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Global packaging group Rexam's underlying operating profits increased
Against somewhat tepid 2010 sales growth of 2%, the underlying operating profits for global packaging group Rexam (LSE, REX) increased by 20%. This is the key story of the year as cost cutting and reduced debt had a leveraged effect on the bottom line, reducing the group’s finance expense. Accordingly while operating profits improved by a fifth the profit before tax increased by 45% due to lower interest payments.
Rexam is comprised of two divisions, Beverage Cans (77% of operating profits) and Plastic Packaging (23% of group operating profits).
Drilling down into these divisions and Beverage Cans are clearly the most significant to Rexam with operating profits coming in at £394m in 2010 against £119m for plastics. Can volumes rose by 2% during the year which meant sales growth of 3%. However, operating profits rose by a more impressive 27% which the group attributes to better pricing, volumes and cost reductions.
Geographically Europe is Rexam’s largest market with the company having a 45% share, as the largest player, of the 65bn a year can market. In North America Rexam is the second largest player with a 21% share of the 100bn can market. Of particular note is Brazil where the group has an impressive 60% market share.
Although the Brazilian market is not as large as Europe or America, at 18bn cans a year, it is growing strongly with an increase of 18% last year. In fact the market sold out during 2010 with Rexam having to import around 1bn cans from North America to meet demand.
High single-digit growth is also expected in Brazil for the next three years which will be underpinned by the 2014 FIFA World Cup in the country and the 2016 Olympic games. The group signed an agreement with its largest customer in Brazil at the end of the year and is looking to increase capacity to 14bn cans from 11bn a year at the end of 2009.
The Plastics Packaging division is much less significant to Rexam but has had higher returns. In 2010 the return on sales came in at 12.6% while the return on net assets came in at 29.1%. This compares to a return on sales of 10.7% and a return on net assets of 27.6% in cans.
The division’s earnings contribution will be underpinned by innovation. A recent development has been the Novelia preservative free multidose eyedropper. Consumers take eye drops for a variety of reasons - such as dry eyes - but these products typically have preservatives in them. Rexam’s product has a mechanism which extracts the preservative upon leaving the bottle which makes for more effective treatment.
For the time being the emphasis for Rexam as a whole is still on reducing debt but if the targeted level can be reached this year then the group could consider some bolt-on acquisitions towards the end of 2011. This is as the company looks to take advantage of the growth opportunities in developing economies as well as seeking to develop market-leading product innovations.
In 2010 emerging markets made up 25% of sales but this increased to 30% in 2011 with Rexam having a notably strong position in Brazil. The group’s three geographic regions are Europe, America and Latin America. The European market also features some developing economies with Rexam having entered Russia in 1998 as the first foreign beverage can maker to enter the country.
This report was produced by Senior Research Analyst, Andrew Latto
