25th Feb 2005 07:00
Rexam PLC25 February 2005 Rexam delivers further strong profit growth Rexam PLC, the global consumer packaging group and the world's No 1 beverage canmaker, announces its results for the full year to 31 December 2004. Underlying performance1 2004 20032 IncreaseSales from ongoing operations3 £3,124m £2,999m +4%Underlying operating profit £391m £344m +14%Underlying profit before tax £300m £239m +26%Underlying earnings per share 38.2p 33.8p +13% Highlights • Underlying profit before tax1 up 26% to £300m (£326m before retirement benefits net finance cost) • Underlying EPS1 up 13% • Excellent free cash flow at £226m, up 7% • Consumer Packaging margins increase to 12.5% from 11% • Beverage Packaging underlying operating profit £318m, up 12%4 • Plastic Packaging underlying operating profit £71m, up 29%4 • Integration of Latasa ahead of plan - synergies of £11m ($20m) Rolf Borjesson, Chairman, commented: "Rexam made further strong progress in2004, with creditable increases in sales, profits and margins. We continue tosee excellent prospects for further organic growth and acquisitions, both ofwhich will reinforce our leadership positions and create value for shareholders.I am confident that we are well positioned for further progress in 2005." Statutory results5 2004 20032Sales £3,081m £3,112mOperating profit £300m £215mProfit before tax £195m £3mBasic earnings/(loss) per share 21.0p (9.5)pDividends per share 17.25p 16.4p 1. For underlying performance, sales include sales of associates and profit and earnings are before goodwill amortisation and exceptional items 2. Restated for UITF38 "Accounting for ESOP Trusts" 3. Sales including sales of associates but excluding sales of businesses that have been discontinued, disposed or are held for sale 4. Based on 2003 underlying operating profit adjusted for full year effect of 2003 acquisitions and constant currency 5. For statutory results, sales exclude sales of associates and profit and earnings include goodwill amortisation and exceptional items See also explanatory notes on next page Explanatory notes Underlying: profit and earnings before goodwill amortisation and exceptionalitems and sales includes sales of associates (Note 1 above). Ongoing operations: underlying performance excluding businesses that have beendiscontinued, disposed or are held for sale in either 2003 or 2004 (Note 3above). Adjusted underlying performance: ongoing operations for 2003 adjusted to includethe pre-acquisition impact of 2003 acquisitions (the "full year effect") and toreflect the impact of re-translating at the 2004 average exchange rates ("constant currency") (Note 4 above). The change between adjusted underlying performance and ongoing operations 2004represents a combination of the result of 2004 acquisitions and organic growth.Organic growth is the year on year change arising on businesses owned since thebeginning of 2004. 25 February 2005 Enquiries Rexam PLC 020 7227 4100Lars Emilson, Chief ExecutiveGraham Chipchase, Group Finance DirectorAndrew Mills, Group Communications Director Financial Dynamics 020 7269 7291Richard Mountain/David Yates Editors' notes: Rexam is one of the world's top five consumer packaging groups and the world'sleading beverage can maker. Its global operations focus on beverage packaging inmetal, glass and plastic, as well as plastic packaging solutions for the beauty,pharmaceutical, and food industries around the world. The Group employs morethan 22,000 people in 24 countries worldwide and has an ongoing turnover ofapproximately £3.1 billion. Rexam is a member of the FTSE 100. Its ordinaryshares are listed with the UK Listing Authority and trade on the market forlisted securities on the London Stock Exchange under the symbol REX. For furtherinformation, visit Rexam's website at www.rexam.com. CHAIRMAN'S LETTER This is my first letter to you since becoming Chairman of the Company at theAnnual General Meeting in May 2004. It has been an interesting and eventfulperiod. When it comes to our overall financial performance, 2004 was another successful,if challenging, year and I am pleased to report that we made further goodprogress. Summarising our underlying results, sales from ongoing operationsadvanced 4% to £3.1bn and our underlying profit before tax rose 26% to £300m.Free cash flow generation was again particularly strong at £226m. These results are testament to the strength of our business and the drive forperformance by everyone in Rexam. They have been achieved despite there being noresolution to the deposit system on one-way packaging in Germany and despite thecontinued weakness of the US dollar, which impacted our results particularlyfrom the Americas on translation into sterling. Executing our strategy Our successful strategy over recent years has transformed Rexam into a focusedglobal consumer packaging group. Now, having achieved strong leadershippositions and a solid base of operational excellence combined with positive longterm customer relationships with many of the most famous brands in the world, weare taking Rexam to the next stage of its development. We are doing this bygrowing organically and by acquisition, as well as by extending our consumerpackaging activities and moving into new geographic markets. The implementation of our strategy progressed effectively during 2004. Wecontinued to drive organic growth through our focus on a number of importantareas. These included our commitment to providing customer satisfaction,innovation in areas such as marketing, supply chain and information managementand the unstinting pursuit of operational efficiency. The highly successful integration of the Latasa beverage can plants in Brazil,which we acquired in November 2003, has reaped even greater benefits than wefirst hoped for. One of the advantages of acquiring the Latasa operations isthat we now, for the first time, have a substantial presence in the southernhemisphere. In line with our strategy to consolidate the northern European glass containermarket, we strengthened our position during the year with the acquisition of twoglassworks, one in the Netherlands and one in Poland. This not only createdopportunities for operational improvement but also reinforced our long termrelationship with one of our major customers. We also continued our strategy of investing in attractive growth sectors withinconsumer packaging. Following on from the acquisition of Risdon Pharma in 2003,we acquired Plastic Omnium Medical in France, a supplier of drug delivery anddispensing systems. This represented a significant step forward in establishinga leading position in the fast growing pharmaceutical packaging market and infurther cementing our relationships with a number of global industry players. Nearly 15% of our sales are now in what are frequently referred to as emergingmarkets, including countries such as Brazil, Russia and China. During 2004, westrengthened our presence in these markets, acquiring full ownership and controlof our beverage can plants in Mexico and China. These investments, together withour recent agreement to provide technical support to a beverage can plantstart-up in India, were all made with our long term future in mind. Weanticipate that they will contribute strongly to the future success of Rexam. We continue to see numerous acquisition opportunities, some of which we seek totake advantage of, to build on our position in consumer packaging throughacquisition. The discipline of our acquisition process remains firmly in placeand we will pursue only the deals which we are convinced will add value forshareholders. Changes to the Board At the Annual General Meeting in May 2004, Jeremy Lancaster stepped down aftereight successful years overseeing the transformation of this Company. Hisexperience, wisdom and integrity were an invaluable part of that transformationand it was a pleasure and privilege to work alongside him. At the same time,Stefan Angwald took over as Chief Executive. However, it became apparent to theBoard that he was not the appropriate individual to lead the Company and weasked him to step down. I feel reassured by the fact that the Board actedresolutely and swiftly to avoid any long term effect. The Board was delightedthat Lars Emilson, who has had previous experience as a Chief Executive at PLMduring the 1990s and has been an executive director of Rexam since 1999, agreedto step up from the position of Group Director Beverage Cans to take on the roleof Chief Executive. Lars played a key role in the integration of the ANC andLatasa acquisitions and his knowledge and experience are invaluable. I am surethat he will provide the Group with strong leadership as Chief Executive. BillBarker, who succeeded Lars as Group Director Beverage Cans, was appointed to theBoard as an executive director in January 2005. Dividend The Board is proposing a final dividend payment of 10.09p per ordinary share.This will mean 17.25p for 2004, which is an increase of 5.2% on last year inline with our dividend policy. Subject to shareholder approval at the AnnualGeneral Meeting in May 2005, the dividend will be paid on 1 June 2005 to holdersof ordinary shares registered on 13 May 2005. Outlook There is great talent throughout Rexam and I would like to thank everyone fortheir dedication to delivering success during 2004. Looking forward, we are continuing to invest in our business to achieve growth.The European beverage can market continues to expand, despite the difficultiesin Germany, and grew some 5% in 2004. We expect the market to grow at a similarlevel this year. The traditional beverage can market in the US is currently flatbut we see numerous opportunities to expand through the introduction of fastergrowth products, such as non-standard can sizes, and we shall continue theconversion of capacity at some of our plants to exploit this. We anticipate that Rexam will deliver its usual levels of efficiencies. Goodvolume and mix improvements, along with some price increases, are expected tolargely offset cost inflation. With a sound and proven strategy, committedemployees and a strong management team led by our Chief Executive, Lars Emilson,we look forward to further progress in 2005. Rolf BorjessonChairman 25 February 2005 OPERATING AND FINANCIAL REVIEW2004 PERFORMANCE The summary Group profit and loss accounts for 2004 and 2003 are set out below: Underlying business Goodwill Exceptional Total performance+ amortisation items statutory £m £m £m £m2004Sales including associates 3,145 3,145Sales of associates - (64)Sales 3,145 3,081Operating profit including 391 (75) (16) 300associatesDisposal of businesses - - (14) (14)Interest (65) - - (65)Profit before tax and retirementbenefits net finance cost 326 (75) (30) 221Retirement benefits net finance cost (26) - - (26)Profit before tax 300 (75) (30) 195Profit after tax 215 (75) (19) 121 Basic earnings per share (p) 21.0Diluted earnings per share (p) 20.8Underlying earnings per share (p):- Before retirement benefits net 41.1finance cost- Including retirement benefits net finance cost 38.2 Dividends per share (p) 17.25 2003 - restated*Sales including associates 3,186 3,186Sales of associates - (74)Sales 3,186 3,112Operating profit including 344 (70) (59) 215associatesDisposal of businesses - - (107) (107)Interest (73) - - (73)Profit before tax and retirementbenefits net finance cost 271 (70) (166) 35Retirement benefits net finance cost (32) - - (32)Profit before tax 239 (70) (166) 3Profit/(loss) after tax 174 (70) (145) (41) Basic earnings per share (p) (9.5)Diluted earnings per share (p) (9.5)Underlying earnings per share (p):- Before retirement benefits net 38.1finance cost- Including retirement benefits net finance cost 33.8Dividends per share (p) 16.4 * The results for 2003 have been restated following the adoption ofUITF38 "Accounting for ESOP Trusts". The background to, and impact of thisrestatement is set out in the Notes to the preliminary statement. + Underlying business performance is the primary performance measureused by management. Management believes that exclusion of goodwillamortisation and exceptional items aids comparison of underlying performance. Highlights of the Group performance over the last four years are shown in theAppendix. The discussion of the results set out in the sections of this review of 2004Performance, Sector Performance, Retirement Benefits, Interest and Tax is basedon the first column of the above tables, "Underlying business performance". Itis felt that by adjusting for exceptional items and goodwill amortisation, theunderlying figures provide a better indication of the Group's performance.During the period of transition from SSAP24 to FRS17, underlying profit alsoexcluded the retirement benefits net finance cost. Although this distinction isno longer considered necessary, it is shown below for comparison purposes. Itis also considered for comparison that sales should include sales of associates.A summary of underlying business performance is set out below. 2003 2004 restated* Change £m £m %Ongoing operations 3,124 2,999 +4Disposals and discontinued 21 187Sales including associates 3,145 3,186 -1Ongoing operations 389 329 +18Disposals and discontinued 2 15Underlying operating profit 391 344 +14Interest (65) (73) +11Underlying profit before tax and retirementbenefits net finance cost 326 271 +20 Retirement benefits net finance cost (26) (32) +19Underlying profit before tax 300 239 +26Underlying profit after tax 215 174 +24 Underlying earnings per share (p):- Before retirement benefits net finance cost 41.1 38.1 +8- Including retirement benefits net finance cost 38.2 33.8 +13 * Restated for UITF38 "Accounting for ESOP Trusts" Sales including associates and underlying operating profit benefited fromacquisitions, mainly in Beverage Packaging, completed in 2003 and 2004.Synergies following integration as well as the improved performance of existingbusinesses also had a positive effect. These benefits were offset by the impactof currency fluctuations, predominantly due to the weaker US dollar, and thedisposal of businesses, primarily the Healthcare Flexibles Sector in October2003. The following tables, showing sales and underlying operating profit, compare ona consistent basis the ongoing Consumer Packaging segments. This basis excludesdisposals and discontinued businesses but includes prior year acquisitions as ifacquired on 1 January 2003, by adding their pre-acquisition results (shown as "Acquisitions 2003"). It also highlights currency fluctuations arising ontranslation. Analysis of sales movement Consumer Packaging Total Beverage Plastic £m £m £mSales including associates reported 2003 3,186Disposals 2003 and 2004 (187)Consumer Packaging 2003 reported in 2004 2,999 2,503 496Acquisitions 2003 235 203 32Currency fluctuations (198) (168) (30)Consumer Packaging 2003 pro forma basis 3,036 2,538 498 Acquisitions 2004 39 28 11Organic sales growth 49 31 18 Consumer Packaging reported 2004 3,124 2,597 527 Disposals 2004 21 Sales including associates reported 2004 3,145 Organic sales growth was £49m, an increase of just under 2%. This includessales from associates but excludes the effect of currency fluctuations and theimpact of acquisitions and disposals. This growth was achieved through acombination of price increases, favourable mix and volume improvements. Theimpact of the German deposit legislation on sales was approximately £40m year onyear. Adjusting for this, organic sales growth was about 3%, which is slightlybelow long term expectations, due largely to the poor summer in parts of Europe. Analysis of underlying operating profit movement Consumer Packaging Total Beverage Plastic £m £m £mUnderlying operating profit 2003 - restated 344Disposals 2003 and 2004 (15)Consumer Packaging 2003 reported in 2004 329 275 54Acquisitions 2003 37 32 5Currency fluctuations (26) (22) (4)Consumer Packaging 2003 pro forma basis 340 285 55Acquisitions 2004 5 3 2Organic operating profit growth 44 30 14Consumer Packaging reported 2004 389 318 71 Disposals 2004 2Underlying operating profit reported 2004 391 Analysis of the improvement in operatingprofit:Price changes 15 20 (5)Cost changes (16) (15) (1)Price and cost changes (1) 5 (6)Volume/mix changes (1) (11) 10Efficiency and other savings 46 36 10 44 30 14 The organic growth in underlying operating profit, after taking into accountacquisitions, disposals and currency movements, was £44m (13%), primarily as aresult of efficiency savings, with price rises largely offsetting inflationarycost increases. The efficiency savings include £11m (US $20m) of synergiesrealised on the integration of the South American beverage can operations. Theprincipal volume reduction was £5m in respect of the German beverage businessesand the remainder due mainly to softer volumes in some parts of Europe includingthe UK flavoured alcoholic beverage market for glass. In respect of Latasa, the "Acquisitions 2003" adjustment includes the benefitderived from fair value adjustments made on acquisition. That benefit was £10mand related mainly to lower depreciation. Managing input costs The annual expenditure on aluminium, by far the largest raw material costincurred by the Group, is approximately £950m. In the US, Rexam's majorcustomers agree the cost of aluminium in advance with their suppliers andtherefore Rexam is largely unaffected by changes in the cost of this commodity.In Europe, both aluminium and the associated US dollar/euro currencyrequirements are hedged, such that input costs are fixed in euros, Rexam'sprincipal transaction currency in Europe. The three year hedging profile issuch that the Group will not be significantly affected by changes in aluminiumprices or the US dollar/euro exchange rates over the next two years. TheEuropean beverage can business also spends about £75m per annum on steel. Thisexpenditure is largely covered by long term contracts, of which about 20% arerenegotiated each year. The annual expenditure on resins by Rexam's Plastic Packaging businesses amountsto £75m. On a large number of sales contracts, any resin price changes arepassed on to customers, although there may be a short time lag before they areimplemented. The Group also spends about £100m each year on energy, the largestpart of which is by the glass business. Historically, Rexam has been able toobtain price increases at regular intervals to compensate for increases inenergy prices and other costs. EXCHANGE RATES The principal exchange rates used in the preparation of the accounts are: 2004 2004 2003 2003 Average Closing Average ClosingUS dollar 1.83 1.93 1.63 1.77Euro 1.47 1.42 1.45 1.42 Profit and loss account The principal currencies that affect Rexam's results are the US dollar, whichweakened significantly against sterling during the year, and the euro, which wasmarginally weaker. The net effect of currency caused sales including associates and underlyingoperating profits to be reduced by £198m and £26m respectively, compared withthe previous year. The effect of purchasing aluminium which is denominated inUS dollars, for products sold in Europe, was minimal as much of the exposure ishedged. The movement in exchange rates had the following impact on the translation intosterling for reporting sales, underlying operating profit and profit before taxin 2004: Sales Underlying Underlying including operating profit associates profit before tax £m £m £mUS dollar (170) (22) (17)Euro (13) (2) (1)Other currencies (15) (2) (2) (198) (26) (20) Looking forward into 2005, it has been assumed that the US dollar will remainweak. Because of the hedging policies adopted by the Group for aluminiumpurchases and interest payments, the impact of recent movements in the US dollarexchange rate is not likely to have a material transaction impact on profit in2005. The proportion of the Group's sales and profit earned by subsidiariesreporting in US dollars has increased with the acquisition of Latasa. Theprecise impact of changing exchange rates on translation into sterling cannot beascertained until the average exchange rates for 2005 have been calculated.However, based on the 2004 results, it is estimated, for example, that a 10 centchange in the principal currencies would have the following impact: Sales Underlying Underlying including operating profit associates profit before tax £m £m £mUS dollar 80 12 10 Euro 65 9 7 Balance sheet Most of the Group's borrowings are denominated in US dollars and euros.Currency movements in the year have reduced net borrowings by £46m; this isalmost entirely due to the weakness of the US dollar. Changes in exchange rateshave also reduced net equity by a modest £8m, as shown in the statement of totalrecognised gains and losses. SECTOR PERFORMANCE Segment analysis All the disposals, businesses for sale and discontinued operations are groupedtogether under disposals. Profit before interest and retirement Sales Underlying benefits including operating profit Return net finance associates £m on sales cost2004 £m % £mBeverage Packaging 2,597 318 12.2 250Plastic Packaging 527 71 13.5 48Consumer Packaging 3,124 389 12.5 298Disposals 21 2 (12) 3,145 391 12.4 286 2003Beverage Packaging 2,503 275 11.0 165Plastic Packaging 496 54 10.9 35Consumer Packaging 2,999 329 11.0 200Disposals 187 15 (92) 3,186 344 10.8 108 The improvement in margins to 12.5% for Consumer Packaging in 2004, up from11.0% in 2003, represents another excellent performance by the Group this year.The following table shows the sustained progress achieved over the last fourhalf years for Consumer Packaging. Sales Underlying including operating Return on associates profit sales £m £m %First half 2003 1,478 156 10.6Second half 2003 1,521 173 11.4First half 2004 1,555 181 11.6Second half 2004 1,569 208 13.3 The fair value adjustments in respect of Latasa, as discussed previously, werefinalised and recorded in the second half of 2004. Consequently, the reportedprofit for the first half should be increased, on an underlying basis, by £4mand that for the second half year reduced by the same amount. Reflecting thisadjustment the return on sales for the first half of 2004 was 11.9% and for thesecond half, 13.0%. Beverage Packaging 2004 2003Sales including associates (£m) 2,597 2,503Underlying operating profit (£m) 318 275Return on sales (%) 12.2 11.0 Overall, Beverage Packaging turned in a solid performance. The beverage canbusiness in the Americas improved on the prior year, although the benefits weresomewhat diluted by currency translation. In the US beverage can business,volumes were just below last year, due to weaker demand in the latter part ofthe year. However, sales revenues, at constant currency, were 6% up, largelydue to the pass through of raw material costs and a positive mix effect. Theintegration of the South American beverage can operations has progressed welland indications are that, by the end of 2006, total annual synergies will exceedUS$30m, at least US$10m higher than anticipated when the deal was announced. Ona combined basis and at constant currency, the operating profit of the wholeSouth American can business is approximately £28m (65%) ahead of last year onsales that were £25m (10%) higher. This profit improvement includes £7m of costreductions, following plant closures in 2003 and 2004, and £11m of synergysavings. The European beverage can business grew by approximately 4% excluding Germany.There was solid growth in soft drinks across most major markets as well as anincrease in slim cans. This helped compensate for Germany where there was norecovery. Additional capacity for slim cans has been added and will beavailable in the latter part of 2005. The glass business performed well and benefited from the two acquisitions madein early 2004. The closure of a furnace and associated production lines inGermany together with a production line closure in Denmark have balancedcapacity in the Northern European market. The one-off cash costs, recorded inexceptional items, associated with these closures and that of the Brazilianplant in 2004, discussed above, were £5m. Plastic Packaging 2004 2003Sales including associates (£m) 527 496Underlying operating profit (£m) 71 54Return on sales (%) 13.5 10.9 Plastic Packaging sustained the improvement reported in 2003, with substantialincreases in sales including associates, underlying operating profit andmargins. The general buoyancy in the beauty businesses was complemented by theaddition of the higher margin pharmaceutical packaging businesses, Risdon Pharmain 2003 and Plastic Omnium Medical in 2004. In June 2004, it was decided toclose the plant in Torrington, US, to maintain competitiveness in the make-upbusiness. Also, in October 2004 the closure of the plastic containers plant inYstad, Sweden was implemented in response to declining volumes in the Nordicfood market. The cash cost of these closures is £4m and is included inexceptional items. The Petainer refillable plastic bottles business continuedto benefit from the demand for its products following the implementation of theGerman deposit system on one-way packaging. RETIREMENT BENEFITS The movement in provisions for retirement benefits is set out in Note 3 on page32. The analysis of the retirement benefits net finance cost is as follows: 2004 2003 £m £mDefined benefit pension schemes:Expected return on scheme assets 124 125 Interest on scheme liabilities (135) (138) (11) (13)Retiree medical interest on liabilities (15) (19)Net finance cost (26) (32) Changes to the actuarial value of retirement benefits at the balance sheet dateare shown in the statement of total recognised gains and losses. These changesreduced shareholders' funds by £61m as follows: £m £mDefined benefit schemes:Scheme assets - returns higher than expected 60Scheme liabilities - experience gains 9Scheme liabilities - lower discount rates (146) (77)Retiree medical:Scheme liabilities - experience losses (6)Scheme liabilities - lower discount rates (7) (13)Actuarial changes before tax (90)Tax 29Actuarial changes after tax (61) The total cash payments in respect of retirement benefits are as follows: 2004 2003 £m £m Defined benefit pension schemes 23 16Other pension schemes 4 4Retiree medical 20 23 47 43Exceptional payment - 10Total cash payments 47 53 Cash payments to defined benefit pension schemes increased as a result of ahigher rate of contribution to the UK scheme. The exceptional payment in 2003was in respect of a defined benefit arrangement, which requires assets to bemaintained at a fixed percentage of liabilities. Based on current actuarialprojections, we expect cash contributions to defined benefit pension schemes tocontinue to increase, rising by approximately £5m in 2005 and again by a similaramount in 2006. INTEREST Interest charged in the year was £65m, which was a substantial reduction from2003 when the charge was £73m. This results from lower borrowings, followingthe success of the disposal programme, as well as lower short term interestrates following the refinancing arranged in April 2004. Currently around 54% ofnet borrowings are at fixed rates and 46% at floating rates. The averageinterest rate during the year was 5.3% (2003: 5.8%). Interest cover improved sharply to 6 times operating profit (before goodwillamortisation and exceptional items) which is comfortably above the Group's longterm parameter to maintain interest cover above 4 times. TAX The tax charge for the year was £85m (28%) on profit after retirement benefitsnet finance cost before goodwill amortisation and exceptional items (2003restated: £65m (27%)). It is currently anticipated that the percentage chargewill be around 30% in 2005 following adoption of International FinancialReporting Standards. In subsequent years it is likely to continue to rise inline with tax rates in the regions in which the Group operates. Tax payments in the year were £54m (64% of the profit and loss account taxcharge) compared with £39m (60%) last year. Payments in 2003 and 2004 werereduced by repayments received, following settlement of prior year taxassessments, and by the utilisation of tax losses. It is expected that the cashtax paid in future years will rise to between 75% and 80% of the profit and lossaccount tax charge as tax losses are used up. EARNINGS/(LOSS) PER SHARE The basic earnings per share for the Group was 21.0p per share (2003: loss of9.5p). This includes goodwill amortisation and the exceptional profits andlosses arising from restructuring, asset impairment and the sale of businesses.Underlying earnings per share before retirement benefits net finance costincreased from 38.1p to 41.1p, an increase of 8%. Including the retirementbenefits net finance cost, earnings per share is up from 33.8p in 2003 to 38.2pin 2004, an increase of 13%. These increases in underlying earnings per sharewere achieved even though the tax rate has increased and the average number ofshares in issue is higher by 10%, following the 2003 Rights Issue made inconjunction with the acquisition of Latasa. 2004 2003 Change pence pence % Basic earnings/(loss) per share 21.0 (9.5)Underlying earnings per share:- Before retirement benefits net finance cost 41.1 38.1 +8- Including retirement benefits net finance cost 38.2 33.8 +13 Average number of shares (millions) 547 496 +10 EXCEPTIONAL ITEMS There were a number of exceptional items during 2004. £m £m Restructuring costs (18)Fixed asset impairments (5)Retiree medical and other 7Charged to operating profit (16)Loss on businesses sold (3)Attributable goodwill in reserves written off (11)Disposal of businesses (14)Total exceptional items before tax (30)Tax 11Total exceptional items after tax (19) The principal restructuring cost related to the closure of the US make-upfacility in Torrington. Included in fixed asset impairments is £8m ofattributable goodwill arising on its acquisition in 1996. Further costs wereincurred on the closure of the Swedish plastic container facility at Ystad. Inaddition, reorganisation costs arose in Beverage Packaging following theintegration of recent acquisitions together with capacity reductions in theGerman beverage can and northern European glass businesses. These costs wereoffset by the write back of £5m in respect of goodwill impairment, recorded in2003, arising on the acquisition of Nacanco GmbH. This write back was aconsequence of the utilisation of assets to support the investment in slim cancapacity, which has underpinned the value of the assets acquired for the relatedbusiness at Gelsenkirchen, and revisions to the provisional fair valueadjustments. During the year the Group negotiated revisions to its obligations in respect ofretiree medical benefits for certain current employees, which reducedliabilities by £11m. The loss on disposal of businesses relates primarily tothe sale of four European non-core thin wall plastics businesses, including £11mof attributable goodwill arising on their acquisition in 1992. DIVIDEND AND DIVIDEND POLICY This year the Board is recommending a final dividend of 10.09p per sharebringing the total dividend for the year to 17.25p per share, an improvement of5.2%. This is in line with Rexam's ongoing policy to increase the dividendpayout by about 5% per annum on the assumption that the financial resources areavailable and that earnings growth continues as expected. CASH FLOW Free cash flow was an inflow of £226m compared with £212m in 2003. This 7%increase is largely due to an improvement in working capital, particularly onreceivables. 2003 2004 restated* £m £mCash flow from operating activities before changein working capital 526 517Change in working capital (7) (26)Cash flow from operating activities 519 491Capital expenditure (net) (175) (159)Purchase of fixed asset investments - (10)Interest, non equity and associate dividends and tax (118) (110)Free cash flow 226 212 Equity dividends (92) (76)Business cash flow 134 136 Acquisitions** (100) (428)Disposals*** 13 192Cash flow including borrowings acquired and disposed 47 (100)Exchange fluctuations 46 (15)Amortisation and payment of financing fees (1) (3)Share capital changes (net of costs) 8 307Purchase of Rexam shares by ESOP trust - (3)Net borrowings at the beginning of the year (1,169) (1,355)Net borrowings at the end of the year (1,069) (1,169) * Restated for UITF38 "Accounting for ESOP Trusts" ** Includes net borrowings acquired of £42m (2003: £176m) *** Includes net borrowings disposed of £3m (2003: £36m) and repayment ofloan to associate of £1m in 2003. CAPITAL EXPENDITURE Capital expenditure was £183m, just above depreciation. It is anticipated thatcapital expenditure in 2005 will be within the range 1.00 to 1.20 timesdepreciation, depending on the timing of projects. This follows two years ofrelative restraint in response to the need to balance capacity with demand in anumber of business areas and reflects an increased number of growthopportunities. 2004 2003 Capital expenditure (gross) (£m) 183 165Depreciation (£m) 178 171Ratio (times) 1.03 0.96 Acquisitions and disposals Expenditure on acquisitions, including borrowings assumed, totalled £100m as setout below: £m Glas Moerdijk 29Latasa minority interest 21Plastic Omnium Medical 21VanCan 14Polglass 11Other, including investment in joint venture 4 100 The principal transactions were in Beverage Packaging. They include thecompletion of the tender offer for the 11% minority interest in Latasa in May2004, the purchase in the first quarter of two European glass businesses in theNetherlands and Poland and the acquisition in October 2004 of the remaining 50%of the Mexican joint venture, VanCan. The acquisition in April 2004 of PlasticOmnium Medical, based in France, strengthened Rexam's position in the plasticpharmaceutical packaging market. The main disposal was four European non-core thin wall plastics businesses for£15m, including borrowings disposed. BALANCE SHEET AND BORROWINGS 2003 2004 restated* £m £m Intangible fixed assets 1,185 1,195Retirement benefits net of deferred tax (532) (496)Other net assets 1,202 1,293 1,855 1,992 Shareholders' funds 786 804Minority interests - 19Net borrowings 1,069 1,169 1,855 1,992 Return on invested capital (%) ** 15 13Interest cover (times) *** 6.0 4.7Gearing (%) 136 142 * Restated for UITF38 "Accounting for ESOP Trusts" ** Underlying operating profit divided by the average of opening andclosing of each of net borrowings, shareholders' funds and minority interestsafter adding back retirement benefits (net of deferred tax) and goodwillpreviously written off against reserves. *** Based on underlying operating profit Net borrowings have reduced by £100m since 31 December 2003 to £1,069m. Thisreflects strong business cash flows and favourable currency movements, offset byexpenditure on acquisitions. Shareholders' funds have reduced by £18m, duemainly to unfavourable changes in actuarial values of retirement benefitsdiscussed above. The return on invested capital continues to exceed the 12% perannum weighted average cost of capital that the Group is currently usinginternally. In April 2004 a £875m five-year revolving credit facility was signed, replacinga €1.4bn facility that was due to mature in April 2005. The new facilityreduced borrowing margins and enhanced the maturity profile of the Group's debt. INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS) The Group will be adopting IFRS with effect from 1 January 2005 and consequentlywill restate its UK GAAP financial statements for 2004. The detailed programmeto effect a smooth transition to IFRS is well advanced. It has addressed notonly the financial effect but also the impact on systems, people and processes. A detailed presentation on the impact of IFRS on the Group was made toinstitutional investors and financial analysts in December 2004. A copy of thispresentation is available on the website, www.rexam.com. The most significantfactors impacting the Group's financial statements include the cessation ofgoodwill amortisation, deferred tax asset recognition, share based payment, thevaluation of retirement benefits, the treatment of convertible preference sharesand the valuation of derivative financial instruments. The underlying profitand earnings per share for 2004 under IFRS are not expected to be significantlydifferent to those reported under UK GAAP. The Group expects to publish its 2004 half year and full year results restatedunder IFRS early in the second quarter of 2005. SUMMARY The 26% increase in underlying profit before tax and 13% increase in underlyingEPS, supported by a 7% increase in free cash flow, demonstrates Rexam's abilityto continue delivering improved results. The integration of Latasa, as well asthe other acquisitions made in the year, is progressing well and the improvementin Plastic Packaging margins reflects the increased focus on the more valueadded businesses in this segment. Lars EmilsonChief Executive Graham ChipchaseFinance Director 25 February 2005 APPENDIX HISTORIC PERFORMANCE The following table shows the Group's historic performance before goodwillamortisation and exceptional items. 2004 2003* 2002 2001 Sales including associates (£m) 3,145 3,186 3,160 3,488Underlying operating profit (£m) 391 344 320 333Underlying profit before tax (£m) 300 239 226 218Underlying earnings per share (p) 38.2 33.8 34.3 33.8** * Restated for UITF38 "Accounting for ESOP Trusts"** Restated for the 2003 Rights Issue Much of the increased profitability has resulted from acquisitions, principallyPLM, ANC and Latasa, price rises in the North American beverage can business andfrom efficiency programmes that have been implemented throughout the Sectors.Over the past five years the Group has achieved strong cash flows, reduced netborrowings and has returned substantial funds to shareholders by way ofdividends. Free Ordinary Business Dividends cash flow dividends cash flow* per share £m £m £m pence 2000 105 (59) 46 14.12001 200 (60) 140 14.92002 176 (70) 106 15.62003** 212 (76) 136 16.42004 226 (92) 134 17.25 919 (357) 562 * Before acquisitions and disposals** Restated for UITF38 "Accounting for ESOP Trusts" CONSOLIDATED PROFIT AND LOSS ACCOUNT For the year ended 31 December 2004 Underlying Exceptional business Goodwill items Total amortisation performance (Note 4) statutory £m £m £m £mTurnover (Note 2) Continuing operations excluding 3,106 - - 3,106acquisitions Acquisitions 39 - - 39 Turnover including associates 3,145 - - 3,145 Turnover of associates - continuing (64) - - (64)operations Group turnover 3,081 - - 3,081 Operating expenses Continuing operations (2,662) (75) (16) (2,753) Acquisitions (34) - - (34) (2,696) (75) (16) (2,787) Operating profit (Note 2) Continuing operations excluding 380 (75) (16) 289acquisitions Acquisitions 5 - - 5 Operating profit before share of profits of 385 (75) (16) 294associates Share of profits of associates 6 - - 6 Operating profit including share of profits 391 (75) (16) 300of associates Disposal of businesses - - (14) (14) Profit on ordinary activities beforeinterest and retirement benefits netfinance cost 391 (75) (30) 286 Interest (65) - - (65) Profit on ordinary activities beforeretirement benefits net finance cost 326 (75) (30) 221 Retirement benefits net finance cost (Note (26) - - (26)3) Profit on ordinary activities before tax 300 (75) (30) 195 Tax on ordinary activities (95) - 15 (80) Tax on retirement benefits net finance costand retirement benefits exceptional item 10 - (4) 6 Profit on ordinary activities after tax 215 (75) (19) 121 Equity minority interests (1) Profit for the financial year 120 Preference dividends on non equity shares (5) Profit attributable to ordinary 115shareholders Ordinary dividends on equity shares (95) Retained profit for the financial year 20 Earnings per ordinary share (pence) (Note 6) Basic 21.0Related Shares:
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