22nd Feb 2006 07:02
Rexam PLC22 February 2006 Rexam reports another strong year Rexam, the global consumer packaging company and the world's leading beveragecan maker, announces its audited results for the year to 31 December 2005. Underlying performance(1) 2005 2004 IncreaseSales from ongoing operations(2) £3,211m £2,976m +8%Underlying operating profit from ongoing operations(2) £412m £386m +7%Underlying profit before tax(3) £307m* £288m +7%Underlying earnings per share(3) 39.5p* 37.5p +5%Dividends proposed and paid per share 18.12p 17.25p +5% * Excluding a net gain of £9m arising on IAS39 financing derivative valuechanges. Including this gain, the underlying profit before tax is £316m andunderlying earnings per share is 40.6p. Highlights • Strong top line ongoing sales(2) growth at 8% • Beverage Cans underlying operating profit1 up 13% to £313m • Acquisitions in Plastic Packaging and Beverage Cans to drive growth • Higher growth emerging markets now 20% of Group sales • Dividends and underlying earnings per share* both advance 5% • Underlying Group margins from ongoing operations(2) hold firm at 12.6% • Free cash flow remains excellent at £248m Commenting on the 2005 results, Rolf Borjesson, Chairman, said: "In 2005 weimproved results and maintained profit margins overall despite increasing inputcost pressures in the second half, reporting good organic growth especially inbeverage cans. We continued to generate strong efficiency savings, increase ourpresence in higher growth plastics and emerging markets and build further on ourmarket leading positions by delivering innovative solutions to our customers. "We are confident that our strategy for growth, both organically and byacquisition, is sound. Looking ahead, we are implementing price increases tooffset the challenge of higher input costs and we will continue to deliverstrong operational efficiencies. The integration of the recent acquisitions isprogressing well and we anticipate that 2006 will be a year in which we willonce again make further progress." 22 February 2006 Statutory results (4) 2005 2004Sales £3,237m £3,081mOperating profit £420m £371mProfit before tax £331m £275mBasic earnings per share 40.4p 36.2p Notes1 Underlying performance is before disposals and other exceptional items.2 Ongoing operations reflects underlying performance excluding businesses that have been discontinued, disposed or held for sale in either 2004 or 2005.3 After total net finance costs, comprising interest and retirement benefit obligations net finance cost. IAS32 has been adopted with effect from 1 January 2005 without the requirement to restate prior periods. Under IAS32 preference dividends are included in net finance costs. For comparison purposes, underlying profit before tax in 2004 has been adjusted to include preference dividends.4 Statutory results include disposals and other exceptional items. Enquiries Rexam PLC 020 7227 4100Lars Emilson, Chief ExecutiveDavid Robbie, Finance DirectorAndrew Mills, Group Communications Director Financial Dynamics 020 7269 7291Richard Mountain/David Yates Editors' notes: Rexam is a leading global consumer packaging company and the largest beveragecan maker in the world. Our vision is to be the leading global consumerpackaging company. We are business partners to many of the world's most famousand successful consumer brands as well as young, entrepreneurial start-ups. Weoffer a broad range of packaging services and solutions for differentindustries, using different materials and technologies. We have some 22,000people in more than 20 countries. Three things characterise us - leadership inour industry, our commitment to innovation and our passion to deliverexceptional value. Rexam has an ongoing turnover of approximately £3.2 billionand is a member of the FTSE 100. Rexam's ordinary shares are listed with the UKListing Authority and trade on the market for listed securities on the LondonStock Exchange under the symbol REX. For further information, visit our web siteat www.rexam.com A copy of this release will be posted on the Rexam web site, www.rexam.com. CHAIRMAN'S STATEMENT I am pleased to report that Rexam continued to make good progress during 2005,building on our position as a leading consumer packaging company and the world'slargest beverage can maker. Looking at our underlying results, which are before disposals and otherexceptional items, we grew sales from ongoing operations by 8% to £3.2bn andreported a 7% increase in underlying profit before tax to £307m (which excludesa £9m positive gain from IAS39 financing derivative value changes in 2005). Freecash flow generation at £248m continued to be very strong. These results aretestimony to the commitment and skill of our managers and their teams around theworld who have endured challenging conditions. A year of delivery During the year, we maintained momentum in the implementation of our strategyaimed at creating the world's leading consumer packaging company. We remaincommitted to this strategy as a way to build a company that will meet all of ourstakeholders' ambitions. We delivered solid organic growth. In particular, I would like to highlight the8% sales growth achieved by the North American beverage can operations,encouragingly boosted in part by the further development of their product mixinto higher growth non-standard can sizes. Our European beverage can operationsachieved a good result, helped by active management of input costs, particularlyaluminium. In Germany, we are well positioned to take advantage of the growthopportunity represented by the predicted return of beverage cans to storeshelves this coming summer. Late in the year, we made two in-fill acquisitions, increasing the proportion ofthe Group's sales arising from the faster growing plastic packaging market.These acquisitions increase our focus on the cosmetic, personal care andpharmaceutical packaging markets and strengthen our positions in food andbeverage closures. The discipline of our acquisition process remains firmly inplace and we will pursue only the deals which we are convinced will add valuefor shareholders. We continued to focus on emerging markets which we believe offer great potentialfor us and our stakeholders and which contribute around 20% of our sales goingforward, with Brazil, Russia and China being particularly important. Since the year end, we have announced two further acquisitions. One of thembroadens our technology and product offering in plastic packaging, while theother gives us a strong base in the emerging Egyptian beverage can market. We maintained our record of operational efficiency by driving £35m out of ourcost base throughout the year using the continuous improvement frameworkprovided by Lean Enterprise and Six Sigma. This helped to mitigate the impact ofrising raw material prices. In May, we exited the UK glass market with the sale of our Barnsley plant. Dividend The Board is proposing a final dividend of 10.6p per ordinary share. This willmean 18.12p for 2005, an increase of 5%, in line with our dividend policy.Subject to shareholder approval at the Annual General Meeting in May 2006, thedividend will be paid on 5 June 2006 to holders of ordinary shares registered on12 May 2006. Board Changes There were a number of changes during the year among the Executive members ofthe Board. As previously reported, Bill Barker, Group Director Beverage Cans,joined the Board in January 2005. Yves Dominioni retired from the Board in July2005 after ten years of heading up the Beauty & Pharmaceutical packagingoperations. Graham Chipchase, who had been Group Finance Director since 2003,moved into the new operational role of Group Director Plastic Packaging. DavidRobbie was appointed to the Board as Finance Director in October 2005, havingpreviously been Chief Financial Officer of Royal P&O Nedlloyd. At the start of 2006, Chris Clark, Deputy Chairman of the Board and seniorindependent director, decided to step down as he approached the end of histhree-year term. I would like to thank Chris for his contribution to the Boardand wish him all the best as he concentrates on his other commitments. CarlSymon has now replaced him as senior independent director. Outlook We are confident that our strategy for growth, both organically and byacquisition, is sound. Looking ahead, we are implementing price increases tooffset the challenge of higher input costs and we will continue to deliverstrong operational efficiencies. The integration of the recent acquisitions isprogressing well and we anticipate that 2006 will be a year in which we willonce again make further progress Rolf BorjessonChairman22 February 2006 OPERATING REVIEW GROUP PERFORMANCE IN 2005 When discussing our performance, we use what we refer to as the underlyingfigures which, we feel, give a better picture of our on-going operations. In summary, 2005 was another year of good progress for the Group, building onthe achievements of 2004. We saw continued growth in sales, underlying profitsand earnings (which exclude disposals and other exceptional items). All of thesebenefited from the acquisitions we made in 2004 in Beverage Cans, Glass andPharmaceutical Packaging. Ongoing Group sales were £3.2bn, up from £3.0bn last year. Our organic salesgrowth (which excludes the impact of acquisitions, disposals and the effects ofcurrency translation) was 5%. Two per cent of this growth, or £52m, came fromthe recovery of aluminium price increases in beverage cans, while the remainderwas a combination of favourable mix and volume changes, mainly in the beveragecan business. Underlying profit before tax improved 7% from £288m to £307m. Including a £9mpositive impact of IAS39 financing derivative value changes arising in 2005, theincrease was 10%. With rising commodity and utility costs in 2005, we faced a challengingenvironment in a number of our businesses. Our on-going focus on cost andefficiency savings, driven by our Lean Enterprise and Six Sigma methodologies,ensured that we improved underlying operating profit or could offset where headwinds were particularly strong. Underlying earnings per share rose 5% to 39.5p. Margins held firm and free cashflow generation was again excellent, moving ahead to £248m from £234m last year.Net borrowings were £1.2bn with interest cover solid at around 6 times. On a statutory basis, sales (including the effect of acquisitions, disposedbusinesses and currency) were up 5%. On this basis, profit before tax (includingdisposals and other exceptional items) was £331m compared with £275m in 2004.For 2005, there were pre-tax exceptional gains of £15m, mainly arising from thereduction in US retiree medical liabilities offset by the loss on the sale ofour UK glass operation. The resulting basic earnings per share was 40.4pcompared with 36.2p in the previous year. Acquisitions and disposals In line with our strategy to expand in growth markets, in the second half of theyear we completed the acquisition of two speciality plastic packaging companiesfor an aggregate consideration of £234m, including borrowings assumed, which isin line with our expected annual spend on in-fill acquisitions. These two USbusinesses, Delta Plastics and Precise Technology, strengthen our overallplastic packaging offering and give us a strong entry platform to the growinghealthcare/pharmaceutical markets in North America as well as the home andpersonal care markets. They also broaden our capability for existing customerswhom we have been supplying mainly in Europe up until now. In addition to thenew sales opportunities expected from broadening our customer relationships, weanticipate synergies in materials purchasing, plant rationalisation and otherareas. In May, we divested our UK glass business to Ardagh Glass for a cashconsideration of £48m. Glass remains part of our offering to customers but inthis case, with new capacity entering the UK market, we decided that divestmentwas the best course of action for a single site operation and the country'snumber three player. The sale of the business incurred an exceptional lossbefore tax of £25m. Since the end of 2005, continuing our focus on building positions in emergingmarkets and plastic packaging, we have announced two additional acquisitions fora total consideration of £103m. These were FangXin, a Chinese beauty packagingbusiness, and Ecanco, the sole Egyptian beverage can maker. Managing our input costs At around £1bn per annum, aluminium is by far our largest raw material cost. Inthe Americas, we are largely unaffected by changes in the cost of this commodityas our major customers agree the cost of aluminium in advance with theirsuppliers. In Europe, both the metal and the associated US dollar/euro currencyrequirements are hedged, such that input costs are fixed in euros, the principaltransaction currency. These hedges unwind naturally over time and, with therecent steep increase in aluminium prices, we expect to face a more challengingcost climate in 2006. We have already communicated with customers our intentionto pass on the increase in aluminium cost and are confident of pushing thisthrough over the coming months. The European beverage can operations expenditure on steel is largely covered bylong term contracts and we have been little affected by recent price rises inthis commodity. Our glass operations mainly use natural gas to fire their furnaces and this isan important cost item in glass production. Recent increases in oil prices havebeen largely translated into higher bulk gas prices. Some larger contractscontain direct clauses linking energy cost to price, while we aim to recoverthese increases on new glass supply contracts. In the plastic packaging businesses, where resin is the main input cost, manysales contracts enable any resin price changes to be passed on to customers,although there may be a time lag. Beverage Cans 2005 2004Sales (£m) 2,235 2,069Underlying operating profit (£m) 313 278Return on sales (%) 14.0 13.4 The beverage can industry is well consolidated globally and Rexam is theindustry leader. We operate predominantly in North America, South America andEurope. There are four players in the US and three significant ones in SouthAmerica and Europe. Our market share in these regions is about 25%, 60% and 45%respectively. We have a relatively small presence in the far east, in China andKorea, but it enables us to keep a close track of developments in this region. Beverage can making is a capital intensive business where profit is dependant onthe high utilisation of installed capacity. We have limited spare capacity inour operations as we work continually to achieve and maintain high levels ofutilisation within our facilities. Plant closures in the US and Brazil and linerationalisation in Europe, as a result of efficiency improvements across ouroperations, demonstrate the extent of this commitment. Beverage Cans had another strong year with reported sales and underlyingoperating profit up by 8% and 13% respectively on 2004. The sales improvementincludes £52m of pass through to customers for increased aluminium costs. InOctober 2005, we announced important volume gains in the US from 2006 onwardsand, while these will depress the profitability of our overall beverage canbusiness in the immediate term, the additional volumes are expected tostrengthen our performance over time. Our North American can volumes were up by 1% on last year. The decline instandard can size volumes was more than offset by good growth in new can sizes.Non-standard sizes now account for around 10% of our output. This change in mix,along with continued strict cost control, helped compensate for the slightsoftness in volumes. We also benefited from the 2004 acquisition of the remaining 50% of the jointventure in Mexico, the full year effect of which increased sales by £29m andoperating profit by £4m. In South America, our beverage can volumes were up by 8% as a result of improvedeconomic conditions and gains by the beverage can in its share of the packagingmix. Brazil itself showed a 6% volume improvement. The weakening of the USdollar against local currencies reduced the improvement in profit on theseincreased sales owing to higher local currency costs. Brazil remains an excitingmarket and in the second half of the year we initiated a £10m investment in anew beverage can plant in Cuiaba in Mato Grosso, the fastest growing region inBrazil. The plant will use equipment mothballed when we closed the Jacarei plantin 2005 and we expect it to be operational during 2006. In Europe and Asia, after a slow start to the year, our sales volumes picked upand finished 3% ahead of 2004, broadly in line with the market. Eastern Europecontinued to grow strongly. Sales of slim cans, particularly to Red Bull,remained robust. We benefited from the conversion to slim can production of thepreviously mothballed Gelsenkirchen plant in Germany. The European and Asian businesses improved their profitability primarily as aresult of efficiency savings arising out of restructuring conducted in 2004. In Europe, we are converting more capacity from steel to aluminium largely inresponse to customer demand. We announced line conversions in Turkey and in ourplant in Berlin, Germany, the latter to prepare for the expected recovery in theGerman beverage can market. It is anticipated that further investment may benecessary in this market as the new deposit legislation comes into effect in May2006. We remain closely involved with all stakeholders to support the successfulre-launch of the beverage can in that market and are confident that beveragecans, especially for beer, will make a strong return to the supermarket shelves. Plastic Packaging 2005 2004Sales (£m) 571 527Underlying operating profit (£m) 63 74Return on sales (%) 11.0 14.0 Plastic Packaging includes packaging for beauty, personal care andpharmaceutical products, along with closures and containers for food andbeverages. They are grouped together under this single banner because they sharecommon technologies and customers across the businesses. By treating themessentially as one operation, we not only provide the opportunity for increasedsales and sharing of operational excellence, but we can also expect to benefitfrom a number of synergies, not least in purchasing. Rigid plastic packaging is growing faster than many other areas of packaging ataround 6 - 7% per annum. It is a broad area covering many products and ourstrategy is to find attractive niches where there are high barriers to entry andwhere we are able to strengthen our relationships with our customers, either byextending our capabilities (on both a geographic or product basis) or offeringthem new ones. It is this strategy that drove the acquisition of two UScompanies in 2005 discussed earlier and the further acquisition since the yearend. Plastic Packaging now accounts for about 20% of Rexam's total sales goingforward. Although we are still building our Plastic Packaging business, we have goodpositions in both developed and emerging markets. Exports of packaging fromemerging countries continue to grow. We also see growth in the export of filledproducts. Added to that, there is a fast growing local demand for beautyproducts in countries such as Brazil and China where we have strengthened ourpositions. In 2005, sales in Plastic Packaging grew overall by 8% to £571m. Organic salesgrowth was 3% which owes much to encouraging performances from a number of ourbusinesses, especially the pharmaceutical packaging operation. These weresupported by an overall solid performance from our beauty packaging business,despite a general slow down in the luxury end of the cosmetics market. The rateof decline in volumes of refillable plastic bottles mentioned at the half year,in Germany, lessened considerably in the second half but did not recover fully. For the year, operating profit was £63m compared with £74m in 2004. The drop wasmainly due to significant changes in mix in some areas of beauty packaging aswell as the volume-related price reductions in refillable plastic bottles. Therewas also the impact of restructuring costs in Scandinavia as well as delayedrecovery of resin price increases in the latter part of the year. As we wereonly able to mitigate these factors partially through further operationalefficiencies, we experienced a drop in margins from 14% to 11%. Going forward, we expect profitability to improve before taking into account thepositive impact of recent acquisitions. Refillable PET in Germany returned toits steady state during the second half of 2005; we will recover thepass-through in resin prices and performance in the beauty business is expectedto improve. Glass 2005 2004Sales (£m) 405 380Underlying operating profit (£m) 36 34Return on sales (%) 8.9 8.9 Rexam is the second largest glass packaging manufacturer in northern Europe. Weprovide leading international and regional beverage and food brands with theexpertise to exploit new packaging solutions. In all, we have 13 glassworkslocated in northern Europe which remains the focus of our operations. 2005 was a challenging year for the European glass industry as a whole,especially in the second half. Despite furnace and line closures in recentyears, in which we have participated, the market has some overcapacity althoughrecent moves are starting to redress this situation. Sales, excluding the UK glass business sold in May, increased 7% to £405m. Ourorganic sales growth was 4%. There were encouraging sales price increases but wealso saw lower volumes in the food market and some adverse changes in productmix, particularly in Germany. Underlying operating profit at £36m was slightly up on last year. We were hithard by the surge in energy costs which further impacted distribution costs.This development came too late in the year and against fixed contracted pricesto be fully recovered. Cost reductions tempered the impact but we were unable tooffset the effects fully. We expect the ongoing high energy cost rates tocontinue to affect our Glass results in the short term, although we anticipatereducing the cost pressures by sales price increases and further efficiencysavings. The plants acquired during 2004 in the Netherlands and Poland were integratedwell and helped strengthen relationships with one of our key customers,Heineken. During the year we moved the headquarters of the business from the UKto Germany, which forms the base of our Glass operation and contributes half ofour Glass sales. Overall, the return on sales held firm with savings realised from restructuringin 2004 helping to mitigate cost increases. Summary of the year In 2005, we improved results and maintained profit margins overall despiteincreasing input cost pressures in the second half, reporting good organicgrowth especially in beverage cans. We continued to generate strong efficiencysavings, increase our presence in higher growth plastics and emerging marketsand build further on our market leading positions by delivering innovativesolutions to our customers. FINANCIAL REVIEW The discussion of the results set out in the sections of this financial reviewis based on the first column of the table below, 'Underlying businessperformance'. It is felt that by adjusting for gains/losses on disposals andother exceptional items, the underlying figures provide a better indication ofthe Group's performance. The disposals and other exceptional items areconsidered separately to provide a full explanation of the total statutoryresults. Group financial performance Underlying Disposals and business other Total performance* exceptional items statutory £m £m £m2005:Sales 3,237 - 3,237Operating profit 409 11 420Share of post tax profits of associates 3 4 7and joint venturesTotal net finance cost (96) - (96)Profit before tax 316 15 331Profit/(loss) after tax 224 (1) 223 Basic earnings per share (p) 40.4Underlying earnings per share (p) 40.6Interim dividend per share (p) 7.52Proposed final dividend per share (p) 10.6 2004:Sales 3,081 - 3,081Operating profit 389 (18) 371Share of post tax profits of associates 1 - 1and joint venturesTotal net finance cost (97) - (97)Preference dividends** (5) - (5)Profit/(loss) before tax** 288 (18) 270Profit/(loss) after tax** 206 (7) 199 Basic earnings per share (p) 36.2Underlying earnings per share (p) 37.5Interim and final dividends per share (p) 17.25 * Underlying business performance is the primary performance measure used by management, as it is believed that exclusion of gain/(loss) on disposals and other exceptional items aids comparison of underlying performance. Disposals and other exceptional items include the gain/(loss) on disposal of businesses and land, recognition of deferred tax assets on prior year acquisitions, major restructuring costs together with related asset impairments and credits arising on the reduction of US retiree medical provisions. Total net finance cost and underlying profit before tax in 2005 includes a net gain of £9m (2004: £nil) arising under IAS39 on fair value changes on derivatives relating to financing activities.** IAS32 has been adopted with effect from 1 January 2005 without the requirement to restate prior periods. Under IAS32 preference dividends are included in total net finance cost. For comparison purposes, underlying business performance in 2004 has been adjusted to include preference dividends. A summary of underlying business performance is set out below. 2005 2004 Increase £m £mOngoing operations 3,211 2,976 8%Disposed businesses 26 105Sales 3,237 3,081 Ongoing operations 412 386 7%Disposed businesses (3) 3Underlying operating profit 409 389 5%Share of post tax profits associates and joint ventures 3 1Net finance cost* (105) (102) *Underlying profit before tax and financing derivatives 307 288 7%Financing derivative fair value changes 9 -Underlying profit before tax 316 288 * 10%Underlying profit after tax 224 206 * 9% Underlying earnings per share (p):Before financing derivatives fair value changes 39.5 37.5 5%Including financing derivatives fair value changes 40.6 37.5 8% * Includes interest £71m (2004: £65m), retirement benefit obligations net finance cost £29m (2004: £32m) and preference dividends £5m (2004: £5m). As noted above, 2004 has been adjusted to include preference dividends of £5m. Sales and underlying operating profit benefited from acquisitions completed in2004 and 2005, predominantly in Beverage Cans and Plastic Packaging, and, to alesser extent, favourable currency fluctuations. The challenges set by risingraw material and energy costs have been met by the continued focus on cost andefficiency savings together with improvements in volume. Including the net £9mgain arising on IAS39 financing derivatives, underlying profit before taximproved by £28m (10%) to £316m. The net gain arising on financing derivativesis further explained in 'Total net finance cost' and 'Financial risk management'below. Analysis of sales movement Beverage Total Cans Plastics Glass £m £m £m £mSales reported 2004 3,081Disposals 2004 and 2005 (105)Ongoing operations 2004 -reported in 2005 2,976 2,069 527 380Acquisitions 2004 39 29 6 4Currency fluctuations 22 10 6 6Ongoing operations 2004 pro forma basis 3,037 2,108 539 390Acquisitions 2005 17 - 17 -Organic sales growth 157 127 15 15Ongoing operations reported 2005 3,211 2,235 571 405Disposals 2005 26Sales reported 2005 3,237 Organic sales growth, which excludes the impact of acquisitions, disposals andcurrency, was £157m, an increase of 5%. A significant portion of this growth,£127m, arises in Beverage Cans (up 6% on their own performance), of which £52mcan be attributed to the recovery of aluminium price increases and £75m tovolume and mix gains. The increase in Plastic Packaging and Glass waspredominantly from improvements in volume. Analysis of underlying operating profit movement Beverage Total Cans Plastics Glass £m £m £m £mUnderlying operating profit reported 2004 389Disposals 2004 and 2005 (3)Ongoing operations 2004 reported in 2005 386 278 74 34Acquisitions 2004 6 4 2 -Currency fluctuations 4 2 1 1Ongoing operations 2004 pro forma basis 396 284 77 35Acquisitions 2005 2 - 2 -Acquisition related intangibles amortisation (1) - (1) -Improvement/(reduction) in operating profit 15 29 (15) 1Ongoing operations reported 2005 412 313 63 36Disposals 2005 (3)Underlying operating profit reported 2005 409 Analysis of the improvement/(reduction) in operating profit:Price changes 61 52 7 2Cost changes (108) (78) (21) (9)Price and cost changes (47) (26) (14) (7)Volume/mix changes 27 34 (9) 2Efficiency and other savings 35 21 8 6 15 29 (15) 1 The improvement in underlying operating profit, after reflecting the impact ofacquisitions, disposals and currency, was £15m (4%). This was attributable toefficiency savings and volume improvements in Beverage Cans, which offset theimpact of cost increases across all business segments. Most of the increase ininput costs was recovered through pricing, however it was difficult to recoupother cost increases, mainly energy and distribution, against a backdrop ofrising raw material prices. These costs were covered by the ongoing focus onefficiency savings and on securing additional volumes. As announced in October2005, significant volume has been obtained in the US beverage can business. Plastic Packaging experienced mixed fortunes during the year. There wereencouraging volume gains in the higher margin pharmaceutical and US foodplastics businesses as well as increases in the lotion pumps business. However,these were not sufficient to offset the impact of price competition in otherbeauty products and volume-related price reductions in refillable plasticbottles. Profits were further affected by restructuring costs and the lag inrecovering resin prices. Encouragingly, Glass achieved some price increases during the year but they werenot sufficient to cover the dramatic rise in energy costs. Efficiency savings,realised mainly from our prompt response to capacity issues, and some volumegains compensated for the under recovery of cost increases. Under IFRS, intangible assets, such as patents and customer contracts, arerequired to be recognised on acquisition and amortised over their useful life.In 2005, the amortisation charge on such items was £1m. It is anticipated thatthis charge will increase substantially in 2006 as the full year impact ofrecent acquisitions is reflected. Exchange rates The principal exchange rates used to translate the income statement and balancesheet are set out in Note 9. Income statement The US dollar and the euro are the principal currencies that impact our results.During the year both currencies marginally strengthened against sterling. Thenet effect of currency translation caused sales and underlying operating profitto be increased by £22m and £4m respectively. The effect on aluminiumpurchasing, which is priced in US dollars, for products sold in euros in Europe,was minimal as most of the exposure was hedged. The movement in exchange rates had the following impact on translation intosterling for reported sales and underlying operating profit in 2005: Sales Underlying £m operating profit £mUS dollar 10 2Euro 6 1Other currencies 6 1Total 22 4 Balance sheet Most of the Group's borrowings are denominated in US dollars and euros. Currencymovements in the year had a minimal impact, increasing net borrowings by £29m,due principally to the US dollar where the exchange rate moved from £1: $1.93 at31 December 2004 to £1: $1.74 at 31 December 2005. Changes in exchange ratesalso increased equity by £26m. Retirement benefits An analysis of retirement benefits is set out in Note 3. The analysis of the retirement benefit obligations net finance cost is asfollows: 2005 2004 £m £mDefined benefit pension plans:Expected return on plan assets 125 119Interest on plan liabilities (138) (135) (13) (16)Retiree medical - interest on liabilities (16) (16)Net finance cost (29) (32) Changes to the actuarial value of retirement benefits at the balance sheet dateare shown in the consolidated statement of recognised income and expense. Thesechanges reduced equity by £8m in 2005 as follows: £m £mDefined benefit plans:Plan assets - returns higher than expected 145Plan liabilities - experience gains 39Plan liabilities - principally lower discount rates (204) (20)Retiree medical:Plan liabilities - experience gains 8Actuarial losses before tax (12)Tax 4Actuarial losses after tax (8) During the year the Group implemented revisions to its obligations in respect ofretiree medical benefits for certain employees in the US, which reducedliabilities by £46m. The Group is seeking to extend these revisions to otheremployees which, if successful, would generate a further substantial reductionin liabilities. The total cash payments in respect of retirement benefits are as follows: 2005 2004 £m £mDefined benefit pension plans 26 23Other pension plans 4 4Retiree medical 18 20Total cash payments 48 47 Cash payments to defined benefit pension plans increased as a result of a higherrate of contribution to the UK plan. Based on current actuarial projections, itis expected that cash contributions to defined benefit pension plans will riseby approximately £20m in 2006. Total net finance cost The total net finance cost comprises: 2005 2004 £m £mNet interest excluding preference dividends (71) (65)Preference dividends (5) -Net gain on financing derivatives 9 -Retirement benefit obligations net finance cost (29) (32)Total net finance cost as reported (96) (97)Preference dividends* (5)Total net finance cost including preference dividends (102) * IAS32 has been adopted with effect from 1 January 2005 without the requirement to restate prior periods. Under IAS32, the convertible preference shares are allocated between their liability and equity components and the dividends thereon included in net finance cost. Interest In total, adjusting for the net gain on financing derivatives, retirementbenefit obligations net finance cost and preference dividends, net interest costincreased by £6m compared with the prior year. Interest, excluding preferencedividends, was higher primarily due to banks exercising options to cancel fixedto floating interest rate swaps relating to the euro 550m MTN and replacing themwith swaps at current rates. The average interest rate during the year was 6.2%(2004: 5.3%). Interest cover was slightly below 6 times underlying operating profit, which isin keeping with the Group's long term parameter to maintain interest covercomfortably above 4 times. Interest cover is based on underlying operatingprofit and net finance cost excluding the charges in respect of retirementbenefit obligations, preference dividends and net gain on financing derivatives. Derivative financial instruments The fair value of the derivatives arising on financing activities directlyrelates to changes in interest rates and foreign exchange rates. In addition,their fair value will change as the transactions to which they relate mature, asnew derivatives are transacted and due to the passage of time. The fair valuechange on financing derivatives, included in net finance costs, for the year to31 December 2005 was a net gain of £9m (2004: £nil). The impact of derivatives arising on trading items such as commodities andforward foreign exchange contracts is reported within underlying operatingprofit. Tax The tax charge for the year was £92m (29%) (2004: £82m (28%)) on profit beforedisposals and other exceptional items. The Group operates in a number ofterritories where the statutory rate of tax on profits is higher than the UKstandard rate. The Group is able to mitigate this to some extent by structuringits activities in order to take advantage of tax incentives which are availablein some territories. It is currently anticipated that the charge will be around31% in 2006, reflecting an anticipated reduction in the benefits from the use oftax losses and similar credits. Thereafter the rate is expected to risemodestly. Tax payments in the year were £47m compared with £54m last year. Payments in2005 were reduced by repayments received, following the settlement of prior yeartax claims, and by the utilisation of tax losses. It is expected that the cashtax paid in 2006 will rise to between 65% and 75% of the tax charge in theconsolidated income statement, as tax losses are utilised, and will be highersubsequently. Disposals and other exceptional items The disposals and other exceptional items arising in 2005 were as follows: £mLoss on disposal of subsidiary (25)Profit on disposal of associate 4Profit on disposal of land 5Recognition of deferred tax assets on prior year acquisitions (7)Restructuring costs, including asset impairment (7)Retiree medical prior service credit (net of legal costs) 45Total disposals and other exceptional items before tax 15Tax (16)Total disposals and other exceptional items after tax (1) The loss on the disposal of subsidiary relates to the sale of the UK glassbusiness. The UK glass market was an over supplied market and was facing theadditional challenge of new capacity being introduced. In these circumstances itwas felt that, as Rexam in the UK was a single site operation and the numberthree player, divestment was the best option. The profit on disposal of anassociate relates to the sale of the Group's interest in Interprint, a non coreprinting business. The recognition of deferred tax assets on prior year acquisitions relates to theutilisation of tax losses on acquired businesses that were not required to berecorded, based on the then prevailing assumptions as to future utilisation, atthe acquisition date. Under IFRS, the subsequent recognition gives rise to areduction in goodwill and a corresponding charge to the income statement. Thisis reported within other exceptional items due to its size and largelytransitory nature. The restructuring cost arises in the European beverage can operation followingconversion of two of its plants in Germany and one in Turkey from steel toaluminium can production. These conversions were in response to the resolutionof the deposit legislation situation in Germany and also to reflect customerrequirements in both territories. The credit, net of legal expenses, arising on US retiree medical obligations isdiscussed under "Retirement benefits" above. The tax charge of £16m arisesprincipally on this credit. Earnings per share Underlying earnings per share, before the net gain on financing derivatives,disposals and other exceptional items, increased from 37.5p to 39.5p, anincrease of 5%. This increase was achieved despite an increase in the tax rateand a higher average number of shares in issue. The increase in underlyingearnings per share including the net gain on financing derivatives was 8%. The basic earnings per share for 2005 was 40.4p per share (2004: 36.2p). In 2005this includes the exceptional profits and losses arising from the sale of asubsidiary, an associate and land, the recognition of deferred tax assets onprior year acquisitions and retiree medical prior service cost credit. 2005 2004Underlying earnings per share (p):Before net gain on financing derivatives 39.5 37.5Including net gain on financing derivatives 40.6 37.5Basic earnings per share (p) 40.4 36.2 Average number of shares (millions) 551.8 546.8 Cash flow Free cash flow was £248m compared with £234m in 2004. This 6% rise is largelydue to an improvement in operating profit and a reduction in net finance costdue to the cancellation in 2005 of certain interest rate swaps, offsetting asmall increase in working capital. 2005 2004 £m £mUnderlying operating profit 409 389Depreciation and amortisation 172 178Retirement benefit obligations (20) (22)Change in working capital (36) (11)Capital expenditure (net) (161) (166)Net finance costs and tax (104) (118)All other movements (12) (16)Free cash flow 248 234Equity dividends (97) (92)Business cash flow 151 142Acquisitions* (235) (100)Disposals** 58 13Cash flow including borrowings acquired and disposed (26) 55Non cash movements (35) 46Share capital changes 6 8Adoption of IAS32 and IAS39 *** (97) -Net borrowings at the beginning of the year (1,068) (1,177)Net borrowings at the end of the year (1,220) (1,068) * Includes net borrowings acquired of £129m (2004: £45m)** Includes net borrowings disposed of £43m (2004: £3m)*** Includes the liability element of convertible preference shares, interest accruals, fair value adjustments to medium term notes and financing derivatives other than the principal amounts of cross currency swaps. IAS32 and IAS39 were adopted on 1 January 2005 without the requirement to restate 2004. Capital expenditure Gross cash capital expenditure was £176m, just above depreciation andamortisation. This reflects the need to balance capacity with demand in a numberof business areas, whilst being alert to growth opportunities as they emerge. Itis anticipated that capital expenditure in 2006 will be within the range of 1.0to 1.2 times depreciation and amortisation, depending on the timing of projectsand the availability of growth opportunities. 2005 2004Capital expenditure* (gross) (£m) 176 174Depreciation and amortisation* (£m) 171 178Ratio (times) 1.03 0.98 * Capital expenditure includes amounts expensed on computer software. Amortisation excludes £1m (2004: £nil) amortised on patents, customer contracts and intangibles other than software. The total profit realised on sale of property, plant and equipment during theyear was £7m (2004: loss £2m) of which £5m related to the sale of land (includedin other exceptional items) and the remaining net £2m included a £5m gain on thesale of pallets in the Beverage Cans and Glass businesses. Acquisitions and disposals Expenditure on acquisitions, including borrowings assumed, totalled £235m as setout below: £mPrecise Technology 146Delta Plastics 88Other 1 235 The principal transactions were in Plastic Packaging with the acquisition ofDelta Plastics in September 2005 and Precise Technology in December 2005. Theseacquisitions were pursuant to the strategy to grow the Plastic Packagingbusiness, to enhance product offering and to participate in growth areas such asthe North American pharmaceutical and healthcare markets. Further acquisitions have been announced in 2006: the FangXin beauty packagingbusiness, based in China, and Ecanco, an Egyptian beverage can operation. Thesefurther strengthen our presence in higher growth and emerging markets. The principal disposals were the sale of the UK glass business for £48m,including borrowings disposed and costs, and the 50% interest in Interprint, anon core printing business, for £10m. Dividend and dividend policy This year the Board is recommending a final dividend of 10.6p per share bringingthe total dividend for the year to 18.12p per share, an increase of 5%. This isin line with Rexam's ongoing policy to increase the dividend payout by about 5%per annum, assuming that the financial resources are available and that earningsgrowth continues as expected. Balance sheet and borrowings The adoption of IAS32 and IAS39 on 1 January 2005, without the requirement torestate 2004, means that it is more meaningful to compare the balance sheet at31 December 2005 with that at 1 January 2005. As at As at 31.12.05 1.1.05 £m £mGoodwill and other intangible assets 1,514 1,292Property, plant and equipment 1,174 1,157Retirement benefits net of tax (548) (538)Other net assets 89 80 2,229 1,991 Equity 1,009 826Net borrowings* 1,220 1,165 2,229 1,991 Return on invested capital (%) ** 14.8 14.6Interest cover (times) *** 5.8 6.0Gearing (%)**** 121 141 * Net borrowings comprise borrowings, the liability element of convertible preference shares (£70m), cash and cash equivalents and certain derivative financial instruments.** Underlying operating profit plus share of associates profit after tax divided by the average of opening and closing of each of net borrowings and equity after adding back retirement benefit obligations (net of deferred tax) and goodwill previously written off against equity under UK GAAP.*** Based on underlying operating profit and total net finance cost excluding retirement benefit obligations net finance cost, the net gain arising on financing derivatives and preference dividends.**** Based on net borrowings divided by equity. The reporting of borrowings under IFRS includes the liability element ofconvertible preference shares, interest accruals and certain financialderivatives. These changes are illustrated below. As at As at 31.12.05 1.1.05 £m £mNet borrowings 1,294 1,291Derivative financial instruments (74) (126)Net borrowings as reported 1,220 1,165Adjustments arising on the adoption of IAS32 and IAS39:Liability element of convertible preference shares (70)Derivative financial instruments and other adjustments (27)As reported under IFRS at 31 December 2004 1,068 Derivative financial instruments comprise instruments relating to net borrowings(eg cross currency and interest rate swaps) and those related to other businesstransactions (eg forward commodity and forward foreign exchange deals). Allthese instruments are required, with effect from 1 January 2005, under IAS32 andIAS39, to be reflected on the balance sheet, as illustrated below. As at As at 31.12.05 1.1.05 £m £mCross currency swaps 74 123Interest rate swaps - 3Derivative financial instruments included in net borrowings 74 126Other derivative financial instruments 41 9Total derivative financial instruments 115 135 The reduction in cross currency swaps can be mainly attributed to thestrengthening of the US dollar. The increase in other derivatives is dueprincipally to the increase in aluminium prices during 2005. Financial risk management Rexam's financial risk management is based upon sound economic objectives andgood corporate practice. Derivative and other financial instruments are used to manage trading exposures,liabilities and assets under parameters laid down by the Rexam Board, which aremonitored by its Finance Committee. The Group's major hedging activities are tomitigate the following risks: (i) Commodity price and currency transaction risks for aluminium purchases madeby its European beverage can operation. (ii) Fair value and cash flow interest rate risks associated with the mediumterm notes. (iii) Currency translation risks of net assets in overseas subsidiaries. The Group has not used derivative financial instruments for purposes other thanfor hedging its exposures. The Group adopted accounting standard IAS39 on 1 January 2005, resulting in therecognition at fair value of all derivative financial instruments previouslyheld off balance sheet under UK GAAP. To avoid income statement volatility, andwhere such benefits outweigh the costs of compliance, the Group has designatedmany of its economic hedges as hedging instruments under IAS39. However, forcertain effective economic hedging relationships such hedge accounting treatmentis not permitted under IFRS. Where hedge accounting is not achieved, fair valuemovements on derivatives are recorded in the consolidated income statement whichcould give rise to earnings volatility. In 2005, this resulted in a net gain of£9m on financing derivatives; comprising a £5m gain on US dollar interest rateswaps, a £6m gain on offsetting euro interest rate swaps and a £2m loss on othercross currency swaps. It is the Group's policy to maintain a range of maturity dates for itsborrowings and to refinance them at the appropriate time so as to reducerefinancing risk. The issue of longer term borrowings through the Medium TermNote (MTN) programme is a key element of the Group's debt and financial riskmanagement process. Fixed rate MTNs, in sterling and euros, were issued in 2002and, simultaneous to issue, were swapped into floating rate euros and USdollars. Additional smaller private issues of MTNs have been made, mostly atfloating rates, to fit into the Group's funding profile. This has enabled theGroup to continue to manage the fixed to floating rate proportion of itsborrowings and the duration of the fixed rate borrowings independently of thesourcing of the funding. CONSOLIDATED INCOME STATEMENTFOR THE YEAR ENDED 31 DECEMBER 2005 2004 Disposals Disposals 2005 and other 2004 and other Underlying exceptional Underlying exceptional business items 2005 business items 2004 performance (Note 2) Statutory performance (Note 2) Statutory £m £m £m £m £m £m Sales (Note 1) 3,237 - 3,237 3,081 - 3,081Operating expenses (2,828) 11 (2,817) (2,692) (18) (2,710)Operating profit (Note 1) 409 11 420 389 (18) 371Share of post tax profits of 3 4 7 1 - 1associatesand joint venturesRetirement benefit obligations net (29) - (29) (32) - (32) finance cost (Note 3)Interest expense* (79) - (79) (78) - (78)Interest income 12 - 12 13 - 13Profit before tax 316 15 331 293 (18) 275Tax (92) (16) (108) (82) 11 (71)Profit after tax 224 (1) 223 211 (7) 204Preference dividends* - (5)Profit for the financial year 223 199 Attributable to:Equity shareholders of Rexam PLC 223 198Minority interests - 1 223 199 Earnings per share (pence) (Note 4)Basic 40.4 36.2Diluted 39.4 35.2 * Preference dividends for 2005 are included as part of interest expense inaccordance with IAS32. For details of equity dividends paid and proposed see Note 5. CONSOLIDATED BALANCE SHEETAS AT 31 DECEMBER 2005 2004 £m £mASSETSNon current assetsGoodwill 1,405 1,252Other intangible assets 109 40Property, plant and equipment 1,174 1,157Investments in associates and joint ventures 29 29Deferred tax assets 332 340Trade and other receivables 35 23Available for sale financial assets 26 -Other investments - 29Derivative financial instruments 92 90 3,202 2,960Current assetsInventories 365 352Trade and other receivables 448 413Available for sale financial assets 4 -Derivative financial instruments 43 11Cash and cash equivalents 87 94 947 870 Total assets 4,149 3,830 LIABILITIESCurrent liabilitiesBorrowings (164) (136)Derivative financial instruments (20) (2)Current tax (22) (4)Trade and other payables (604) (609)Provisions (18) (9) (828) (760)Non current liabilitiesBorrowings (1,217) (1,127)Retirement benefit obligations (Note 3) (783) (774)Deferred tax liabilities (152) (97)Non current tax (90) (98)Other payables (36) (42)Provisions (34) (38) (2,312) (2,176) Total liabilities (3,140) (2,936) Net assets 1,009 894 EQUITY (Note 6)Ordinary share capital 356 354Convertible preference share capital 1 89Share premium account 748 741Capital redemption reserve 279 279Retained earnings (431) (561)Fair value and other reserves 56 (8)Total equity 1,009 894 CONSOLIDATED CASH FLOW STATEMENTFOR THE YEAR ENDED 31 DECEMBER 2005 2004 £m £mCash flows from operating activitiesProfit before tax 331 275Adjustments for:Net interest expense 67 65Share of post tax profits of associates and joint ventures (7) (1)Depreciation of property, plant and equipment 162 170Amortisation of intangible assets 10 8Impairment of property, plant and equipment 5 -Disposal of subsidiaries 25 3Movement in provisions 1 (6)Movement in grants (9) -Equity settled share options 6 7Changes in working capital (36) (11)Recognition of deferred tax assets on prior year acquisitions 7 9(Profit)/loss on disposals of property, plant and equipment (7) 2Movement in retirement benefit obligations (37) (1)Other adjustments (6) (2)Cash generated from operations 512 518Interest paid (70) (69)Dividends paid to convertible preference shareholders - (5)Tax paid (47) (54)Net cash flows from operating activities 395 390 Cash flows from investing activitiesCapital expenditure (176) (174)Proceeds from sale of property, plant and equipment 14 3Acquisition of subsidiaries, net of cash and cash equivalents acquired (106) (52)Proceeds from sale of subsidiaries, net of cash and cash equivalents disposed 5 10Proceeds from sale of an associate 10 -Investment in joint venture - (3)Sale of properties surplus to requirements 1 5Dividends received from associates 1 -Interest received 13 10Net cash flows from investing activities (238) (201) Cash flows from financing activitiesProceeds from borrowings and derivatives 47 -Repayment of borrowings (124) (82)Proceeds from issue of share capital 9 8Purchase of Rexam shares by ESOP trust (3) -Dividends paid to equity shareholders (97) (92)Net cash flows from financing activities (168) (166) Net (decrease)/increase in cash and cash equivalents (11) 23 Cash and cash equivalents at the beginning of the year (2) (17)Non cash movements 9 (8)Net (decrease)/increase in cash and cash equivalents (11) 23Cash and cash equivalents at the end of the year (4) (2) Cash and cash equivalents comprise:Cash at bank and in hand 37 29Short term bank deposits 50 65Bank overdrafts (91) (96) (4) (2) CONSOLIDATED STATEMENT OF RECOGNISED INCOME AND EXPENSEFOR THE YEAR ENDED 31 DECEMBER 2005 2004 £m £mExchange differences 26 (8)Actuarial losses on retirement benefit obligations (12) (92)Tax on actuarial losses on retirement benefit obligations 4 30Net investment hedges 7 -Cash flow hedges recognised 60 -Tax on cash flow hedges (9) -Cash flow hedges transferred to inventory (31) -Changes in market value of other investments - 1Tax on share option schemes - 1Net profit/(loss) recognised directly in equity 45 (68)Profit for the financial year 223 199Total recognised income and expense for the year 268 131Adoption of IAS32 and IAS39 (68) - 200 131 Total recognised income and expense for the year attributable to:Equity shareholders of Rexam PLC 268 130Minority interests - 1 268 131 NOTES 1 Segment analysis (a) Analysis by business segment 2005 Disposals & Beverage businesses Cans Plastics Glass for sale Group £m £m £m £m £m Sales 2,235 571 405 26 3,237Underlying operating profit/(loss) 313 63 36 (3) 409Underlying return on sales (%) 14.0 11.0 8.9 (11.5) 12.6 Operating profit/(loss) 345 62 36 (23) 420Share of post tax profits of associates and joint 3 - - 4 7venturesNet interest expense (67)Retirement benefit obligations net finance cost (29)Profit before tax 331Tax (108)Profit after tax 223 Segment assets 2,248 858 470 - 3,576Less inter segment assets (7) (2) (1) - (10)Assets of associates and joint ventures 29 - - - 29Unallocated assets 554Total assets 4,149 Segment liabilities (438) (164) (100) - (702)Less inter segment liabilities 5 2 3 - 10Unallocated liabilities (2,448)Total liabilities (3,140) (b) Analysis by geographical segment 2005 Rest of Rest of UK Germany France Europe USA Brazil world Group £m £m £m £m £m £m £m £mSales by destination 220 251 162 1,012 1,136 289 167 3,237 Segment assets 342 490 274 877 1,122 385 172 3,662Assets of associates and joint 3 - - - - - 26 29venturesLess inter segment assets (55) (11) (5) (8) (5) (8) (4) (96)Unallocated assets 554Total assets 4,149 If the disposal of the UK Glass business had been included as part of the Glassbusiness segment rather than in disposals and businesses for sale, sales,underlying operating profit and operating profit of that segment would have been£431m, £33m and £8m respectively. Underlying operating profit comprisesoperating profit before disposals and other exceptional items. Underlying returnon sales comprises underlying operating profit divided by sales. Unallocatedassets comprise derivative financial instrument assets, deferred tax assets andcash and cash equivalents which are used as part of the Group's financing offsetarrangements. Unallocated liabilities comprise borrowings, derivative financialinstrument liabilities, current and non current tax, deferred tax liabilitiesand retirement benefit obligations. NOTES continued 1 Segment analysis continued (c) Analysis by business segment 2004 Disposals & Beverage businesses Discontinued Cans Plastics Glass for sale operations Group £m £m £m £m £m £mSales 2,069 527 380 105 - 3,081Underlying operating profit 278 74 34 3 - 389Underlying return on sales (%) 13.4 14.0 8.9 2.9 - 12.6 Operating profit/(loss) 275 67 29 2 (2) 371Share of post tax profits of associates and - - - 1 - 1joint venturesNet interest expense (65)Retirement benefit obligations net finance (32)costProfit before tax 275Tax (71)Profit after tax 204 Segment assets 2,164 545 472 94 - 3,275Less inter segment assets (6) (2) (1) - - (9)Assets of associates and joint ventures 25 - - 4 - 29Unallocated assets 535Total assets 3,830 Segment liabilities (433) (144) (102) (28) - (707)Less inter segment liabilities 4 1 1 3 - 9Unallocated liabilities (2,238)Total liabilities (2,936) (d) Analysis by geographical segment 2004 UK Germany France Rest of USA Brazil Rest of Group £m £m £m Europe £m £m world £m £m £m Sales by destination 308 255 152 956 1,042 263 105 3,081 Segment assets 450 490 299 914 750 324 146 3,373Assets of associates and joint 3 - - - - 4 22 29venturesLess inter segment assets (54) (11) (8) (21) (4) (8) (1) (107)Unallocated assets 535Total assets 3,830 If the disposal of the UK Glass business had been included as part of the Glassbusiness segment rather than in disposals and businesses for sale, sales,underlying operating profit and operating profit of that segment would have been£480m, £37m and £32m respectively. For 2004 reporting, Plastics was reportedseparately as Beauty and Pharma and Plastic Containers. The reporting has beenchanged for 2005 reporting to reflect the definition of a reportable segmentfollowing the appointment to the Board of a director with overall responsibilityfor Plastics. On the previous basis, sales, underlying operating profit andoperating profit for 2004 were £385m, £58m and £53m respectively for Beauty andPharma and £142m, £16m and £14m respectively for Plastic Containers. NOTES continued 2 Disposals and other exceptional items 2005 2004 £m £mOperating profit:Loss on disposal of subsidiaries (25) (3)Recognition of deferred tax assets on prior year acquisitions (7) (9)Restructuring: impairment of assets (5) -Restructuring: other costs (2) (18)Profit on disposal of land 5 -Retiree medical past service credit (net of legal fees) 45 11Other - 1 11 (18)Share of post tax profits of associates and joint ventures:Profit on disposal of an associate 4 - Tax:Disposal of subsidiaries (2) 9Restructuring and other items 2 6Retiree medical past service credit (net of legal fees) (16) (4) (16) 11 Total disposals and other exceptional items (1) (7) The loss on the disposal of subsidiaries in 2005 relates to the sale of the UKglass business. The recognition of deferred tax assets on prior yearacquisitions relates to the utilisation of tax losses on acquired businessesthat were not required to be recorded, based on the then prevailing assumptionsas to future utilisation, at the acquisition date. Under IFRS, the subsequentrecognition gives rise to a reduction in goodwill and a corresponding charge tothe income statement. The restructuring costs in 2005 arise in the Europeanbeverage can operation following conversion of two of its plants from steel toaluminium can production. The retiree medical past service credit relates tochanges implemented to the Group's obligations in respect of retiree medicalbenefits. The profit on disposal of an associate relates to the sale of Rexam'sinterest in Interprint, a non core printing business. NOTES continued 3 Retirement benefit obligations Other Total Retiree Gross Deferred Net Defined pensions pensions medical retirement tax retirement benefit £m £m £m benefit £m benefit pensions obligations obligations £m £m £m At 1 January 2005 (477) (20) (497) (269) (766) 228 (538)Exchange differences (17) (2) (19) (29) (48) 16 (32)Current service cost (22) (4) (26) (2) (28) 7 (21)Past service credit - - - - 46 46 (16) 30exceptional itemCurtailment - exceptional item 6 - 6 - 6 (2) 4Total included in operating (16) (4) (20) 44 24 (11) 13profitNet finance cost (13) - (13) (16) (29) 10 (19)Actuarial changes (20) - (20) 8 (12) 4 (8)Cash contributions and 26 4 30 18 48 (14) 34 benefits paidTransfers 3 (1) 2 - 2 - 2At 31 December 2005 (514) (23) (537) (244) (781) 233 (548) The balance for net retirement benefit obligations of £548m is included in theconsolidated balance sheet as retirement benefit obligations of £783m, lessother receivables of £2m and deferred tax assets of £233m. Principal actuarial assumptions: UK USA Other UK USA Other 2005 2005 2005 2004 2004 2004 % % % % % %Future salary increases 4.25 4.50 2.88 4.30 4.50 2.83Future pension increases 2.75 - 1.73 2.80 - 1.62Discount rate 4.75 5.40 3.92 5.30 5.50 4.59Inflation rate 2.75 2.50 1.90 2.80 2.50 1.79Expected return on plan assets*:Equities 6.95 7.23 6.83 7.38 8.27 7.03Bonds 4.10 4.26 3.57 4.63 4.58 4.43Cash 4.35 2.82 2.02 3.88 2.68 2.45 * Net of administration expenses. NOTES continued 4 Earnings per share 2005 2004 Pence PenceBasic earnings per share 40.4 36.2Diluted earnings per share 39.4 35.2Underlying earnings per share before derivative financial instrument value 39.5 37.5changesUnderlying earnings per share after derivative financial instrument value 40.6 37.5changes 2005 2004 £m £mProfit attributable to equity shareholders before derivative financial 218 205instrument value changes, disposals and other exceptional itemsDerivative financial instrument value changes (net of tax) 6 -Profit attributable to equity shareholders before disposals and other 224 205exceptional itemsDisposals and other exceptional items (1) (7)Profit attributable to equity shareholders 223 198Dilution on conversion of preference shares 5 5Profit attributable to equity shareholders on a diluted basis 228 203 Number Number millions millionsWeighted average number of shares in issue for the year 551.8 546.8Dilution on conversion of preference shares 24.4 24.4Dilution on exercise of outstanding share options 3.1 5.0On a diluted basis 579.3 576.2 5 Equity dividends 2005 2004 £m £mInterim dividend for 2005 of 7.52p paid on 1 November 2005 41 -Final dividend for 2004 of 10.09p paid on 1 June 2005 56 -Interim dividend for 2004 of 7.16p paid on 3 November 2004 - 40Final dividend for 2003 of 9.58p paid on 1 June 2004 - 52 97 92 A final dividend per equity share of 10.6p has been proposed for 2005, payableon 5 June 2006. In accordance with IFRS accounting requirements this dividendhas not been accrued in these consolidated financial statements. NOTES continued 6 Equity Convertible preference Ordinary share Share Capital Fair share capital premium redemption value capital £m account reserve Retained and other Total £m £m £m earnings reserves equity £m £m £mAt 1 January 2005 354 89 741 279 (561) (8) 894Adoption of IAS32 and IAS39 - (88) - - 9 11 (68)Exchange differences - - - - - 26 26Actuarial losses on retirement benefit - - - - (12) - (12)obligationsTax on actuarial losses on - - - - 4 - 4retirement benefit obligationsNet investment hedges - - - - - 7 7Cash flow hedges recognised - - - - - 60 60Tax on cash flow hedges - - - - - (9) (9)Cash flow hedges transferred to inventory - - - - - (31) (31)Net profit/(loss) recognised - - - - (8) 53 45directly in equityProfit for the financial year - - - - 223 - 223Total recognised profit for the - - - - 215 53 268yearShare option schemes value of - - - - 6 - 6services providedShare option schemes proceeds 2 - 7 - - - 9from shares issuedPurchase of ESOP shares by Rexam PLC - - - - (3) - (3)Dividends paid - - - - (97) - (97)At 31 December 2005 356 1 748 279 (431) 56 1,009 7 Net borrowings 2005 2004 £m £mAt 1 January (1,068) (1,177)Adoption of IAS32 and IAS39 (97) -Acquisition of subsidiaries (129) (45)Disposal of subsidiaries 43 3Cash flow movements 123 105Non cash movements (92) 46At 31 December (1,220) (1,068) Balance at 31 December: Cash and cash equivalents 87 94Derivative financial instruments* 74 101Borrowings** (1,381) (1,263) (1,220) (1,068) * Derivative financial instruments are included in net borrowings to the extent they relate to underlying items of a financial nature.** Borrowings at 31 December 2005 comprise medium term notes, bank loans, bank overdrafts, finance leases and the liability element of convertible preference shares. At 31 December 2004 borrowings excluded the liability element of convertible preference shares. NOTES continued 8 Reconciliation from UK GAAP to IFRS (a) Profit Note £mProfit for the 2004 financial year under UK GAAP 116Goodwill amortisation 1 75Goodwill in reserves 2 19Share based payment 3 (2)Deferred tax 4 (9)Acquisition of businesses 5 (1)Other 1Profit for the 2004 financial year under IFRS 199 (b) Equity Note At 31 December At 1 January 2004 2004 £m £mEquity under UK GAAP 786 823Goodwill amortisation 1 75 -Share based payment 3 (2) (1)Retirement benefit obligations (net of tax) 6 (14) (12)Equity dividends 7 55 52Deferred tax 4 (9) -Acquisition of businesses 5 - (10)Other 3 (2)Equity under IFRS 894 850 Notes1 Under UK GAAP, goodwill was amortised over its useful economic life, not exceeding 20 years. Under IFRS, goodwill is not amortised but tested annually for impairment.2 Under UK GAAP, goodwill previously written off directly to reserves was recycled to the consolidated income statement on disposal or impairment of the related business. Under IFRS, goodwill previously written off directly to reserves is not recycled.3 Under UK GAAP, an expense was recognised in the consolidated income statement for share options, excluding save as you earn options which were exempt, based on intrinsic value. Under IFRS, an expense is recognised for all equity settled share options granted after 7 November 2002 and for all cash settled share options, based on the fair value of the options calculated using appropriate pricing models.4 Under UK GAAP, the subsequent recognition of deferred tax assets not originally recognised at the time of acquisition was recorded as a deferred tax asset and a tax credit in the consolidated income statement. Under IFRS, subsequent recognition also gives rise to a reduction in goodwill and a corresponding operating profit expense in the consolidated income statement.5 Under UK GAAP, fair value adjustments to assets and liabilities were permitted up to the end of the year following the year of an acquisition and recognised in the year when the adjustments were made. Under IFRS, fair value adjustments to assets and liabilities are permitted up to one year following an acquisition and are recognised retrospectively in the consolidated financial statements.6 Under UK GAAP, insured liabilities for lump sum death in service benefits were based on premiums payable. Under IFRS, insured liabilities for lump sum death in service benefits are recognised on the balance sheet to the extent that they relate to past service. Under UK GAAP, the fair value of pension plan assets was calculated using mid prices. Under IFRS, the fair value of pension plan assets is calculated using bid prices.7 Under UK GAAP, equity dividends were recognised in the year to which they related. Under IFRS, final equity dividends are recognised only when approved by the shareholders. NOTES continued 9 Exchange rates The principal exchange rates against sterling were: 2005 2004Average:US dollar 1.82 1.83Euro 1.46 1.47Closing:US dollar 1.74 1.93Euro 1.46 1.42 10 The consolidated income statement and consolidated cash flowstatement for the year ended 31 December 2005 and the consolidated balance sheetat 31 December 2005 do not constitute statutory accounts as defined by section240 of the Companies Act 1985. They are extracted from the full statutoryaccounts for the year ended 31 December 2005 which have been approved by a dulyconstituted Committee of the Board of Directors on 22 February 2005, but whichhave not been delivered to the Registrar of Companies. The report of theauditors on those accounts is unqualified and does not contain a statement undereither section 237(2) or section 237(3) of the Companies Act 1985. 11 A copy of the information to be provided to financial analysts isavailable on request from the Company Secretary, Rexam PLC, 4 Millbank, London SW1P 3XR. It is also on Rexam'swebsite, www.rexam.com. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
REX.L