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Rexam PLC Dives On Higher Costs.

Shares in drinks can manufacturer Rexam (LSE: REX) crashed as much as 8% in early trading this morning as the company predicted costs to rise by £45m in 2015.

A significant rise in the Aluminium premium from $300.00 per tonne to $500.00 since January has placed pressure on margins and could potentially result in £30m worth of costs next year, while an unprecedented drought in Brazil could see the company paying an extra £15m for energy in 2015.

Management has vowed to review the company’s cost base and will report their findings alongside the full year results in February. The costs total 10% of 2013’s underlying operating profit and investors have chucked the stock on the scrapheap, but the underlying business continues to perform well.

The company grew global beverage can volumes by 4% in Q3, driven by increasing sales in Europe, Russia, India, Egypt and Turkey. North American volumes continued to decline in line with the market, while specialty volumes in the region continued to grow. The company expects growth to continue into 2015.

Rexham is also facing an increasingly consolidated customer base customer base with a global approach to procurement. Customers are demanding a more diverse and complicated set of products to differentiate their drink on the shelves, increasing demand for specialty can sizes.

To deal with this, Rexam have assigned ‘key account leads’ to manage their global customers in an attempt to build long term relationships and better manage these increasingly demanding orders. They have also as well aligned production across their four regions to better respond to these large and complicated orders as a single company.

This could pose a risk going forward, but as the second largest drinks can manufacturer in the world by revenue Rexham is well positioned to deal with the changing market. Management also seem well aware of this trend and a focus on customer service seems a sensible approach to locking in long-term contracts with the most valuable customers.

CEO Graham Chipchase said the business would approach its current problems as it always has done, by focusing on tight cost management and the elements of the business they can control. He said,

“Despite ongoing foreign exchange translation headwinds and metal premium cost at an all-time high, the business is in good shape operationally and we continue to expect to make further progress in 2014 on a constant currency basis”.

After today’s tumble, the shares trade on a PE of 14 and yield 4%. The company predicts continuing sales growth at constant exchange rates, and so there could be significant upside in the shares once these exceptional costs disappear. However investors might have to wait over a year for the impact of these costs to die down, and of course no one can be sure prices will normalise when the company hopes. 

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Zach Coffell has no position in any shares mentioned. The Motley Fool UK has recommended Rexam. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.