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Relationships and risks

Relationships

Rexam’s critical external relationships are with its major customers, which are typically large global or regional brand owners, and its suppliers of raw materials, mainly aluminium and resin.

The vast majority of our sales are made to large multinational consumer products companies who are growing their businesses on a global basis. These customers are becoming increasingly consolidated which puts increasing demands on the Group’s service levels. At the same time, they continue to rationalise their supplier base and look to align themselves with global partners who understand the scale and nature of their business, and who can supply their needs on a local level. Following the acquisition of OI Plastics and Rostar, Rexam is now number 2 global consumer packaging company.

Our customers are invariably world class organisations. They require us to support their growth plans in established and emerging markets, with investment in plants or capacity or through acquisition, and to deliver consistency in terms of technological capability, service and quality. They expect us to be proactive in contributing to innovative solutions to their changing packaging needs and in driving costs out of the supply chain. In this respect everyone in the Rexam organisation shares in the responsibility to maintain relationships with our customers: from the sales force, through global account managers, technical and engineering staff and quality controllers to those involved in the day to day manufacture of the products.

Our customer base is highly concentrated. As a Group, our top ten customers account for 58% of our annual sales following the acquisition OI Plastics. In Beverage Cans, our markets are dominated by a few key customers with the top ten accounting for 78% of sales. The equivalent figure for Plastic Packaging is 35%. Of the remaining customers, none accounts for more than 1.4% of our sales.

Rexam uses more than 25,000 suppliers globally. We have strong strategic relationships with the major aluminium producers and resin companies. The procurement of these primary raw materials, as well as energy, is coordinated across the businesses for efficiency and economies of scale. These raw materials are considered to be in adequate supply globally.

As we look forward, our aim is to ensure that we drive performance improvement and value within the supply chain applying both strategic procurement and Lean Enterprise tools. In 2008, we will be seeking to use existing Supplier Relationship Management programmes to practically set targets for Quality, Supply, Cost and Innovation, define improvement plans and work with our strategic suppliers to deliver those targets.

Following the acquisition of OI Plastics, Rexam Supply Chain teams have focused efforts on the integration of the new businesses and on positioning ourselves so that we can ensure that our business relationships with strategic suppliers deliver maximum value.

On 1 June 2007, REACH (Registration, Evaluation, Authorisation and Restriction of Chemicals), a new framework for regulation of chemicals in Europe, came into force. It requires industry to register materials and substances that are manufactured, imported or used in Europe. With most of the materials used in our products, the responsibility for registration lies with suppliers. Rexam has established an internal steering group to ensure that its products and materials remain compliant and we will continue to work closely with our suppliers as REACH is implemented.

Rexam employee in a beverage can plant

Beverage can making is a capital intensive business. Profit is dependent on high utilisation of installed plant capacity. Rexam works continually to achieve high levels of utilisation at its plants. Optimum capacity is around 95% which allows for full utilisation of assets whilst allowing for sufficient maintenance downtime and peak demand periods.

Risks

There are many risks facing a global company such as Rexam: market, operational, environmental, social and governance, as well as financial. Our challenge is to identify those risks that are most relevant and develop appropriate methods to avoid or mitigate them. An overview of Rexam’s process for managing and reporting risks is covered in Internal Control in the Corporate Governance Report.

Rexam has traditionally been considered a defensive type of company in shareholder terms but, with the high level of capital investment in the last two years, that profile is beginning to change. We have upgraded our portfolio to higher growth segments and expanded the geographies in which we operate. In 2007 alone, Rexam increased its presence in emerging markets with new plants or lines and acquisitions in countries such as Brazil, Egypt, Guatemala, India, Malaysia, Mexico, Russia and Singapore. Whilst a diversified product portfolio can help mitigate risk, the higher growth potential in emerging markets is associated with greater risks in terms of political and economic stability compared with more established and mature economies. These risks, as with all other risks, are always assessed in detail by directors and senior management when considering investment opportunities and setting financial policies and procedures.

The principal risk factors and the way we aim to manage them are detailed below.

Top 10 consumer packaging companies by 2007 sales (US$bn)

Chart displaying the top 10 consumer packaging companies by 2007 sales (US$bn)

Source: Company annual accounts and Rexam estimates The figures are proforma, which for Rexam includes its 2007 acquisitions

Top 10 customers account for 58% of Rexam sales

Chart displaying the top 10 customers account for 58% of Rexam sales
  • Anheuser-Busch
  • Cadbury Schweppes
  • Carlsberg
  • Coca-Cola
  • Heineken
  • InBev
  • PepsiCo
  • Procter & Gamble
  • Red Bull
  • SABMiller

Dependency on key customers

Loss of sales volumes from key customers would adversely impact our business. Many of our largest customers have traded and, in some cases, grown with us for many years, during which time we have built up a strong interdependency and sense of partnership. Relationships are often beyond the pure procurement level and extend far into the supply chain. This not only helps drive out costs to the benefit of both Rexam and its customers, it also increases the likelihood of retaining customers, always provided that we are supplying the quality of product required at a competitive price. Our proprietary online ordering system for beverage cans in North America is one example of how we can cement and deepen our relationships with customers. Another is the completion in 2007 of the wall to wall beverage can plant at Ludesch in Austria to serve Red Bull.

National political and economic stability

Rexam is a global company operating in countries and regions with diverse economic and political conditions and sensitivities. The degree of diversity is increasing as we expand our operations into new geographies. Our operations and earnings may be adversely affected by political or economic instability and unrest, including civil unrest, wars, international conflicts, financial crisis, greater and tighter government regulation on cross border trading, production, pricing and environmental regulation. We remain vigilant to these risks. We take external advice on such matters and consider the risks when determining whether or not to do business in countries or regions which are recognised as unstable.

Supply of faulty or contaminated products

Rexam’s reputation as a business partner relies heavily on its ability to supply quality products on time and in full. The consequences of not being able to do so, owing to accidental or malicious raw material contamination or due to supply chain contamination caused by human error or equipment failure, could be severe. Such consequences might include adverse effects on consumer health, loss of market share, financial costs and loss of turnover. As part of our Environment, Health and Safety policy and our Lean Enterprise framework we have strict control measures and systems in place to ensure the safety and quality of our products are maintained.

Changes in packaging legislation

Changes in laws and regulations relating to deposits on and recycling of packaging could adversely affect the business if arbitrarily implemented on a large scale in the major markets in which we operate. Our experience is that deposits and recycling systems per se pose limited risk to our business: indeed, many of the markets in which we operate have mandatory deposit systems. The risk to the business, in our view, is the way in which these systems are implemented and managed. We make available our considerable packaging know how and our experience of involvement in setting up deposit and recycling systems to ensure that any recycling system is optimised from the very outset.

Changes in the regulatory environment

Changes to health and food safety regulations could increase costs and also might have a material adverse effect on sales if, as a result, public opinion of end products for which we provide packaging changes substantially. When it comes to such risks, we remain vigilant to changes. To monitor the regulatory environment and to minimise the risk of arbitrary implementation of any measures that may affect consumer packaging, we have a Director of External Environmental Affairs reporting to the CEO. We engage with governmental and non governmental organisations directly or through trade associations to ensure that our views are represented.

Competition may reduce market share and margins

Rexam operates in competitive markets. In most of these markets Rexam is either the leader or one of the top three players. In Beverage Cans, for example, we are the world’s number 1 manufacturer, and in Plastic Packaging we hold leading global or regional positions in the majority of our markets. Aggressive pricing from our competitors may cause a reduction in our sales and margins. To minimise this risk, we aim to build long term relationships with our customers with the aim of becoming an integral part of their supply chain and helping to drive out costs. We also ensure that we are the supplier of choice by focusing on innovation for our customers and maintaining the highest standard of operational excellence to achieve lowest cost manufacturer status.

Changes in consumer lifestyle, nutritional preferences and health related concerns

The majority of our sales are generated by packaging for products such as carbonated soft drinks and alcoholic beverages. Any far reaching consumer shift away from these product types as a result of lifestyle, nutrition and health considerations, or even legislation, could have a significant impact on our customers and hence our business. Whilst it is difficult to fully plan for this change, we monitor market and consumer trends as well as political developments through our own and external business intelligence services and through our involvement in national and international packaging associations in the countries and regions where we operate. Even if a change were to occur, it is clear that consumers will still need and want beverages of some kind. New categories of drink would most likely replace any void, and beverage cans are inherently an important part of a customers’ pack mix. The rise of the energy drink segment and, more recently, nutritional drinks and iced teas are examples of new categories.

Changes in the cost and availability of direct materials

Steep and prolonged rises in input prices may have a material impact on our results as witnessed by the rise in aluminium cost in recent years. One consequence of a substantial rise in material costs could be a change in demand for our products as customers adjust their packaging mix and the materials they use, although we have not noticed this in the recent period of aluminium price volatility. Aluminium is our most significant raw material cost but resin costs are increasingly important as we build our Plastic Packaging business.

In the US beverage can business, we charge our customers on a pass through basis. Whilst these commercial arrangements are agreed with customers and suppliers and are intended to protect us from price risk, changes could occur in the commercial arrangements which expose Rexam to risk. In Europe, we are increasingly moving to a pass through model with our main customers such that 50% of our supply needs are now on this basis. To mitigate the risk on the remaining aluminium exposure, we hedge the aluminium cost and associated currency requirements.

In Plastic Packaging, some 80% of the resin costs are on pass through contracts which include resin escalator/de-escalator clauses that change our selling price as resin prices change.

Financial risk

Rexam’s financial risk management is based upon sound economic objectives and good corporate practice. Our main financial risks are related to the availability of funds to meet our business needs and movements in interest and currency exchange rates as well as commodity costs. Derivative and other financial instruments are used to manage exposures under conditions laid down by the Board and monitored by its Finance Committee. Further details of our financial risks and the way in which we mitigate them are set out in note 24 to the financial statements.

Tax risk

As a Group we seek to plan and manage our tax affairs efficiently in the jurisdictions in which we operate. In doing so, we aim to act in compliance with relevant laws and disclosure requirements. Tax planning will complement and be based around the needs of our operating businesses. In an increasingly complex international tax environment, a degree of uncertainty is inevitable in estimating our tax liabilities. We exercise our judgement in assessing the required level of provision for tax risk and allocate resources appropriately to protect our position.