Final Results

Rexam delivers progress in difficult conditions

18 February 2016

Rexam, a leading global beverage can maker, announces its results for the full year 2015.

Highlights

· Beverage can volumes including UAC up 4% (2% organic)

· Underlying operating profit flat at constant currency, including UAC

· Underlying earnings per share up 5%

· Return on capital employed at 14.5%

· Final dividend declared as a second interim dividend of 11.9p, taking total to 17.7p in line with 2014, consistent with the terms of the Ball offer

· Recommended offer by Ball Corporation progressing with completion expected towards the end of H1 2016.

Commenting, Graham Chipchase, Rexam's chief executive, said:

"I am pleased with our performance and progress as reported volumes grew 4% in difficult trading conditions. Underlying profit before tax is up 1% despite commoditisation of certain specialty cans in North America and higher energy costs in Brazil. We remained focused on our strategic priorities whilst supporting the anti-trust process for the Ball offer.

 "We expect 2016 to present a tough trading environment but with continued volume growth. The expected premium benefit will be offset by pricing pressures in Europe and the savings from restructuring will be partially offset by cost headwinds. However, as ever, we continue to focus on tight cost management and the elements that we know we can control."

CHIEF EXECUTIVE'S OPERATIONAL REVIEW

Rexam delivered a good operational performance in 2015. Our results are testament to the efforts of a great team working hard in the unique context of challenging market environments, the impact of foreign currency translation and the uncertainty that has come with the Ball offer.

Dividend

Returns to shareholders are an established priority for Rexam and the dividend is a core element of total shareholder returns. The board has declared a final dividend* of 11.9p (2014: 11.9p) per share consistent with the terms of the Ball offer requiring that future dividends would not exceed the corresponding interim or final dividend paid or declared in respect of 2014. The final dividend* will be paid on 6 May 2016 to holders of shares registered on 8 April 2016. This final dividend* for 2015 will be paid whether or not the Ball offer completes.

Ball offer

In February 2015 the boards of Ball Corporation (Ball) and Rexam announced that they had reached agreement on the terms of a recommended offer for the entire issued and to be issued ordinary share capital of Rexam by Ball.

In recent years, Rexam has transformed its business, returning approximately £1.6bn of cash to shareholders since 2010, creating a focused beverage can maker with a promising future. Notwithstanding that, my fellow board members and I believe that the offer from Ball represents a strong opportunity to create a 'best in class' global service in the metal packaging industry with an enhanced ability to serve the demands of our increasingly global customers.

We have explained that for the Ball offer to proceed certain regulatory clearances are required. Throughout 2015, we worked to support Ball's preparation of merger control filings for submission in all relevant jurisdictions. Final regulatory clearances are still awaited. In July, Ball shareholders approved the future issuance of new Ball shares to Rexam shareholders in connection with the Ball offer. These new Ball shares will form part of the consideration paid under the Ball offer. Rexam shareholders will be asked to vote on the scheme of arrangement once the regulatory clearances are substantially finalised and we anticipate completion of the transaction towards the end of the first half of 2016.

Despite the Ball offer, we continued in 2015 to pursue our own plans as an independent company.

2015 overview

In 2015, our beverage can volumes grew 4%, 2% excluding the acquisition of United Arab Can Manufacturing Limited (UAC). Reported sales were up 2% at £3,925m due to good volume growth, partially offset by the impact of foreign currency translation and lower pricing. Sales adjusted for foreign exchange were up 3% driven by volume growth, partially offset by pricing.

The increase in volumes stemmed from organic growth across all regions (except North America) at rates in line with - or ahead of - their respective markets. This good growth was offset by the commoditisation of a certain specialty size can in North America and higher energy costs in Brazil - as well as the non repeat of the tax benefit in Brazil in 2014. As a result, reported underlying operating profit was down at £404m (2014: £418m) while operating profit, excluding foreign exchange, was flat.

Free cash flow for the year was lower than our target range at £115m. This was due to higher capital expenditure and adverse working capital.

Divisional performance

In 2015 volume growth in our markets was in line with expectations and the respective markets in which we operate.

The following section reviews the Group's financial performance based on the Europe & Rest of World and the Americas segments, which comprise our four main geographic regions.

Europe & Rest of World: overview

In the Europe & Rest of World segment, organic sales grew 7%, with growth in most regions and organic operating profit up 13%. Return on sales was flat, and recent investments made in growing the business (including the new plant in Switzerland) led to reduced return on net assets for the segment.

Europe

After a solid start to the year in both standard and specialty cans, trading in Europe slowed down and volume growth for the year was 3%, driven by Germany, Austria and Spain. Standard cans were flat, while specialty cans were up 8% 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 manufacturing process and customers. Against a backdrop of a weak macroeconomic environment and a declining beer market, we saw positive development in Russia, with volumes growing by 3% as the can continued to gain share in the pack mix reaching 25% for beer, helped by the development of modern retailers in the market.

Africa, Middle East & Asia (AMEA)

Our AMEA business saw continued growth, with overall volumes growing 55%, 12% excluding UAC, to close to 5bn cans driven by good growth in specialty cans. Our volumes in India continued to grow strongly at 22%. In Turkey and domestic Egypt, the market performed well and volumes ended up ahead of last year. Given the political instability in the Middle East, certain borders remain closed and this has led to some softness in our export business.

Americas: overview

In the Americas segment, organic sales were down 4% as continued volume decline in North America was offset by some growth in South America. Organic operating profit was down 13% as lower sales combined with commoditisation of a certain specialty size in North America and higher energy costs in Brazil. As a result, return on sales and return on net assets for the segment were lower than last year.

North and Central America

In North America, can consumption remains the highest in the world at 315 cans per capita per year. Rexam has more than 20% of the North American market. During the year we continued to focus on diversifying the portfolio and establishing strong positions with customers in growth categories such as craft beer, tea and energy drinks. In craft beer, for example, we are a leader in the segment, working closely with brands such as 612Brew, Sudwerk Brewing Co., Tin Man Brewing Co., Silver City Brewery, and Burnside Brewing Co., all of whom have recently chosen Rexam cans.

In 2015 our volumes were down 2% due to our exposure to the carbonated soft drinks (CSD) market. This was partially offset by specialty can volumes, which continued to grow strongly at 10%. This was driven by growth in Sleek® and 16oz cans coming from customers in a variety of categories including beer, CSDs and energy drinks as well as flavoured alcoholic beverages. The process of commoditisation of a specialty can size in North America has affected margins during 2015 as previously disclosed.

Outside the US, there continued to be 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 plant in Querétaro, Mexico. We also have a joint venture in Guatemala and Panama to help us broaden and strengthen our customer relationships in this region.

South America

Despite difficult comparative volumes versus 2014 because of the FIFA World Cup, volumes in South America continued to grow at 2% in 2015. After a quiet start to the year, volume strengthened in the second half despite a weakening macroeconomic environment. Specialty cans continued to grow much faster than the total market, and with recent conversion of lines to specialty cans we have fully participated in that growth.

Key group risks

We have a well established risk management framework which is embedded in day to day operations and responsive to changes in the business and operating environment. We ensure that key risks are fully defined and mitigating actions are in place to monitor and manage these risks. We maintain close working relationships between Group functions and business units to understand and address risks. Further details will be available in the Annual Report 2015.

Sustainability

As a global business producing billions of cans per year, we have a clear responsibility to ensure that sustainability sits at the heart of our business. Many of our customers have advanced programmes that commit them to stretching targets with regard to the sustainability of their packaging. Rexam supports them in this journey to drive sustainable transformation within their supply chains and maintain the sustainability credentials of the can.

Our sustainability framework was established in 2010 around the key areas of products, operations and people. It continues to provide the roadmap that defines how we contribute and create value across a wide range of stakeholder issues. In 2014 we undertook a materiality study to validate our framework, setting ourselves updated measures and targets through to 2020. Notable additions are ambitious targets to reduce the carbon footprint of a can by 25% and to reduce water intensity by 10%. Further details will be available in the Annual Report 2015 and our 2015 Sustainability Report available on our website.

Outlook for 2016

Looking ahead, the environment remains challenging but we continue to expect low single digit growth in global can volumes. Customer pressure and competitor actions are reducing market prices in Europe. We have taken resolute steps to address these challenges, reducing our cost base to mostly offset these pricing pressures in 2016. At current aluminium premium rates, we would expect a tailwind, although the cost of premium remains uncertain. Partially offsetting this benefit will be the ramp up costs for new capacity in Widnau and India, as well as foreign exchange losses in Brazil. As ever, our focus will remain on tight cost management and the elements of our business that we can control.

In closing, I return to the subject of global change in our industry which includes customer and supplier consolidation with resulting pressure on costs and prices. Rexam's proposed combination with Ball will create a global packaging leader driven by a common desire to serve all customers in the best possible way around innovation, manufacturing excellence, supply chain efficiency and sustainability. The proposed combination will also be able to respond to changes in the industry environment in a faster and more effective manner.

I have been proud to lead the Rexam business for the last six years and am confident that the future will continue to deliver value and opportunity for our stakeholders.

FINANCIAL REVIEW

This financial review of our results is based on what we consider to be the underlying business performance, as shown in the tables below.

This excludes exceptional items, the amortisation of certain acquired intangible assets and fair value changes on operating and financing derivatives (together 'exceptional and other items'). We believe that the underlying figures aid comparison and understanding of the Group's financial performance.

The Healthcare business was sold in the first half of 2014 and its results for that period are set out in 'Discontinued operations' below.

Summary of the statutory performance

Results on a statutory basis include the effects of currency translation, exceptional and other items, and discontinued operations. The exceptional and other items and the results of discontinued operations are described in more detail below. For continuing operations, sales were £3,925m (2014: £3,832m) and profit before tax including exceptional and other items was £250m (2014: £343m). Total profit after tax for the year attributable to the shareholders of Rexam PLC, including the results of discontinued operations, was £182m (2014: £357m) and basic earnings per share was 25.9p (2014: 48.4p).

Reconciliation of underlying to statutory performance

The following tables, showing sales and underlying operating profit, compare the continuing operations on a consistent basis to demonstrate 'like for like' trading performance.

Analysis of sales movement

Sales, which exclude the impact of currency, increased by £106m including UAC, with no impact of pass through of aluminium costs. Overall volumes grew 4%. Volumes grew 3% in Europe driven by good growth in energy drinks and growth in Germany, Spain and Austria. Volumes grew in Turkey, Egypt and India, whilst market softness was experienced in the Middle East. Standard volumes in North America declined due to softness in the carbonated soft drinks (CSD) market, whilst specialty volumes increased due to growth in beer and energy drinks. Volumes in South America were 2% higher than last year with a decline in standard can volumes more than outweighed by increased specialty can volumes. Included in 2014 is the benefit of an indirect tax credit in Brazil.

Analysis of underlying operating profit movement

A further analysis of the change in underlying operating profit is set out below:

Underlying operating profit, after adjusting for the impact of currency, was flat. Sales price and cost changes were adverse in aggregate, predominantly from a reduction in sales pricing reflecting the commoditisation of specialty cans in North America, the non repeat of a 2014 indirect tax benefit in Brazil, higher energy costs in Brazil and inflationary cost increases, particularly in Brazil and Russia, partly offset by supply chain and other cost savings. Metal premium costs were in line with last year. Volume growth in Europe, AMEA and South America was partly offset by lower standard can volumes in North America. Efficiency savings totalled £22m and predominantly comprised metal savings and other cost reductions.

Exchange rates

The main exchange rates used to translate the consolidated income statement and balance sheet are set out below:

Analysis of currency in the consolidated income statement

The principal currencies that impact our results are the US dollar, the euro and the Russian rouble. The net effect of currency translation caused sales and underlying operating profit from ongoing operations to decrease by £13m and £14m respectively compared with 2014 as shown below.

In addition to the translation exposure, the Group is also exposed to movements in exchange rates on certain of its transactions. These are principally movements in the US dollar/euro and the US dollar and euro/Russian rouble on the European operations and the US dollar/Brazilian real on the South American beverage can operations. These exposures, in aggregate, did not materially impact underlying profit.

Analysis of currency on the consolidated balance sheet

Most of the Group's borrowings and net assets are denominated in US dollars and euros. Currency movements increased net borrowings by £32m and reduced net equity by £21m.

Underlying total net finance cost

The underlying total net finance cost for continuing operations was £13m lower than 2014. The retirement benefits net interest cost is explained in 'Retirement benefits' below. The £9m reduction in net interest is primarily due to a change in hedging strategy in Brazil. The overall average interest rate for the year was around 3%, down from 4% in 2014. Based on underlying operating profit from continuing operations, interest cover was 9.4 times (2014: 8.0 times). Interest cover is based on underlying operating profit from continuing operations and underlying net interest expense excluding charges in respect of retirement benefit obligations.

Tax

The tax charge on profit before exceptional and other items for the year on total operations was £82m (23%) (2014: £96m, 25%).

The tax charge applicable to underlying profit from continuing operations before exceptional and other items is £82m (23%) (2014: £86m, 24%). Our rate varies to some extent in line with our profit mix across our businesses. We anticipate the sustainable rate on continuing operations going forward will be in a range of 23% to 25%, reflecting the territories in which we operate, as well as the availability of tax incentives in some jurisdictions. A number of factors can cause the final tax charge to vary from the weighted average tax rate of the countries of the Group's operations. In 2015, the charge has been impacted by reassessment of the recoverability of deferred tax balances, movements in provisions for uncertain tax positions, and tax incentives, offset to some extent by tax on differences between local and functional currencies, withholding taxes and other charges on the repatriation of profits.

Tax cash payments in the year for continuing operations were £60m compared with £63m last year. Cash taxes can vary from the charge in the income statement for a number of reasons. The most material of these has been the utilisation of deferred tax assets such as tax losses, but in addition our cash payments can be affected by local laws governing the timing of certain tax deductions, and payments of taxes sometimes falling outside of the year to which they relate or settlement of provisions. We anticipate cash tax to continue to be lower than the charge to the income statement for the foreseeable future.

Exceptional and other items

The exceptional and other items arising in 2015 in respect of total operations were as follows:

Restructuring, transaction related costs, employee incentive related costs and other exceptional items 

In 2015, the restructuring charge of £44m principally relates to reorganisation costs for the European beverage can business, including closure of the plant in Berlin, and costs incurred with respect to the conversion of steel beverage can lines to aluminium.

Transaction related costs of £29m have been incurred as a consequence of the proposed acquisition of Rexam by Ball.

Employee incentive related costs of £20m will be incurred as a consequence of the proposed acquisition of Rexam by Ball.

Other exceptional items of £2m include an increase in a legal provision relating to an historic dispute in a business that originated prior to Rexam ownership and transaction fees relating to the acquisition of UAC.

Other items

Amortisation of certain acquired intangible assets

Intangible assets, such as technology patents and customer contracts, are required to be recognised on the acquisition of businesses and amortised over their useful life. The board consider that separate disclosure, within exceptional and other items, of the amortisation of such acquired intangibles relating to total operations amounting to £5m (2014: £1m) aids comparison of organic change in underlying profit.

Operating derivatives fair value changes

Fair value changes on operating derivatives relate to changes in the value of commodity hedges for the forward purchase of aluminium and the fair value movements on non hedge accounted commodity and foreign exchange contracts. Accounting rules require that the effectiveness of our commodity hedges is tested at each reporting date. Where a hedge is deemed to be effective, the fair value change is recorded in the relevant hedge reserve and where it is ineffective, or there is over hedging, the relevant proportion of the fair value is charged or credited to the consolidated income statement.

Effectiveness on our aluminium forward deals is calculated by comparing the value of the forward deals to the value of our underlying hedged item; for Rexam this is principally aluminium coil. Current accounting rules require that the ingot conversion cost of our aluminium coil is included when calculating the effectiveness of our underlying hedged item, despite the fact that we hedge only the underlying LME portion of the aluminium coils. Revised accounting standards are being drafted which will address this particular anomaly but they are not currently expected to be implemented before 2018.

In both 2015 and 2014, some of the aluminium hedges failed the effectiveness test. Once a hedge has failed an effectiveness test, accounting standards do not allow for it to be retrospectively redesignated and therefore fair value movements will continue to be recorded in the income statement. The change in aluminium prices on these failed aluminium hedges has given rise to a loss of £14m (2014: gain of £3m). There was also a gain of £1m (2014: gain of £2m) relating to fair value changes on certain non hedge accounted commodity and foreign exchange contracts.

This accounting treatment can give rise to income statement volatility up to the date the hedge matures and management believe that it is more appropriate to exclude any such movements from underlying profit. As the hedge matures, at which point the cost will be substantially passed onto our customers, any realised gain or loss on the hedge is reversed in full from fair value changes on operating derivatives and recognised within underlying profit.

Fair value changes on financing derivatives

The fair value of the derivatives arising on financing activities directly relates to changes in interest rates and foreign exchange rates. The fair value will change as the transactions to which they relate mature, as new derivatives are transacted and due to the passage of time. The fair value change on financing derivatives for the year was a net gain of £1m (2014: net loss of £1m).

Discontinued operations - Healthcare

The Healthcare businesses were disposed of in the first half of 2014. There have been no transactions in 2015.

Earnings per share

Underlying earnings per share from continuing operations was 5% higher at 39.1p compared with 37.2p in 2014. The average number of shares in issue reduced following the share consolidation that accompanied the 2014 return of cash. Basic earnings per share from total operations, which includes exceptional and other items, was 25.9p (2014: 48.4p).

Retirement benefits

Retirement benefit obligations (net of tax) as at 31 December 2015 were £268m, an increase of £10m compared with £258m reported at 31 December 2014. This change was principally due to foreign exchange movements and actuarial losses. These actuarial losses are included in the consolidated statement of comprehensive income.

The retirement benefit obligations net interest cost is analysed as follows:

The overall retirement benefit obligations net interest cost, which is a non cash accounting charge, reduced to £12m (2014: £16m) due to a higher UK defined benefit plan surplus and lower discount rates.

The total cash payments in respect of retirement benefits are as follows:

In July 2015, the trustees of the UK defined benefit plan and the Company agreed the March 2014 actuarial valuation and an extension to the escrow arrangement until 2020. Under this agreement, £130m will be paid into the escrow account, at a rate of £15m per year. At each subsequent valuation date, the assets in escrow will either be allocated to the plan, to Rexam PLC or remain in escrow subject to the funding position of the plan. If there is a change of control with a subsequent material decline in Rexam's credit rating or a material deterioration in Rexam's financial covenant, the entire £130m escrow would be paid into the plan. As at 31 December 2015, £55m had been paid into the escrow investment account.

Based on current actuarial projections, it is expected that total cash payments in 2016 will be around £65m.

Cash flow

Total free cash flow for the year from continuing operations resulted in an inflow of £115m compared with £203m for 2014. This lower inflow primarily reflects an outflow in working capital of £35m and higher capital expenditure. Capital expenditure was £47m higher than 2014, in line with expectations. In 2015, there was a £125m outflow on acquisitions (including borrowings acquired), principally a 51% stake in United Arab Can Manufacturing Limited, a Saudi Arabian beverage can maker, and a 50% joint venture interest in Endelis, a Panamanian beverage can maker.

Capital expenditure - continuing operations

Gross capital expenditure by continuing operations was £243m, around 1.8 times depreciation and amortisation, of which approximately 70% was attributable to strategic and growth projects. The principal projects were the construction of a new plant in Widnau, Switzerland, which opened in November to support customer demand for energy drinks in Europe, construction of a new plant in India to support market growth, further investment in our Fusion® bottle manufacturing capability and the development of specialty can products globally.

It is expected that capital expenditure from continuing operations in 2016 will be around £240m, 1.6 times depreciation and amortisation.

Balance sheet and borrowings

Net borrowings, which include interest accruals and certain financing derivatives, are set out below:

Net borrowings/EBITDA based on continuing operations was 2.4 times (2014: 2.0 times). Interest cover is over 9 times and we remain comfortably within our debt covenants. Our liquidity is strong with committed debt facilities of £2.0bn at the year end.

The Group's current principal committed loan and bank facilities are detailed below:

For the management of foreign currency asset matching and interest rate risk, the profile of gross borrowings is approximately 56% (2014: 58%) in US dollars and 44% (2014: 42%) in euros.

Derivative financial instruments comprise instruments relating to net borrowings (cross currency, interest rate swaps and forward foreign exchange contracts) and those related to other business transactions (forward commodity contracts and forward foreign exchange contracts). Total derivative financial instruments are set out below:

The decrease in the value of cross currency swaps can be mainly attributed to the weakening of the euro against sterling and interest rate swaps maturing in the year. The decrease in the value of other derivatives was due mainly to the decrease in aluminium prices.

CONSOLIDATED INCOME STATEMENT

FOR THE YEAR ENDED 31 DECEMBER

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

FOR THE YEAR ENDED 31 DECEMBER

CONSOLIDATED BALANCE SHEET

AS AT 31 DECEMBER

Approved by the Board on 18 February 2016

Graham Chipchase, Chief Executive

CONSOLIDATED CASH FLOW STATEMENT

FOR THE YEAR ENDED 31 DECEMBER

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY CONTINUED

NOTES

1 Basis of preparation

This condensed set of financial statements do not constitute the Company's statutory accounts for the years ended 31 December 2015 or 2014 but are derived from those accounts. Statutory accounts for 2014 have been delivered to the Registrar of Companies, and those for 2015 will be delivered in due course. The auditors have reported on those accounts; their reports were (i) unqualified, (ii) did not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying their report and (iii) did not contain a statement under section 498 (2) or (3) of the Companies Act 2006.

This condensed set of financial statements has been prepared in accordance with the Disclosure and Transparency Rules of the UK Financial Conduct Authority, the principles of International Financial Reporting Standards ('IFRS') and the IFRS Interpretation Committee ('IFRIC') interpretations as adopted by the European Union. The accounting policies applied are consistent with those described in the Annual Report 2014

The condensed set of financial statements has been prepared on a going concern basis. The auditors have confirmed that they are not aware of any matter that may give rise to a modification to their audit report.

The consolidated cash flow statement for 2014 includes a revision relating to the classification of a settlement of a government incentive in Brazil for indirect taxes. A £22m outflow has been reclassified to "Cash generated from operations" from "Repayment of borrowings". The Group believes that this revision is not material to the consolidated financial statements taken as a whole.

The Group presents underlying operating profit, underlying profit before tax and underlying earnings per share information as it believes these measures provide a helpful indication of its performance and underlying trends. The term underlying refers to the relevant measure being reported before exceptional items, the amortisation of certain acquired intangible assets and fair value changes on certain operating derivatives which are not hedge accounted and on financing derivatives. These measures are used by the Group for internal performance analysis and as a basis for incentive compensation arrangements for employees. The terms underlying and exceptional items are not defined terms under IFRS and may, therefore, not be comparable to similarly titled measures reported by other companies. They are not intended to be a substitute for, or be superior to, GAAP measurements of performance.

2 Segment analysis

For internal reporting, Rexam is organised into four operating segments for Beverage Cans based on the geographical locations of Europe, AMEA (Africa, Middle East & Asia), North America and South America. For external reporting, the four operating segments for Beverage Cans are combined into two reportable segments, Americas and Europe & Rest of World. Management determined that the Europe and AMEA operating segments, and the North America and South America operating segments, respectively met the criteria for aggregation because they are similar in each of the following areas: (i) the nature of the products and services; (ii) the nature of production processes; (iii) the methods of distribution; and (iv) the types or classes of customers for the products and services. Management also determined that the operating segments aggregated have similar economic characteristics. Beverage Cans comprise aluminium and steel cans for a wide variety of beverages including carbonated soft drinks, beer and energy drinks.

3 Exceptional items

Restructuring relates to reorganisation costs for the European beverage can business, including closure of the plant in Berlin, costs incurred with respect to conversion of steel beverage can lines to aluminium, and is net of a £2m reversal for certain employee related costs no longer required. Transaction related costs have been incurred as a consequence of the proposed acquisition of Rexam by Ball. Employee incentive related costs that will be incurred as a consequence of the proposed acquisition of Rexam by Ball. Other exceptional items comprise an increase in a legal provision relating to a historic dispute in a business that originated prior to Rexam ownership and transaction fees relating to the acquisition of UAC.

4 Earnings per share