RPC thrives on plastic

Few companies have coped with the economic recession as well as rigid plastic packaging specialist, RPC. With well over half of its sales going to solidly defensive clients - like the big supermarkets or household goods specialists, such as Unilever - trading was never going to slide too far for the group. Where sales volumes have fallen, RPC has pushed through price increases in order to protect its margins. Moreover, with a potential economic recovery on the horizon, there may even be room for a further earnings boost.

The group's trading update this month certainly pointed to the possibility of recovery. In particular, management felt able to call an end to the de-stocking process that has hit the majority of those sectors to which the company supplies packaging. That should help rebuild sales. What's more, the update flagged falling interest charges on the group's diminishing debt pile. RPC's strong cash generation - cash flow before exceptional items reached an impressive £87.7m at the full-year stage - helped cut the debt pile by £33m in 2008-09 to £116.6m. And analysts expect that to fall to £104m by end-March 2010. Management is also focused on costs and says that its cost-cutting programme, called RPC 2010, should deliver better than anticipated savings. Such factors leave management expecting half-year, pre-exceptional, operating profit to be ahead of last year's figure.

RPC also boasts a considerable exposure to continental Europe, where economic recovery is arguably emerging faster than in the UK. Add that to the increasingly favourable euro exchange rate, and prospects are brightening. Moreover, improving conditions should help with the disposal of the company's German distribution operation after the credit crunch forced the sale to be abandoned. So, with management sounding uninterested in acquisitions at present, and with the RPC 2010 plan set to cut capital employed, the way is clear for the group to make progress towards its return on capital employed target of 15 per cent.

That said, management is expecting that half-year revenues will be down on last year's figure - that's because polymer price reductions have been passed through to customers. In fact, raw material prices are an issue that investors will need to keep an eye on. Take the price of polypropylene, for instance - that has skyrocketed over past two years, driven by high oil prices and unprecedented demand, before falling rapidly. Such volatility makes consistent pricing difficult, as well as adding to the group's cost base when prices are high.

And while the trading outlook is improving, RPC is continuing to tackle much reduced demand for items like high-end plastic mouldings, typically used for expensive cosmetics. RPC does have some operational flexibility to push through price increases and use lower grade packaging for cheaper products.