Business Operations

RPC is a leading supplier of rigid plastic packaging with operations in 19 countries. The business, which comprises 50 manufacturing sites and seven sales centres, converts polymer granules into finished packaging product by a combination of moulding and assembly processes. It is organised around the three main conversion processes used within the Group, each site being managed within one of six clusters which are defined along technological and market lines.

Each cluster operates across a wide geographical area for reasons of customer proximity, local market demand and manufacturing resource, with the Ace cluster based in China.

Strategy

The Group announced its Vision 2020 Focused Growth Strategy in 2013, of which there are three core elements:

·    continuing focused organic growth in selected areas of the packaging markets;

·    selective consolidation in the European packaging market through targeted acquisitions to strengthen and extend market positions; and

·    creating a meaningful presence outside Europe where growth rates in rigid plastic packaging are considerably higher.

The Group also identified further opportunities to optimise its existing asset base, resulting in the final phase of the Fitter for the Future business optimisation programme and the decision to sell its Cobelplast and Offenburg businesses.

The Group has made good progress in the period in implementing this strategy.

Continuing focused organic growth

The Group achieved further growth during the half year, with sales growing by 4% on a like-for-like basis supported by higher levels of investment in product and process innovation. Activity levels improved compared with the previous year with most of the growth experienced in the UK and USA, and sales volumes in mainland Europe generally flat. Sales in higher added value products accounted for a higher proportion of overall sales, which improved the overall profitability of the Group.

Selective consolidation in the European packaging market through targeted acquisitions

In 2013/14 the Group made two acquisitions in Europe. The Maynard & Harris (M&H Plastics) business, whose principal manufacturing site is based in Beccles, UK, and Helioplast, based in Bosnia-Herzegovina. Both have been successfully integrated within the Group and both have made a good contribution to the half year results.  M&H Plastics, with an annual turnover of around £80m and whose acquisition has consolidated the Group's leading personal care offering in the UK, fully realised its anticipated purchasing and working capital synergies during the period. Helioplast, albeit a smaller business, increased its sales by 41% over the same (pre-acquisition) period, benefiting from the opportunities provided by Superfos and supporting the cluster with a manufacturing and sales base to supply into the Balkans and the wider south eastern European region.

The Group continues to seek further acquisition opportunities in Europe and on 27 November 2014 RPC announced its proposed acquisition of Promens Group AS, a leading European manufacturer of rigid plastic products for a wide range of end markets, including plastic packaging for chemicals, personal and health care, food and beverage, and rigid plastic components for materials handling and commercial vehicles. With 40 production facilities spanning 20 countries, including sites in North America, Asia and North Africa, this will be a significant acquisition for the Group. It is also an excellent strategic development for RPC, extending the Group's reach and capabilities in Europe, strengthening its position across the enlarged Group's common packaging end markets and acquiring adjacent technologies in rotational moulding, reaction injection moulding and vacuum forming.

Creating a meaningful presence outside Europe

During the period the Group completed its major expansion programme at Morgantown, PA, USA providing additional capacity for growth in food packaging. In addition, further capital expenditure to support Superfos' growth in North America was made, alongside the expansion of M&H Plastic's facility at Winchester, VA as its successful UK business model is rolled out to the USA. Sales in the USA have grown significantly and now represent 5% of total Group sales, up from less than 3% in the same period last year.

On 2 June 2014 the Group completed the acquisition of Ace Corporation Holdings Limited ('Ace'), a China based and Hong Kong headquartered award-winning manufacturer of complex plastic injection moulded components and injection moulding tools for the packaging, lifestyle, medical, power and automotive end markets. Operating from five factories in China and with an annual turnover of circa  £104m, it provides RPC with a strong platform to support its international customer base with high quality packaging of European standards in Asia, as well as the opportunity to benefit from the high and sustained growth of this profitable niche manufacturer of injection moulded components and moulds. Ace operates as a separate cluster within the Group and good progress has been made in integrating the business and developing the growth opportunities. The strategic potential of the acquisition has been confirmed by both packaging and non-packaging customers. 

Fitter for the Future

The Group is nearing completion of the final phase of Fitter for the Future, its business improvement programme, which is focused on optimising its existing business portfolio and European manufacturing footprint whilst disposing of its non-core businesses.  It is expected to be completed by the end of 2015. Good progress has been made in this final phase as follows:

·     Rationalising manufacturing footprint: construction of the new extension to the Superfos facility at Mullsjö in Sweden is on schedule and the merger of the Tenhult factory into these facilities is expected to be completed in the second half year. The closure of the Troyes site in France, as a result of the flooding, is nearing completion. With respect to the rationalisation of the Spanish blow moulding business, the site at San Roque ceased production in August with the retained business being transferred to the Campo Real site in Madrid.  

·     Optimising the existing business portfolio: reorganisation and restructuring undertaken in response to the structural changes within the blow moulding business and to improve production efficiencies in the Bramlage-Wiko cluster as part of the initiative to transfer lower value added business to lower cost facilities.

• Divesting non-core businesses: the Group sold its trading disposables business at Offenburg (Germany) in May 2014 and the Cobelplast sheet business (comprising sites at Lokeren (Belgium) and Montonate (Italy)) in September 2014.

The business incurred programme costs of £12.5m in the period (£8.1m continuing business; £4.4m relating to Cobelplast including a £3.7m loss on sale) with an additional £9m of costs expected to complete. The programme is expected to deliver steady state cost savings of £16m by the end of 2015/16, with cumulative annual savings currently at £13m including £4m incremental savings delivered in the period.

Business Review

The Group produced a good set of results, in line with expectations and with satisfactory profit growth despite the impact of the foreign exchange translation headwind, the time lag in passing through higher polymer prices, and a generally flat economic growth environment particularly in mainland Europe. Revenues for continuing operations grew by 12% to £589m in part due to the acquired businesses (M&H Plastics, Helioplast and Ace) as well as growth on a like-for-like basis of 4%.  Adjusted EBITDA¹ was £86.9m (2013 restated: £71.4m) and adjusted operating profit¹ of £60.9m increased by £13.8m (29%), with return on sales improving to 10.3% (2013: 9.0%) and RONOA at 24.1% (2013: 23.3%), both measures comfortably ahead of the Vision 2020 minimum performance metrics.  The Group incurred £16.1m (2013: £9.5m) of exceptional restructuring costs, impairments and other exceptional items in the first half year, mainly relating to the final phase of the Fitter for the Future business optimisation programme and costs attributable to the recent acquisitions.

The Group invested heavily in growth and efficiency projects, with over £40m of capital expenditure incurred in the period. Cash generation remained strong with £42.4m net cash from operating activities and free cash flow² of £20.2m.  Working capital as a percentage of sales for continuing operations remained low at 4.1% (2013 restated: 3.0%). The Group retains a strong balance sheet with net debt of £318m, and having refinanced ahead of the Ace acquisition it had total finance facilities of £663m at 30 September 2014.

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Injection Moulding

The business comprises the Superfos, Bramlage-Wiko, UKIM and Ace clusters. The Ace business was acquired on 2 June 2014 and these results include four months of post-acquisition contribution. The M&H Plastics business which was included in Injection Moulding in the results to 31 March 2014 is now reported in Blow Moulding. The improvement in adjusted operating profit reflects the contribution made by Ace and sales growth within the existing injection moulding businesses, particularly in the higher value added products.

Superfos sales volumes were higher, with the recent Helioplast acquisition performing well and growing market share in the south east Europe region. The dairy and ice-cream sectors saw particularly strong growth and the cluster benefited from continued sales growth in thin-walled and barrier packaging. The consolidation of manufacturing facilities in Sweden as part of the Fitter for the Future programme is progressing in line with plan.

For Bramlage-Wiko business performance was mixed, with destocking effects in mainland Europe lowering customer demand for personal care products in the first quarter. New investments in Tassimo production lines are in progress, whilst increased food packaging sales from its USA business are forecast following a major expansion of its production facilities at Morgantown, PA. The Manuplastics business, based in the UK, continued to trade well. The cluster is active in developing new product designs and is well positioned to exploit new business opportunities through its strong market positions and leading technological know-how.

Overall activity levels for UKIM were similar to last year with the increase in the DIY market offsetting the delay of some projects. Surface coating and paint container sales improved over the period and food packaging sales have grown. Sales of the Superlock product range, with its barrier capabilities, have gained traction and are showing good potential for further growth. 

The strategic potential for the acquisition of the Ace business, comprising five manufacturing sites in China, has been confirmed by both packaging and non-packaging customers. The process of integrating Ace in the Group in order to realise these opportunities has been progressing well. On 22 October 2014 a fire incapacitated the electroplating lines at the Zhuhai factory and although insured this may create a pause in the rate of planned growth of the business. Contingency plans are working well and the factory is producing again.

Thermoforming

The thermoforming operations comprise the retail food packaging and beverage businesses which are managed by the Bebo cluster. The cluster performed well in the period, with profitability and RONOA significantly improved. 

Overall activity levels on a like-for-like basis were similar to last year. Increased competiveness in the margarine and spreads market, which is a significant part of the thermoforming business and in which the Group has strong market positions, necessitated a reorganisation programme under Fitter for the Future. This programme is coming to an end and is now yielding savings through reduced capacity costs following the closure of the Beuningen site in 2013, and transfers of business to lower cost operations in the UK and Poland. In addition the development of in-mould labelling to thermoformed products will help retain current market share. Sales into the French dairy market have stabilised but were slightly lower year on year, still affected by the flood and subsequent closure of the Troyes site. Offsetting this and underpinning the growth in return on sales, was further sales growth in beverages. The non-core trading disposables business at Offenburg (Germany) was sold in May 2014, which explains the decrease in turnover for the period.

Blow Moulding

The blow moulding business comprises the Blow Moulding cluster which operates from 11 sites in the UK and mainland Europe, and the M&H Plastics business whose processes and markets are predominantly blow moulding.

The segment has benefited from the acquisition of M&H Plastics, whose margins are generally higher, and its associated synergies resulting in the significant increase in sales, operating profit and improved returns. Sales volumes at M&H Plastics have grown since joining the Group in December 2013, particularly in the USA where investment in expanding its US facility at Winchester, VA, has resulted in higher sales. Activity levels and sales for the Blow Moulding cluster were at similar levels to the previous year on a like-for-like basis. Growth in agrochemicals and industrial products was offset by some contract losses. The strategic review of the Spanish blow moulding business under the Fitter for the Future programme has resulted in the closure of the San Roque facility, with its remaining viable business transferred to the Madrid facility run by the Bramlage-Wiko cluster.

Non-financial key performance indicators

RPC has three main non-financial key performance indicators, which provide perspectives on the Group's progress in improving its contribution to the environment and employee welfare.

¹ Reportable accident frequency rate (RAFR) is defined as the number of accidents resulting in more than three days off work, excluding accidents where an employee is travelling to or from work, divided by the average number of employees, multiplied by the constant 100,000.

The Group continues to make stringent efforts to improve its efficient usage of electricity and water. Electricity usage per tonne and water usage were both higher reflecting the increase in consumption associated with the manufacture of higher added value products. There has been a significant improvement in reportable accident frequency rate which was impacted in the first half of 2013/14 by an unusually high level of reportable accidents. Following a renewed focus on health and safety in the current year, including a programme of safety tours by the Group Executive, this figure has reduced considerably to its lowest reported level, with the Bramlage-Wiko, Bebo and Superfos cluster reportable accidents reducing by more than 50% compared with the same period last year.

Financial Review

The financial review of the business is based on underlying business performance, excluding exceptional and non-underlying items which include the amortisation of acquired intangible assets, pension administration costs, the fair value changes of unhedged derivatives and the unwinding of the discount on deferred and contingent consideration including related exchange impacts. All prior period figures have been restated accordingly.

Acquisitions

On 2 June 2014 the Group acquired effective control of 100% of the share capital of Ace Corporation Holdings Ltd. The business was acquired for an initial consideration of US$301m (£178m) and a total consideration of up to US$430m (£255m) on a cash-free, debt-free basis and subject to customary adjustments. The initial consideration was satisfied through the issue of 8,509,841 ordinary shares in RPC Group Plc (consideration shares) and cash payments of US$207m (£123m) funded from the placement of 12,500,000 ordinary shares (placement shares) and from new debt facilities. Further contingent payments in cash of up to US$129m (£77m) are payable by the Group subject to Ace's financial performance up to the year ending 31 December 2017. The provisional goodwill on acquisition amounted to £154.4m after fair value adjustments, and the trading results of the business after the acquisition date are included in the Group results.

Divestments

On 22 May 2014 the Group sold its disposables trading business at Offenburg, Germany (RPC Tedeco-Gizeh GmbH) to HOSTI International GmbH. The results of the business up until this date are included in the results of the Bebo cluster (Thermoforming segment).

On 30 September 2014 the Group sold its Cobelplast extruded sheet business, comprising its businesses at Lokeren, Belgium (RPC Cobelplast NV) and Montonate, Italy (RPC Cobelplast Montonate S.r.l.). These businesses had been put up for sale in September 2013 and their results reported as Discontinued operations.

Condensed consolidated income statement

Sales from continuing operations in the first half of 2014/15 increased by 12% to £588.9m (2013: £524.7m), with recent acquisitions (M&H Plastics, Helioplast, Ace) net of disposals (Offenburg) accounting for most of this, together with sales growth of 4% reflecting an underlying increase in activity levels and an improved sales mix. This was offset by the translation effect of a weaker euro (€1.24 v €1.17) which reduced sales by £25.4m compared with the corresponding period last year, with over 60% of turnover generated from businesses in the Eurozone.

Adjusted EBITDA was £86.9m (2013 restated: £71.4m) and adjusted operating profit was £60.9m (2013 restated: £47.1m), an increase of £13.8m (29%). The effect of the weaker euro was to reduce profit by £2m and there was a polymer headwind of circa £3m adversely impacting margins. Polymer prices rose steadily through the first and second quarters of the calendar year, giving rise to increased costs which could only be passed on with a time lag, although reductions in polymer prices in the latter part of the half year mean that a margin benefit should arise in the second half. Offsetting these were the impact of the acquisitions (£13.7m) and disposals (£0.5m) over the period, further cost savings from the Fitter for the Future programme and general sales mix and other business improvements offsetting inflationary pressures.

Exceptional items for the period amounted to £16.1m (2013: £9.5m), comprising Fitter for the Future restructuring costs of £8.1m, other exceptional costs of £0.6m, acquisition and integration costs mainly relating to Ace of £5.1m, and £2.3m inferred remuneration relating to Ace shareholders who have been retained in the business. The main elements of the Fitter for the Future costs relate to redundancies and restructuring costs on the closure of San Roque, the restructuring of Blow Moulding operations, rationalisation in Bramlage-Wiko (Pulheim & Vel'ky Meder) and ongoing costs relating to the closure of the Troyes site and the thermoformed spreads business. The inferred remuneration charge of £2.3m represents the expected contingent consideration earned in the period under the acquisition purchase agreement by three of the senior Ace executives employed in the business. Accounting standards (IFRS 3) require this amount to be charged to profit rather than be attributed to goodwill on acquisition.

Net interest payable increased from £5.9m to £6.1m due to the higher average net debt levels over the period. The remaining increases in net finance charges related to non-underlying finance charges including the unwinding of the discount on the deferred and contingent consideration for the Ace acquisition, fair value adjustments on unhedged foreign exchange derivatives and higher net pension interest charges.

The adjusted profit before tax¹ increased from £41.4m (restated) to £54.9m largely as a result of the improvement in adjusted operating profit. The adjusted tax rate was 24.0% (2013: 24.0%), resulting in an adjusted profit after tax of £41.7m (2013 restated: £31.5m), and adjusted basic earnings per share² of 22.8p (2013 restated: 19.1p).

The Group's overall tax charge for continuing operations was £10.6m (2013: £8.0m) resulting in a reported tax rate of 30.4% reflecting an adjusted effective rate of 24.0% and a 12.8% tax credit on exceptional and non-underlying charges. The profit after tax was £24.3m (2013: £22.1m), the increase being mainly due to the higher operating profit. Basic earnings per share for continuing operations was 13.3p (2013: 13.4p).

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Condensed consolidated balance sheet and cash flow statement

The balance sheet of the Group at 30 September 2014 was significantly affected by the acquisition of Ace and the related funding arrangements, with the net assets of the Group increasing by £126.4m as a consequence of the acquisition. The increase in goodwill of £153.6m is attributable to Ace as is the increase in other intangible assets which largely represent the value of customer contacts identified on acquisition. The carrying value of property, plant and equipment, excluding Ace assets of £63.7m, was largely unchanged. Although capital additions of £40.2m were ahead of depreciation of £25.0m, the movements were adversely affected by the exchange rate impact of the weakened Euro on translation.

Working capital (the sum of inventories, trade and other receivables and trade and other payables) increased slightly to £48.1m representing 4.1% as a percentage of sales for the half year (annualised) (2013 restated: 3.0%).

The long-term employee benefit liabilities at the half year increased from £72.5m to £88.9m, most of the increase reflecting an increase in the funding deficit position of the two major UK defined benefit schemes, RPC Containers and M&H Plastics. These showed actuarial losses of £15.4m in the period mainly due to a reduction in the discount rate and lower than expected returns on assets.

Provisions and other liabilities include deferred consideration relating to the Helioplast (£4.2m) and Ace acquisitions (£51.3m), the latter including £2.3m of expected contingent consideration earned during the period by shareholders who are working within the business.

Capital and reserves increased in the period by £101.4m, the proceeds from the equity raise for the acquisition of Ace amounting to £126.4m, net movements from the issue and purchase of shares for share-based arrangements of £0.3m and the net profit for the period of £20.2m offsetting dividends paid of £20.6m, exchange movements on translation of £8.6m, pension related net actuarial losses of £15.1m and net fair value movements on hedging derivatives of £1.2m. Further details are shown in the Condensed consolidated statement of changes in equity which is included in the financial statements.

Net cash from operating activities (after tax and interest) was £42.4m compared with £51.1m in the same period in 2013, mainly due to a small working capital outflow in the period. The net cash outflow from investing activities of £160.4m includes the net cash paid for the initial Ace acquisition consideration of £118.9m, together with £43.5m of capital expenditure. Net debt, which includes the fair value of the cross currency swaps used to repay the US private placement (USPP) funding, increased from £265m (restated) at 31 March 2014 to £318m at 30 September 2014. Average net debt for the first half year was £344.1m (2013: £226.3m). Gearing stands at 85% and the covenanted leverage (net debt to EBITDA ratio) is at 1.79.

Financial key performance indicators (KPIs)

The Group's main financial KPIs focus on return on investment, business profitability and cash generation.

1      RONOA is adjusted operating profit for continuing operations (annualised for half year reporting) divided by the average of opening and closing property, plant and equipment and working capital for continuing operations for the year concerned.

2      ROS is adjusted operating profit divided by sales revenue for continuing operations.

3      Free cash flow is cash generated from continuing operations less net capital expenditure, net interest and tax, adjusted to exclude exceptional cash flows and one off pension deficit reduction payments.

4      ROCE is adjusted operating profit for continuing operations (annualised for half year reporting), divided by the average of opening and closing shareholders' equity, after adjusting for net retirement benefit obligations, assets held for sale and net borrowings for the year concerned.

5      Added value per tonne is the difference between production sales value per tonne produced and the cost of polymer per tonne produced for continuing operations. The 2013/14 comparative numbers have been restated using 2014/15 exchange rates.

6      Cash conversion is the ratio of cash generated from operations less net capital expenditure excluding exceptional cash flows and one-off pension deficit reduction payments, to adjusted operating profit.

The key measures of the Group's financial performance, which are measured on a continuing basis, are its return on net operating assets (RONOA) and return on sales (ROS). The new hurdles agreed by the Board are for the Group to exceed 20% RONOA and 8% ROS and for ROCE to be maintained at 20% throughout the cycle for the 2013 pre-acquisition business portfolio. The increase in return on sales resulted from improved gross margins and lower costs. The improvement in added value per tonne reflects the impact of an improved sales mix.  Free cash flow was down on last year reflecting the higher capital expenditure in the period and consequently cash conversion reduced.