25th Aug 2005 07:01
Rexam PLC25 August 2005 Part 1 Rexam on track for another good year Rexam PLC, the global consumer packaging group and the world's No 1 beverage canmaker, announces its results for the half year to 30 June 2005, in accordancewith International Financial Reporting Standards (IFRS). Underlying performance 1 2005 2004 IncreaseSales from ongoing operations 2 £1,538m £1,480m +4%Underlying operating profit from ongoing £194m £184m +5%operations 2Underlying profit before tax 3 £143m* £135m +6%Underlying earnings per share 18.2p 17.4p +5%*Includes £2m positive impact of IAS39 derivative market value changes Highlights • Strong performance from Beverage Cans, with underlying operating profit improving 8% to £143m • Consumer Packaging margins increase to 12.6% • Strong free cash flow at £37m, ahead of first half 2004 by £32m • David Robbie announced as Group Finance Director in succession to Graham Chipchase Rolf Borjesson, Rexam's Chairman, commented:"Rexam had a good first six months of 2005, with both sales and profitsadvancing. We continue to reap the benefits of our focus on cost and efficiency.Margins improved and cash generation was substantially ahead of the same periodlast year. The second half has started positively and we are on track foranother good year in 2005." 25 August 2005 Statutory results 4 2005 2004Operating profit £167m £180mProfit before tax £114m £133mBasic earnings per share 12.3p 16.3pDividends per share 7.52p 7.16p Notes1 Underlying performance is before disposals and other exceptional items.2 Ongoing operations (Consumer Packaging) reflects underlying performance excluding businesses that have been discontinued, disposed or are 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 For statutory results, profits and earnings include disposals and other exceptional items. Enquiries Rexam PLC 020 7227 4100Lars Emilson, Chief ExecutiveGraham Chipchase, Group Finance Director/Group Director Plastic PackagingAndrew 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. INTERIM STATEMENT Rexam had a good first six months of 2005, building on the good growth achievedin 2004. Sales from ongoing operations advanced 4% with underlying profit beforetax up by 6% at £143m. Excluding the £2m positive impact of market value changeson derivatives under IAS39, underlying profit before tax improved by £6m to£141m. This was driven in particular by focusing on efficiency and cost savings.Underlying earnings per share rose 5% to 18.2p. Margins held firm and cash flowgeneration was again positive and substantially ahead of the same period lastyear. Foreign exchange did not have as large an impact as last year. The net effect ofmovements in our two main currencies, the US dollar and the euro, reduced salesand underlying operating profit by £8m and £1m respectively. On a statutory basis, sales, including the effect of acquisitions, disposedbusinesses and currency, were up 2%. On this basis, profit before tax (includingdisposals and other exceptional items) fell by £19m to £114m, primarily due todisposals and other exceptional items. There were pre-tax exceptional costs of£29m, mainly arising from the disposal of businesses. The resulting basicearnings per share was 12.3p compared with 16.3p in the previous year. Beverage cansOur global beverage can sales grew by 4%, with underlying operating profit up 8%to £143m and margins increasing slightly. Our continued active management ofinput costs, principally aluminium, through the use of pass through contractsand hedging has meant that our results have not been materially affected by thehigher input cost of raw materials. During the period, we identifiedopportunities for further efficiency savings across our global can makingoperations and put in place plans to ensure that we capture their full value. In the Americas, sales of beverage cans were ahead by 8%, predominantly owing tothe pass through of increased aluminium costs. Further contribution came fromthe 2004 acquisition of the joint venture in Mexico, continued strong growth innon standard beverage cans in the US, as well as improved volumes in SouthAmerica. Rexam will establish a new plant in Cuiaba, in the state of Mato Grosso inwestern central Brazil, to meet increased demand. The region has the fastestgrowing GDP levels in Brazil and, with a geographically dispersed population ofnearly 13m people, the can is regarded as the optimal packaging solution forbeverage distribution. In Europe, our beverage can sales were down slightly but have picked up stronglysince April. We benefited from the further advances in the energy drinks sector,where we are the leading supplier, and recently manufactured our ten billionthcan for Red Bull. The Gelsenkirchen plant in Germany is now on stream, followingits conversion to slim can production, and is helping to satisfy the growingglobal demand for this category-defining product. European operating profit grewby 5%, benefiting from efficiency savings. We are encouraged by the progress being made in the preparations for the May2006 introduction of nationwide collection and clearing systems for one-waypackaging in Germany. Drawing on our experience of establishing similar systemsin other countries, we remain closely involved with all stakeholders to supportthe successful re-launch of the beverage can in that market. We remain confidentthat beverage cans, primarily for beer, will return in numbers to thesupermarket shelves. GlassExcluding the impact of the divested UK business, sales in the first six monthsrose 4%, mainly owing to last year's acquisitions, while underlying operatingprofit improved by 13% to £17m. The plants acquired during 2004 in theNetherlands and Poland have been integrated according to plan, further cementingour relationship with one of our key customers, Heineken. During the period wemoved the headquarters of the business from the UK to Germany, which forms thebase of our glass operation. Plastic PackagingPlastic Packaging includes our beauty and pharmaceutical packaging along withour businesses for closures and for food and beverage plastics. Further top linegrowth in the beauty and pharmaceutical packaging area was offset by a weakperformance in our beverage plastics operation as the demand slowed forrefillable plastic bottles in our main market, Germany. Although PlasticPackaging grew sales overall by 5% to £284m, underlying operating profit was£34m compared with £36m for the equivalent period last year. DisposalsIn May, we divested our UK glass business to Ardagh Glass for a cashconsideration net of costs of £49m. The UK glass market is facing a difficultoutlook with new capacity coming on stream and we felt that, as a single siteoperation and the number three market player, we were not best positioned inthis local market. Having considered all options, we decided that divestment wasthe best course of action. We remain firmly committed to glass, continuing tofocus on developing our business in northern continental Europe where we have asolid market position and in the fast growing markets in Eastern Europe. Thesale of the business incurred an exceptional loss of £24m, before tax. Cash flowOur free cash flow improved by £32m to £37m and net borrowings were £1,125m withinterest cover at 5.6 times which is well ahead of our target of above 4 times. DividendsThe Board has approved an interim dividend of 7.52p per ordinary share, anincrease of 5% on last year. The dividend will be paid on 1 November 2005 toholders of ordinary shares registered on14 October 2005. Changes to the BoardIn July, Graham Chipchase, Group Finance Director since March 2003, wasappointed Group Director Plastic Packaging on the retirement from the Board ofYves Dominioni who has led the beauty and pharmaceutical packaging businesssuccessfully for ten years. We are pleased to welcome David Robbie as Graham'ssuccessor. David, who is 42, joins us from P&O Nedlloyd where he has been ChiefFinancial Officer and a member of the Board since 2004. His previous positionsinclude Chief Financial Officer of CMG, where he was instrumental in deliveringthe merger of Logica and CMG, and Vice President Finance at Invensys. OutlookRexam remains committed to its strategy of building on its leadership positionsin the global consumer packaging market by supplementing organic growth withacquisitions. The second half of 2005 has started positively. We are on track to deliver ourusual level of efficiencies and to offset cost inflation through volume and miximprovements, along with some price increases. We therefore remain confidentthat we are well positioned for further progress in 2005. OPERATING AND FINANCIAL REVIEW 2005 PERFORMANCEThis is the first time Rexam has reported in accordance with InternationalFinancial Reporting Standards (IFRS). The impact of the transition from UK GAAPto IFRS was published in April 2005 and is shown in notes 7 to 12 of theseinterim consolidated financial statements, setting out the results for the sixmonth period to 30 June 2004, the full year to 31 December 2004 and including abalance sheet restatement as at 1 January 2005 incorporating IAS32 and IAS39.The basis of preparation of the interim consolidated financial statements is setout on page 20. The summary Group income statements for the six months to 30 June 2005 and to 30June 2004 under IFRS are set out below. 6 months to 30 June 2005: Underlying Disposals business and other performance+ exceptional Total £m items £m £m Sales 1,564 - 1,564 Operating profit 191 (24) 167Share of associates profit after tax 1 - 1Total net finance costs (49) (5) (54)Profit/(loss) before tax 143 (29) 114 Profit/(loss) after tax 100 (32) 68 Basic earnings per share (p) 12.3Underlying earnings per share (p) 18.2 Proposed dividend per ordinary share (p) 7.52 6 months to 30 June 2004: Sales 1,532 - 1,532 Operating profit 184 (4) 180Share of associates profit after tax 2 - 2Total net finance costs (48) (1) (49)Preference dividends* (3) - (3)Profit/(loss) before tax* 135 (5) 130 Profit/(loss) after tax* 96 (6) 90 Basic earnings per share (p) 16.3Underlying earnings per share (p) 17.4 Dividend per ordinary share (p) 7.16 Underlying business performance is the primary performance measure used by+ management, who believe that exclusion of disposals and other exceptional items aids comparison of underlying performance. Disposals and other exceptional items include the profit/loss on disposal of businesses and fixed assets, recognition of deferred tax assets on prior year acquisitions and exchange gains and losses arising on inter company funding. Underlying business performance in 2005 includes a net gain of £2m arising in the current period on market value changes on derivatives under IAS39.* 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 business performance in 2004 has been adjusted to include preference dividends. The discussion of the results set out in the sections of this review of 2005Performance, Sector Performance, Total Net Finance Costs and Tax is based on thefirst column of the above tables, "Underlying business performance". It is feltthat by adjusting for disposals and other exceptional items, the underlyingfigures provide a better indication of the Group's performance. The disposalsand other exceptional items are considered separately to provide the fullunderstanding of the statutory results. A summary of underlying business performance is set out below. 6 months to 6 months to 30.6.05 30.6.04 Increase £m £m % Ongoing operations 1,538 1,480 +4Disposed businesses 26 52Sales 1,564 1,532 Ongoing operations 194 184 +5Disposed businesses (3) -Underlying operating profit 191 184 +4Share of associates profit after tax 1 2Total net finance costs* (49) (51)**Underlying profit before tax 143 135 +6 Underlying profit after tax 100 96 +4 Underlying earnings per share (p) 18.2 17.4 +5 * Includes interest and retirement benefit obligations net finance cost.** As noted above, 2004 has been adjusted to include preference dividends. Sales and underlying operating profit benefited from acquisitions in BeverageCans, Glass and Pharmaceutical Packaging, completed in 2004. The impact ofcurrency translation was not significant in the first half year. The continuingfocus on cost and efficiency savings has ensured that underlying operatingprofit improved or was maintained despite the challenging pricing environmentfaced by some of our businesses. The exception was Plastic Containers wherefurther restructuring costs were incurred and the refillable plastic bottlebusiness faced a decline in volumes and lower prices. Excluding the £2m positiveimpact of IAS39 derivative market value changes arising in 2005, underlyingprofit before tax improved by £6m to £141m. The following tables, showing sales and underlying operating profit, compare ona consistent basis the ongoing Consumer Packaging segments. This basis excludesdisposals and discontinued businesses (described as "Disposed businesses") butincludes prior year acquisitions as if acquired on 1 January 2004, by addingtheir pre-acquisition results (described as "Acquisitions 2004"). It alsohighlights currency fluctuations arising on translation. Organic change is theyear on year change arising on businesses owned since the beginning of 2005. Analysis of sales movement Consumer Packaging Total Beverage Glass Beauty & Plastic £m Cans £m Pharma Containers £m £m £mSales reported 6 months to 30.6.04 1,532Disposed businesses 2004 and 2005 (52)Consumer Packaging 6 months 1,480 1,022 187 196 75to 30.6.04 reported in 2005Acquisitions 2004 28 19 4 5 -Currency fluctuations (8) (13) 6 (2) 1Consumer Packaging 6 months to 30.6.04 1,500 1,028 197 199 76pro forma basisOrganic sales change 38 31 (2) 8 1Consumer Packaging reported 6 months 1,538 1,059 195 207 77to 30.6.05Disposed businesses 2005 26Sales reported 6 months to 30.6.05 1,564 Organic sales growth, which excludes the impact of acquisitions, disposals andthe effects of currency translation, was £38m, an increase of 2.5%. Asubstantial part of this growth, £28m (1.9%), represents the recovery ofaluminium price increases in Beverage Cans, while the remainder is a combinationof favourable mix and volume changes. Analysis of underlying operating profit movement Consumer Packaging Total Beverage Glass Beauty & Plastic £m Cans £m Pharma Containers £m £m £mUnderlying operating profit 6 months 184to 30.6.04Disposed businesses 2004 and 2005 -Consumer Packaging 6 months to 30.6.04 184 133 15 27 9reported in 2005Acquisitions 2004 4 2 - 2 -Currency fluctuations (1) (2) 1 - -Consumer Packaging 6 months to 30.6.04 187 133 16 29 9pro forma basisOperating profit change 7 10 1 - (4)Consumer Packaging reported6 months to 30.6.05 194 143 17 29 5Disposed businesses 2005 (3)Underlying operating profit reported 6 191months to 30.6.05 Analysis of the improvement in operating profit Consumer Packaging Total Beverage Glass Beauty Plastic £m Cans £m & Containers £m Pharma £m £m 8 8 1 2 (3)Price changesCost changes (19) (14) (1) (2) (2)Price and cost changes (11) (6) - - (5)Volume/mix changes 3 6 (1) (2) -Efficiency and other savings 15 10 2 2 1 7 10 1 - (4) The growth in underlying operating profit, after taking into accountacquisitions, disposals and currency movements, was £7m (4%). This was mainlyattributable to efficiency savings. The principal volume reductions were inparts of the Beauty Packaging business in the Far East and in the harvestrelated food products business in Glass. Aluminium is the largest raw material cost incurred by the Group. In the US,Rexam's major customers agree the cost of aluminium in advance with theirsuppliers and therefore the Group is largely unaffected by changes in the costof this commodity. In Europe, both aluminium and the associated US dollar/eurocurrency requirements are hedged, such that input costs are fixed in euros, theprincipal transaction currency in Europe. The European beverage can businessexpenditure on steel is largely covered by long term contracts. For expenditure on resins, by the Plastic Packaging businesses, a large numberof sales contracts enable any resin price changes to be passed on to customers,although there may be a short time lag before they are implemented. The Grouphas also been able to obtain price increases at regular intervals to compensatefor increases in energy, principally affecting the Glass business, and othercosts. EXCHANGE RATESThe principal exchange rates used in the preparation of the interim consolidatedfinancial statements are set out on page 23. Income statementThe principal currencies that impact Rexam's results are the US dollar, whichweakened against sterling compared with the same period last year, and the euro,which was slightly stronger. The net effect of currency translation caused salesand underlying operating profit to be reduced by £8m and £1m respectively,compared with the previous year. The movement in exchange rates had thefollowing impact on the translation into sterling for sales, underlyingoperating profit and profit before tax reported in the first half of 2004: Sales Underlying Underlying £m operating profit profit before tax £m £mUS dollar (22) (3) (3)Euro 6 1 1Other currencies 8 1 1 (8) (1) (1) The effect of purchasing aluminium, which is priced in US dollars, for productssold in Europe, was minimal as most of the exposure was hedged. Balance sheetMost of the Group's borrowings are denominated in US dollars and euros. Currencymovements in the period reduced net borrowings by £35m, almost entirely due tothe strength of the US dollar offset by the weakness of the euro, when comparedwith the exchange rates ruling at 31 December 2004. Changes in exchange ratesalso reduced net equity by £27m, as shown in the consolidated statement ofchanges in equity. SECTOR PERFORMANCE Segment analysis All the disposals, businesses for sale and discontinued operations are groupedtogether under "Disposed businesses". Sales Underlying Return Operating £m operating on sales profit profit % £m £m2005:Beverage Cans 1,059 143 13.5 143Glass 195 17 8.7 17Beauty and Pharma 207 29 14.0 29Plastic Containers 77 5 6.5 5Consumer Packaging 1,538 194 12.6 194Disposed businesses 26 (3) (11.5) (27) 1,564 191 12.2 167 2004:Beverage Cans 1,022 133 13.0 135Glass 187 15 8.0 14Beauty and Pharma 196 27 13.8 25Plastic Containers 75 9 12.0 20Consumer Packaging 1,480 184 12.4 194Disposed businesses 52 - - (14) 1,532 184 12.0 180 The improvement in margins for Consumer Packaging to 12.6% in the first sixmonths of 2005 represents a solid performance by the Group. Beverage Cans 6 months 6 months to to 30.6.04 30.6.05Sales (£m) 1,059 1,022Underlying operating profit (£m) 143 133Return on sales (%) 13.5 13.0 Beverage Cans had a strong first half year, with reported sales and underlyingoperating profit up by 4% and 8% respectively compared with the same period lastyear. Reflected in the sales improvement is £28m due to the pass through tocustomers of increased aluminium costs. The North American business benefited from the acquisition, in October 2004, ofthe remaining 50% of the joint venture in Mexico, which increased sales by £19mand operating profit by £2m. Overall, North American can volumes are slightlybelow last year with the decline in standard can size volumes offset by growthin new can sizes. In the US market, the change in mix together with strict costcontrol compensated for the softness in volumes. In South America, the improved economic conditions, allied to beverage can gainsin share of the packaging mix, contributed to a successful first half year forbeverage can operations there, with can volumes up by 7%. The impact on costs ofthe weakening of the US dollar against local currencies tempered the improvementin profit on these higher sales. To take advantage of regional growthopportunities in Brazil, the construction of a new beverage can plant in Cuiaba,costing £7m, has been approved. The project will utilize equipment mothballed onthe closure of the Jacarei facility in 2004. In the Europe and Asia operations, overall sales volumes were 1% lower than theprevious year. There were areas of strong growth, especially in Eastern Europe,and sales of slim cans, particularly to Red Bull, remained strong. The businessis beginning to benefit from the conversion of the previously mothballedGelsenkirchen plant to slim can production. These gains offset lower volumes inthe UK, Scandinavia and Germany. Despite the softness in volumes, the Europeanand Asian businesses improved their profitability primarily as a result ofefficiency savings arising out of the restructuring conducted in 2004. The European Beverage Can operation is converting more capacity to aluminiumaway from steel in response to customer demands. It is anticipated that furtherinvestment will be necessary to prepare for the recovery in the German market asthe new deposit legislation comes into effect in mid 2006. Glass 6 months 6 months to to 30.6.04 30.6.05Sales (£m) 195 187Underlying operating profit (£m) 17 15Return on sales (%) 8.7 8.0 The increase in sales was due to the impact of the acquisitions in theNetherlands and Poland completed in 2004 and the effect of currency translation.Sales prices have shown a modest improvement compared with the equivalent periodlast year. Volumes have been somewhat lower in the food market, where sales aredependent on the timing of harvests. Overall, the return on sales has improvedslightly with savings realised from restructuring in 2004 covering costincreases. These figures exclude the results of the UK Glass business, which wassold for £49m, net of costs, in May 2005. Beauty and Pharma 6 months 6 months to to 30.6.04 30.6.05Sales (£m) 207 196Underlying operating profit (£m) 29 27Return on sales (%) 14.0 13.8 The Beauty and Pharmaceutical packaging operation delivered a robustperformance, with organic sales growth up by 4%, despite the higher cost ofoutsourced components in the Far East businesses. The results of thePharmaceutical Packaging businesses, increasing both sales and margins, and theUS Closures business were particularly pleasing. The Dispensing Systems businessproduced another solid performance, despite operating in difficult marketconditions. Plastic Containers 6 months 6 months to to 30.6.04 30.6.05Sales (£m) 77 75Underlying operating profit (£m) 5 9Return on sales (%) 6.5 12.0 Sales were up by 3% compared with the corresponding period last year,principally reflecting improvements in the Plastic Containers food businessesand the favourable impact of exchange translation. These benefits were offset byprice and dramatic volume reductions in Germany in the refillable plastic bottlebusiness, as fillers assessed the impact of the reform of the depositlegislation. This, along with further restructuring costs, principally relatingto a Plastic Containers food plant in Sweden, accounted for most of the fall inunderlying operating profit. TOTAL NET FINANCE COSTSUnderlying total net finance costs comprise: 6 months to 6 months to Year to 30.6.05 30.6.04 31.12.04 £m £m £mInterest excluding preference dividends 34 32 65Preference dividends 3 - -Derivative market value gains (2) - -Retirement benefit obligations net finance 14 16 32costTotal net finance costs as reported 49 48 97Preference dividends* 3 5Total net finance costs including 51 102preference dividends * 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 costs. InterestIn total, adjusting for derivative market value gains and preference dividends,net finance costs remained unchanged compared with the corresponding priorperiod. The average interest rate during the period was 5.7% compared with 5.1%in the corresponding period last year. Interest, excluding preference dividends,was higher primarily due to banks exercising options to cancel fixed to floatinterest rate swaps relating to the euro 550m medium term note and replacingthem with swaps at current rates. 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 costs excluding the charges in respect of retirementbenefit obligations and preference dividends. Derivative market value changesThe value of the financial derivatives directly relates to changes in interestrates, foreign exchange rates and commodity prices. In addition, their valuewill change as the transactions to which they relate mature, as new derivativesare transacted and due to the passage of time. The market value changes,included in net finance costs, for the six months to 30 June 2005 were a gain of£2m. RETIREMENT BENEFIT OBLIGATIONSThe analysis of the retirement benefit obligations net finance cost is asfollows: 6 months to 6 months to Year to 30.6.05 30.6.04 31.12.04 £m £m £mDefined benefit pension schemes:Expected return on scheme assets 62 59 119Interest on scheme liabilities (68) (67) (135) (6) (8) (16)Retiree medical interest on liabilities (8) (8) (16) (14) (16) (32) Changes to the actuarial value of retirement benefits at the balance sheet dateare shown in the statement of total recognised income and expense. These changesreduced equity by £60m in the six months to 30 June 2005, as follows: £mDefined benefit schemes:Scheme assets - returns higher than expected 57Scheme liabilities - principally lower discount rates (136) (79)Retiree medical - lower discount rates (9)Actuarial changes before tax (88)Tax 28Actuarial changes after tax (60) The total cash payments in respect of retirement benefit obligations were asfollows: 6 months to 6 months to Year to 30.6.05 30.6.04 31.12.04 £m £m £mDefined benefit pension schemes 11 12 23Other pension schemes 1 2 4Retiree medical 9 11 20 21 25 47 It is now expected, following the disposal of the UK Glass business, that cashcontributions for the full year to defined benefit pension schemes will besimilar to 2004 and that they will then rise by around £10m in 2006. A fullactuarial valuation of the UK Pension Plan will be carried out as at 6 April2005. This will then be used as a basis for determining the level of future UKcontributions. The principal assumptions in respect of retirement benefitobligations are set out on page 38. TAXThe tax charge for the six months to 30 June 2005 was £43m (30%) on profitbefore disposals and other exceptional items (2004: £39m (28%)). Tax payments in the first half of the year were £27m (63% of the incomestatement tax charge before disposals and other exceptional items) compared with£35m (90%) for the equivalent period last year. A number of territories makepayments on account based on prior year assessments; these payments were higherin 2004 than in the current year. It is anticipated that the full year 2005 taxpayments as a percentage of the income statement charge will be at a similarlevel to that at June 2005. However, it is expected that the cash tax paid infuture years will rise to between 70% and 80% of the income statement tax chargeas tax losses are exhausted. EARNINGS PER SHAREUnderlying earnings per share, before disposals and other exceptional items,increased from 17.4p to 18.2p, an increase of 5%. This increase in underlyingearnings per share was achieved despite an increase in the tax rate and a higheraverage number of shares in issue. The increase in underlying earnings per shareexcluding derivative market value changes arising in 2005 was 2%. The basic earnings per share for the six months to 30 June 2005 was 12.3p pershare (2004: 16.3p). This includes the exceptional profits and losses arisingfrom the sale of businesses, the recognition of deferred tax assets on prioryear acquisitions, and exchange gains and losses on inter company funding. 6 months to 6 months to Year to 30.6.05 30.6.04 31.12.04 Pence Pence PenceUnderlying earnings per share 18.2 17.4 37.5Basic earnings per share 12.3 16.3 36.8 Average number of shares (millions) 551 545 547 DISPOSALS AND OTHER EXCEPTIONAL ITEMSThe disposals and other exceptional items arising in the first half of 2005 wereas follows: £mLoss on disposal of businesses (24)Profit on disposal of land 3Recognition of deferred tax assets on prior year acquisitions (3)Total included in operating profit (24)Loss arising on inter company funding included in net finance cost (5)Total disposals and other exceptional items before tax (29)Tax (3)Total disposals and other exceptional items after tax (32) The loss on the disposal of businesses relates to the sale of the UK glassbusiness. The UK glass market is an over supplied market and is facing theadditional challenge of new capacity being introduced. In these circumstances itwas felt that, as Rexam was a single site operation and the number three player,divestment was the best option. The following accounting adjustments, arising out of the adoption of IFRS havebeen reported as exceptional items due to their size and transitory nature. Therecognition 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 prevailing assumptions as to future utilisation, at theacquisition date. Under IFRS, the subsequent recognition gives rise to areduction in goodwill and a corresponding charge to the income statement. Theexchange loss on inter company funding arises on loans between Group companieswhere the denominated currency of the loan is different to the functionalcurrency of the reporting entity. It is expected that the accounting guidancemay be changed in the future such that exchange differences relating to intercompany funding will be charged directly to shareholders' equity. DIVIDEND AND DIVIDEND POLICYThe Board has approved an interim dividend of 7.52p per ordinary share animprovement of 5% over the 7.16p per ordinary share for the equivalent periodlast year. 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. In accordance with IFRS, this dividend will be reported in the consolidatedstatement of changes in equity in the second half of 2005 when it is paid. CASH FLOWFree cash flow for the six months to 30 June 2005 was an inflow of £37m comparedwith £5m in the equivalent period in 2004. This is largely due to an improvementin working capital and lower tax payments. 6 months to 6 months to Year to 30.6.05 30.6.04 31.12.04 £m £m £mCash flow from operating activities before 264 249 529change in working capitalChange in working capital (90) (100) (11)Cash flow from operating activities 174 149 518Capital expenditure (net) (78) (78) (166)Net finance costs, preference dividends and (59) (66) (118)taxFree cash flow 37 5 234Equity dividends (56) (52) (92)Business cash flow (19) (47) 142Acquisitions* (1) (82) (100)Disposals** 49 15 13Cash flow including borrowings acquired and 29 (114) 55disposedExchange differences 35 60 48All other changes (24) 5 6Adoption of IAS32 and IAS39*** (97) - -Net borrowings at the beginning of the year (1,068) (1,177) (1,177)Net borrowings at the end of the period (1,125) (1,226) (1,068) * Includes net borrowings acquired of £nil (6 months to 30.6.04: £40m, year to 31.12.04: £45m).** Includes net borrowings disposed of £43m (6 months to 30.6.04: £3m, year to 31.12.04: £3m).*** Includes the liability element of convertible preference shares, interest accruals, fair value adjustments to medium term notes and financial derivatives other than the principal amounts of cross currency swaps. Capital expenditureCapital expenditure was £82m, just below depreciation and amortisation. It isanticipated that capital expenditure in the full year 2005 will be at a higherrate compared with depreciation and amortisation, depending on the timing ofprojects. This reflects continued restraint in response to the need to balancecapacity with demand in a number of business areas, whilst taking advantage ofgrowth opportunities as they arise. 6 months to 6 months to Year to 30.6.05 30.6.04 31.12.04Capital expenditure (gross) (£m) 82 81 174Depreciation and amortisation (£m) 87 87 178Ratio (times) 0.94 0.93 0.98 DisposalsThe business disposal was the UK glass business for £49m, including borrowingsdisposed and costs. ABRIDGED BALANCE SHEET As at As at As at 30.6.05 30.6.04 1.1.05 £m £m £mGoodwill and other intangible assets 1,285 1,277 1,292Retirement benefits net of tax (611) (444) (538)Other net assets 1,225 1,294 1,237 1,899 2,127 1,991 Shareholders' equity 774 900 826Minority interests - 1 -Net borrowings* 1,125 1,226 1,165 1,899 2,127 1,991 Return on invested capital (%) ** 14 14 15Interest cover (times) *** 5.6 5.8 6.0Gearing (%) **** 145 141 * Net borrowings comprise borrowings, the liability element of convertible preference shares, 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, shareholders' equity and minority interests after adding back retirement benefit obligations (net of deferred tax) and goodwill previously written off against equity under UK GAAP. Underlying operating profit and share of associates profit after tax are annualised by doubling the results for the six month periods.*** Based on underlying operating profit and net finance costs excluding retirement benefits net finance cost, derivative market value changes and preference dividends.**** Based on net borrowings divided by shareholders' equity. The balance sheet at 30.6.04 has not been restated for the adoption of IAS32 and IAS39, accordingly the gearing would not be comparable and has not been calculated. 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 As at 30.6.05 30.6.04 1.1.05 £m £m £mNet borrowings 1,202 1,305 1,291Derivative financial instruments (77) (79) (126)Net borrowings as reported 1,125 1,226 1,165Liability element of convertible preference (70)sharesDerivative financial instruments and other IFRS (26)adjustmentsAs reported under UK GAAP at 31 December 2004 1,069 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 30.6.05 1.1.05 £m £mCross currency swaps, including accrued interest 87 123Interest rate swaps (10) 3Derivative financial instruments included in net borrowings 77 126Other derivative financial instruments 2 9Total derivative financial instruments 79 135 SUMMARYRexam again delivered improved results, which were in line with ourexpectations. As a Group, we improved margins and the cash flow performance wasparticularly encouraging. We expect to be able to build on this performance aswe look forward to continued progress during the second half of the year. Lars EmilsonChief Executive Graham ChipchaseGroup Finance Director 25 August 2005 BASIS OF PREPARATION OF THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS The financial information set out on pages 22 to 58 comprises the interimconsolidated financial statements of Rexam PLC for the six months to 30 June2005 prepared in accordance with the accounting policies set out on pages 22 to29. From 1 January 2005, Rexam PLC is required to prepare consolidated financialstatements in accordance with accounting standards adopted for use in theEuropean Union (EU). Rexam PLC previously prepared consolidated financialstatements in accordance with UK GAAP until 31 December 2004. The adjustmentsrequired to restate previously reported UK GAAP comparative financialinformation onto an International Financial Reporting Standards (IFRS) basis areset out in notes 7 to 12 of the interim consolidated financial statements. At this interim stage, the full impact of reporting under IFRS as it will beapplied and reported in Rexam's first IFRS financial statements for the year to31 December 2005 may be subject to change for the following reasons:(a) As permitted, Rexam has adopted in these interim consolidated financial statements the amendment to IAS19 "Employee Benefits" published in December 2004. This accounting standard has not yet been formally endorsed by the EU, but is expected to be so by the end of 2005.(b) Standards currently in issue and adopted by the EU are subject to interpretation issued from time to time by the International Financial Reporting Interpretations Committee (IFRIC).(c) Further standards may be issued by the International Accounting Standards Board that will be adopted by the EU for financial years beginning on or after 1 January 2005.(d) Practice is continuing to evolve. There is not yet an overall body of established IFRS practice to draw on in forming opinions regarding interpretation and application. The rules for first time adoption of IFRS are set out in IFRS1, "First-timeAdoption of International Financial Reporting Standards". IFRS1 requires the useof the same accounting policies in the IFRS transition balance sheet and for allperiods presented thereafter. The accounting policies must comply with all IFRSeffective at the reporting date for the first financial reporting under IFRS. IFRS1 permits companies adopting IFRS for the first time to take certainexemptions from the full requirements of IFRS in the transition period. Theseinterim financial statements have been prepared on the basis of taking thefollowing exemptions.(a) Business combinations prior to 1 January 2004 have not been restated to comply with IFRS3 "Business Combinations".(b) All cumulative actuarial gains and losses with respect to employee benefits have been recognised in shareholders' equity at 1 January 2004.(c) Cumulative translation differences on foreign operations are deemed to be zero at 1 January 2004. Any gains and losses recognised in the consolidated income statement on subsequent disposal of foreign operations will therefore exclude translation differences arising prior to the transition date.(d) IAS32 "Financial Instruments: Disclosure and Presentation" and IAS39 "Financial Instruments: Recognition and Measurement" have been adopted from 1 January 2005, with no restatement of comparative information.The tax charge on underlying business performance is calculated by reference tothe estimated effective tax rate for the full year 2005. Tax on disposals andother exceptional items is based on the expected tax impact of each item. The financial information does not comprise statutory accounts within themeaning of Section 240 of the Companies Act 1985. The preparation of financial statements in conformity with generally acceptedaccounting principles requires the Directors to make judgements and assumptionsthat affect the reported amounts of assets and liabilities and disclosure ofcontingencies at the date of the financial statements and the reported incomeand expense during the reporting periods. Although these judgements andassumptions are based on the Directors' best knowledge of the amount, events oractions, actual results may differ from those estimates. PRINCIPAL ACCOUNTING POLICIES The accounting policies set out below have been used in preparation of theinterim consolidated financial statements. They include accounting policies forfinancial instruments applied both before and after the adoption of IAS32 andIAS39 on 1 January 2005. Basis of consolidationThe interim consolidated financial statements comprise Rexam PLC and all itssubsidiaries, together with the Group's share of the results of its associatesand joint ventures. The financial statements of subsidiaries, associates andjoint ventures are prepared as of the same reporting date using consistentaccounting policies. Intercompany balances and transactions, including anyunrealised profits arising from intercompany transactions, are eliminated infull. Subsidiaries are entities where the Group has the power to govern the financialand operating policies, generally accompanied by a share of more than 50% of thevoting rights. Subsidiaries are consolidated from the date on which control istransferred to the Group and are included until the date on which the Groupceases to control them. Associates and joint ventures are entities over whichthe Group has significant influence but not control, generally accompanied by ashare of between 20% and 50% of the voting rights. Investments in associates andjoint ventures are accounted for using the equity method. If the Group's shareof losses in an associate or joint venture equals or exceeds its investment inthe associate or joint venture, the Group does not recognise further losses,unless it has incurred obligations or made payments on behalf of the associateor joint venture. All business combinations are accounted for by applying the purchase method. Thecost of a business combination is measured as the aggregate of the fair values,at the acquisition date, of the assets given, liabilities incurred or assumed,and equity instruments issued by the Group, together with any costs directlyattributable to the combination. The identifiable assets, liabilities andcontingent liabilities of the acquiree are measured initially at fair value atthe acquisition date, irrespective of the extent of any minority interest. Theexcess of the cost of the business combination over the Group's interest in thenet fair value of the identifiable assets, liabilities and contingentliabilities is recognised as goodwill. Currency translationThe financial statements for each of the Group's subsidiaries, associates andjoint ventures are prepared using their functional currency. The functionalcurrency is the currency of the primary economic environment in which an entityoperates. The presentation currency of the Group and functional currency ofRexam PLC is sterling. Foreign currency transactions are translated into the functional currency usingexchange rates prevailing at the dates of the transactions. Exchange differencesresulting from the settlement of such transactions and from the translation at exchange rates ruling at the balance sheet date of monetary assets and liabilities denominated in currencies other than the functional currency are recognised in the consolidated income statement. The balance sheets of foreign operations are translated into sterling using theexchange rate at the balance sheet date and the income statements are translatedinto sterling using the average exchange rate for the period. Where this averageis not a reasonable approximation of the cumulative effect of the ratesprevailing on the transaction dates, the exchange rate on the transaction dateis used. Exchange differences arising from 1 January 2004 are recognised as aseparate component of shareholders' equity. On disposal of a foreign operationany cumulative exchange differences held in shareholders' equity are transferredto the consolidated income statement. The principal exchange rates against sterling used in these interim consolidatedfinancial statements are as follows: 6 months 6 months Year to to to 31.12.04 30.6.05 30.6.04Average:US dollar 1.88 1.82 1.83Euro 1.46 1.48 1.47Closing:US dollar 1.82 1.83 1.93Euro 1.50 1.50 1.42 Revenue recognitionRevenue from the sale of goods is measured at the fair value of theconsideration, net of rebates and trade discounts. Revenue from the sale ofgoods is recognised when the Group has transferred the significant risks andrewards of ownership of the goods to the buyer, when the amount of revenue canbe measured reliably and when it is probable that the economic benefitsassociated with the transaction will flow to the Group. Royalty income is recognised on an accruals basis in accordance with thesubstance of the relevant royalty agreements. Dividend income is recognised whenthe right to receive payment is established. Retirement benefit obligationsThe Group operates defined benefit pension plans and defined contributionpension plans. A defined benefit pension plan is one that specifies the amount of pensionbenefit that an employee will receive on retirement. The Group operates bothfunded defined benefit pension plans, where actuarially determined payments aremade to trustee administered funds, and unfunded defined benefit pension plans,where no such payments are made. The liability recognised on the balance sheetin respect of defined benefit pension plans is the present value of the definedbenefit obligation less the fair value of scheme assets at the balance sheetdate. The defined benefit obligation is calculated, at least triennially, byindependent actuaries using the projected unit credit method and is determinedRelated Shares:
REX.L