing maintenance programmes are also in place at manufacturing plants and facilities. Strong relationships with suppliers enable us to make flexible sourcing arrangements for key supplies and we ensure appropriate levels of inventory are maintained. Additionally, mechanisms are in place to monitor the financial and operational viability of our key suppliers. Insurance programmes, reviewed on an ongoing basis, are in place to cover losses associated with business interruption for a stipulated period as a result of property damage or supply failure. There were no significant changes during 2014. Business units across the Group continued to focus on risk mitigation, including the drawing up, refinement and testing of business continuity and disaster recovery plans. | MEDIUM | Increased |
Tax risks In an increasingly complex international tax environment, some uncertainties are inevitable in estimating our tax liabilities. Strategic priorities: 4 | Potential impact Additional tax liabilities, fines and penalties, and reputational impact. Key mitigationsWe seek to plan and manage our tax affairs efficiently in the jurisdictions in which we operate. Tax planning will complement and be based around the needs of our operating businesses. With dedicated internal tax experts and the use of external tax advisors where required, we exercise our judgement in assessing the required level of provision for tax risk and allocate resources appropriately to protect our position. | HIGH | Stable |
Changes in consumer tastes, nutritional preferences, health and environment related concerns The risk of changing consumer trends resulting in a shift in demand away from beverage cans or from our customers' products for which Rexam manufactures packaging. Drivers of this risk can include lifestyle and taste changes, nutrition and health considerations or environmental concerns. Strategic priorities: 1, 4 | Potential impact Adverse business performance, loss of market share or business and being substituted by other forms of beverage packaging products. Key mitigationsWe continue to monitor and focus on market and consumer trends as well as political developments through internal and external business intelligence services and through our involvement in national and international packaging and environmental associations in the jurisdictions in which we operate. | MEDIUM | Stable |
Environmental, fire, health and safety The risk of a significant environmental contamination, fire or health and safety issue at one of our locations. Strategic priorities: 5 | Potential impact Health and safety incident, financial exposure, business disruption and reputational damage. Key mitigationsWe continue to carry out regular environment, health and safety (EHS) audits in cooperation with internal and external specialists to drive best practice. The audit approach provides the basis for delivering a more sustainable and robust improvement of EHS management systems and performance at all sites and strives for continuous improvement in our key health and safety KPI measures. During the year, we continued with our fire safety and property protection audit supported and performed by an independent provider, and invested a total of c £5m in fire safety and property protection. We have also developed a three year world class safety roadmap. See also page 25. | MEDIUM | Stable |
Changes in packaging legislation and regulatory environment The Group is subject to applicable laws and regulations in the global jurisdictions in which Rexam operates. Packaging will continue to be a focus for government legislators working within the sustainability agenda. Strategic priorities: 4 | Potential impact Changes in packaging legislation and regulation could affect producer responsibility for recycling, recycled content and carbon footprint, while landfill taxation represents an increasing risk. Key mitigationsRexam continually monitors developments in laws and regulations in the jurisdictions that may affect our business. This is performed through established and effective membership of relevant trade associations, by direct collaboration with governmental and non governmental organisations and through our own efforts which include a legislative risk monitoring tool. This ensures the best possible chance of shaping a constructive outcome which is not detrimental to Rexam or its stakeholders. Rexam also focuses on investment in new innovation and technology programmes to ensure continuous enhancements in our packaging products and manufacturing processes. See also page 10 in relation to our sustainability strategy. | MEDIUM | Stable |
Pension deficit Risk relates to cash contributions, charges to the income statement and balance sheet volatility. Strategic priorities: 5 | Potential impact Adverse financial impact to the Group as a result of a pension deficit. Key mitigationsRexam's retirement benefit risk management is overseen by the Retirement Benefits Committee (RBC) which is chaired by the finance director. The RBC reviews all proposed new undertakings and improvements to retirement benefits. Managing pension deficit volatility on the balance sheet and general derisking of funded plans, which includes equity, interest rate and inflation risks, are undertaken by pension plan fiduciaries in consultation with the RBC. Cash contributions are paid to the respective plans to ensure that there are adequate assets to meet the plans' obligations. (See page 44.) | MEDIUM | Stable |
Fraud, bribery and internal control failure The risk of an internal control failure such as a Rexam employee committing fraud or bribery due to lack of integrity or awareness. Strategic priorities: 5 | Potential impact Financial loss, reputational damage and breach of laws. Key mitigationsThe Rexam Code of Conduct provides a framework for all of our policies at Group, sector and individual businesses. A Group control framework, setting out key financial controls to be applied across the Group, is in place to ensure consistency and further enhance the control environment. Rexam's Raise Your Concern (whistle blowing) hotline also allows employees to raise any concerns regarding behaviour that does not conform to Rexam policies. This was reviewed and relaunched during 2014. During the year, anti fraud and bribery workshops were held across the Group to increase employees' awareness and ensure compliance. Additional workshops will continue to be rolled out in 2015. New service providers were appointed for the whistle blowing hotline and online compliance training respectively, in order to obtain the required service level in meeting our objectives in these areas. | MEDIUM | Stable |
Funding and other financial risks Risks related to the cost and availability of funds to meet our business needs, movements in interest rates, foreign currency exchange rates as well as commodity prices. Strategic priorities: 2, 3 | Potential impact Financial exposure due to interest rates, foreign currencies and commodities price volatility, and lack of funding to meet our requirements. Key mitigationsRexam's financial risk management is based upon sound economic objectives and good corporate practice. Rexam negotiates funding requirements in a timely manner ensuring appropriate headroom is secured to mitigate the risk of lack of availability. Derivative and other financial instruments are used to manage exposures under conditions agreed by the board. Further details of our financial risks and the way in which we mitigate them are set out in note 24 to the consolidated financial statements. | MEDIUM | Stable |
Counterparty default Risk of counterparty failure including, for example, bank, insurer, customer or supplier. The continued challenging macroeconomic environment in certain regions or countries in which Rexam operates requires focus in this area. | Potential impact Financial losses, service and supply disruptions. Key mitigationsA range of financial counterparties are used, and we apply strict limits (determined by qualitative and quantitative measures) on our exposure to each of them. The risk of insurer failure is monitored by our insurance broker and reported to Rexam immediately if an issue arises. Customer credit limits are imposed and their credit risk, as well as suppliers', is reviewed and monitored. In addition, there are procedures across the Group to manage working capital tightly, including customers' overdue debts reporting. | MEDIUM | Decreased |
Insufficient talent andknowledge capital Risk of insufficient talent and lack of high quality knowledge capital. Strategic priorities: 5 | Potential impact Performance declines or lack of growth due to lack of bench strength. Key mitigationsAs part of our focus to build a winning organisation, we continue to invest in active talent management, succession planning and the development needs of our employees. We also carry out an employee survey across the Group approximately every 18 months and review the outcome of the survey to address areas that require improvement. (See also page 29.) | LOW | Stable |
An additional risk has been added in light of the Ball offer for Rexam. The transaction may not complete if any regulatory pre condition and/or other conditions to which the offer is subject are not satisfied or waived. | |||
Rexam PLC takeover The risks associated with Rexam PLC being taken over by another organisation. These risks may have a significant impact on key relationships with customers, suppliers, employees and other stakeholders due to the lack of certainty regarding completion of the transaction and how it will be implemented. | Potential impact Negotiations with customers and suppliers may prove more difficult. Potential business interruption due to employee turnover or resignation may consequently lead to loss of valuable experience, expertise and business networks. Key mitigationsAll major customers and suppliers have existing contracts in place and will have senior level interactions to ensure business as usual. Internally appropriate communication and retention/compensation packages will be put in place to enable employee engagement and retention. External communication with all stakeholders will be managed across the Group in a co-ordinated and consistent manner." | ||
Part C - Related Party Transactions
The Annual Report 2014 contains the following statements regarding details of key management compensation (including the directors of Rexam PLC) at Note 4(ii) to the consolidated financial statements on page 108:
"(ii) Key management compensation (including directors of Rexam PLC)
2014 £m | 2013 £m | |
Salaries and short term employee benefits | (9) | (7) |
Post employment benefits | (1) | (1) |
Share based payment | (4) | (4) |
Termination payments | - | (1) |
(14) | (13) |
Key management comprises all directors of Rexam PLC, the Executive Leadership Team and band 1 executives. For details of directors' remuneration see the remuneration report."
The Annual Report 2014 contains the following statements regarding details of transactions with the Envases Universales Rexam de Centroamerica SA joint venture in Guatemala at Note 16 to the consolidated financial statements on page 119:
"At December 2013, there was an unsecured interest free loan from the joint venture in Guatemala of £3m. This loan was increased to £10m during 2014. The loan was interest free and repayable on demand. In December 2014, a capital reduction took place in the business and as a result the £10m loan was discharged."
Part D - Director's Responsibility Statement
The following statement is included in the Annual Report 2014 at page 84 in compliance with Disclosure and Transparency Rule 4.1.12 and extracted and reproduced here for the purposes of compliance with DTR 6.3.5. This statement relates solely to the Annual Report 2014 and is not connected to the extracted information set out in this announcement or the Results Announcement.
"STATEMENT OF DIRECTORS' RESPONSIBILITIES
The current directors of the Company are responsible for preparing the annual report, the remuneration report and the financial statements in accordance with applicable law and regulations.
Company law requires the directors to prepare financial statements for each financial year. Under that law the directors have prepared the consolidated financial statements in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union and the parent company financial statements in accordance with UK Generally Accepted Accounting Practice (UK Accounting Standards and applicable law). Under company law the directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and the Company and of the profit or loss of the Group for that year. In preparing these financial statements, the directors are required to:
• select suitable accounting policies and then apply them consistently;
• make judgements and accounting estimates that are reasonable and prudent;
• state whether IFRSs as adopted by the European Union and applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the consolidated and parent company financial statements respectively; and
• prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Group and the Company will continue in business.
The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Group's and the Company's transactions and disclose with reasonable accuracy at any time the financial position of the Company and the Group and enable them to ensure that the financial statements and the remuneration report comply with the Companies Act 2006 and, as regards the consolidated financial statements, Article 4 of the IAS Regulation. They are also responsible for safeguarding the assets of the Company and the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities, and responsible for the maintenance and integrity of the Group's website. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
The directors consider that the annual report and accounts, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company's and the Group's performance, business model and strategy.
Each of the current directors, whose names are listed on pages 48 and 49 of the annual report, confirms that, to the best of his or her knowledge:
• the consolidated financial statements, which have been prepared in accordance with IFRSs as adopted by the EU, give a true and fair view of the assets, liabilities, financial position and profit of the Group; and
• the strategic report includes a fair review of the development and performance of the business and the position of the Group, together with a description of the principal risks and uncertainties that it faces."
The names of the current directors of Rexam PLC and their functions as extracted from pages 48 and 49 of the Annual Report 2014 are listed below:
Name of Director | Function |
Stuart Chambers | Chairman |
Graham Chipchase | Chief Executive |
David Robbie | Finance Director |
Carl-Peter Forster | Non executive Director |
John Langston | Non executive Director |
Leo Oosterveer | Non executive Director |
Ros Rivaz | Non executive Director |
Johanna Waterous CBE | Senior Independent Director |
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