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Rexam prefers patience to Russian Roulette in 2012

By Ben Bouckley , 01-Aug-2012

Rexam will await the effects of higher beer prices before adding extra Russian beverage can capacity, as new comments by Russian president Vladimir Putin sent major brewers’ share prices tumbling yesterday.

Beverage can giant Rexam revealed the move in its H1 2012 results announcement today, where it reported Q2 sales of ₤2.165bn ($3.38bn) in H1 (+3% on H1 2011), and pre-tax profits of ₤207m, up 1% year-over-year.

Company can sales totaled ₤1.946bn in the six months to June 30, while underlying operating profit for the half year was ₤226m, up from ₤212m in H1 2011.

London-headquartered Rexam said its Russian beverage can volumes (only 6% of global volumes) fell 1% due to bad weather, economic uncertainty and a focus on “returns rather than volumes”.

Stiff beer tax hikes

The company said it would decide whether to build a plant in Russia’s third city, Novosibirsk (Siberia) once the impact of pending legislation relating to kiosk beer sales from kiosks became clearer.

Brewers in Russia are reeling from a combination of stiff tax increases in recent years, a sales ban on beer from street kiosks and stores outside after 11pm from 2013. The Russian government is also poised to tighten rules on alcohol advertising.

And only yesterday, Russian president Vladimir Putin hinted that his government could impose new taxes – beyond a 25% rise scheduled from January 2013 – to curb beer-related alcoholism in Russia.

Russian beer taxes rose 20% this year, with another 20% rise planned for 2014; Putin said further tax rises were “probably” needed, but that the government needed to implement them carefully.

As a result, SABMiller shares fell 1%, Carlsberg’s 5.4% and AB InBev’s 3.2% by the end of yesterday.

On a later analyst call today, Deutsche Bank analyst Deborah Jones asked Rexam CEO Graham Chipchase and finance director, David Robbie about the firm’s ‘wait and see’ approach in Russia.

Hard Russian winter

Was Rexam waiting to see whether Russian government measures would hit alcohol consumption, or if its customers would make moves in terms of filling capacity, she asked?

Chipchase admitted that Russia’s asset utilisation rates were relatively low in group terms, but that Rexam’s sales margins there were some of its highest.

“It’s about making sure that we understand the impact of any future legislation. That’s a decision we have to take over the reasonably long term as the winters are so extreme in Russia,” he said.

We can’t start and finish a plant within 18 months – it takes nearly or over 2 years, as you can’t build in winter.

Chipchase added: “In Russia there are huge distances. It’s not so much about a country utilisation rate, but you must look at it as a region. For instance, we are now shipping some cans from Moscow and St. Petersburg to our most easterly plant in Argayash, which is 1500km.

“What we’re proposing to look at – another plant in Novosibirsk – is another 1500km east of Argayash, 3000km from Moscow. These are huge distances, and it’s much more about the freight advantage or disadvantage as opposed to the utilisation.”

Rexam’s H2 volumes in the US were up 13%, with 25% specialty can growth driven mainly by Sleek can sales, with 8oz and 12oz options popular with beer customers.

Chipchase told analysts that the firm was converting capacity in Chicago to service specialty can demand, but added that he expected growth to slow down.

“I would be surprised if we saw a similar sort of increase next year on this year, but let’s wait and see. Specialty cans are growing very fast in many sizes. It’s not just the big cans. ‘Sleek’ cans are also growing extremely well,” he said.

The company lost major US volumes – 3bn cans – in 2011, but said it recovered a third of this volume from January 2012, underpinning standard can growth, and expected to take the rest in 2013.

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