Rexam's (REX) core beverage packaging business measurably improved in 2010. For full-year 2010, beverage can sales increased 3% to £3.7 billion and underlying operating profit increased from £310 million (8.7% of sales) in 2009 to £394 million (10.7% of sales) in 2010. The improved operation profit performance was driven by better pricing and increased volumes coupled with a better mix of products and cost reductions.
Rexam--which alone accounts for 21% of North America's 100 billion annual can capacity--is expected to lose some volume in 2011 as a result of recent contract renegotiations. The decline primarily will impact Rexam's 12-ounce can production; but some of that capacity is planned to be converted into 24-ounce specialty cans, which typically carry higher margins. Fortunately, the company anticipates that this improving mix, manufacturing efficiencies, and light-weighting of the beverage cans should enable 2011's North American beverage can operating profit to be on par with that of 2010.
The company also has signed new contracts to recover most of the 2011 volume loss by 2013. These new contracts will be important for the company to increase its plant utilisation rates in North America. Currently some of Rexam's North American production is shipped (at a high cost) to South America in order to feed the demand for beverage packaging. However, by the end of 2012 Rexam will have 14 billion cans per year of capacity in South America (versus 11 billion at the end of 2009). Therefore, there will be less of a need for exports from North America.
Rexam is looking to divest its beverage and specialty operations of the closures division. This business is currently part of the plastic packaging division and drove £343 million in sales and £22 million of underlying operating profit in 2010. Closure sales from this business unit into the beverage market have been hard hit, with volumes down 9% and the company taking a £171 million impairment charge in 2010. The impairment loss was recorded from comparing indicative offers received on the assets versus the carrying value of the business.
Going forward, Rexam wants to improve returns on capital employed by a few hundred basis points. The company plans to improve asset utilisation, further expand into emerging markets, and focus on innovation. Packaging businesses are most profitable when they can constantly operate their plants. Rexam will look to efficiently run their plants in the developed world and to add capacity in the developing world. Emerging markets, which currently account for 30% of Rexam's sales, likely will increase in importance as the firm adds capacity or forms joint ventures in these burgeoning regions. Product innovation can lead to more profitable products for Rexam if it is able to have beverage makers utilise nonstandard cans.
